Different Regulatory Approaches to the Application of Financial Services Legislation to Complementary Currencies in North West Europe Introduction Â
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 Union’s Cohesion Policy ‒ Investing in Opportunities. Find out more about CCIA on our website:
www.communitycurrenciesinaction.eu
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 EU’s 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.
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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 vouchers’2. 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 services’3. 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 growing’4. The key term to 2
Part 2 Schedule 2 (g)(iii) Payment Services Regulation 2009 PSD -‐ 2007/64/EC – Article 3 (k) 4 Recital 5 EMD 3
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 instruments like digital currencies. In Germany, anyone who buys/sells Bitcoin on a professional basis needs to register with the Federal Financial Supervision Authority (BaFIN). This also extends to mining operations if the activity is carried out ‘professionally’. This regime has led to most exchanges cooperating with banks, such as FIDOR, and using the licenses and authorisations that they have already received from the regulator. In addition, Germany has taken the step of designating Bitcoin a ‘private currency’, meaning that it can be used for tax and trading purposes.
4 – Electronic Currency Systems Regulated as E-Money In the UK all currencies that have a digital form and are convertible from and to legal tender will fall under the requirements of the E-money regulations. This mandates registration with the FCA as well as ongoing reporting and other obligations. So far no currency operator has obtained a registration under the legislation. The only 2 electronic legal backed tender currencies have ensured compliance in 2 different ways. The first has partnered with a local credit union and uses the licenses that it already has to comply and the second uses the ‘limited network’ exemption, which we will discuss in more detail later.
Currently in France, the interpretation of what kinds of currencies may fall within the scope of the e-money legislation is very narrow. There is a general understanding that e-money legislation is reserved for currency models that accept payment in legal tender in exchange for a card onto which e-money has been preloaded. The emoney then sits on the card to be used. The important distinction with a normal bank card is that a bank card has all the necessary details to be able to transfer money within the banking system’s payment infrastructure and loss of the card would not equate with loss of the money in the bank account (cases of fraud notwithstanding). In contrast, a person using a card that operated with preloaded e-money would lose all the money stored on the card. In Germany, there are currently only a limited number of entities registered as emoney institutions, with a minority of those actually issuing a complementary currency. The standard compliance model in Germany has been for the currency operator to partner with a local banking institution which already has the required licenses. 4.1 – Limited Network Exemption In the UK, the limited network exemption has been interpreted as being applicable to currencies that operate across a very small geographic area and are comprised of a limited range of shops and services. There is evidence that the FCA would consider any city-sized currency to be outside of the scope. The exact requirements for a network to be considered “limited” remain unclear, but recent communications with the FCA show that it may be hard to convince them of the applicability of the limited network exemption. In Germany, a recent bulletin confirms that for the exemption to apply, an increase in the range and variety of good and services that can be procured with the currency must correspond with a descrease in the geographical range of the currency and vice versa.
In Belgium, only one digital legal backed tender currency has been granted an exemption from EMD, although the exact conditions under which this was achieved are not in the public domain.
5 – Legal Standing of Exemption notices In France, the ACPR can grant official exemptions. These are legal documents that can be relied on in court. However, in the UK, the FCA’s responses to exemption requests are merely guidance and only represent the opinion of the FCA. It would remain up to the courts whether the particular currency actually complied with the requirements of the Directive. 6 – Passporting Licenses and Exemptions across EU countries Although it was always the intention of the legislation to allow for the passporting of licenses received under the EMD or PSD in one EU country to another, the rules actually governing this are less clear. There is evidence that one currency system has successful negotiated the applicability of an exemption granted under the EMD in another member state. However, additional guidance in this area would be very helpful. 7 – Printing ‘Coins’ and ‘Notes’ The production of coins is an extremely highly regulated activity and outlawed in most EU countries and therefore is not undertaken by any complementary currency system in the EU. Most countries have very strict rules about who can print notes or money. However in UK, France, Netherlands and Belgium, it is possible to circumvent these rules by ensuring that complementary currency ‘notes’ differ significantly from legal tender notes.
Germany, however, as a legacy of Nazi-era legislation, prohibits the production of money-like notes. In the only known case, Prosecutor Waldshut-Tiengen initiated proceedings against a complementary currency operator for contravening the law by printing notes. The case was, however, dropped before it came to court and so the legislation remains unchallenged. Practically, however, many German currency systems do produce notes. In order to provide some security to the currency systems, the German Bundesbank has stipulated a number of criteria that would need to be fulfilled to ensure that a printed note did not contravene the legislation. The notes would have to be different in size from legal tender notes, they should not reproduce the more elaborate design features of legal tender notes, the word ‘voucher’ or ‘coupon’ should be clearly printed upon them, they should be useable only in a limited geographical network, they should expire after a certain period, they should bear the name of a specific person and thus be non-transferable and, finally, the names of the places where the note can be used should be clearly printed. Most paper-based German complementary currencies satisfy all but the last two conditions, but have not been taken to court by the authorities. It has, however, been
acknowledged that complementary currencies do not constitute a threat to the monetary stability of the Eurozone system.