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In the wake of the judgment given by the EU Court of Justice in 2015, on 22nd February  2018 the German Finance Ministry issued its decision regarding the legal treatment of payments with cryptocurrency, according to which cryptocurrency is coming to be equated to payments made by legal means of payment inasmuch as they are accepted as a form or means of payment for goods and services which is contractual and immediate. It considers the conversion from cryptocurrency into conventional fiduciary money to be taxable, when this generates a profit; currency operations carried out by an operator in its own name shall be exempt, while exchange platforms shall be subject to tax. Equally, transactions related to mining shall not be subject to tax as they are deemed to be voluntary services, but the taxes charged by portfolio providers or virtual wallets shall be taxable.

Once the cryptocurrency is admitted as a form of payment, it would seem that the next step would be to establish rules which regulate the legal domain thereof in a specific manner or to either haul it into the legal framework applicable to fiduciary currencies. However, the latter presents serious difficulties when we consider the nature of cryptocurrency, that is to say, a digital asset which operates on the sidelines of a central authority and which has a floating quotation system with no possibility for any intervention on the part of a monetary authority or any other, except for the mere prohibition thereof, which does not seem reasonable nor likely to happen.

On the other hand, the messages sent out by European Union officials are incoherent. In December 2017, the commissioner Moscovici announced that the EU was not going to regulate cryptocurrencies and was partially discredited thereafter by the Vice President of the Commission who said that Europe should accept cryptocurrencies in order to continue being competitive. In January of this year, France announced the creation of a commission for their regulation and Germany stated the need to regulate them on a global level. It should be noted that these statements arose in a time frame of 3 months between December 2017 and February 2018 during which sharp speculative movements were registered on a world-wide scale as well as some cases of theft of currencies from cryptocurrency exchanges.

With that being the case, it seems that the cataloguing of cryptocurrency as a “form of payment” proves to be a neutral formula for the purposes of avoiding the in-depth legal treatment of the concept “cryptocurrency”. It simply comes to acknowledge an incontrovertible fact, that a part of market transactions is carried out exchanging assets of a digital nature with a recognised value amongst those who intervene in the operations, however, without an objective value derived from the official or centralised recognition in regulated equity markets, as happens with foreign currencies. With this in mind, we may assume that the cryptocurrency concept does not currently fit in with the term conventional fiduciary currency, although it does comply with the principal function of a currency.

In this article, we use the expressions “cryptocurrency” and “cryptoasset” indiscriminately to refer to the same thing, even if there is no consensus regarding their legal nature, and it seems to us that at present the denomination “cryptoasset” is the closest to reality.

Let us take a look at how certain countries are positioning themselves. In Asia, Japan and Singapore seem to be taking open, but ambiguous positions in a race to attract the market of digital assets. While Japan is focusing on regulating the mechanisms of conversion of cryptocurrency, without officially  pronouncing on their nature, Singapore has declared that it does not recognize differences between payments made in cryptocurrency, conventional currency or other means of value transmission and recognizes  the need to protect the consumer. Canada declines to define cryptocurrency as “currency” (given that it does not incorporate an intrinsic value), but rather as a financial asset and alerts us of the possible application of the legislation regarding the securities market, as if it was a share or a financial instrument. For its part, the Australian Tax office has recently indicated that it rules out defining it as money or currency, but instead as a barterable asset, with the result of the operations carried out with cryptocurrencies being subject to taxation.

One of the problems in regulating cryptocurrencies from a traditional perspective of State control lies in the anonymity of the transactions and their decentralised nature. Therefore, it seems logical that governments start by regulating periphery aspects, such as for example, the activities of cryptocurrency exchanges by way of an authorisation to operate, based upon the fulfilment of certain conditions equivalent to traditional foreign exchange bureaus. It is also possible to test regulations that make it obligatory to have in place systems which allow the traceability of operations and the obligation to communicate them to the authorities, upon request, for the purposes of combatting money laundering activities. Precisely, the regulation of the operation of cryptocurrency exchanges is the path taken by Japan in May 2017, with the principal effect of giving a certain public credibility to intermediary platforms. But it is obvious that only a small fraction of conversion operations was carried out through cryptocurrency exchanges based in countries with regulation in this area. Furthermore, if they are obliged to be equipped with traceability systems, they would lose a significant part of their clientele who put privacy above all other values; finally, and given that we are dealing with a decentralised digital assets market, the operations shall able to take place bypassing national regulations and establishing platforms with servers in deregulated countries or regions.

