What is the current approach in your jurisdiction to the treatment of cryptocurrencies for the purposes of financial regulation, anti-money laundering and taxation? In particular, are cryptocurrencies characterised as a currency?


Australia Small Flag Australia

The Government shares a broad commitment to facilitating productivity and economic growth and innovation within the technology and financial services sector and improving the efficiency and inclusiveness of the financial system over the long term. Though the Government has remained relatively non-interventionist in the cryptocurrency sector, in recent times market regulators have become more engaged with industry developments and have focused on consumer education and issued warnings on the risks of trading and investing in cryptocurrencies. This has happened simultaneously to the sharp rise in the creation and use of cryptocurrencies in Australia in the past few years, with companies such as Synthetix (formerly Havven) and Enosi raising millions through the creation of digital tokens in Australia-based ICOs.

In Australia, cryptocurrencies (also known as virtual assets or digital currencies) refer to digital tokens created from code using blockchain that do not exist physically in the form of notes or coins. The current position in Australian law is that cryptocurrency is to be treated as an asset and not as fiat currency or money. Amendments to existing legislation over the last few years to accommodate increasing use of cryptocurrencies have generally been focused on transactional relationships (ie, issuing and exchanging) rather than on cryptocurrencies themselves. As a result, while cryptocurrencies themselves are not restricted under Australian law, dealings in relation to, or services involving, cryptocurrencies are likely to be captured within existing regulatory regimes.

Financial regulation
A person who carries on a financial services business in Australia must hold an Australian financial services licence (AFSL) or be exempt from the requirement to be licensed. Persons or entities dealing with, or providing services involving, cryptocurrencies should consider whether the cryptocurrency constitutes a financial product, which may trigger the licensing requirement as well as other obligations in relation to disclosure, registration and conduct. The definitions of ‘financial product’ and ‘financial service’ under the Corporations Act 2001 (Cth) (Corporations Act) are broad, and cover facilities through which a person makes a financial investment, manages a financial risk or makes a non-cash payment. ASIC continues to reiterate its view that cryptocurrencies with similar features to existing financial products will trigger the Australian financial services laws.

ASIC recently updated its regulatory guidance on cryptocurrencies, INFO 225 Initial coin offerings and crypto-assets (INFO 225) to inform a greater range of crypto-asset participants, including issuers, crypto-asset intermediaries, miners and transaction processors, crypto-asset exchange and trading platforms, crypto-asset payment and merchant services providers, wallet providers and custody service providers, and consumers. INFO 225 sets out ASIC’s approach to determining the legal status of cryptocurrencies, which is dependent on the rights attached to the cryptocurrencies – ASIC has indicated this should be interpreted broadly – as well as their structure. Depending on the circumstances, coins or tokens may constitute interests in managed investment schemes (ie, collective investment vehicles), securities, derivatives, or fall into a category of more generally defined financial products, all of which are subject to the Australian financial services regulatory regime.

An entity that facilitates payments using cryptocurrencies may also be required to hold an AFSL and the operator of a cryptocurrency exchange may be required to hold an Australian market licence if the coins or tokens traded on the exchange constitute financial products.

ASIC’s recognition that an ICO may involve an offer of financial products has clear implications for the marketing of an ICO. For example, an offer of a financial product to a retail client (with some exceptions) must be accompanied by a regulated disclosure document (eg, a product disclosure statement or a prospectus and a financial services guide) that satisfies the content requirements of the Corporations Act and regulatory guidance published by ASIC. Such a disclosure document must set out prescribed information, including the provider’s fee structure, to assist a client to decide whether to acquire the cryptocurrency from the provider.  In some instances, the marketing activity itself may cause the ICO to be an offer of a regulated financial product.

Under the Corporations Act, depending on the minimum amount of funds invested per investor and whether the investor is a ‘sophisticated investor’ or wholesale client, an offer of financial products may not require regulated disclosure.

Cross-border issues
Carrying on a financial services business in Australia will require a foreign financial services provider (FFSP) to hold an AFSL, unless relief is granted.  Entities, including FFSPs, should note that the Corporations Act may apply to an ICO regardless of whether it was created and offered from Australia or overseas.  Currently, Australia has cooperation (passporting) arrangements with regulators in foreign jurisdictions (including the United States of America and the United Kingdom), which enable FFSPs regulated in those jurisdictions to provide financial services in Australia without holding an AFSL. The passporting relief is currently only available in relation to the provision of services to wholesale clients (i.e. accredited investors), and the FFSP must only provide the services it is authorised to provide in its home jurisdiction.  However, ASIC has announced that it will be repealing passport relief for FFSPs, and instead will introduce a new regime which will require FFSPs to apply for a new foreign AFSL. It is expected that the new regime will apply from 31 March 2020. FFSPs relying on passport relief will have 24 months (until 31 March 2022) to transition to a foreign AFSL or satisfy licensing requirements in some other way.

Foreign companies taken to be carrying on a business in Australia, including by issuing cryptocurrency or operating a platform developed using ICO proceeds, may be required to either establish a local presence (ie, register with ASIC and create a branch) or incorporate a subsidiary.  Broadly, the greater the level of system, repetition or continuity associated with an entity’s business activities in Australia, the greater the likelihood that registration will be required.  Generally, a company holding an Australian financial services licence will be carrying on a business in Australia and will trigger the requirement.

Promoters should also be aware that if they wish to market their cryptocurrency to Australian residents, and the coins or tokens are considered a financial product under the Corporations Act, they will not be permitted to market the products unless the requisite licensing and disclosure requirements are met.  Generally, a service provider from outside Australia may respond to requests for information and issue products to an Australian resident if the resident makes the first (unsolicited) approach and there has been no conduct on the part of the issuer designed to induce the investor to make contact, or activities that could be misconstrued as the provider inducing the investor to make contact.

Consumer law
Even if an ICO is not regulated under the Corporations Act, it may still be subject to other regulation and laws, including the Australian Consumer Law set out at Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL) relating to the offer of services or products to Australian consumers. The ACL prohibits misleading or deceptive conduct in a range of circumstances including in the context of marketing and advertising.  As such, care must be taken in ICO promotional material to ensure that buyers are not misled or deceived and that the promotional material does not contain false information.  In addition, promoters and sellers are prohibited from engaging in unconscionable conduct and must ensure the coins or tokens issued are fit for their intended purpose.

The protections of the ACL are generally reflected in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), providing substantially similar protection to investors in financial products or services.

ASIC has also received delegated powers from the Australian Competition and Consumer Commission to enable it to take action against misleading or deceptive conduct in marketing or issuing in ICOs (regardless of whether it involves a financial product).  ASIC has indicated misleading or deceptive conduct in relation to ICOs may include:

  • using social media to create the appearance of greater levels of public interest;
  • creating the appearance of greater levels of buying and selling activity for an ICO or a crypto-asset by engaging in (or arranging for others to engage in) certain trading strategies;
  • failing to disclose appropriate information about the ICO; or
  • suggesting that the ICO is a regulated product or endorsed by a regulator when it is not.

