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Crypto in the EU: The Past, Present, & Future of Digital Currency in Europe
In 2018, the European Union’s gross domestic product exceeded $18 trillion. All told, the EU contributes 22% of all economic activity in the globe. That economic influence places the EU alongside the United States as world economic leaders. Along with that economic leadership comes geopolitical influence for the EU government and global respect for the EU’s largest corporations. So, it’s no wonder that cryptocurrency advocates and investors are watching the EU so closely. Any decision the EU makes about digital currencies will heavily impact the global market and enterprise adoption of blockchain technology.
Unfortunately for investors and blockchain startups, it doesn’t look like the European Union will be offering any clear overarching guidance or legitimacy for cryptocurrencies any time soon. The EU has been strongly divided on the role Europe should play in the blockchain and digital currency ecosystems. To further complicate matters, the individual member states of the EU have their own attitudes and policies toward cryptocurrencies that range from blockchain havens like Malta to more strictly regulated banking environments like Germany where all accounts need to be registered.
For the vast majority of member states in the EU, ICOs and token trading are evaluated on a case by case basis. Questions of utility versus security tokens are still in play, as are issues of how to best regulate cryptocurrency exchanges and other service providers. In this article, we’ll look at the EU’s stance toward cryptocurrency to date, review the policies of a few major member states in the EU, and assess the future outlook for cryptocurrencies in Europe.
The Europe Central Bank has long recognized and written about cryptocurrencies. In 2012, the ECB became one of the first major regulatory bodies to write about cryptocurrency as a growing trend. Over the years, the ECB has tracked crypto’s growth, releasing new reports every few years. So far, however, the ECB and EU have issued very few general rules about cryptocurrencies.
Regulators have declared cryptocurrencies and the ownership thereof as a legal activity, but they do not recognize digital currencies as “money” for traditional means of commerce and exchange. Cryptocurrencies themselves are not banned or discouraged in the EU. That said, according to Mario Draghi, head of the European Central Bank, the ECB has no intention of issuing a blockchain-based currency alongside or as a replacement for the euro.
In addition, European member states may not introduce their own cryptocurrencies on a national level, either. This ruling has been an issue in countries interested in digital currency like Estonia. The ECB’s firm stance on non-competition with the euro has led Estonia to abandon its national cryptocurrency plans. In the face of such regulations and with the ECB refusing to investigate digital currency for the euro, it’s unlikely that Europeans will use cryptocurrency to pay for goods and services on a regional level any time soon.
Outside of national currencies competing with the euro, the ECB and EU have not set many firm rules for cryptocurrencies. Exchanges and other crypto service providers, for instance, aren’t regulated at a regional level. Instead, the EU and ECB leave exchange regulation up to the discretion of member states. When an exchange receives authorization from a national government, however, that authorization works as a passport for operation across the entire Eurozone. As such, an exchange authorized to operate in Malta can also offer services to French, German, Italian, and Irish citizens.
In April 2018, the EU agreed on the text for the Fifth Money Laundering Directive (5MLD). That directive will now include all cryptocurrency exchanges that offer fiat conversion. As regulated institutions under Europe’s money laundering legislation, crypto exchanges will be required to perform know your customer (KYC) and customer due diligence (CDD) on all exchange users.
In a report to EU finance ministers in August 2018, the Brussels-based think tank Bruegel argued for EU-wide regulation of crypto exchanges and clearer rules on initial coin offerings in the EU. The report outlined ways in which regional regulations would mitigate risks while also allowing Europe to become a global leader in blockchain regulation and adoption. Other reports have indicated that regulations consistent across the entire EU would foster the blockchain ecosystem in Europe under a standardized system.
2. Member States Respond to Crypto
In the absence of region-wide regulations, individual member states in the EU have responded with their own regulations and initiatives. This mixture of regulations has made it difficult for many blockchain startups in the European Union to establish themselves. With changing and often conflicting regulations across the EU, many blockchain startups that began in Europe have since relocated their headquarters to more favorable countries in Southeast Asia.
Recognizing the challenges of navigating various regulations, seven EU countries, led by Malta and France, have begun an initiative called the “Mediterranean Seven”. The goal of this initiative is to promote the use and development of blockchain technology. France, Italy, Spain, Portugal, Malta, Greece, and Cyprus will all cooperate on education, mobility, land registry, business registry, and healthcare for blockchain companies.
While the Mediterranean Seven initiative may simplify things, currently the system of cryptocurrency regulation and adoption in the European Union is divided and different in each country. Let’s take a look at a few major states’ stances toward crypto.
So far, only two ordinances on blockchain technology have passed the French legislature. The first established a narrow definition of cryptocurrencies in French law as a type of coupon. The second ordinance widens those potential uses toward financial instruments, but cryptocurrencies still remain largely unregulated in France. The French government has shown signs, especially with the announcement of the Mediterranean Seven, toward increased legislation and regulation in the coming years.
France’s official position on bitcoin and other cryptos is that they are not financial instruments under French law. As such, these currencies are not legal tender, but ownership of such currencies isn’t illegal.
The German Federal Financial Supervisory Authority (BaFin), on the other hand, does qualify virtual currencies as financial instruments when they represent units of account for their holders. As such, BaFin has undertaken the regulation of cryptocurrency exchanges and brokerages in Germany. If you want to open a cryptocurrency service that trades or manages these instruments, you’ll need authorization from BaFin.
BaFin makes rulings on ICOs ona case-by-case basis, and it does not have a single guideline for what makes a token a security versus a financial instrument. The German Federal Ministry of Finance has also determined cryptocurrency transactions to be exempt from value-added taxes (VAT).
Ireland has ruled similarly to Germany, finding that cryptocurrencies can either be financial instruments or tradable securities, and that determination is made on a case-by-case basis. Capital gains taxes apply to transactions where cryptocurrency is sold for a profit. Still, Ireland has largely been content to wait, see what happens with cryptocurrencies, and cooperate with other governments in the region in crafting new legislation or regulations. Irish finance organizations have supported initiatives to create Europe-wide cryptocurrency regulations.
Italy concurs that cryptocurrency exchanges are exempt from VAT, and it has legislation dating back to 2016 that categorize cryptocurrency profits as “corporate income” subject to the applicable tax laws. When a cryptocurrency exchange or brokerage wants to operate in Italy, they’ll have to undergo registration in much the same way they would in other European nations. Italian law treats cryptocurrency exchange providers the same as other money exchange operators.
The Maltese government has been vocally pro-cryptocurrency, and they see blockchain as an opportunity to bring investment and innovation to Malta. While official legislation is not yet on the books, it soon will be, and it’s expected to be the most crypto-friendly set of regulations in Europe. The goal of such legislation would be to create a clear framework for blockchain startups in Malta, and in turn these companies would have access to the rest of the European market through their Maltese headquarters.
3. The Future of Cryptocurrency in Europe
While the European Union is the second largest economy in the world, it is behind Asian countries like Japan and South Korea in terms of investment in cryptocurrency. The future of crypto in the EU depends on shared regulations and clear frameworks for blockchain businesses moving forward. If the European Union wants to be a leader in blockchain technology, prioritizing blockchain legislation and cooperation between member states should be a top priority.