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DATE DOWNLOADED: Wed Aug 5 21:52:10 2020 SOURCE: Content Downloaded from HeinOnline Citations: Bluebook 20th ed. Anton N. Didenko Ross P. Buckley, The Evolution of Currency: Cash to Cryptos to Sovereign Digital Currencies, Fordham International Law Journal 42, no. 4 (April 2019): 1041-1094 McGill Guide 9th ed. Anton N Didenko Scientia Professor; and Member, Centre for Law, Markets and Regulation, UNSW Sydney. We are grateful for the financial support for our research by the Australian Research Council (ARC) and the United Nations Capital Development Fund (UNCDF) through ARC Linkage Project 150100269. As always, all mistakes and omissions remain the Authors responsibility. 1041 1042 FORDHAMINTERNATIONAL LAWJOURAAL for good reasons, respond in kind and the ground will be laid for a sovereign digital currency battle royale. A B ST R A C T . 1041 I. INTRODU CTION . 1043 II. A QUAGMIRE OF CONFUSING VOCABULARY. 1045 III. USEFUL BUT WORTHLESS: CURRENCY AS THE BACKBONE OF MODERN PAYMENT SYSTEMS 1052 IV. THE CONCEPT OF CURRENCY IN FORMAL PAYM ENT SYSTEM S . 1056 A. Official currency: cash and bank accounts . 1058 B. Surrogates of Official Currency . 1061 1. Differences from Official Currency . 1062 2. Connection to Official Currency . 1067 3. SOC as Part of the Formnal Payment System . 1068 C. Development trends in formial payment systems . 1070 V. THE CONCEPT OF CURRENCY IN ALTERNATIVE PAYM ENT SYSTEM S . 1072 A. Taxonomy of Alternative Currencies . 1073 1. Physical or Digital? . . 1074 2. Convertible or Non-convertible? . 1075 3. Centralized or Decentralized? . . 1079 4. The Bitcoin Legacy . 1080 B. Alternative Currencies: Legal Status and Regulatory Im plications . 1081 1. Uncertain Legal Status of Alternative C urrencies . 1081 2. Digital Alternative Currencies and SOC . 1082 VI. NEXT STEPS IN THE EVOLUTION OF OFFICIAL CU RREN CY . 1085 A. Implications of the Formal Payment System . 1085 B. Three Ways Forward for Official Currency . 1087 1. Central Bank Accounts with Intermediated A ccess . 1087 2. Central Bank Accounts with Direct Access . 1088 3. New Forms of Official Currency . 1089 C. New Opportunities and New Challenges . 1090 V II. CON CLU SION . 1093 Vol. 42:4 2019 THE EVOLUTION OF CURRENCY 1043 I. INTRODUCTION There are today over 2,000 new, privately held and controlled digital currencies across the globe and the rush to create them shows no sign of abating.1 The first of its kind was Bitcoin, established in 2009.2 This digital decentralized alternative to state-controlled currency offered new opportunities for end-users, by providing additional methods for transferring or storing value. In developing countries, mobile money, issued and used on mobile phones, provided another digital alternative, with the best known example being M-Pesa, launched by Safaricom in Kenya in 2007. 3 These new products have created additional risks for national and international payment systems and triggered a regulatory response. Mobile money (also known as electronic money or e-money) products have largely become regulated activities, although many issues remain unresolved. 4 In the case of Bitcoin and its spin-offs, regulation has proven distinctly problematic for technical reasons: 1. All Cryptocurrencies, COINMARKETCAP, perma/WA4W-BJJT. 2. Bitcoin is the first digital currency issued without a single administrator or repository. Its operation was described in SEC v. Shavers as follows: Bitcoins are held at, and sent to and from, bitcoin addresses. A bitcoin wallet is a software file that holds bitcoin addresses. Along with each bitcoin address, a bitcoin wallet stores the private key for the address, essentially a password used by the holder to access the bitcoins held at the address, as well as the transaction history associated with the address. Whoever has the private key for a bitcoin address controls the bitcoins held at that address. SEC v. Shavers, No. 4:13-CV-416, 2014 U.S. Dist. LEXIS 130781, at *3 (E.D. Tex. Sept. 18, 2014). 3. See ALLIANCE FOR FINANCIAL INCLUSION, ENABLING MOBILE MONEY TRANSFER: THE CENTRAL BANK OF KENYAS TREATMENT OF M-PESA 12 (2010). For additional detail concerning M-Pesa, see Nick Hughes Benjamin Ngugi, Matthew Pelowski, Mercy W. Buku Isaac Mbiti Katharine Kemp David Ramos, Javier Solana, Ross P. Buckley John Barrdear ; Walter Engert see also Ruth Wandhfer, The Future of Digital Retail Payments in Europe: A Role for Central Bank Issued Crypto Cash?, EUR. CENT. BANK (Oct. 2017), ecb.europa.eu/pub/conferences/shared/pdf/20171130_ECB BdI conference/paym ents conference 2017 academicpaper wandhoefer.pdf perma/NPA6-YMJ5; JP Koning, Fedco in: A Central Bank-issued Cryptocurrency, R3 REPORTS (Nov. 2016), central-bank R3.pdf perma/VJ4W-FQ4L; see generally GEORGE DANEZIS FINANCIAL ACTION TASK FORCE, VIRTUAL CURRENCIES: KEY DEFINITIONS AND POTENTIAL AML/CFT RISKS 5 (2014). 