Virtual currencies deciphered (1) – the new legal definition and AMLD5

Virtuelle Währungen entschlüsselt: Die neue Legaldefinition & 5AMLD | PayTechLaw

It is not only the Prussians who are quick to shoot, but the European Commission, too. To put it more accurately, the Commission may be quick to shoot, but it takes a while before their bullet reaches its destination. Still caught up in the aftermath of the terrorist attacks of Paris and Brussels, the Commission presented a draft amendment to the 4th Anti-Money Laundering Directive (AMLD4) in July 2016, with the amendment due to enter into force six months later. This was a unique procedure, as at that time, member states had not yet been under an obligation to implement AMLD4. But in times of danger, quick or blind shots are, of course, justified. Now the fog has cleared and the new directive (AMLD5; or AML5 Matthäus Schindele recently reported on this), which is to amend AMLD4, was published in the Official Journal of the European Union on 19 June 2018 under the number 2018/843 after going through usual legislative processes. The implementation is now scheduled for 10 January 2020, three years later than planned.

What AMLD5 has to offer for payment transactions:

  • further reduction of the limits for anonymous e-money products (amount stored, turnover, redeemability),
  • introduction of a limit for remote payments with anonymous e-money of €50 per transaction. No acceptance of anonymous prepaid cards issued outside the EU that do not meet EU-AMLD standards (this has to be ensured by the acquirer),
  • general national ban on accepting anonymous prepaid cards (option for member states),
  • extension of the application of AMLD4 to operators of trading platforms where virtual currencies are traded and to providers of “custodian wallets” (i.e. wallets for virtual currencies).

It is somewhat doubtful whether these measures will be able to stop money launderers and terrorists and whether they are proportionate due to the inherent restrictions on freedom and data protection, but this is not the main focus of the discussion here.

A remarkable by-product of AMLD5 is the first legal definition of virtual currencies (VC). A definition is, however, essential to regulate this type of money that many find difficult to grasp. This is naturally a difficult task, since even economists – let alone lawyers J – are not in a position to define money cleanly and clearly. You will not find a legal definition of what money is in any German law book. With AMLD5, however, we at least know what the term “virtual currency” means to the national legislator in the context of anti-money laundering laws:

…a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically. (Art. 3 no. 18 of Directive EU/2015/849-new)

Looking at the wording, one can almost smell the little beads of sweat running from the foreheads of those drafting this definition. During the legislative process, the definition was rephrased again and again. For example, the ECB was concerned that the Commission’s first proposed definition was too positive and inviting for this – from the central bank’s point of view – unwelcome and unpopular money innovation.

Looking more closely at the result of the definition makers

The definition mainly contains negative statements as to what does not constitute a VC.

The following criteria remain:

the digital representation of value



is accepted by natural or legal persons as a means of exchange


and (in my opinion a pretty superfluous option)

which can be transferred, stored and traded electronically.


These remaining positive criteria apply to 90% of our money (except cash) and therefore don’t get us anywhere.

  • The negative statements point to a black hole next to the brightly lit, legally safeguarded cosmos of the governmental central bank currencies. There is an insurmountable abyss between the two: no secured link, no guarantee, no legal status. The ECB’s wish has been granted. In any case, this definition is no longer inviting.
  • The “black hole” of the VC is – as a result of the negative definitions and the merely abstract positive criteria – almost infinite, i.e. a catch-all provision. All instruments with a monetary function without a material structure (such as cash) that have not yet been regulated constitute a VC and therefore fall into the black hole, but are fortunately caught by law. This vast definition is also intended. Recital 10 states that:

Although virtual currencies can frequently be used as a means of payment, they could also be used for other purposes and find broader applications such as means of exchange, investment, store-of-value products or use in online casinos. The objective of this Directive is to cover all the potential uses of virtual currencies.