ASIC has stated that it will use this power to issue further inquiries into ICO issuers and their advisers to identify potentially unlicensed and misleading conduct.

A range of consequences may apply for failing to comply with the ACL or the ASIC Act, including monetary penalties, injunctions, compensatory damages and costs orders.
Anti-money laundering

Cryptocurrencies and tokens were brought within the scope of Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regulatory framework as a result of legislative amendments in the Anti-Money Laundering and Counter-Terrorism Amendment Act 2017 which came into force in April 2018. The legislation was introduced to recognise the movement towards digital currencies becoming a popular method of payments and the transfer of value in the Australian economy while posing significant money laundering and terrorism financing risks.

Broadly, digital currency exchange (DCE) providers are now required to register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) in order to operate, with a penalty of up to two years’ imprisonment or a fine of up to A$105,000, or both, for failing to register.  Registered exchanges will be required to implement know-your-customer processes to adequately verify the identity of their customers, with ongoing obligations to monitor and report suspicious and large transactions.  Exchange operators are also required to keep certain records relating to customer identification and transactions for up to seven years.
Bringing DCE providers within the ambit of the AML/CTF framework is intended to help legitimise the use of cryptocurrency while protecting the integrity of the financial system in which it operates.

Recently, the Treasury has released for consultation the exposure draft legislation and accompanying explanatory material to implement an economy-wide cash payment limit of A$10,000 for payment made or accepted by businesses for goods or services (with limited exceptions). As part of the consultation, it has been proposed that reporting entities will generally no longer be required to report transactions above A$10,000 to AUSTRAC except where the transaction is exempt from the cash payment limit legislation. The consultation proposes implementation of this regime from 1 January 2020 and, for reporting entities, 1 January 2021. Breaching the payment limit will result in up to two years’ imprisonment and/or a fine of A$25,200.

Notably, payments made in digital currency have been exempted from the cash payment limit regime including payments made only in part in digital currency, so long as the remainder of the payment is below A$10,000. The explanatory material notes that digital currencies have been exempted so as to not stifle innovation in the sector and because the Government has found “little current evidence” that digital currencies have been used to facilitate black economy activities. However, the consultation flags that whether this exemption is appropriate will remain subject to ongoing scrutiny.

Additionally, Australia is a member of the Financial Action Task Force (FATF), an intergovernmental organisation that establishes international standards for combating money laundering and terrorist financing. The FATF recently announced that it plans to strengthen controls over cryptocurrency exchanges to stop digital currencies from facilitating money laundering and related crimes. Among other recommendations, the FATF specifically declared that it wanted crypto-asset participants to reveal the identity of crypto-asset investors, conduct proper due diligence processes and develop risk management programs.

The taxation of cryptocurrency in Australia has been an area of much debate, despite recent attempts by the Australian Taxation Office (ATO) to clarify the operation of the tax law.  For income tax purposes, the ATO views cryptocurrency as an asset that is held or traded (rather than as money or a foreign currency).

Investors and holders of cryptocurrencies
The tax implications for investors, holders and users of cryptocurrency depends upon the intended use of that cryptocurrency.  The summary below applies to investors who are Australian residents for tax purposes.

Investors (including funds) in the business of trading cryptocurrencies are likely to be subject to the trading stock provisions, much like a supermarket treats its goods for sale as trading stock.  The gain on the sale of cryptocurrencies will be taxable to such investors on “revenue account”, and any losses will be deductible on a similar basis.

Otherwise, the ATO has indicated that cryptocurrency will likely be a capital gains tax (CGT) asset.  The gain on its disposal will be subject to CGT.  Capital gains may be discounted under the CGT discount provisions, so long as the investor satisfies the conditions for the discount.  Note that the ATO’s views on the income tax implications of transactions involving cryptocurrencies is in a state of flux due to the rapid evolution of both cryptocurrency technology and its uses.

Capital losses made on cryptocurrencies which are “personal use” assets are disregarded.  This includes cryptocurrencies acquired or kept for personal use or consumption (i.e., to buy goods or services).  Capital gains on personal use assets are only disregarded where the asset was acquired for less than A$10,000.

Issuers of cryptocurrencies
Issuance of a token or coin, in the context of an ICO, by an entity that is either an Australian tax resident, or acting through an Australian “permanent establishment”, will likely be taxable in Australia.  The current corporate tax rate in Australia is either 27.5% or 30%.  If the issued coins are characterised as equity for tax purposes, the ICO proceeds should not be taxable to the issuer, but all future returns to the token holders will be treated as dividends.

Australian Goods and Services Tax (GST)
Supplies and acquisitions of digital currency made from 1 July 2017 are not subject to GST on the basis that they will be input taxed financial supplies.  Consequently, suppliers of digital currency will not be required to charge GST on these supplies, and a purchaser would not be entitled to GST refunds (i.e., input tax credits) for these corresponding acquisitions.  On the basis that digital currency is a method of payment, as an alternative to money, the normal GST rules apply to the payment or receipt of digital currency for goods and services.

The term “digital currency” in the GST legislation requires that it is a digital unit of value that has all the following characteristics:

  • it is fungible and can be provided as payment for any type of purchase;
  • it is generally available to the public free of any substantial restrictions;
  • it is not denominated in any country’s currency;
  • the value is not derived from or dependent on anything else; and
  • it does not give an entitlement or privileges to receive something else.

The ATO has created a specialist task force to tackle cryptocurrency tax evasion.  The ATO also collects bulk records from Australian cryptocurrency designated service providers to conduct data matching to ensure that cryptocurrency users are paying the right amount of tax.  With the broader regulatory trend around the globe moving from guidance to enforcement, it is likely that the ATO will also begin enforcing tax liabilities more aggressively.

France Small Flag France

Cryptocurrencies are not characterised in France as “currencies” (fiat money) but as “virtual (or digital) assets”.

Cryptocurrencies are the subject of a close and on-going examination by the French governmental and regulatory authorities (including the AMF, ACPR and ANSSI - the national agency for cybersecurity); such scrutiny has recently been strongly reinforced upon the announcement of the Libra project.

The system set up by the loi PACTE reflects a general effort to regulate (whilst not slowing down) the use of crypto-assets and the ecosystem (of service providers) which is developing around such assets (investment advice, custody, exchange or trading platforms etc.), with a specific focus on key issues such as IT security, fraud and AML/CFT.

Germany Small Flag Germany

In accordance with the binding decision of BaFin on units of account within the meaning of the German Banking Act (“KWG”), Bitcoins are financial instruments. Units of account are comparable to foreign exchange with the difference that they do not refer to a legal tender (gesetzliche Zahlungsmittel). This classification applies in general to all cryptocurrencies. What software they are based on or which encryption technologies they apply is immaterial in this respect. Financial regulation is therefore mainly found in two areas: banking (supervision) law and anti-money laundering law.

By contrast, cryptocurrencies are not legal tender and so are neither currencies nor foreign notes or coins.

There are no explicit legal provisions governing the taxation of cryptocurrencies. In fact, the general tax regulations apply, although, due to the novelty of the assets concerned, their application is not always unproblematic.

