What blockhain developers and users expect from virtual currency regulations: A survey study

Abstract

Blockchain and distributed ledger technologies (BC/DLT) are one of the hottest hype information technologies. Within BC/DLT regulatory development, virtual currency regulations have dominated both research and regulative work. At the same time, the impacts on virtual currency regulation on their developers and users have been investigated limitedly, especially empirically. This article fills this research gap. The present article reviews research on regulatory frameworks, approaches and regulations primarily within the European Union (EU) as the empirical data is collected within one EU member state. The virtual currency regulation use case of the country is also described. Survey data was collected from 40 virtual currency service developers and users with the help of three BC/DLT and fintech associations. The detected 27 regulatory expectations were rank-ordered with 164 pairwise comparisons by using the analytic hierarchy process (AHP) based Wiki Survey method. The respondents indicated that increased clarity of taxation is their most important regulatory expectation followed by regulators’ understanding about the nature of distributed ledgers. This article contributes to research by consolidating findings on regulations, by empirically investigating developers’ and users’ regulatory expectations and by extending the use of the Wiki Survey to fintech and BC/DLT studies.

Keywords

Blockchain virtual currencies fintech regulations survey study Wiki Survey

1. Introduction

In a few years, blockchain and distributed ledger technologies (BC/DLT) have become one of the hottest hype information technologies (IT) with a myriad of blockchain meetups, seminars, summits, other events, and daily blockchain newsletters, news and tweets all over the world. However, we still appear to be in a technology learning phase, where proof of concept and pilot projects prevail. Moreover, most of these projects have failed to deliver the proposed benefits of BC/DLT and proceed beyond the pilot phase (e.g. Lacity, 2018). On the other hand, a small but rapidly growing number of successful blockchain-enabled solutions have started to transform the activities, processes and businesses of both privately-owned companies and public sector organizations (e.g. Hileman & Rauch, 2017; Zhang et al., 2019; Wang et al., 2018). Bitcoin, Ether and thousands of other virtual currencies appear to be here to stay. Both existing and newly created assets have been tokenized (Peters et al., 2015). Initial coin offerings (ICO) have grown rapidly both in volume and in monetary value raised from investors after the first ICO was executed in 2017 (Tapscott D & Tapscott A, 2018; Lacity, 2018).

Technology developments and successful use cases have led to expectations – even demands – to establish regulatory frameworks and approaches with effective and efficient regulations for BC/DLT innovations. Blockchain texts deem regulatory development critical for the future diffusion of these technologies (e.g. Tapscott D & Tapscott A, 2017; Lacity, 2018). In his article on the regulatory challenges of virtual currencies, Yeoh (2017, p. 204) concluded: “Laws and regulations could impact how far and how fast the technology could develop. Therefore, regulatory approaches would need to cleverly balance against its innovative spirits while recognizing the possibility of the technology unintentionally contributing to systemic risks to the financial system.” Regulations appear to be needed to guide trading with and investments into virtual currencies, the issuance of ICOs, and the tokenization of virtual and real assets. Regulations are also needed to fairly collect taxes from BC/DLT based virtual currency transactions. With the exception of virtual currencies, regulatory frameworks, approaches and regulations have received limited attention in prior research. Empirical studies on the regulatory expectations of BC/DLT based virtual currency developers and users are few. This article attempts to fill this research gap.

Regulatory frameworks and approaches differ between jurisdictions despite of some shared features (Kiviat, 2015; Yeoh, 2017; Naheem, 2018). Empirical data for this study was collected in Finland, one of the 27 European Union (EU) member states after Brexit and one of the 19 Eurozone countries. Within EU, the five-dimensional Digital Economy and Society Index (DESI) – connectivity, human capital, internet use, digital technology integration, and digital public services – establish EU’s cornerstones for digitalization, BC/DLT included. The purpose of DESI is to measure the digital performance and the evolution of EU member states in digital competitiveness (European Commission 2016). European authorities’ DESI influenced approach to regulating BC/DLT is called smart regulatory hands-off approach (EU Parliament, 2014; Yeoh, 2017). It combines two perspectives. Firstly, EU Parliament established a Virtual Currency Task Force, and several EU member countries established similar national task forces, e.g. Finland. The objective is to promote innovations with a precautionary monitoring approach to preemptive regulation. EU and national virtual currency task forces actively follow how technologies evolve and develop proposals for specific regulations if and when needed. By doing this, regulators are also assumed to be able to acquire sufficient competencies and capabilities including technical expertise. Secondly, hard-touch regulations are executed rapidly should a technological innovation spread fast and pose systemic risks. The objective is to address risks before they become problematic. In line with this perspective, the EU Parliament accepted the fourth anti money laundering (AML) directive on May 20 ${}^{\text{th}}$ , 2015 and the fifth AML Directive on May 30 ${}^{\text{th}}$ , 2018. These directives stipulate among other things that the issuers, market places, exchange service providers and wallet service providers of virtual currencies need to be registered. To accomplish this each EU member country needs to define and pass national laws that implement EU directives. The contents of national laws may differ and create differences between the virtual currency markets of EU countries. For example, in Finland, the country’s parliament accepted national laws implementing the fifth EU AML (Anti-Money Laundering) directive on March 13 ${}^{\text{th}}$ , 2019. The legislative proposal accepted by the Finnish Parliament differed from the approach of e.g. Estonia, Finland’s southern neighbor country.

