If you haven’t heard anything about bitcoin, ethereum and other cryptocurrencies in the last year, especially in the last few months, then you probably don’t have access to the Internet. There is a lot of talk about them: enthusiastically, neutrally or extremely negatively.
Decentralized virtual currencies (cryptocurrencies) are spreading all over the world and, inevitably, in Canada. The most popular cryptocurrency is bitcoin. Other cryptocurrencies are called collectively – altcoins (this term combines all other cryptocurrencies, other than bitcoin).
The prospect of taking away the state’s monopoly on the “printing” of money is too tempting, so interested parties convince us of the value of cryptocurrencies.
An interesting fact: in September 2017, interest in bitcoin peaked in Google searches. With Canada in first place (100 points), followed by: Russia (91), Kazakhstan (71), Belarus (69) and Uzbekistan (43). The interest of people in these countries in bitcoin is not accidental. The fall of national currencies, the level of the economy, the high cost of imports, etc. makes residents and entrepreneurs more interested in cryptocurrencies than residents of countries with a stable national currency, which does not have to look for an alternative.
Canada is in the top 10 countries by the number of users of bitcoin wallets. And by the number of visits to Blockchain.info, Canada came in fourth place, behind only Russia, the U.S. and Nigeria – a strange company, isn’t it?
The concept of cryptocurrencies
Bitcoin is a mathematically secure currency maintained by a network of peers. Bitcoin units are computer files, like a text file. These files contain a unique number created using encryption technology.
A register of bitcoin transactions is held by all owners of the cryptocurrency. That is, bitcoin records are kept by each of the network’s users, not by the financial institution as a third party trustee. For cryptocurrencies, trust is created by cryptographic protection as well as transaction records that cannot be tampered with.
Transactions are confirmed by the electronic signatures of each previous and each subsequent bitcoin owner. Digital signatures authorize each transaction, and the order of transactions is provided by the blockchain.
“Turnover” of bitcoins is done by adding new data to the chain of transactions with specific bitcoins.
The payment itself is made by the owner of a bitcoin unit specifying a new public address on it and signing it with his private key. The anonymity of transactions is ensured by the fact that only the transaction data becomes public, without any link to the identity of its participants. Virtual units are stored in a virtual wallet located either on the user’s computer or on a remote server. Loss of a purse for various reasons (computer loss, hard drive failure) leads to loss of the virtual units stored on it. Moreover, such units drop out of circulation as a whole, thus reducing the total circulating money supply.
A user uses a special wallet program to make a transaction. Every 10 minutes, computers/maintainers that are part of the global network aggregate hundreds of transactions into a block, legalize the transaction and a new block is added to the bitcoin network (blockchain) transaction database. The recipient’s wallet reflects the arrival of the bitcoins.
The miners solve the cryptographic problems (proof-of-work) associated with the verification of the blocks, for which they receive remuneration – new bitcoins/coins. This process is also called “mining”. The Bitcoin protocol is designed so that the number of potentially “minable” bitcoins decreases with each subsequent processing.
The volume of bitcoin is not infinite, with a maximum of 25 bitcoins appearing every 10 minutes, and their issuance will end when 21 million bitcoins have been “emitted”. Currently, there are about 14 (according to other reports 16) million units of this currency in circulation.
Bitcoins are exchanged for national currencies at virtual exchanges, which often disappear along with users’ bitcoins (it’s no wonder that crypto-exchanges go bankrupt due to fraud or hacker attacks). It is also possible to convert bitcoins through the virtual world of Second Life, as well as by making exchanges between individuals on special sites.
At the same time, cryptocurrencies cannot be identified with the concept of “e-money,” which is also known in our legislation. The main difference is that “e-money” has a centralized issuer and is pegged in value to fiat currencies. The procedure of issue and operations with e-money in Canada are stipulated by art. 15 of the Law “On payment systems and funds transfer in Canada” and Regulation on e-money in Canada, approved by the Resolution of the Board of National Bank of Canada (hereinafter – NBU) dated 04.11.2010 № 481. E-money shall only be issued by banks after approval of the rules of use of e-money by the NBU. Legal entities – commercial agents of the issuing bank are entitled to conduct operations with e-money, in particular, to distribute e-money (distribution agent), receive funds from users to replenish electronic devices (replenishment agent), exchange e-money issued by one issuer for electronic money of another issuer (exchange transactions), accept e-money in exchange for cash and/or non-cash funds (settlement agent). Exchange agent may only be a bank, and settlement agent – a bank and a non-bank financial institution licensed by the NBU to transfer funds.
Cryptocurrencies are not guaranteed and secured by the NBU as well as the national banks of other states. In fact, they are not even a currency. But what kind of assets they can be attributed to is still undecided in most countries of the world.
