Digital currency: a primer for in-house lawyers

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For years most money has been virtual. In the UK, M0 (notes and coins) represents less than five per cent of M4 (the whole money supply). The rest of the money supply is information, ranging from bank account ledgers on hard drives to paper-based commercial instruments. Money being represented by information and that information being stored digitally is not new.

The first Electronic Money Directive came into force in 2000 and was overhauled in 2009. The Payment Services Directive came into force in 2007, with an updated version going to plenary vote in April. Together there is more than a decade of lobbying, recitals, bills, guidance notes, regulations, approach documents and so forth on digital money.

Modern digital currencies such as Bitcoin, however, attempt to do something fundamentally different to a digital representation of ‘standard’ money. As a decentralised system, the intention is that no trusted third party (such as a central bank, regulator or payment processor) is needed or wanted, which lends it certain unique characteristics. The absence of a trusted third party means that processing and verification can be incentivised and built into the network as central components. The consequences of this are far-ranging. As a starter, such a system allows for near-instant transactions at low cost for large, small and micro amounts. The transaction protocol also allows for new transaction and verification processes and therefore the potential for value exchange to be built into software scripts and automated. These features mean that this type of digital currency requires a distinct legal analysis from that of ‘traditional’ electronic money…

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