In addition to virtual currencies, also other BC/DLT based financial technology innovations as well as other BC/DLT use cases need regulations. The diversity of BC/DLC increases the challenges of regulatory development. Blockchain use cases are generally classified into public and private, and into permission-less and permissioned (Yli-Huumo et al., 2016; Tesca & Tessone, 2018; Gaur et al., 2018). For example, Bitcoin is a public permission-less BC/DLT use case. Marco Polo and WeTrade trade finance service solutions are examples of private permissioned BC/DLT use cases. The regulatory needs of the four BC/DLT use case types differ as both the technological and the socio-behavioral characteristics of use cases differ. For example, the senders and receivers of Bitcoin virtual currency transactions are pseudonymous and additional Bitcoins are “issued” through mining to compensate work done to maintain the Bitcoin network. In Marco Polo and WeTrade, the parties of trade finance transactions are known, they have been registered prior the permission to use services and so-called fiat currencies are used to transfer value. In general, the common principle is that regulations need to be technology and actor neutral to encourage innovations and competition at the same time as the economic, social and other interests of societies, their companies, public and third sector organizations, and citizens are considered. Regulatory authorities, such as ministries, governmental agencies and authorities need to work together to develop effective and efficient regulations. This is another challenge, as these organizations have often seen to work in silos (e.g. Layne & Lee, 2001). Overlapping and conflicting regulations could hamper the development of BC/DLT and other digital innovations.

Against this backdrop, the present article investigates the regulatory expectations of BC/DLT based virtual currency and virtual token business developers and users. An email-invitation to a two-question survey was submitted to 40 virtual currency and virtual token experts. Invitation to the same survey was also sent to 29 regulation experts working in various ministries and government agencies. They had been members in the so called D9 BC/DLT regulation task force, including the preparation of national AML laws. Respondents were first asked to describe regulatory issues that harm or could harm (a) the use of BC/DLT in virtual currency business and (b) digital business. A week later, respondents were asked to compare 10 pairs of randomly selected responses from the responses collected during the first round. To sum up, the objective of this study is to investigate the regulatory expectations of BC/DLT based virtual currency developers and users. From this generic research problem, the following more specific research questions were formulated to guide this study:

RQ1
What expectations do virtual currency and token developers and users place on BC/DLT regulation?
RQ2
What expectations do virtual currency and token developers and users place on the development of digital business?

The next section of the article reviews regulatory frameworks, approaches and regulations applied to BC/DLT based virtual currency and financial technology innovations primarily within European Union. After that, the methodology section presents the Finnish BC/DLD based virtual currency use case, and depicts data collection and analysis methods used in this study. The results of the study are then presented and the article ends with a discussion and conclusions section.
2. Theoretical background – risk motivated regulations and taxation issues

The regulation of monetary system belongs to the key functions of sovereign states and economic areas. Monetary system regulation is one of the means to maintain social and economic stability. Sovereign societies usually mandate a Central Bank to perform this task together with the right to issue legal money, fiat currency in virtual currency terminology (Davies, 2002; Kiviat, 2015). Monetary systems with financial instruments, currency and money systems, value transfer mechanisms and practices together with related regulations evolve continuously (Naheem, 2018). From this perspective, BC/DLT based virtual currencies are not unique. BC/DLT are adaptable and innovative technologies and regulators need to view them as such when these technologies are deployed to transfer values with virtual currencies. The present article follows the European Central Bank (ECB) definition of virtual currency. Virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money. Several technologies could be used to implement virtual currency solutions and the history of virtual currencies started prior any BC/DLT virtual currency innovation. Due to the mentioned reasons, this article applies the term distributed virtual currency to underline the use of BC/DLT if needed. Distributed virtual currencies are also called crypto currencies, but here the term (distributed) virtual currency is used. This section reviews mainly European Union regulatory frameworks, approaches and regulatory actions as they are relevant for the investigated use case and the collected empirical data.

Since BC/DLT are adaptable and innovative technologies, a logical conclusion is that it is necessary to stipulate regulations to mitigate the risks of these powerful technologies. Regulations are needed, when BC/DLT are used to execute distributed virtual currency issuance, transfer, exchange and/or storing transactions as well as in the context of other comparable value transactions, e.g. with virtual tokens. Due to the key societal role of monetary systems it is understandable that the current BC/DLT regulations focus almost entirely on virtual currencies. For example, there are few if any regulations on how to use of BC/DLT in healthcare or logistics as such regulations are considered premature (e.g. Queiroz et al., 2019; Zhang et al., 2017). Regulators should exercise caution and precision in determining the scope of virtual currency regulations to encourage innovations. Answers to the following questions help to understand BC/DLT based virtual currency regulations. What are the differences between centralized (regulated) moneys/currencies and decentralized virtual currencies? What are the perceived risks of decentralized virtual currencies? What are the objectives of virtual currency regulation and how much do they reflect the regulation of Fiat currencies? Are distributed virtual currencies securities or commodities?

2.1 Regulatory frameworks, approaches and regulations in BC/DLT based virtual currency contexts

Most researchers and practitioners note and agree that moneys/currencies and especially their transfers have de facto become virtual. In developed economies such as the EU member states, the history of (alternative) virtual currencies started in late 1990s and paved way to BC/DLT based distributed virtual currencies (Naheem, 2018).

