Cryptocurrencies overcome California legal hurdle – but the battle is not over yet

Digital and alternative currencies, including Bitcoin, can now be used for transactions in California, following the implementation of bill AB129 on 1 January 2015. The new bill is a step forward for cryptocurrencies which have faced tough opposition and scrutiny from global regulators. However, serious doubts about the safety of digital currencies have been voiced by banks.

Before the beginning of this month only US dollars were valid in California, and transactions denominated in cryptocurrencies were technically illegal. The new rule does not oblige vendors to accept the cryptocurrencies – it merely allows them to support Bitcoin and  rivals such as Litecoin, Peercoin, Primecoin and others.

The new bill is a step forward for cryptocurrencies, which have faced a rocky road in the US and beyond following scandals such as the collapse of Bitcoin exchange Mount Gox in 2013, which resulted in the loss of $460 million, and its use on illegal website the Silk Road, which was seized by US enforcement agencies and shut down in August 2013.

“This bill makes clarifying changes to current law to ensure that various forms of alternative currency such as digital currency, points, coupons, or other objects of monetary value do not violate the law when those methods are used for the purchase of goods and services or the transmission of payments,” said Roger Dickinson, chair of the California state Assembly Committee on Banking and Finance.

However, not everyone is comfortable with the use of Bitcoin or other digital currencies in any form of transaction. The implementation of the Californian bill is just part of the wider battle they face to gain widespread acceptance around the globe.

Other US jurisdictions are proceeding with caution. In New York, state authorities have set out plans for a ‘BitLicence’, which seeks to regulate and control Bitcoin companies and imposes registration and record keeping requirements. Elsewhere in the world, Bitcoin has also faced official disapproval, notably in China, where banks have been prohibited from using Bitcoin on the grounds that it is not a recognised currency. Closer to home, last month the IBOS Association, an alliance of international banks, responded to a call by HM Treasury for information on digital currencies by arguing forcefully that these offerings must fall within the remit of financial services regulation and regulators, if necessary by amending the scope of the regulation and the powers of regulators to ensure there are no gaps. Members of IBOS include Banco Santander, HSBC, UniCredit Bank, Intesa Sanpaolo, KBC, Nordia Bank, RBC and RBS, among others.

“The EBA and the financial action taskforce have already said this [digital currency] is really dangerous,” said Bob Lyddon, general secretary of IBOS. “What is the consumer being offered? Who is offering it? Where from? It’s not money, so what is the regulatory regime? Is there one? If you are in the UK and you buy an investment, the person that sells it to you has to be registered with the FCA. You have rights of recourse, dispute resolution and law. But if you put your money into a crypto currency, how much of that applies? There are so many unanswered questions. What exactly have you acquired with your cash? Are the people putting it forward to you actually breaking the law?”

Lyddon added that in the UK, the regulatory regime consists of several  categories of financial services company, including ‘financial market infrastructure’ and ‘payments system’, which set out the requirements for capitalisation, board structure, the use of independent directors and other obligations. But Bitcoin exchanges such as CoinBase may not necessarily be covered.

“The regulators need to wake up,” said Lyddon. “If it isn’t a financial market infrastructure, it must be a payment service provider. It needs to be registered to be able to take in customer money. It should be one of the known categories of provider under EU law, which would mean either an e-money institution, a payment institution or a bank. If it’s distant selling from outside the EU, it’s breaking the law. Virtual currencies like this are dangerous, because they are not properly regulated, and consumers are at risk. How is it different to a boiler room scam?”