Siân Jones is the principal of COINsult, the cryptocurrency consultancy, where she focuses on regulation, compliance and taxation. In this article, she focuses on the current status of virtual currencies in the jurisdictions whose regulators have embraced them.

The Financial Action Task Force – the world's anti-money-laundering standard-setter – has already thought a good deal about digital currencies. In one paper, it says that 'digital currency' can mean a digital representation of either virtual currency (non-fiat) or e-money (fiat) and thus is often used interchangeably with the term 'virtual currency.'

There is a minefield of terminology here – the FATF definition is generally accepted and most countries in the European Union follow it, but the British Government dislikes it and, confusingly, calls virtual currencies 'digital currencies', which in the FATF lexicon has a different meaning.

Towards the mainstream

It is now clear that virtual currencies are not a fly-by-night phenomenon and are moving slowly towards mainstream use. Various small offshore nations – all of which are trying to carve out little niches for themselves – are exploiting that trend.

One of the things that any jurisdiction’s regulated financial services industry has to be open to is know-your-customer or KYC control. The idea of having to persuade someone to sign a photocopy of a passport is, in view of today's advanced technology, crude. It would be much better to have one's ID recorded on a blockchain and available when needed.

Estonia already operates an e-passport that does this. The applicant can become an e-resident and never enter the country. He/she can go to the embassy, have his/her background details verified, and when that is done he/she can open a bank account while never setting foot in the country. The Estonians are thinking of extending it to the blockchain – indeed, they are not the only jurisdiction that is thinking of doing such a thing. Alderney is doing something similar with a kind of notarial service that uses the blockchain.

Law in action

In the UK in March last year, HM Government announced that virtual currency exchanges were to come into the ambit of the Money Laundering Regulations, although many had been conducting 'due diligence' before then. The EU is about to do the same and is also proposing to include custodian wallet providers. The EU is likely to categorise such exchanges as 'gatekeepers' in the DNFBP (designated non-financial businesses and professions) category.

The Isle of Man has put virtual currency businesses into amendments to its Proceeds of Crime Act, which became effective on 1 April last year. It has also brought virtual currency business into its 'designated businesses' legislation (which obliges the Financial Services Commission to act as the supervisor for the money-laundering legislation) – this came in last autumn. The legislation, in fact, applies to a wide range of activities that previously had no supervisor.

Virtual currencies and blockchain technology offshore

The offshore world's reaction to the advent of virtual currencies – of which there are just under 700 at the time of writing – has been very positive.

• The Isle of Man has always been interested in reducing its dependence on financial services and the government is trying out its own blockchain now. The jurisdiction is technically advanced in other ways. It is the third largest nation in the world for commercial geostationary orbit statellite filings. E-gaming accounts for 16.7% of the island's GDP now, having surpassed insurance.
• It is no secret that Gibraltar is working on virtual currency and distributed ledger. It would like to become a major centre.
• Alderney had a look at virtual currencies but its plans were thwarted by intervention from the UK.
• Cyprus barely qualifies as an 'international financial centre' any more. However, it was the first jurisdiction to offer a university degree course in digital currencies.
• Estonia was once thought of as an onshore/offshore jurisdiction but is now more mainstream. This jurisdiciton has been the first country to offer e-residency.

The Internet of trust

Blockchain, the 'public ledger' technology behind Bitcoin and the other virtual currencies, can inspire trust in an otherwise trustless realm. It is able to provide an incontrovertible single source of truth that cannot be altered or corrupted. The potential of this trustworthy mechanism has not been missed by the public or private sectors. The trust mechanism that underlies the world of virtual currencies comes through blockchain's transparency.

Trust in the conventional world happens through financial institutions, which allow counterparties to deal with one another in a preordained way. Banks inspire trust because they are regulated and/or they have government licences and they have correspondent banking relationships that give the customer a greater level of assurance. Blockchain removes the need for trusted third parties. In a sense, blockchain’s code becomes the trusted intermediary.

Some of the world's major countries are thinking of creating their own digital fiat currencies. This requires an administrator in a centralised form. Digital fiat currency must have an issuer and a redeemer that might be one and the same party. If this were to happen, the result would be less like Bitcoin and more like e-money.

* Siân Jones can be reached at sian@coinsult.eu