According to Peters et al. (2015) centralized regulated currencies (eMoneys) and distributed virtual currencies differ in at least four ways. The controlling company of a centralized (virtual) currency, e.g. a central bank, may alter the specification of the currency. This happens by following known rules and procedures, such as legislation and/or contracts between the controlling company and its customers. According to Peters et al. (2015) this is impossible for Bitcoin type distributed virtual currencies. However, I point out that since the writing of the cited article forks have happened, and protocol changes are also possible. Secondly, the use of a centralized (virtual) currency happens within a known online community (market), whereas distributed virtual currencies are used within a wider economy. Probably the most important difference is related to the control of (virtual) currency issuance. A centralized (virtual) currency has an authority that exercises control over issuance, the administration of currency balances and monetary policies and may require that the customers of currency/money services are identified and known. The authority may even intervene in money supply, e.g. enforce currency value stability, and demand transaction reversals, e.g. to prevent money laundering and other criminal activities. In distributed virtual currency networks, users control these issues with computational power. Since these networks have no central authority, transactions are and have to be irreversible. Finally, according to Peters et al. (2015) centralized (virtual) currencies can be changed to any Fiat currency at any time though currency market valuation and exchange services. It is possible to exchange most popular decentralized virtual currencies into fiat currencies but even their value is at least partly based on scarcity. I point out that since the writing of cited article lots of new virtual currencies have been launched. Several of them derive value from scarcity, and, more importantly, many fiat-virtual currency exchanges are largely centralized and custodial. The exchange of some distributed virtual currencies to fiat currencies is not possible or is done by exchanging them first to another virtual currency such as Bitcoin. As will shortly become evident, actions taken by the EU and national virtual currency task forces, such as AML directives, clearly reflect attempts to drive the regulation of distributed virtual currencies towards the regulation of centralized (virtual) currencies

This conclusion is clear by looking at the perceived risks or distributed virtual currencies (e.g. Peters et al., 2017). European Banking Authority (EBA) published its opinion on virtual currencies in July 2014 (EBA 2014). Their opinion listed seven benefits of distributed virtual currencies such as lower transaction costs and faster transaction processing times. Regulators depict similar benefits of distributed virtual currencies in the documents reviewed in the remaining part of this section. The EBA opinion also listed 70 risks of distributed virtual currency use. Twenty-nine were classified severe. The identified 70 risks were also mapped against 20 risks drivers. Rapid and unexpected exchange and price volatility related value losses to distributed virtual currency users constitute three of the identified severe risks. Violation of laws, wallet, user identity or market place theft and/or hacking are another category of risks. Limited opportunities to use distributed virtual currencies, unexpected disappearance, breakdown or loss of service providers, marketplaces or wallets are also listed as severe risks. According to Lacity (2018) at least 20% of Bitcoins have been estimated to been permanently lost as the consequence of lost user wallets and/or accounts. Money laundering, trade of drugs and other illegal goods and the financing of terrorist and criminal activities complete the list of severe risks.

The European Banking Authority’s (EBA) opinion (EBA 2014) recommended an EU level approach. The impact of the EBA opinion is visible in EU’s smart regulatory hands-off approach, in European Parliament’s Anti-Money Laundering (AML) directives, and even on national level. For example, EBA’s opinion with the 70 risks is cited in the justification of the national Finnish law on virtual currency issuers accepted in March 2019 by the Finnish Parliament, which implements the Fifth EU AML directive. Some other EU directives also reflect the same regulatory approach to distributed virtual currencies. The finality directive is especially important (Yeoh, 2017). The finality directive requires that erroneous and illegal transactions are unwound and that the physical location of registered and stored data is known. The directive could even be used to provide legal definitions for transaction settlement times. These requirements are either a poor fit or completely incompatible with Bitcoin type distributed virtual currencies.

Lessig (2006) points out that laws in the form of legal codes and software/hardware/technical codes interact in digital contexts. Legal codes are primarily extrinsic (Yeoh, 2017). This means that should the rules of a legal code be breached the consequences of the breach could still ensure and restore compliance. Contrary to this, software/hardware/technical codes are primarily intrinsic. Should the rules of a technical code be breached errors are returned without executing any activity. Thus, compliance is achieved through the execution of the code with error-free transactions. According to Yeoh (2017) a combination of technical and legal codes is used to govern modern financial systems, although the role of the latter is more significant. The same conclusion made above is repeated here. Due to the nature of distributed virtual currencies, not only in EU but also in the United States and in other developed economies fiat currency laws are used to regulate globally distributed Bitcoin, Ether and virtual currencies linked to them to the extent possible (Naheem, 2018).

Although distributed virtual currencies have received a lot of concrete regulatory attention, also other digital financial technology (fintech) innovations have received attention. Distributed virtual currencies are often considered in this context as a specific type of fintech innovation. EU Parliament’s Economic and Monetary Affairs Committee (ECON) created the Virtual Currency Task Force mentioned above in April 2016 and several EU member states followed with local task forces. In November 2016, the European Commission (EC) created an internal task force on financial technology. This task force has three objectives: “First, to make sure that all policy work across the board is informed by and takes account of technological innovation; second, to assess whether existing rules and policies are fit for purpose in the digital age; and third, to identify actions and proposals that could harness the potential opportunities fintech offers while also addressing its possible risks” (Miseviciute, 2018, p. 35). EC accepted its fintech action plan in March 2018 with 19 proposed actions for the deployment of BC/DLT, artificial intelligence and cloud services (Miseviciute, 2018). Proposed actions include e.g. the hosting of an EU fintech laboratory, the creation of BC/DLT strategy, and presenting best practices on regulatory sandboxes. The objective is to make Europe a global hub for fintech by creating a more competitive and innovative European financial sector (Miseviciute, 2018).

