Blockchain & Cryptocurrency Regulation 2019

Blockchain & Cryptocurrency Regulation 2019

Alfonso López-Ibor Aliño

24-09-2018


Government attitude and definition

The Spanish government has been very cautious and conservative with regard to cryptocurrencies, since Spanish law is highly protective of the rights of investors and consumers, and because during the recession there has been a large number of cases of financial and securities fraud.

Cryptocurrency cannot be legally treated as money for legal tender. The Law 46/1998 of 17th December, on the introduction of the euro as the national currency, provides that from 1st January 1999 the national currency of Spain shall be the euro. This law cross-refers to Council Regulation (EC) Nº 974/98 of 3rd May 1998. Under article 10 of this Regulation, only banknotes and coins denominated in euros and valid in other Eurozone countries shall have the status of legal tender in Spain and, more generally, the euro shall be the sole unit of account in legal instruments, whether under private or public law.

On 8th February 2018 the Bank of Spain and the Spanish Stock Market Regulator (CNMV) issued a joint communiqué about the perils of investing and dealing in cryptocurrencies, and emphasises that small investors should avoid these investments. The communiqué does not contain a normative definition of cryptocurrencies, although it describes accurately concepts such “initial coin offering” (ICO) and “tokens” by differentiating between “security tokens” and “utility tokens”, using terms in Spanish which can be easily understood and are accessible to the layman. The communiqué is not part of Spanish true legal order as such, but certain parts could be considered as “soft law” in as much they signal the Spanish government’s attitude.

Regarding blockchain technology, it is fair to say that a technology which allows digital information to be distributed but not to be copied, will have many uses in the Spanish legal environment. In Spain, notaries have a monopoly on certifying the authenticity of legal documents, so that blockchain platforms could be an alternative to notaries for the documentation of certain legal documents. A recent example has been a syndicated financing carried out by a major bank (BBVA) based on a blockchain platform.

Cryptocurrency regulation

There is no specific regulation on cryptocurrencies in Spain, except that they cannot be treated as legal tender, which is exclusively reserved for the euro as national currency. The mentioned joint communiqué also points out that there are no issues of cryptocurrency or ICO which have been approved or verified by any regulatory authority such as the Bank of Spain or the CNMV. In Spanish law, cryptocurrency cannot be considered as a financial instrument (promissory note, derivative, etc.) either, nor a currency (domestic or foreign),but we consider that they could be assimilated to securities in the case of public offerings, or to chattels or commodities when they are traded individually.

To the extent that they can be considered as securities, ICOs may fall within the prospectusfiling requirements of the Spanish stock market law (LMV), as the definition of financial instruments and negotiable securities is very wide (article 2 LMV), and the Spanish government can add new types of securities by its own fiat without an amendment of the law being necessary, provided this has been agreed under EU regulations. A communiqué of the CNMV dated 8th February 2018 has also confirmed this view and therefore been ratified by a notice, dated 6th July 2018. Under article 38 of Royal Decree 1310/2005, as amended from time to time, offerings addressed exclusively to professional investors or to fewer than 150 persons, or with a minimum investment of at least €100,000 per investor, or in the case of securities having a face value of at least €100,000, would not be subject to the prospectus-filing requirements (CNMV).

As discussed, the Spanish regulator (CNMV) is highly protective of small investors’ rights. This may have had an impact on the non-advertisement of ICOs in the Spanish market so far. On the other hand, the CNMV is also sensitive to the benefits of ICOs, to the extent that they bring technological innovation and may promote entrepreneurial business. The current position of CNMV and Bank of Spain is that specific regulation of cryptocurrency and ICOs is necessary, but such regulation can only be made at European Union level and after consultation with certain third countries such as the U.S., which play a major role in world financial markets (see statement to the press by Sebastian Albella, Chairman of the CNMV, El Economista, dated 9th June 2018).

Sales regulation

To the extent that cryptocurrencies are considered commodities, they will be traded under the general rules of the Civil Code and the Code of Commerce, and in particular, those applicable to the contract of barter (permute). Aside from Spanish law that would allow the parties freedom of choice of the governing law, applicable to the transaction (article 3 of Regulation Rome I, Regulation (EC) 593/2008 on the law applicable to contractual), small investors qualify for treatment as consumers and therefore even if a law other than Spain has been chosen, mandatory Spanish law on consumer or investment protection will apply to the trade in order to benefit the Spanish party (article 6.2 of Regulation Rome I), which expressly refers to the “protection afforded by legal provisions that cannot be derogated from by agreement” (…).

Depending on the type of tokens (security or utility), the Spanish rules on title transfer may be more easy or difficult to apply. Broadly speaking, Spanish law requires a contractual agreement plus the delivery of the object, so that title is passed from the seller to the purchaser. This would be non-controversial if the security token comprised only membership rights within the meaning of corporate law, but would be different and more complicated in the case of dematerialised claims such as payment claims via the internet.

