Cryptocurrencies and Regulation, a Master Thesis on the Best Practices for Regulating Cryptocurrencies Within the Eu

Table of Contents

1. Introduction....................................................................................................4

Methodology ...................................................................................................9

1. Cryptocurrencies explained and why regulation is necessary ................11

1. 2.1  Background on Cryptocurrency.............................................................................11
2. 2.2  Do we need regulation for cryptocurrencies at all? ...............................................14
3. 2.3  The risks and demerits of cryptocurrencies ...........................................................14
4. 2.4  Benefits and Cost-benefit overview .....................................................................18
5. 2.5  The Bottom line why regulation is necessary ........................................................20

1. The different Approaches of Regulation ...................................................24

3.1 3.2 3.3 3.5 3.6 3.7

Banning Cryptocurrency.........................................................................................24 The ‘Wait and see approach’ ..................................................................................26 The regulation approach – Different Pathways ......................................................26

Classification of cryptocurrency in the EU............................................................28 Developments within the EU .................................................................................31 Individual Approaches of Member states of the EU..............................................32

1. Determining the best approach ..................................................................43

1. 4.1  The requirements and goals of regulation ..............................................................43
2. 4.2  The framework for regulation – What or whom should be targeted? ....................44
3. 4.3  Assessing the different layers .................................................................................47
4. 4.4  Who should oversee regulation or implement them? .............................................50

1. Recommendations for the EU.....................................................................52

1. 5.1  Classification of Cryptocurrencies .........................................................................52
2. 5.2  Taxation of cryptocurrencies ..................................................................................53
3. 5.3  Consumer risks .......................................................................................................55
4. 5.4  Summary of concrete recommendations ................................................................56

Conclusion .........................................................................................................59 Appendix ............................................................................................................64 Works cited........................................................................................................75

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List of figures:

Figure 1. Types of Virtual Currency Schemes .......................................................................64 Figure 2. Differences between electronic money schemes and virtual currency schemes.....64 Figure 3. Snapshot on Bitcoin Price Volatility (1 Year) ........................................................65 Figure 4. Snapshot on Ehtereum Price Volatility (1 Year) ....................................................65 Figure 5. Price fluctuations within different exchanges and different currencies ..................66 Figure 6. Number of cryptocurrency wallet users Q1 ’15 to Q1 ‘18 (Statista) ......................67 Figure 7. Market Cap of cryptocurrencies..............................................................................67 Figure 8. Google search trends for the term ‘Bitcoin’............................................................68 Figure 9. Google search trends for the term ‘Blockchain’ .....................................................68 Figure 10. Legality of Bitcoin on a per country basis ............................................................69 Figure 11. A world of Cryptocurrencies and their regulation ................................................70 Figure 12. Communications System Layers...........................................................................71 Figure 13. OSI Model.............................................................................................................72 Figure 14. Bitcoin Ecosystem.................................................................................................73

Tables:

Table 1. The core feats of cryptocurrencies with their Possibilities and Risks .....................19

Table 2. Overview on the different classification and taxation approaches across EU member states. ........................................................................................................................33

Table 3. Cost and Benefits of cryptocurrencies......................................................................74

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1. Introduction

‘Banking is essential, banks are not’ is the controversial statement released by Bill Gates in 1994 arguing that banking would be needed in the future but banks themselves would become obsolete (Filkorn). This statement has not been realized yet and is currently far from being realized. However, steps are being taken in order to provide an alternative financial system that is not reliant on banks. Within the wake of the 2008 financial crisis, distrust amongst governmental authorities and private banking institutions were soaring. The crisis resulted in a near complete collapse of the banking system and led to bailouts of insolvent banks, ultimately reaching a pinnacle in low interest rates and zero inflation and a general lack of economic stimuli (Guadamuz and Marsden 2). It was therefore a logical consequence that cryptocurrencies and their proposed Peer-To-Peer financial system gained immense popularity during an era of distrust and uncertainty. Bitcoin was born during this tumultuous time and provided stakeholders such as consumers or businesses to execute transactions without the reliance on one party (Banks), allowing them to operate outside of the regular existing financial institutions (Panchèvre 5).