ECB and The European Securities and Markets Authority (ESMA) are the other significant European Union level actors in addition to European Parliament and European Commission. Due to their roles they are more cautious than EC or European Parliament. ECB and its national branches, e.g. Bank of Finland, follow and investigate the development of fintech and distributed virtual currencies together with other European actors and with other central banks. As the virtual currency definition indicates, ECB considers BC/DLT, Bitcoin and other distributed virtual currencies immature in terms of safety and efficiency and has issued warnings to citizens, investors and to other regulators about the risks of BC/DLT and fintech. For example, in late 2017, ECB’s President criticized the Estonian Government’s proposal to launch a state-managed digital currency. This incident clearly shows that the EU does not compete only with the USA, China or other countries for the leading position as the global hub for fintech innovations. Also EU member countries compete against each other with national regulations that aim to attract fintech startups, distributed virtual currency startups included. For example, Estonia encourages this by granting e-citizenship to the citizens of EU member states.

Similarly to ECB, also ESMA has issued warnings especially related to ICOs (initial coin offering). ESMA published two statements in November 2017 (Miseviciute, 2018). In one statement, ESMA warned investors about the risk of losing their invested capital by describing ICOs as risky and highly speculative investments. According to ESMA “ICOs may fall outside of the scope of EU laws and regulations, in which case investors cannot benefit from the protection that these laws and regulations provide” (Miseviciute, 2018, p. 36). In another statement, ESMA reminded that in cases where ICOs qualify as financial instruments they need to comply with relevant legislation, such as EU’s prospectus directive, markets in financial instruments directive, alternative investment fund managers directive and the anti-money laundering directives.

In summary, issues discussed above clearly drive the regulation of distributed virtual currencies and fintech towards the laws and the regulation practices of fiat currencies. Fiat currency services are highly regulated and there is usually also a commodity linked to a fiat currency such as a coin or a bank note, whereas virtual currencies are seldom linked to physical commodities (see e.g. Naheem, 2018). The main motives to establish regulations is to prevent money laundering (AML), to prevent the execution of drug and other criminal sales transactions, and countering financing of terrorism (CFT). At the same time, distributed virtual currency innovations are still in an early stage and meet specific gaps in financial markets. The majority of fintech and virtual currency actors welcome AML and CFT regulation as it is also in their interest.

Thus, the key questions are whether or not the impacts of regulatory actions are effective and beneficial or harmful? AML and CFT risk measurements focus on customer identification and authorization. These measurements are a poor fit for Bitcoin and some other distributed virtual currencies as the senders and receivers of transactions cannot be easily identified due to the pseudonymous nature of transaction parties. Furthermore, virtual currencies are issued to (sometimes) anonymous miners and/or to other maintainers of distributed virtual currency networks, who could then sell the received virtual currencies. The costs of regulation are also relevant. Most current (distributed) virtual currency enterprises are small start-up companies that are more aligned to software development than financial service providing realms (Yeoh, 2017; Naheem, 2018). Possible high costs of business application license fees and running supervision fees together with the amount of administrative work may be disproportionate to their scales of business. For example, in the U.S. the 5 000 USD non-refundable application fee was enough to drive many operators out of business (Naheem, 2018). EU’s objective to be a leading global hub for fintech requires caution with regulatory fees.

2.2 A comment on taxation

In general, there is no consensus about the nature of Bitcoin and other distributed virtual currencies. This impacts how distributed virtual currencies are taxed (Ram, 2017). This article follows the ECB definition of virtual currencies that also influences EU’s (distributed) virtual currency and fintech regulatory development. One of the consequences is that (distributed) virtual currencies are not considered currencies or securities but commodities, and are consequently taxed as commodities.

The status of virtual currencies as commodities impacts the taxation of consumption, e.g. the value added tax (VAT) of services, income and capital gains, wealth and wealth transfers and other potential taxable aspects. It is worth to notice that in late 2015 EU’s Top Court Ruled That Bitcoin Exchange is tax-free, that is exempted from VAT (Ram, 2018). This boosts business with distributed virtual currencies. On the other hand, the exchange rate value increase of a virtual currency may lead to income and capital gain taxation even without a virtual currency exchange transaction. This might happen even in situations, where the exchange rate values of two or more virtual currencies change, such as in a virtual currency basket or where virtual currencies cannot be exchanged directly to any fiat currency. Whatever the taxation principles are, it is important that virtual currency exchange rate value decreases are treated similarly to exchange rate increases (Ram, 2018).

3. Methodology – the investigated use case, data collection and analysis

3.1 The investigated virtual currency use case

The history of fintech and (distributed) virtual currency innovations in Finland is similar to comparable evolutions in other northern EU countries. In some statistics, such as the World Economic Forum Global competitive index, the country ranks high in digitalization. For example, Finland ranked first in E-participation, fourth in digital skills among population and 14th in ICT adoption in 2017 (World Economic Forum, 2018). SatoshiLabs’ data gave an estimate that approximately 50 Finnish pioneer companies used and 15–20 companies accepted Bitcoins in 2015. These numbers have increased since 2015, although there are no reliable statistics on virtual currency service providers or users.

