At Grant Thornton Cyprus we are constantly monitoring developments in the blockchain and crypto space. Our multidisciplinary team covers all aspects of digital asset professional services and is ready to accommodate customized solutions based on your needs. In our effort to educate our partners, our network of associates, and the public at large, we are launching a series of articles covering the most important updates from the DLT world. In this first article, we are publishing a summary of regulations from the EU and the rest of the world.
One of the most crypto-friendly jurisdictions is Switzerland. According to Swiss law, cryptocurrencies are not considered legal tender and consequently, “money” and do not define the term “cryptocurrency” or “virtual currency”. For individuals, cryptocurrencies are seen as assets and subject to wealth tax, while capital gains on these assets are exempt from income tax. In 2017, the canton of Zug (also known as the Crypto Valley) began accepting Bitcoin and Ether as payment for operating expenses, and Chiasso, in the canton of Ticino, began accepting bitcoin as tax payments in 2018 (with Zug set to follow in 2021).
Cryptocurrency is widely regarded as legal throughout the EU, but the rules governing exchanges vary by the member state. Taxation varies as well, with rates ranging from 0% to 50%, and crypto is subject to capital gains tax. According to EU regulations, for exchanges to operate throughout the EU, they must first be registered in the local financial authority. According to the 5th AML Directive, which came into effect 10 January 2020, crypto exchanges must now comply with the EU's anti-money laundering regulations. Under the 5th AMLD, cryptocurrency businesses are now considered to be “obliged entities” and are required to adhere to the AML/CFT (Anti-Money Laundering/ Combating the Financing of Terrorism). It is important to note that Grant Thornton Blockchain Cyprus provides qualified assurance reporting for compliance and effectiveness of AML/CFT policy and procedures. We may assist in digital forensics, asset tracking and recovery, chain analysis, and due diligence legal risk assessments for wallet custodians according to applicable laws and regulations.
Other jurisdictions where virtual assets are recognized and taxed as financial assets are Germany, the UK, Sweden and Austria.
According to BaFin (German Federal Financial Supervisory Authority), bitcoin can be used for payments since early 2013. Since February 2018, converting virtual assets into fiat (government-issued currency), using cryptocurrencies for payment, and mining cryptocurrencies have all been considered tax-free activities in Germany. Since January 1, 2020, Germany expanded on the 5th AMLD by identifying crypto assets in its Banking Act. It began to recognize virtual assets as financial instruments, introducing a new service called "crypto safekeeping" or "Crypto Custody" (safeguarding of crypto assets). Furthermore, Germany allowed banks to sell and retain cryptocurrencies for their clients.
When the UK was still a member of the EU, it implemented the 5th AMLD into its law, while the Financial Conduct Authority (FCA) announced that it would become the supervisor of UK crypto-asset businesses. During Brexit, cryptocurrencies in the UK were not considered legal tender. Since the 6th of January 2021, despite 97% of respondents disagreeing with the proposal, the FCA has recently decided to ban the sale, marketing, and distribution of certain crypto-based products for retail investors. However, UK is currently collecting feedback on whether it should reconsider its decision about cryptocurrencies being used in the financial sector. The feedback results are expected in the first half of 2021. Additionally, according to the updated “Crypto manual” Tax guidance of Her Majesty's Revenue and Customs (HMRC), individuals holding cryptocurrency will be earning rewards for aiding with the maintenance of proof-of-stake blockchains. This activity is called “staking”. Staking operations in the nearest future will be subject to tax trade depending on the volume, the organization, the risk, and the commerciality of the activity. But, if the mining operation does not incline any trading activity, then any crypto assets awarded with pound sterling for completed mining procedure will be taxable as income (miscellaneous income), with any relevant costs decreasing the amount chargeable. HMRC also added that “If the activity does aggregate a trade, any profits must be derived and measured from UK’s relevant tax laws.” The UK as a government has not still put these regulations at governmental level, that’s why HMRC – UK’s Tax Advisory had to take this responsibility to press the need of implementing new crypto rules.
Although the Swedish Enforcement Authority does not consider cryptocurrencies as currencies, they are recognized as a form of payment and capital investment. As a result, although the selling of cryptocurrency is tax-free, the purchasing of virtual currency as an investment is subject to capital gains tax.