Thus, much depends on how Spanish law would characterise cryptocurrencies. The Bank of Spain and the CNMV seem to consider them as “securities” based on the position adopted by the SEC (see the SEC Chairman’s communiqué dated 11th December 2017, which has been extensively quoted by Spanish regulators). This view is based on the fact of the purchase of a financial instrument, there being a profit expectation, and also the confidence in other people’s efforts to generate an economic revenue. However, in Spanish law, in certain cases, cryptocurrency has been simply categorised as an electronic product, which is intangible, and which is certainly similar to the information stored in computer hardware. The Spanish Mercantile Register has already followed this approach in late 2017 when it accepted that the corporate capital of a limited company could be contributed in bitcoins (although the capital was denominated in its euro counter value).

Aside from the foregoing, the judgment of the European Court of Justice (ECJ) of 22nd October 2015, which treated bitcoins as foreign exchange, could also have a future bearing in Spain, even though there is the serious objection that there is no state authority or central bank supporting bitcoins and they cannot be legal tender, which creates legal uncertainty. Finally, utility tokens which can be assimilated to vouchers entitling the selling entities to discounts, would not be treated as securities or commodities and would only be subject to consumer protection legislation.

Aside from the foregoing, token sales of bitcoins against euros could lead to a risk of criminal prosecution to the extent that the bitcoins’ seller purports to the buyer to be selling or exchanging “money”, hiding the risk of bitcoins’ depreciation, as under Spanish law the payment of debts must be done in the agreed currency or in euros as the currency of legal tender in Spain (article 248 CP in relation with section 1170 CC).

Taxation

Capital gains from the sale of cryptocurrencies by a person resident in Spain will be taxed according to a rate of 23%. If they have been acquired and sold within 12 months, the tax rate may vary from 24.75% to 52%. If the capital gains have been obtained by a company, there is a flat tax rate of 25%.

VAT treatment

The exchange of cryptocurrencies into euros or vice versa is VAT-exempt (ECJ, 22nd October 2015-C-264/14, Hedqvist). This judgment establishes that such exchange is a provision of a service and not the delivery of a good, and that bitcoins can be assimilated as to a type of foreign exchange, which has been voluntarily accepted by the parties to the relevant transaction, and therefore enjoys the VAT exemption provided under article 135,1 subsequently e) of Directive 2006/112/CE on VAT.

Money transmission laws and anti-money laundering requirements

Law 10/2010 dated 28th April, on the prevention of money-laundering, is widely drafted regarding the parties which are subject to it. Article 2 expressly mentions entities of electronic money, foreign exchange or money transfer companies, depositors or custodians or funds or payment means, all of which may trade or deal in one way or another in cryptocurrencies, and therefore become subject to money laundering supervision. On top of this, the new EU Directive (2015/849/EU) will also extend the requirements to entities providing services to safeguard private cryptographic keys to hold, stake or transfer virtual currencies. In addition to this, it is clear that purchase, conversion or transfer of cryptocurrencies that have originated in a crime will fall within the scope of the Spanish Criminal Code (Article 301 seq) which imposes very serious penalties on this activity.

Promotion and testing

There is new draft legislation currently before Parliament which will allow the introduction of new technologies to the Spanish market through a “controlled testing environment”. In this, Spanish law seems to be drawing its inspiration from the UK Financial Authority (FA) which grants licences for sandboxes, but it is still at a very incipient stage and the Ministry of Economy has drafted preliminary legislation that will be subject to open consultation.

Ownership and licensing requirements

To the extent that cryptocurrencies are considered to be technological products, there are no licence requirements. If they are used as financial instruments, they will be subject to stock market regulation with regard to the issue and the ICO of cryptocurrencies. There is no published guidance about investments in cryptocurrencies by funds except that alternative investment funds may invest in cryptocurrencies when dealing with the money of qualified investors.

Mining

Many bitcoin and other cryptocurrencies are not yet regulated, and this is permitted except as discussed in ‘Cryptocurrency regulation’, above.

Border restrictions and declaration

There are no frontier restrictions or obligations to report cryptocurrency holdings at the border which are only applicable to “cash” as defined by article 2 of regulation (EU) 1889/2005, which does not include electronic means of payment.

Reporting requirements

Under article 34.2 of law 34.2 of law 10/2010 of 28th April on the prevention of money laundering, electronic payments which can be used to make payments to an unidentified beneficiary (payments to the bearer) are treated as physical money (banknotes, cheques, etc.) and therefore subject to a limit of €2,500 per payment, or €15,000 per payment if the party making the payment is not resident in Spain. This limitation is not applicable if the payment is made through banks.

Estate planning and testamentary succession

Cryptocurrency for the purposes of wills and intestate succession will be treated as any other ordinary assets of the deceased person.