The developers and users of BC/DLT technologies have together with other enthusiasts established several interest networks and associations. They exchange experiences, arrange events and promote the interests of BC/DLT actors. BC/DLT networks’ and associations’ focuses range from specific technologies and code bases through industry specific interests to generic promotion of BC/DLT understanding and deployment. Virtual currency market, exchange and wallet service providers have networked at least since 2016. Ethereum specialists’ network has monthly meet-ups and concentrates on the Ethereum code base, including the promotion of Ether based distributed virtual currency and token services. Distributed virtual currency start-up companies established their own association under the name The Finnish Crypto-Currency Association Konsensus in early 2018. Leading fintech start-ups and fintech specialists founded Finland’s Fintech Association in late 2017. This association has a paid executive manager and promotes actively the interests of Fintech companies. Blockchain Forum Finland was also founded in 2017. It is a generalist association that promotes understanding, education, research and responsible deployment of BC/DLT with the objective to increase the well-being of Finns and Finland related citizens, companies and public sector organizations. The association is neutral in terms of technologies, BC/DLT code bases and use cases, and has actively promoted discussions between virtual currency actors and regulators. In addition to BC/DLT experts in Finland, Blockchain Forum has ambassadors in Estonia, Germany, Belgium, Switzerland, Malta and Singapore and has established contacts to similar organizations in other Nordic and Baltic countries. The 40 virtual currency experts invited to the survey of this research were selected with the help of Konsensus, Fintech Association and Blockchain Forum.

The evolution of regulative actions and regulations have followed those of the EU as well as the developments of the Finnish virtual currency and fintech markets. Universities and research institutions started to investigate BC/DLT early on (e.g. Yli-Huumo et al., 2016; Korpela et al., 2017; Välivaara et al., 2017; Laikari, 2018). Ministry of Finance and Bank of Finland organized a series of discussions and seminars in 2017 and 2018. The wide variety of identified on-going BC/DLT pilots, proof-of-concepts, market reports, research activities and use cases were presented and discussed in these events. Conclusions for regulatory policies and regulations were also made. Similar to the EU, the conclusion has been that, with the exception of the finance industry, the early phases of BC/DLT innovations do not yet require regulations. Ministries, Bank of Finland, large governmental and other public sector agencies established so called D9 network and project ( $=$ EU type BC/DLT task force) to share experiences. The role of D9 has been important in the crafting of guidelines for virtual currency taxation and for the preparation of national laws that implement the EU’s 5th AML directive. The D9 project ended in 2018 after the drafts for the national laws were crafted. The network/task force of some 65 persons still continues to share information about BC/DLT innovations. I knew or was able to identify 29 of these 65 persons and sent myself to them the invitation to participate to the survey of this research. One of the 29 invitees forwarded the invitation to all the other 36 persons.

Konsensus, Fintech Finland Association and Blockchain Forum established Blockchain Alliance in early 2018. The focus soon became to carry out discussions with Finnish regulators, especially with the key members of the D9 project. In addition to D9, the Alliance met the Committee for the Future of the Finnish Parliament and provided them education about BC/DLT. The member organizations arranged in May, June and November 2018 a series of three events – called the three steps – to promote discussions between BC/DLT virtual currency regulators and virtual currency issuers. In the mentioned national laws, virtual currency issuer is the term used for any issuer, exchange, market and wallet service provider of virtual currencies and/or virtual tokens (HE 167/2018).

BC/DLT based distributed virtual currency developers and users had and have two concerns in their discussions with regulators. Firstly, the exchange rate increases of virtual currencies were taxed as capital gains, e.g. the fiat currency exchange rate changes of Bitcoin and related virtual currencies or virtual currency indexes linked to the value of Bitcoin. At the same time, virtual currency exchange rate decreases were not deductible from the capital gains of the same assets and/or transactions. The dispute between tax authorities and virtual currency actors and investors has been processed in courts. The Finnish Supreme Administrative Court finally decided in March 2019 that related exchange rate increases and decreases have to be taken into consideration in taxation.

The second concern was directed at the license fees and the increased administrative work of virtual currency issuers suggested in the law proposal HE 167/2018. The justification text of the law proposal depicted ECB’s, Interpol’s, Europol’s and local police academy’s warnings about possible and detected money laundering, drug and criminal sales financing, and terroristic activities financing cases with Bitcoins and other virtual currencies that allow the anonymity of virtual currency senders and receivers and virtual currency issuance through mining. The justification text deemed it necessary to stipulate strong administrative practices to know and register customers and their transactions as well as to supervise distributed virtual currency issuers. The following statements translated into English are descriptive: “As an aberration from the Directive ( $=$ EU’s 5th AML Directive) it is proposed in the law proposal that also virtual currency issuers will be included in the purview of the law.” and “The supervision of virtual currency issuers can be paralleled to the supervision of other companies that operate in financial markets.” A one-time non-refundable 5 600 Euro license application fee and an annual 2 140 Euro supervision fee paid to the Financial Supervision Authority were proposed. The increased administrative work consists of obligatory customer and transaction registers needed to fulfill supervisory needs and the requirement to identify “the ultimate beneficiaries” of virtual currency transactions.

