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In the EU, cryptocurrencies are legal, but member states that support the euro may have restrictions on the introduction of their own cryptocurrencies. In 2015, the European Court of Justice (ECJ) ruled that the purchase and sale of virtual currencies will be considered a ‘supply of services’, meaning that cryptocurrencies are exempt from all value added taxes (VAT) in EU member states.
Access to cryptocurrencies by EU member states is quite progressive, but cryptocurrency businesses and financial institutions must understand that regulations will not be standardized across all member states. Currently, virtual currencies are not considered legal tender in member states, but more regulations are being introduced, showing a legislative warming for cryptocurrencies.
So what can cryptocurrency companies and financial institutions expect from the EU’s stance on cryptocurrencies?
- EU attitude towards cryptocurrency
- Crypto exchanges in the EU
- The future of cryptocurrency regulation in the EU
EU attitude towards cryptocurrency
As noted, cryptocurrencies are mostly legal in the EU. Taxation varies from member state to member state, but most EU states charge capital gains tax on cryptocurrency gains at rates ranging from zero to 50%.
As you can imagine, because the EU is made up of individual countries, attitudes and approaches to cryptocurrency can vary. Take Bitcoin, for example. EU countries have developed uniform legislation for currency management:
- In Finland, Bitcoin is exempt from VAT because it is classified as a financial service and is treated as a commodity.
- Bitcoin is neither controlled nor regulated in Cyprus.
- In Bulgaria, Bitcoin is subject to the country’s existing tax laws.
- In Germany, Bitcoin is legal and taxed differently based on the participation of either exchanges, users, miners or businesses.
In general, cryptocurrencies are classified as ‘Qualified Financial Instruments’ (QFI). Entities such as banks, credit and investment firms are able to hold, trade and offer services in cryptoassets and currencies.
Those firms dealing with or offering crypto-related services will use their QFI license to provide those services, but must comply with a wide range of EU laws currently in force, which include:
- BPPN/Combating Terrorist Financing (CTF) Act.
- Capital Requirements Directive (CRD)/ Capital Requirements Regulation (CRR)
- Electronic Money Directive
- Markets in Financial Instruments (MiFID II)
- Payment Services Directive (PSD2)
Organizations and individuals preparing to start using and trading cryptocurrencies should identify what regulations they will face in the EU member state in which they operate.
So what about crypto exchanges?
Crypto exchanges in the EU
The EU takes anti-money laundering (AML) compliance very seriously. In January 2020 Fifth Anti-Money Laundering Directive (5AMLD) came into force, which aimed to bring cryptocurrency exchanges directly under the scope of EU anti-money laundering legislation.
Essentially, 5AMLD requires exchanges to implement know-your-customer (KYC) and know-your-customer protocols for all exchange users. In December of the same year, 6AMLD was introduced.
This directive added cybercrime to the list of money laundering offenses that could be committed and extended liability for money laundering offenses to legal entities. This is something that cryptocurrencies and exchanges should remain aware of, requiring them to manage their AML records more effectively.
Those crypto exchanges that deal with QFI are regulated at regional levels and in certain EU countries there are specific registration requirements implemented by the relevant regulatory bodies in the country, such as:
- German Financial Supervisory Authority (BaFin)
- Italian Ministry of Finance
- France Autorité des Marchés Financiers (AMF)
An interesting benefit of registering under one of these EU-based authorities is that licenses can be granted that act as a passport, allowing an exchange to operate across the bloc under that single authority.
The future of cryptocurrency regulation in the EU
Over time, regulations will continue to change, either due to regulatory decisions in member states or updates to compliance requirements with bodies such as the European Commission, the European Central Bank, the European Banking Authority (EBA) and the European Securities and Markets Authority.
Part of this is reflected in the active research of EU regulations on cryptocurrencies. Obviously, there will always be concerns about virtual currencies, along with hopes for increased legitimacy and visibility around crypto transactions.
In addition, regulation will potentially become more centralized, with the recent announcement by the EBA calling on the European Commission to adopt ‘a single rulebook‘ which EU member states use in the fight against money laundering and terrorist financing. For example, the article states that the EBA recommends this single rulebook to:
Harmonize the EU legal framework in a directly applicable Regulation where evidence suggests that a difference in national rules and practices has had a significant, negative impact on preventing the use of the EU financial system for AML/CFT purposes. This is the case with client due diligence and the wider AML/CFT systems and controls requirements, as well as those rules governing key supervisory processes such as AML/CFT risk assessment, cooperation and enforcement.
The European Commission is currently determining how cryptoassets fit into the regulatory framework currently being adopted by the EU, after announcing a public consultation, which shows a more open relationship between regulators and cryptocurrency. This started in early 2020 and was followed by the proposal for the Markets in Crypto Assets Regulation (MiCA), which sets out new measures that include the introduction of a new licensing system for crypto users and new consumer protections.
In a Stanford Law School articleMiCA “has the potential and open ambition to set global standards for the supervision and regulation of blockchain-based digital assets. By applying clear rules and long-term legal certainty, the EU could attract crypto talent, companies and investments from around the world.”
However, the criticisms are well-deserved and reflect many other concerns about cryptocurrency regulation – that regulation could go beyond what is necessary and place insurmountable restrictions on cryptocurrency businesses, users and financial institutions. However, if these criticisms are addressed, MiCA could become a turning point in the history of cryptocurrency adoption.
Through its broad regulatory framework and high level of interest in blockchain and cryptocurrencies, the EU is an area that sets the tone for cryptocurrency regulation that many around the world are seeking insight into. However, this is still only one area. Around the world, regulations are changing – but what do they look like? You can explore this information in more detail in our guide.
Regulation of cryptocurrencies around the world
EU. USA. Japan. China. UK. Russia. These are some of the key players in the changing regulatory approach to cryptocurrencies, with some being very progressive and others very restrictive.
In our guide, we explore the regulatory environments of each of these locations, revealing global attitudes towards cryptocurrency and what the future holds for regulation. To get your copy of this guide, click the button below.
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Compliance with EMEA regulations
