Your Comprehensive Guide On Cryptocurrency Regulations in Europe and CIS

• Regulation and licensing of cryptocurrencies in Europe
• Regulation and licensing of cryptocurrencies in the CIS
• Governments and Cryptocurrencies: Relationship Development

Not so long ago, when most countries were yet to take a stand on blockchain technology and cryptocurrencies, the legislative and regulatory framework used to be pretty all over the map, from the release of national cryptocurrencies to banning and criminalizing them. Some jurisdictions are still uncertain about the sphere, a fact that emphasizes its dual nature.

Politicians’ indecisiveness when it comes to crypto assets is understandable. In this case, the financial side has many subtleties the governments are usually in no hurry to interfere with unless they absolutely must. On the other hand, the authorities’ interest in blockchain technology and its application has been on the rise for some time now.

Today, however, everything is seemingly falling into place. The applicability of blockchain technology to areas other than finance is still being assessed, but some countries have already put into effect legislation regulating the circulation of cryptocurrencies. The authorities realized it is possible to benefit from the financial component of the cryptocurrency phenomenon, and thus, in the past couple of years, the legislative framework is being developed in a slew of countries.

We will analyze the most thought-provoking cases of introducing regulations or lack thereof, and provide links to legislative enactments as well as other useful publications. Next, we will draw some conclusions about how various governments are attempting to juggle crypto-economics.

Proceed to part II of the article.

Regulation and licensing of cryptocurrencies in Europe

Regulators. The European Securities and Markets Authority (ESMA), the European Banking Authority (EBA).

Many EU countries still hold a rather conservative position regarding cryptocurrencies. There is still no officially accepted legal classification of digital assets that could be applied throughout the entire European Union, so one should consider the legislation of each specific country in each specific case.

That being said, in 2019, several international and European regulators conducted and published their studies on the legal status of cryptocurrency assets and initial coin offerings (ICOs) intending to offer greater clarity to the relevant authorities and legislators. The most significant of them are listed below (the publications are in English):

• European Securities & Markets Authority (ESMA): Advice — Initial Coin Offerings and Crypto-Assets (Jan. 2019);
• European Banking Authority (EBA): Report with advice for the European Commission (Jan. 2019);
• European Banking Authority (EBA): Report on Regulatory perimeter, regulatory status and authorization approaches in relation to FinTech activities (July 2019);
• International Monetary Fund (IMF): The Rise of Digital Money (July 2019);
• European Council and the European Commission: Joint statement on “stablecoins” (Dec. 2019).

European Banking Authority defines virtual currencies (particularly Bitcoin) as a digital representation of value that is not issued by a central bank or public authority and is not necessarily tied to legal tender (fiat currency). Virtual currencies can be accepted by individuals or legal entities as a means of payment and can be transferred, stored, or sold. However, they are not electronic money within the meaning of the EU Electronic Money Directive (DIRECTIVE 2009/110/EC).

General provisions on taxation. According to Article 135(1)(e) of the EU's common system of value-added tax (VAT), transactions involving the exchange of traditional currencies for virtual currencies (i.e. cryptocurrencies) are VAT-exempt.

Germany

Cryptocurrency status: Legal
Regulator: the Federal Financial Supervisory Authority (German: Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin)
Crypto-exchange activities: legal, regulated. Different license types are required depending on the business model

Germany is considered to be one of the most progressive EU countries in terms of cryptocurrency regulation. On February 27, 2018, based on the decision of the European Court of Justice, BaFin issued a circular according to which the exchange of cryptocurrencies is VAT-exempt. The move equated cryptocurrencies with means of payment in terms of taxation.

Germany also has a special regulation regarding ICOs. The choice of the specific regulation and the required license are considered separately in each case. Tokens, ICOs can be recognized as a financial instrument, security, or investment.

Luxembourg

Cryptocurrency status: Legal
Regulator: the Luxembourg Financial Supervisory Authority (French: Commission de Surveillance du Secteur Financier, CSSF)
Crypto-exchange activities: legal

Luxembourg became the first country in Europe to begin licensing cryptocurrency exchanges. To provide financial services, cryptocurrency exchangers or exchanges must obtain special permits from the Ministry of Finance.

In March 2019, the CSSF enacted a law that equates cryptocurrencies with traditional currencies, although there is still no specialized regulation in the country.

Also, a circular was issued in Luxembourg which determined cryptocurrency taxation rules. In particular, professional mining activities or selling cryptocurrencies are subject to normal tax regulations, and in the case of equipotent non-professional activities, speculative income rules may apply if transactions involve assets held for less than six months. As for indirect taxes: under EU legislation, financial services are VAT-exempt.

France

Cryptocurrency status: Legal
Regulators: the French Financial Market Authority (French: Autorité des marchés financiers, AMF), the French Prudential Supervision and Resolution Authority (French: Autorité de contrôle prudentiel et de résolution, ACPR)
Crypto-exchange activities: legal, regulated

According to the requirements of the Directorate General of Public Finance of France (French: Direction générale des Finances publiques, DGFP), profits from the sale of cryptocurrencies are taxable. Moreover, in France, cryptocurrency savings are also taken into account when calculating the so-called wealth tax (French: impôt sur la fortune), while the transfer of cryptocurrencies from one person to another may be subject to a gift tax.