The speculative price, active promotion/advertising of bitcoin does not allow to identify its real value, as well as other cryptocurrencies. For example, fake news about one of the cryptocurrencies, that supposedly there is a partnership agreement with Visa, brought 700% growth of its value. In another case, the mere mention of bitcoin in a speech by a president led to its growth, and the ban on ICOs in China led to a drop in the value of bitcoin, but not for long.
Actually, the value of a cryptocurrency is determined by the demand for it (partly also by the intensity of mining and other factors), but the issue of trust of participants in the cryptocurrency is the main one in the formation of its value. It is necessary to constantly attract a sufficient number of people who believe in the value of cryptocurrency, who will invest their dollars, euros, etc. in cryptocurrency.
Bitcoin reached $1 per bitcoin in 2011 and $5,000 and $6,000 in September and October 2017, respectively.
Therefore, it should not surprise us that cryptocurrency holders or those interested in cryptocurrency investing mechanisms praise and prophesy the future only for cryptocurrencies. Stakeholders are in an extremely excited, euphoric and optimistic mood about the value of cryptocurrencies. That makes sense. Everyone knows the anecdote about selling an elephant: “…You can’t sell an elephant with a mood like that.” A good investment mood is the main hallmark of a crypto investor.
Bitcoins have been talked about in Canada lately so often that it looks like bitcoin mania, and, like any mania, it scares away. However, observing this market for about five years, we must admit – it is developing, although this does not mean that it (the cryptocurrency market) has become more important on the scale of the global economy.
Separately, it is worth noting that cryptocurrency (blockchain) platforms have evolved significantly, offering new products (e.g., smart contracts). At the same time, they use cryptocurrencies as the unit of account, which means that they also provide cryptocurrency demand.
Therefore, the enormous potential of the blockchain also creates a base for the development of cryptocurrencies. The ICO is also not without cryptocurrencies (Initial Coin Offering – a form of attracting investment by issuing and selling new cryptocurrencies/tokens to investors). The term ICO was formed by analogy with the IPO (Initial Public Offering). Coins placed at the ICO are called tokens (from the English sign, symbol).
It is interesting: we learned about blockchain through bitcoin, and now it is blockchain that gives “solidity” and functionality to cryptocurrencies. Blockchain is already being talked about as the “new Internet,” and government agencies and banks are actively interested in it.
While investors are very enthusiastic about ICO-projects, they write a lot about them, they brag about the success of raising funds for start-ups, although it is obvious that most of them will never be realized.
We can highlight the following functions that cryptocurrencies perform today:
“settlements” for goods, works, services between persons “trusting” cryptocurrencies (most often, cryptocurrencies received in this way are converted using, for example, special cryptocurrency exchanges into fiat currencies);
as raised capital for the development of some startup ideas (raised funds are also usually converted into fiat money, for example, in June 2017, projects on Etherium raised more than $1 billion through ICOs. However, a lot of attracted tokens were immediately exchanged for fiat currencies after the ICO and the price of Ether dropped almost twofold).
But it is too early to talk about cryptocurrencies as a substitute for money: first of all, using bitcoin as an example, the speed of bitcoin transactions is very slow, unlike MasterCard and Visa, transactions in bitcoin are thousands times slower (every transaction needs a confirmation, which miners perform by solving a mathematical problem, which can happen once every 10 minutes); second, the small amounts are expensive (commission); third, the bitcoin value is constantly changing, sometimes by hundreds of dollars a day, so it will not change much. Third, the price of bitcoin is constantly changing, sometimes by hundreds of dollars per day. Bitcoin is easy to lose, if the private key is lost, it cannot be recovered as if it were lost in cash.
How do we treat cryptocurrencies: as a new scam or a revolution?
We see different opinions about cryptocurrencies today: from the exaltation of bitcoin (crypto-boom, revolution, “new world currency,” “new oil,” etc.) to harsh criticism and predictions that this “bubble” and modern MMM will soon burst.
Crypto-skeptics
For example, JPMorgan Chase CEO D. Dimon has been sharply critical of cryptocurrencies, including bitcoin, calling them a scam: “If we had a bitcoin trader working at our company, I would fire him. First of all it’s against our rules. Secondly, it’s just stupid.” Francisco Blanche, head of global commodities and derivatives research at Bank of America, said cryptocurrency remains a lure for crooks and thieves. The rise in the price of cryptocurrencies will continue to depend on the faith of financial institutions, corporations and individuals in it.
Many believe that the cryptocurrency pyramid is supported by mining equipment manufacturers.
