BITCOIN AS A PARALLEL CURRENCY – AN ECONOMIC VISION AND MULTIPLE LEGAL CONSEQUENCES

Nicole Julie Fobe

BITCOIN AS A PARALLEL CURRENCY – AN ECONOMIC VISION AND MULTIPLE LEGAL CONSEQUENCES

São Paulo 2016

ABSTRACT. The existence of monetary instruments complementary to those so-called “official” ones is not a recent phenomenon. Throughout history, many have been the forms and occasions in which complementary currencies were put in circulation. Recently, however, these instruments merged with technology, reaching almost unlimited potential and bringing to light consequences which we do not yet know how to estimate. This dissertation’s objective is to analyze a specific case of highly technological complementary currency: the Bitcoin. This should constitute a clearer approach directed to jurists, since most of the vocabulary involving cryptocurrencies involves IT and economical concepts. The study proposes a discussion as to what does it mean to regard the Bitcoin as a complementary currency – even though the discussion as to whether it is or not a currency at all constitutes only one of the possible approaches. I also explore which are the regulatory options adopted by different jurisdictions that have been forced to take a position regarding virtual currencies in general and Bitcoin in particular. As I will present, the terminology chosen by countries while regulating the Bitcoin results in its inclusion under different law categories and, as a direct consequence, the legal implications vary according to the terminology first embraced. The main treatment given to Bitcoin translates in taxation, in which we can clearly notice the concern from each State to classify the instrument according to the specific regulation one wants to invoke. From the survey carried out here, 62 jurisdictions have already taken a position towards the Bitcoin. With more and more attention from international regulatory agencies – such as the European Central Bank and the International Monetary Fund – the Bitcoin increases its potential and its limitations, especially regarding the challenges faced by an efficient regulation. The conclusion of this dissertation reinforces the notion that the juridical treatment given to new phenomena is not homogeneous, that is, Law does not have one right way to deal with situations found in the world of facts. Also, regarding the Bitcoin as a parallel currency may help regulators to better understand and regulate this cryptocurrency.

KEYWORDS: Bitcoin, complementary currencies, cryptocurrencies, regulation.

GRAPHICS Graphic 01

Bitcoin’s price fluctuation between 4th and 14th June 2014

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Graphic 02

Bitcoin’s price fluctuation between 13th and 23rd June 2014

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Graphic 03

Local Payment Systems worldwide between 1993 and 2012

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Graphic 04

Legal classification for Bitcoin, by country

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TABLES Table 01

Percentage of personal remittances in relation to the GDP in some 17 selected countries

Table 02

Foreign currency remittance simulation via Western Union

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Table 03

Comparative table between local currencies and cryptocurrencies

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Table 04

Some postures adopted by jurisdictions regarding Bitcoin

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SUMMARY 1. Introduction ......................................................................................................................... 6 2. The narrative of the phenomenon: the Bitcoin case. ......................................................... 12 2.1.

Characteristics ........................................................................................................... 12

2.2.

Possibilities................................................................................................................ 15

2.3.

Limitations ................................................................................................................ 19

3. Parallel Currencies ............................................................................................................ 22 3.1.

Concept...................................................................................................................... 22

3.2.

Local Currencies ....................................................................................................... 31

3.3.

Digital Currencies ..................................................................................................... 34

3.3.1. Virtual Currencies.................................................................................................. 37 3.3.2. The Cryptocurrencies ............................................................................................ 39 3.4.

A differentiation ........................................................................................................ 40

3.5.

Bitcoin as a parallel currency .................................................................................... 43

4. Regulatory Experiences..................................................................................................... 49 4.1.

Data analysis ............................................................................................................. 50

4.2.

Relevant legal concerns ............................................................................................. 56

5. Conclusions ....................................................................................................................... 59 Bibliography ............................................................................................................................ 63 Annex I..................................................................................................................................... 70

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1. INTRODUCTION

It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. (MAQUIAVEL).

Living in society demands a series of conventions which, if not observed, make coexistence hard or impossible. Two of these conventions, currency1 and Law are intertwined in several theoretical and practical aspects – coexisting in peace or presenting degrees of complexity and conflicts. Sometimes, the emergence of certain payment instruments defies national sovereignty itself2, leading to a series of economical and legal contradictions. When, way back in 2009, I first came across the Palma – a social currency currently being issued and circulating in Brazil –, I noticed there was an object of study to be understood by Law and, mostly, I realized there was a phenomenon in the world of facts which the legal order still did not have a way to deal with in a satisfactory way.3

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See CAMERA and CASARI, 2013, p. 14889. The term “currency”, here, shall be used as a synonym for “money”. In the same direcition, “Sempre considerei útil explicar a meus alunos que é pena qualificarmos o dinheiro como substantivo, e que seria mais útil para a compreensão dos fenômenos monetários se ‘dinheiro’ fosse um adjetivo descrevendo uma propriedade que diferentes objetos poderiam possuir, em graus variados. ‘Moeda corrente’ é, por esse motivo, uma expressão mais adequada (...)”. (HAYEK, 1986, p. 49). And: “(…) a moeda é nada mais, nada menos do que sempre pensou ser – o que é comumente oferecido ou recebido pela compra ou venda de bens, serviços ou outras coisas.” (GALBRAITH, 1977, p. 5). For a terminological discussion – that also accepts the interchangeability between “currency” and “money”, see NUSSBAUM, 1950, pp. 21-22. 2 In this sense, “Durante mais de 2000 anos, a prerrogativa governamental ou o direito exclusivo de fazer dinheiro significou, na prática, tão somente o monopólio sobre a cunhagem de moedas de ouro, prata ou cobre. Foi nesse período que se verificou a aceitação irrestrita dessa prerrogativa como atributo essencial da soberania – envolta no manto de mistérios que os sagrados poderes do príncipe costumavam inspirar (...). De qualquer modo, a prerrogativa de cunhagem do governante foi consolidada pelos imperadores romanos. Quando, no início da era moderna, Jean Bodin desenvolveu o conceito de soberania, considerou o direito de cunhagem como uma de suas partes mais importantes e essenciais. As regalias, como eram, em latim, denominados os direitos e privilégios reais, dos quais a cunhagem, a mineração e os impostos alfandegários eram os mais importantes, foram, durante a Idade Média, a principal Source de renda dos príncipes, sendo examinados somente sob este prisma. É evidente que, à medida que se difundia a cunhagem, os governos, em toda parte, logo descobriram que ela, além de ser uma atraente Source de lucros, constituía um importantíssimo instrumento de poder. Desde seus primórdios, esta prerrogativa não foi reivindicada nem concedida em nome do bem geral, mas usada, simplesmente, como um elemento essencial do poder dos governos. Na verdade, as moedas, tal como a bandeira, serviam largamente como símbolos de poder. Através delas o governante afirmava sua soberania e mostrava ao povo quem era seu senhor: aquele cuja imagem as moedas levavam às mais remotas regiões de seu reino.” (HAYEK, 1986, p. 20). 3 The so-called local currencies will be object of a specific section in this dissertation.

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Several years later, within the FGV São Paulo Law School’s Academic Master Program, I wrote Professor Bernard Lietaer – specialist in alternative monetary formats and member of the commission responsible for developing and implementing the Euro 4 – who had already helped me several times before in previous researches, in order to question his opinion about the importance of Bitcoin and if he considered it to be worth conducting a dissertation on. His answer deepened my interest in this “currency” that, up to that moment, I knew only from media reports or articles more or less on the sensationalist side, written by libertarians and anarchists. My initial challenge was to understand, from a legal formation – that is, without having any conceptual foundations in Information Technology – the functioning dynamic of the Bitcoin system.5 The Bitcoin system is, briefly, an entirely virtual payment system which does not depend on a centralized entity to guarantee its reserves or organize its circulation. It is also a cryptographic system – based on computerized codes – that generates “currency” to the users who verify the ongoing transactions that use Bitcoin. The first sources I used were digital magazines and newspapers, especially from the United States (such as The Economist, The New York Times, Forbes).6 The choice for this country was not random – a simple research on the main online search mechanism showed that most of the papers and media resources came from the US. This phase of construction of the foundations of my work, in which I neared myself from my prospective – and, at that time, already actual – object of study was essential to limit my academic contribution and come up with the first (of many) research question. This step was guided by several guidelines from EPSTEIN, among which: “[…] two criteria that better 4

For a full biography, see http://www.lietaer.com/about/bio/. Last accessed on the 29th of January 2016. The term “cryptocurrency” started being used after the paper-manifesto published by Satoshi Nakamoto – the alleged creator of Bitcoin – in 2008. The paper, titled “Bitcoin: A Peer-to-Peer Electronic Cash System”, which can be accessed here: https://bitcoin.org/bitcoin.pdf (last access: 8th May 2015), reaches the following conclusion: “We have proposed a system for electronic transactions without relying on trust. We started with the usual framework of coins made from digital signatures, which provides strong control of ownership, but is incomplete without a way to prevent double-spending. To solve this, we proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power. The network is robust in its unstructured simplicity. Nodes work all at once with little coordination. They do not need to be identified, since messages are not routed to any particular place and only need to be delivered on a best effort basis. Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism.” (NAKAMOTO, 2008, p. 8). Emphasis added. 6 In Brazil, my first priority were articles published by newspapers Valor Econômico and Folha de São Paulo – mostly because of the economical and legal analyses that both attempted to focus on. 5

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research questions meet: they contribute to existing knowledge and they have some importance for the real world”.7 That being said, I intend to find out through this dissertation how legal mechanisms have been used to deal with Bitcoin and verify whether classifying Bitcoin as a “parallel currency” may contribute with the actual set of legal alternatives developed to deal with cryptocurrencies. My potential contributions insert themselves within three of the five keys suggested by EPSTEIN, namely: (i) the research question developed here has not yet been subject of any other study in the context of Bitcoin. The same happens regarding the classification of Bitcoin as a parallel currency, which has not been done; (ii) on the chapter about parallel currencies, I bring a table comparing local currencies and cryptocurrencies. This is a new set of observable implications referring to a phenomenon happening in Brazil right now; and (iii) by regarding a legal debate with an economical point of view I intend to bring more elements to the discussion and, with this, provide means for a reexamination of existing information.8 That being said, describing a phenomenon such as the Bitcoin is to explore a field in constant development, extremely dynamic and misunderstood by the system’s users themselves.9 During the preliminary survey, I noticed some issues which I believed to deserve a closer inspection. Among them, I highlight: (i) the terminological confusion found in reports, news and academic articles, in which one would find Bitcoin being treated as a “virtual currency”, as a “digital currency” and as a “cryptocurrency”; (ii) the scarcity, in early 2014, of legal papers which handled this particular theme10; (iii) the challenge in monitoring a phenomenon marked by its dynamics and its quick development, especially regarding the jurisdictions’ reactions. In this sense,

scholars must have the flexibility of mind to overturn old ways of looking at the world, to ask new questions, to revise their blueprints as necessary, and 7

EPSTEIN, 2002, p. 40. Emphasis added by the author. See EPSTEIN, 2002, p. 59. 9 In a recent survey, 1 in 10 users showed knowledge in the system’s functioning logic. See GAO, Xianyi, CLARK, Gradeigh and LINDQVIST, Janne. Of Two Minds, Multiple Addresses, and One Ledger: Characterizing Opinions, Knowledge, and Perceptions of Bitcoin Across Users and Non-Users, Rutgers University. Available at http://www.winlab.rutgers.edu/~janne/CHI16-Bitcoinstudy.pdf. Last accessed on the 29th January, 2016. 10 In a quick survey made on the 29th of January, 2016, the number of papers rose significantly: the platform Sistema Integrado de Bibliotecas da Universidade de São Paulo, which aggregates academic papers from all search engines subscribed by the University of São Paulo, from 1.374 papers containing the term “Bitcoin”, 149 (about 10%) present, in the same document, the term “Law”. The platform HeinOnline, on the other hand, which compiles exclusively legal publications, shows 397 (out of 415) which combine both search terms. It is important to notice that the majority of articles published in both platforms dates from 2015, qualifying as quite recent. 8

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to collect more (or different) data than they might have intended. It may be that, after amassing the evidence for which the design calls, the scholar finds an imperfect fit among it, the main research questions, and the theory. Rather than erasing months or even years of work, the investigator certainly should return to the drawing board, design more appropriate procedures, or even recast the original research question. Indeed, often when researchers find that data turn out to be inconsistent with a hypothesis, they immediately see a new hypothesis that apparently explains the otherwise anomalous empirical results. (EPSTEIN, 2002, p. 54).

The last reformulation of the original research question was a reflex of the path this research started following after the first examination board took place. Throughout the bibliographic survey which followed the preliminary survey, I came across several Economics authors – being Lietaer one of them – that identified in Bitcoin a natural occurrence in economic systems, being Bitcoin a simple example of several other “parallel currencies”. This natural-occurrence approach seemed quite compelling. First of all, the concept of parallel currencies, as the denomination itself shows, does not implicate a substitution of the so-called “official currencies” with which they compete. Second, the harmonious coexistence between parallel currencies and official currencies was presented, by these authors, as a recurring phenomenon in the monetary history, closely related to the history of National States. From then on, I searched what Law had to say regarding the existence of parallel monetary instruments, which comprised to look for legal answers beyond the doctrine. If scholars repelled the notion of existence of one or more parallel “currencies”, how did other legal bodies positioned themselves regarding Bitcoin? This is the objective of the third section of this dissertation11 which, combined with Annexes I and II, presents a detailed narrative on the treatment regarding Bitcoin in several legal orders that already dealt with this instrument. The research based itself on an observatory that evaluates and publishes any news related to Bitcoin – here included regulatory measures adopted by States. The Coindesk platform is an independent publication with reporters based in several countries (England, United States, Canada and Japan, among others)12 describing itself as “world leader in news and information on digital currencies such as bitcoin, and its

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Shortly before the conclusion of this work, the Bank for International Settlements, institution that assembles several central banks, published a repot on digital currencies which contains specific regulatory answers already presented by States. Committee on Payments and Market Infrastructures, Digital Currencies, Nov. 2015. The whole document can be downloaded at http://www.bis.org/cpmi/publ/d137.pdf. Access: 22nd January 2016. 12 For more information, see http://www.coindesk.com/about-us/. Access: 29th January 2016.

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underlying technology – the blockchain”.13 Its databases are connected to 67 media sources14 that, added to its own investigative journalism, bring daily updates on Bitcoin around the world. The presentation by the observatory’s team is the following:

We aim to publish top-quality news and information relating to digital currency and blockchain technology. We cover a broad range of topics within the crypto space, including regulatory developments, investment, technological updates and price fluctuations. We maintain principles of fairness, accuracy, objectivity and responsible reporting. We uphold principles of excellence in reporting original news and in reviewing and corroborating information from other sources. The editorial team will cover both positive and negative news with objectivity and integrity, without influence of the publisher. CoinDesk does not accept payment in return for news articles, features or product reviews.

In order to account for more precision in my results, the data gathered at the observatory was compared do data presented by the platform Virtual Currency Report15, published by the Perkins Coie’s Virtual Currency Group – a law office that specializes in technology and leads matters involving virtual currencies.16 The data crossing shows that, until now, 61 countries – plus the European Union – have presented reactions to the phenomenon, among which 24 developed legal classifications for Bitcoin and 23 established legal consequences for the Bitcoin’s presence in their financial system. The objective of this dissertation is to identify how Law uses its available mechanisms to deal with new situations. The Bitcoin phenomenon constitutes a good example in this sense by showing that the legal classifications and implications are as varied as possible. On this matter, the classification developed by Economics regarding the genre “parallel currencies” could aggregate elements to the legal analysis, allowing for the economic debate to contribute to the regulatory debate. 13

Source: idem. The full list can be seen at http://www.coindesk.com/press/. Access: 29th January 2016. 15 Available at https://www.virtualcurrencyreport.com/. Access: 29th January 2016. 16 “Perkins Coie, with our long history representing Internet and technology leaders, is at the front line of digital currency issues. Our attorneys help clients navigate the thorny challenges faced by bitcoin and other virtual currency businesses. We provide regulatory investigations and compliance counseling, litigation support, consumer protection counseling and business transaction assistance on a range of bitcoin and digital currency systems, services and products. We counsel virtual currency industry clients on such regulatory issues as compliance with the Bank Secrecy Act, FinCEN regulations, and securities and commodities laws and regulations.” Source: https://www.virtualcurrencyreport.com/. 14

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This dissertation is divided in four sections. The first section narrates the case Bitcoin, its specificities, potentials and limitations, simplifying notions from the Information Technology and Economics in order to bring the discussion closer to legal scholars and practitioners. The narrative was built based on reports from several institutions – both public and private –, news articles, papers from several fields (IT and Economics, for example) and specialized bibliography, which shall be specified in the corresponding section. The second section presents the notion of parallel currency and seeks to deconstruct the terminological problem to which I referred when beginning this chapter. The sources used here use the same bases from the previous section. The third section, as briefly formulated before, brings the different treatments offered by legal orders from several countries regarding Bitcoin. This survey was made based on digital platforms that monitor, among other questions, the regulation of this cryptocurrency. It is interesting to point out that, following the wave of manifestations around Bitcoin and its regulation, the International Monetary Fund recommended in a recent report17 that legal interventions should be careful not to suffocate innovation. It is, in the end, the constant tension between reducing risk and the existence of enough space for actors to act creatively, tension which does not seem to resolve itself and whose complexity tends only to grow. The fourth section concludes.

