Cryptocurrencies and blockchain regulation in the European Union

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Lawyer Blockchain EU

Lawyer Blockchain EU

Absence of harmonizing official regulation in the EU

Though the European Union (EU) has followed developments in cryptocurrency, it has not issued any official decision on legality, acceptance, or regulation.

We are a legal firm specialized in Blockchain, cryptocurrencies, smart contracts and tokenization.

There are some specific rules on money laundering and terrorism that affects cryptocurrencies. And some resolutions of the TJEU. In addition, some report from public bodies in the EU.

In the absence of central guidance, individual EU countries have developed their own Bitcoin stances.

 

Cryptocurrencies and VAT in the UE

On 22 October 2015, the Court of Justice of the European Unión (CJUE)
resolved the question of whether cryptocurrencies are subject to VAT tax.

Transactions to exchange a traditional currency for bitcoin or other virtual currencies and vice versa constitute the supply of services for consideration, but fall under the exemption from value-addedtax (VAT).

 

The main aspects of this resolution are:

-The exchange of different means of payments constitutes a supply of services (article 24 VAT directive).

-Secondly, an exchange transaction involving Bitcoin constitutes a supply of services (article 2 (1) (c ) VAT Directive).

-The aforementioned service fall under the VAT exemptions (article 135 (1) (e ) of the VAT Directive applied. Although cryptocurrencies are not legal tender (as currencies, bank notes and coins issued as legal tender) transactions involving non-traditional currencies (accepted by the parties to a transaction) are also financial transactions. Applying this judgment to this case, the Bitcoin (and other cryptocurrencies) has no other purpose than to be used as a means of payment.

 

In the UE the transaction of cryptocurrencies are no subjected to VAT tax.

 

VAT is subjected to EU jurisdiction.

Any transactions involving virtual currencies in the EU should be treated in line with the CJEU´s decision.

 

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Directive (EU) 2015/849 of the European Parliament and of the Council

On July 5, 2016, the European Commission presented a legislative proposal to amend the Fourth Anti-Money Laundering Directive (AMLD). It constitutes the main legal instrument in the prevention of the use of the Union financial system for the purposes of money laundering and terrorist financing.

 

The Directive contains a definition of virtual currencies:

“A digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically”.

 

Member States will have until January 10, 2020 to amend their national laws to implement MLD5.

 

 

Action plan of the European Commission

On March 8, 2018, the European Commission presented an Action Plan on how to take advantage of the opportunities presented by technology-enabled innovation in financial services (FinTech), like blockchain, artificial intelligence, and cloud services.

The report stated that:

FinTech solutions using digital identification, mobile applications, cloud computing, big data analytics, artificial intelligence, blockchain and distributed ledger technologies are being rolled out.

 

Negative vision of cryptocurrencies

Such crypto-assets and the underlying blockchain technology hold promise for financial markets and infrastructures. Their use also presents risks, as has been witnessed by strong volatility of crypto-assets, fraud and operational weaknesses and vulnerabilities at crypto-asset exchanges.

 

Concerns concerning the blockchain techonology:

-blockchain-based applications may raise jurisdictional issues about the law applicable and liability issues;

the legal validity and enforceability of smart contracts may need clarification;

-there are uncertainties surrounding the legal status of ICOs and the rules applicable to them, …

 

The EU Blockchain Observatory and Forum

Was launched in February 2018 for a period of 2 years, aims to monitor trends and developments, pooling expertise to address sectoral and cross-sectoral issues and exploring joint solutions and cross-border cases of blockchain use.

 

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ESMA, EBA and EIOPA

On February 12, 2018, the European Supervisory Authorities for securities (ESMA), banking (EBA), and insurance and pensions (EIOPA) jointly issued a warning to consumers regarding virtual currencies, stating that they are

 

“highly risky and unregulated products and are unsuitable as investment, savings or retirement planning products.”

  

 

Cryptocurrencies volatility

“VCs such as Bitcoin, Ripple, Ether and many others have been highly volatile of late, meaning that there have been significant daily fluctuations in their prices. For example, the value of Bitcoin increased sharply in 2017 from around €1,000 in January to over €16,000 in mid-December and then fell almost 70% to €5,000 in early February. It has more recently recovered some 40% from the low, and is currently trading at around €7,000. The total market capitalisation of the 100 largest VCs is said to exceed the equivalent of €330 billion globally today.”

 

Surprisingly non mention of stable-coins is made anyway.

 

Risks expressly mentioned on the report:

-Extreme volatility and bubble risk.

-Absence of protection.

-Lack of exit options:

If you decide to buy VCs, you are at risk of not being able to trade your VCs or to exchange them for traditional currencies, such as the Euro, for a long period of time. You may therefore suffer losses in the process.