Hundreds of cryptocurrency scams have already been described. A Greek court granted the U.S. request to extradite Russian citizen A. Vinnik, accused by the U.S. side of laundering $4 billion with the help of cryptocurrencies. U.S. law enforcement officials believe the Russian was a member of a criminal group that stole more than $4 billion from the Japanese bitcoin exchange MtGox in 2011 – the money was allegedly laundered through another bitcoin exchange, of which Vinnik is a co-owner. In February 2015, a Hong Kong bitcoin exchange declared bankruptcy, whose investors lost about $387 million. Examples abound.
The total value of bitcoins obtained through scams runs into the hundreds of millions of dollars. The exact figure remains “behind the scenes”, many market players are silent about their losses. There are already court statistics. In 2016, in the U.S., a court heard the first ever case of a financial pyramid scheme built using bitcoin. The main defendant, Trendon Shavers, was sentenced to 18 months in prison and three years of post-release supervision, a special tax of $100, $1.2 million in non-refundable bail, and $1.2 million in restitution. There are also several high-profile lawsuits now underway in several countries for those who lost millions in cryptocurrency transactions. Europol commented that “transactions cannot be attributed to any specific user/address, all coins used in a transaction are hidden by default, and transaction histories remain confidential.
There are pessimistic predictions for the development of blockchain technology:
- The high cost of “mining” a block will allow mining to be monopolized by large miners (this is already partially happening now, according to various data, about 80% of mining is carried out by large pools of miners in China), and the huge volume of records of transactions will reduce the speed of transactions to a minimum, and therefore it will become extremely inconvenient to use this technology.
- On the other hand, cryptocurrencies have many supporters who believe in their prospects.
Crypto-optimists
- There are reports that major banks are teaming up to develop their own cryptocurrency (Deutsche Bank, UBS, Barclays, Credit Suisse, Canadian Imperial Bank of Commerce, etc.).
- In addition, a consortium of Japanese banks led by Mizuho Financial Group and Japan Post Bank received support from Japan’s central bank and financial regulator to create and launch J Coin, a digital currency that can be used to pay for goods as well as transfer money using smartphones. J Coin will be convertible into yen at a one-to-one rate. It will be possible to make payments with the digital currency through a mobile app or using QR codes by scanning them in stores. Banks will offer this service free of charge and will collect data on the consumer habits of their clients in return.
In Canada, bitcoin is increasingly used as a “means of payment” for goods, works, services (exchange of cryptocurrencies for these goods, for example, it was even reported about “sale” of an apartment for cryptocurrency), crypto businesses and even cryptomats (terminals to sell bitcoin for cash) work.
Two law firms, Ilyashev & Partners and Juscutum, announced the possibility of paying for their services in bitcoins, explaining that bitcoin is not banned, so it is allowed. It turned out to be quite good PR, for example, for a few days about such an opportunity to pay for the services of Ilyashev and Partners “informed almost all popular legal websites.
However, as long as the state authorities have not defined what cryptocurrency is, it will be difficult to protect the right to remuneration in cryptocurrency if the party does not fulfill the obligation voluntarily. This is more like a natural obligation: if the party voluntarily fulfills the obligation to pay in bitcoins – fine, but if not – there is no enforceable protection either, as with betting.
In Canada, there is already an example of a court-ordered demand for payment under a contract in bitcoins, but not supported by the courts.
An example of cryptocurrency legalization is Japan. In Japanese banks it is possible to open accounts not only in yen, US dollars, but also in bitcoins. This fact has greatly affected the credibility of cryptocurrencies not only in Japan, but also in other countries.
However, until now, most transactions with cryptocurrencies are made outside of the legal regulation of most countries in the world.
Cryptocurrencies in the Canadian legislative dimension
On November 10, 2014 NBU clarified that it considers Bitcoin “virtual currency/cryptocurrency” as money surrogate which is not secured by real value and cannot be used by individuals and legal entities in Canada as means of payment as it contradicts the norms of the Canadian legislation and recommends citizens to use only those payment systems, settlement systems, participants of these systems and payment services operators entered by the National Bank of Canada into the Register of Payment Systems, Settlement Systems, and Payment Services Operators.
The letter of the NBU dated 08.12.2014 states that “the issue of virtual currency Bitcoin does not have any security and legally liable persons, is not controlled by the state authorities of any country… We believe that the activity of buying and selling Bitcoins for U.S. dollars or other foreign currencies has signs of so-called “financial pyramids” and may indicate potential involvement in dubious transactions in accordance with the legislation on combating money laundering and terrorist financing”.
According to Part 2 of Article 32 of the Law of Canada “On the National Bank of Canada” the issue and use of money surrogates is prohibited.
After a long silence (and even an attempt to prosecute the miners!) at the end of August and beginning of September, state authorities of Canada stepped up the issue of defining the legal status of cryptocurrencies.