17. For a discussion on centrally issued digital currencies, see infra Section IV.B.3. 18. In its report on digital currencies, the Bank for International Settlements (BIS) stresses that these alternative currencies are not a liability of any individual or institution. See 2019 1047 1048 FORDHAMINTERNATIONAL LAWJOURAAL Bitcoin, are often subject to regulatory scrutiny in the form of warnings, prohibitions, or express prescriptive rules. The effectiveness of these measures hinges on clear and unambiguous definitions of their subject matter yet regulators frequently reuse the existing terminology and, by doing so, fail to achieve the clarity required. Fifth, occasionally new technologies end up being so deeply associated with their applications, that absurdity results. Blockchain19 is one such example. On the one hand, blockchain and its first application Bitcoin are sometimes used interchangeably. A publication of the UK government, no less, states: However, when people talk about the block chain sic, they tend to mean the collection of technologies and techniques that underpin the Bitcoin system, which other projects have used as inspiration because they solve unrelated problems in finance and elsewhere. 20 Yet, blockchain is but one of many technologies that, operating together, give Bitcoin its functionality. To equate blockchain with Bitcoin is plain silly. On the other hand, the perceived strength and resilience of Bitcoin has generated the popular, but ridiculous, view that all blockchains are inherently strong and resilient.21 This BANK FOR INTERNATIONAL SETTLEMENTS, DIGITAL CURRENCIES 4 (2015). The emergence of an official cryptocurrency would change this as well. 19. Blockchain is a special database structure first utilized in Bitcoin to link together data arranged in individual blocks in append-only chronological order. Bitcoins blockchain uses cryptographic hashing to uniquely identify each block and uses this identification as a reference to connect different blocks into a single chain. Although the basic features of Bitcoin were explained in a whitepaper by an author named Satoshi Nakamoto, see Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN (Oct. 2008) ibitcoin/ bitcoin.pdf perma/7W3N-NZMM, the term blockchain was not introduced in the whitepaper and became widespread only subsequently. For some of the earliest mentions of the term, see, e.g., richbodo, Usage of the Word Blockchain, MEDIUM (Aug. 8, 2018), perma/UA8H-FK4R. 20. UK Government Chief Scientific Adviser, Distributed Ledger Technology: Beyond Block Chain, GOvT OFF. SCI. (Jan. 2016) 34, assets.publishing.service.gov.uk/ government/uploads/system/uploads/attachment data/file/492972/gs- 16- 1 -distributed-ledger- technology.pdf perma/XB4V-JE84 (emphasis added). 21. See, e.g., MARC PILKINGTON, RES. HANDBOOK DIGITAL TRANSFORMATION 15 (F. Xavier Olleros Chamber of Digital Commerce, Digital Currency Group Andrea Tinianow Amending Title 44, Chapter 26, Arizona Revised Statutes, By Adding Article 5; Relating To Electronic Transactions 2 AZ HB2417 (2017) (emphasis added). 23. Walch, supra note 11, at 743-45. 24. Although currencies are analyzed by reference to their functional characteristics, legal implications still need to be considered particularly for separating formal and alternative payment systems, as discussed below. 25. See, e.g., EUROPEAN CENTRAL BANK 2015, supra note 12, at 24. 2019 1049 1050 FORDHAMINTERNATIONAL LAWJOURAAL treated as such. This follows from Article 1(4) of the E-Money Directive 26 and Article 3(k) of the Payment Services Directive, 27 which exclude from the scope of the E-Money Directive services based on instruments that can be used to acquire goods or services only in the premises used by the issuer or under a commercial agreement with the issuer either within a limited network of service providers or for a limited range of goods or services. ,28 In a similar fashion, Section 9(3) of Australias Payment Systems (Regulation) Act 1998 (the Act) permits the Reserve Bank of Australia (RBA) to exempt from the Act certain facilities with limited impact, having regard to any restrictions that limit the number or types of people who may purchase the facility or any restrictions that limit the number or types of people to whom payments may be made using the facility., 29 Facilities covered by such exception do not qualify as purchased payment facilities (PPF).30 The RBA has exercised this authority on a number of occasions, thus excluding, among other things, (i) gift card facilities,31 (ii) loyalty schemes,3 2 (iii) electronic road toll services,33 (iv) prepaid mobile phone accounts,34 (v) facilities limited to AUD$10 million (in total)35 and (vi) facilities whereby payments can be made to no more than fifty persons. 36 The above exceptions from EU and Australian law are based on the assumption that the limited scope of certain facilities removes the 26. Directive 2009/110, 2009 O.J. (L 267) (amending Directives 2005/60/EC and 2006/48/EC and repealing Directive 2000/46/EC). 