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In the previous article, we have touched on some regulations in Americas. Following up, we have some of the newest regulations in Europe that are being implemented. For those of you living in the following countries, here are some regulations that could affect investors.

*Disclaimer: The contents of this article are meant to provide helpful insights into the regulation going on. It is by no means meant to be taken as legal advice. For legal advice, do contact a certified attorney. The writer is not responsible for any consequences to any person reading this post. Readers should be aware that cryptocurrency regulations undergo constant change, and the relevance for the post will change.

 

01

 

United Kingdom (UK)

 

The UK has recognized the importance of the distributed ledger technology that lies beneath the cryptocurrency boom going on, and has decided to position itself as one of the leading groups to adopt this technology, as mentioned by the Chief Scientific Advisor of the UK government. This is a stance taken due to the importance of the financial and services sector to the economy of the UK.

Here are some of the regulations for taxation in the UK with regards to cryptocurrency.

Value Added Tax (VAT)

UK is currently not imposing VAT on the income made from mining of Bitcoin, nor will they impose VAT on individuals who are converting their Bitcoin into fiat.

However, VAT will be due from the suppliers of any goods or services that are exchanged for Bitcoin or other similar cryptocurrency, and the value of the transaction is the sterling value of the cryptocurrency at the point of transaction.

Corporation Tax (CT)

UK has decided to view cryptocurrency under the same umbrella as foreign exchange and loans relations when it comes to Corporation Tax. This means that profits or losses on exchange movements between currencies are taxable, with no special rules for cryptocurrencies.

Capital Gains Tax (CGT)

Just like CT, CGT for cryptocurrency is regarded with the same rules as trading profits or loan relationship rules. Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable for CGT for individuals, or chargeable for CT for companies.

Income Tax (IT)

Profits and losses on Bitcoin transactions must be reflected in accounts and will be taxable on normal IT rules for individuals, meaning that it will be treated just like a regular income.

Regulations

PM Theresa May has called for closer look at cryptocurrency regulations in Jan 2018, stating that ‘Cryptocurrencies like Bitcoin, we should be looking at these very seriously, precisely because of the way that they can be used, particularly by criminals.’

Since then, CryptoUK has been formed. A collaboration between 7 prominent cryptocurrency related companies, they have come together to self-regulate. This involves

CryptoUK Members

1. Block Ex

2. Coin Shares

3. Coinbase

4. CryptoCompare

5. CEX.IO

6. Commerce Block

7. Etoro

7 of them have formed a cryptocurrency trading body to self-regulate in the ‘wild west’ cryptocurrency market. They aim to create an environment where cryptocurrency can flourish within the UK, while maintaining enough regulation to protect investors from malicious actors in the network. A full list of their policies can be found here.

Summary

Relatively open to cryptocurrency, and has taken steps to appease regulatory bodies while preserving the innovation required for cryptocurrencies to mature and grow.

 

02

 

European Union (EU)

 

As a whole, the EU has been relatively sceptical of cryptocurrency as an investment. The European Supervisory Authorities (ESA) have warned investors of the “high risks of buying and/or holding so-called virtual currencies”, and that investors can stand to lose all their funds if they invest in cryptocurrencies.

The ESA comprises of three authorities, namely the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA), and have warned that cryptocurrencies do not fall under the regulated financial services, and that businesses and consumers were not protected if they were to lose their money, such as in the case of a cyber-attack. In any case, ESA has stated that cryptocurrency regulation will be one of its top priorities in 2018.

European Commission

The European Commission has also issued the following statement regarding cryptocurrencies.

Remarks by Vice-President Dombrovskis at the Roundtable on Cryptocurrencies

“That is why the Commission proposed that virtual currency exchanges and wallet providers should be subject to the Anti-Money Laundering Directive.

The co-legislators reached an agreement in December, and we invite Member States to prepare for a speedy transposition of this legislation.

To sum up, the Commission will continue to monitor these markets together with other stakeholders, at EU and international level, including in the G20.

We stand ready to take action based on an assessment of risks and opportunities.

Following upcoming international discussions, we will decide on how to follow up today’s roundtable.”

The Commission also proposed to amend Article 2 of the 4th Anti-Money Laundering Directive (4AMLD) to include virtual currency exchange platforms and wallet providers. This is done in order to “allow competent authorities to monitor suspicious transactions with virtual currencies, while preserving the innovative advances offered by such currencies”.

This means that exchanges and wallets are legally obligated to perform Know Your Customer (KYC) checks on each account, and assess the risk of them performing money laundering or terrorist financing. They will also have to “collect, process and record personal data, and sometimes to share such data with public authorities … or with private entities within the same group.”