Ireland Small Flag Ireland

For the purposes of this chapter, by 'cryptocurrencies' we mean cryptotokens which operate purely as payment instruments, such as Bitcoin, Ether, Litecoin and their equivalents.  We are not referring to other forms of cryptoassets, such as security tokens, utility tokens or tokenized assets, which are discussed elsewhere in the chapter. 'Cryptocurrencies' in this sense are frequently referred to as 'virtual currencies' by the CBI.

Financial Regulatory Regime

There is currently no specific regulatory regime in Ireland that deals with pure cryptocurrencies. However, the following provisions of general Irish financial regulation merit consideration:

MiFID II Regulations
The MiFID II Regulations derive from and transpose an EU directive, MiFID II, and are the cornerstone of Irish financial markets regulation. The MiFID II Regulations set out requirements relating to 'financial instruments' (which includes 'transferable securities') – the key requirement being that most intermediaries and advisors involved in this space in Ireland are subject to prior authorisation by the CBI. The definition of 'financial instruments' under the MiFID II Regulations directly transposes the definition under MiFID II and explicitly excludes 'instruments of payments'.  Therefore, while certain forms of cryptoassets may fall within the scope of the MiFID II Regulations and/or the Prospectus Regulations, activities relating to pure cryptocurrencies would appear to be out of scope. 

E-Money Regulations
The E-Money Regulations transpose the E-Money Directive without any significant additional national measures. '[E]lectronic money' is defined as 'electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer, which (a) is issued on receipt of funds for the purpose of making payment transactions, (b) is accepted by a person other than the electronic money issuer, and (c) is not excluded [from the scope of the E-Money Regulations].'

Most forms of cryptoassets (including pure cryptocurrencies) do not represent a claim on the issuer and so will fall outside the scope of the E-Money Regulations.  This would appear to be in line with the views of the CBI which has emphasised that that cryptocurrencies are 'unregulated'. 

However, an exception to this may apply in relation to the category of cryptocurrencies known as 'stablecoins' – particularly, where these are pegged to, and are directly exchangeable on demand for, fiat currencies.  While the CBI has not commented on this, the EBA has indicated  that these type of cryptocurrencies may satisfy the claim on the issuer criterion. This means that where they also meet the other criteria for 'electronic money', they can fall within the scope of the E-Money Directive. As the E-Money Regulations transpose the E-Money Directive with little variation, it is likely that the CBI will reach a similar view.

Where a particular cryptocurrency qualifies as 'electronic money', the E-Money Regulations would require that the issuer be authorised as an e-money institution. In order to be authorised as an e-money institution in Ireland, the issuer would need to apply for authorisation from the CBI, comply with on-going financial regulatory requirements and would be subject to Irish anti-money laundering (AML) requirements.

Anti-Money Laundering
Cryptocurrency transactions do not currently per se fall within the scope of the Irish AML regime. With that said, certain market participants may fall within scope – for example, because their wider service offering involves regulated financial services related activities (for example, where they offer traditional banking or payment services as part of their wider offering) or because the cryptocurrency qualifies as 'electronic money'.

This is set to change for certain market players under the forthcoming Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Bill 2019 (the 2019 Bill).  The 2019 Bill, once enacted, will formally transpose 5AMLD into Irish law. 5AMLD requires member states to impose registration and AML requirements on fiat-to-virtual cryptocurrency exchanges and custodian wallet providers operating in Europe. Under the current draft of the 2019 Bill, fiat-to-virtual cryptocurrency exchanges and custodian wallet providers are expressly included as 'designated persons' under the CJA 2010. Designated persons for the purposes of the CJA 2010 must apply customer due diligence, report suspicious transactions and have specific procedures in place to prevent money laundering and terrorist financing.

There are no Irish tax provisions which apply specifically to transactions involving cryptocurrency.

Guidelines from Revenue (the Guidelines) state that the ordinary income tax, corporation tax and capital gains tax rules apply to cryptocurrency activities. The Guidelines confirm that, where an employee receives remuneration paid in a cryptocurrency, the value for computing Irish employment taxes is the Euro amount attaching to the cryptocurrency at the time it is paid to the employee. Irish payroll tax returns and taxes withheld at source should be reported in Euro and remitted to Irish Revenue in Euro respectively. 

In respect of VAT, Revenue's view is that Bitcoin and other similar cryptocurrencies are regarded for VAT purposes as 'negotiable instruments' and exempt from VAT. The mining of cryptocurrencies is considered to be outside the scope of VAT, on the basis that the activity does not constitute an economic activity for VAT purposes.

At the time of writing, no specific legislation has been introduced to bring cryptocurrency transactions within the scope of stamp duty. However, if an instrument is created to transfer cryptocurrency, this document could potentially trigger an Irish stamp duty charge.

Is cryptocurrency regarded as currency under Irish law?

The CBI has noted that, in general, cryptocurrency is more like a very high-risk, speculative asset than a standard currency.  It has emphasised that there are various limitations associated with cryptocurrencies, in particular, relating to their volatility, that make it difficult for them to properly function as currencies.   

This is in line with the approach taken in the current draft of the 2019 Bill, which defines 'virtual currencies' as a 'digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically'.

However, as outlined above, there are a number of regulatory grey areas in this context and each situation would need to be analysed on its facts. In particular, the category of cryptocurrencies known as "stablecoins" - which specifically aim to minimise the volatility issues that are associated with general cryptocurrencies and which are in many cases pegged to (or one could argue "attached" to) a legally established currency – is particularly relevant in this context. Where a stablecoin is structured such that it is pegged to a fiat currency and it successfully avoids the volatility issues generally associated with cryptocurrencies, it is possible that the CBI could take the view that it is a form of currency.

Italy Small Flag Italy

Cryptocurrencies cannot be regarded as currencies under Italian law. Indeed, using them as a means of payment is possible only if the parties to a transaction so agree. As the acceptance of cryptocurrencies to extinguish debt is not required by law, they cannot/do not qualify as a currency.

From a financial regulation standpoint, the Italian Financial Act (“IFA”) includes a wider category than MiFID financial instruments in which the inclusion of cryptocurrencies is uncertain: financial products. These are defined as “financial instruments and any other form of investment with a financial nature”. Based on this definition, cryptocurrencies may qualify as financial products and then be subject to specific provisions. More specifically, relevant caselaw has stressed that the prominence of a financial purpose underlying a transaction – to be assessed on a case-by-case basis – is the main feature to be considered when determining whether an asset class (including cryptocurrencies) is to be regarded as a financial product.

Furthermore, from an anti-money laundering standpoint, persons who: (a) convert legal tender to cryptocurrency, and/or (b) convert cryptocurrency to legal tender are subject to anti-money laundering duties similarly to financial agents and credit brokers (among others).

Italian tax law does not provide nor a definition neither a reference to “virtual currencies” or similar instruments. In absence of specific tax provisions on this matter, as of today it not possible to perfectly outline the related tax treatment.

According to the Italian tax authority cryptocurrency is an alternative currency mainly used as means of payment and less frequently with speculative purposes. As a consequence, cryptocurrencies are subject to the same tax treatment provided for foreign currencies, which are - in principle - subject to tax when they are (i) converted or (ii) transferred to a third party for a consideration.