Several statements about the proposed national law HE167/2018 suggested that the aberration from EU’s Directive should not be implemented. The Finnish Parliament, however, passed the law unchanged on March 13th, 2019. The consequence has been that during 2018 and 2019 most existing distributed virtual currency start-ups changed their domicile from Finland to other EU countries, Switzerland or Singapore. New start-up companies have continued to do the same. The alternative domicile countries have more favorable regulations, for example they have not executed regulation-tightening aberrations from EU Directives. The various distributed virtual currency service providers calculated that the (low) volumes of their businesses are unable to carry the new license and supervision fees and the costs of increased administrative work. If taken literally, the passed law includes tokens used to play virtual games as well as tokenized loyalty program benefits with supervision fee consequences. Financial supervision has the option to exempt small companies from fees, but the establishment of a predictable practice is yet to be seen. Virtual currency service providers also pointed out that the law is ineffective in its intended purpose, that is in the preventing the undesirable use of Bitcoin and other global distributed virtual currencies. Discussions between (distributed) virtual currency service providers and regulators continue. Virtual currency service providers continuously compare the regulatory environment of various locations as the web-article of Shilov (2019) shows. It is in the interest of all parties that the financing of criminal activities and terrorism is prevented and that such activities do not tarnish the reputation of (distributed) virtual currencies. Similarly, all parties want to promote financial technology innovations. In summary, at the moment, it is too early to predict, what the long-term impacts of the above addressed regulations are or where the dialogue leads.

3.2 Data collection and analysis

In this study, a two-question two-step survey method, Wiki Survey, was applied to capture the regulatory expectations of Finnish virtual currency developers and users, including experts working for companies that have moved the domicile of their companies away from Finland. The Wiki Survey method (Salganik & Levy, 2015) – with its pairwise comparisons of received response alternatives – is based on the analytic hierarchy process (AHP) method (e.g. Saaty, 2008).

During the first round, a respondent was invited to write her/his regulatory expectation(s) and during the second round to compare the importance of two expectations at a time as a pairwise comparison. After three discussions with the expert of the survey method service provider (www.innoduel.com), the best formulation for the survey question during the first round was deemed to ask what regulatory issues prevent the development and use of virtual currencies and digital business. After two survey instrument evaluation rounds with five experts and one test run with three persons, the still somewhat complex and intellectually demanding survey questions became:

Question 1:
What issues related to laws, to standard contracts, to restrictions in the use of electronic documents and electronic signatures, to standards or lack of them, or to others similar factors seriously hamper or slow down the use and/or deployment of blockchain technologies?
Question 2:
What comparable regulatory factors seriously hamper or slow down the development of digital business.

An email invitation with a motivation letter was sent on March 4 ${}^{\text{th}}$ 2019 to 40 potential expert respondents. First reminder and motivation email was sent on March 6 ${}^{\text{th}}$ and the second reminder and motivation email on March 8 ${}^{\text{th}}$ . The first round of data collection was closed after March 10 ${}^{\text{th}}$ . During the same dates the same invitations and reminders were sent to 41 social welfare and healthcare experts that develop electronic healthcare services to citizens, to 44 electronic logistics and cargo forwarding experts and to 29 experts of BC/DLT regulations working in public sector organizations. Only findings related to the virtual currency expert survey are reported in this study. Cumulatively 27 unique responses were received to the first question and 15 unique responses to the second question from 21 respondents.

On March 11 ${}^{\text{th}}$ the same 40 persons were invited with another email to compare 10 pairs of regulatory needs selected randomly for each respondent. They compared the 27 and 15 responses received during the first round. In a pairwise comparison the respondent was asked to select the more important alternative of the two possible. After one reminder 17 persons completed comparisons between responses given to question 1 during the first round and 17 persons as well to question 2. The randomly selected responses were shown as written during the first round, possible typos included. The total numbers of pairwise comparisons completed were 164 (question 1) and 161 (question 2). Thus, a few pairwise comparisons were not completed (6 and 9). Each of the 27 alternatives received as an answer to question 1 were compared in 9–15 pairwise comparisons. Similarly, the 16 alternatives received as an answer to question 2 were compared in 17–22 pairwise comparisons.

Seven responses were received from the 29 invited regulator experts, three by the time the second round of the survey was started. The second round of the Wiki Survey was therefore not carried out among this respondent group. All invitation and reminder emails were signed by the author as a university professor and the chair of the Blockchain Forum. All invitation and reminder emails also explained that no predetermined attitudes or values were present in the research to guide it.
4. Results

During the second round of the Wiki Survey method, the responses received to the survey questions of the first round were rank-ordered on the basis how many times did each response win pairwise comparisons. The alternative that won proportionately most often was considered the most important regulatory expectation. Alternative that won proportionately second most often was deemed the second most important regulatory expectation. The responses still had to be transformed from the negative formulation (what is the regulatory obstacle to the use of virtual currencies/to develop electronic business) to positive formulations.