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IMF, 2016.

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2. THE NARRATIVE OF THE PHENOMENON: THE BITCOIN CASE. 2.1. CHARACTERISTICS The criticism is severe. Many link the volatility of its exchange rate to its liquidity – what could be explained by the universal reach of debit and credit cards, making them hard to compete with. But, above all, the advantage of not existing a central bank or regulation is its biggest disadvantage: a medium of exchange need to be believable in order to spread and, in the modern world, the State still represents order and legal tender.18

First of all, a useful distinction: the word “Bitcoin” is commonly used as a synonym for (i) the initiative of creation of a cryptographic monetary alternative, (ii) this alternative’s user network, (iii) the technology comprised within the cryptographic schemes and (iv) the unit of account of the “currency” Bitcoin itself – whose symbol is ฿.19 The Bitcoin-currency is, today, the most famous among cryptocurrencies. Much of its relevance comes from it being the first medium of exchange that is completely virtual and decentralized. The denomination “cryptocurrency” comes from its purely virtual existence20 and some characteristics which differ from those called “virtual currencies”, as shall be explained in the next section. Created by an open source21 program that operates on a peer-to-peer basis, that is, from user to user, its transactions take place from private citizen to private citizen. It is not bound to any central organization that regulates its emission, monetary ballast or value. A Bitcoin enters circulation through a mathematical process called, by its users, “Bitcoin mining”. The program from which the cryptocurrency can be extracted was designed in 2008 by an anonymous programmer known as Satoshi Nakamoto, and it is 18

Newspaper Valor Econômico Online. A Regulação dos Bitcoins. 31st of March 2014. THE, 2014, p. 11. 20 There are, both in Canada as in the United States, ATMs which work only with Bitcoin. One cannot withdraw physical money from the machine, since Bitcoin is virtual. The operations of withdrawal and deposit are made through a QR code issued by the machine and scanned by the user’s Smartphone. It makes possible for users to purchase products instantly or update their Bitcoin account. (USA Today. Bitcoin ATMs come to USA. February 20, 2014 and USA Today. Bitcoin ATM dispenses cash for cryptocurrency. February 20, 2014). 21 An “open source” program allows for users to constantly modify and update its original version, not depending on an intervention by a “central” – such as Microsoft in Window’s case, for instance – to correct flaws or provide improved versions. The principles of open source programs are the following: (a) free distribution, that is, creators and users may not restrict access to the program and its components in any way; (b) the source code must be accessible to all users, allowing them to alter the original program – which also configures the third principle, the one of derived work; (c) integrity of the source code’s author: any alteration in the original code must be published so that one knows which code originated them, the author cannot be forgotten along the way; (d) nondiscrimination, that is, the program’s distribution shall not discriminate people, groups or field of activity; (e) license: conceded use licenses are neutral, wide-ranged and free. 19

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basically a cryptographic problem which keeps evolving in terms of complexity. Every time a user “solves” the problem at hand, he will earn, as a reward, Bitcoins.22 The Bitcoin system users can be divided in two types: the miners, who act as suppliers of monetary units – and therefore monetize Bitcoins by retrieving them and adding them to the other Bitcoins already in circulation23 –, and the clients, who use Bitcoin simply as a payment method for transactions in general. At some point, the complexity of the mathematical problem for which Bitcoins are awarded shall be so great that no more Bitcoins will be put in circulation – the system will then operate with a limit amount of monetary units, namely, the already foreseen maximum of 21 million Bitcoins. This means that, similarly to the mining of precious metals – which is limited according to the availability of natural resources, equally limited – the mining of Bitcoins also faces depletion: one calculates that the last Bitcoin will be mined around 2140.24 It is important to stress that exactly due to its inelasticity, that is, its finiteness, it will probably face a deflationary trend. That being said, the overall expectation in the long run is for the price of the monetary units to rise. A possible consequence of this would be that the use of satoshis (the minimum unit of Bitcoin)25 rises exponentially.26 One of the most complex matters regarding cryptocurrencies is their independence from a central official entity that mediates and oversees their transactions.27 In order to understand what the inexistence of a central entity implies, let’s consider the following hypothesis: if a person buys a book online with a credit card, the credit card company withdraws the applicable amount from this person’s bank account and deposits the money in the account of who sold the book. Without this intermediary, the virtual amount of money could be spent several times: basically, when I send money from my virtual account to someone, a copy of this money-file would still be available at my computer. It is more or less like an e-mail annex – the original document remains with the sender. Without someone to 22

In order to understand the nuances of this process, some tutorials might help. See https://www.youtube.com/watch?v=LuA3xb-L8r8 and https://www.youtube.com/watch?v=Lx9zgZCMqXE. Last visited on 9th January 2017. 23 Miners are users with great operational and technological potential who possess advanced computer ressources and use these to solve the aforementioned cryptographic problems. 24 BRITO and CASTILLO. Bitcoin: a primer for policymakers. POLICY, Vol. 29 No. 4, Summer 2013-2014, p. 5. 25 The “satoshi” is the smallest unit of the Bitcoin currency and totals 10 -8 BTC. 26 See THE, 2014, p. 11. 27 Without a central institution, the price of a Bitcoin (which, on the 30th of January, 2016, equaled US$ 377 (three hundred and seventy seven American Dollars), is determined solely by the supply and demand of its users. The current price can be consulted at http://www.coindesk.com/price/.

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control who sent what and “delete” the money-file from my account, the possibilities of fraud are pretty much endless. Bitcoin was the first system that provided a solution for this through a technology called blockchain, revolutionary in several ways. The blockchain provides, basically, a possibility of control by each system’s user through broad and unrestricted access to information regarding everything that happens inside the system.28 In other words, the Bitcoin system would be a closed-encoded-universe, in which all users, all transactions and all Bitcoins are registered and available on the blockchain. 29 This would be the equivalent to a “central entity” responsible for organizing the cryptocurrency’s activities. The difference is that this “central entity” is a compilation of code, a program under constant scrutiny and validation by each user of the system. The fraud problem elucidated before is solved exactly through this mutual control by the users. When a user performs a transaction, a new line of code is added instantly to the blockchain. Since each user is identified by a specific line of code, called the “wallet”, it is possible for other users to control the history of transactions of this specific user. When a user sells a Bitcoin, this transaction will be controlled and validated by the remaining users connected to the blockchain. Transparency is the key to the safety needed in order for the system to work. In this sense, one of the big discussions around Bitcoin – or to be more precise, around cryptocurrencies in general – is the possibility of users’ identification, considering the alleged “anonymity” of the cryptocurrency system crystallized through the blockchain. Actually, the accurate remark would be to say that the system works through pseudonyms (that is, parts identify themselves as they want to) and not anonymously (when parts do not identify themselves at all).30 This means that if a given user is searched within the system by her identifying code, all her transactions will be identifiable. With this in mind, several

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Transactions are updated instantly and can be consulted both by users and non-users at https://blockchain.info/. Access on: 25th January, 2016. 29 The blockchain technology, which implies total transparency in a given context, it is already considered by several banks as the future of financial transactions. In a meeting that took place in January 2016, 70% of the institutions present at the Bankers' Association for Finance and Trade (BAFT) Global Annual Meeting, stated that the technology is currently being analyzed by them. Source: http://www.coindesk.com/baft-bankersbillions-private-blockchains/. Accessed on February 1st, 2016. 30 BRITO and CASTILLO. Bitcoin: a primer for policymakers. POLICY, Vol. 29 No. 4, Summer 2013-2014, p. 5.

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studies31 claim to be possible to find the true identity of every user through, for example, tracking the IP number or other “digital footprints” left when accessing the internet.

2.2. POSSIBILITIES The main question regarding the use of Bitcoin is: why would someone prefer, instead of using the official currency of her country, a currency which she does not even fully understand?32 True, the mathematical logic of the cryptocurrency system keeps many aspiring users away. The growing use of Bitcoin, however, confirms that not only users actually believe in the possibilities behind its adoption, they also seem to get advantages from it. One first advantage in using Bitcoins is the reduction of transaction costs inherent to financial operations depending on an intermediary.33 The most emblematic example of this is the one of credit card operators: in order for a company to be able to accept payments through credit cards, it needs to pay several fees throughout every step of the negotiation – to provide its customers with the acceptance of the card, to acquire the processing equipment, commissions for every transaction, among others. This makes impossible for smaller businesses and companies to offer their clients this payment method – and therefore negatively impacts their profits as a whole for reducing the amount of prospective clients. In this particular situation, Bitcoins have been quite popular among small businesses as an alternative to the credit card system.34 Apart from that, transactions using the cryptocurrency are instantly debited of the users’ virtual account, what does not happen in bank transactions. The factor of velocity is also important for the adoption of Bitcoin by entrepreneurs. Furthermore, a fraud quite common among credit card operators – which happens when the buyer claims not having purchased a given product or that the purchased product did not arrive or that she regrets her purchase and demands her money back – the so-called chargebacks, are avoided through the use of Bitcoin. Chargebacks cost for the merchants not only the product (with the exception of the case in which the buyer regrets her purchase, since there is usually the obligation to send the product back in order to be refunded) but also the paid amount – not to mention the fee for returning the money to the consumer. Since 31

The study commonly cited on this particular field is the one written by Elli Androulaki, et al. Evaluating User Privacy in Bitcoin, IACR Cryptology ePrint Archive 596 (2012). 32 Which apparently does not hinder new users from entering the system. See supra note 9. 33 See FONG, Jeff. How Bitcoin Could Help the World's Poorest People, PolicyMic (May 2013) and BRITO and CASTILLO. “Bitcoin: a primer for policymakers”. POLICY, Vol. 29 No. 4, Summer 2013-2014. 34 KAROL, Gabrielle, Small Business Owners Say Bitcoins Better than Credit Cards, FOX Business, Small Business Center (April 12th, 2013).

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Bitcoin works on an instantaneity logic, being immediately debited, it is virtually impossible for this “return” to the previous situation to occur. There is not, with this, any chance of regret and frauds which could take advantage of this possibility. Given the coexistence between credit and cryptocurrency systems, consumer and merchant are free to choose the scenario which fits them best. The existence of this alternative is, by itself, positive – in a market economy, it promotes, even indirectly, competition among both systems and benefits, in theory, the consumer. Another important scenery in which one could see an advantage for using Bitcoin relates to foreign remittances to the country of origin. It is known that several underdeveloped countries receive a significant amount of money from emigrants that work abroad and send resources to their families in their home country. In 2014, the amount of remittances reached US$510.8 billion.35 The table below shows the percentage of the remittance’s participation in the GDP in some selected countries:

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Information from http://data.worldbank.org/topic/financial-sector. The amount received by each country can be found at http://data.worldbank.org/indicator/BX.TRF.PWKR.CD.DT. Access: 30th of January, 2016. The data were updated by the World Bank for the last time in December 2015. Source: http://databank.worldbank.org/data/reports.aspx?source=2&country=&series=BX.TRF.PWKR.CD.DT&period= #. Access: 30th of January, 2016.

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Country Albania Armenia Bangladesh Dominican Republic El Salvador Ecuador Gambia Georgia Guatemala Haiti Honduras India Jordan Kosovo Lebanon Nigeria Philippines Senegal Tajikistan

2006 14.9 10.2 8.8 8.5 18.8 6.3 9.7 8.1 12.2 21.8 21.6 3.0 10.1 19.7 23.2 11.6 12.5 9.9 36.0

2008 11.5 9.0 11.2 7.9 17.5 5.0 6.7 8.3 11.4 21.4 20.5 4.1 17.3 18.1 23.9 9.2 10.7 11.0 49.3

2014 8.6 17.9 8.7 7.5 16.8 2.4 na 12.0 9.9 22.7 17.4 3.4 10.4 16.1 16.2 3.7 10.0 na 41.7

Table 01. Percentage of personal remittances in relation to the GDP in some selected countries. The data bank did not disclose the amounts for Gambia and Senegal for the year of 2014. Source: World Bank.36

This remittance is usually made through currency exchange agencies – such as Western Union – which charge significant fees in order to perform the transaction and need several business days for the money to actually reach its recipient. The following simulation37 shows that an online transfer would have fees varying from US$4 to US$15. If the same transfer was made personally or by phone, the amounts would be respectively US$8 and US$34. The average time needed is three business days.

36

Available at http://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS/countries/1W?page=1&display=default (access: April 6th, 2014). 37 Simulation made on April 6th, 2014, on Western Union’s website, remittance from Germany to Mexico totaling US$1000. Source: https://www.westernunion.com/price-estimator/continue?REF_ID=4DJ9-FMBFVJ1H-T05K-R7K9-9BCK-4CFU-AUB8&2.

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Table 02. Simulation of remittance via Western Union. Source: Online simulation provided by Western Union’s webpage.38

Performing these transactions in Bitcoins would have practically no operational costs (with the exception of computer and internet access) and would be instant. This possibility is considered attractive by exchange and remittance companies themselves. 39 To sum up, the use of cryptocurrencies in this context would reduce significantly the cost of sending capital to developing countries – which are, in the long run, the greatest beneficiaries of foreign remittances. One last remark on development: some have claimed the importance of cryptocurrencies in the financial inclusion of the portion of the population with no access to banking services.40 Assuming that the inclusion in the economic sphere happens mainly through the banking system, several underdeveloped countries have been quite enthusiastic about the use of digital alternatives for banking inclusion – like Kenya, Tanzania and Afghanistan.41 Some of these services are already cryptocurrency-compatible, making it possible for poor regions to insert themselves in the financial world in a fast and cheap way. 38

Page available at www.westernunion.com.br. Access: February 3rd, 2016. JOHNSON, Andrew R. Money transfers in bitcoins? Western Union, MoneyGram weigh the option, The Wall Street Journal (April 18th, 2013). 40 In Brazil, according to a survey conducted by IPEA, 39,5% of the country’s population have no bank account. In the North region, the exclusion is even greater: 50% of the inhabitants have no access to a bank. In the Northeast, the number reaches 52,6%. In the South, the least-excluded region, the percentage is of 30%. Source: Sistema de Indicadores de Percepção Social (SIPS), IPEA, 2011. http://www.ipea.gov.br/portal/images/stories/PDFs/livros/livros/livro_sistemaindicadores_sips_01.pdf. Access: February 13th, 2016. 41 FONG, Jeff. How Bitcoin Could Help the World's Poorest People, PolicyMic (May 2013). 39

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Finally, the Bitcoin system allows not only for users to avoid restrictive monetary policies (such as in Argentina, suffering from a 25% yearly inflation and strict capital controls)42 but also to avoid restrictive policies in general. For instance, in countries like China and Iran, it is forbidden to carry out certain transactions – such as purchasing a premium package for blogs or acquiring music and video licenses.43 Bitcoin could provide a margin of economic and political freedom in these cases.

2.3. LIMITATIONS The biggest disadvantage of the Bitcoin system, constantly reported by the media, is its price fluctuation. Since 2011, when it started being used in larger scale, Bitcoin suffered five significant fluctuations in its value.44 In 2011, in less than a week, Bitcoin had its deepest fall registered until today – 68%. Five months later, in November 2011, the currency’s rate reached US$2, totaling a fall of almost 95% since the beginning of the crisis.

Graphic 01. Bitcoin’s price fluctuation between 4th and 14th June 2014. Source: Mt. Gox Exchange.