At the beginning of September Acting Chairman of the NBU Yakov Smoliy said that “today we can’t define what it is. Bitcoin cryptocurrency does not fall under the definition of currency or cash surrogate, and mining is not a violation of the law. Bitcoin, like commodities, is traded.
Various levels of officials in the management and control of the financial system of Canada have made statements about the need to define the attitude of the state to cryptocurrencies.
The Verkhovna Rada Committee on Financial Policy and Banking has begun work on a bill that would regulate the status of cryptocurrencies in Canada.
GFS in September 2017 repeated in a clarification on currency/cryptocurrency to the request of the media what the NBU had explained earlier and stressed that cryptocurrency cannot be used by individuals and legal entities in Canada as a means of payment, because it contradicts the norms of the Canadian legislation. The State Financial Service recommends using only those payment and settlement systems listed by the NBU in the Register of Payment Systems, Settlement Systems, Participants in These Systems and Payment Infrastructure Service Operators.
By the end of September it was reported that the NBU can not recognize cryptocurrencies as currency because there is no central issuer, and therefore recognize it as a means of payment. And, once again, warned of the risks of fraud.
In addition, officials have not yet sorted out who should determine the rules of circulation of bitcoins, so if the cryptocurrency is a means of payment, then this is the sphere of regulation of the Central Bank. But if it is a financial instrument, such as securities or securities derivatives, it is in the sphere of the National Securities Commission.”
On October 6, 2017, the VRU registered the bill No. 7183 “On the circulation of cryptocurrencies in Canada” .
The bill gives concepts: cryptocurrency, miner, mining, blockchain and many others. The question of the regulator is resolved, namely, as conceived by the developers, it should be the National Bank of Canada, rather than, for example, the National Commission on Securities (such an opinion was expressed in the context of the recognition of cryptocurrencies as uncertified securities).
As the process of “creation” of cryptocurrency is decentralized, the NBU cannot not only participate in this process, but also regulate it, but the NBU will determine the order of creation and operation of cryptocurrency exchanges.
Cryptocurrency – a software code (a set of characters, numbers and letters), which is an object of property rights, which can act as a means of exchange, information about which is entered and stored in the blockchain system as accounting units of the current blockchain system in the form of data (software code).
The project proposes to consider that the cryptocurrency (program code) is an object of property rights. And its turnover is carried out by means of an exchange agreement.
The subject composition of the owners of cryptocurrencies: individuals and legal entities (i.e., there is no restriction for individuals, for example, the Russian Federation is now discussing the regulation of cryptocurrency as a financial asset, which can not be bought by individuals, and transactions with them can only be carried out by qualified investors through the Moscow Stock Exchange).
However, there are no public entities in this list. This means that the state and territorial bodies will not be able to have cryptocurrency wallets, it will be impossible to exchange cryptocurrency with them. This suggests that most of the turnover, where conventional fiat money is used for cryptocurrencies will not be available.
The bill specifies that the taxation of operations on mining, cryptocurrency exchange is regulated by the current legislation of Canada (this issue requires a separate consideration by experts in the field of tax law in the context of the recognition of the cryptocurrency property of the miner, as well as the circulation of cryptocurrency by means of exchange contracts). Obviously, special clarifications by the State Tax Service will be required (e.g., the U.S. Internal Revenue Service has developed guidance on the taxation of Bitcoin transactions as property transactions). Cryptocurrency owners believe that they make transactions completely anonymous. But there are already a number of technologies that can search the public Blockchain network and link Bitcoin accounts to their real owners, which the U.S. tax authorities do. However, this is not yet a common practice.
A cryptocurrency exchange is an organization that provides interconnection between the subjects of cryptocurrency transactions, ensures the exchange of cryptocurrency for electronic money, currency values and securities, and only with the help of an electronic exchange it is possible to exchange cryptocurrency for electronic money, financial values and securities.
For other transactions it is possible to use online cryptocurrency exchange services (it is emphasized that such use is carried out at one’s own risk and the state does not guarantee their activities).
Cryptocurrency exchange must monitor all cryptocurrency transactions, identify and personalize the subject of cryptocurrency transactions.
That is, there will be mandatory provision of personal data of participants of cryptocurrency transactions. This is a very positive point.
Cryptocurrencies are issued by an unlimited number of anonymous subjects, which contributes to the involvement of participants in illegal activities (sale of drugs, laundering of proceeds of crime, terrorist financing, etc.). The anonymity of electronic technologies does not provide financial transparency, and therefore the inability to combat the above risks.
In the rules, which will be developed by the NBU, it will probably be provided that these subjects are identified by BankID (“Regulation on the Unified National System of Electronic Remote Identification of Individuals and Legal Entities BankID of the National Bank of Canada”, approved by NBU Decree № 378 of 30.08.16).