Table 1
Ten most important regulatory expectations perceived by Finnish virtual currency developers and users formulated as regulatory obstacles to the use of virtual currencies

Rank #	Virtual currency regulatory expectations rank-ordered on the basis of pair-wise	Proportion	Shown #
	priority comparisons ( $n=$ 164)	of wins (%)	of times
TOP 1–5
1	Taxation is unclear and does not fit to virtual currencies	75	12
2	Missing requirement (and political will) on open real-time accounting-ledgers	67	9
3	Either the facilitation of full anonymity in the linking of personal data as required in the law or clear limits to both	64	11
4	The regulation of virtual currency market places lead to a situation, where one needs to follow the regulations of all countries where sales activities are done	64	11
5	The expensive proposed license and supervision fees to be applied on all virtual currency and token actors prohibits business	62	13
TOP 6–10
6	In Finland public innovation funds have been allocated to artificial intelligence without understanding the integration of artificial intelligence and blockchain	60	15
7	Limited understanding regarding the structural defects of fiat currencies in peer, circulation and data markets (cf. anti-rival goods)	60	15
8	The taxation and accounting requirements placed on consumers and enterprises, as well as KYC/AML regulations	60	10
9	Banks perceive that they are unable to serve customers with crypto currencies because they fear regulator’s unpredictable reactions	60	10
10	In regulatory sense, the treatment of tokens, their owners and actors is hostile	57	14

Table 1 shows the 10 highest ranked regulatory expectations to the first survey question (virtual currency regulation) with their original negative formulations. According to the responses the most important regulatory expectation is to improve the clarity of virtual currency taxation. The description of the use case in the previous section makes this expectation understandable and logical. Two-thirds of the respondents hope that regulators are more understanding and have political will to promote the use of real-time distributed ledger technologies. They also expect more precise regulations on the issue, how personal data should be linked to Bitcoin type virtual currencies where the senders and the receivers of transactions are pseudonymous The third ranked response proposes that either full anonymity should be followed or that the use of Bitcoin type virtual currencies should not be allowed. Increased harmonization between national (EU) regulations is also expected. A clear majority of respondents also want to have license and regulatory fees that are appropriate to the volume and type of business. These five and also the other five regulatory expectations shown in Table 1 are well in line with the description of the use case.

The three responses received from the regulators after the invitation and two reminders and before the second round of the Wiki survey were similar in tone. According to these few responses there are no regulatory issues that hamper or slow down the use of virtual currencies. The other four later responses were more mixed and two of them acknowledged serious taxation and virtual currency definition problems and one response indicated minor problems. This study is unable to reveal, why so few regulators responded to the survey invitation. The reminders were sent one at a time to a single email account without any attachments to reduce the probability that spam filters would remove these messages. The comparison of these reactions, the 27 responses received from the virtual currency developers and users, and the ranked responses highlight the conclusion that constructive discussions between the two groups are needed.

Table 2 shows the 9 highest ranked regulatory expectations with their original negative formulations to the second survey question (digital business regulation). Those 9 expectations won over 50% of the pairwise comparisons. Respondents expressed as their opinion that the country should develop holistic and balanced guidelines for the development of future digital business. They also expect that the activities of agencies should overlap less and that taxation should become less complicated. Respondents were satisfied with EU regulations and wanted to avoid local regulations that extend EU regulation. Both the 4 ${}^{\text{th}}$ and 5 ${}^{\text{th}}$ highest ranked responses reflected this with different perspectives.

Table 2

Nine most important regulatory expectations perceived by Finnish virtual currency developers and users formulated as regulatory obstacles to the development of digital business

Rank #	Digital business regulatory expectations rank-ordered on the basis of pair-wise	Proportion	Shown #
	priority comparisons ( $n=$ 161)	of wins (%)	of times
TOP 1–5
1	Finland has not developed holistic guidelines for digital business as individual parts are conflicting and unequal	76	21
2	The overlaps of agencies (who is responsible for specific regulations) create roadblocks	63	19
3	The taxation of private individuals and companies, as well as the inappropriate accounting requirement resulting from that	61	18
4	All additional regulation over the demands of EU is unnecessary and weakens competitiveness	59	17
5	Time will show, but current practices and guidelines have driven a lot of development from here. The regulation of the Financial Supervision Authority has a similar impact	57	21
TOP 6–9
6	In Finland, the public sector does not know the industry well enough, so their competencies should be improved	57	21
7	Regulation may also be positive, when it guides to better control or even an industry into a new operative model, such as through the APIs of PSD 2	56	18
8	None of the agencies wants to take a firm standpoint and provide guidelines before someone else has made a mistake regarding a new thing/industry/law. GDPR is a good example	55	22
9	Insufficient understanding about the limitless, multipurpose (non-rival, anti-rival) nature of digital products	53	19

Regulatory experts provided only two responses. These responses are inconclusive and offer no possibilities to compare them to the responses shown in Table 2.

5. Discussion and conclusions

This article reviewed regulatory frameworks, approaches and the development of regulations for distributed virtual currencies, that is blockchain and distributed ledger technologies enabled virtual currencies. The article focused on the regulation in European Union, since the empirical part of the study was conducted in one EU country (Finland) implementing the EU regulations. The use case of the study depicted how the EU level regulations have been implemented in the country of interest. Other EU countries have gone or will go through comparable evolutions. Such evolutions may lead to alternative local regulations within the EU regulatory framework and to competition between EU member countries in attracting financial technology innovations and companies.

