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Which are the most virtual currency friendly countries and how are virtual currency currently regulated within different EU member states?

Author: Triinu Noogen
January 2, 2022
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This article will give an overview of the regulation of virtual currencies within the EU. Although all EU member states are all obliged to implement the EU directives into their national legislation, the regulation of virtual currencies may vary substantially among member states. Estonia and Germany shall be the central examples, in this article, of the regulation of virtual currency on a national level.

Which are the most virtual currency-friendly countries and how are virtual currencies currently regulated within different EU member states? Estonia and Germany bring great examples how virtual currency can be regulated on a national level. Virtual currency is regulated in the Anti Money Laundering Act – has been since 2017, making Estonia the first country to implement the AMLD5 to its national legislation. In Estonia one license covers all instances, while in Germany, virtual currency custody requires a separate license. Estonia and Germany are amongst the countries that have already taken significant steps to regulate virtual currency, meaning that they are prepared for a smoother implementation process of stricter EU legislation, which may be already seen in the next few years.

The world of virtual currencies has developed, and is still developing at a rapid pace – since 2009, when Bitcoin entered the market, over 7800 virtual currencies have been created. In comparison to 180 official currencies, there are over 20 times more virtual currencies. While it is a fast-growing area with tons of potential, regulatory authorities have been placed in a difficult position when trying to regulate the matter, and more importantly, regulate it sufficiently. In this article a brief overview is given of the current situation and future proposals of regulating virtual currencies in the EU as well as answers some general questions that may arise about virtual currencies.

What are virtual currencies? Can they be considered money?

This needs to be answered because definitions create a basis for any regulation – they are simply necessary to know what is regulated. Concerning virtual currencies, even these seemingly basic questions cannot yet be answered with total certainty. Virtual currency belongs to a class of virtual -assets, which has a wide range of use and for different groups they may represent a different function, such as an investment, commodity, property etc. Although initially created as means of payment, currently virtual currency is not really recognized as a “currency” or money, because it is missing some of its essential characteristics, such as allowing value by constituting a unit of measure; which is the reason why the European Commission has suggested to rather use the words virtual -tokens or virtual -assets. Because of all the gaps in understanding how to exactly classify virtual currencies, it has created a big question regarding which regulations should apply to them, which legal threats come within the use of this new asset and how to effectively regulate it.

Why virtual currencies?

To simply illustrate the potential of virtual currencies, on 22 May 2010 the first purchase using Bitcoin was made – 10 000 BTC was offered by a programmer, wishing to see if bitcoin had any value, to a person who will buy him 2 pizzas at the value of 25 €; now, just a decade later, these two pizzas are worth about 80 000 000 €. Today the person volunteering to buy the two pizzas could buy themselves 3 200 000 pizzas or assuming that an average pizza is 2 cm thick, they could buy a worth of 77 times the height of the world’s tallest building, Burj Khalifa (828m). Thanks to this small experiment, Bitcoin showed the world the tremendous potential of a virtual currency. 

How are virtual currencies currently regulated at the EU level?

The biggest problems regulators have to tackle are regarding illegitimate activities, such as tax evasion, money laundering and terrorist financing – all of which have been prevalent issues since virtual currencies became widely used, the extent of misuse was already over € 7 billion in market value up until 2018. Although anonymity or pseudo-anonymity, cross-border nature and encryption are important characteristics of virtual currencies that make them a preferred option, these same characteristic often also attract cybercriminals. Because of that, since 2018 virtual currencies are included to the EU Fifth Anti Money Laundering Directive aka AMLD5which implementation date to national legislations was January 2020. AMLD5 defines virtual currencies as a subcategory of virtual-currencies and has provided the first regulations applicable directly on virtual currencies - the directive mainly obliges Member States to closely monitor and cooperate in fighting financial crime. It now obliges Member States to ensure that the providers of exchange services between virtual currencies and fiat currencies are registered with the competent authorities, which is a huge step in creating a trustworthy environment and an appealing option to customers. Exchange service providers are also now considered as “obliged entities”, which means that they must comply with the same requirements as traditional financial institutions: AML/CFT, KYC and data-sharing requirements.

How do national legislations regulate virtual currency?

