Virtual currencies are a digital representation of value and they can be considered a specific type of assets which their holders are ready to hold and/or exchange electronically and use them sporadically for payments. Virtual currencies are not money as they do not fulfil the basic functions of money, which is particularly influenced by the high volatility of their value as well as the fact that the supply of any virtual currency is based exclusively on technological solutions and not on economic or monetary needs. Virtual currencies are not legal tender in the Republic of Croatia, they are not a foreign currency (foreign exchange) and, in accordance with the law, they do not have the features of electronic money, so that trading and paying in virtual currencies cannot be considered as payment services. Therefore, organisations and individuals issuing or trading in virtual currencies are not authorised or supervised either by the Croatian National Bank or any other institution in the Republic of Croatia.
Also, there is no insurance scheme for investment in virtual currencies and there is also a large number of operational and other risks of losing assets. This particularly refers to the use of the digital wallets for virtual currencies and platforms for their exchange. Notwithstanding the recent popularity and public interest in virtual currencies, their impact on the payment system and money market both at the global level and in Croatia has remained relatively small, and investment in this type of specific assets currently has no implications for and does not pose a risk to monetary policy of the Croatian National Bank in terms of maintaining price stability and the financial stability of the banking system of the Republic of Croatia.
WHAT ARE VIRTUAL CURRENCIES
In accordance with the definition that largely relies on the opinion of the European Banking Authority, virtual currencies are a digital representation of value and they can be considered a specific type of assets which their holders are ready to hold and/or exchange electronically and use them sporadically for mutual payments in line with the belief that such currencies have real value. Virtual currencies are not issued by central banks or any other public authorities. The maximum supply of a virtual currency is de facto limited and based on initial assumptions of complicated algorithms, which may have significant consequences on movements in its prices, which, in turn, depend much more on demand. While the number of virtual currencies is not limited and has been increasing rapidly, the supply of such currencies does not depend on any economic needs, but exclusively on external technological solutions. Virtual currencies are stored in the digital wallets and traded in the virtual currency exchanges.
Virtual currencies are not money as they do not fulfil the basic functions of money. They are not a measure of value as they are not used to compare relative prices of various goods and services, and are not a means of exchange as their use so far has been scarce. Also, virtual currencies cannot be deemed a means of saving as it currently does not seem that investors and holders of virtual currencies may expect safe and stable savings. Rather, they are primarily motivated by quick and possibly extremely large profits, which may be viewed as speculative demand. Finally, the intrinsic value of virtual currencies is not clear, among other things, because the entire scheme of their creation is based on extremely complicated and sophisticated technological processes that are not easily understandable and clear to the general public.
THE CNB DOES NOT SUPERVISE OPERATIONS IN VIRTUAL CURRENCIES
Virtual currencies are not legal tender in the Republic of Croatia, they are neither a foreign currency (foreign exchange) nor foreign means of payment. Virtual currencies are not used to make payment transactions in accordance with the Payment System Act, so that trading and paying in virtual currencies cannot be considered as payment services. Also, virtual currencies are not electronic money as they essentially cannot be considered money, i.e. they are not stored monetary value or a monetary claim on the issuer. In particular, under the Electronic Money Act, the electronic money issuer is obliged, at the request of the electronic money holder, to redeem the monetary value of the electronic money (electronic money redemption) at par value. By contrast, because of rapid and dramatic changes in their prices, the value of virtual currencies at which they may be exchanged by their holders most often is not equal to the monetary value the holders have previously invested.
Organisations or individuals issuing or trading in virtual currencies are not authorised or supervised either by the Croatian National Bank or any other institution in the Republic of Croatia. While the use of virtual currencies is not illegal, the prevailing opinion in most European countries is that virtual currencies do not meet the legal criteria that would qualify them as legal tender, electronic money or a payment instrument. Therefore, under the current regulatory framework in these countries, institutions do not regulate or supervise the purchase, sale or any other form of investment or use of virtual currencies.
INVESTMENT IN VIRTUAL CURRENCIES IS A HIGH RISK INVESTMENT
Investment in virtual currencies is a high risk investment. It entails a large number of operational and other risks of losing assets. Also, there is no insurance for investment in virtual currencies.
The large number of risks is particularly amplified by the rapid development of hundreds of virtual currency networks, lack of regulations, exposure to theft or data loss, the global character and significant fluctuations in the value of virtual currencies, all of which has led to many instances of compromise. As virtual currencies enable the execution of anonymous or pseudoanonymous transactions that are hard to trace, it is assumed that virtual currency networks are, among other things, used in transactions associated with criminal activities, including money laundering and terrorist financing. This is why regulations on the prevention of money laundering and terrorist financing may restrict financial institutions from providing services associated with virtual currencies.
A specific operational risk in the use of virtual currencies is associated with the virtual currency wallets and platforms for their exchange. Wallets for virtual currencies enable their storage, payment and monitoring of balances, while platforms for the purchase and exchange of virtual currencies (the virtual currency exchange platforms) enable the purchase of virtual currencies for funds or a mutual exchange of funds in various virtual currencies. A compromise of virtual currency wallets or exchange platforms as well as unethical behaviour on the part of organisations or their managers may lead to permanent loss of assets in virtual currencies.
It should be noted that there is no insurance for investment in virtual currencies. In contrast to deposits with banks, which are covered in the amount of up to 100 thousand euro per depositor, or compensation to investors in investment funds in the amount of up to 150 thousand kuna, there is no institutional or monetary protection for investment in virtual currencies. Should an organisation or individual issuing or trading in virtual currencies fail or be dissolved, holders of virtual currencies may file claims for their funds only in civil proceedings. In addition, all persons that trade in virtual currencies should take account of possible tax liabilities arising from such activities.
NEGLIGIBLE IMPACT ON THE PAYMENT SYSTEM AND THE MONEY MARKET
The impact of virtual currencies on the payment system and the money market both at the global level and in Croatia is negligible. For example, on 14 December 2017, there were 490 thousand transactions made worldwide using bitcoin, the most popular virtual currency, which was the highest ever number of daily transactions. For the sake of comparison, according to European Central Bank data, the total number of average daily cashless payment transactions in the euro area amounted to 484 million in 2016, with 122 billion payment transactions being made in the entire year. Croatian National Bank data show that the average daily number of cashless payment transactions made in the Republic of Croatia exceeded 2.9 million in 2016.
This shows that the daily number of transactions in bitcoins is negligible not only in global terms but also in terms of Croatian payment operations as it may be assumed that only a very small share of the 490 thousand transactions in bitcoins was associated with the Croatian market. Furthermore, despite the stronger issuance of virtual currencies in recent periods, the market capitalisation of all virtual currencies has remained very small in comparison with the total global money supply or, for example, the size of the markets for capital, debt, derivatives, etc. (All of the World’s Money and Markets in One Visualization).
VIRTUAL CURRENCIES POSE NO RISK TO CNB MONETARY POLICY
Finally, it should be noted that the current acceptance of virtual currencies and their limited use do not pose any limitation or risk to the implementation of monetary policy or key central bank objectives, such as price stability, the financial stability of the banking system or payment system stability. The recent growing interest of the Croatian general public in investing in this type of specific assets and the associated risk for individual investors currently have no implications and do not entail risks for monetary policy of the Croatian National bank in terms of maintaining price stability and the financial stability of the banking system in the Republic of Croatia.