They have furthermore stated that these regulations will have a positive effect for the consumers, as the regulations will help to increase the trust of users.

It is important to note that countries in the EU still retain their sovereignty, and are able to push forth their own policies within their borders.

For example, Germany considers cryptocurrency transactions for a good or service to be a means of payment, rather than a like-kind exchange. This means that the VAT still applies, but it will not be taxed in the same way as the US, where it is subject to capital gains tax.

According to their tax decision,

“Virtual currencies (cryptocurrencies, e.g., Bitcoin) become the equivalent to legal means of payment, insofar as these so-called virtual currencies of those involved in the transaction as an alternative contractual and immediate means of payment have been accepted.”

If an individual decides to buy something using bitcoin or other cryptocurrencies, the VAT is based on the euro at time of transaction.

The conversion of cryptocurrency to fiat, or vice versa, is viewed as a “supply of services”. This means that the intermediary for the exchange will not be taxed. However, this only applies to individuals; cryptocurrency exchanges that are operating as a marketplace will still be taxed.

Another important point is that cryptocurrency miners that receive block rewards will not be taxed, as their services are voluntary.

Summary

Getting increasingly strict on cryptocurrency, and regulations are amassing to try impose governance over the growing market.

 

03

 

Russia

 

While Russia had previously shown indications of wanting to ban cryptocurrencies altogether, the Russian Finance Minister Anton Siluanov released the following statement.

“Trades with cryptocurrencies have become so widespread, a legal ban on such activity would lead to the creation of conditions for the use of cryptocurrencies as an instrument to service illegal businesses, launder criminal incomes, and finance terrorism.”

Instead, Russia has begun drafting laws for the regulation of cryptocurrency, including definitions of cryptocurrency, tokens, smart contracts, crypto exchanges, and mining.

Cryptocurrency: a type of digital financial asset created and accounted for in the distributed registry of digital transactions by participants in this registry in accordance with the rules of maintaining the registry of digital transactions

Token: a type of a digital financial asset that is issued by a legal entity or an individual entrepreneur (hereinafter referred to as an issuer) in order to attract financing and is recorded in the registry of digital records

Mining: an entrepreneurial activity aimed at creating a cryptocurrency and / or validation in order to receive compensation in the form of a cryptocurrency.

Under these laws, mining has been included as a legal activity.

According to the drafted regulations, Russians have the right to trade their cryptocurrencies for other digital assets and for fiat currency.

In the draft, it states that citizens have the right to exchange digital financial assets of one type to digital financial assets of another type (trading), as well as the right to exchange digital financial assets for rubles, foreign currency and other property through the exchange operator of digital financial assets.

However, it is emphasised by Forbes, Russia, that “citizens of Russia will be able to buy and sell cryptocurrencies and tokens only through professional participants of the securities market”.

The operators of cryptocurrency exchanges can only be legal entities, and must be “established in accordance with the legislation of the Russian Federation”. The draft document also places regulations upon wallets, as a wallet must be “opened by the operator of exchange of digital financial assets only after passing the procedures of identification of its owner”.

ICOs

The new draft law also contains specifies rules for token sales, such as the issuing procedures and documents and information that need to be disclosed prior to the sales. Each ICO must also provide an investment memorandum containing all information related to the issuer and the tokens.

Tax

As with all drafts, proposals to amend this draft law “On Digital Financial Assets” have been put forth, especially with regards to taxation.

Vedomosti, a Russian business daily published in Moscow, has reported that tax breaks on profits from cryptocurrency transactions have been brought up during a meeting at the Russian Ministry of Economic Development. Participants also called for increasing the limit for individual shares of “unqualified” investors in ICOs from 50,000 to 500,000 Russian rubles, which means that individuals who fall below the bracket will not be taxed on their cryptocurrency profits.

The release of the draft has raised a slew of comment. Lawyers that work with cryptocurrency companies have raised the point that legal rights and obligations of cryptocurrency participants are still not clearly defined, and smart-contracts are still viewed as regular contracts, instead of being given a bespoke guideline.

Summary

Russia has begun introduction of regulations and guidelines for cryptocurrency, but is still in the infant stages of creating a comprehensive set of rules to oversee the market.

 

Conclusion

Europe has also begun taking steps to regulate cryptocurrency in their region. Unlike the US, their regulations do not encourage their citizens to be banned from participating in ICOs. There have been no major actions taken to completely ban or support cryptocurrency, but authorities have confirmed that cryptocurrency regulation will be a priority in 2018.

 

Safe investing!

Mike