For VAT purposes, Italian tax authority considered cryptocurrency trading as commercial activity that falls within the scope of VAT.

Japan Small Flag Japan

The PSA requires a person who provides Exchange Services to be registered with the FSA.
"Crypto Asset" is defined in the PSA as:

(i) proprietary value that may be used to pay an unspecified person the price of any goods purchased or borrowed or any services provided and may be sold to or purchased from an unspecified person (limited to that recorded on electronic devices or other objects by electronic means and excluding Japanese and other foreign currencies and Currency Denominated Assets; the same applies in the following item) and that may be transferred using an electronic data processing system (“Type I Crypto Asset”); or

(ii) proprietary value that may be exchanged reciprocally for proprietary value specified in the preceding item with an unspecified person and that may be transferred using an electronic data processing system (“Type II Crypto Asset”).

"Currency Denominated Assets" means any assets that are denominated in Japanese or other foreign currency. Such assets do not fall within the definition of Crypto Asset.

To enhance the regulation of Exchange Providers and to strengthen the regulatory framework surrounding Crypto Assets, a bill containing proposed revisions to the PSA (“PSA Revisions”) and FIEA (“FIEA Revisions”) was tabled before the Diet on March 15, 2019 (“Bill”). The Bill was passed by both chambers of the Diet on May 31, 2019, and will come into force within a year of its introduction.

The term “Crypto Asset Exchange Services” means any of the following acts that is carried out in the course of business:

(i) sale and purchase of Crypto Asset or exchange of Crypto Asset for other Crypto Asset;
(ii) intermediary, brokerage or delegation for the acts listed in (i) above; or
(iii) management of users’ money or Crypto Asset in connection with the acts listed in (i) or (ii) above .

Only those registered with the FSA to engage in Exchange Services may provide such services.

Liechtenstein Small Flag Liechtenstein

As mentioned above, the FMA issued a fact sheet stating that virtual currencies are generally defined as a “digital representation of a (cash equivalent) value that is neither issued by a central bank or a public authority.” Further, the fact sheet stated that these tokens do not constitute fiat currency (legal tender).

Additionally, as discussed above at points 6 and 7, the FMA also released guidance regarding security tokens.

As Liechtenstein is a member of the European Economic Area the Regulations and Directives from the European Union in general are applicable (EEA Joint Committee Decision required). All the banking activities (deposit and loan business) as well as investment services pursuant to the Annex I of MiFID II are regulated. Also, payment services pursuant to the PSD II and the E-Money-Directive are regulated.

The Netherlands Small Flag The Netherlands

Cryptocurrency is not considered to be money or fiat currency, either by the Dutch government or by the financial regulators. The DNB reached this conclusion by applying the common economic theory of the uses of money: money should be regarded as a unit of account, a store of value and a medium of exchange. The DNB has stated many times that cryptocurrencies fail to sufficiently fulfil these requirements, due to their high volatility and their relative lack of adoption. The focus of the Dutch government and the financial regulators – with regard to cryptocurrencies and ICOs – is double edged.

On one hand, the Dutch government and the financial regulators are eager to mitigate the risks associated with cryptocurrencies and ICOs, such as the use of cryptocurrencies for criminal purposes (for example, fraud and money laundering) and the lack of proper protection afforded to consumers who want to invest in cryptos. An example of this stance is evident in the report, published by the DNB and AFM in December 2018, in which the financial regulators pleaded for the introduction of a licensing regime – much like the one that already exists for financial undertakings – for providers offering crypto-to-fiat exchange services and custodian wallet providers.

On the other hand, the Dutch government and the financial regulators also acknowledge the potential of specific functionalities of cryptos. As an example of this acknowledgment, they have indicated that they see potential in cryptos for funding small and medium-sized enterprises ("SMEs"). However, only under the condition that investors receive clear and enforceable rights in return – as is the case, for example, with shares and bonds. To this end, the DNB and AFM have recommended an amendment to the European regulatory framework, in order to enable blockchain-based development of SME funding and to reconcile the European and national regulatory definitions of "security".

The Dutch Secretary of State of the Ministry of Finance has indicated that it is unlikely that earnings from mining or trading cryptocurrencies by individual tax residents in the Netherlands not acting in business or professional capacity will be qualified as taxable income. Consequently, cryptocurrencies held by the individual tax residents in the Netherlands will generally be taxed under the regime for savings and investments (inkomen uit sparen en beleggen). Irrespective of the actual income and capital gains realized, the annual taxable benefit of all the assets and liabilities of such an individual under this regime, including the cryptocurrencies, is set at a percentage of the positive balance of the fair market value of these assets and liabilities. This percentage, which is subject to an annual indexation, increases from approximately 1.9% to a maximum of 5.6% (2019). No taxation occurs if this positive balance does not exceed a threshold under this regime (heffingvrij vermogen). The fair market value of the assets and liabilities under this regime, including the cryptocurrencies, is measured exclusively on January first of every calendar year. The tax rate under the regime for savings and investments is a flat rate of 30% (2019).

A corporate entity tax resident in the Netherlands is generally subject to corporate income tax at the statutory rate of 25% (19% up to EUR 200,000) (2019) with respect to any benefits derived (or deemed to be derived) from dealings involving cryptocurrencies, including mining and trading.

See question 9 for the anti-money laundering treatment of cryptos.

Russia Small Flag Russia

Strictly speaking, there is no unified and firm position of the Russian authorities towards cryptocurrencies. On the one hand, the officials representing different state bodies related to fintech sphere like the Ministry of Finance and the Central Bank express the point of view that cryptocurrencies and cryptoassets in general are an integral and inevitable part of the future technological development. On the other hand, there is an opposite opinion stating that cryptocurrencies and cryptoassets are another financial pyramid scheme and any use of cryptocurrencies (mining, issuance and transfer, opening of crypto exchanges, etc.) in Russia should be prohibited.

The main document elaborated in the sphere of cryptocurrencies in Russia that should contain the basic regulatory framework for this virtual assets is the draft law “On digital financial assets” prepared by the Ministry of Finance and the Central Bank which was submitted to the Parliament (State Duma) on March 20, 2018 and passed the first reading in May. After the first reading a substantial number of amendments was introduced. For example, some basic concepts like cryptocurrency, token, mining, were substantially altered and some of them, especially cryptocurrency and token, may disappear from the document completely if the final wording of the act will have a framework character. These modifications provoked a wave of criticism and scepticism from the part of the Presidential Council for codification and development of civil legislation. The second hearing of this draft should have taken place in Autumn 2018, then was postponed until Spring 2019, but due to these disputes the destiny of this law remains unclear.

In March 2019 FATF asked Russian officials to resolve the issue with the regulation of cryptocurrencies by the end of this year. The main issue that remains undecided is whether the use of cryptocurrencies and cryptoassets will be generally allowed or prohibited in Russia. Provided that the act is still not adopted we may state that this issue remains unclear for the state officials and they are currently evaluating all the pros and cons of every decision. Anyway, it is highly unlikely that cryptocurrencies will be qualified as currency along with fiat (the sole national currency of the Russian Federation is Russian rouble).

