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Cryptocurrencies and the consumer: some legal considerations
By Avv. Francesca Sutti and Avv. Federich Romby
23 November 2017
The European Union has recently stated its intention to soon regulate cryptocurrencies, primarily in order to introduce rules to protect users, especially consumers.
This, however, clashes with the logic of cryptocurrencies, since it affects the speed of transactions, a speed that traditional systems cannot achieve. The ECB itself has recognized the positive effects for consumers brought by financial innovation through the introduction of alternative payment systems by cryptocurrencies. On the other hand, the lack of regulation exposes users to numerous risks.
As is known, many cryptocurrencies start with so-called ICOs, Initial Coin Offerings, a term certainly evocative of IPOs, Initial Public Offerings. However, in most jurisdictions, ICOs and IPOs are not considered subject to the same regulations. Whether this is correct or not, it deprives users, and in particular consumers, of the strong protections granted to investors in the context of crowdfunding. In fact, the investor does not purchase shares but rather a token, which allows the buyer access to the software based on that blockchain.
In the United States, for example, the SEC, Security Exchange Commission, that is, the supervisory body for the placement of securities to the public, has established that in some cases ICOs must be subject to the same procedures as IPOs, reserving the right to evaluate on a case-by-case basis.
There is also the risk of falling victim to fraudulent behavior, a risk certainly higher for a consumer than for a professional due to the information asymmetry between the two. On August 10, 2017, the Italian Competition and Market Authority imposed sanctions on the companies ONE LIFE NETWORK LTD (€2,000,000), ONE NETWORK SERVICES LTD (€500,000), Easy Life S.r.l. (€80,000), as well as on the registrants of the sites onecoinsuedtirol.it, onecoinitaliaofficial.it, onecoinitalia.com (€5,000 each), as it considered the methods used to promote the purchase of the virtual currency OneCoin and the training packages sold in combination to be unlawful (PS10550 - ONE COIN/ONE NETWORK SERVICES LIMITED – PYRAMID SELLING).
In particular, it appears that the promotional activity was focused on the promise that the consumer, after purchasing a training package, could obtain OneCoin through a mining process. Incidentally, mining consists of participating, with the help of very powerful computers, in the decentralized process of searching for and maintaining the record of transactions in the virtual ledger called blockchain. It was also allegedly promised that by joining the program, OneCoin would then increase in value as its diffusion grew.
In reality, it seems that the spread of OneCoin took place through a pyramid selling system that rewarded sales with bonuses, the only actual and real remuneration of the program. In addition to fraudulent behavior, the lack of regulation more easily exposes consumers to practices that do not comply with the principles set by consumer protection.
Beyond the rules that the European Union will certainly establish in this area, there is already protection for consumers today: the Consumer Code. The recent interest shown by the Italian Competition and Market Authority in the phenomenon of virtual currencies is also an indication of the applicability of this regulation. There is an ongoing debate about the legal nature of both cryptocurrencies and so-called tokens. The question is whether they are goods or services. However, whatever their legal nature, the cryptocurrency system is one that is offered to everyone, including consumers, usually through websites. In most cases, digital currencies are purchased on the websites of entities that deal with cryptocurrency brokerage. The general online sales conditions intended to apply to Italian consumers must therefore comply with the provisions of the Consumer Code. Otherwise, the professional risks both being sanctioned by the Authority and being subject to a claim for damages. Therefore, although not subject to specific regulation, at least within the European Union a basic regulation of virtual currencies exists, albeit limited to consumers.
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