Just like many of the Dutch mining bitcoins and other cryptovaluta, the Dutch government and the Lower House of the States General of the Netherlands raised the question of how cryptocurrency should be appreciated. In order to bring clarity to the situation, the Minister of Finance, W.B. Hoekstra, wrote the following public letter on May 8th, 2018
To the Chair of the Lower House of the States General,
It was in the context of the plenary debate on the Financial Markets (Transparency) Act of the Netherlands held on 31 January of this year (Lower House Proceedings 2017/18, no. 46 reprint, item 4) that I promised – partly in response to a request submitted by MP Paternotte – that I would be sending a letter to the Lower House in response to developments in the area of bitcoin and other so-called crypto-currencies. By presenting the letter now before you I have granted the aforementioned request as well as elaborating on the motion tabled by MPs Ronnes (Christian Democratic Party) and Nijboer (Social Democratic Party) on the topic of bitcoin futures and other high-risk derivatives such as binary options. This letter additionally follows up on the commitments I made earlier to MPs Van der Linde (Liberal Party) and Azarkan (DENK Party) to address in more detail the applicable legislation and regulations and the guidelines governing the investment by public authorities in crypto-currencies. I am having this letter accompanied by my replies to the written questions submitted by MP Van Rooijen (50Plus Party) on the same subject.
The past year has seen nothing short of a worldwide surge in bitcoin and other crypto-currencies. The Netherlands too has experienced a rapid upsurge in crypto-currency investment among the general public. A recent survey by Kantar TNS has borne out that some half a million Dutch households have invested in crypto-currencies. There are risks to investing in bitcoin or other crypto-currencies, which explains why watchdog organisations both nationally and at European level frequently stress the necessity of carefully weighing up the risks of acquiring crypto-currencies and derivatives such as bitcoin futures. Differently, from savings, no deposit guarantee scheme is available for investments in crypto-currencies while more often than not there is no central issuer to be held accountable for malpractices. Added to this are concerns about the use of crypto-currencies for criminal purposes such as fraud and money-laundering.
This letter represents an initial appreciation of crypto-currency trends and the scope for clamping down on abusive practices and curbing consumer risk. The appendix to this letter goes into detail on the background to the crypto-currency technology, an overview of regulations in a selection of other countries and a summary of applicable legislation and regulations as well as powers accruing to the various supervisory bodies.
Crypto-currency and the associated service provision
The crypto-currency associated service provision comes in different guises, which has inspired me to make the following distinction:
- the crypto-currency trade,
- the issue of new crypto-currencies by means of so-called ICOs (Initial Coin Offerings),
- crypto-currency based derivatives (such as bitcoin futures), and
- other high-risk financial products (such as binary options).
Crypto-currencies are digital means of exchange that can be swapped between users without an (official) central party of the other part interceding. There is an inherently transboundary aspect to crypto-currencies owing to their digital make-up. The first crypto-currency to be launched, in 2009, was bitcoin. The number of crypto-currencies in circulation has swelled to over 1,500 since, and this is not even counting the significant number of crypto-currencies that have come and gone. The majority of crypto-currency transactions are carried out using exchange platforms, which in addition to enabling crypto-currencies being acquired on payment of “regular” money also facilitate coins-for-coins transactions, which involve one crypto-currency being exchanged for another.
New types of crypto-currency or tokens can be launched in the market by means of ICOs (Initial Coin Offerings). Although the new crypto-currencies or tokens can be paid for in regular currencies (euros, US dollars), more often than not they are swapped against existing crypto-currencies. ICOs can be used for funding (new) services or products, as the case may be, or they may serve a purely speculative purpose.
A bitcoin future is a specific crypto-currency based derivative enabling speculation on the future value of an underlying instrument – such as bitcoin – or an event involving an underlying instrument, as appropriate. It has been possible since mid-December 2017 to trade bitcoin futures on the US-based Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE).