The research investigated with an analytic hierarchy process based two-question Wiki Survey method, what regulatory expectations expert level virtual currency developers and users place on virtual currency regulations in Finland. The three member associations of the national Blockchain Alliance helped to select 40 respondents to the survey including persons who had switched the domicile of their companies from Finland to other countries due to regulations, which they had perceived adverse to the business of their companies. Cumulatively 27 regulatory expectations were outlined. After 164 pairwise comparisons of the 27 expectations, respondents that participated to the rankings indicated that improving the clarity of virtual currency taxation is the most important regulatory expectation. Nine other regulatory expectations were also shown in the Results section, please, see Table 1. This is the answer to the research question RQ1 of this article.

In the Wiki Survey, the respondents were also asked to indicate their expectations for the development of digital business regulations. Respondents provided 16 responses to this survey question. In the 161 pairwise rankings of the responses, 9 responses were prioritized more than 50% of times over the shown alternative. Respondents perceived the development of holistic and balanced guidelines for electronic business clearly as the most important regulative expectation. This and the other winning expectations were shown in Table 2. This constitutes the answer to the second research question.

In the light of the literature review on virtual currency regulations and the description of the investigated use case, the findings of the survey were not surprising. They were predominantly consistent with the reviewed literature as well as with the dialogue between the developers and users of distributed virtual currency actors on one hand side and the Finnish regulators on the other hand side. The lack of prior empirical research on the impacts of regulatory development was, however, surprising. Efforts to identify comparable literature and empirical research on the impacts of regulatory development on investors in other finance industry innovation contexts proved futile. The literature search was, however, not systematic and this a potential topic for a future study.

The small number of responses from the network and task force of regulators with 65 members was a surprise. Furthermore, four of the seven responses saw no challenges with the national virtual currency regulations, whereas the three other responses reflected those of the developers and users. An interesting question is, what might be the reasons of this finding? The present article offers Granovetter’s (1973, 1983, 2005) social network theory as a potential explanation. There appears to be communication challenges in the dialogue concerning the development of effective and efficient regulations for distributed virtual currencies. Most employees of virtual currency service providers are young internationally oriented persons with more programming, software development and technology background than business and finance industry background. Some of them even want the disrupt the dominance of fiat currencies in line with the arguments presented by Satoshi during the introduction of the Bitcoin in 2008 (Satoshi, 2008). They also expect rapid answers. The world of regulation experts in ministries and agencies and the politicians passing laws in the Parliament is different. Although regulators usually have master level and some even Ph.D. level academic education, some of them may find it difficult to understand the language and the clock-speed of the rapidly evolving digital innovations and the underlying technologies even if they want. They have to consider and balance different kinds of innovations, both disruptive and evolutionary within their respective regulatory frameworks and traditions of thinking. From their perspective it may look logical to consider virtual currencies just another subsector of financial markets and its regulation.

Granovetter’s social network theory suggests that the close ties of nearby social groups (e.g. a ministry or an agency, a virtual currency market place or a virtual currency start-ups) dominate their communication with persons from other social groups. Weak ties, that is communication between persons from different social groups, are necessary to exchange ideas, e.g., to develop effective and efficient regulations for virtual currencies that satisfy the needs of various actors. According to Granovetter there is a structural gap, should there be no communication between two social groups or should the communication relationships be strained. A mediating actor could be used to fill this communication gap, for example trusted persons from Blockchain Forum type social groups could act in this role. This is another potential venue in future research.

As any research this study has limitations. The survey of the research was conducted in one country at an early stage of virtual currency market development. These related limitations can be removed by repeating the study in other countries and areas and over time by using the contacts of the BC/DLT associations. At the same time the present study is able to provide an example to future studies. Despite of the limitations, the present study contributes to scientific research on the regulations of virtual currencies, and hopefully supports discussions between regulators, practitioners and academics. The study condenses literature on regulatory issues and shows how the impacts of those regulations can be investigated empirically both among service developers and users and among regulators. The use of the AHP based Wiki Survey in the context of virtual currency opens up new opportunities both for research and practice. The use of the method was able to reveal the most important regulatory expectations and this may support the discussions between virtual currency service providers and regulators should the discussions lack structure and priorities.

In addition to the ideas for future research presented above, this research is amenable to other future studies. The invitation to the survey was sent to social welfare and healthcare as well as to logistics and forwarding specialists. Their responses could be compared to the findings of this study. It may also be possible to bring virtual currency service providers and regulators to the same table and investigate what happens.

The main recommendation to researchers is to investigate empirically the impacts of virtual currency regulations and other market features. The use of the Wiki Survey method is also recommended. The recommendation to practitioners is to establish close interactive relations between actual virtual currency developers and regulators if the objective is to promote digital innovations.

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What blockhain developers and users expect from virtual currency regulations: A survey study

Abstract

Keywords

1. Introduction

2.1 Regulatory frameworks, approaches and regulations in BC/DLT based virtual currency contexts

2.2 A comment on taxation

3. Methodology – the investigated use case, data collection and analysis

3.1 The investigated virtual currency use case

3.2 Data collection and analysis

Table 1 Ten most important regulatory expectations perceived by Finnish virtual currency developers and users formulated as regulatory obstacles to the use of virtual currencies

References

Table 1
Ten most important regulatory expectations perceived by Finnish virtual currency developers and users formulated as regulatory obstacles to the use of virtual currencies