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Annex. Policy Responses to Virtual Currencies—Selected Countries

Jurisdictions have taken different approaches towards mitigating the potential risks of VCs and regulating VC-related activities. Following the Regulatory and Policy Challenges section, this Annex considers responses by selected jurisdictions that illustrate this divergence in approaches. 59

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The IMF staff team comprised Dong He, Karl Habermeier, Ross Leckow, Vikram Haksar, Yasmin Almeida, Mikari Kashima, Nadim Kyriakos-Saad, Hiroko Oura, Tahsin Saadi Sedik, Natalia Stetsenko, and Concepcion Verdugo-Yepes. Inputs are also gratefully acknowledged from Victoria Perry, Federico Diaz- Kalan, Silvia Iorgova, Jonathan Pampolina, Nadia Rendak, Anna Strandquist, Herve Tourpe, and Christophe Waerzeggers. Sonia Echeverri, Rosemary Fielden, and Kajal Jagatsing provided valuable support.


Given the fast evolving nature of the industry, a universal definition has yet to emerge and could quickly change as the VC ecosystem continues to transform.


This type of VCs is backed by the combination of existing tangible assets or national currencies and the creditworthiness of the issuer.


An additional distinction is sometimes made between unidirectional flow and bidirectional flow of convertibility, with the former referring to VCs that can be obtained in exchange for fiat currency (or other VCs), but cannot be converted back to fiat currency (or other VCs)—the flow of convertibility being unidirectional (for example, Nintendo Points, some frequent-flyer programs air miles)—and the latter—where the flow of convertibility is bidirectional (for example, Bitcoin, Linden Dollar). See ECB (2012).


It should be noted that convertible VCs may be subject to illiquid markets, limiting their de facto convertibility.


For example, Ripple.


Trade platforms provide a forum where buyers and sellers can offer and bid for VCs (akin to a market place).


VC wallets are used by VC holders to hold and transact in VCs. Cryptocurrencies are stored in digital wallet software associated with cryptographic keys: (i) “public keys,” which are used to encrypt data and function akin to an account number; and (ii) “private keys”, which are needed for decryption and which function akin to a password to access the cryptocurrencies or a signature to authenticate transactions. Where no intermediary is involved (for example, VC wallet service provider), the loss of a private key will in effect result in the loss of the VCs held in the VC wallet, as the owner of the wallet cannot access its content. VC wallets can be held online (“hot storage”) or offline (“cold storage”). The latter is considered to afford greater protection against hacking and theft.


“Money” could have different meanings depending on the context. VCs are comparable to banknotes, coins, and other liabilities of the issuer—the central bank in a modern monetary system. These are also called high-powered money, central bank liability, base money, or outside money. In contrast, money supply includes base money and liabilities (denominated in the national currency) created by banks and bank-like financial institutions (such as deposits and some money market fund shares—called inside money). Even in a system where the central bank has a monopoly right to issue base money, the bulk of the money supply could be provided in a decentralized manner by multiple financial institutions. These financial institutions could be regulated or unregulated (such as shadow banks and as in the “free banking” regime (Gorton, 1985). On the other hand, there is currently no known financial institution that provides inside money in VCs, and the VC monetary system consists only of high-powered money.


Convertibility in this section refers to convertibility of fiat currencies to commodity reserves and international reserves, in the context of the gold standard or the Bretton Woods System, in contrast with the convertibility of VCs into national currencies as discussed in the earlier section.


It should be noted that the definition of legal tender varies slightly among jurisdictions. For example, in some countries, legal tender rules allow the debtor to make a valid “tender”—that is, to take the necessary steps to complete a payment—but there is no obligation on the side of the creditor to accept the tender. A creditor, however, would be barred from recovering the debt in court, if he has refused to accept a valid tender. On the other hand, in other countries, it is unlawful to refuse legal tender in payment. In light of the differences in the definition of legal tender in the euro area, the European Commission adopted a recommendation in 2010 that the concept of legal tender should rely on three main elements: (i) a mandatory acceptance of banknotes and coins; (ii) for their full face value; and (iii) with a power to discharge debt.


See Yermack (2013); Lo and Wang (2014); and Ali, Barrdear, Clews and Southgate (2014).


Given the current very low level of acceptance and transaction volume of VCs and the evidence they are being “hoarded” (stored for speculative purposes) in some cases, as opposed to being used as an alternative medium of exchange, demand for VCs is mainly driven by expectations about their future use. If the market believes that VCs, or their embedded payment network, will become more widely adopted, this will be reflected in the price at which individuals are willing to buy and sell a particular VC. Changes in these expectations are reflected in VC prices.