Online services are not regulated by the state, which means that transactions using them will be carried out without identification of participants of cryptocurrency transactions. With their help, cryptocurrency can be sent anywhere and for anything (de facto) – the state can not regulate this process yet. The online marketplace only shows that someone transferred a certain amount of bitcoins to someone, which is unacceptable for the tax and currency laws.
You should also take into account that we are talking about the Canadian bill, which means that it will be valid in Canada. In other countries, there may be other regulation of crypto-exchanges, for example, recently the US Securities and Exchange Commission (SEC) and the Monetary Authority of Singapore (MAS) equated some types of tokens to financial instruments and extended the securities legislation to the issue of such tokens.
There are many other examples, but mainly the trend of tightening control over crypto-exchanges, crypto-exchanges and ISOs is evident. The number of criminal prosecutions for violation of financial legislation is constantly growing. Canadian entrepreneurs should be aware of the legal consequences of non-compliance with the laws of different states. There is no unified legal assessment of crypto transactions in the world yet: barter, issue of securities, sale of currency, etc., which means that there will still be risks of spreading special legislation on crypto transactions, e.g. on financial services of other states.
The recent situation with the BTC-e cryptocurrency exchange (FinCEN imposed a $110 million fine on BTC-e for willful violation of U.S. laws, and a BTC-e owner was arrested in Greece) confirms that cryptocurrency legislation should be quite thought-out. Thus, BTC-e services were used by clients located in the USA and transactions were processed through servers located in the USA. This means that the crypto-exchange had to be registered as an MSB (Money Services Business). MSBs located abroad were required to designate an agent who would be located in the United States. In addition, BTC-e did not collect the client information required to comply with U.S. law. BTC-e allowed its customers to open accounts and conduct transactions by entering only a username, password, and email address, regardless of the number of transactions the customer made or the amount of transfers, without effectively monitoring transactions.
Scope of cryptocurrency: the subject of cryptocurrency transactions has the right to freely dispose of cryptocurrency, in particular, to carry out transactions to exchange (exchange) cryptocurrency of any type for another cryptocurrency, to exchange it for electronic money, currency values, securities, services, goods and the like.
As stated above, some of these transactions are possible only on the crypto-exchange, and not between all subjects of civil turnover.
We conclude: 1) cryptocurrency is not currency/money, but goods; 2) in circulation cryptocurrency is not a means of payment, but the subject of an exchange contract; 3) goods, works, services cannot be paid for with cryptocurrency, but only exchanged for these goods; 4) cryptocurrency cannot be used as a unit of payment for wages of a hired worker.
An exchange contract where one party transfers bitcoin and the other party transfers labor as a hired worker is impossible. The contract of exchange is an exchange of goods for another good (not money, as in the contract of sale). Within the meaning of Article 715 of the Civil Code, the subject of the exchange contract is goods, which can be in the form of property, works, services.
Although, maybe the last conclusion is too categorical. So, maybe the state authorities will interpret the part. 1 of Article 6 and Part 1 of Article 7 of the Draft Law and not tie cryptocurrency transactions only to the mechanism of the exchange contract.
Cryptocurrency in the Bill is not considered as a foreign currency, which means that its use is not covered by the norms of currency control, the sale of foreign exchange earnings by exporters, etc.
Obviously, cryptocurrencies can become a contribution to the charter capital of a business company. But it is unlikely that cryptocurrencies will become an equal financial instrument, for example, it is unlikely that in the near future, investment funds and insurance companies will be allowed to invest in cryptocurrencies.
If cryptocurrency is an object of property right, its inheritance is legally possible, but how technically feasible is it? Even the owner can lose access to an electronic wallet without the possibility of recovery. The anonymity of a cryptocurrency owner plays against the heirs in this case. However, if they are stored on the resources of a cryptocurrency exchange, which, as indicated, is obliged to personalize the subject of a cryptocurrency transaction, then theoretically inheritance will be possible. However, it is still difficult to imagine how it will be technically implemented. How to divide the wallet between the heirs? Probably, experts in the field are already thinking about these questions.
The bill also defines the concept of mining. The important, in our opinion, is the phrase that “the miner chooses the type of cryptocurrency for mining at his discretion”, that is not supposed to introduce a list of cryptocurrencies recognized by the NBU.
Although the bill provides the notion of mining and miner, you need to understand the peculiarity of cryptocurrencies – the anonymity of the participants and the system itself, which has no control center and, consequently, legal and legislative affiliation. The good thing is that now there will not be disputes with law enforcement agencies about the illegality of mining. Moreover, you can mine with your own or rented funds.
We are convinced that whatever risks associated with the use of cryptocurrencies, legal regulation is necessary. In place of one “burst” cryptocurrency there will be many new ones, technology will change and improve, but there must be at least some clear rules to protect users, even if they will be outdated faster than their use.
