Virtual currencies are quite a recent emergence in the field of digital currency, which is evolving at a fast pace. Until the present day there is no actual universal definition to the term virtual currency.
The Financial Action Task Force attempts to define it as being:
“a digital representation of value that can be digitally traded and functions as a medium of exchange; a unit of account; and/or a store of value but which has no legal tender status in any jurisdiction”.
The European Banking Authority declared that a virtual currency is:
“a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically”.
Virtual currencies although being a digital currency, must be distinguished from electronic money (e-money), which is another type of digital currency. The latter is defined by Directive 2009/110/EC as being electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transactions and which is accepted by both natural or legal persons other than the electronic money issuer. At a glance, this definition may be applied to virtual currencies, as some of the features of and activities performed by virtual currencies, do fall within the remit of the above cited EU Directive.
However, the distinction lies within the fact that unlike e-money, virtual currency is not a fiat currency. When a currency is said to be a ‘fiat’, it essentially means that it would have been issued by a public authority or central bank and can either be physical or in digital form. The characteristics that distinguish virtual currency from a ‘fiat’ is firstly, that its value is not fixed in a fiat currency and also, that it is not necessarily fixed to be redeemed at par value by an issuer.
Certain virtual currencies and activities in relation to such currencies may be subject to existing financial services legislation, whilst others may not fall within the scope of existing legal frameworks, rendering them to be unregulated. This results in lack of investor protection and financial stability. In this scenario, the Malta Financial Services Authority is proposing for the Maltese legislator to formulate an Act of Parliament that would seek the regularisation of those virtual currencies not falling within the scope of the current legislative framework. In light of this the MFSA is of the idea that such a framework would act ancillary to existing legislation, both on a national and EU level, whilst ensuring continuous technological advancement and innovation.
