Last year in September, Swiss bank UBS and the American start-up company Clearmatic presented their concept of a “Utility Settlement Coin” (USC) to the world. Now a group of these two companies and the Spanish bank Santander as well as the German Deutsche Bank together with the investment firm BNY Mellon announced to follow up on this concept and implement it until 2018.
Blockchain to be used in international banking settlement
The purpose of the USC is to act as a faster, cheaper and more secure alternative to the current approach of international settlement between banks. If today a Spanish bank wants to transmit money to a bank in Greece they do not interact directly with each other but have to involve their national central banks. The central banks then are using the TARGET2 mechanism of the European Central Bank to settle the transaction. The USC shall now be used to transfer this settlement from the central banks to the Blockchain. With a Blockchain there is no need for a trusted third party to actually carry out the transactions and act as bookkeeper.
Thus, the role of central banks would be reduced from a settlement agent to a depositor of central bank money. This remains necessary since the USC shall not be an abstract currency unit like other cryptocurrencies. Instead it shall be formed as a one-to-one representation of various fiat currencies like the Euro, the Dollar or the Swiss Franc. That way one Euro-USC on the Blockchain would be backed by one Euro held with the central bank. In essence the USC would share more similarities to today’s E-money which is a representation of book money.
Classify virtual currency as means of payment
Thereby the USC could be the catalyst to pass regulation that brings cryptocurrencies into line with other means of payment under the Payment Service Directive. Such regulation would be most fitting for virtual currencies like Bitcoin, Litecoin and Monero. While they cannot be directly converted to fiat money like the USC they are nevertheless widely used as a means of payment. Particularly, in international settlement virtual currencies are faster and cheaper than the transmission of fiat money.
The regulatory approach of the German Financial Supervisory Authority (BaFin) on the other hand does not do justice to the nature of virtual currencies. BaFin classifies Bitcoin and similar tokens as units of account and therefore as financial instruments. But contrary to other financial instruments virtual currencies do not have a central issuer. Moreover virtual currencies are – as the name implies – used as currencies and not as financial instruments. Even the European Court of Justice ruled last year, that Bitcoins are comparable with other means of payment and therefore not subject to value added taxation.
Patchwork regulation hinders virtual currency adoption
As long as there is no consistent approach to virtual currency regulation across the European Union the widespread adoption of this new technology will be encumbered. A current proposal by the European Commission is another good example of this. The idea of the Commission to bring certain virtual currency businesses under the regulatory framework of the Fourth Anti Money Laundering Directive is certainly well meant. But since there is no unified framework like the Payment Service Directive for Blockchain-based payment systems the specific legal situation of related businesses still has to be evaluated on a state-to-state basis. The international legal nature of virtual currencies remains unsolved. Therefore, Blockchain businesses are still facing legal uncertainty.
If you intend to run a virtual currency business in this uncertain legal environment our lawyers with a specialization in bank and capital market law and a lot of experience with Bitcoin and its alternatives will gladly help you to bring your business to success.