  • However, the objective to cover “all the potential uses” (including digital assets such as ICOs as an investment) is not fulfilled by the legal definition. A VC, like any other money (or currency), should at least be accepted as a means of exchange according to the legal definition of VC. In this respect, economists (and probably also lawyers) agree: If a value (material, electronic or digital) is not a means of exchange and payment, it does not constitute money. The statement of the new “in-depth analysis” commissioned by the ECON Committee of the European Parliament and entitled “Virtual Currencies” (June 2018) is correct:

Money is primarily the generally accepted means of exchange and constitutes an economic category sui generis.

  • The German version of Recital 10, which was quoted above, is missing the word “also“ and in any case, the word “frequently“ should be deleted:

Although virtual currencies can frequently be used as a means of payment, they could also be used for other purposes…

  • The legal definition would then match the Recital again. While we’re on the subject of deleting words: What does the addition “for use in online casinos” mean? Use as what? I don’t know any other use of a VC than as an exchange medium (either to buy chips or tokens or bet without exchange). Maybe I lack the imagination here?
  • Apart from the optional requirement regarding electronic transfers, storage and trades, there are no further technical requirements, although it is the precisely the technical design (blockchain and use of cryptography) that plays a decisive role in the phenomenon that is “VC” (Bitcoin & co). This is not an oversight but it is deliberate. As per its definition, VC is a technology-neutral generic term for all privately issued types of money that are not tied to the money of the central bank (“legally established currency”) in the form of cash or central bank money in the current monetary system. This excludes bank money of credit institutions and e-money (both also issued by private issuers). In the case of bank money of commercial banks, the mandatory link is ensured by the obligation to exchange for cash and by the minimum capital requirements in the form of central bank money, in the case of e-money, this is indirectly ensured by the obligation to redeeem it at par value into bank money or cash. The characteristics of “private issue” and the lack of “legal status” are therefore not the key aspects in the definition, but the mandatory link to a legally determined currency. VC can therefore be digital tokens (bearer instruments) or value units in an account managed centrally by an issuer (e.g. in-game currencies) or they can be managed decentralised without an issuer via a blockchain (Bitcoin & co). This puts the multimerchant account-based bonus systems on the radar of the regulators if the issue of monetary values is not already to be regarded as e-money which is subject to authorisation. In this context, I would like to refer you to my blog post on the subject of e-loyalty. The economists from Kiel in the ECON study “Virtual Currencies”, which was already quote above, are correct:

Cryptocurrencies are a special case of digital/virtual currencies.


  • Digital currencies issued by a central bank or a government are therefore not VC within the meaning of AMLD5. Several countries are thinking intensely about this option, such as Sweden (e-krona), or have already announced such issues, as in Venezuela (“petro”). These currencies are referred to in the world of literature as CBDC (“Central Bank Digital Currency”). This usually puts one in mind of blockchain-based crypto currencies (decentralised accounts). However, other variants in the form of digital bearer instruments (“digital cash”) or accounts held with the central bank are also conceivable. If it is intended to replace cash, only anonymous options would be marketable. This shows the internal inconsistency of the entire directive, which regulates payments with state cash in excess of €10,000, but excludes payments with state CBDC. Up to AMLD6, this would create an interesting loophole for platforms on which legally anonymous petros can be traded without any legal anti-money laundering obligations.

Who should now be added to the AML-obliged entities with regard to VC?

In accordance with the German text of AMLD5

service providers who barter virtual currencies for fiat currencies and vice versa



 electronic wallet providers.


At first glance, this seems peculiar. I do not know (at least in Germany) any service providers who – as in the classified ads of local newspapers – buy my jewellery, gold, old coins, militaria and Bitcoin. However, I know of platforms on which providers and customers of VC meet to settle VC trades (buying and selling against the euro). As far as I’m concerned, the somewhat archaic term of “barter”, as used in the German text, may be used here. However, it is not the service provider who acts as the bartering partner, as the German translation suggests. The English text of AMLD5 luckily provides more clarity as it states:

providers engaged in exchange services between virtual currencies and fiat currencies.