In January 2012, still experiencing prices below US$10, Bitcoin’s value sunk, within two days, to 50% of its selling price. 42

MATONIS, John. Bitcoin’s Promise in Argentina. Forbes (April 27th, 2014) and WELLS, Georgia. Bitcoin downloads surge in Argentina. The Wall Street Journal Money Beat (July 17th, 2014). 43 BRITTO, Jerry. Bitcoin: more than Money. Reason. Dezembro de 2014, Vol. 45, p. 4. 44 LEE, Timothy. An Illustrated History of Bitcoin Crashes. Forbes (April 11th, 2014). Graphics 01 and 02 were taken from the aforementioned article. The currency rates were based on the page http://bitcoincharts.com/charts/mtgoxUSD#czsg2012-01-13zeg2012-01-22ztgSzm1g10zm2g25zl, which brings the Bitcoin-Dollar parity as transactioned by the exchange Mt. Gox.

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Graphic 02. Bitcoin’s price fluctuation between 13th and 23rd June 2014. Source: Mt. Gox Exchange.

Similar crises repeated themselves in August 2012, March and April 2014, but not in the same magnitude of the ones shown by the graphics. These fluctuations usually occur because of (a) excessive supply or (b) excessive demand. The demand excesses are mostly caused by media movements that end up attracting attention to the system and lead to adhesion booms. There are basically two ways for users to acquire Bitcoins. A user can both install in her computer a “mining” program – which, in the current cryptographic stage of the math problem to be solved, will take some time to extract one Bitcoin from the system 45 – and buy from other users or from “exchange” shops Bitcoins that were previously mined. This is why when more aspiring users join the Bitcoin community, the currency’s price skyrockets, since demand surpasses supply. The supply excess, on the other hand, happens mostly when one of the users (or a separate community of users, also named “clusters”) develops an improvement to the mining tool – which, as I pointed out before, is open source and, therefore, open to upgrades and enhancements. That way, if a user develops a key to speed up mining, several Bitcoins will be monetized in record time – which leads to an overflow of the currency in the market and, as consequence, a price drop. Another challenge that led to price fluctuation is the occasional security breach suffered by users or exchange agencies due to the system’s cryptographic nature. Bitcoin wallets have been hacked several times. Users are also sometimes responsible for mistakes

45

Who started mining in June 2014 took, in average, several weeks to obtain a Bitcoin. See Bitcoin Mining (https://www.bitcoinmining.com/bitcoin-mining-hardware/) and We Use Coins (https://www.weusecoins.com/en/mining-guide/). Access: January 24th, 2016.

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while administrating their wallets – such as deleting them by accident or saving a transaction under another user’s pseudonym. In these cases, because of a moment of negligence, the values can be lost forever. And yet another disadvantage which has been object of discussion by several regulators around the world: the possible illegal use of cryptocurrencies, especially regarding money laundering and weapons, drugs and terrorism financing. It is nevertheless important to stress out that Bitcoin, as a medium of exchange, is subject to the same abuses than the official currency of a country. The Dollar, for example, can be used for all these purposes as well. The only aggravating factor is that Bitcoins can be more easily transferred and their monitoring and control are way more complex.46 The use of Bitcoin, however, still thrives in spite of instability. Currently, one Bitcoin unit can be bought by approximately US$377.47 One of the main reasons for this success might be that the use of the cryptocurrency concerns mostly the completion of transactions. This means that for most Bitcoin users who bought units on a given day, it does not matter how much the currency will be worth in two weeks – they are interested in paying for a service or purchasing a product in the near future. The high degree of fluctuation indicates that if Bitcoin were used mostly for speculation purposes or a store of value – I will come back to this when I discuss whether Bitcoin can be considered a parallel currency or not –, it is quite possible that it would not exist anymore. It is its intense circulation that guarantees that this volatility does not affect its use.

46

I stress once again that this complexity does not change the fact that the control is possible. For suggestions on monitoring and controlling the instrument, see ANDROULAKI, Elli et al. Evaluating User Privacy in Bitcoin, IACR Cryptology ePrint Archive 596 (2012). 47 Rate of January 30th, 2016 at http://www.coindesk.com/.

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3. PARALLEL CURRENCIES 3.1. CONCEPT In the case of the monetary unit (...) we find a substantive that is, apparently, used to identify an object. But there is no object; the word no longer identifies anything. There is no question as to its important role when it is used in a certain way, according to law and social practices. It is through its intermediation that all exchange of goods and services can be made (…). Nobody is interested to question what are the alleged objects designated by the word that mentions the monetary unit; the goods, services, obligations and means to be freed of them are what really matters. (OLIVECRONA, 2002, p. 40). Free translation of the original.

This section is inspired by the work of COHEN in which he acknowledges two types of “nonstate monies”, that is, two species of non-state currencies: the local currencies and the electronic currencies.48 By local currencies, the author understands those restricted to a specific community or region. And states its development and growth: “In early 2000, as many as 2.500 local currency systems were thought to be in operation in more than a dozen countries, up from an estimated 300 worldwide in 1993 and fewer than 100 in the 1980s”.49 By electronic currency, on the other hand, he describes those based on a digital support. In this section I attempt to develop the differentiation brought by COHEN, moving forward in his classification in order to solve some terminological problems that emerged when I analyzed the bibliography on Bitcoin. While on the process of gathering material for my research, I noticed that the terms “digital currency”, “virtual currency” and cryptocurrency were used as synonyms, even though “virtual currency” was the main choice of several official entities such as the International Monetary Fund and the European Central Bank. As I seek to clarify, digital currencies are the genus, from which virtual and cryptocurrencies are species. After examining examples of these monetary instruments50, I realized that there are some distinctions among them that deserve attention, not only for a matter of merely naming them correctly, but because the proposed differentiation might contribute to the further description and understanding of this phenomenon in a regulation to

48

In order to avoid confusion with the term “electronic money”, which, in Brazil, is a part of the official electronic payments system and, therefore, does not relate to parallel currencies, I chose to adopt the synonym “digital currency” throughout this text. COHEN also uses both terms as synomys.. 49 COHEN, 2004, pp. 179-192. 50 By “monetary instrument” I adopt the concept developed by Jérome Blanc (1998), who acknowledges monetary character to a given instrument when it assumes the functions of charging and paying.

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come. In other words, the specificities of each monetary type call for a regulatory answer sensitive to these differences.51 This is precisely the objective of the table that follows the differentiation, that is, to provide subsidies for the comprehension of two distinct logics currently circulating in Brazil: both at the level of local currencies, for which the Palma is internationally regarded as a successful example of local currency, as well as that of cryptocurrencies, and therefore the Bitcoin – whose acceptance has been rising exponentially in the last years.52 These are, then, matters of interest for Brazilian jurists since they configure new full functioning monetary developments in Brazil. In order to introduce the concept of parallel currencies, I would first like to present the division made by BLANC53 of the monetary context in three different historical moments.54 The first moment comprises the Middle Ages and the feudal economic system, composed of several currencies and value units. Every feudal lord could issue and adopt currency to his convenience, what led to several barriers and practical challenges to commercial development. In the second moment – quite recent in human history, starting around the 18th and 19th century – there is the rise of nation states and the appropriation, by the ruler, of the power to issue currency as a component of his sovereignty.55 The existence of a sole national currency starts then to be challenged during the 20th century, with the rise of the first social movements fighting for the implementation and circulation of parallel currencies (also called “complementary” or “alternative”). Under this division, one can easily realize that the period in which a State was composed by a sole national currency – during which currency issuance

51

Just before the conclusion of this dissertation, the International Monetary Fund published a report in which presents a taxonomy of parallel currencies, also stressing differences between digital, virtual and cryptocurrencies. IMF, Virtual Currencies and Beyond: Initial Considerations, Jan. 2016. The full report is available at http://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf. Access: January 27th, 2016. 52 See infra note 125. 53 BLANC, 2006. 54 For a historical analysis of the emergence of currencies, see the work of SERVET, Jean-Michel, especially “Essai sur les origines des monnaies” and “Genèse des formes et pratiques monétaires”, both from Cahiers monnaie et financement, nº 8 and nº 11, respectively. 55 See supra note 2 and infra note 62. See also COHEN, 2004, p. 5. The author describes five benefits (economical and political) associated with the adoption of the Westphalian model: (i) a potential reduction of the domestic transaction costs in the promotion of economic growth; (ii) the creation of a powerful instrument for administrating the macroeconomic performance of the economy; (iii) a possible source of revenues to guarantee public expenditure; (iv) a powerful symbol to promote a “national identity”; and (v) a practical way to block foreign influences or restrictions. (Idem, p. 17).

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was regarded as integrating part of the State’s sovereignty and as condition for its recognition as a sovereign State – was fairly short.56 In this sense:

But what, then, of all the private monies that have flourished throughout history? In fact, the historical record is replete with examples of what economist Richard Timberlake (1987) calls common tender, in contrast to state-sanctioned legal tender – payments media that have been commonly accepted without coercion through legal means (…). All demonstrates that state power is by no means the only source of trust in money (…). Likewise, the bursts of scrip-based systems in earlier times, as well as the re-emergence of local currency systems in the present era, testify eloquently to the limitations of the state theory of money. (COHEN, 2004, p. 190). Emphasis by the author.

The transition from the first historical moment to the second was very slow and gradual. A currency which was suddenly taken off circulation would bring great difficulties to commerce – not to mention the chaos and panic occasioned by the legal and economical uncertainties among the users of the monetary instrument. The first nation states eliminated little by little the institutions responsible for currencies issuance (such as private banks, issuance houses and, in some case, individuals), but not currencies themselves.57 These kept being accepted in commercial transactions until the national currency was effectively implemented. During the second historical moment, it is possible to identify at least three reasons for the threat against the principle of monetary sovereignty. First of all, wars. In political collapse situations and massive destruction of cities and roads, people were forced to use parallel instruments to keep some of the economy’s functioning alive. Secondly, the cases of deflation or hyperinflation, which interfere with the availability of money supply and obstruct further commercial transactions, leading to a cyclic worsening of the economy’s situation.58 56

GALBRAITH, 1977, p. 7. Some authors go as far as to not acknowledging the existence of a monetary pattern oneness. “Beyond the misty landscape defined by government preferences lie new frontiers, populated by an increasing variety of currencies emanating from sources other than the sovereign state. National governments have neSee been the sole suppliers of money. Even during the heyday of the Westphalian Model, when the dominance of state-sanctioned currencies was most complete, numerous nonstate monies could be found in circulation. Prior to the nineteenth century, the role of the private sector as a major producer of money was taken for granted. Today, as demand-driven competition among currencies is once more becoming the norm, there is every reason to expect the role of the private sector to be affirmed again and even reinforced. In a world increasingly accustomed to choice among currencies, there seems little that is anomalous in adding new and potentially attractive nonstate monies to the menu.” (COHEN, 2004, p. 179). Emphasis added. 57 BLANC, 2006, p. 4. 58 As examples we have the 1930 deflation in the United States which led to the boom of LETS (Local Exchange Trading System) networks and other alternative systems, as well as the Argentinean crisis of 2001, which led to the use of several complementary monetary instruments in all economy sectors. Regarding

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Finally, the unavailability of national currency can also be caused by other reasons such as, for example, the scarcity of metals used for coinage or its sudden increase in value (what happened in France between 1914 and 1924). “This means that the need to protect local economies leads to local currencies.”59 Thus, the issuance of money bills by central banks is fairly recent and can be traced back to the 19th century, mostly in countries such as Holland, Germany and England.60 Before that, the State hired private banks to provide this service, leading to the existence of several existing issuing institutions. This situation led to a theoretical discussion between the currency school and the banking school, prevailing the first and, as a consequence, leading to the State’s exclusivity over currency issuance. This victory also implied a clear interest from the State to gain the monopoly over issuance and use this to strengthen its sovereignty.61 Shortly after the concept of state sovereignty was bound to the monopoly of currency issuance62, the beginning of the 20th century will witness an end to this exclusivity63, this time headed by groups frustrated with the quality or even inexistence of state-provided services. The apparent failure of the welfare state, followed by several economical, political and social crises64 leads to the rise of new exchange instruments that make it possible not only for

hyperinflation, the countries of Eastern Europe which were destroyed during World War II experienced several alternative exchange networks as a way to make purchases and exchanges of goods and services possible. (PRIMAVERA; LIETAER, 2001; BLANC, 2006). 59 BLANC, 2006, p. 5. Free translation from the original 60 KNAPP (1924) brings in his Chapter IV a historical reconstruction of the monetary evolution in several countries, such as England, France, Germany and Austria. 61 The currency school had in David Ricardo its greatest defender, who stated that currency should be backed by precious metal reserves. The banking school, on the other hand, defended that the task to control and issue currency should rest with private banks. See PROCTOR, 2012, p. 97. 62 As stated by an International Monetary Fund former Director: “in my experience there is no field where governments at present attach so much importance to sovereignty as the monetary field...” (SCHWEITZWER apud MENDES, 1991, p. 54). And: “Esta evolução só foi possível em razão, inter alia, de dois fatores: o advento do Estado moderno com a consequente instituição do monopólio estatal da cunhagem e da emissão de moedas; e a criação do instituto jurídico do curso forçado, pelo qual os credores são legalmente obrigados a aceitar moeda corrente em pagamento e para cancelamento de seus créditos.” Emphasis by the author. (MENDES, 1991, p. 38). 63 “(…) the growing proliferation of private monies represents a direct threat to the traditional authority of states. Most governments have already lost their traditional territorial monopolies in the geography of money owing to the widening of choice on the demand side of the market. Now, contrary to the view of many respected economists, I contend that states risk losing dominance of the supply side, as well (…).” (COHEN, 2004, p. 179). Emphasis added. 64 “Diante das práticas estatais abusivas, era natural que os particulares passassem a instituir mecanismos de proteção contra os efeitos nocivos das manipulações monetárias arbitrárias (...). É em períodos de incertezas, porém, quando falece a confiança do público no Estado e a inflação ou a hiperinflação campeiam, que os particulares se lançam à busca angustiante de mecanismos jurídicos de proteção de ativos monetários e financeiros.” Emphasis by the author. (MENDES, 1991, p. 37).

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people to maintain simples economic transactions – what had already happened during those emergency situations of monetary pluralism – but also for an actual economic development of the regions in which this was regarded as both impossible and improbable.

Mas a superstição de que é necessário que o governo (em geral denominado ‘Estado’, para que soe melhor) declare o que deve funcionar como dinheiro, como se ele o tivesse criado, e como se o dinheiro não pudesse existir sem ele, provavelmente teve origem na crença ingênua de que um instrumento tal como o dinheiro deve ter sido ‘inventado’ e dado a nós por algum inventor original. Essa crença foi totalmente derrubada no momento em que passamos a compreender o fenômeno da geração espontânea de instituições não planejadas, através de um processo de evolução social, da qual o dinheiro, desde então, se tornou o paradigma (...). (HAYEK, 1986, p. 30).

Under the rule of law, the role of currency issuance is assigned, by law, to the State. There is a national currency, official to a given country, that automatically introduces a monopoly of money supply. The existence of this monopoly ultimately means that only that instrument can be used to validly solve debts – in legal terms, it is only legal tender that can lead to solving contractual obligations. One of the aspects of state sovereignty is the power to invest a particular instrument with this authority65 – acknowledged not only by the subjects that use it but also by others outside this legal order. In this sense, the Real (R$), Brazil’s national currency, is acknowledged as “currency” not only by Brazilians but also by the international community as a whole. How should one define this “authority investment”? The act of issuing currency does not resume to creating a medium of exchange and making it available for circulation, or simply adding a “cifrão” ( ) to monetary pieces, or even enacting rules for the conversion of old currency into new currency as well as for the establishment of exchange rates between national currency and foreign currency.66 In order to better answer the question, one must first take a small detour among some concepts of monetary nominalism.

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The set of sovereign competences regarding the official currency encompasses, beyond minting metallic currency and printing paper money, the rights over fixating and altering the nominal value of the currency, as well as establishing a monetary pattern and organizing an internal monetary system and, still, establishing exchange rules and legal consequences to challenges against this sovereignty. “Portanto, a política monetária acabou tornando-se uma parte secundária da política econômica como um todo. E a política econômica, por sua vez, tornou-se um aspecto da política – da questão de quem exerce o poder, quem controla a distribuição de benefícios.” (GALBRAITH, 1977, p. 317). 66 JANSEN, 1991, p. 128.

