“States and traditional banks will have to adapt to these new means of payment and find ways to regulate and bring into the legal sphere an inevitable reality”
Virtual currencies, commonly known as cryptocurrencies, are here to stay and are arguably one of the most talked about topics in the business world alongside artificial intelligence. This new type of currency is growing at a gallop, with hundreds of cryptocurrencies already recognised, in addition to the more common bitcoin, litecoin and ethereum.
Bitcoin is a decentralised virtual currency whose main difference from traditional money is that it is not issued or controlled by a central bank. By using blockchain technology, bitcoin is not controlled by a central database, which means that ownership of monetary units is more secure. In fact, with today’s technology, blockchain technology guarantees the reliability of information like no other data storage system, and this will be its truly revolutionary aspect.
The growing demand for this type of currency and the fact that bitcoin production is limited explain its extraordinary rise in price. From there, it was only a short step to its use for purely speculative purposes.
It’s true that these currencies do not have a specific gold equivalent, but this is not an exclusive feature of virtual currencies, as is the case with traditional currencies. Nor will their virtual nature be their main defining characteristic, since conventional currency is also, more often than not, a mere cipher. And this will become more and more the case as transactions in physical money become increasingly rare in the future.
The use of cryptocurrencies has several advantages: i) the speed of transactions, which can be carried out in a matter of minutes, especially for international transfers, which usually take a few working days; ii) the security of information on transactions and ownership of monetary units; and iii) the (still) low transaction costs.
On the other hand, another advantage of using cryptocurrencies is the privacy that users of this virtual currency enjoy, since only the pseudonym of the holder is recorded. This pseudonymisation guarantees the privacy of the holders, who don’t even have to register with their real personal details. However, this is the aspect that will give rise to the most reservations on the part of the States regarding the use of this means of payment. In fact, states have to guarantee their national security and, more importantly, they want to guarantee their revenues through the collection of taxes, which is why they are reluctant to allow these currencies to spread, at least until they are properly regulated. It should be noted that the holders of virtual currency units are guaranteed their ownership as long as they are the only ones who know the private key that defines their ownership.
Another of the great advantages of this virtual currency is that it is a global currency that is the same in all countries of the world and can be used without distinction, without being subject to the bureaucracy of different economic systems and the loss of value associated with currency conversion.
Although this is an attractive novelty from an economic and financial point of view, because of the advantages mentioned above, there are some reservations about this new virtual currency payment model that have been discussed.
Like any other currency, virtual money depends on trust. On the other hand, its price depends on the law of supply and demand. In this period of enthusiasm, the value of the cryptocurrency has been quite volatile, which ultimately translates into increased risk for investors. In addition, the lack of regulation and safeguards against potential losses or fraud may raise doubts among the more sceptical.
There is therefore an urgent need to regulate these new means of payment as soon as possible, even if it seems difficult to do so, since they have not yet reached the necessary level of maturity and there is not even the necessary consensus within the international community.
In this regard, European bodies, in particular the European Banking Authority (EBA) and the Court of Justice of the European Union, are paying close attention to this new means of payment and have issued several communiqués in recent years with the aim of protecting the interests of their users and proposing a legal framework for the concept of cryptocurrency.
For example, the ECJ ruling 264/14 on the VAT exemption of transactions involving the exchange of traditional currencies for bitcoin or vice versa states that bitcoin is a “contractual means of payment and cannot be regarded as a current account, a deposit of funds, a payment or a transfer” with “no purpose other than to serve as a means of payment”.
At the national level, in January this year, the Portuguese Tax Authority issued a Binding Information – Case 5717/15 – on the taxation of cryptocurrencies, in response to a request from a taxpayer asking about the tax framework for income derived from transactions made with bitcoin. In this specific case, the tax authority ruled that the income generated by bitcoin is not taxed, either in the context of property additions (category G) or capital income (category E), concluding that “the sale of cryptocurrency is not taxable under the Portuguese tax system”, with the exception of cases in which “due to its habitual nature, it constitutes a professional or business activity of the taxpayer”, in which case it would be taxed in category B”.
In this way, profits from the sale of bitcoin are not subject to any form of taxation, unless the production and sale of bitcoin is the taxpayer’s professional activity.
Despite the lack of specific rules, some steps are already being taken within EU law to standardise the concept of virtual currency. In this context, we can mention the Proposal for a Directive of the European Parliament and of the Council – amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing and amending Directive 2009/101/EC – which adds point 18 to Article 3 of the Directive, defining virtual currency. It adds point 18 to Article 3 of the Directive, defining virtual currency as “a digital representation of value, not issued by a central bank or public authority and not necessarily linked to fiat money, which is accepted as a means of payment by natural or legal persons and which can be electronically transferred, stored or traded”.
In the context of so much volatility and uncertainty, one conclusion seems certain: states and traditional banks will have to adapt to these new means of payment and find ways to regulate and bring into the field of law a reality that is unavoidable. To do this, they will have to understand what has been seducing economic agents in order to be able to compete with this phenomenon, in the case of banks, and combat its illicit or fraudulent use, in the case of states.