27. Directive 2007/64/EC, 2007 O.J. (L 319) (amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC), replaced by Directive 2015/2366, 2015 O.J. (L 337) (amending Directives 2002/65/EC, 2009/110 /EC and 2013/36/EU and Regulation (EU) No. 1093/2010 and repealing Directive 2007/64/EC). 28. See Directive 2007/64/EC, art. 3(k), 2007 O.J. (L 319) (amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC and repealing Directive 97/5/EC), replaced by Directive 2015/2366, 2015 O.J. (L 337) (amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No. 1093/2010, and repealing Directive 2007/64/EC). 29. Payment Systems (Regulation) Act 1998 (Cth) 9(3) (Austl.). 30. Payment Systems (Regulation) Act 1998 (Cth) 9(1) (Austl.). 31. Reserve Bank of Australia, Declaration No I of 2006, RBA, rba.gov.au/media-releases/2006/pdf/mr-06-02-purchased-payment- facilities-dec- 1.pdf perma/ZDG4-BZDQ. 32. Id. 33. Id. 34. Id. 35. Reserve Bank of Australia, Declaration No 2 of 2006, RBA, rba.gov.au/media-releases/2006/pdf/mr-06-02-purchased-payment- facilities-dec- 2.pdf perma/CLF6-2L2U. 36. Id. Vol. 42:4 THE EVOLUTION OF CURRENCY need to regulate them. Also, these exceptions apply to the scope of the regulatory instruments, rather than the definitions themselves (which remain largely functional). Although the result is the same (excepted facilities are not regulated), functionally the exceptions fully satisfy the relevant definitions of electronic money and purchased payment facilities, respectively. Third, the proposed taxonomy is technology-neutral. The problem with taxonomy based on technology is that technology changes and as is demonstrated by the blockchain example above3 7 can be readily misunderstood. Fourth, it focuses on the concept of currency,38 rather thanmoney (although certain references to basic theories and technical concepts are, of course, unavoidable). For the purposes of suggested functional analysis, the term money that is often used in literature is too abstract: with enough qualifications (such as the limited ability to perform one or more functions of money),3 9 almost anything of value can be classified as such;40 conversely, if interpreted more broadly, many national currencies will not qualify as money either. 41 As a result, references to the term money are often used without further explanation as if its meaning is obvious, which creates taxonomy issues. For example, in its taxonomy of money and exchange mechanisms the Bank for International Settlements (BIS) refers tomoney in traditional sense, clarifying that this means money denominated in a sovereign currency. 42 Overall, a discussion about the moneyness of various assets is outside the scope of this Article. 37. See UK Government Chief Scientific Adviser, supra note 20. 38. Merriam Webster dictionary defines currency as something . that is in circulation as a medium of exchange. In this Article, currency is thus understood broadly, by reference only to the medium of exchange function, disregarding other functions of money (such as store of value and unit of account). Currency, MERRIAM-WEBSTER, merriam- perma/RAF5-HMZE. 39. See LOCKE, infra note 66; LOCKE, infra note 67; TOBIN, infra note 68. 40. See, e.g., Aleksander Berentsen Lerner, supra note 59, at 312. 61. Fox see also BANK FOR INTERNATIONAL SETTLEMENTS, supra note 71, at 2. 79. KOKKOLA, supra note 70, at 44. 80. Committee on Payment and Settlement Systems, Core Principles for Systemically Important Payment Systems, BIS (Jan 2001) 8, bis/cpmi/publ/d43.pdf. 81. KOKKOLA, supra note 70, at 45. 82. BANK FOR INTERNATIONAL SETTLEMENTS, supra note 71, at Annex 3 Table C. Vol. 42:4 THE EVOLUTION OF CURRENCY to make all payments to and from the CLS. 8 3 This is in contrast to other multicurrency settlement systems that perform settlement using commercial bank accounts. 84 While it can be said that commercial banks85 also create official currency by issuing loans, 86 they are limited in performing this function by several factors: the law generally precludes uncontrolled lending by establishing mandatory ratios (e.g., capital adequacy ratios) and by otherwise restricting leverage (not to mention economic factors, such as central banks interest rate policies). 87 Similarly to central bank money balances, a client account with a commercial bank is essentially a liability of the latter.88 This liability, however, is of a lower quality than a central bank liability, as its originator can mismatch its liquidity and obligations or otherwise default. For this reason, countries develop additional instruments to increase public trust in commercial banks, by establishing deposit insurance and oversight mechanisms, by reserving resolution powers in the event of financial distress and by adopting other
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