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Nominalism is a theoretical tradition that emerges after the notion of intrinsic value of the currency – which credited the currency’s value to its physical support, such as noble metals.67 Thus, a specific currency was “worth” 5 units of value because of its weight and dimensions in gold or silver. Metal, at that point, was acknowledged and valued by itself, despite of circulating in different countries and containing symbols that represented several different authorities. “With the decline of the intrinsic value’s doctrine there is a change in this conception and there is no longer confusion between content and fundament of a currency. The currency’s fundament started being thought not as arisen from its content, but from the competence of who issues it.”68 The competence of the issuer – fundamentally relevant in that moment of nation states’ growing importance69 – starts being the main characteristic to configure a currency.70 In the context of identity consolidation and sovereignty as a new concept, nothing could be more suitable than adding another essential and exclusive aspect to the state’s functions.71 Going back to the question left unanswered, to invest one payment instrument with authority is only possible if the entity to perform this action is, itself, acknowledged as an authority. It is an authority duly supported by a given people and international actors that is able to give validity to a medium of exchange in the applicable national territory. 67

See MENDES, 1991, p. 36. JANSEN, 1991, p. 129. 69 “Todavia o ouro – rígido, pouco elástico e de manuseio difícil – não pode acompanhar a velocidade com que cresceram as economias humanas. Por outro lado, o desenvolvimento econômico das sociedades humanas também determinou o surgimento do Estado. Esses dois fatores, somados, determinaram outra evolução: passou-se paulatinamente da doutrina metalista para o conceito estatal da moeda, com o que deixou a moeda de corresponder a uma determinada quantidade de determinado metal para tornar-se, modernamente, uma espécie de título de poder liberatório emitido pelo Estado, com curso forçado previsto em lei e com aceitação obrigatória para cancelar débitos.” Grifos no original. (MENDES, 1991, p. 36). 70 In this sense, “The development of an independent legal tender concept is a modern phenomenon. In general, up to the eighteenth century lawful money could be used in discharge of debts as a matter of course; proclamation of a novel coin by the Sovereign meant compulsion upon his subjects to receive it for the prescribed value.” (NUSSBAUM, 1950, p. 46). See also MENDES, 1991, p. 53. 71 JANSEN, 1991, p. 141. “Consolidou-se, assim, com o passar dos séculos, o monopólio estatal da cunhagem e da emissão da moeda, ao mesmo tempo em que se desenvolveu ao redor do Estado um complexo de normas jurídicas destinado a assegurar ao Estado a ferrenha manutenção deste privilégio: restrições judiciais e legais à livre estipulação monetária nos negócios privados; instituição legal do curso forçado da moeda; a supervalorização do conceito de soberania monetária do Estado e a inexistência de meios jurídicos para coibir o abuso estatal da senhoriagem, que resulta na irresponsabilidade monetária do Estado; a capitulação do crime de moeda falsa, do crime de evasão de divisas, e outros crimes correlatos nas leis penais; as restrições cambiais; e outras mais.” (MENDES, 1991, p. 37). The right to “seigniorage” to which the author alludes relates, in its origin, to the tax paid to the sovereign lord for the right to mint money. Nowadays, the concept relates to the difference between real value and nominal value of money. Seigniorage corresponds then to the “cost of inflation suffered by the people in benefit of the State”. (MENDES, 1991, p. 53). Free translation from the original. 68

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Competence to issue a currency relates, therefore, to the power to give an up to that moment unnamed currency an official name. It is only Brazil, in its quality as a subject of international public law, that can give to a currency the name of Real. The logical consequence of Nominalism is the idea that the notion of currency is a legal notion. Nomos, from Greek, means “law”. It can also be found again in the Greek word for money, nômisma. “Nominal” is, then, what comes from the law. “Currency, being a nominal value, is a legal norm (…). Money is seen simultaneously both as a monetary norm and as monetary legal action.”72

A moeda é uma criação do Direito, e pode subsistir, inclusive, sem metais monetários, e a razão fundamental é que a unidade monetária se define não tecnicamente, mas juridicamente. A questão do valor da moeda é secundário: uma só questão importa, e é sua validade, quer dizer, o poder liberatório que lhe dá o Estado, ou seja, aquilo a que a moeda dá direito em virtude de Lei. (KNAPP apud JANSEN, 1991, p. 149).

This being said, all those instruments which were not invested with enough authority to be acknowledged as official currency become “alternative payment instruments”, a legal irrelevant with no power to free people from obligations and that will be dealt with by private contractual law. Having this in mind, the remark by ASCARELLI73 when comparing credit titles (in Portuguese, “títulos de crédito”) and money, is quite fitting:

É nesse caso que surge o problema da concorrência econômica ao papelmoeda. Isso, aliás, é natural, atendendo-se a que o papel-moeda, nas suas origens, não passava de um título ao portador, título abstrato, para o pagamento à vista de certa quantia de dinheiro; dinheiro, então, era o ouro. A qualidade de título de crédito não é incompatível com a de moeda. Com efeito, para decidir o que constitui moeda (conceito mais amplo que o de ‘moeda legal’) é necessário considerar o que de fato é correntemente dado e aceito como instrumento de troca; daí a possibilidade de determinado título de crédito acabar sendo considerado como ‘moeda’. (ASCARELLI, 1969, p. 307). Emphasis added.

The author shows enough sensibility to acknowledge that some of these alternative instruments can assume the shape of “currency”, seeing no problem with the existence of “currencies” concomitant to the “legal currency” of a State.74 A parallel currency would then 72

JANSEN, 1991, p. 134. Free translation of the original. ASCARELLI, Tulio. Teoria Geral dos Títulos de Crédito. São Paulo, Saraiva, 1969. 74 “A importância do aparição gradual do papel-moeda governamental, e logo das notas bancárias, é complexa em termos de nossos objetivos, pois, por longo tempo, o problema não foi o surgimento e novos tipos de 73

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be an exchange instrument, used in a context in which there already exists an official currency (or “legal”, in ASCARELLI’s words), commonly accepted by a group of people which recognize in this instrument a currency. It is a category usually identified by economists within the capitalist system.75 “Various commodities have been, and still are, used as money in some societies” 76 – though one must point out that not only commodities can be used as currency. In some cases, when a community develops an exchange mechanism, we can find bills, coins, cards and other supports, physical or not, that present the same characteristics inherent to parallel currencies enunciated above.

Consideration of these dynamic historic factors would illustrate in greater detail that money is a social phenomenon just as is any other economic category. Its existence and the form it takes reflect the social and economic structure within which it is used. A dollar bill is, in itself, a useless thing – a valueless piece of paper; it acquires value only because society, through its laws and customs, has invested it with the power to act as a Medium of Exchange, Unit of Account and Store of Value. (HARRIS, 1981, p. 8). Emphasis added.

It seems then that a currency does not result from a simple state imposition. The excerpt transcribed above goes in the same direction, by acknowledging that currency is also a social phenomenon.77

dinheiro com denominações diferentes, mas o emprego, como dinheiro, de papéis que representavam direitos sobre o dinheiro metálico existente emitido pelo monopólio governamental. Seria, provavelmente, impossível que pedaços de papel ou outros símbolos de materiais que não tivessem, por si mesmos, grande valor de mercado, fossem gradualmente aceitos e considerados como dinheiro, a não ser que representassem um direito de reivindicação de algum tipo de objeto de valor. De início, para que sejam aceitos como dinheiro, precisam derivar seu valor de outra Source, tal como sua convertibilidade em outro tipo de dinheiro (...)”. (HAYEK, 1986, p. 22). 75 The difference is that, for economical theory, in order for an instrument to be understood as “currency” it needs to fulfill three characteristics common to legal tender: (i) medium of exchange, (ii) value reserve and (iii) unit of account. I will come back to this discussion in the next section. 76 HARRIS, 1981, p. 9. “By contrast, a monetary economy is one where a particular commodity, money, is exchangeable for any good and any good is exchangeable for money, but goods (nonmoney commodities) are not exchangeable for one another.” (Idem, p. 6). 77 In the same direction, “Moeda é, ao mesmo tempo, uma linguagem específica (o sistema de contas), um objeto (os instrumentos de pagamento), e uma instituição (as regras de moedagem). Ela não é somente um objeto, uma mercadoria meio de troca mercantil, como em seu sentido mais comum na economia; ela não se reduz tampouco a uma simples linguagem especial de comunicação, como na visão destacada por alguns sociólogos; mas ela não é também apenas uma instituição, um sistema de regras, tal como o afirma frequentemente a economia institucionalista. Ela é um fato social total que tem simultaneamente estas três dimensões, o fenômeno da moeda sendo ao mesmo tempo econômico, político e simbólico.” (THÉRET, 2008, p. 25).

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It is this recognition by a given user community that leads to a instrument having value, keeping its value and being accepted as an intermediary for exchanges and transactions. Seen in these terms, money is usually defined as the medium of exchange widely accepted78, but there is no reason to say that, in a community, this happens with only one money.79 From this, one can conclude that parallel currencies are those that lack a legal recognition regarding its quality as a currency by the State, but are used and recognized as money supply by those who use them. Nowadays, we find several parallel monetary instruments circulating within national territories – and these are no longer restricted to foreign currencies, that is, currencies invested by another authority. These parallel, non-official instruments have, as characteristics, (i) the fact that they are used as different pricing units when compared to the national price unit; (ii) not having the power to release someone from a contractual obligation after the “payment”; and (iii) not being backed by the authority of a nation state.80 It is also important to notice that the fact that one national currency is considered strong and safe by its users does not prevent the emergence of parallel currencies – even though in periods of economic crisis the creation and circulation of these instruments does, indeed, tend to grow.81 The graphic that follows shows the evolution in the creation of local trading systems. Not all of them make use of physical instruments recognized as “currencies”, but it is 78

This definition was introduced by Carl Menger, whose work should definitely mark the surpassing of the medieval concept that money, or money’s value, is a State creation. “Servir como meio de troca amplamente aceito é a única função que um objeto deve preencher para que seja qualificado como dinheiro, embora um meio de troca geralmente aceito normalmente deva preencher também as funções adicionais de ser unidade de cálculo, guarda de valor, padrão de pagamentos futuros, etc. A definição de dinheiro como ‘meio de pagamento’, contudo, é meramente circular, já que esse conceito pressupõe dívidas contraídas em termos de dinheiro”. [See MISES, The Theory of Money and Credit]. Emphasis added. “A definição de dinheiro como o meio de troca geralmente aceito não significa, necessariamente, que, mesmo dentro de um território nacional, deva haSee um ínico tipo de dinheiro que seja mais aceitável do que todos os outros; pode haSee vários tipos de dinheiro igualmente aceitáveis (que podemos, por conveniência, chamar de moeda), particularmente se um tipo pode ser rapidamente trocado pelos outros, a uma taxa conhecida, mas não fixa”. (HAYEK, footnote n. 46). 79 HAYEK, 1986, p. 48. 80 BLANC, 1998. BLANC develops these remarks by regarding mostly alternative experiences that use local currencies. The main difference of local currencies, if compared to other monetary instruments described here, is that the “investment of authority” is made by community leaders, whereas in the virtual and cryptocurrency experiences the investment of authority – if we can speak of “investment” in this case – is made by the own user community, which reinforces and repairs the protocol through transactions. 81 In this sense: “Herein lies the real meaning of the transformation of the state from monopolist to oligopolist in the management of monetary affairs. Substitute currencies mean alternative circuits of spending, affecting prices and employment, and alternative settlement systems that are not directly affected by the traditional instruments of policy (…). The greater the intensity of competition from monies originating abroad, the weaker is the effectiveness of conventional monetary policy at home. Central banks must now make an effort to maintain market loyalty to their own sanctioned currency”. (COHEN, 2004, p. 195).

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nevertheless a good overview of the number and developing of alternatives to the economic system.

Graphic 03. Local Exchange Systems in the world between 1993 and 2012.82 This graphic is part of an annual report which gathers information on all complementary monetary instruments’ experiences.83

3.2. LOCAL CURRENCIES Local currencies, under the terminology adopted by COHEN, are also known as “social currencies” or “community currencies”. They are pictured, by BLANC, as currencies created by social groups without commercial purpose or any sort of state intervention along the way. The logic inherent to these instruments is to stimulate the local and reciprocal circulation of wealth while being organized under a communitary trust system.84 In a study 82

Source: https://ijccr.files.wordpress.com/2012/05/ijccr-vol-12-2008-1-demeulenaere.pdf. Access: January 24th, 2016. 83 The report is available at http://www.complementarycurrency.org/ccDatabase/les_public.html. Access: January 24th, 2016. 84 “The motivations for local currency systems are clear. Most fundamentally, local money is intended to promote the cohesion and self-reliance of communities (…). Local currency systems are self-consciously designed to serve as an instrument of economic empowerment.” (COHEN, 2004, p. 184).

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carried out in 199885, BLANC verified that between 1988 and 1996, at least 10% of all monetary instruments used in the world could be classified as local currencies. Local currencies have as important characteristic the social integration of their actors, combined with the essential issue of trust. It is the trust in a common objective, in a specific community and especially in its leaders that will lead, jointly, to the success or failure of a social currency initiative. They are founded in the logic of stimulating circulation86 among a reduced number of people as a way to promote economic development and using, for that, physical instruments identified and used as currency. But what leads to the need for parallel instruments? Why does a community see the urge to perform the task of promoting development when, in theory, this function should lie with the State? The challenges faced by the nation state to answer to its citizens’ demands, especially those neglected by the economic order (such as, for example, the 55 million Brazilians who do not have access to a bank account)87, forces individuals to take on activities and objectives that, in theory, would be solely State’s responsibility.88 One can also argue that other four aspects of emerging economies contribute, to a greater or lesser extent, to the search for monetary alternatives. First of all, there is the matter

85

BLANC, 1998, p. 3. The incentive to circulation as a way to promote economic development was deepened by Silvio Gesell, a German economist that elaborated the theory of “reversed interests”. According to him, one of the main factors that hinder wealth circulation is the fact that money kept in a bank – that is, money outside circulation – generates interests. This stimulates a hoarding behaviour and less circulation. Gesell proposes, then, a reversed logic: hoarded money should instead lose its value through negative interests, which would depreciate day by day the amount taken off circulation. This would stimulate, he believed, a greater wealth circulation and, therefore, a greater economic development. 87 Research by Instituto Data Popular in 2013. These 55 million Brazilians (more than one third of the country’s population) are mostly spread through the North and Northeast region of the country, and consider that the bureaucratic demands and the absence of bank agencies in certain localities are the main reasons for their lack of access to the official banking system. More information can be found at: http://www1.folha.uol.com.br/mercado/2013/05/1275019-brasileiros-sem-conta-em-banco-vao-girar-oequivalente-ao-pib-da-colombia-em-2013.shtml, http://oglobo.globo.com/economia/uma-populacao-comdinheiro-mas-sem-banco-11690634, http://www.cartacapital.com.br/sociedade/brasileiros-sem-conta-em-bancomovimentam-mais-de-meio-trilhao-de-reais-ao-ano. Access: February 3rd, 2016. 88 BLANC (2006, p. 4) justifies as follows the issuance of currency by a group of individuals (as opposed to the State): “while local public administration’s goals are mainly to protect or stimulate local economics or to finance themselves (when it is not a case of claiming sovereignty), groups of citizens either aim at stopping a currency shortage or at transforming the nature of exchanges according to an ideological basis, whereas businesses aim at organizing exchanges and purchases on the basis of which they can develop their activity.” (Emphasis added). 86

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of liquidity.89 Emerging markets usually present lower levels of liquidity, if compared to developed markets. This is due mostly because of the interests’ volatility and of the consequent instability of the investments sector. It is also hard to deny that the quantity in circulation of goods and services in emerging markets is inferior to that found in developed countries. Second, there is the quality of financial instruments in circulation. In contexts subject to risk and instability, we find mainly “short-life” assets (meaning that their maturity happens as soon as possible in order to avoid losses caused by inflation or financial system’s instability) and a certain aversion to contracts.90 Credit is the third challenge faced by developing countries.91 The lack of liquidity and interest’ instability limit available credit for investments and financing from private individuals and companies. The lack of credit leads, in the long run, to an economy freeze and a cyclic exhaustion of consumers’ purchasing power. Capital control mechanisms, the fourth limitation faced by emerging economies, prevent the excessive valuation of national currency – which leads to internal and external costs for a country’s economy. As to state reactions to the parallel currency phenomenon, in most cases – like in the Brazilian – they wind up being considered a minor movement, demanding little or no attention from central banks.92 If, however, they start playing an important role and being successful in the increase of commercial transactions in a community, the second most common reaction is to forbid them through legal norms. It is the case, for instance, of Austria and Germany in 1930.93 The third reaction is that adopted by the central bank of New Zealand, which not only tolerates local currencies, but also considers them an alternative to reduce unemployment and inflation (after all, if there is more “money” in circulation, the State can slowly remove official currency and control prices with the help of the parallel currency).94 It seems, however, that local currencies are not limited to being just payment instruments. On one side, they do allow for commercial transactions and payment of debts to 89

“We define liquidity as the measure of the ease with which we can buy (and even more, sell) a financial instrument. The best measure of liquidity is the bid-offer spread, the difference between the price at which one is willing to buy and the price at which one is willing to sell”. (MAZZI, 2013, p. 103). 90 MAZZI, 2013, pp. 103-104, 108. 91 MAZZI shows a table in which he calculates the amount of risk borne by creditors in emerging countries (idem, p. 110). 92 LIETAER, 1999, p. 71. 93 Idem. 94 Idem, p. 115.