Binary options are another example of a specific type of derivative enabling speculation on the future value of an underlying instrument or an event involving an underlying instrument, as appropriate. Such underlying instrument may be a crypto-currency or a share, or gold or an exchange rate. “Binary” is the operative word in “binary option”, in that the underlying product invariably ends up appreciating or depreciating in value. What also sets this type of derivative apart is its particularly short-term nature, with the typical binary option “run time” ranging from a handful of minutes to no more than a few hours.
Approach to curbing the crypto-currency risks
I have identified the following points of departure on which to base my assessment of potential policy and regulation aimed at curbing the crypto-currency risks:
- (i) gaps in consumer and investor protection are to be fixed where necessary, with the proviso that any measures to be implemented should be well-balanced;
- (ii) the integrity of the financial system is to be safeguarded;
- (iii) the innovative technology underpinning crypto-currency – such as the cryptography and DLT (distributed ledger technology) used – is to be preserved;
- (iv) the transboundary nature of crypto-currency calls for an international approach given how easily national regulations can be dodged and how challenging it can be to enforce them.
1. Strategy for trade in bitcoin and other crypto-currencies
The holding of and trading in crypto-currencies is fraught with counterparty and cyber-related risks owing to the lack of business operation safeguards among service providers, and it should, therefore, come as no surprise that incidents involving fraud and hacking on a major scale have already occurred. Crypto-currencies moreover come with financial risks due to the fledgling nature of and lack of regulation in the relevant market. It is important for consumers and investors full well to appreciate the existence of risks and the lack of similar guarantees to the ones in operation throughout the financial service industry. I intend in this respect – as the motion tabled by MPs Ronnes and Nijboer has likewise requested – to liaise with credit card companies to discuss potential measures for crypto-currency acquisitions paid for by credit card.
Coming up with an effective approach to and proportional regulation of the trade in bitcoin and other crypto-currencies constitutes a complex challenge which many countries are grappling with owing to the existing supervisory framework and toolkit not being properly geared to dealing with crypto-currencies. This is why the European Commission together with Germany and France have called for a more detailed discussion on how to shape the regulation. MMoreover, atchdog organisations in the United States have been calling attention to the risks in an effort to get the regulatory debate to be taken to the next level (reference being made in this respect to the appended overview of the international playing field). The decentralised and transboundary nature of crypto-currencies renders it less than likely that they should end up banned, the adequate enforcement of such a ban being expected to lack feasibility. I would therefore advocate the creation of an appropriate regulatory framework to accommodate crypto-currencies so as to make it possible to crack down on abuse while safeguarding the potential of the underlying technology (see appendix). The transboundary aspect of the crypto-currency trade calls for a coordinated international approach where this is concerned. If the Netherlands were to “go it alone” in a regulatory sense, this could result in activities being rendered legitimate without there being any scope for effective enforcement. I am increasingly identifying support and urgency at international level. The French and German Finance Ministers together with central bank presidents, for example, have called for G20 talks being held on the topic of crypto-currencies. The Netherlands supports this initiative and is keen to assume a leading position where the European and international crypto-currency strategy is concerned, which is why I will be discussing the scope for additional regulatory steps with like-minded EU Member States.
At international level, the Netherlands is moreover to drum up attention to crypto-currencies at the level of FATF, the Financial Action Task Force, which has been set up for the purpose of clamping down money-laundering and counteracting the financing of crime and terrorism. It is crucial to deflect money-laundering and other crypto-currency abuse in order to preserve the integrity of the financial system. This makes it particularly important that crypto-to-regular currency conversion should not be allowed to take place surreptitiously. It was for this reason that the Netherlands at European level took such an active part in the campaign in favour of amendment of the EU’s Fourth Anti Money Laundering (AML) Directive so as to expand the scope of the regulations governing banks and other financial institutions to include crypto-currency conversion platforms and providers of digital (crypto-currency) wallets. The upshot of the amendment is that it has made the latter market players subject to the same customer due diligence obligations including that of vetting the customer’s identity, in addition to which they will have to register, comply with reliability and suitability requirements and report unusual transactions to their national FIU (Financial Intelligence Unit). Bearing in mind the customary path to be negotiated in order for legislation and regulations to be duly finalised, I am hopeful that the new regulations should be rendered effective by late 2019. It is my expectation that the amendments to the EU’s Fourth AML Directive will also be helpful to foiling tax evasion. I would stress that allowances are to be made in setting the “Box 3” capital yield tax base at the reference date for the relevant income tax year for the aggregate market value of privately held crypto-currencies, it being compulsory for tax payers to report any such assets and any crypto-currency related operating profit and result from sundry operations.