The use of cryptocurrencies raises a range of legal issues:
- Taxation of the “issuance into circulation” of cryptocurrency, its exchange.
- Is it allowed to use it as a legal means of payment for goods, works, services; a contribution to the authorized capital.
- Whether it is allowed to be used as a unit of account of wages of a hired worker.
- Inheritance of cryptocurrency in case of death of the owner.
Activities of crypto-exchanges (licensing, special rules of activity), crypto-exchanges and other issues.
In any case, cryptocurrencies are “virtual property”, have their own market and application, so the law should not be ignored. The risks of their use (money laundering, use in the drug business and other criminal areas) exist, and they will not disappear with the appearance of regulation, but the market of cryptocurrencies in non-criminal areas of activity will come out of the gray area, which will bring profit to the state budget in the form of taxes, the circulation of cryptocurrencies will be streamlined, etc.
A ban on activities aimed at creating cryptocurrencies and their circulation in the current environment is unlikely to be justified. Moreover, many jurisdictions already allow such activities (usually under special licenses), which means that the prohibition will only lead to their transfer to a more loyal regulatory jurisdiction.
Currency or commodity?
The legal nature of cryptocurrencies and its place among the objects of civil rights is a complex and controversial issue.
In the U.S., there is no unambiguous answer to this question, everything depends on the state, and the situation is constantly changing, because in addition to legislative regulation, a lot depends on judicial practice.
In 2015, the Commodity Futures Trading Commission (CFTC) in the U.S. recognized bitcoins as an exchange commodity, considering the issue of allegations of illegal trading against Coinflip platform, which allows transactions with options on bitcoins.
Moreover, in the U.S., cryptocurrency is considered both as money (several court decisions in particular confirm that, although there is other practice) and as property. Cryptocurrency companies must be registered as money transfer operators in the Financial Crimes Network. Bitcoin transactions are taxable like other properties. Cryptocurrency employee wages are also subject to taxation.
The U.S. Financial Crimes Enforcement Network (FinCEN) issued guidance explaining that cryptocurrency exchanges and exchange owners are “money transmitters” under the Bank Secrecy Act and its implementing regulations. Therefore, they are required to register with FinCEN as financial services companies and maintain appropriate records and reporting as part of the anti-money laundering package.
The People’s Bank of China considers Bitcoin a virtual commodity, not a currency (with all the ensuing consequences for tax purposes, including its sale may be subject to VAT). Cryptocurrency exchanges must be registered with the Telecommunications Bureau.
Bitcoin transactions are prohibited for banks, but allowed for individuals. Although China is home to the world’s main mining capacity (according to various estimates, up to 80%), China’s Central Bank has advocated a complete ban on cryptocurrency circulation due to the outflow of funds abroad and money laundering. And in September this year, it even banned ICOs. Chinese companies carrying out ICOs, and foreign companies that carry out activities in connection with the ICO in China or their activities are aimed at Chinese consumers, will be subject to civil and criminal liability.
In Japan, Bitcoin has long been recognized as an asset-like value and its sale was subject to the Japanese equivalent of VAT.
Today, however, Japan has not just legalized cryptocurrencies, but has recognized cryptocurrencies as a means of payment. Cryptocurrency exchanges and exchangers are now subject to registration and must comply with requirements that protect users, and since 07/01/2017 cryptocurrency exchanges for fiat money are exempt from taxation.
The Japanese Auditing Standards Board plans to prepare a set of conditions for the circulation of cryptocurrencies.
In Australia, they are treated as property and transactions with them are treated as barter and subject to income tax and income tax. Although there is a report that the Australian government has prepared a bill that addresses the “double taxation” problem for cryptocurrencies by eliminating tax on their purchase. The bill aims to ensure that the GST (Goods and Services Tax) for the purchase of digital currencies is abolished, treating them the same as physical money.
Australia has an Australian Digital Currency Industry Code of Conduct, developed by the Australian Digital Currency & Commerce Association. The document sets the proper standards for conducting cryptocurrency business in the country, but is only binding on members of the Association.
In Canada, bitcoin is defined as an “intangible asset” and transactions with it are also defined as barter. Cryptocurrency exchanges are subject to registration as financial institutions. Like all financial institutions, they must comply with anti-money laundering legislation, including the introduction of user verification. Since the sale of bitcoin is a barter, the taxation of this transaction involves the collection of income tax and income tax, while the mining of cryptocurrency is subject to income tax. The issue of taxation of wages in cryptocurrency is also resolved.
EU countries are trying to find ways to regulate cryptocurrencies.