Furthermore, Bitcoin, which accounts for about 90 percent of decentralized VC market value (, January 11, 2016), had a small daily transaction volume of about US$70 million in 2015 (, which is marginal compared to the largest global credit card providers.


Given the high exchange rate risk, most retailers also immediately convert payments received in Bitcoin into fiat currencies.


Reliable record keeping is a challenge even in well-developed institutional settings. For instance, even in the United States, the record of property title is imperfect. A buyer of a property usually hires a title search company to go through various records and confirm the seller and that only the seller has title to the property. In addition, buyers typically purchase title insurance in case somebody else claims ownership later. The Economist (2015a and 2015b) discusses ongoing effort of a country to use blockchain technology for improving its land registry.


For example, a consortium that includes most of the major global banks and is led by a U.S.-based firm (R3) is promoting collaboration and developing standards for blockchain applications in financial services More recently, the Linux Foundation announced a new collaborative effort to advance the use of blockchain technology. Many corporates, including major financial institutions, are participating in this initiative.


World Bank, Remittance Prices Worldwide Database.


However, the cost advantages of Bitcoin (and other VCs that adopts a similar “proof-of-work” system) may not be sustainable, as the cost of mining is expected to rise. Mining Bitcoin is costly, requiring computer processing power and associated energy costs. In addition, such systems involve a negative externality that causes overinvestment in computer power. The negative externality emerges because the expected marginal revenue of individual miners increases in the amount of computing power they individually use, but the difficulty of the puzzle they solve (marginal cost) increases in the total amount of computing power. Individual miners do not take into account the negative effect on other miners of their investment in computing resources. Therefore, all miners inefficiently overinvest in computer hardware, which results in significant waste of resources (Ali, Barrdear, Clews, and Southgate, 2014b). Moreover, seignorage for miners is set to decline over time, which may push miners to start charging more fees to users for compensation. Other VCs have adopted a “proof-of-stake” system to address this potential limitation (for example, Nextcoin). In a “proof-of-stake” system, instead of having miners compete to verify and validate the transaction, the transaction is assigned at random on the basis of the miner’s “stake” in the network (that is, the number of coins he or she holds).


The G-8 and G-20 endorsed pursuing the “5×5 objective,” which aims to reduce the global average cost of sending remittances from about 10 percent in 2009 to 5 percent in five years.


However, Continuous Linked Settlement (CLS) group, which settles a majority of global foreign exchange transactions, provides settlement finality in real-time.


These risks arise if the counterparty defaults before settling an agreed trade. For example, the failure of Lehman Brothers caused a number of settlement fails in various markets.


The misuse of the technology has carried reputational costs for the industry and undermined consumer confidence, resulting in an internal push for self-regulation by some market participants, for example, The CryptoCurrency Certification Consortium (C4) and the CryptoCurrency Security Standard (CCSS) (Source:


For example, the new regulation adopted by the New York Department of Financial Services (NYSDFS) makes the rules applicable to all entities who conduct Bitcoin businesses with New York residents, regardless of the VC market participant’s location of business. See footnote 54.


For example, Bolivia and Russia.


For example, Canada amended existing laws in order to expand the coverage of AML/CFT requirements to VC businesses. The U.K. and U.S., among other countries, have clarified the tax treatment of VCs and the application of AML/CFT regulations to VC exchanges.


It is worth noting that this is not necessarily the case. Fiat currency can be exchanged for VCs and vice versa on a peer-to-peer basis, and the same applies to goods or services. However, users will often choose to go through VC exchanges or other VC businesses for a variety of reasons (easier access, convenience, etc.).


For example, the People’s Bank of China has issued a notice to financial and payment institutions prohibiting their use of, or trade in, Bitcoin.


The European Banking Authority (EBA) issued an opinion in July 2014 (“EBA Opinion on ‘Virtual Currencies’”) recommending that legislative action should be taken at the EU level in order to implement a consistent level of regulation among EU countries which ensures that the risks identified are mitigated for all market participants in the EU.


There are several initiatives underway at the international and national levels to bolster the international CFT efforts which could have an impact on the use of new payment technologies, including VCs.


Because of user anonymity, transactions recorded in the public ledger cannot be traced back to real world identities.


FATF (2014 and 2015).


