I am reading the June 2014 FATF report “Virtual Currencies: Key Definitions and Potential AML/CTF Risks”. The FATF (Financial Action Task Force) will have some major influence on the coming wave of worldwide Bitcoin regulation. They are in the business of setting worldwide standards in the anti-money laundering (AML) and counter-terrorist financing (CFT) fields. Since the Bitcoin network raises some questions in that field, I am sure that ten years from now there will be a recommendation from the FATF on how to deal with Bitcoin. If that recommendation is restrictive, that is one possible scenario where Bitcoin fails to go mainstream.
That means that the discussions at the FATF are important. The paper mentioned above is the first step in these discussions.
It starts off with a proposal for defining “virtual currencies”.
And the first thing necessary in the opinion of this paper is:
Virtual currency is a digital representation5 of value that can be digitally traded and functions as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but does not have legal tender status (i.e., when tendered to a creditor, is a valid and legal offer of payment)6 in any jurisdiction.7 It is not issued nor guaranteed by any jurisdiction, and fulfils the above functions only by agreement within the community of users of the virtual currency. Virtual currency is distinguished from fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the coin and paper money of a country that is designated as its legal tender; circulates; and is customarily used and accepted as a medium of exchange in the issuing country.
They think that the status of Bitcoin depends on whether Mongolia (or some other country) has enacted a law yet recognizing Bitcoin as a second currency.
And that’s where the Luxembourgish franc comes into play. As the relevant Wikipedia article shows, Luxembourg recognized the Belgian franc as legal tender, along with their own currency. From the article:
Between 1944 and 2002, 1 Luxembourg franc was equal to 1 Belgian franc. Belgian francs were legal tender inside Luxembourg and Luxembourg francs were legal tender in Belgium.
So that’s an interesting precedent for one country having multiple currencies. Another one is the transition to the euro. Again, from the Wikipedia article:
During the period 1999–2002, the franc was officially a subdivision of the euro (1 euro = 40.3399 francs) but the euro did not circulate. Under the principle of “no obligation and no prohibition”, financial transactions could be conducted in euros and francs, but physical payments could only be made in francs, as euro notes and coins were not available yet.
That principle “no obligation and no prohibition” describes very well the status of Bitcoin right now. And just as the euro was a currency in Luxembourg even before they issued notes and coins, Bitcoin is of course a currency everywhere in the world, even if there are no banknotes and coins, and even if there is still no country that recognizes it as legal tender.
In contrast, under the definition of the FATF report, Bitcoin’s status as a “virtual currency” would immediately cease the moment any State in the world enacted a law that recognized Bitcoin as a second legal tender, as Luxembourg recognized the Belgian franc.
Having any State enact such a law sure would add some credibility to the Bitcoin project, even if it is a developing nation like Mongolia.
But why should that be a decisive factor for the legal analysis? The basic structure of the Bitcoin network does not suddenly change with such a development. Mongolia’s decision would have no effect on the blockchain.
But anyway, when discussing these issues, it is interesting to know that some countries had multiple currencies with legal tender status in the past. And the Luxembourgish franc is one case to point to.