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occur95, but they also provide the socialization of actors involved96 and provide internal coordination within a community. COHEN argues that97, although small and restricted to “sub-national” localities, the local currencies’ movement represents a competition with the official currency. The systems of local currencies configure, under his view, voids of non-implementation of legal rules regarding official currencies98 since, in these communities, the official money loses – even if only informally – its power to liberate from legal obligations. In this context, he argues that “In time, the traditional powers of central banks will almost certainly suffer even greater erosion as compared with the heyday of the Westphalian Model”. 3.3. DIGITAL CURRENCIES This section approaches two kinds of digital currencies: virtual currencies and cryptocurrencies. As I mentioned before, there is a certain terminological confusion regarding these three denominations (digital, virtual and cryptocurrencies) which can make it difficult for their specific characteristics to be understood. In general terms, one can identify a technological evolution starting with digital currencies and reaching cryptocurrencies, from which Bitcoin is only one example. I propose here a differentiation that takes into consideration the specifics of every monetary type. First of all, it is important to stress that digital currencies are those that depend on the internet in order to be exchanged.99 Both virtual currencies and cryptocurrencies are examples of digital currencies, since both need the support of the web in order to circulate. Their transactions cannot happen if the users are not connected to the internet. The main characteristic of this monetary type – apart from the necessary internet support – is its reach. Just like the internet, currencies which use the cyberspace do not know

95

For examples as to how local currencies have been used in the Brazilian reality, see the research funded by the Fundação Getulio Vargas within the Casoteca Program in a joint project with Renato Vilela. Results available at http://direitogv.fgv.br/casoteca/moedas-sociais-mecanismo-de-desenvolvimento-desafio-multidisciplinar. Access: February 13th, 2016. 96 BLANC, 1998, p. 8. 97 COHEN, 2004, p. 186. 98 The question is if in a “vacuum” situation one can speak of “competition”. If (i) the rules regarding the official currency in a community are not efficient, legally speaking; and (ii) the alternative instrument emerges with the objective to supply an existing demand, in a strict sense we cannot speak of competition. 99 See COHEN, 2004, p. 186.

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national or time borders: their transactions happen instantly and within global range – that is, without location restrictions.100 The emergence of the first digital currencies goes back to the 90s, when Information Technology enthusiasts took the first steps towards “anonymous” money flows. The precursors of virtual and cryptocurrencies were seeking for a way to distance themselves from the official monetary system and, with that, to preserve their privacy. Even though the first manifests allude to libertarian references such as the work of Mises and Hayek101 – which advocate, among others, the decentralization of the banking system and from the monetary system as a whole –, the fact is that the matter of privacy in internet times is still a major concern. This group of technicians entitled themselves “cypherpunks” and their initial proposal was to make use of cryptography to eliminate a possible State control over their actions on the internet.

Cypherpunks assume privacy is a good thing and wish there were more of it. Cypherpunks acknowledge that those who want privacy must create it for themselves and not expect governments, corporations, or other large, faceless organizations to grant them privacy out of beneficence. (Eric Hughes, co-founder of the movement).102

The matter of control over private actions seemed to reach critical levels in the financial system: with the exception of barter, which involves direct exchange of one good or service for another, and transactions among people outside the official financial system, the entire financial activity of citizens depends on the activity developed by financial institutions – such as banks, credit card companies, among others – in the quality of intermediaries. These intermediaries are usually narrowly controlled by state institutions which have direct access to clients’ and users’ information, having them no option to guarantee their privacy. The philosophy which started as libertarian assumed anarchist contour when these digital activists started, after some preliminary experiences, to think a new system that allowed for the full anonymity of its users. Two of these experiences, the e-gold and the Liberty Reserve, constituted centralized initiatives (that is, they depended on the organization 100

“Whereas local currency systems, by definition, are typically meant to remain rooted in a single community or subnational region, electronic money’s horizons are in principle limitless, potentially encompassing the whole universe of cyberspace.” (Idem). 101 PECK, Morgen E. Report: The Future of Money, available at http://spectrum.ieee.org/static/future-ofmoney. Access: May 10th, 2015. 102 The manifesto is available at: http://www.cypherpunks.to/faq/cyphernomicron/chapter4.html. Access: February 3rd, 2016.

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by an institution, being their users not “free” to promote their development on their own) and were forbidden and extinct by the North American government under the allegation that they were used for covering up schemes of money laundering. The e-gold was created in 1996 and existed until 2009, counting at the time with 5 million active accounts. Its system allowed users to open accounts through operator Gold & Silver Reserved Inc. (G&SR), the organizing institution, in gold or other precious metals. After that, users could promote transactions among themselves in a strictly digital and instant way with the values active in their accounts – that is, with gold, silver or other available precious metals.103 Liberty Reserve, in turn, extinguished in 2013, allowed for users to exchange Dollars or Euros for its digital currency – which, in turn, could be exchanged among users and converted to official currency in a second moment. Transactions demanded only one name, valid e-mail address and birthday date, what led to several transactions aiming for legal loopholes (such as money laundering, financing of illegal activities and tax evasion) and resulted in the closing of its system in 2013 and in the prison of its creator by the United States.104 It is important not to confuse the money kept and organized by financial institutions electronically and digital currencies. The “official” money deposited by citizens in banks that can later be electronically moved through credit or debit cards or internet banking transactions carries with it the expectation that it can be converted at all times in physical cash by institutions integrating the official financial system. The banking system bases itself on this fiction, making it “physically” available for its clients a lot less money than it actually holds. Digital currencies, in turn, are not translatable in physical currency. Their objective is precisely to offer an alternative to the official financial system as a way to guarantee to users privacy and other advantages such as: (i) instant transactions, (ii) of low or no cost, and (iii) without territorial borders. Digital currencies, therefore, are those used by a users’ community that aims for the advantages enumerated above and for the support provided by the internet as basis for their transactions. Without internet, one cannot speak of digital currency.

103

The copy of an inactive page of e-gold (https://web.archive.org/web/20061109161001/http://www.egold.com/examiner.html) shows how transactions took place around 2006. 104 More information on the judicial process which involved 17 countries and resulted in the dismantling of this digital currency can be found at http://www.bbc.com/news/technology-22680297. Access: May 10th, 2015.

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3.3.1. VIRTUAL CURRENCIES The virtual currencies could be understood as an evolution of the original concept of digital currency, but along this section I try to show that they actually constitute a species of the genus (digital currencies) identified by COHEN. To treat them as synonyms hinders a greater precision, since virtual monetary instruments are way more complex, have more reach and are more independent when compared to their precursor. This happens because digital currencies have an implicit exchangeability. They exist as long as they are exchangeable into one or more official currencies – depending for that on an institution similar to a central bank, which organizes its activities and exchange rates. Virtual currencies, in turn, circulate within a specific community and are valuable even without exchangeability. In other words, the final objective of having a virtual currency is not, as it happens with the digital ones, to convert it into Dollar, Euro or Real. The virtual currency has value on its own. The difference might seem irrelevant, but in practical terms, the impact is significant. For instance, the “central institution” concerning digital currencies, which was responsible for controlling exchange rates and performing transactions similar to those performed by currency exchange offices, was under the supervision of several financial entities – what ultimately led for them to be shut down. Under the dynamics followed by virtual currencies, the entity similar to a “central institution” does not perform exchange transactions – its activities are limited to setting a currency value and organizing its functioning.105 The objective of virtual currencies is not to make it possible for transactions to occur in the “physical” world, but to assure the existence of transactions in the virtual world. Thus we can notice the subtle evolution from one monetary form to the next one: the digital currencies were a lot more prone to public intervention than their updated version. That being said, it is the term “virtual currency” which has been used by official entities in several countries (such as the FinCEN106, the FATF107 and the European Central Bank) as a synonym for “cryptocurrency”. For these institutions, virtual currencies are

105

The main example would be games played online and online communities that use a given currency to buy a given amount of goods available on that context. For examples of games that use virtual currencies with different degrees of complexity, see https://bitcoinmagazine.com/15862/digital-vs-virtual-currencies/. Access: May 10th, 2015. 106 Financial Crimes Enforcement Network, a branch of the U.S. Treasury. 107 Financial Action Task Force, linked to the Organization for Economic Co-operation and Development (OECD).

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decentralized instruments, based on mathematic schemes and whose main example is Bitcoin.108 This section suggests a differentiation between the terms “virtual currency” and “cryptocurrency” not only because they ultimately should not be used in an interchangeable manner – since there are relevant differences between them – but also because the final objective of a classification is to reach a result that respects the greatest amount of specificities. That being said, it is important to point out that “virtual” refers solely to the support of a currency (its antonym would be “physical”). The term relates to the fact of a currency exist, circulate and extinguish in the physical world or not. As we shall see in the next section, cryptocurrencies do not “exist” outside the virtual world, but they show such unique characteristics that its virtuality is only one of the available traits. Virtual currency would be, therefore, a generalization which ranges from the bonus systems offered by stores – also organized by a central institution, such as a supermarket or company (Payback in Germany, for example) and that can only be used for goods available at that given context (which means that the points or bonus can only be traded by products inside the supermarket) – to values accumulated in RPG games and Bitcoin itself. To conclude, it is important to stress that any parallel currency can be virtual or physical – that is, to change hands in “real” life or without any currency having been exchanged in the physical world.109 Seen in these terms, most local currencies are not virtual: there are usually bills110, cards, paper or other support that qualify transactions as being “physical”, here as non-virtual understood. Cryptocurrencies, however, will always be virtual, since they only exist on a virtual support – a software, computer or internet. The

108

FATF. Virtual Currencies – Key Definitions and Potential AML/CFT Risks, 2014. A relevant example is the C3 (Commercial Credit Circuit), a payment instrument which connects suppliers and companies and resembles factoring. The difference is that the “credit” from the company (or the supplier) can be accumulated, exchanged and converted into services, goods or any official currency. Transactions are all made virtually and there is no physical support for the instruments. For more details, see http://www.lietaer.com/2010/01/commercial-credit-circuit-a-financial-innovation-2008/. Access: 9th May, 2015. Another initiative that uses credit as a currency is the LETS (Local Exchange Trading Systems), active since 1980 and that, in 2012, gathered almost 800.000 people and a commercial volume totaling US$ 108,078,945. The system monetizes services provided by users in the form of credit – which can later be exchanged by other services or goods within the network of creditors and debtors. In order to do that, LETS uses a sort of log, in which all credits and debits are published and available to other users. Source: http://www.complementarycurrency.org/ccDatabase/les_public.html. Access: 9th May, 2015. 110 There are community currencies of fairly complex printing processes, which make use of serial numbers, watermarks, special paper and ink, among others. 109

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relevance of the differentiation, then, relies on the fact that there are currencies which do not fit under the category “cryptocurrencies” and can still be considered virtual. To offer a similar treatment to all instruments which do not have a physical support without taking in consideration their specifics leaves aside users’ sensibility and related legal questions. A better classification aggregates value to the comprehension itself of what parallel currencies are and how they are used. In the section that follows, I present the specificities of the general category “cryptocurrencies” using as starting point the narrative developed under the first section of this dissertation and the notions relating to digital and virtual currencies. If virtual currencies could be understood as an update of the system imagined by the first digital currencies, cryptocurrencies took a step further: they eliminated the need for a central entity all together.

3.3.2. THE CRYPTOCURRENCIES This section presents an overview of what constitutes a cryptocurrency in order to differentiate it from the other species previously introduced. For a more detailed explanation on functioning and specifics, see the narrative on Bitcoin developed in the first chapter. The root problem with conventional currency is all the trust that’s required to make it work (…). The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. (NAKAMOTO, Satoshi. Manifest on the creation of Bitcoin, 2009).

The term “cryptocurrency” was used for the first time by Satoshi Nakamoto, pseudonym of the creator (or group of creators) of the first monetary form of this species – the Bitcoin.111 Cryptocurrencies are virtual monetary instruments because they do not exist on a physical level. Its issuance and circulation are happen via cyberspace through software, usually open source112 and peer-to-peer113, being the access to internet indispensable.

111

The term started being used after the paper-manifesto “Bitcoin: A Peer-to-Peer Electronic Cash System” published by Nakamoto in 2008. The document is available at https://bitcoin.org/bitcoin.pdf (access: May 8th, 2015). 112 What constitutes an open source program was already described in the first section. 113 What constitutes a peer to peer program was already described in the first section.

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The main feature of cryptocurrencies is their complete independence from a central authority, not being bound to the existence of a bank or any other organizing institution that promotes their issuance and control their value. Nowadays, one estimates that there are over 740 cryptocurrencies114 in circulation. 530 of them have established virtual markets and 10 present, jointly, a market capitalization of over 10 million Dollars.115

3.4. A DIFFERENTIATION Boaventura de Sousa Santos claims that one reflex of globalization in the way States act is the de-statization of political regimes, which can be identified when we have the transition of the idea of government to the idea of governance. There is then a change from a regulation model conducted by the State, in which it assumes a central function in the economic and social conduction of a country to the model “that rests on partnerships and other forms of association between governmental, para-governmental and non-governmental institutions, over which the State has only a coordination task (…).”116 The same happens in the monetary context. “No longer is the public sector privileged in relation to societal actors. In a growing number of countries, governance now is uneasily shared between the public and private sectors, greatly weakening the state’s ability to manage economic performance through monetary policy.”117 Facing the State’s challenge in providing legal services to its citizens, parallel legal orders emerge. Facing the challenges in the provision of social assistance, communities find alternatives through mutual aid initiatives. Facing the scarcity of money supply – which can happen as (i) a consequence of regulatory adjustments by the State or (ii) because of the control of interest rates or inflation or (iii) the redistribution of money supply already in circulation, new alternative exchange

114

The cryptocurrencies that were created after Bitcoin are generally called “Altcoins”. All of them have individual names, however, such as “Ripple”, “Litecoin”, and “Dash”. The 100 cryptocurrencies with the highest market values are shown at https://coinmarketcap.com/. Access: 30th of January, 2016. 115 Data retrieved from http://mapofcoins.com/. The information was found in March 2015. The values corresponding to the capitalization can be found at https://coinmarketcap.com/. Access: 30th of January, 2016. 116 SANTOS, 2002, pp. 37-38. Free translation. 117 COHEN, 2004, p. 204. Jérome Blanc, on the other hand, does not consider that the monetary initiatives here narrated contradict or threaten the state order. For him, “As moedas paralelas aparecem, portanto, não como um fenômeno patológico, e sim normal, no próprio centro dos sistemas monetários.” (BLANC, 1998, p. 9). Tradução livre. Emphasis added. This “normal” occurrence is a direct consequence of the failure and/or lack of trust in the State-providence, that sees its actions shrunk by factual, political, economical and social limitations.