There is a notable aspect in the legislation regarding the operation of ATMs. Both AMF and ACPR allow, as part of ATM functionality, the purchase or sale of digital assets (i.e. cryptocurrencies) in exchange for legally circulating currency. This service is subject to registration per the Monetary and Financial Code.

When it comes to using cryptocurrencies as a means of payment, back in 2019 at Paris Retail Week, it was announced that cryptocurrencies would be officially accepted as a payment method in dozens of major retail stores, including sportswear giant Decathlon and perfume brand Sephora. This has only partially come true: currently, it is only possible to purchase Decathlon and Sephora gift cards with Bitcoin.

Finland

Cryptocurrency status: Legal
Regulator: the Finnish Financial Supervisory Authority (Finanssivalvonta, FIN-FSA)
Crypto-exchange activities: legal, regulated

Cryptocurrencies are subject to special regulation in Finland. Finland has adopted the definition of “virtual currency” by the European Banking Authority in its national legislation. Virtual currency providers can operate in the country only if they register with the local regulator and meet all its requirements. Virtual currency providers include companies (platforms) issuing virtual currencies, cryptocurrency exchanges, cryptocurrency exchanges, companies providing virtual currency storage services). In case of non-compliance with the requirements, FIN-FSA may prohibit the operation of the company providing such services and impose fines.

Finnish crypto exchanges are also responsible for assessing the reliability of each virtual currency used in trading. At the same time, all operations involving fiat money must be carried out under all respective regulations, depending on each specific business model.

In the context of initial coin offerings (ICOs), FIN-FSA identifies three approaches to defining the nature of virtual currencies:

• virtual currency, the analog of a payment instrument (e.g., Bitcoin);
• the virtual currency used to pay for goods and services (utility coin) at the early stage of issuance;
• a financial instrument (security).

From the point of view of taxation, cryptocurrencies in Finland are being treated similarly to CFDs (contract for difference). For example, in March 2019, the Supreme Administrative Court of Finland ruled that the sale of ETH acquired to make a profit is not subject to net investment income tax, but rather to transfer tax. Mining income is considered labor income and is taxed accordingly. Also, following EU legislation, cryptocurrency trading in Finland is VAT-exempt.

Italy

Cryptocurrency status: Legal
Regulator: the Italian Companies and Exchange Commission (Commissione Nazionale per le Società e la Borsa, CONSOB)
Crypto-exchange activities: legal, regulated

In Italy, all the activities related to the circulation of cryptocurrencies are regulated by the Legislative Act no. 90, adopted in 2017 by the Ministry of Economy and Finance. The act equated both platforms that issue cryptocurrencies and cryptocurrency exchanges with operators working with traditional currencies.

Any activity related to the purchase and sale of cryptocurrencies is taxed in Italy, but using cryptocurrency as a form of payment for a product or service is exempt from the financial transaction tax. At the moment, Italy is the leader among the EU countries when it comes to the use of cryptocurrencies for various transactions. According to Coinmap, as of January 2019, 15.3% of all stores in the world that accept Bitcoin for payment were located in Italy.

Sweden

Cryptocurrency status: Legal
Regulator: the Financial Supervisory Authority (Swedish: Finansinspektionen, FI)
Crypto-exchange activities: legal, regulated

In Sweden, no laws have been passed that would directly relate to cryptocurrencies and the respective activities. At the same time, Swedish economics and finance legislation can be applied to companies that work with cryptocurrencies, depending on the nature of their activities. Sweden has laws and regulations regarding the provision of financial services, taxation, and money laundering. Cryptocurrency-related activities may fall under any of the categories listed above.

For instance, if a client service that facilitates the sale and purchase of cryptocurrencies falls into the category of financial services, the operator in question is obliged to register with the Financial Supervisory Authority, keep records of its operations and provide information on them to the authority regularly, and take measures to prevent money laundering. In case the operator does not comply with these requirements and does not undergo the registration procedure, the authority may impose a fine or issue a termination order.

In Sweden, the sale of cryptocurrencies is also VAT-exempt, however, it is subject to the capital gains tax: only profits are taken into account when calculating the taxable amount, with losses deducted.

Estonia

Cryptocurrency status: Legal
Regulator: the Estonian Financial Intelligence Unit (controlled by the Estonian Financial Supervisory Authority, Estonian: Finantsinspektsioon, or FSAEE)
Crypto-exchange activities: legal

Estonia is one of the EU leaders in terms of cryptocurrency regulation and crypto business development. The Estonian approach is centered around a strict regulation model that stimulates the development of a transparent crypto business focused on high-security services within the framework of strict requirements.

Estonia has a license for crypto-for-fiat exchange, as well as for cryptocurrency storing. Since July 1, 2020, the rules for obtaining crypto have been tightened and modeled on those of traditional financial institutions. This means a single regulator imposes the same requirements on a company that provides services for the exchange and storage of cryptocurrency as it would on any other financial institution operating fiat money.