Although there is no specialized legislation in the EU regarding the issuance and use of digital currencies. In 2012. The ECB indicated that cryptocurrencies are not covered by the Electronic Money Directive 2009/110/EC2 and the Payment Services Directive 2007/64/EC3.
In Switzerland, for a long time state authorities of Switzerland believed that cryptocurrency is a marginal financial phenomenon, which is not a threat to the financial system and does not need special regulation. However, today they are actively promoting the idea of legal regulation of cryptocurrencies and the use of blockchain, but it is still unknown under what conditions.
In Denmark in 2013. The Financial Supervisory Authority (FSA), in an official statement regarding Bitcoin, informed that this cryptocurrency is not recognized as a currency and that there is no need to regulate it. In 2014. The Danish Central Bank issued a statement that bitcoin has no real trading value compared to gold or silver and is more akin to glass beads.
In Finland and Belgium, cryptocurrency transactions are treated as financial transactions in valuable assets, so no value-added tax is applied.
In Spain, until 2014, cryptocurrencies were treated as digital goods or things under the Civil Code, and Bitcoin transactions were treated as barter transactions.
Swedish tax authorities say bitcoin has the characteristics of goods and services, so trade in it should be subject to sales taxes.
In Sweden, bitcoin has been treated as currency since 2013. According to Swedish tax law, there are three main types of income – income from employment (which includes activities related to collecting, buying, etc. for personal purposes (hobbies)), economic activity (including business for personal purposes) and income from capital.
In Germany in 2013. The Ministry of Finance issued a decree recognizing the Bitcoin cryptocurrency as an official means of payment. For commercial purposes, activities with this cryptocurrency require a special permit (license), such organizations become under the control of the Federal Office of Financial Supervision, and higher requirements are imposed on them. To date, in Germany, activities with any digital currencies (e.g., Ripples) refers to financial instruments, for violations of the rules of such activities involves criminal liability.
In the UK, cryptocurrencies were not regulated until 2014 and were classified by the Crown Revenue and Customs Service as “target vouchers,” transactions with which were subject to VAT.
In 2014, the UK Financial Services Authority confirmed that Bitcoin is neither currency nor money, so cryptocurrency cannot be regulated under UK financial laws. Thus, a digital currency in the UK even today is considered to be a unique combination of numbers derived from complex mathematical calculations and algorithms. Therefore, Bitcoin is also not subject to the UK Money Laundering Act.
In addition, the British government intends to develop specific regulation of cryptocurrency exchanges, develop a number of best practices and standards for companies whose activities are related to digital currencies to ensure consumer protection, adapt the distributed blockchain system to electronic document management, contracts and other options for its non-financial uses.
Bitcoin is a currency, not a commodity, the European Court of Justice (not to be confused with the ECHR!) decided. The court was considering the taxation of bitcoin exchange in connection with an appeal by the Swedish authorities. In 2013, Swedish citizen Daniel Hadqvist, owner of bitcoin.se, was planning to launch a Swedish bitcoin exchange on his website and appealed to the Swedish tax authorities about whether bitcoin exchange for fiat money should be subject to value-added tax or not.
The EU Court of Justice ruled that exchanging traditional currency for bitcoins should be exempt from VAT (the decision was published on the court’s website on October 22, 2015). Bitcoins and other cryptocurrencies must be treated the same as fiat currencies in transactions. That is, bitcoin should be considered a currency, not a commodity, at least from a taxation point of view.
The European Directorate of Taxes (DGT) decided in 2015 to exempt cryptocurrency transactions in Spain from VAT. German and British authorities also exempted cryptocurrency transactions from taxes.
Thus, the legal nature of cryptocurrencies is still interpreted differently.
Cryptocurrency as an object of civil rights
As an object of civil rights, cryptocurrency is difficult to build into existing classifications.
Bitcoin is positioned by its creators as money.
However, cryptocurrency is not money at all, at least in terms of the classical understanding of money issued by the state. This is very important, not only for civil law, but also for financial and criminal law (for the correct qualification of offenses related to cryptocurrencies).
At the same time, it often serves as money (cryptocurrency “pays for” real objects of the material world, even apartments, the main thing that the parties allow for such a possibility), but it is not money. This means that “buying” for bitcoins is not a purchase, but only an exchange of one value for another.
Bitcoins gain purchasing power only when the parties agree. It is not possible to oblige the other party to the agreement to accept bitcoins as legal tender.
In most countries, cryptocurrency is not a means of payment at all, only of exchange.
By the way, the example is often given that in 2010 a pizza was bought for 10,000 bitcoins. But in fact, the owner of the bitcoins offered bitcoins to anyone who would buy him a pizza. That is, in reality, the pizza was bought with money and then exchanged (resold, if you think of cryptocurrency as money) for bitcoins.