One of the differences in regulating virtual currency in national legislations largely depends on the legal status of virtual currencies – at the moment there is no mutual definition and countries define virtual currency individually, for example, in Germany virtual currencies are defined as financial instruments; in Estonia however they are defined as value represented in the digital form.How they are defined can make a big difference in how virtual currencies are taxed and how/what licenses need to be obtained. Not having even a definition of virtual currency in the legislation creates a difficult market for virtual currency firms to enter; governments of such countries often issue a warning of the risks in trading virtual currency in an area where it is unregulated, often adding that citizens who do choose to invest in virtual currencies do it at their own risk and in the event of loss there are no legal recourses available. Estonia and Germany bring great examples how virtual currency can be regulated on a national level. To operate as a virtual currency firm in Germany, a license needs to be obtained according to The Banking Act Section 32; one important thing to remember is that while the AMLD5 requires having a license for fiat-to-virtual currency exchanges, in Germany also virtual currency-to-virtual currency traders need to have a license to exchange virtual currency -to-virtual currency as well as virtual custody. Virtual currency is regulated in the Anti Money Laundering Act – has been since 2017, making Estonia the first country to implement the AMLD5 to its national legislation. According to the Anti Money Laundering Act, companies need to obtain a license – a license is needed for trading fiat-to-virtual currency, virtual currency -to-virtual currency and virtual currency storage. In Estonia one license covers all instances, while in Germany, virtual currency custody requires separate license. Estonia and Germany are amongst the countries that have already taken significant steps to regulate virtual currency, meaning that they are prepared for a smoother implementation process of stricter EU legislations, which may be already seen in the next few years.

Which are the most virtual currency-friendly countries within the EU?

Though ownership of virtual currencies is legal within the EU, the legal framework for harmonized virtual currency regulation is still largely under construction – there is little guidance provided at the EU level. Nevertheless, individual states have decided to take action to accommodate virtual currencies in their legislation and because of that, several countries have been recognized as virtual currency friendly and attract many companies concentrating on virtual currencies to start or move their business there. Two of the leading countries, France and Malta have started an initiative called Mediterranean seven to promote the development of virtual currencies – it will include in addition to the leaders, Italy, Spain, Portugal, Greece and Cyprus. Besides those countries, Estonia, as said, has as well became an attractive destination for companies, as in addition to the accommodating legislature, Estonia offers a great opportunity of e-residency which allows people wishing to set up a business there to become a resident without ever having to actually come to Estonia. Another countries that have been added to the, virtual currency hub list are Gibraltar, Germany and Switzerland which is situated in the Eurozone and is home to many well-known virtual currency firms, like Ethereum Foundation. All the named  countries have at least one really important thing in common – their tax laws are very virtual currency friendly, in some instances being as low as 0%.

How does virtual currency regulation impact the success of virtual currency firms?

There is a great reason why countries would want to attract virtual currency firms, it has a spillover positive effect on their economies, therefore it suggests that many countries will be developing a legal framework that promotes such activities. In the future there will definitely be stricter regulations – which should not be seen as a negative thing at all, quite the contrary. Right now a fragmentation of the area is regulated, but many successful exchange firms, like Coinbase have already prepared for the likely upcoming changes. To ensure resilient business, the most important thing right now is to think forward. A clear and transparent regulatory framework can create a unique opportunity for companies to enter into a safe and transparent trading environment which will have great long-term benefits.

What does the future of virtual currencies within the EU look like?

As emphasized in the beginning, the aim is to develop sufficient law, which is also rational, and this kind of law needs strong basis, which means conducting exhaustive studies of the threats and characteristics that come with virtual currencies – it is tied with several sensitive matters such as monetary policies, consumer protection and data protection, all of which are held to a high standard in the EU. There have been identified many new places of concerns which are unique to its nature; for example simply having an additional currency next to fiat creates a difficulty to buyers and sellers to constantly monitor the exact values of the two in relation to each other. At the moment the EU executive branch has ambitious plans to create a comprehensive framework by 2024 called the Regulation on Markets in Virtual Assets aka MiCA, which adoption will hopefully make EU the most significant and largest regulated space for virtual currencies. A problem arises in that assessing all the necessary factors may take up significant time, but regulating virtual currencies in an urgent matter, so a comprehensive legal framework on virtual currencies at the EU level to harmonize yet another market may take more time as expected as the world of virtual currencies moves at a fast pace - but all the research that needs to be done first will possibly lead to a highly functioning harmonized system on virtual currencies. 

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