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mechanisms emerge. These alternative mechanisms, when developed enough, can make use of a parallel money supply in order to facilitate their transactions. Parallel currencies emerge in this context of paradigm change described by BOAVENTURA, in which the public is forced to live with the private – and the state regulation coexists with self-regulation. Each parallel currency’s species is a reaction to specific postures adopted by the regulatory State. With the successive economic crises of the 20th and 21st century, extra regulatory attention was destined to the markets. However, the excessive financial system’s regulation led to uncertainty and winded up stifling the fluid character of the market. The graver the economic crisis, the greater the state efforts to repair the instability through laws, regulation and clearer game rules. At some point, the optimal level of regulation was lost, and this excess led exactly to the search of an alternative monetary form that would not be influenced by or be under the control of a national system prone to political failure. As to social matters, it is clear that a State does not have enough capacity to encompass every demand that arises from civil society. During economical crisis periods, especially when the focus turns to stabilizing the economy, there is an even greater distancing between some society sectors and the nation state. The paradigm change winds up affecting then two different and diametrically opposed groups: the super-included, those who depend and are directly affected by economic policies adopted by central banks, and the superexcluded, which, since not a part of the economic system, no longer are understood as a priority to the State, falling into oblivion.118 As I briefly stated in this section’s first paragraphs, to establish a clear differentiation between local and cryptocurrencies – what has not yet been done in the literature – is an attempt to show the different logics ruling each of these non-official monetary types. In order to do this, I chose to use the following categories, as a way to organize the comparison and conceptual clarification: the reason for their existence, that is, which reaction these currencies establish with regard to the State; what is their internal objective – the objective of adoption by a group of users; regarding users, who are they?; how does their functioning work; what is their main organizational bases; what are the challenges faced by each one of them; how is their position towards an active intervention of the State in their functioning; and, finally, what are the common characteristics.

118

I thank Professor Mario Schapiro for presenting the dichotomy “super-included x super-excluded” in a comment to my work in 2014.

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Answer to Objective

Local currencies Lack of State Promote development

Cryptocurrencies Excess State Avoid national economic policies and the control by central banks Cyberactivists, internet idealists, libertarians, individuals or entities looking forward to avoiding state control No regulating or controlling mechanism of its activities, currency’s reach is the same of the internet: unlimited and unrestricted. System is founded on cryptographic keys Technology Price stability, repression of illegal uses, more safety for users

Users

Poor communities, neglected by state programs

Organization

Presence of a community leadership, local networks limited to small regions or communities, need of community banks to control the currency’s issuance Community bonds Maintenance of the trust network, coexistence with national currency Desirable – increases trust Undesirable – would restrict free initiative

Foundations Main challenges

Active state participation in its operation Common characteristics

Promote circulation (no incentives for keeping or sparing the currency, like interests, for example) Existence assumes the circulation of an official currency

Table 03. Comparative table between local and cryptocurrencies. Source: Own ellaboration.

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3.5. BITCOIN AS A PARALLEL CURRENCY Thus, money exists only in societies where exchange occurs. (HARRIS, 1981, p. 5). (...) embora habitualmente se aceite o fato de que existe uma clara linha divisória entre o que é e o que não é dinheiro, e a lei geralmente tente estabelecer essa distinção –, quando se trata dos efeitos causadores de efeitos monetários tal diferença não é tão clara. O que encontramos é, ao contrário, um continuum em que objetos com vários graus de liquidez, ou com valores que podem oscilar independentemente, se confundem um com o outro quanto ao grau em que funcionam como dinheiro. (HAYEK, 1986, p. 49).

Keeping in mind that the objective of inference is “using facts we know to learn about facts we do not know”119, I bring some facts along this section that could convince the reader about the inclusion of Bitcoin in the list of parallel currencies. Nowadays, BTCJam120 is the biggest worldwide loan net of Bitcoins, made possible through a strictly trust-based platform among its users.121 The main innovation of the platform – apart from the absence of an intermediary between creditors and debtors – is the fact that, since all transactions take place in virtual currency, a Frenchman can loan money to an Italian who, in turn, can finance a small business in Venezuela. The internet allows for the existence of no language, no frontiers and no exchange rates, whereas Bitcoin keeps connecting businesses and people through the most diverse paths. Its characteristics allow also for it to be used in economic transactions that range from loans to booking a hostel room122, aggregating complexity to regulatory initiatives and reducing the chances of a homogeneous regulation to virtual currencies altogether. In February 2014, programmer André Horta transferred the amount of 0.22 BTC – the equivalent, at the time, to R$ 430 – to mechanic Diego Silva. The transaction happened in Belo Horizonte, and paid for the mechanical check of André’s car.123 In July 2014, 79

119

EPSTEIN, 2002, p. 2. The platform can be accessed at: https://btcjam.com.br/. 121 If, for instance, A loans 20 BTC to B, and B honors her debt, A vouches for B’s reputation within the platform for future loans. 122 The Hostel Caracol, in Florianópolis (South of Brazil), accepts BTC since December 2013. 123 G1 - Moeda virtual bitcoin começa a ganhar espaço no comércio brasileiro - notícias em Tecnologia e Games, 14th February, 2014. 120

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commercial establishments around the world declared accepting Bitcoins124, ranging from bars to design offices. In 2016, the number increased to 7.545, a considerable boost.125 But why is it so interesting to qualify Bitcoin as a parallel currency? It is helpful to recover some of the elements of the economic theory presented before. The hypothesis is that the notion of parallel currency, even when developed by a non-legal theory, may contribute to the regulatory debate. Again, to speak of parallel currency is to speak of instruments that do not rival – whether this is the objective or the reality – with the official instrument, both coexisting side by side. I stress, however, that this vision – to consider an instrument a parallel currency – configures only one possible economic approach to monetary instruments. Other economic concerns include, for instance, the matter of inflation – since the existence of multiple monetary substrata could eventually influence prices (if there is more “money” in circulation being accepted to buy goods, but the number of goods does not grow, the trend is for prices to rise, as a direct consequence of supply and demand law). The defense of parallel currency’s movements usually claims that the objective of such instruments is to promote wealth circulation, and not its accumulation.126 However, the creation of “currency” without enough goods to back its value results, in theory, in inflationary scenarios. In this sense:

The main difficulty in thinking about inflation in the context of complementary currencies is that everything we have learned from the economic or monetarist perspective assumes implicitly that there is only one single currency system in a country. For example, within that frame of mind, the appearance of a second complementary currency may be interpreted as a simple local increase in money supply. All economists would immediately understand why such a process would create employment, but also (erroneously) conclude that complementary currencies would automatically 124

Source: http://coinmap.org/. Access: July 30th, 2014. Source: http://coinmap.org/. Access: January 31st, 2016. The first exchange to commercialize Bitcoins in Brazil, the BitcoinToYou, was inaugurated on June 17th, 2014 in Curitiba (South of Brazil), whereas the first Latin America’s ATM started operating in São Paulo in April of the same year. See Revista Exame. São Paulo recebe 1º caixa eletrônico de Bitcoins do país. March 14th, 2014. The ATM accepts Real bills and electronically converts Bitcoins into the user’s virtual wallet. 126 “[...] não é um sistema alternativo e sim complementar à economia. Ela é produzida, distribuída e controlada pelos seus usuários. Por isso, o valor dela não está nela própria, mas no trabalho que vamos fazer para produzir bens, serviços, saberes e depois trocar com o resultado do trabalho dos outros. A moeda enquanto tal não tem valor, até que comecemos a trocar trabalho com trabalho. Aí então, ela vai servir de mediadora dessas trocas. Ela é diferente também porque a ela não está ligada nenhuma taxa de juros. Por isso não interessa a ninguém guardá-la, entesourá-la. Interessa, sim trocá-la continuamente por bens e serviços que venham responder às nossas necessidades Esta moeda será sempre um meio, nunca um fim. Não será inflacionária nem jamais poderá ser usada como especulação.” (MUTIRÃO ABOPURU, Manifesto, 2000). 125

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add to inflationary pressures on the economy as a whole. (LIETAER, 1999, p. 115).

The assumption of LIETAER is that the parallel currency will not be used as a store of value127 – another economic concern which I shall approach next. I stress, however, that Bitcoin has also been used with that purpose, even though this is not its main objective and one might add, not the most adequate (given the high price volatility, the user who eventually hoards a large amount of Bitcoin has a lot to lose).128 The matter of store of value, in turn, is related to the economic functions of money – conditions for an instrument to be acknowledged as money by the Economy, just as the power to extinguish debt is a legal condition to the official currency. The Economy recognizes three main functions that money needs to fulfill: (i) unit of account; (ii) medium of exchange; and (iii) store of value. Even though most users within the Bitcoin system are interested in its function as a payment instrument, Bitcoin has also been acting as a unit of account and a store of value – functions which were revealed and confirmed by the economic crisis in Greece in July 2015, when the banking system remained closed for several days in order to prevent a bank run after the default of the country before the International Monetary Fund. Under this critical scenario, the acquisition of Bticoins experienced a boost of 500%129, following the trend of currency alternatives – mostly in moments of economic crisis (in Greece’s case, one can

127

As the author states: “Currencies that are not inflationary but have demurrage charges are of unusual interest because they induce a totally different collective behavior pattern relating to money than that with which we are familiar today. Logically, such currencies would systematically discourage hoarding of that particular currency. Such currency would be used as a pure medium of exchange and not a store of value, while at the same time avoiding the well-known negative effects of inflation on the social relationships of a community”. (LIETAER, 2000, p. 121). Emphasis by the author. 128 However, speculation still constitutes a relevant option for users – confirming its use as a reserve of value. See KRISTOUFEK, Ladislav. What are the main drivers of the Bitcoin price? Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, 2014. Available at: http://arxiv.org/pdf/1406.0268v1.pdf. See also Speculation Isn't the Sole Driver of Bitcoin Prices, by Stan Higgins. Published on Coindesk on Juny 4th, 2014. It is important to stress out that the potential fulfilling of this function already started discussions as to whether cryptocurrencies should be classified as securities. In a recent decision by CVM (the Brazilian Securities Exchange Comission), one finds that “apesar de constar às fls. 12 que a utilização em massa dos bitcoins tem por objetivo a obtenção de ganho de capital hipoteticamente advinda da variação de suas cotações, não se pode afirmar, ao menos a partir dos documentos constantes dos autos, que essa moeda virtual seja um valor mobiliário (...).” (Processo Administrativo CVM nº RJ 2014-10277, p. 6). Emphasis added. The same positioning – against its classification as a security – can be found on Valor Econômico, Os bitcoins são valores mobiliários? By Celso Roberto Pereira Filho, article published on 20/01/2014. 129 BloombergBusiness, Greece’s Cash Crisis is Bitcoin’s Boost. By Muhammad Darwish on July 8th, 2015.

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notice the aforementioned scarcity of money supply), one feels the need to appeal to another instrument that enables for exchange to occur and assets to be preserved.130 The function of unit of account is fulfilled when the instrument presents three characteristics: it is divisible, fungible and countable. Bitcoin has all of these characteristics: it can be divided in satoshis, can be traded for Bitcoins or other currencies and is also quantifiable. The fact that users are able to acknowledge these qualities allows for transactions to be performed. This is, actually, one general characteristic of all parallel currencies – if they were not recognized as a unit of account by a given community, they would not be able to fulfill the second function, that is, the one of medium of exchange, which usually constitutes their main use. As a means of exchange, Bitcoin is more efficient than the official currencies in circulation. This happens because a medium of exchange is the one suitable for purchasing goods and services – but this potentiality faces limits if one considers national currencies, especially regarding time and space. It is not very easy for a Brazilian national to acquire a good in Germany. The costs of this transaction – which exist exactly because transactions which are not restrained within national borders are a lot more complex in the logic of national currencies – make the Real a payment method a lot less convenient than Bitcoin, in this case. The function of medium of exchange is Bitcoin’s function by excellence, powered exactly due to its virtuality. It is the question about its function as a store of value that divides economists. The International Monetary Fund, in a recent report131 concludes that, due to its high price volatility, virtual currencies do not fulfill the function of store of value in an adequate way. COHEN, in turn, when considering “virtual monies”, clarifies that, once the question of volatility of private currencies is surpassed, there are no economic barriers to consider these instruments currencies.

Most critical of all is the question of value: how to safely preserve the purchasing power of e-money balances over time. Initially at least, this is likely to require a promise of full and unrestricted convertibility into more conventional legal tender – just as early paper monies first grained wide acceptance by a promise of convertibility into precious metal. But just as paper monies eventually took on a life of their own, delinked from a specie base, so, too, might electronic money one day be able to dispense with all 130

“(...) em períodos de incertezas os agentes econômicos se lançam à busca angustiante de mecanismos jurídicos de proteção de ativos monetários e financeiros; mecanismos que possiblitem o prosseguimento dos negócios e dos investimentos.” (MENDES, 1991, p. 48). 131 IMF, 2016, p. 17.

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such formal guarantees as a result of growing use and familiarity. (COHEN, 2004, p. 191). Emphasis by the author.

COHEN thus defends that the possibility of conversion into multiple currencies (for instance, the exchange of Bitcoin for Dollars, Euros, Reais and other currencies) ensures that the function of store of value is not lost despite high price volatility. When we add to this assertion the fact that Bitcoin’s virtual characteristic allows for convertibility to be instant – allowing people to choose what currency they want to keep as a way to preserve their own assets – one can infer that this possibility of choice configures its use as a reserve of value, even if temporary. In other words, maybe Bitcoin is acting as an intermediary reserve of value between currencies of different countries. The speculative character of Bitcoin described before adds yet another element to the possibility that this function is being fulfilled. As one can realize from this discussion, the qualification of Bitcoin as a fiat currency is still under discussion in the Economy, while its character as a parallel medium of exchange, that is, its qualification as a parallel currency (as opposed to official currency) is not questioned.132 The contribution to the regulatory debate might be, then, in the identification of its non-rivalry character regarding the official currency and also in the acknowledgment of its parallel (competing) logic. The objective of a parallel currency is not to assume the monetary prominence in a country – it is rather to act in relation to it, whether in a complementary logic or in contraposition. Nevertheless, a parallel currency is always interdependent of one or more official currencies. Under these terms, we might be able to infer that Bitcoin can be understood as a parallel currency. It is, after all, a medium of exchange acknowledged as such by its users and that circulates side by side to the official system, without the intention to replace it. Its use, as opposed to existing official currencies, does not know national boarders133 and is boosted by the reduced operational costs of its transactions. Being a parallel currency, its existence has consequences to the official system, what in the case of virtual currencies ends up being 132

Quick reminder: the definition of parallel currencies takes into consideration two aspects: first of all, parallel currencies circulate simultaneously with the official currency of a country, competing, therefore, in the same physical space and same users of the official medium of exchange. Secondly, parallel currencies lack the legal recognition attributed to the official currency and thus lack the characteristics attributed by Law (releasing a debtor from her obligation). 133 In this sense, “Monetary sovereignty has a territorial dimension. The law of the currency is always confined to a territory. It can only be enforced in that territory. This territoriality does not preclude a voluntary surrender of sovereignty. But it implies that limitations to sovereignty cannot be presumed” (LASTRA, 2006, p. 17).

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amplified due to its global reach and to the challenges regarding its control by central banks and other financial institutions. Throughout this dissertation, I attempted to bring several allegations that demonstrate the natural occurrence of parallel currencies and tried to show that its existence does not necessary leads to the implosion of a country’s monetary system. This discussion was recently renewed during Greece’s economic crisis, when people not only searched for alternatives to preserve the value of their assets by migrating from Euro to Bitcoin, but also because authorities in the Euro zone started discussing the possibility of adoption, by Greece, of a parallel currency as an alternative to pay some state obligations.134 If we consider the possibility to conceptualize Bitcoin as a parallel currency, we must consider how Law could benefit from this characterization. It is exactly with this objective in mind that we advance to the next section, where I try to identify in the theory of parallel currencies an economical contribution to the debate on the regulation of cryptocurrencies.

134

See SCHUSTER, Ludwig. Parallel Currencies for the Eurozone: An outline and an attempt at systemization. Veblen Institute, 2013; BOSSONE, Biagio and CATTANEO, Marco. A parallel currency for Greece. VOX: 25th May 2015. Available at: http://www.voxeu.org/article/parallel-currency-greece-part-i. Access: January 24th, 2016.

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4. REGULATORY EXPERIENCES Everything that a people desires, does, suffers, is – is reflected in a people’s monetary system. (SCHUMPETER). Emphasis by the author.