Another important aspect of the Estonian model: to launch a foreign regulated crypto business in the country, a branch of the said foreign company, as well as a business operations center must be opened there.

Switzerland

Cryptocurrency status: Legal
Regulator: the Swiss Financial Market Supervisory Authority (FINMA)
Crypto-exchange activities: legal

On December 14, 2018, the Swiss Federal Council issued a document that declared, within the scope of existing legislation, the legal regulations for cryptocurrencies, blockchain technology, and modern financial technologies. In particular, widespread cryptocurrencies such as Bitcoin are classified by Swiss law as payment tokens, which means they are allowed to be used as means of payment.

At the same time, no regulations were adopted concerning ICOs; each specific ICO may be subject to any of the current laws of the financial market, with selected cases being reviewed by the FINMA. Among the laws that can be applied to cryptocurrencies are anti-money laundering laws, tax laws, financial markets laws, civil laws, bankruptcy laws, and banking laws.

Even though Switzerland is not an EU member, cryptocurrency exchange operations are also VAT-exempt here.

Cyprus

Cryptocurrency status: Legal
Regulator: The Cyprus Securities and Exchange Commission (Greek: Επιτροπή Κεφαλαιαγοράς, CySEC)
Crypto-exchange activities: legal

In December 2020, CySEC issued its first document regarding the regulation of cryptocurrencies. Under the Law for the Provision of Investment Services and Activities and the Operation of Regulated Markets, companies are allowed to use cryptocurrencies to conduct transactions — but CySEC has established some requirements for companies engaged in activities related to cryptocurrencies and derivatives, including requirements on accounting, sufficient capital, risk management, etc.

As a member of the EU, the Republic of Cyprus does not impose VAT on cryptocurrency exchange operations.

Ireland

Cryptocurrency status: legal, but no specific regulation
Crypto-exchange activities: legal, but no specific regulation

In March 2018, the Irish Department of Finance issued a bill discussing “the creation of an internal working group ... to monitor further developments in the areas of virtual currencies and blockchain technology,” following the criteria determined by consumers, the industry, EU authorities, and the global community.

The creators of the bill noted that they were not seeking to establish cryptocurrency trading rules, or those for buying, selling, or raising funds via ICO. Also, the Department of Finance had specifically stressed that they do not consider virtual currencies as a replacement for the Central Bank of Ireland-issued currency. It would appear that the Irish government is still adhering to its wait-and-see attitude when it comes to crypto regulation.

Yet another essential document regarding the circulation of cryptocurrencies was released in May 2018 by the Revenue Commissioners. In it, the agency described the tax regime for transactions involving virtual currencies. The document defined the concept of crypto exchanges (organizations that allow customers to buy and sell virtual currencies in exchange for fiat money or other types of virtual currencies), as well as the fact that the exchange of virtual currencies into fiat currencies and vice versa is not subject to VAT. However, if a company accepts virtual currencies as a means of payment for goods or services, then VAT is charged as usual.

Malta

Cryptocurrency status: legal
Regulator: the Malta Financial Services Authority (MFSA)
Crypto-exchange activities: legal

In Malta, cryptocurrency exchange services are regulated under the Virtual Financial Assets Act (VFAA). The said Act equates companies that operate in the field of cryptocurrencies to traditional businesses. With this stance, the authorities are hoping to create an enabling environment in which more and more companies will develop thanks to blockchain technology. For its efforts, the country is now known as the Blockchain Island among crypto enthusiasts.

Also, due to the peculiarities of the Maltese tax system, holding any crypto assets is not subject to any capital, wealth, or inheritance taxes. However, if cryptocurrency transactions take place in the context of trading operations or exchange trading, the profit is subject to 35% corporate income tax.

Governments and Cryptocurrencies: Relationship Development

On the one hand, we can say with confidence that the concerns about the steps of the authorities taken towards cryptocurrencies turned out to be unfounded. Every year more and more news is emerging about new laws coming into force.

On the other hand, we see that governments are not planning to become players in the cryptocurrency market.

Perhaps for safety reasons or due to reluctance to devote additional resources, the authorities prefer to remain detached observers or act as regulators.

In this regard, the main trend in the relationship between the state and crypto enthusiasts is the emphasis on the points of contact between the unregulated digital sphere and the traditional economy.

Often, such small-scale regulations arise in areas where there is a risk of a collapse of the financial and legal environment or the emergence of a large shadow market that would require extra resources to shut down.

Taking the example of the way cryptocurrency is regulated in Estonia, we can see that traditional civil and economic laws are very well able to deal with the cryptocurrency industry, and in five or ten years, the phenomenon loses its novelty and aura of confusion.

However, countries whose governments dared to take the first steps in this direction are now setting an example for others. And, if we take into account the first half of this article, such examples abound.

We have the opportunity to analyze in detail one of such examples, to show the stages of the complex process of developing regulatory legislation, starting with negotiations and ending with the adoption of the outcome document. As blockchain and cryptocurrency enthusiasts committed to providing a bright future for the crypto movement, we feel we must share such an experience with the world.

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