According to the Austrian Ministry of Finance (Bundesministerium der Finanzen, BMF), bitcoin does not qualify as legal tender or financial instruments, but rather as a commodity such as "other business assets" for income tax purposes. Exchanging fiat currency for virtual currencies, mining, and other related activities is tax-free, but when used for payment, they are treated as traditional payment methods.
Countries that early recognized virtual assets are Luxembourg, Finland and the Netherlands.
In early 2017, Luxembourg was one of the first countries to recognize cryptocurrencies as "money," stating that "they are recognized as a means of payment for goods and services by a sufficiently broad circle of citizens," with the exception that cryptocurrencies are still not legal tender. A legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt. Each jurisdiction determines what is legal tender, but essentially it is anything which when offered in payment of a debt extinguishes the debt. In 2018, Luxembourg, in line with other EU countries, established that cryptocurrencies are not actual currencies but rather intangible assets for tax purposes. Moreover, when crypto is used as a means of payment, standard tax laws should be applied.
In 2014, the Finland Central Bank classified bitcoin as a commodity, adding that it doesn’t meet the requirements to be considered as a payment instrument or an official currency. By 2017, the same financial institution defined virtual currencies associated with ICOs, stating that when transferred to another currency, taxation of capital gains applies. However, while using cryptocurrencies as a form of payment, it is treated as a trade. And the increase in the value of the currency might be taxable, but trade in cryptocurrencies is exempt from VAT.
Crypto is not considered to be money or fiat currency by the Dutch government and financial regulators. Earnings from mining or trading cryptocurrencies by an individual are unlikely to be qualified as a taxable income. However, if a person receives a salary in crypto, then the payout is naturally taxable. In 2019, the Central Bank of the Netherlands (De Nederlandsche Bank, DNB), in compliance with its “DNBCoin” project started in 2015, announced that it would begin regulating companies offering cryptocurrency services requesting them to register with the Bank.
Cryptocurrency exchanges are welcomed in Malta. In 2018, the Maltese government introduced landmark legislation to define a new regulatory framework for cryptocurrencies and address AML/CFT concerns. The legislation comprised of three separate bills which set a global precedent by establishing a regulatory regime applicable to crypto exchanges, Initial Coin Offerings (ICOs), brokers, wallet providers, advisers, and asset managers. These are:
- Malta Digital Innovation Authority Act – the centralized authority for controlling technological development, including the usage of blockchain and cryptocurrency.
- Innovative Technological Arrangement and Services Act – enables businesses to implement cryptocurrency, but with auditing and operating under strict rules
- Virtual Financial Asset Act – the regulatory regime of cryptocurrency exchanges, ICOs, brokers, wallet providers, advisers to protect investors and financial stability.
Malta supports the Security Token Offerings (STO) initiative as well, several companies help to register and launch your company under STO regulation in compliance with EU laws. STO ensures consumer protection, market integrity, and financial stability thanks to its open-door policy backed by blockchain.
Due to the rapid development of the DLT industry around the world and within the EU, the Cypriot government pays special attention to the regulation of crypto assets. The Cyprus government has formed an ad hoc working group to develop and implement blockchain technology in Cyprus with the Council of Ministers’ decision on the 30th of August 2018. The priority for its national strategy is the enactment of a legal framework for regulation blockchain and crypto-assets. The Cyprus Securities and Exchange Commission (“CySec”) has been appointed as the supervising authority to supervise the compliance of Crypto Asset Service Providers with the AML Law. “CySec” issues directions with their obligations and imposing sanctions in case of a breach. The Crypto Asset Service Providers that offer services either to exchange, sell crypto assets/fiat currencies or act as participants, managers, provisioners of financial services related to the distribution, offering, or selling of crypto assets from or in Cyprus - must be registered in a registry to be kept by CySec. The treatment of cryptocurrency although not prohibited, still faces barriers from commercial banks, under the scrutiny of the Central Bank of Cyprus.
United Arab Emirates
On September 30, 2020, the UAE Central Bank (UAECB) released a new regulation on Stored Value Facilities (SVF) to promote the growth of digital payment services in the UAE. This new regulation makes it easier for SVF providers, FinTech firms, and Payment Service Providers (PSPs) to enter the UAE market. Though banks are excluded from the Regulation, they must still inform the UAECB if they plan to issue an SVF or engage in any SVF business activities. On December 6, 2020, the UAECB explained that the Regulation does not recognize cryptocurrencies and virtual assets as legal tender in the UAE, reiterating the position that the UAE dirham is the only legal tender. The UAECB is also working on a new retail payment system regulation that will include "payment tokens," which are described as crypto-assets backed by fiat currency and used for payment. Furthermore, crypto-assets and virtual assets could be used as investment assets, making them subject to the Securities and Commodities Authority's rules and regulations.