Due to its rapid virtual spread, cryptocurrencies reach today almost every location in which access to internet is possible. Facing the growing number of users, several jurisdictions have already taken a position regarding the phenomenon. This last section’s objective is to compile and present the known regulatory experiences until February 2016. The research was made based on data provided by the observatory Coindesk, identified in this dissertation’s introduction, which evaluates and reports any news regarding Bitcoin – here included the regulatory positioning of States. One of the results is presented in Annex I – which contains a table detailing every legal consequence already identified, by jurisdiction – and another one in Annex II, containing a description of all legal reactions, also by jurisdiction. It is important to point out that the observatory does not encompass doctrine debates, in other words, the sources are mostly documents originated in the Executive powers and, in some rare cases, texts containing politicians’, economists’ and jurists’ points of view. With this material, it was possible to identify some trends in the legal treatment of Bitcoin. It is important to stress that, usually, the consulted documents allude to terms more general than Bitcoin – such as “virtual currencies” or “cryptocurrencies” – but this does not interfere with the results, especially because, as I tried to demonstrate before, it was Bitcoin – with its transaction volume and growing use – the main trigger for regulatory discussions. This is also usually brought up by the documents’ own preambles or forewords. After assembling the positions under three postures it was evident that they unfold in actions relating to other regulating aspects. There are, for instance, jurisdictions that do not enter the legal discussion as to whether Bitcoin does constitute a currency or not, existing merely an acknowledgement of the existence of this phenomenon and the regulation of particular aspects (such as taxation) and/or the expansion of other legal fields in order to encompass activities using Bitcoin (such as criminal law, especially regarding money laundering and financing of illegal activities). There are also those jurisdictions which directly or indirectly enter the discussion about monetary aspects of Bitcoin – such as, for example, the affirmation that the instrument is not legal tender, or that it does not rival with the official currency (or does). Finally, a third position encompasses those jurisdictions which

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declare to be monitoring or studying Bitcoin – in some cases, promoting discussions at the Legislative level (like in Canada) regarding possible regulatory benchmarks and designs. This is – hopefully – the moment in which the association between economic and legal currency concepts which I attempted to carry out along this dissertation becomes clear. The legal conditions for an instrument do not change the possibility that it might be regulated – in other words, there are situations in which, even though the monetary character of a currency was not provided by Law, regulation is still needed. How to proceed in such cases? The concept of parallel and cryptocurrencies might aggregate more elements to the understanding of this phenomenon and, with that, allow a more careful regulation of Bitcoin.

4.1. DATA ANALYSIS Among the 62 jurisdictions which have already taken a position on cryptocurrencies, it is possible to notice three lines of positioning which, in turn, ramify in other regulatory actions.135 These comprise:

I)

Publishing of warning, combined or not with the request or proposal to study and obtain more information by the regulator. Sometimes, there is the formation of taskforces in the Legislative (Canada136, France137, New Zealand138) or Central Bank (Sweden139, United Kingdom140) to discuss regulatory models. Usually, the discussion results in the release of reports;

135

The following footnotes are compiled in Annex II, which brings the referring events. Source: http://www.cbc.ca/news/business/bitcoins-aren-t-tax-exempt-revenue-canada-says-1.1395075. Access: February 3rd, 2016. 137 “Rapport d'information n° 767“, authored by senators Philippe Marini and François Marc, dated from 23rd of July, 2014. Source: http://www.senat.fr/rap/r13-767/r13-767_mono.html#toc0 available at: http://www.senat.fr/rap/r13-767/r13-7671.pdf. Access: February 3rd, 2016. 138 Source: http://www.stuff.co.nz/technology/digital-living/30008862/bitcoin-beauty-or-bubble. Access: February 3rd, 2016. 139 Source: http://www.riksbank.se/Documents/Rapporter/Ekonomiska_kommentarer/2014/rap_ek_kom_nr02_140617_eng .pdf. Access: February 3rd, 2016. Shortly after, a new report was published by the institution, describing the risks, benefits and challenges of the virtual currency. Source: http://www.riksbank.se/Documents/Rapporter/POV/2014/2014_2/rap_pov_artikel_4_1400918_eng.pdf. Access: February 3rd, 2016. 140 Source: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q3digitalcurrenciesbitcoin 2.pdf. In March 2015, the United Kingdom Ministry of Finance published a new report, in which announces the current discussed regulation plans for Bitcoin, as well as the allocation of personnel and resources to investigate and study the blockchain technology. Source: 136

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II)

Creation of legal implications without discussion of monetary aspects. Usually results in taxation. It is the case, for example, of Australia141, Brazil142, Bulgaria143 and Slovenia.144 Many jurisdictions adopted this line at a first moment to discuss next other questions regarding Bitcoin (such as monetary matters, for instance);

III)

Creation of legal implications based on “monetary” elements of Bitcoin. One example is Russia’s145 positioning which, for considering Bitcoin a “monetary substitute”, opted to forbid it. Ireland146, in turn, adopted this posture when its Central Bank declared that Bitcoin is not considered legal currency in the country.

It is important to point out that the three position lines can be combined and jointly adopted by the same jurisdiction, in a hybrid solution. It is the case of Holland, for example, which adopted the warning publication147, the inclusion of Bitcoin under specific taxation

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414040/digital_currencies_respo nse_to_call_for_information_final_changes.pdf. 141 Source: http://www.afr.com/news/policy/tax/ato-targets-bitcoin-users-20130624-jhj8r#. Access: February 3rd, 2016. In August 2014, the body declared that Bitcoin is neither money nor foreign currency, but is considered a financial asset for tax and capital gain purposes. For more information, see: https://www.ato.gov.au/General/Gen/Tax-treatment-of-crypto-currencies-in-Australia---specifically-bitcoin/ e Challenges for Australia’s Tax System, available at http://bettertax.gov.au/files/2015/03/01_ChallengesAustralias-tax-system.pdf. Access: February 3rd, 2016. 142 Folha de S. Paulo. Brasileiro tem que declarar bitcoin; IR pode ser cobrado. Mercado, 07/04/2014. See also Valor Econômico. Receita define regra para taxação de IR sobre bitcoins, article from 06/04/2014. 143 Source: http://www.nap.bg/document?id=8614. Access: February 3rd, 2016. 144 Source: http://www.durs.gov.si/si/davki_predpisi_in_pojasnila/dohodnina_pojasnila/dohodek_iz_kapitala/dobicek_iz_ka pitala/vrednostni_papirji_in_delezi_v_gospodarskih_druzbah_zadrugah_in_drugih_oblikah_organiziranja_ter_i nvesticijski_kuponi/davcna_obravnava_poslovanja_z_virtualno_valuto_po_zdoh_2_in_zddpo_2/. Access: February 3rd, 2016. 145 Source: http://www.coindesk.com/russia-lowers-proposed-penalties-bitcoin-activities/. See also http://www.coindesk.com/russia-proposes-fines-bitcoin/ e http://cointelegraph.com/news/112815/it-isimpossible-to-technically-ban-decentralized-cryptocurrencies-due-to-the-nature-of-the-internet-evgeny-volovik. Source: http://regulation.gov.ru/project/17205.html?point=view_project&stage=2&stage_id=13089. All accessed on July 8th, 2015. 146 Source: http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2013121000054?open document. Access: February 3rd, 2016. 147 Source: http://www.loc.gov/law/help/bitcoin-survey/index.php#netherlands. Access: February 3rd, 2016.

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without discussing its monetary character148 and, finally, the Dutch Judiciary, after a discussion regarding Bitcoin’s monetary character, decided to qualify it as an object.149 It is also interesting to notice the temporal development which takes place in most cases. Firstly one institution – usually a central bank – issues a warning note regarding Bitcoin. This tends to be the first executive manifestation about the cryptocurrency. Next – perhaps due to the emergence of legal problems or due to the increase of transactions which lead to worries in the financial arena – jurisdictions opt to regulate precise aspects of Bitcoin, especially tax matters. Here one does not find an explicit worry about the monetary character of Bitcoin, but the purpose to solve questions or eliminate legal “vacuums” – like those that would emerge in cases of tax evasion and money laundering. After a more mature stage of discussion, position III takes place, stressing the concern around Bitcoin’s legal classification and, in some cases, the interest to proof its non-classification as legal tender. This declassification can also appear, however, in the warning note itself, as in the case of Belgium150, Indonesia151, Malaysia152 and South Korea.153 It seems that the warning note has been the most common manifestation by jurisdictions on the matter of Bitcoin. This is a note usually issued by central banks, which communicates to investors the risks regarding the use of Bitcoin (price fluctuation, security breaches, frauds, among others) and states that the institution is currently supervising the instrument without, however, the intention of regulating for the time being. The positioning commonly allows for the cryptocurrency to circulate legally even though lacking specific regulation. Annex III brings the note published by Brazil as an example, since almost every warning note follows the same line of argument, constituted by an informative section, a section that warns about the risks, a section in which the body declares to be monitoring the phenomenon and one section in which it justifies the option to not regulate for the time being. Another interesting finding relates to the multiple legal classifications attributed to Bitcoin, which vary from “unit of account” – a strictly economic concept, as seen previously 148

“Antwoord van de Minister van Financiën op vragen van het lid Nijboer (PvdA) aan de minister van Financiën over de opkomst van de Bitcoin als digitale betaaleenheid”, document dated from April 10th, 2013. Original with me. 149 Source: http://www.dutchnews.nl/news/archives/2014/07/dutch_prosecutors_now_have_pow/. Access: February 3rd, 2016. 150 Source: http://pt.scribd.com/doc/240574802/belgium-s-federal-public-service-finance-addresses-bitcoin-vat. 151 Source: http://www.bi.go.id/en/ruang-media/siaran-pers/Pages/SP_160614.aspx. Access: February 3rd, 2016. 152 Source: http://www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement_all&ac=275. Access: February 3rd, 2016. 153 The Korea Herald, Korea decides not to recognize Bitcoin as real currency. Article from December 10th, 2013, available at http://www.koreaherald.com/view.php?ud=20131210000673. Access: February 3rd, 2016.

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– to “money” – both notions connected to the second of the position lines described above, where there seems to be a concern or direct reference to the monetary character of Bitcoin. The following graphic summarizes the findings:

Graphic 04. Legal classifications attributed to Bitcoin, by number of countries.154 Source: own ellaboration.

The graphic was built with information assembled in the table of Annex I, and brings the exact term used by each analyzed document.155 Another important distinction: many countries have differentiated the Bitcoin instrument from the virtual activity used to obtain it. Mining is considered, in several cases, similar to an occupation or service. This differentiation is usually useful for taxation purposes, since once the activity is classified under these terms, there is a tax incidence over income or service provision, adding other bases to cryptocurrency taxation – apart from circulation or exchanges. Aside from that, as one can see on the graphic above, there is little unanimity regarding Bitcoin’s legal classification. However, since it has been incorporated to legal

154

Some jurisdictions have more than one understanding over Bitcoin’s legal nature, whereas others alter their position in time. 155 The term “good” is usually used in documents referring to private Law (contracts and consumer rights) and “commodity” usually appears in documents dealing with taxation.

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orders mainly via Tax Law, the classification tends to be elaborated according to the terms used by each country’s tax legislation. Another fitting conclusion is that, from the 11 jurisdictions that chose to forbid the use and circulation of Bitcoin, all opted to use for that objective the field of Criminal Law, turning users’ actions illegal. The penalties for using Bitcoin vary from fines (Island 156) to prison (China157 and Russia158). It is curious to notice that the countries which impose the prohibition wind up taking into consideration exactly the monetary aspect of Bitcoin, inserting themselves under the third positioning line described before. Russia, for instance, recognizes in Bitcoin a “monetary substitute”, using this denomination to justify its prohibition. Still regarding Criminal Law, 10 jurisdictions chose to amplify existing crimes to include the possibility of crime through Bitcoin – usually, money laundering, tax evasion and financing of illegal activities, such as terrorism and drugs. In these cases, there is the editing of a normative instrument which includes Bitcoin transactions among the legal provisions. The act of delegating regulatory competence to a specific legal field or state institution constitutes a strategy for countries outside the European Union – probably because the European Central Bank has already positioned itself159 in the sense that it will regulate virtual payment instruments160, with what the legislations of member countries must comply. The main institutions to which the regulation task were delegated are Treasury, Ministry of Finance, financial supervisory bodies, commercial law and laws to protect consumers. Even indirectly, this allocation constitutes a positioning in the way that it categorizes Bitcoin according to a specific Law field – always keeping in mind that the option for Tax Law is still the most common decision, encompassing 22 jurisdictions. 156

Source: Foreign Exchange Act No. 87, from November 17th, 1992. Available at: http://eng.fjarmalaraduneyti.is/media/skjal/Act_no_87_1992_2013.pdf. Access: February 3rd, 2016. 157 Source: http://www.pbc.gov.cn/publish/goutongjiaoliu/524/2013/20131205153156832222251/20131205153156832222 251_.html. Access: February 3rd, 2016. See also Valor Econômico. China reforça restrição a moeda virtual, article from 19/12/2013. 158 Source: http://www.coindesk.com/russia-lowers-proposed-penalties-bitcoin-activities/. See also http://www.coindesk.com/russia-proposes-fines-bitcoin/ and http://cointelegraph.com/news/112815/it-isimpossible-to-technically-ban-decentralized-cryptocurrencies-due-to-the-nature-of-the-internet-evgeny-volovik. The project which seeks the definitive banishment of Bitcoin is available at http://regulation.gov.ru/project/17205.html?point=view_project&stage=2&stage_id=13089. All accessed on February 3rd, 2016. 159 Source: https://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf. 160 Decision ECLI:EU:C:2015:718 in Process C-264/14 (Available at: http://curia.europa.eu/juris/documents.jsf?num=C-264/14, access: February 3rd, 2016).

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Other less common options are: (a) forbid the use of Bitcoin by financial institutions, but not by individuals (Colombia161; position III); (b) use of Bitcoin logic by the Judiciary, which has its own Bitcoin wallet and performs searches and seizures in the currency (Holland162, position II and III); (c) equate Bitcoin to an electronic payment system (Spain163, position III); (d) equate Bitcoin to legal tender (United States164, position III); (e) adoption of blockchain technology by the financial system (Isle of Man165, position II); (f) proposal to identify users who move values in Bitcoin surpassing a given amount (Italy166, position II); (g) establish a value limit for transactions (Spain167, position II); (h) equate contracts in Bitcoin to financial instruments (Poland168, position II); (i) equate the institution that exchanges official currency for Bitcoins to a non-profit organization, subject to self-regulation (Switzerland169, position II); (j) equate the institution that exchanges official currency for Bitcoins to a bank-like institution (France170, position II); (k) acknowledge in virtual currencies the three economic functions of currencies – unit of account, medium of exchange and store of value (Argentina 171, position III).

161

Source: http://www.banrep.gov.co/es/comunicado-01-04-2014. Access: February 3rd, 2016. Source: http://www.dutchnews.nl/news/archives/2014/07/dutch_prosecutors_now_have_pow/. Access: February 3rd, 2016. 163 Source: http://www.coindesk.com/spain-cracks-bitcoin-gambling-loopholes/. Access: February 3rd, 2016. 164 FINCEN. Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001, 18th March 2013. Available at: https://www.fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html 165 Source: http://www.coindesk.com/isle-of-man-trials-first-government-run-blockchain-project/. Access: February 3rd, 2016. 166 Source: http://www.coindesk.com/italian-amendment-treat-bitcoin-like-cash/. Access: February 3rd, 2016. 167 Source: https://www.ordenacionjuego.es/en/que-es-el-juego-ilegal. Access: February 3rd, 2016. 168 Source: http://www.coindesk.com/polish-finance-ministry-says-bitcoin-can-used-financial-instrument/ and also http://www.coindesk.com/polish-tax-authority-bitcoin-mining-profits-subject-22-vat/. Access: February 3rd, 2016. 169 Source: http://www.coindesk.com/swiss-regulators-give-green-light-bitcoin-atm-network/, https://www.finma.ch/en/search/#query=bitcoin&Order=4 and report published by FINMA on June 25th, 2014. Original with me. 170 Source: http://arstechnica.com/tech-policy/2012/12/bitcoin-going-mainstream-exchange-approved-tooperate-as-a-bank/. Access: February 3rd, 2016. 162

56

4.2. RELEVANT LEGAL CONCERNS VCs [virtual currencies] pose a definitional challenge to regulators. VCs combine properties of currencies, commodities, and payments systems, and their classification as one or the other will often have implications for their legal and regulatory treatment—in particular, in determining which national agencies should regulate them. Finding a consistent classification for VCs even within the same jurisdiction has proven difficult, as different competent authorities may classify them according to their own policy priorities. (IMF, 2016, p. 24). Emphasis added.