Although VCs pose ML/TF risks, the distributed ledger technology itself may have benefits in combating ML/TF. Specifically, where it is adopted by financial institutions to decentralize know your customer requirements (“KYC”) and AML/CFT registries, this technology could potentially make internal AML/CFT controls more cost effective, timely, and accurate.


Mt. Gox, the largest Bitcoin exchange, filed for civil rehabilitation in Japan in February 2014, announcing that Bitcoins held for customers were missing. The company subsequently filed for liquidation proceedings in April 2014. While it was initially reported that the system was hacked by outsiders, the CEO of Mt. Gox was charged with embezzlement by Japanese prosecutors in September 2015.


For example, Bitstamp, a large European Bitcoin exchange, suspended services in January 2015 due to a security breach involving the loss of 19,000 Bitcoin. Instawallet, a web-based wallet provider, also suspended services in April 2013 due to attack by hacking activities, resulting in the theft of over 35,000 Bitcoins (Congressional Research Service, 2015).


Users cannot reclaim payment for erroneous transactions given that decentralized VCs lack a central intermediary as well as clarity regarding the counterpart.


Some regulators have introduced, or are considering to introduce, regulations requiring registration to operate VC businesses, segregation of customer assets and/or posting of surety bonds to protect customers from the failure of VC intermediaries and service providers (e.g., New York, Connecticut, Japan—see footnote 54).


In the U.S., the Securities Exchange Commission (SEC) filed a complaint against a company engaging in a Bitcoin-denominated Ponzi scheme pursuant to federal securities legislation which prohibit fraudulent offers and sales of “securities”. The federal district court ruled that such Bitcoin-denominated investment vehicles should be considered as “securities” under federal securities legislation (SEC v. Shavers, E.D. Tex. August 6, 2013). In addition, SEC has taken enforcement actions against unregistered offerings of shares sold in exchange for Bitcoins (In the Matter of Erik T. Voorhees, Administrative Proceeding File No. 3-15902, June 3, 2014) and unregistered online VC-denominated stock exchanges and broker-dealers (In the Matter of BTC Trading, Corp. and Ethan Burnside, Administrative Proceeding File No. 3-16307, December 8, 2014 (Congressional Research Service (2015))). U.S. Commodity Futures Trading Commission (CFTC) has also taken enforcement actions pursuant to the Commodities Exchange Act against entities that operated an unregistered Bitcoin derivatives trading platform, ruling that Bitcoins and other VCs should be considered as “commodities” under the Act (In the Matter of Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29, September 17, 2015).


Most countries that have addressed this issue have determined that VCs will be treated for income tax purposes as non-currency (or in a few cases non-domestic currency), property. See for example: U.S., IR-2014-36 and IRS Notice 2014-21 (March 25, 2014); Canada, CRA news release (May 11, 2013); U.K., Revenue and Customs Brief 09/14 (VCs are treated as foreign currency asset for income tax purposes); Australia, GSTR 2014/D3 (VC transactions are treated as if barter transactions, VC not money or foreign currency); France, declaration December 2013 (VCs cannot be legally considered a currency); Germany, 2014 (VCs are a form of “private money” treated like foreign exchange; earlier guidance suggested VCs are commodities, and therefore subject to taxation upon both sale of Bitcoin and sale of goods in exchange for Bitcoin).


The first question is what kind of income is generated by mining. The U.S., for example, includes the fair market value at the time of mined currency in gross income (which also establishes the basis for any later disposition). Australia, by contrast, taxes miners only upon the sale or transfer of Bitcoins previously mined (which until then are treated as business inventory). Regarding the VAT and sales tax treatment of VCs, the U.K. (Revenue and Customs Brief 09/14) declared that: (i) use of VCs in purchase of any goods or services will be treated in the normal way for VAT, with the value being the sterling value of the VC at the time the transaction takes place; (ii) income from “mining” activities will be outside the scope of VAT; and (iii) exchange of VCs for British or foreign currency will not be subject to VAT on the value of the currency itself, nor on any fees or charges for arranging the transactions. Australia, in contrast, announced (ATO ruling GSTR 2014/D3) that Bitcoin exchanges and markets would have to charge GST on the full value of the Bitcoins they supply to residents, and not merely on any commissions charged. Further, the use of Bitcoins would result in the application of two GSTs—one on the goods and services supplied in exchange, and one on the use of the Bitcoins themselves. In the U.S., New York has declared that transactions using Bitcoins will be treated as a barter transaction subject to sales tax.


For example, the buyer of VC would purchase an online product for the seller of VC, who in turn would transfer to the buyer the corresponding amount in VC.