In summary, I will:
- stick with my commitment to increasing consumer and investor awareness of the risks of investing in crypto-currencies and enter into consultations with credit card companies, with the added advantage of the warnings issued by national and European watchdog organisations. As I have publicly done on multiple previous occasions, I would underline my support for this approach by reiterating that “fools rush in where angels fear to tread”;
- make a concerted effort to impose an appropriate regulatory framework on the trade in crypto-currencies at both European and international level, to pave the way for an effective crack-down on unwelcome practices. This will inter alia involve me consulting with the various watchdog organisations;
- tackle the integrity risks associated with crypto-currencies by enhancing the transparency of crypto-currency trade related services by implementing the EU’s amended Fourth AML Directive. I intend in consultation with the national watchdog organisations and other parties involves to look into the most effective ways of shaping the obligations to be imposed on conversion platforms and digital wallet providers. Once the implementation of the amended Fourth LM Directive has been completed, an inquiry is to bear out whether the measures having been implemented have been shown to be sufficiently effective or whether auxiliary measures are called for.
A further question submitted by MP Azarkan (DENK Party) has been that of whether crypto-currency investment is being participated in by local and/or regional authorities. The guidelines governing crypto-currency investment by decentralised authorities are set out in the Local and Regional Authorities Funding Act of the Netherlands (or “Fido” for short) and subsidiary regulations, as a legislative and regulatory framework which allows local and regional authorities to draw down loans, deposit funds or issue bonds only where their acquitting themselves of their public remit so warrants, the National Treasury being where they should hold all other cash resources. It is up to local and regional authorities to determine (in a duly substantiated and transparent manner) what their public remit should be. They should be aware of the risks when deciding whether or not to make a particular investment. Central government does not actively engage in investment activities and therefore steers clear of speculative investment including crypto-currencies.
(2) Strategy for ICO-facilitated issue of new crypto-currencies or tokens
As prevailing legislation and regulations tend not to allow newly issued crypto-currencies or tokens being regarded as financial instruments or investment objects, the regime that customarily governs the issue of financial instruments – such as offering circular or licensing rules – tends not to apply either, nor will there be specific rules governing the organisation of platforms enabling the trade in the relevant crypto-currencies or tokens, with the Netherlands Authority for the Financial Markets (AFM) likewise being unable to take any enforcement action. Then again the generic consumer protection standards do apply. These come under the supervision of the Netherlands Authority for Consumers and Markets (ACM) and as such offer a lower level of protection. They deal with matters such as the dissemination of information to on-line consumer buyers and the availability of a reflection or approval period. As ICOs serve the same purpose as conventional IPOs and bond issues- that of drumming up funds with investors – this calls for an analysis being made of the scope for ensuring that investors in an ICO setting should be as adequately protected as investors in a regular IPO or bond issue setting. As the current framework falls short in this respect, I will:
(i) make an effort to put a European ICO strategy in place. This will be a lengthy process, and one in which I intend together with like-minded Member States to lead the field;
(ii) at national level look into the scope, in consultation with the various financial watchdog organisations, for already launching enforcement actions within the existing regulatory framework while a European strategy is being developed.