If one analyzes what was argued in the previous section and add to that the results presented in the annexes, the main legal question that emerge from the positions adopted by the 62 jurisdictions172 are: (a) if and how to tax cryptocurrencies; (b) how to legally qualify cryptocurrencies; (c) how to control illegal activities enabled by “anonymity”173 on the web; (d) how to track and identify users and their transactions; and (e) how and when to start creating legal implications for the use of cryptocurrencies. The taxation of a cryptocurrency is closely related to the legal classification adopted by a given legal order. Throughout the description of the positioning adopted by each jurisdiction (Annex II) I tried to point out the different legal meanings that cryptocurrencies have been assuming – such as “commodities”, “goods”, “medium of exchange”, “monetary substitute” and “income”. What one can perceive is that the tax aspects usually are the first to attract attention and regulatory relevance – and, from then on, competent authorities frame cryptocurrencies according to their levy interests. The Brazilian Internal Revenue Service, for example, was the first body of the country to classify Bitcoin, defining it as a “financial asset” so that it would be possible to collect income tax over it – and, with this, started a precedent in the legal order about how to classify the cryptocurrency. What we have seen until now, then, is that Bitcoin enters different legal systems mainly via tax law, and this choice induces further Bitcoin classification within future regulation in the country. In this sense, one body of the Department of Treasury of the United State, the FinCEN (Financial Crimes Enforcement Network), recently published some legal benchmarks that encompass what has been concluded up to this point by different tax authorities around the world: (1) Bitcoin is private property, and not legal tender (official currency), and therefore 171

Source: http://www.infoleg.gob.ar/infolegInternet/anexos/230000-234999/231930/norma.htm. Access: February 3rd, 2016. 172 61 countries, plus the European Union. 173 Considering that there is a difference between “anonymously” and “pseudonymously”, as I attempted to clarify in the Bitcoin’s narrative.

57

must be taxed as a capital good; (2) the profit from selling Bitcoins for legal tender falls on the hypothesis of taxes over capital gains; (3) purchase of goods and services made with Bitcoin must also be understood as capital gains; (4) Bitcoins and other cryptocurrencies obtained through mining are understood as income, being the overall value computed in relation to the day in which the currency was “acquired”; (5) the equipment used for cryptocurrency mining can be deducted under the category of capital goods.174 If the regulation of cryptocurrency instruments is directly related to the legal qualification they assume in different jurisdictions, the same could be said about the relation between anonymity and user responsibility.175 In these internet times, when sometimes the virtual facet of citizens winds up assuming a greater importance than their participation in the real world, it is hard to deny that the virtual space assumes equally complex significance and challenges. Especially if one takes into consideration that a digital footprint is harder to follow than a concrete one. Facing this scenario, several countries have combined efforts in order to overcome virtual anonymity and restrict the no-man’s land enabled through cyberspace. One example of this initiative is the ITOM, Illegal Trade on Online Marketplace, led by Holland jointly with the United States and European Union. This is an EU financed plan which is executed by special forces such as the Europol (EU), Eurojust (EU), FBI (USA) and BKA (Germany), and has by objective to reduce the cyber-anonymity and make it possible to track users who hide behind the network

174

Source: Department of Treasury – Financial Crimes Enforcement Network, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. FIN-2013-G001, published on March 18th, 2013, available at: http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013G001.pdf. Access: January 24th, 2016. 175 The option has been to regulate and control the so-called gatekeepers, intermediaries who exchange Bitcoins for official currency. “In determining who to regulate, national authorities have mostly targeted VC market participants and financial institutions that interact with them. While the issuance and transfer of VCs between users are less likely to pass through an intermediary, the interface between VCs and the broader economy— payments for goods and services and exchanges with fiat currency—will often go through a VC exchange or other VC service provider. In addition, in light of the limited size of the VC network, it is generally accepted that VC users will have to “cash out” at some point— that is, convert their VCs into fiat currency. Recognizing these features of the current market, regulators have targeted “gatekeepers.” In practice, this has been done in two ways: (i) by regulating VC market participants that provide an interface with the broader economy (for example, VC exchanges); and/or (ii) by restricting the ability of regulated entities (for example, banks) to interact with VCs and VC market participants”. (IMF, 2016, p. 25).

58

apparatus to engage in illegal activities.176 The plan is constituted by three fronts, being the last one of them Bitcoin itself.177 Thus, if on a first moment countries seemed to be more interested to regulate tax aspects of cryptocurrencies, the worry regarding its illegal or criminal uses appears to be the new trend to attract authorities’ attention.178 It is very interesting to observe how Bitcoin, in a way, exacerbates two aspects of globalization which were never solved in a satisfactory manner by States179 – the potential and dangers of the connection made possible through internet, and the absence of supranational control and supervision institutions which are, in fact, efficient. By personifying decentralization and pseudonymity – that are also inherent to the current globalized context – Bitcoin highlights the same problems that States cannot face in an efficient way when certain matters demand a supranational position and/or combined efforts in order to be addressed and resolved. And how can the notion of parallel currencies influence Law within this context? It is a concept that dismisses the concern to deny Bitcoin’s official monetary character. Once this question is surpassed, jurisdictions can proceed to developing a regulatory framework that encompasses cryptocurrencies’ specifics and prioritizes the inherent challenges of their virtual format, as well as specific internal order interests, without greater legal concerns regarding their monetary character. This would lead to saving time and resources, since one would not see the need to deepen monetary discussions or opt for a regulatory framework that identifies in Bitcoin a threat, crippling innovation – which does not seem to be the ideal scenario.

176

A full presentation of the plan, as presented to the European Commission in 2013, is available at https://www.deepdotweb.com/2014/09/28/itom-europes-plan-crack-online-drug-trade/. Access: February 3rd, 2016. The non-official release by Holand’s Public Attorney’s Office is available at http://static3.volkskrant.nl/static/asset/2014/Reactie_Openbaar_Ministerie_6685.pdf. 177 The presentation (supra note) lists the fronts adopted by the plan: tracking, shipping and Bitcoin. 178 In this sense, “The transnational reach of VCs complicates regulation. Asserting jurisdiction over a particular VC transaction, market participant, or scheme may prove challenging for national regulators in light of the cross-border reach of the technology. National authorities may also find it difficult to enforce laws and regulations in a “virtual” (online) environment. Cryptocurrencies pose particularly difficult challenges. Their decentralized nature does not fit easily within traditional regulatory models. Through the use of distributed ledger technologies, cryptocurrencies eliminate the role of a central intermediary, such as an issuer or a payment processor, that would normally be the focal point of regulation. In such circumstances, the question then becomes who to regulate – for example, the individual VC users or other parties within the system”. (IMF, 2016, p. 25). 179 See BUCHAN et al. “Globalization and human cooperation”. PNAS, vol. 106, n. 11, 2009.

59

5. CONCLUSIONS However, a great deal of work remains to be done to put in place effective frameworks to regulate VCs [virtual currencies] in a manner that guards against the risks while not stifling financial and technological innovation. (IMF, 2016, p. 35).

Carl Menger once stated, in 1892, that the origins of currency could be followed back to the social group, and not the State. “Currency is not a product derived from Law. In its origin, it is a social institution, and not a state institution.”180 This endogenous view, which goes back to system’s users and the regulation circumscribing it explains, at least partially, the phenomenon featured by the Bitcoin system. After all, its emergence, development and evolution are closely related to the active role of users, social actors, and not a state body. The “elegant”181 design of Bitcoin, with its own regulatory mechanisms, plus the main aspect of decentralization, plus the matter of transparency enabled by the existence of the blockchain182 seem to be an empiric example for proving that the existence and maintenance of trust within a monetary system does not necessarily rely on the presence of a State as last guarantor of the economic order. In the introduction of this dissertation, I explained that my objective here would be to answer this research question: how legal mechanisms have been used to deal with Bitcoin and verify whether classifying Bitcoin as a “parallel currency” may contribute with the actual set of legal alternatives developed to deal with cryptocurrencies. Now it is time to evaluate if the answer I attempted to provide was in fact given and if it meets the question in a satisfactory way. I opted to present, before approaching the legal implications that Bitcoin has led to in several jurisdictions, the economic theory’s notion about parallel currencies. These are complementary or competing monetary instruments whose definition encompasses: (i) the parallel circulation to a country’s official currency; and (ii) the absence of the legal recognition dispensed to the official currency. Combining both elements, it seems to be 180

MENGER, 1892, p. 51. Free translation. THE, 2014, p. 23. 182 In this sense: “the growing interest in blockchain and distributed ledger applications in London, Washington, DC and New York suggests this core technology could become the back-office foundation of our global financial system. Knowing the harm that system’s vulnerabilities can cause, everyone should care about how this new architecture is designed.” (PALMER, 2016). Emphasis added. See also the report published by the United Kingdom government in January 2016 entitled Distributed Ledger Technology: beyond block chain. Available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1distributed-ledger-technology.pdf. Accesso: January 25th, 2016. 181

60

possible to face the question regarding the “official” monetary character of Bitcoin – it is enough, for its quality as a parallel currency, for it to be recognized as a non-official monetary instrument by its users. If we consider Bitcoin an accessory instrument to an already established monetary system, it follows that Bitcoin could not exist, in its current stage of development, in a scenario in which there were not official currencies, central banks and States. Although one can identify in Bitcoin the three economic functions of currency – unit of account, medium of exchange and store of value – the majority of its transactions does not provide a good example of the third function, from what we can conclude that the possibility of conversion to legal tender seems to be an imperative for most of Bitcoin’s users. With the growing regulatory interest towards cryptocurrencies, some significant actors – such as the International Monetary Fund – have already warned that the creation of regulatory instruments should allow for the maintenance of an innovative environment. In this sense, apart from the challenge of establishing efficient regulation that limits the practice of illegal activities and creates a framework for its development, one must still consider the existence of an optimal point for regulation, which minimizes risks and allows for innovation to occur. As I attempted to show along the third section, the regulatory designs up to this far have been as varied as possible. Among the 62 jurisdictions that already took a stand on the matter of cryptocurrencies, one can identify three positions that unfold in different legal implications. The positions are:

I)

Publishing of warning statement;

II)

Creation of regulatory instruments without entering the discussion about the

monetary status of Bitcoin; III)

Creation of regulatory instruments while discussing the monetary status of

Bitcoin.

Some of the legal implications were compiled in the table below, along with their classification among the positions described previously:

61

Action forbid the use by financial institutions, but not by individuals assimilation of Bitcoin logic by the Judiciary, which has its own virtual wallet and performs searches and seizures of the cryptocurrency equate Bitcoin to an electronic payment system equate Bitcoin to legal tender adoption of blockchain technology by the financial system proposal to identify users that allocate values over a certain amount in Bitcoin establishing a limit to the transactional values equate contracts performed in Bitcoin to financial instruments equate Bitcoin "brokers" to a non-profit organization, subject to self-regulation equate Bitcoin "brokers" to a bank acknowledge in virtual currencies the three economic functions of money: medium of exchange, unit of account and store of value

Country Colombia; Lebanon

Category Position III

Netherlands

Position II; Position III

Spain

Position III

United States

Position III

Isle of Man

Position II

Italy

Position II

Spain

Position II

Poland

Position II

Switzerland

Position II

France

Position II

Argentina

Position III

Table 04. Some postures adopted by jurisdictions regarding Bitcoin Own ellaboration

The findings lead to the conclusion that there is no single and homogeneous legal answer to this particular phenomenon, that is, Law has been using several instruments and regulatory mechanisms at its disposal. The main legal implication, however, lies with taxation: approximately one third of the analyzed jurisdictions built regulatory frameworks in this direction, followed by concerns translated in the criminal area through the identification and criminalization of activities involving Bitcoin or through forbidding Bitcoin itself. And what does the notion of parallel currencies bring to this scenario? It is a concept that dismisses the concern to deny Bitcoin’s official monetary status. If we follow the theory that acknowledges the existence of complementary monetary instruments, parallel currencies do not rival and cannot be confused with official currency. Once this question is overcome, jurisdictions may develop a regulatory framework that encompasses the specifics of cryptocurrencies and prioritizes the challenges inherent to its virtual format, as well as the interests concerning each legal order – without further legal questioning as to its monetary character.

62

There is no going back after the stage of development and spread of parallel currencies through technology. It is time to face the problems which already start emerging and look for answers and solutions – a task not to be lightly understood and of intriguing complexity.

63

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ANNEX I

Country

Circulation and/or Legal use restriction classification I

Legal classification II

Legal implication I statement published by the Central Bank statement published by the Central Bank

Legal implication II

Legal implication III

x

x

x

x

Argentina

N

x

x

Armenia

N

x

x

Australia

N

money

financial asset

taxation

x

x

Austria

N

unit of account

x

taxation

x

x

Bangladesh

Y

x

x

x

x

Belgium

N

x

x

taxation

x

Bolivia

Y

x

x

x

x

Brazil

N

financial asset

x

taxation

x

Bulgary

N

financial asset

x

taxation

x

x

Canada

N

commodity

x

taxation

criminalization of conducts already forbidden by law

x

China

Y

x

x

x

x

Colombia

Y

x

x

x

x

Croatia

N

x

x

x

x

criminalization of use and circulation statement published by the Central Bank criminalization of use and circulation statement published by the Central Bank

criminalization of use and circulation criminalization of use and circulation legality acknowledged by the Central Bank

71

Cyprus

N

x

x

statement published by the Central Bank

legality acknowledged by the Central Bank

x

Czech Republic

N

x

x

criminalization of conducts already forbidden by law

x

x

Denmark

N

x

x

x

x

Ecuador

Y

x

x

x

x

Estonia

N

capital gain

x

statement published by the Central Bank criminalization of use and circulation taxation

x

x

European Union

N

money

x

statement published by the Central Bank

taxation

criminalization of conducts already forbidden by law

Finland

N

commodity

financial service

legality acknowledged by the Central Bank

taxation

x

France

N

private property

financial service

taxation

criminalization of conducts already forbidden by law

x

Germany

N

commodity

financial instrument

taxation

x

x

Greece

N

x

x

x

x

Greenland

N

x

x

x

x

Hong Kong

N

commodity

x

x

x

Hungary

N

x

x

x

x

Iceland

Y

x

x

x

x

India

N

x

x

x

x

statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank criminalization of use and circulation statement published by the Central Bank

72

Indonesia

N

x

x

statement published by the Central Bank

criminalization of conducts already forbidden by law

x

Ireland

N

commodity

currency

taxation

x

x

Isle of Man

N

x

x

criminalization of conducts already forbidden by law

x

x

Israel

N

x

x

x

x

Italy

N

x

x

x

x

Japan

N

x

x

x

x

x

Jordan

Y

x

x

Kyrgyzstan

Y

x

x

criminalization of use and circulation criminalization of use and circulation

Lebanon

N

e-money

x

Lithuania

N

x

x

statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank

Luxembourg

N

x

x

Malaysia

N

x

x

Mexico

Y

x

x

Netherlands

N

asset

x

New Zealand

N

x

x

Norway

N

asset

x

statement published by the Central Bank statement published by the Central Bank

remittance to the Treasury Department

x x

x

x

x

x

remittance to the Financial Market Supervisory Authority

x

x

x

statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank

criminalization of use and circulation possibility of search and seizure remittance to Corporate Law

taxation

taxation

x

x

x

x

73

Philippines

N

x

x

statement published by the Central Bank

x

x

Poland

N

service (mining)

financial instrument

taxation

legality acknowledged by the Treasury Department

x

Portugal

N

x

x

statement published by the Central Bank

Central Bank exempted itself as a regulatory instance

x

Russia

Y

money substitute

x

x

x

Serbia

N

x

x

x

x

Singapore

N

asset

service

taxation

criminalization of conducts already forbidden by law

Slovenia

N

income (mining)

x

taxation

x

South Africa

N

x

x

x

x

South Korea

N

x

x

x

x

Spain

N

electronic payment system

x

taxation

x

Sweden

N

commodity

employment (mining)

taxation

x

x

Switzerland

N

payment method

x

taxation

criminalization of conducts already forbidden by law

x

Taiwan

Y

x

x

statement published by the Central Bank

criminalization of use and circulation

x

Thailand

N

x

x

remittance to Corporate Law

remittance to Consumer Law

criminalization of conducts already forbidden by law

criminalization of use and circulation statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank statement published by the Central Bank remittance to gambling law

74

Turkey

N

x

x

statement published by the Central Bank

x

x

United Kingdom

N

payment method

x

taxation

x

x

United States

N

commodity

currency

taxation

criminalization of conducts already forbidden by law

x

Vietnam

N

x

x

statement published by the Central Bank

x

x

Source: own ellaboration.183

183

Uma versão mais sintética de um quadro semelhante foi proposta pelo Fundo Monetário Internacional. IMF, 2016, p. 42.

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