We are expecting to have the law “On digital financial assets” adopted in the nearest future as this situation of legal uncertainty may not last forever and some very important aspects of the use of cryptocurrencies, like AML policy and taxation should receive an accurate regulation.

South Korea Small Flag South Korea

There are no laws of regulations that specifically regulate transactions involving cryptocurrencies in Korea.  However, Korean regulators tend to apply existing relevant Korean laws such as the Financial Investment Services and Capital Markets Act (“FSCMA”) and the Criminal Act to cryptocurrency-related transactions.  The FSCMA defines securities as “financial investment products for which investors do not owe any obligation to pay anything in addition to the money or any other valuables paid at the time of acquiring such instruments.”  Securities are categorized into six classes under the FSCMA: (1) debt securities, (2) equity securities, (3) beneficiary certificates, (4) investment contract, (5) derivatives-linked securities, and (6) depositary receipts.  Cryptocurrency could likely fall under the FSCMA’s definition of debt security, equity security or investment contract depending on the specific facts and circumstances involved. 

Cryptocurrency exchanges are not directly subject to any anti-money laundering requirements under the Act on Reporting and Use of Certain Financial Transaction Information (the “AML Act”).  However, virtual currency exchanges are indirectly affected by the AML Act’s anti-money laundering requirements through its application to financial institutions.

There are also several bills seeking to directly regulate cryptocurrency exchanges proposed in the National Assembly including the Special Act on Cryptocurrency Business, which seeks to, among others, impose licensing requirements, anti-money laundering requirements, consumer protection and cybersecurity requirements for cryptocurrency exchanges and cryptocurrency-related businesses, impose record-keeping obligations, explicitly incorporate cryptocurrency businesses into the AML Act, and mandate the adoption of cybersecurity measures.

Financial institutions doing business with virtual currency exchanges and/or custodial wallet providers are subject to the Financial Intelligence Unit’s Anti-Money Laundering Guidelines for Cryptocurrency published in January 30, 2018 (the “AML Guidelines”).  The notable requirements under the AML Guidelines include the following: (i) real-name verification for fiat withdrawal from and deposits to cryptocurrency exchanges, (ii) customer due diligence to check the identity of users, maintenance of a separate transaction record for each user, and compliance with cryptocurrency-related policies, and (iii) monitoring and reporting suspicious transactions.  The financial regulators may issue correction orders or business suspension orders pursuant to the AML Act if a financial institution violates a provision of the AML Guidelines.

There are no Korean tax laws that explicitly regulate cryptocurrencies.  Some accounting firms have interpreted cryptocurrencies as “intangible assets” for Korean accounting treatment.  The National Tax Service (“NTS”) has called for the need to develop accounting standards for cryptocurrencies.  The Ministry of Economy and Finance has announced that plans for the taxation of cryptocurrencies are being developed, but no decisions have been made.  The NTS published its preliminary assessment of taxing cryptocurrencies, which is not an official policy but does represent the only published position or research on cryptocurrency taxation by the government.   The NTS’ assessment noted that cryptocurrencies are hybrid products that have characteristics of, among others, fiat currency, securities and goods.  Based on this determination, the NTS has made a preliminary assessment of taxation on cryptocurrencies under the existing laws as summarized in the table below:

In addition, the NTS has noted that to increase transaction transparency and to prevent tax avoidance, strengthening the regulation of cryptocurrencies is required.  The NTS mentioned the introduction of a registration requirement for cryptocurrency exchanges, the implementation of the Real Name Verification System, and the imposition of anti-money laundering requirements and reporting requirements on cryptocurrency exchanges as examples of possibly regulatory improvements.  

Sweden Small Flag Sweden

For income tax purposes, cryptocurrencies are generally not characterised as a currency. In a recent ruling regarding the classification of bitcoins (HFD 2018 ref. 72), the Supreme Administrative Court held that currency generally refers to a payment instrument issued and guaranteed by a central bank or similar institution of a state. Bitcoin lacks a formal publisher. Its value is not based on any claim on the issuer but is determined based on market availability and demand. A bitcoin is also not generally accepted as a means of payment. Against this background, a bitcoin cannot be regarded as a currency within the meaning of the income tax legislation. A sale of a bitcoin should therefore be taxed in accordance with the provisions for “other assets” in the income tax legislation, meaning that upon disposal, such as a sale or an exchange if used as payment for goods or services, capital gains are taxed as capital income at a rate of 30 per cent and capital losses are deductible with 70 per cent. The Swedish Tax Agency has in a statement held that the same applies for other equivalent cryptocurrencies.

If transactions in cryptocurrencies are carried out as a business or if a person carries out so-called “mining” of cryptocurrencies, the tax rules for business income or employment income (hobby) will also be relevant to consider.

For VAT purposes, the provision of exchange services relating to bitcoins has, however, been considered to fall within the scope of the VAT exemption for currency transactions based on the ECJ ruling C-264/14, Hedqvist (HFD 2016 ref. 6).

From a financial regulatory perspective, the SFSA has not provided any conclusive guidance on the treatment of cryptocurrencies or cryptoassets for the purposes of financial regulation. It has been indicated that a cryptocurrency or cryptoasset may be treated as a currency if it constitutes a means of payment. The determination whether the cryptoasset meets the definition of a financial instrument and whether the services or activities provided therewith should be treated as a regulated investment service or activity is made on a case-by-case basis. Authorisation may be required from the SFSA prior to conducting certain activities in Sweden.

For AML purposes, business involving exchange of cryptocurrencies that is conducted professionally and not ancillary to the business is, in general, within the scope of the AML regulations. The applicability of the AML regulations to other businesses must be made on a case-by-case basis. Starting from next year, Directive (EU) 2018/843 is intended to be implemented into Swedish law and will bring all business involving exchange of cryptocurrencies as well as wallet providers within the scope of the AML regulations.

Switzerland Small Flag Switzerland

Financial regulation
Swiss law does not specifically define the term "crypto currency", a consequence of the principle-based and technology-neutral approach to financial regulation. Some federal ordinances, in specifying certain legal requirements, refer to "virtual currencies" (Anti-Money Laundering Ordinance) or "assets based on electronic encryption" (Federal Banking Ordinance) without further defining such terms. That said, there is interpretative guidance by federal authorities. In particular, the Swiss federal government outlined an initial understanding of the legal qualification of virtual currencies in a report dating back to 2014, which was mainly based on an analysis of Bitcoin (Federal Council report of 25 June 2014 on virtual currencies in response to the Schwaab (13.3687) and Weibel (13.4070) postulates, p. 7; see also question 6):

"A virtual currency is a digital representation of a value which can be traded on the Internet and although it takes on the role of money – it can be used as means of payment for real goods and services – it is not accepted as legal tender anywhere. […] Virtual currencies exist only as a digital code and therefore do not have a physical counterpart for example in the form of coins or notes. Given their tradability, virtual currencies should be classified as an asset."