Cryptocurrency is not a thing (has no corporeality), not non-cash money, this is obvious. Cryptocurrencies are not a type of electronic money (this was mentioned above).
Sometimes they talk about the similarity of cryptocurrency and uncertificated securities, but they, like non-cash money, have an issuer to whom the right of claim arises. Cryptocurrency has no central registrar, so the cryptocurrency holder has no right of claim. And to whom can such a right of claim arise? Maybe Satoshi Nakamoto: either to a mythical character (there are even versions that it is an alien or an artificial intelligence…), or to a carefully classified person?
No person is obliged to redeem them at face value.
Cryptocurrencies are not the result of creative activity, because there is no creative element in them.
It is sometimes said that objects like bitcoins are a kind of intellectual constructs, which have, on the one hand, an objective character (in the sense that they are embedded in a conventional system of digital interpretation), and on the other hand, subject to agreement between people, have a kind of purchasing power.
Draft Law No. 7183 “On Circulation of Cryptocurrencies in Canada” proposes the following concept: a cryptocurrency is a software code (a set of symbols, numbers and letters), which is an object of property rights, which can act as a means of exchange, information about which is entered and stored in the blockchain system as accounting units of the current blockchain system in the form of data (software code).
Bitcoin is recognized as an object of civil law, with ownership rights arising to it (for example, a service as an object of civil law has no ownership rights, but only a claim). In other words, cryptocurrency is a quasi-property.
Lawyers of civil law are accustomed to understand objects of property rights to be things (bodily accessible objects of the material world, whereas a program code is not such). Recently, however, more and more often talk about the so-called “virtual property”, which extends the boundaries of understanding the objects of property rights. If this bill passes, we will have to analyze the application of the rules of property rights to these new objects. The prospect of vindication and negation actions, as well as the claim for recognition of ownership rights looks doubtful in view of the anonymity of cryptocurrency owners (many other arguments can also be cited). Cryptocurrency is a digital record, how can it be vindicated at all, and can bitcoin be ownerless, be the subject of a find or treasure trove, etc.? Obviously, the question of recognition of cryptocurrency as an object of ownership rights will generate the need to develop a coherent concept of “virtual property” in Canadian law and the applicability to it of the “classic” (on the objects of the material world) ownership rights.
Still, we believe that an attempt to “adapt” cryptocurrencies to one of the existing objects of civil rights is unlikely to succeed. In our opinion, cryptocurrency can be attributed to intangible goods, as Art. 177 of the Civil Code of Canada is not exhaustive (besides things, property rights, results of works, services, results of intellectual and creative activity, information, the Civil Code speaks about other tangible and intangible goods). To deny the phenomenon of cryptocurrencies is impossible, because cryptocurrencies are verbal, but objective. Cryptocurrency as an intangible good has value and negotiability.
It is as an intangible good that they should be recorded on the balance sheet of legal entities, be taxed, etc., and participate in circulation.
However, every time you make a decision or you are ready to ship a product, do a job, render a service for cryptocurrency or exchange fiat money for cryptocurrency, you should remember:
- cryptocurrencies are highly volatile;
- activities with cryptocurrencies may be subject to special regulation in some countries;
- in the Canadian reality, their display on the balance sheet of legal entities and contribution to the statutory fund is still controversial;
- it is impossible to foreclose on the cryptocurrency;
- it is impossible to inherit cryptocurrencies if the wallet is not known or it is impossible to get a private key, etc.
And despite the fact that many countries haven’t decided about their attitude to cryptocurrencies, they walk around the planet, generating whole lines of business around them.
But the scale of their spread is far from significant and is greatly exaggerated. Right now, the volume of the crypto market is about $70 billion, which is almost nothing in terms of the global economy.
We should not have a false idea about large-scale use of cryptocurrencies, as it may seem by the number of articles in business news.
That said, we have to remember that cryptocurrencies are a risky instrument. There is no government behind it (it doesn’t provide regular fiat money, the level of economy, currency reserves, military force, etc.), companies (like securities, electronic money, stocks are provided). Cryptocurrency is decentralized, secured by the faith of participants (maybe cryptocurrency is the new religion?).
Being neither crypto-skeptic nor crypto-optimist, we want to note the promise of research in this area. Cryptocurrencies appeared about 8 years ago, and therefore any legal regulation of them is just the beginning, as cryptocurrencies themselves are just at the beginning of their development. They still have a lot of ups and downs to go through. The legal doctrine must also go through formation: this has already been the case with copyright objects, uncertified securities, etc. Their “virtuality” for a long time was put on the agenda. – Their “virtuality” has long been blamed on them.
The idea of bypassing the state to create money is too tempting. This means that these technologies will develop, albeit with periodic jumps, “bankruptcy” of individual cryptocurrencies, etc.