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Association of Canada (IIROC) issued a detailed securities law specification that applies to crypto-asset trading platforms (CTPs), as well as how regulators can adapt them to the CTPs business model. The notice guides the legal requirements for securities as applied to trading platforms, whether trading crypto-assets, which are securities or derivatives, or trading underlying crypto-assets such as bitcoin or ether. IIROC noted that “CTPs will have to contact their state securities regulator to review the registration procedures and clarify relevant conditions to bring their activities into compliance.” Canadian government outlined the importance of an “interim transition phase,” which means firms can continue operating while starting to bring their businesses in line with the new guidance. “Under this interim strategy, platforms that exchange crypto contracts will be bound by terms and conditions that are specific to their business model, for example, platforms operating in Ontario, Quebec, Nova Scotia, and New Brunswick will be expected to initiate the registration process with IIROC to fully comply with the regulators' expectations. Furthermore, the note offers an outline of key CTP threats and areas where specifications may be tailored, which key risks will be tackled, and how investor privacy may not be jeopardized. Finally, the note explains how to apply with the appropriate CSA jurisdictions and IIROC. All cryptocurrency platforms looking to bring their operations into compliance now that the guidance is finalized should contact their local securities regulator to discuss the registration process. IIROC president reminded that all CTPs who work with Canadians, including foreign-based CTPs, are required to comply with Canadian securities regulations. In case of violation, CSA members will take compliance action against them.
Singapore's regulatory and legal environment for cryptocurrencies is well-balanced. The Monetary Authority of Singapore (MAS) believes in controlling the cryptocurrency environment to track threats associated with crypto operations, like money laundering and terrorist funding. MAS has also been working to regulate cryptocurrency exchanges in Singapore and is looking for new ways to introduce digital payments, such as financial institutions using blockchain technology for inter-bank payments. Singapore has become Asia's cryptocurrency center because it provides this neutral environment for the growth of cryptocurrency and blockchain operations.
South Korea is the world’s third-largest bitcoin-traded market. Its cryptocurrency history began in 2017 when due to the lack of adequate crypto regulation, misconduct and hack attempts were frequent, costing on average a 17% asset loss for companies. Since then, cryptocurrency was banned from use and it was considered neither as tender nor as a financial asset. However, in 2018 Korea recognized crypto as an electronically transferable token and made it an exchange mean. Starting from 25th of March 2021, Korean National Tax Service (NTS) made amendments to its regulations law, according to which, within six months period, Crypto firms involved in trading, sales, exchange, and digital wallet services must register with the FSC and get the license in compliance with AML, otherwise they will be confronted by sanctions worth of 50 million Korean won. Moreover, Registered Virtual Asset Service Providers (VASPs) must directly report suspicious transactions with the FSC.
Japan is the world's largest market for bitcoin. The Payment Services Act (PSA) of Japan accepts bitcoin and other digital currencies as legal property. Crypto exchanges in Japan are expected to register and comply with standard AML/CFT obligations and according to the National Tax Agency ruled in December 2017, earnings on cryptocurrencies should be classified as "miscellaneous revenue" and holders should be charged accordingly. Japan's cryptocurrency exchange rules are also forward-thinking. Under the PSA, only companies with a qualified local Financial Bureau are permitted to act as cryptocurrency exchanges. As FATF updated its crypto regulatory rules regarding “Virtual Assets,” “Travel Rule” regulations, which oblige companies to record the beneficiaries of the ongoing transactions, Japan also declared that the Japanese Financial Services Agency (FSA) will enforce "Travel Rule" suggested by FATF for the country's crypto industry for the prevention of money laundering. Under the new FATF policy, Virtual asset service providers in Japan will be forced to disclose transaction data of senders and receivers, this policy is expected to come into force by April 2022, according to the Japanese FSA. The Japan Virtual and Crypto Assets Exchange Association (JVCEA) will form a council that will oversee the launch of this program.
If you have questions on the topic of the article, you can contact us for more information. Our expert legal team is ready to assist and help you understand the specifics of legal and regulatory requirements, depending on your jurisdiction of interest. Stay tuned for our next article regarding regulations in the US and the updated guidelines from FATF.