Each country adopts its own position regarding cryptocurrencies depending on various factors, which we may systemise in three: 1) the political or economic environment which they form a part of (as in the EU); 2) strategic factors with the objective of attracting the potential of the digital asset market to their economy; 3) economic and political imperatives (Venezuela).

We shall briefly analyze the case of Venezuela. The country is experiencing a serious economic crisis, with inflation rates during the first 5 months of 2018 of more than 900%, and it is furthermore being subject to international commercial blockade pressure. In order to give an institutional response, in February of 2018 the Venezuelan government launched the “Petro” cryptocurrency (backed in its first issue by 5,300 million barrels of oil), although it did not achieve the expected substantial practical result due to the lack of confidence of the public and companies. Likewise, on 15th March 2018 a draft bill was presented for the regulation of the Petro and other aptly named “cryptoassets” instead of “cryptocurrencies”, which once in force shall grant legal recognition to the use and exchange of cryptoassets as a means of payment. Due to the scarce following of the Petro, the public, grouped in communities which use cryptocurrency on a day-to-day basis, are making payments and collections in cryptocurrencies such as DASH, given that no mining work is required, it is instant, and there are low exchange commissions compared to other cryptocurrencies, although this is also due to the detention of Bitcoin miners. Thus, they have been making an appearance in economic communities participated by production companies and service providers which allow DASH as a form of payment. The most interesting aspect of this social and economic phenomenon is its autonomous character, given that the transactions taking place in this environment are outside of the direct control mechanisms of the State, especially  if the cycles of exchange are carried out entirely in cryptocurrency without a final conversion into fiduciary money. In view of what is currently happening in Venezuela or Nigeria, it is possible that cryptocurrencies really take off in either emerging countries or countries subject to international blockades, as a consequence of a need for more than a financial or speculative project, as would happen in developed countries.

However, cryptocurrency is still perceived as a vehicle for financial speculation, in such a way that the buyers purchase it without the intention of maintaining and using it in ordinary economic circuits, but rather for a rapid and substantial revaluation, at which time they will be converted into a fiduciary currency. So much so that in the United Kingdom there are well-known betting companies which offer cryptocurrency derivatives to their clients, as a type of stake. Their eminently speculative use generates unforeseen  and drastic fluctuations in the market value giving rise to considerable losses or profits in short spaces of times, as well as a well-founded sense of insecurity. The experience of the first quarter of 2018 shows that the fall and increase in their value may not be tempered by anyone except for the market itself, given that the transactions are not subject to the control of a central authority capable of intervening in moments of crisis. Volatility is a characteristic of the cryptoasset, which penalises its generalised use and development in the economy, given that if one is not able to wait for a relatively stable value, it is difficult to carry out significant investments which generate an amortisation over several years.

However, if we observe cryptocurrency as a form of payment in itself and a means of use in ordinary economic traffic, and not as an instrument of speculation, it is very probable that its use on a large scale makes their volatility subside to levels comparable to those which conventional currencies experience. And so that cryptocurrencies may acquire proportions of significant use and a digital asset market is developed, legislation should not focus on the limitations to their use or operability in the market, but instead on aspects associated with fraud and the protection of the consumer, especially in the area of cryptocurrency exchanges. It is not to be forgotten that it is a matter of a product of a decentralised nature and that for this reason it can only be regulated indirectly. In a nutshell, it seems advisable that the legislator does not suffocate the digital economy before it blooms, instead it should allow cryptoassets to coexist in the market with conventional currencies, and only intervene with caution and in a progressive manner to the extent that their impact on the economy becomes more and better known, as well as the problems derived from their large-scale use.

1st of June 2018

Eduardo Vilá

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