More recently, the Swiss Financial Market Supervisory Authority FINMA issued further guidance on the regulatory treatment of blockchain tokens and activities relating thereto (see question 7). Pure crypto currencies that are not coupled with any claim against an issuer (such as Bitcoin) are classified by FINMA under its "three bucket" approach as so-called payment tokens, i.e. tokens that are factually used or intended by the issuer to be used as a means of payment for goods or services or as a means for the transfer of money or value (cf. FINMA guidelines for enquiries regarding the regulatory framework for initial coin offerings (ICOs) dated 16 February 2018, p. 3).

Within this classification, FINMA considers that payment tokens typically do not qualify as securities in the meaning of Swiss law, but may be considered a means of payment under Swiss anti-money laundering (AML) regulation if they can be transferred by technical means on a blockchain infrastructure. If that is the case, the token issuer (assuming the tokens are issued against consideration) qualifies as a so-called financial intermediary and must (i) join a recognised Swiss self-regulatory organisation (SRO) for AML purposes, and (ii) comply with Swiss know-your-customer requirements in connection with the token issuance as well as further duties based on AML regulation such as proper record-keeping and reporting duties in case there is a suspicion of money laundering or terrorist financing (compliance with these requirements can be substituted by way of the issuer mandating a regulated Swiss financial intermediary with the collection of funds and performing the associated duties). Similarly, once a crypto currency qualifying as a payment token is in circulation, service providers such as custodians or exchange platforms may also be required to comply with Swiss AML regulation if they are acting in or out of Switzerland.

Other forms of tokens that are not pure crypto currencies (incl. so-called "stable tokens" that are linked to underlying assets such as fiat currency, commodities or securities) may be subject to substantially different treatment. In particular, these may be digital assets qualifying as securities or other financial instruments, interests in a collective investment scheme or (bank) deposits. The legal qualification of these types of tokens and activities relating thereto must be assessed in the individual case based on the available FINMA guidance. In many cases with a Swiss nexus, it is considered good practice to pre-discuss projects relating to blockchain tokens with FINMA and/or to obtain a ruling regarding the applicable regulatory treatment (sometimes referred to as "no-action letter") prior to implementation. Some legal aspects of blockchain tokens can be expected to be further clarified once the DLT legislative proposal presented by the Federal Council on 22 March 2019 is turned into law.

With regard to the Swiss tax treatment of crypto currencies, the following guidelines have been published during the year 2019: (i) a revision of various value-added tax (VAT) guidelines and sector information guidelines, outlining the relevant aspects of Swiss VAT treatment (published on 17 June 2019), and (ii) a working paper on the tax treatment of crypto currencies as well as initial coin/token offerings in the area of wealth tax, income/profit tax, withholding tax and stamp duty. Also, the Swiss Federal Tax Authority (FTA) has included the most popular crypto currencies in the foreign currency exchange list it publishes for the purposes of enabling conversion into Swiss Francs for tax purposes. In addition, certain cantons have published their own guidance on the tax treatment of crypto currencies, especially with regard to wealth tax/individual tax.

For tax purposes, tokens are generally categorised into the following buckets: (i) payment (or native) tokens, (ii) asset-backed tokens (further divided into debt tokens, equity tokens and participation tokens), and (iii) utility tokens.

Payment tokens are from a tax perspective treated as movable capital assets. Therefore, they are subject to wealth tax at the cantonal/communal level on the basis of their fair market value (i.e. typically the year-end value published in the FTA foreign currency exchange list) if held by a Swiss individual investor at year-end. The purchase or sale of payment tokens is treated like a transaction with traditional means of payment (currencies). The resulting profit or loss at the level of a Swiss individual investor generally qualifies as taxable income or as a non-tax-deductible expense (with certain exceptions, e.g. salary payments in payment tokens, professional trading in payment tokens, income from mining activities etc.). The purchase of a payment token by a Swiss investor on a crypto exchange respectively the issuance of a payment token is not subject to Swiss withholding tax. Because payment tokens do not qualify as taxable securities, they are not subject to issuance stamp duty respectively security transfer tax. From a VAT perspective, the issuance of payment tokens is not considered a taxable supply/service. The use of a payment token for the purchase of a supply or service is treated like the use of traditional means of payment (currencies), i.e. as a remuneration, and is not itself considered a taxable supply or service.
The categorisation into asset-backed tokens and utility tokens is more complex and the relevant tax treatment depends on the specific facts and circumstances respectively "features" of the token.

Uganda Small Flag Uganda

Current financial sector and tax legislation is silent on cryptocurrencies as an asset class. The only level of accountability under the anti-money laundering framework is with respect to the treatment of companies and their directors as accountable persons. Given the nature in which anti-money laundering legislation has been evolving in Uganda, it is expected that Uganda will follow the evolving developments at the Financial Action Task Force, whose latest guidelines only came out on June 21, 2019, with a further variation to FATF Recommendation 15. On September 30th 2019, the Minister of Finance issued an official statement to the effect that cryptocurrencies are not officially recognized as legal tender in Uganda. There is yet no formal position from the Uganda Revenue Authority on taxation, although it is expected that the Authority will lean towards the formal ministerial position.

United Kingdom Small Flag United Kingdom

For the purposes of financial regulation, the FCA has adopted three categories for the classification of cryptoassets: (i) exchange tokens, which are not issued or backed by a central authority and are intended to be used as a means of exchange; (ii) security tokens, which are tokens amounting to a debt and/or equity interest; and (iii) utility tokens, which can be exchanged by the holder for the use of a digital resource (such as use of a network, digital storage, computing power or an application). The classification of a particular cryptoasset will depend on the features of the particular asset and may change over time. Cryptocurrencies (such as Bitcoin or Litecoin) are generally classified as exchange tokens.

The FCA’s current position, articulated in PS19/22, is that exchange tokens (like most cryptocurrencies) and most utility tokens are usually outside the FCA’s regulatory remit. However, utility tokens which amount to “e-money” may be regulated under the UK’s E-Money Regulations, and the UK’s Payment Services Regulations may apply to international money remittance where exchange tokens are used. HMT is currently considering whether the regulatory perimeter should be expanded to bring exchange tokens and utility tokens within the remit of the FCA. At the moment, most cryptocurrencies would fall outside the scope of financial regulation in the UK.

At the time of writing, this also means that cryptocurrency exchanges and crypto-wallet providers are not generally required by UK law to implement AML checks, although some have implemented these already. MLD5, which should become law in all EU member states (including the UK) by 10 January 2020, requires all cryptoasset exchanges and custodian crypto-wallet providers to comply with AML regulations, including a requirement to implement identity and other AML checks. Brexit is not expected to have any impact on the UK’s approach to MLD5.

For tax purposes, cryptoassets (including cryptocurrencies) are generally regarded by HMRC as capital assets that are subject to capital gains tax (“CGT”). Therefore, subject to various exemptions and deductions, when a cryptoasset is disposed of (including where it is used to purchase something, where it is sold for a fiat currency or where it is exchanged for another cryptoasset), any increase in value (by reference to Pounds Sterling) over the period that the asset was held, will be a capital gain on which the person or entity disposing of the asset will have to pay CGT. Any loss of value over that period will be a capital loss which can off-set any other capital gains the person or entity may have.

