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Payment law reforms leave open possibility of Bitcoin regulation in EU, says expert

Proposed new EU laws on payment services could be applied to Bitcoin, an expert has said.

Technology and payments law specialist Angus McFadyen of Pinsent Masons, the law firm behind Out-Law.com, said that regulating Bitcoin could help encourage banks and other payment service providers (PSPs) to facilitate the wider use of the digital asset in transactions. However, he identified difficulties that could arise in applying the existing and proposed new legal framework to Bitcoin.

McFadyen was commenting after Bitcoin exchange Mt. Gox reported that the value of a single Bitcoin now exceeds $1,000.

The trading of Bitcoin is not regulated within the UK or broadly across the EU currently, but McFadyen said that the proposed new updates to the existing EU Payment Services Directive (PSD) leave open the possibility of it being regulated in future.

"Whether Bitcoin would be regulated under the revised Payment Services Directive (PSD2) depends on if it is considered to be a currency," McFadyen said. "The European Commission's PSD2 proposals would, if introduced as drafted, apply some of the rules where payment services are provided 'in any currency'. This wording would seemingly allow for the regime to be applied to Bitcoin if governments and regulators so wish."

McFayden said that the development of the market for Bitcoin in the EU is in relative "limbo" due to regulatory uncertainty. He said that the drive towards regulation of Bitcoin in the US is "aiding its ascendency", and that there was further evidence of growth of the market for Bitcoin in Asia. He highlighted notable developments in India and China in particular.

Regulating Bitcoin in Europe could help drive innovative new payment services, McFadyen said.

"The regulation of Bitcoin in the EU would give PSPs greater legal certainty and allow them to invest in building payment systems that facilitate transactions made using Bitcoin," McFadyen said. "Currently because of the lack of understanding on exactly how Bitcoin should be treated, payment services incorporating Bitcoin are available only at the margins in the retail sector and predominantly so in the US only. Adoption of Bitcoin-enabled payment channels is likely to increase if the assets are recognised as currency and regulated as such."

However, McFayden warned that idiosyncrasies in the way Bitcoin systems work would make it difficult to apply the same rules to those assets that apply to traditional payment methods.

"One example can be seen in the existing European rules around refunds and transaction reversals," McFadyen said. "Whilst consumers can require banks to refund and reverse transactions that they did not authorise, Bitcoin transactions are inherently irreversible. This stems from the way Bitcoin systems operate. This presents a major compliance problem, or cost to the payment service providers, if hackers break into Bitcoin platforms or carry out other fraud and steal assets. There have been several examples recently of hackers doing just that."

Last week payment service provider Bitcoin Internet Payment System (BIPS) temporarily closed its "consumer wallet initiative" after it revealed that hackers had manage to access some accounts. Technology news website The Verge reported that Bitcoins worth more than $1 million were stolen as a result of the attack.

Another Bitcoin site Inputs.io also announced the reported theft of approximately 4,100 Bitcoins earlier this month, according to a report by the Guardian.

A new Bitcoin exchange, Coinfloor, was due to open in the UK earlier this month but it has postponed that launch following systems problems. Coinfloor has said that it conducts anti-money laundering and other security checks on registrants and that its manual system for exchanging currency helps protect customers against risks posed by cyber attacks or physical theft, despite its business not being regulated.

A spokesman for the Financial Conduct Authority (FCA) in the UK told Out-Law.com that the regulator is aware of developments around Bitcoin but said that it currently has no plans to regulate that market.

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