Regulation of cryptocurrency in EU jurisdictions using the example of Luxembourg

Starting a series of publications on the legal status of cryptocurrencies in different countries of the world, we will first consider the EU member states. Today we have chosen the European jurisdiction of Luxembourg for analysis.

First, a short excursion into the history of the formation of European law in the field of electronic payment systems.

The fundamental fundamental regulatory act on the basis of which the further development of the entire sectoral EU regulatory framework in relation to electronic money in general and digital currencies began - in particular, is considered to be the Payment Services Directive of November 13, 2007 (PSD - Payment Services Directive, 2007/64/EC).

This regulatory document was adopted by the European Parliament on the initiative of the European Commission (Directorate General for Internal Markets) and was intended to regulate payment services and payment service providers throughout the European Union (EU) and the European Economic Area (EEA). The aim of the Directive was to increase pan-European competition and participation in the payments industry by non-banking institutions, ensuring a level playing field by harmonizing consumer protection, as well as the rights and responsibilities of both payment providers and payment users.

The PSD Directive was subsequently amended and updated twice: in 2009 (EU Regulation 924/2009) and in 2012 (EU Regulation 260/2012), but on October 8, 2015 it was replaced by a new Directive, or rather its second version, which even has a suitable name for this - "PSD2".

Revised Payment Services Directive (PSD2), adopted by the European Parliament at the initiative of the European Commission, had the goal of creating safer and more innovative European payments. The new rules were able to better protect consumers when making payments online, and also created a platform for the promotion, development and use of innovative online and mobile payments, such as "open banking", making international European payment services more secure. On November 16, 2015, the Council of the European Union approved PSD2 as a basis, and EU member states had to implement this directive into their national laws and regulations within two years.. As a result, the EU and many banks began to be guided in their activities even earlier by the new Payment Services Directive, which, by the way, came into force this year 2018.

The second key regulatory document that EU state regulators are guided by when issuing licenses in the field of e-commerce, including in relation to cryptocurrency companies, isDirective 2009/110/ECadopted by the European Parliament and the Council of 16 September 2009 on the control and prudential supervision of electronic payment institutions, as amended 2005/60/EC and 2006/48/EC, which repealed Directive 2000/46/EC.

Thus, we see that the majority of EU members are only taking a closer look at the cryptocurrency market, trying to “try on the coat” of existing regulations in the field of electronic payment systems.

But, despite some amorphousness and callousness of European law, Some members of the European Community decided to make the leap without waiting for the rest. 

And it was Luxembourg who became such a pioneer in cryptocurrency regulation, or rather licensing.

We can safely say that the Duchy of Luxembourg is one of the most advanced countries of the European Union, having a fairly high standard of living among its “brothers,” while remaining one of the richest European states. 

This is de facto and de jure an offshore zone that provides the most favorable conditions for investment, which, in turn, has made this country a leader compared to other members of the European world community. Thus, Luxembourg, following modern trends, subsequently attracted even more investments into its economic zone. 

Evidence of this was the first license in the European Economic Area, issued in 2016 by the Commission for Supervision of the Financial Sector (CSSF) - the state regulator of Luxembourg - to the Slovenian cryptocurrency exchange BitStamp

Thanks to this licensing, exchange clients for the first time received the legal opportunity to trade cryptocurrency paired with fiat money simultaneously in 28 countries of the European Union.. 

This pleasant “bonus” is explained very simply. According to European standards, financial service providers, if granted a state license in one of the EU countries, receive equivalent powers that extend to the territory of other EU members. 

For reference: the BitStamp exchange was founded in 2011 by Nejc Kodric and is currently the 3rd largest cryptocurrency exchange in the world in terms of trading volumes in the BTC/USD pair.

Trying to stay ahead of the curve, the Commission de Surveillance des Sectors Sectors Supervises (CSSF) of Luxembourg, unlike its “colleagues” from other countries European countries, on February 14, 2017, made an essentially revolutionary statement, in which she revealed her attitude towards digital currencies and her expectations from bitcoin companies. In its statement, the CSSF offered assistance to bitcoin companies that have expressed a desire to operate in this country, and also promised to take a case-by-case approach when making regulatory decisions.

As follows from the statement, verbatim: “Interested persons who want to engage in financial business in Luxembourg must describe in detail their goals and scope of activity so that the CSSF commission can determine their status for obtaining government authorization.”

Despite the fact that this message took only one page, it describes the CSSF's position on cryptocurrencies in some detail.

CSSF notes that it considers cryptocurrencies to be money because they are accepted for payment by “a sufficiently large group of individuals.” Meanwhile, the national regulator does not consider cryptocurrencies to be “official means of payment.”

The statement also indicated how digital currencies such as bitcoin differ from other categories of electronic money. In addition, the regulator mentioned warnings made earlier by the European Banking Authority (EBA) and the European Securities and Financial Markets Authority (ESMA). However, the likelihood of the Luxembourg authorities creating special legislation that would regulate the activities of bitcoin companies is still negligible.

Summarizing the above, we can definitely say that the world community does not pay enough attention to the regulation of cryptocurrency transactions.. The illustrative example of Luxembourg and the development of the regulatory framework, primarily in the UK, can provide a positive experience for the entire global community as a whole. Luxembourg, considered the financial and economic center of the European Union, will obviously accelerate the already accelerated integration of cryptocurrency into the existing system of licensing regulation of electronic payment instruments.