Reference : The Dark Side of Licensing Cryptocurrency Exchanges as Payment Institutions
Scientific journals : Article
Law, criminology & political science : Economic & commercial law
Law / European Law
The Dark Side of Licensing Cryptocurrency Exchanges as Payment Institutions
Nabilou, Hossein mailto [University of Luxembourg > Faculty of Law, Economics and Finance (FDEF) > Law Research Unit >]
Law and Financial Markets Review
Taylor & Francis
Yes (verified by ORBilu)
United Kingdom
[en] Cryptocurrency, Payment, Payment Institution License, Settlement Finality, Liquidity
[en] The ultimate objective of cryptocurrencies is to become a payment system substituting, complementing, or
competing with the existing conventional fiat-based payment systems. Irrespective of whether such an
objective could be accomplished, the functional similarities between certain cryptocurrencies and fiat
money has persuaded competent authorities of certain EU Member States to grant payment institution
licenses to cryptocurrency exchanges. At first blush, granting such an authorization would seem to be a step
forward as it would bring otherwise unregulated cryptocurrency exchanges within the scope of the existing
payment regulatory framework. However, such authorization not only faces major legal challenges
related to the definition of a payment institution but also introduces new lesser-known risks. Aside from
the semantic and definitional issues, authorizing cryptocurrency exchanges as payment institutions can
bring activities and instruments - with a different risk profile than that of conventional payment instruments
- within the scope of payment systems. It appears that such risks embedded in those instruments cannot be
fully addressed under the existing payment laws.
This paper studies two examples of unattended risks under the cryptocurrency-exchange-as-payment institution
regime. The first risk concerns the use of untethered, non-convertible, illiquid and volatile
settlement assets for settlement purposes in cryptocurrency exchanges. The second risk concerns the risks
associated with the finality of settlements arising from the use of probabilistic finality in some of the most
popular cryptocurrency blockchains. Given that in the conventional payment institutions central bank
money or commercial bank money is primarily used as the settlement asset, such risks have already been
addressed or otherwise taken for granted, however, in cryptocurrency exchanges, the risks involved in the
settlement of liabilities with an illiquid and volatile asset relying on probabilistically final settlement
mechanism cannot be dealt with by the existing applicable regulations. As the risks cannot be addressed
within the current European payment regulation framework, an alternative policy option would be granting
a special license to cryptocurrency businesses or introducing ring-fencing mechanism to protect the
conventional payment systems from the risks of cryptocurrency payments.

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