Similarly, when the term “custodian wallet” as used in the English text was translated as “electronic purse” in the German version, the translators probably already had World Cup fever. The term “electronic purse” has so far been strongly associated with e-money and refers to the variant in which e-money is stored on a carrier medium (example: the unsuccessful GeldKarte in Germany). You can find over 500,000 links on Google on this topic. It is therefore not an electronic purse, as the providers of electronic purses have been subject to the Anti-Money Laundering Act as e-money issuers for ages. A provider of “custodian wallets” is defined as:

an entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies. (Art. 3 no. 19 of Directive EU/2015/849-new).

The term “key guardian” would have been somewhat more accurate.

Fiat Lux? Fiat Ducato? What is this “fiat currency?”

A further contribution to the general ambiguity is the term “fiat currency” contained in the text of the Directive as an object of exchange for VC. A definition is not provided, despite the term currently only being used in the cryptocurrency scene. However, Recital 8 of AMLD5 explains the term fiat currency in more detail:

coins and banknotes that are designated as legal tender and electronic money, of a country, accepted as a medium of exchange in the issuing country.

No bad translation this time as the original sentence in the English version sounds just as rough. By the way, if e-money is mentioned anyway, bank money should also have been listed. Why not simply refer to “legally established currency” as a counterpart to the “virtual currency” or “amount of money” in accordance with Art. 4 no. 25 of PSD2?

The new pair “virtual” vs. “fiat” is not a good match anyway. One refers to the form of appearance, the other to its process of creation from nothing. The correct counterpart to fiat currency (i.e. money without intrinsic value) would therefore be commodity money and not VC. In this sense, almost any money today (whether euros or bitcoin) is “virtual” and “fiat” at the same time. However, the unconventional interpretation of the term “fiat currency” in the sense of the legal/national currency has prevailed in the VC scene – presumably based on incomprehension of the opposite monetary system – and now even finds its way into the law. Sometimes you get the impression that the money alchemists misunderstand each other and that the overburdened regulator is right in the middle of this game of “Chinese whispers”.

Can area exemptions provide clarity?

Fortunately, there are also two area exemptions, but they are only mentioned in the recitals.

in-games currencies, that can be used exclusively within a specific game environment (Recital 10)

local currencies, also known as complementary currencies, that are used in very limited networks such as a city or a region and among a small number of users” (Recital 11).

PSD2 (Art. 3k) provides the known area exemptions of the limited network and the very limited range of products as well as instruments for tax and social purposes. Why didn’t they just take over this area exemption? The area exemptions for VC cited above would certainly also apply under PSD2 if the national currency was used instead of VC. It is likely that the regulator wanted to narrow the area of application considerably compared to the PSD2 exemption. Where PSD2 simply mentions “limited networks”, the adjective “very” is added here for limited networks (“currencies, that are used in very limited networks”). New, but open to interpretation, is also a quantitative criterion (number of users).

The reference to the so-called complementary currencies (also called regional money) is remarkable. Most complementary currencies in Europe are “prepaid”, consist of colourful paper notes and thus clash at most with the cash monopoly of the respective central bank. However, there are some local currencies in the UK that can also be used cashless via accounts. That is where the term “e-money” would come in. By the way, the area exemption for these currencies was the result of the lobbying work of some English issuers. The only complementary currency that can actually be classified as VC on the basis of the broad definition is the Swiss cashless complementary currency “WIR”, which is issued by WIR Bank in Basel. With approximately 50,000 users, the area exemption would probably not apply.

So when is a digital value e-money and when a virtual currency?

With this legal definition of VC, however, new difficulties arise. Under what conditions is a digital value e-money and when does it constitute a VC? The two money innovations are close together. The new directive therefore rightly warns:

Virtual currencies should not to be confused with electronic money (Recital 10).


You can read more on this in my next blog post here on PayTechLaw.

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