For VAT, in line with the Court of Justice of the European Union’s decision in the 2014 Skatteverket v David Hedqvist case, the current position adopted by HMRC is that, when exchanging a cryptocurrency for a fiat currency, VAT will not be due on the value of the cryptocurrency itself. Where a cryptocurrency is used to pay for goods and services, VAT will still be chargeable in the normal way on the supply of those goods or services. Cryptocurrency received from mining activities or other rewards for participating in a cryptocurrency network is not generally subject to VAT, but will usually be treated as miscellaneous income for the purposes of income tax.

If the cryptoasset activities of a person or business amount to taxable trading, Income Tax will be applied to their trading profits. Transactions involving cryptoasset exchange tokens that are undertaken by businesses may, depending on the activity being undertaken, attract further taxes such as Corporation Tax, National Insurance contributions and Stamp Taxes.

On the question of characterisation, the dominant (although by no means the only) view in the UK appears to be that cryptocurrencies are not considered to be “currency” or “money”. This is, at least, the position adopted by the Cryptoassets Taskforce consisting of HMT, the FCA and the BoE. This point has not yet received judicial attention and may be subject to change, although the view of the Cryptoassets Taskforce is likely to be highly persuasive.

However, in UK law the consequences of cryptocurrencies not being characterised as currency are less significant than one may assume. For example, while cryptocurrencies are treated as capital assets for tax purposes, this is similar to the approach taken in the UK to all foreign currency. Subject to various exemptions (such as certain personal expenses) and deductions, when foreign currency is disposed of (spent), changes in the value of that currency by reference to Pounds Sterling will be treated as capital gains or losses for the purposes of CGT. Additionally, in terms of asserting or exercising legal rights over cryptocurrencies, much more turns on whether or not a cryptocurrency can be characterised as property (considered further below) than whether it is characterised as currency.

United States Small Flag United States

Cryptocurrency is the focus of most of the blockchain-related questions arising in the US. As discussed earlier, there has been some acceptance towards Bitcoin but concerns about new cryptocurrencies, such as the Facebook’s Libra, are still in full debate in the Senate. The US has a split between pro-blockchain states, passing favorable regulations such as cryptocurrency exemptions from state securities laws, blockchain-cautious states, issuing warnings mainly related to cryptocurrency investments, and blockchain-restrictive states, issuing cryptocurrency restrictions.

Singapore Small Flag Singapore

Cryptocurrencies are not considered legal tender in Singapore. Since Bitcoin, cryptographic digital assets have developed beyond just having the sole characteristic of a currency or a medium of exchange. Quite often, we see a digital token having multiple functions. For instance, a digital token can be used as a medium of exchange to purchase goods or services on a digital marketplace, for payment of network or “gas” fees, to participate in network consensus such as proof-of-stake, and/or possess network governance functions such as voting on network proposals. Other types of digital tokens have securities-like characteristics (commonly referred to as securities tokens) or are digital tokens backed by assets (commonly referred to as asset-backed tokens), or tokens that can be used as collateral in exchange for other digital assets. The regulatory treatment of cryptocurrencies / digital tokens will generally depend on their specific characteristics. We will address the questions below based on this broader classification of cryptocurrencies / digital tokens.

On the securities regulation front, the SFA regulates the issuance or sale of capital markets products by way of imposing prospectus requirements and licensing requirements on intermediaries who are involved in advising on fund raising and dealing in capital markets products. Digital tokens may fall within one or more categories of capital markets products as prescribed under the SFA, which include (but are not limited to) shares, debentures, units in a collective investment scheme, securities-based derivatives contracts and units in a business trust. If a digital token is classified as a capital markets product, issuers and sellers of these regulated digital tokens will need to comply with the requirements under the SFA. Where digital tokens are classified as capital markets products, persons establishing or operating an organised market for the exchange of such digital tokens must (unless exempted) be either an AE or a RMO under the SFA. Platforms of AE licensing status can allow trading by participants who are of institutional investor / accredited investor / expert investor status (terms as defined in the SFA) (each being a “Qualified Investor”) as well as participants who are Singapore-based retail investors (being investors who are not Qualified Investors); whereas platforms of RMO status can only allow trading by retail level participants who are not Singapore-based Qualified Investors.

In relation to AML/CFT, there is a general obligation for businesses to carry out a reasonable standard of know your client and due diligence measures pursuant to the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Chapter 65A) of Singapore and the Terrorism (Suppression of Financing) Act (Chapter 325) of Singapore; the Monetary Authority of Singapore Act (Chapter 186) sets out further requirements which financial institutions are required to comply with, while the United Nations Act additionally sets out prohibitions and sanction requirements which are imposed on non-financial institutions as well as natural persons in Singapore (collectively, the “AML/CFT Regulations”). Businesses should also take reasonable steps to satisfy themselves that the property received was not owned or controlled by or on behalf of any terrorist or terrorist entity. Significantly, it is mandatory for a person in the course of his business or employment to lodge a “Suspicious Transaction Report” if he knows or has reason to suspect that any property may be connected to a criminal activity. The Terrorism (Suppression of Financing) Act also criminalises and imposes a duty on all to provide information pertaining to terrorism financing to the Commissioner of Police in Singapore.

In the context of the PS Act, as mentioned in our response to question 6 above, the MAS considers digital payment tokens to carry higher money laundering and terrorism financing risks and plans to implement standards in line with FATF standards for “virtual asset services providers”. The MAS will impose AML/CFT requirements on payment services licensees that are digital payment token service providers who deal in or facilitate the exchange of digital payment tokens for fiat currency or other types of digital payment tokens.

In relation to tax, there are no capital gains taxes in Singapore. This means that businesses that derive a capital gain from disposing digital tokens bought for long-term investment purposes are not subject to tax. On the other hand, businesses that buy and sell virtual currencies in the ordinary course of their business will likely be taxed on the profit derived from trading in virtual currency. Profits derived by businesses which mine and trade virtual currencies in exchange for money are also subject to tax.

In the context of indirect tax, under the current rules, payment using digital payment tokens in return for goods and services may be treated as a taxable supply of services and subject to goods and services tax (“GST”). However, the Singapore tax authority is proposing changes to the application of GST on the supply of digital payment tokens to better reflect the characteristics of these tokens (“GST Reforms”). With these proposed GST Reforms, while the seller of goods or services (if GST-registered) would still have to charge and account for GST for the provision of goods or services, the consumer paying for such goods and services will no longer be considered to be making a taxable supply of services and will not be subject to GST. Additionally, under the proposed GST Reforms, the exchange of digital payment tokens for fiat currency or other digital payment tokens will be exempt from GST. This means that the supply of digital payment tokens by OTC service providers, digital token exchanges or initial coin offering issuers will be considered as GST-exempt supplies. If the GST Reforms are passed, they are expected to take effect from January 2020 – which is when the PS Act is also anticipated to take effect.

