The European Union is a supranational entity consisting of 28 sovereign countries that delegate a portion of their authority and sovereignty to an amalgamate state-like entity (the Union) in order to improve and work together towards a common goal.
Virtual currency regulation in the European Union is still in its early stages, and even though the FinTech Task Force is working on the harmonization of the existing national laws regulating virtual currencies, most individual member states have undertaken separate legislative strategies in accordance with their specific legal traditions and practices.
The legal definition of virtual currencies in the EU
Even though it’s been ten years since the advent of Bitcoin, questions about the economic nature and the legal definition of virtual currencies are still a source of great contention within academic circles around the world.
Back in October 2012, the European Central Bank was among the first reputable institutions in the world to weigh in and present its own response to the questions. In the report titled “Virtual Currency Schemes,” the ECB defines bitcoin as a convertible, bidirectional and decentralized virtual currency, or a “type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”
In 2015, the ECB produced another, updated and revised Virtual Currency Schemes report, in which the Central Bank argues that virtual currencies do not fully meet the three golden criteria of “money” as defined in the economic literature: medium of exchange, store of value, and unit of account. Accordingly, the ECB proposed a new definition: “virtual currency is a digital representation of value, not issued by a central bank, credit institution or e-money institution, which, in some circumstances, can be used as an alternative to money” – purposefully omitting words such as “digital money” or “unregulated.”
AML & CFT regulations
On July 5, 2016, the European Commission (a politically independent body representing EU’s executive branch) proposed an amendment to the 4th AML Directive in which it affirmed that “gaps still exist in the oversight of the many financial means used by terrorists, from cash and trade in cultural artifacts to virtual currencies and anonymous pre-paid cards.”
According to the Commission, the biggest problem regarding virtual currencies is the fact that most virtual currency transactions cannot be linked to identified persons.
Following the proposal, on December 15, 2017, the European Council and the European Parliament finally agreed to the new set of rules, and the 5th AML Directive was born. The intention of this new-and-upgraded Directive was to bring virtual currency exchanges and custodian wallet providers under the umbrella of the existing European AML legislation.
This means that – as soon as the Directive is incorporated into the national legislation of EU member states – virtual currency exchanges and custodians will have to register with the relevant AML authority in their jurisdiction, identify users, monitor transactions, report suspicious activity, and give national investigators greater access to information.
Furthermore, the 5th AML Directive contains the first legally binding definition of virtual currencies and is, simultaneously, the most significant regulatory action towards the regulation of virtual currencies on the supranational level in the EU.
Tax treatment of virtual currencies
Following the request for a preliminary ruling made by the Swedish Supreme Administrative Court in 2015, regarding the proceedings between Mr. Hedqvist and the Swedish Tax authority, the European Court of Justice (ECJ) passed the following judgment: for tax purposes, bitcoin (read: virtual currencies) should be treated as a currency rather than as a commodity; consequently, bitcoin transactions are exempt from VAT according to the current EU laws and regulations.
Even though most, if not all, countries in the EU have Romano-Germanic legal systems i.e. civil law, the binding force of the case law of the ECJ has been recognized without objection by the totality of EU member states and their courts. Put simply, this means that virtual currencies will be exempt from VAT across all jurisdictions of EU member states.
Cryptocurrency in the EU: Conclusion
All in all, the EU has been working hard to create an optimal normative environment that stimulates the growth and advancement of the blockchain industry and, aside from the GDPR, has done an exceptionally great job thus far.
The EU authorities are surprisingly cognizant of DLT’s impact on the FinTech sector, and they’re actively subsidizing European blockchain startups in order to position the EU as a true world leader in the crypto scene.
The author is not currently invested in any digital asset.