Bitstamp announcing the grant of a Payments licence in Luxembourg is certainly a step forward for the industry. Most important is that such a licence should facilitate their banking relationships. As an unlicensed Virtual Currency (VC) exchange, it is almost impossible to get banking.
With regards to the exact scope of their licence, it is not clear the type of permissions applied for. That won’t be available until it is live, apparently after 1 July.
We should note that the first licensed VC Payment Institution (to my knowledge) was SnapSwap. SnapSwap are a Ripple Gateway who moved their operations to Luxembourg. They were granted permissions for money remittance, execution of payment instructions and operation of a payment account. I expect Bitstamp will have similar permissions with maybe a few more.
The financial services single market in the EU is certainly not harmonised. There is, for example, one law, the Payment Services Directive, but interpreted in many different ways by national regulators.
To elaborate further, the FCA in the UK considers VC exchanges to sit outside of the Payment Services Directive (PSD) mainly because the primary purpose of the VC exchange is not the provision of payment services. In Germany, BAFIN considers VC exchanges to be offering trading in ‘financial instruments’, almost switching the business model from a movement of value to the trading of securities. In contrast, Luxembourg CSSF, looking at the same law, considers that it can licence VC exchanges under PSD.
This fragmentation is just as bad as state-level interpretation in the US: some states don’t regulate, some do but only custodians (New Jersey), some will only regulate VC to fiat exchanges, some will try and regulate everything.
The advantage of the EU approach is that if you are licensed under an EU directive you can put the Single Market behind you to get your services into every member state.
To illustrate this: once authorised by CSSF, there a default single market right to ‘passport’ the licence to the rest of the EU. But, for example, BAFIN may argue that a payments licence can’t cover trading ‘financial instruments’, which it has defined cryptocurrency as. In which case you have to rely on the Single Market freedoms to prove that BAFIN’s interpretation amounts effectively to a trade barrier. This doesn’t work every time especially when public policy is involved, for example: member states are allowed to ‘gold plate’ AML requirements, so if Estonia feels that the KYC threshold should be EUR1,000 then the regulated entity has to meet that particular domestic requirement.
The question is when will these fragmented regulatory interpretations be harmonised? Most likely, the EU Commission will harmonise the interpretation of PSD through legislation or the Court of Justice of the European Union will do the job, which they did with the Ruling on the EU wide VAT exemption. However, after Paris attacks, maybe the Commission may jump ahead of CJEU.
So, to summarise, the Single Market in financial services is not complete nor is it in continual sync with the pace of innovation. A separate example outside of VC would be binary options, these are regulated in some EU states as gambling products in others as financial instruments. The first EU country to regulate them as a financial instrument was Cyprus. The consequence of which saw a large number of operators from around the world queuing up with CySec to pick up a MIFID passport to provide their binary options products to the rest of the EU. Same with Equity Crowdfunding. This is essentially arranging deals in investments (covered under MIFID). When the FCA in the UK started issuing MIFID passports to UK crowdfunding operators they could use that to enter other EU markets where the regulator might not have been as keen on equity crowdfunding or were delaying on having an official position. These are the natural regulatory arbitrage opportunities that exist in the EU. Certainly, I would never advise a client to get a ‘passport’ and go for it without concern or recourse to domestic regulators, but innovation waits for no-one and it would be ridiculous not to use the imperfections of EU Single Market to power your fintech business.