CCIA Legal Overviews - Financial Services Regulators. 10pp

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CCIA Legal Overviews - Financial Services Regulators. 10pp

Transcript of CCIA Legal Overviews - Financial Services Regulators. 10pp

  • Different Regulatory Approaches to the

    Application of Financial Services Legislation

    to Complementary Currencies

    in North West Europe


    Since currencies are fundamentally financial instruments, it would seem logical that some of the key pieces of legislation developed over the years to ensure the proper functioning of the system would also apply to complementary currencies. However, as we shall see from this document, this is far from the case. In actual fact, many types of complementary currency escape the reaches of these legal texts for a number of reasons. The key regulations in this area, namely the Payment Services Directive (PSD) and the Electronic Money Directive (EMD), are both focused on management of nation currencies or currency units that can be converted from and into the national legal tender currency, which many complementary currencies prohibit. This document will seek to give some clarity as to the application of these pieces of legislation to the various standard models of complementary currencies.

    In addition, although all of the PSD and EMD emanate from European Institutions, there are clear differences in how these regulations are applied and interpreted with regard to community currencies in North West Europe (NWE). This document will seek to analyse these varying practices and offer practical examples of how specific regulations have been applied in the United Kingdom, France, Belgium, Netherlands and Germany.

    An analysis of the applicability to community currencies of a variety of regulations that govern the provision of credit to third parties is beyond the scope of this document.

  • Disclaimer

    This document only offers an overview of the legal landscape that complementary currencies operate within and nothing contained herein should be considered legal advice.

    Only the most generic systems are covered. Deviation or hybrid models may alter liability, obligations and compliance options.

    This report has been produced by the New Economics Foundation as part of the Community Currencies in Action (CCIA) collaboration project. CCIA is a transnational partnership project designing, developing and implementing community currencies across northwest Europe. The partnership provides a rigorously tested package of support structures to facilitate the development of currency initiatives across NWE, promoting them as credible policy vehicles. Running from May 2012 to June 2015, CCIA is part-funded through the INTERREG IVB North West Europe Programme, a financial instrument of the European Unions Cohesion Policy Investing in Opportunities.

    Find out more about CCIA on our website:

  • 1- Applicability of Financial Services Regulation

  • 2 - Currency Systems outside the current Regulatory Framework:

    Even though it may seem surprising, some of the largest complementary currency systems do not fall under regulatory control of current financial legislation. This is because regulations such as the PSD or EMD only apply within a system that allows the complementary currency to be exchanged for legal tender currency.

    This means that complementary currencies that operate within a closed loop that expressly forbids the exchange of that currency into national legal tender - like mutual credit systems, credit clearing systems and smaller Timebanks and Local Exchange Trading Systems (LETS) - do not fall within existing legislation1.

    In Germany, the KWG (Credit Services Law), built on policy developed under Hitler, basically outlawed any credit creation that could not be converted into cash. In this way, the authorities were ahead of their time in recognising that not all forms of exchange need occur with legal tender and were aware of the rise of complementary currencies. With the EUs EMD (implemented in Germany in 2002 and updated in 2011) and PSD (implemented through the ZAG in 2009), barter, LETS and other non redeemable private currencies have been explicitly exempted from the KWG. The KWG clauses, however, have not been directly challenged and, although they now seem obsolete, a specific ruling is lacking in this regard.

    In France, the category of unregulated currencies has been extended beyond the limited scope of non-convertible closed-loop currencies to include paper-based currencies where only the businesses participating in the system can exchange the currency for legal tender and where it is not possible for users of the currency to receive change for the their purchases in any form. In addition, the French government have recently expanded the exemption of certain currency systems by stating a digital currency may fall out with current regulations, provided that the amount that is convertible by users is limited that the currency is re-convertible into Euros.

    1 For More detail, please refer to the country-specific publications

  • 3 Currency Systems regulated as Payment Services

    Under certain conditions, complementary currencies can be regulated under the provisions of the EU PSD. However, member states have applied this legislation in various ways, especially regarding paper-based legal tender backed currencies.

    In the UK, for instance, there is a specific exemption for services that offer payment transactions based on paper-based vouchers2. In the UK, all notes issued by legal back tender currency providers are legally considered vouchers, since only authorised agents of the Bank of England can print actual notes. This means that a purely paper-based legal backed tender currency would not be classed as a payment service provider and would therefore not need to register as such.

    In France, however, the operators of paper-based legal backed tender currencies are considered to be providing payment services and therefore need to register with the Prudential Supervisory Authority (ACPR). As noted above, the ACPR has also exempted currencies which limit convertibility into legal tender to member businesses and where no change is given. These wide-ranging exemptions from legislation means that there few of the 30 French complementary currencies currently in existence are registered as payment systems.

    In Belgium, Germany and the Netherlands, there are currently no complementary currencies that are regulated as payment systems.

    In Belgium, the factor most likely to bring any future paper-based currency into the scope of the payment services legislation is the management of the legal tender that is used to guarantee reconversion. that is, the act of receiving funds from users and transferring them into the operating account of the currency, possibly also into a savings account, and then back into the operating account for reconversion upon request.

    3.1 Limited Network Exemption Under the PSD, there is a specific exemption that is applicable if an entity that is required to register under the directive can satisfactorily show that it is only usable in a limited network of service providers or for a limited range of goods and services3. Unfortunately, the legislation does not provide any other guidance on how to interpret the exemption, although it may be possible to employ parts of Recital 5 of the EMD, which contains the same exemption. This states that instruments which can be used for purchases in stores of listed merchants should not be exempted from the scope of this Directive as such instruments are typically designed for a network of service providers which is continuously growing4. The key term to

    2 Part 2 Schedule 2 (g)(iii) Payment Services Regulation 2009 3 PSD - 2007/64/EC Article 3 (k) 4 Recital 5 EMD

  • address when understanding the application of the exemption is whether the proposed system is going to continuously grow so as to be beyond a limited scope. There is also a need to balance the desire to foster small scale innovation without too much regulatory burden while ensuring that schemes of a larger scale are monitored and controlled.

    The ACPR has struck a good and proportionate balance in the only known application and acceptance of an exemption based on the limited network criteria under the PSD. The ruling relates to a currency in France that will operate across a whole region of France, but in its initial phase will be piloted in the major city and some of the surrounding areas. The ACPR therefore accepted that during the pilot phase of the project, the currency operator could use the limited network exemption, but stated that once the currency was fully rolled out, it would have to reapply and be re-assessed.

    3.2 Bitcoin Exchanges and Payment Services In the US, the Financial Crimes Enforcement Network (FinCEN) has sought to clarify that it expects certain businesses providing services in virtual currencies to register as money transmitters, the equivalent of payment services in the US. However, there has been a distinct lack of clarity in the EU.

    In the UK, the FCA has specifically denied that it is responsible for regulating digital currencies. This may be changing with the recent formation of the Digital Currency group within the Bank of England to better understand the new currencies and what role the central regulators should have in attempting to control them.

    In France, Bitcoin exchanges are regulated as payment systems and required to be registered and approved by the ACPR. The rationale for this move in 2014 was that the ACPR was prompted to make the statement in light of criminal activities at that time, mainly in the US, and the risk of fraud, money laundering and terrorist financing associated with anonymous financial ins