Cryptocurrencies and distributed ledger technologies continue to
change the world. We are at the stage of forming complex concepts
of regulation of cryptocurrencies and blockchain. Therefore, today
it is extremely important to understand all the intricacies of
regulation and crypto-assets.

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.

Switzerland

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).

European Union

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.

Germany

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.

UK

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.

Sweden

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.

Austria

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.

Luxembourg

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.

Finland

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.

The Netherlands

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.

Malta

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.

Cyprus

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.

Canada

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

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

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

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.

References


  • https://www.loc.gov/law/help/cryptocurrency/world-survey.php#switzerland


  • https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32018L0843

  • https://www.imf.org/external/np/leg/amlcft/eng/


  • https://bitcoinmagazine.com/business/regulation-bitcoins-germany-first-comprehensive-statement-bitcoins-german-federal-financial-supervisory-authority-bafin-1391637959

  • https://www.fca.org.uk/publication/policy/ps20-10.pdf


  • https://markets.businessinsider.com/currencies/news/uk-fca-ban-crypto-based-products-retail-investors-review-jan-2020-10-1029653299


  • https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual


  • https://www.theblockcrypto.com/linked/99822/uk-tax-authority-publishes-updated-crypto-guidance?utm_source=coinmarketcap&utm_medium=rss

  • https://www.loc.gov/law/help/cryptoassets/sweden.php

  • https://freemanlaw.com/austria-and-cryptocurrency/


  • https://www.loc.gov/law/help/cryptocurrency/world-survey.php#luxembourg


  • https://www.bloomberg.com/news/articles/2014-01-19/bitcoin-becomes-commodity-in-finland-after-failing-currency-test


  • https://web.archive.org/web/20210217034138/https://www.fintechfutures.com/2016/03/dutch-central-bank-mulls-new-blockchain-currency/


  • https://www.blockchain-council.org/blockchain/cryptocurrency-tax-regulations-in-malta/


  • https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020PC0594&from=EN


  • https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/cyprus


  • https://www.karitzis.com/en/news/amendment-of-cyprus-aml-law-%E2%80%93-crypto-assets/ppp-101/161/

  • https://centralbank.ae/en/node/1934


  • https://www.osc.ca/en/news-events/news/canadian-securities-regulators-outline-regulatory-framework-compliance-crypto-asset-trading


  • https://www.mondaq.com/fin-tech/1025630/cryptocurrency-regulation-in-singapore-challenges-and-opportunities-ahead-


  • https://www.fsc.go.kr/eng/pr010101/75563?srchCtgry=&curPage=&srchKey=&srchText=&srchBeginDt=&srchEndDt=

  • https://www.nta.go.jp/english/Report_pdf/2018e_06.pdf

  • https://www.fsa.go.jp/en/news/2021/20210331/20210331.html

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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