A European perspective on digital currencies

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As the recent price surge in the value of Bitcoin has shown, digital currencies and blockchain technology have significantly matured and increasingly become a hot topic in the digital economy and civil society at large. Today, an ever-increasing number of companies are launching initial coin offerings (ICOs) and more and more financial and government institutions are investing in research and development of blockchain solutions or investigating a potential need for future regulation.

Blockchain technology, the technological foundation for digital currencies, is a de-centralized, cloud-based database that maintains a continuously growing list of ordered records called blocks. Through its construction, it is inherently traceable, transparent and highly resistant to forgery. As such, it is widely considered as the future direction for record management activities, identity management, transaction processing, supply chain management and the provision of data provenance.

Keyword ‘Trust’

While an ever-increasing number of people are investing in digital currencies, their acceptance and trust level among the wider public remains low. For one part, this may be due to their financial independence from traditional currencies and government jurisdictions, while, for the other, it may be due to their valuation instability, with digital currencies gaining and losing hundreds of euros in a matter of seconds. However, a number of analysts also highlight the digital currencies’ independence from government jurisdictions and cloud-based nature as one of its most crucial benefits.

According to them, the recent investment surge may be explained by citizens looking for a currency safe haven which is independent from the impacts of war, natural disasters or the political landscape. Moreover, they argue that, due to its cloud-based peer-to-peer nature, digital currencies will be become more trustworthy and safer as more people connect to its underlying blockchain.

Potential for ‘soft’ legislation

While the European Commission is not considering specific regulation on blockchain technology and digital currencies at this time, it will launch a Blockchain observatory in January 2018 and will publish a non-legislative action plan on FinTech in March 2018.

While aspects of regulation of digital currencies are currently under negotiation as part of the revision of the 4th Anti-money-laundering Directive, the Commission may be looking into regulating ICOs in the future to ensure that they adhere to the same standards as other security and commodities traders in Europe.

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