This risk anyway does not always occur with all exchanges, or with all cryptocurrencies.

 

-Lack of price transparency.

-Operational disruptions.

-Misleading information.

-Unsuitability of VCs for most purposes, including investment or retirement planning.

 

 

EBA report 12.12.2013 warning consumers on cryptocurrencies

The main risks related on the report are:

-You may lose your money on the exchange platform.

-Your money may be stolen from your digital wallet.

-You are not protected when using virtual currencies as a means of payment.

-The value of your virtual currency can change quickly, and could even drop to zero.

-Transactions in virtual currency may be misused for criminal activities, including money laundering.

-You may be subject to tax liabilities.

 

 

EBA Opinion on ‘virtual currencies’ (4th July 2014)

-Definition of virtual currencies and market participants.They treated:

-Potential benefits of blockchain and cryptocurrencies: Economic benefits and Individual benefits.

-Risks, and their causal drivers; Risks to users; Risks to non-user market participants; Risks to financial integrity; Risks to payment systems and payment service providers in FCs; Risks to regulatory authorities.

-The proposed regulatory approach. A potential regulatory approach for the long term; The immediate regulatory response for the short term.

 

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The warning by ESMA on initial coin offerings (ICOs)

 

On 13th November 2017 ESMA alerted firms involved in Initial Coin Offerings (ICOs) to the need to meet relevant regulatory requirements.

 

And the alerted investors to the high risks of Initial Coin Offerings (ICOs)[5]. They stated for example: “In particular, be aware that you will have no protection in the case where the ICO is unregulated”.

 

What were the main risks of investing in ICOs for ESMA?

-Unregulated space, vulnerable to fraud or illicit activities.

Depending on how they are structured, ICOs may not be captured by the existing rules and may fall outside of the regulated space.

Some ICOs may be used for fraudulent or illicit activities. Several recent ICOs have been identified as frauds.

 

In the case where an ICO does not fall under the scope of EU laws and regulations, investors cannot benefit from the protection that these laws and regulations provide.

 

-High risk of losing all of the invested capital.

The vast majority of ICOs are launched by businesses that are at a very early stage of development. Those businesses have an inherently high risk of failure.

There is no guarantee that the services/products will be successfully developed. And, even assuming that the project is successful, any eventual benefit may be extremely low relative to the invested capital.

 

-Lack of exit options and extreme price volatility.

ESMA considers that in some cases investors may not be able to trade their coins or tokens or to exchange them for traditional currencies, such as the Euro. Not all the coins or tokens are traded on virtual currency exchanges and when they are, like virtual currencies, their price may be extremely volatile. Many of those exchanges are unregulated and vulnerable to market price manipulation and fraudulent activities. Investors may be exposed to the lack of exit options or not be able to redeem their coin or token for a prolonged period.

 

-Inadequate information.

The information that is made available to investors, e.g. in so-called white papers, is in most cases unaudited, incomplete, unbalanced or even misleading. Investors may therefore not understand the risks that they are taking and make investments that are not appropriate to their needs.

 

-Flaws in the technology.

The distributed ledger or blockchain technology that underpins the coins or tokens is still largely untested. There may be flaws in the code or programs that are used to create, transfer or store the coins or tokens. Investors may not be able to access or control their coins or tokens, or the coins or tokens may be stolen, e.g., in case of a hack. More generally, the technology may not function quickly and securely, e.g. during peaks of activity.

 

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ESMA calls for common regulation regarding ICOS, IEOS, etc

On 9th January 2019, the European Securities and Markets Authority (ESMA) published its “Advice to the European Union (EU) Institutions – Commission, Council and Parliament – on initial coin offerings and crypto-assets”.

The Advice clarifies the existing EU rules applicable to crypto-assets that qualify as financial instruments, and provides ESMA’s position on any gaps and issues in the current EU financial regulatory framework for consideration by EU policymakers.

 

ESMA has been working with National Competent Authorities (NCAs)

In particular on analysing:

-The different business models of crypto-assets.

-The risks and potential benefits that they may introduce, and

-How they fit within the existing regulatory framework.

 

Esma´s concerns regarding cryptocurrencies regulation

ESMA has identified a number of concerns in the current financial regulatory framework regarding crypto-assets.

 

For crypto-assets that qualify as financial instruments

They are under MiFID regulation. ESMA considers there are areas that require potential interpretation or re-consideration of specific requirements to allow for an effective application of existing regulations.

 

 

Assets do not qualify as financial instruments

ESMA considers that the absence of applicable financial rules leaves investors exposed to substantial risks.

 

We are a legal firm specialized in Blockchain, cryptocurrencies, smart contracts and tokenization.

 

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