(3) Strategy for derivatives: futures and binary options
Both AFM and ESMA, the European Securities and Markets Authority, alerted by the risks involved, have expressed reservations in connection with the sale of derivatives – such as binary options – to non-professional investors. I consider it important for watchdog organisations to apply a critical perspective when vetting the sale of derivatives such as these – crypto-currencies in particular – to non-professional investors and intervene where necessary. Product intervention authorisation has accrued to the watchdog organisations since the third of January 2018 as the effective date of MiFIR, the EU’s Markets in Financial Instruments Regulation, which has empowered them to impose bans or restrictions on the sale of financial instruments. As this issue is not confined to the Dutch market, I would side with AFM in expressing a preference for measures being taken at European level where possible. AFM is operating in tandem with its EU counterparts and with ESMA where this is concerned. ESMA for its part finalised a market consultation on the fifth of February of this year in the context of which it announced that it was planning the introduction of a ban on the sale of binary options to retail customers in conjunction with restrictions being imposed on the sale of other high-risk products. ESMA in the context of said consultation additionally put the question out there as to whether restrictions should be imposed on the sale of crypto-currency derivatives. I intend to liaise with AFM to discuss potential measures to be taken by the latter – based on the remit with which it has been charged – in so far as ESMA fails to implement (sufficient) measures. I am in any event having regulations prepared aimed at imposing more stringent requirements on advertising for high-risk financial products. In summary, where this aspect is concerned I will:
(i) proactively alert the European watchdog organisations to the importance the Netherlands attaches to prompt action being taken where it concerns the sale of high-risk derivatives (including crypto-currencies);
(ii) liaise with AFM to discuss potential measures to be taken by the latter where insufficient measures, or no measures at all, are taken at European level;
(iii) authorise AFM in any event – hopefully with effect from the first of July 2018 – to outlaw advertising communications aimed at consumers for high-risk financial products such as binary options.
Crypto-currencies are a novel phenomenon to which the existing supervisory system and regulatory framework are as yet insufficiently geared. The transboundary nature of the market calls for a European if not international strategy for closing the various supervisory and regulatory gaps. Although the strategy as such is yet to be shaped, it has already been pushed to the forefront of conversation. The process will take considerable time and reconciliation to be completed. I will take a proactive approach at European level to ensure that crypto-currencies are duly subjected to particular rules as a way of stamping out inappropriate practices, and will alert the relevant watchdog organisations to the Dutch views on the matter, more in particular where it concerns the risks I have identified in connection with crypto-currency derivatives. This letter outlines my expected future contribution. It is my aim during the second half of the current year to present the House with an update.
The Minister of Finance,
Wopke B. Hoekstra
 Reference is made to Kantar TNS’s survey dated 08 February 2018, which is available at http://www.tns‑nipo.com/nieuws/persberichten/aantal‑nederlandse‑beleggers‑cryptovaluta‑geexplod. The overall level of investments relative to the assets households have saved and invested in the aggregate is minor (at 0.1% of the total).
 Available via www.tweedekamer.nl.
 Whereas crypto-currencies lack a net asset value of their own and have their use confined to that of an exchange medium, tokens by contrast are the digital representation of undertakings in connection with goods, services or claims and as such can be regarded as digital scrips or securities of sorts.
 Reference is made inter alia to Reuters, “Japan Raps Coincheck, Orders Broader Checks after $ 530 million cryptocurrency theft”, 28 January 2018, and Reuters, “Special report: How Mt. Gox’s Bitcoin customers could lose again”, 17 November 2017.
 With this in mind the European Commission has already announced that an evaluation is to be held involving attention being devoted inter alia to the necessity and desirability of ensuring that virtual currency users should be registered, as part of the compromise having been struck over a revised article 65 of the Fourth ALM Directive. The Netherlands is to lend its active support to this evaluation. Reference is made to http://data.consilium.europa.eu/doc/document/ST‑15849‑2017‑INIT/en/pdf for the integral text of the agreement reached on the amendment of the Fourth ALM Directive.