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ACI’s 2nd National Forum on Virtual & Digital Currency and Payment Systems

The International Digital and Virtual Currency Landscape

Andy Roth

Partner

Dentons LLP

November 20-21, 2014

Tweeting about this conference?

Jacqueline D. Shinfield

Partner

Blake, Cassels & Graydon LLP

Heidi Wicker

Partner

Schwartz & Ballen LLP

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Comparative Volumes of Bitcoin Vs. Traditional Payments As stated by FinCEN Director Jennifer Shasky Calvery :

“This relative volume of transactions becomes

important when you consider that, according to the United Nations Office on Drugs and Crime, the best estimate for the amount of all global criminal proceeds available for laundering through the financial system in 2009 was $1.6 trillion.”

0

50

100

150

200

250

300

ACH Network2013 ($38.7

trillion)

Bank of AmericaWires 2012

($244.4 trillion)

Trillions

0

50

100

150

200

Bitcoin, 12 monthsended Oct. '13 (8

billion)

Western UnionRemittances in 2013

(82 billion)

PayPal OnlinePayments in 2013

(180 billion)

Billions

Source: Public financial reports, and Remarks of Director Jennifer Shasky Calvery at the ACAMS Conference (March 18, 2014), http://www.fincen.gov/news_room/testimony/

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International Jurisdictions: Treatment of Virtual/Digital Currency* (“V/C”)

Developed Countries Are Cautious:

•Central authorities in many developed counties have issued warnings relating to the use of V/C

•These warnings often include: • Informing the public of the risks of trading in V/C

• Warning companies about the need of AML compliance

• Concerns that V/C will be used to fund terrorism

*Collectively referred to as “V/C” for convenience in this presentation.

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International Jurisdictions— Treatment of Virtual Currency, Cont’d • Warnings by Central Authorities:

• Examples of Open Inquiries:

• U.K. HM Treasury—in November 2014, issued a ‘Call for Information’ on risks and benefits, intended to investigate whether to regulate V/Cs.

• U.S. States—New York, North Carolina, others reviewing appropriate licensing/regulatory structure.

• European Banking Authority • UK • India

•Israel • Portugal • Serbia • Singapore

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Obtaining Certainty on Legality of V/Cs Abroad is Still Elusive

• Affirmative Statements Re: Legal Status:

• German Federal Financial Supervisory Authority (BaFin) has classified V/C as legally binding financial instruments • Not legal tender, but binding in private transactions.

• Other countries prohibit financial institutions/financial services countries from dealing in V/Cs.

• China:

• Banks and payment institutions may not deal in V/Cs.

• Banks have defined V/Cs as a virtual “commodity”.

• Japan: Banks and securities companies may not deal in V/C.

• Yet others would prohibit use by individuals and entities.

• Russia: As of November 2014, Ministry of Finance has proposed administrative fines for creating, issuing or promoting V/Cs. Bill proposed which would prohibit use of alternative currencies.

Sliding Scale

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Foreign Jurisdiction Taxation Status Tax Status Proclamations Issued In:

• Bulgaria: Will be taxed as individual income and corporate income.

• Finland: Capital gains taxes apply when transferred to another country. If used as a form of payment, may be taxed if it increases in value, but not if decreases in value.

• Norway: Taxed as capital property. Sale of Bitcoins subject to 25% VAT.

• Singapore: Taxed under the goods and services tax depending on what good or service is provided.

• U.S.: Convertible V/C is treated as property, and tax principles for property transactions apply. Not treated as currency that could generate a foreign currency gain/loss.

• U.K.: No VAT due for mining income or exchanges for sterling/other currencies. VAT due for sales of goods/services; value is sterling value at time of transaction.

• But. . . Just because a country has not affirmatively issued a proclamation does not necessarily mean there is no tax liability!!

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V/C is not considered to be legal tender in:

Denmark No trading value. Government will not regulate V/C use.

Ecuador Banned, but the Government plans on developing its own digital currency.

France

Not currency under French law, and the government has warned against its use.

Japan No applicable laws.

Kyrgyzstan Use of V/C is currently illegal.

Malaysia Not legal tender and the government will not regulate V/C. The government has warned against the risks associated with using V/C.

Russia Not recognized as currency and is considering issuing administrative fines if V/C is used.

Sweden Does not recognize as currency and has warned against its use.

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International Cooperation Efforts

• June 2014—The Financial Action Task Force (FATF) released a discussion paper on V/Cs and anti-money laundering/counter terrorist financing risks.

• U.S., Australia, Canada, Russia and U.K. assisted in preparing the paper; comments invited by other countries.

• The paper:

• Proposes a common set of terms and conceptual framework for analyzing V/Cs.

• Applies risk factors to specific types of V/Cs; and

• Summarizes regulatory approaches.

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International Cooperation Efforts

• Risks identified by FATF: • Greater anonymity of funding, transfers

• Decentralized systems particularly vulnerable • Global reach increases potential AM/CFT risks

• Segmentation of services means responsibility for AML/CFT compliance and supervision or enforcement may be unclear.

• Customer and transaction records held in different countries, difficult for law enforcement and regulators to access, or in countries without adequate AML/CFT controls.

• Centralized systems could be complicit in money laundering and seek jurisdictions with weak AML/CFT regimes.

• Decentralized systems may lead to jurisdictional issues and inability to come within the reach of any particular country.

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IMF and World Bank Consider Global Inclusion

•October 2014 annual meetings of the International Monetary Fund (IMF) and World Bank Group continued discussions among those bodies of the role of V/Cs on achieving greater global financial inclusion.

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Cross-Border Regulatory Challenges

• Regulation/Supervision: How do we impose a uniform regulatory framework to give businesses certainty?

• Enforcement: How to coordinate law enforcement cross-border? Can traditional channels be used, or are new avenues needed?

• Consumer Protection: How to educate and protect consumers doing business with foreign entities?

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Panel Discussion

Source: http://www.rogerclarke.com/EC/AuthModel1.gif

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Heidi S. Wicker

Schwartz & Ballen LLP 1990 M Street NW, Suite 500

Washington, DC 20036 (202) 776-0700

hwicker@schwartzandballen.com