See also footnote 44 for the treatment of VC-denominated derivatives pursuant to the Commodities Exchange Act in the U.S.


Studies analyzing Bitcoin transaction patterns have, indeed found that a majority of all coins in circulation are being hoarded. See Ron and Shamir (2013), Meiklejohn et al (2013), and Badev and Chen (2014).


For further discussion of these risks see ECB (2012 and 2015); Ali, Barrdear, Clews, and Southgate (2014a); and CPMI (2015). Credit and liquidity risks may occur for user funds held with third-party institutions that provide support for the use of VCs (for example, VC wallet service providers or exchange platforms) if there are no guarantees that these institutions can meet their obligations or provide liquidity to users when needed. Operational risk could occur if there is no sound operational procedure or business continuity plan. Legal risk arises from legal uncertainty regarding VCs.


There is a risk that VCs could create an alternative payment system, subject to lower standards in terms of regulatory requirements. The uneven playing field may exacerbate the price advantage that VCs are able to offer their clients in addition to the technology advantages they enjoy. In the event VCs achieve scale, banks could lose a valuable source of revenue, which is also often an anchoring point for client relationships. Faced with a threat to revenue, banks may be forced to ramp up efforts to adopt and implement innovative technologies and business models to compete with VCs.


Cryptographic systems depend on the assumption that an attacker would need a very long time to decrypt a message. However, this could change in the face of future advances in technology (for example, the development of quantum computers) or in mathematics (for example, new algorithms). See Dowd (2014).


Some countries have more broadly prohibited financial institutions from using or trading in Bitcoin (for example, China—see Annex). The EBA’s 2014 opinion (see footnote 35) also recommended national authorities in EU to discourage credit institutions, payment institutions, and e-money institutions from buying, holding or selling VCs, thereby “shielding” regulated financial services from VCs. The EBA notes that this immediate response will allow VC schemes to innovate and develop outside the financial services sector.


In June 2015, New York Department of Financial Services (NYSDFS) issued regulations requiring businesses involved in transmitting, storing, buying, selling, exchanging, issuing, or administering VCs in New York to be licensed by the NYSDFS unless they are a state-chartered bank. The regulation requires licensees to be subject to minimum capital requirements, regulatory periodic examinations, financial disclosures, and approval of changes of control and mergers or acquisitions. Similarly, in June 2015, the Connecticut Money Transmission Act was amended to require licenses for all businesses engaged in the transmission of VCs in Connecticut. Under the revised Connecticut Transmission Act, such businesses are subject to all requirements applicable to money transmitters, as well as some additional requirements. Furthermore, the Conference of State Bank Supervisors developed a model framework for state VC regulatory regimes (“CSBS Model Regulatory Framework for State Regulation of Certain Virtual Currency Activities” (September 2015)). The Model Regulatory Framework notes that state regulators should ensure that the stability of the larger financial marketplace is maintained in allowing such activities, and recommends introducing financial strength requirements for VC companies, including capital and permissible investment standards, surety bond requirements, and development of policies for customer access to funds in the event of failure.


However, Buiter (2014) points out that the proliferation of VCs and the expansion of the sum of all VCs may lead to inflation.


The Fund’s Special Drawing Rights (SDR) initially had a role of alleviating the structural shortages of international reserves.


See, for example, Bordo, Choudhri, Schwartz (2002), Bernanke and James (1991), Temin (1989), and Eichengreen and Sachs (1985).


It is unclear whether this limitation can be overcome by future generations of VCs. Notably, there is no obvious way to program VC supply rules to respond appropriately to all conceivable macroeconomic shocks. Even largely rule-based inflation-targeting regimes still require a great deal of judgment, especially in the face of large or qualitatively different shocks. Even substantially improved supply-rule programs that incorporate various contingency plans will probably not be flexible enough (Yellen, 2015; King, 2004), particularly in view of ongoing structural changes in the economy.


The information gathered in the Annex includes readily available information from public sources and does not necessarily reflect all actions taken by any given jurisdiction.

Virtual Currencies and Beyond: Initial Considerations
Author: Mr. Dong He, Mr. Karl F Habermeier, Mr. Ross B Leckow, Mr. Vikram Haksar, Ms. Yasmin Almeida, Ms. Mikari Kashima, Mr. Nadim Kyriakos-Saad, Ms. Hiroko Oura, Tahsin Saadi Sedik, Natalia Stetsenko, and Ms. Concha Verdugo Yepes