Hong Kong Small Flag Hong Kong

The Hong Kong Government and the major Hong Kong regulators, as well as the Hong Kong Police Force, have issued numerous public warnings concerning cryptocurrencies and other virtual assets.

These began with a warning published by the Hong Kong Police Force in 2014 concerning virtual commodities trading and, specifically, Bitcoin. The warning referred to advice from the HKMA that Bitcoin falls outside the regulatory ambit of the HKMA on the basis that it is not considered as legal tender but as a virtual commodity, which is not backed by any physical items, issuers or the real economy, so has no fixed value. The warning noted that: virtual commodities pose considerable security risks to consumers; the possible cyber-security loopholes of Bitcoin trading platforms may lead to the loss of virtual commodities; due to the anonymous nature of virtual commodities transactions, there have been criminals using Bitcoins as a means of money laundering; as Bitcoin is not money, but rather a highly speculative virtual commodity, people should pay more attention to the risk when trading or engaging in related investment activities; and where people come across any property, which they know or suspect to be crime proceeds, they should make a suspicious transaction report (STR) to the Joint Financial Intelligence Unit (JFIU).

This was followed by a statement published on 26 April 2014 by the Money Service Supervision Bureau of the Customs and Excise Department, which is responsible for the regulation money service operators, comprising remittance agents and money changers, under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615 of the Laws of Hong Kong) (“AMLO”). The purpose of the statement was to remind money service operator licence applicants and members of the public that, for the purposes of ALMO, Bitcoin or other similar virtual commodities are not “money” and do not fall within the regulatory regime administered by the Customs and Excise Department.

Next came a press release from the HKMA published on 11 February 2015, noting that the HKMA had reminded the public through the media about the risks involved in Bitcoin trading. The press release reiterated that Bitcoin is not a legal tender but a virtual “commodity” and that as it does not have any backing – either in physical form or from the issuer – and its pricing is highly volatile, it does not qualify as a means of payment or electronic money. The press release concluded that Bitcoin and other similar virtual commodities are not regulated by the HKMA and that given the highly speculative nature of Bitcoin, the HKMA would like to remind the public to exercise extra caution when considering making transactions or investments with Bitcoin.

In a circular to authorized institutions published on 18 March 2018 (the “HKMA BCBS Circular”), the HKMA endorsed the statement on cryptoassets issued by the Basel Committee on Banking Supervision (“BCBS”) on 13 March 2019 (the “BCBS Statement”), setting out the BCBS’ prudential expectations regarding banks’ exposures to crypto-assets and related services in jurisdictions where banks are involved in such business activities. The HKMA circular noted that as the BCBS explains its statement: cryptoassets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value; such assets are not regarded as legal tender and are not backed by any government or public authority; and the BCBS is of the view that the continued growth of cryptoasset trading platforms and new financial products related to cryptoassets has the potential to raise financial stability concerns and increase risks faced by banks. The HKMA statement emphasised that it expects authorized institutions to take note of the BCBS’ statement and its prudential expectations, and that authorized institutions planning to engage in activities relating to cryptoassets should discuss with the HKMA and demonstrate that they have put in place appropriate systems and controls to identify and manage any risks associated with such activities. The HKMA’s statement followed similar remarks made by its Chief Executive, Norman T.L. Chan, in his keynote speech on 21 September 2018 at the Treasury Markets Summit 2018: “Crypto-assets and Money” (the “HKMA Cryptoasset Keynote Speech”).

The Hong Kong Government has also expressed concern over the risks to the Hong Kong public posed by investments in cryptocurrencies and ICOs. This was reflected in the joint launch, on 29 January 2019, by the Financial Services and the Treasury Bureau (FSTB) and the Investor Education Centre (IEC), a subsidiary of the SFC, of a public education campaign aimed at providing the public with an understanding of the potential risks of participating in ICOs and cryptocurrency transactions.

As noted in the responses to the questions above, the SFC has also expressed caution in a number of circulars and statements warning investors about the risks of investing in cryptocurrencies and other virtual assets and participating in ICOs and STOs.

The first was a circular published on 16 January 2014, providing guidance to licensed corporations and associated entities on measures to mitigate the money laundering and terrorist financing risks associated with virtual commodities such as Bitcoin. This was followed by another circular on 21 March 2014, drawing attention to the press statement issued by the Hong Kong Government on 14 March 2014 warning the public of various risks associated with any trading or dealing in virtual commodities.

These were followed on 5 September 2017 by the SFC’s statement on ICOs, the purpose of which was to explain that, depending on the facts and circumstances of an ICO, digital tokens that are offered or sold may be “securities” as defined in the SFO, and therefore subject to the securities laws of Hong Kong. More specifically: (i) where digital tokens offered in an ICO represent equity or ownership interests in a corporation, these tokens may be regarded as “shares” (for example, token holders may be given shareholders’ rights, such as the right to receive dividends and the right to participate in the distribution of the corporation’s surplus assets upon winding up); (ii) where digital tokens are used to create or to acknowledge a debt or liability owed by the issuer, they may be considered as a “debenture” (for example, an issuer may repay token holders the principal of their investment on a fixed date or upon redemption, with interest paid to token holders); (iii) if token proceeds are managed collectively by the ICO scheme operator to invest in projects with an aim to enable token holders to participate in a share of the returns provided by the project, the digital tokens may be regarded as an interest in a “collective investment scheme” (“CIS”). Shares, debentures and interests in a CIS are all regarded as “securities”.

The statement went on to explain that where the digital tokens involved in an ICO fall under the definition of “securities”, dealing in or advising on the digital tokens, or managing or marketing a fund investing in such digital tokens, may constitute a “regulated activity”; and that parties engaging in a “regulated activity” are required to be licensed by or registered with the SFC irrespective of whether the parties involved are located in Hong Kong, so long as such business activities target the Hong Kong public. In addition, where an ICO involves an offer to the Hong Kong public to acquire “securities” or participate in a CIS, registration or authorisation requirements under the law may be triggered unless an exemption applies. The statement also noted that parties engaging in the secondary trading of such tokens (e.g. on cryptocurrency exchanges) may also be subject to the SFC’s licensing and conduct requirements; and that certain requirements relating to automated trading services and recognised exchange companies may be applicable to the business activities of cryptocurrency exchanges.

This was followed on 11 December 2017 by an SFC circular on Bitcoin futures contracts and cryptocurrency-related investment products, the primary purposes of which were to remind intermediaries of the legal and regulatory requirements for providing to Hong Kong investors any financial services in relation to Bitcoin futures contracts (“Bitcoin Futures”) and other cryptocurrency-related investment products, as well as to remind investors of the risks associated with these products. The SFC issued a further statement on 6 November 2019 warning investors about the risks associated with the purchase of virtual asset (e.g. Bitcoin) futures contracts, focusing on the fact that they are largely unregulated, highly leveraged and subject to extreme price volatility. The 11 December 2017 circular and the 6 November 2019 statement are discussed further in the response to question 13 below.

On 9 February 2018, the SFC released a statement again alerting investors to the potential risks of dealing with cryptocurrency exchanges and investing in ICOs. The statement disclosed that the SFC had sent letters to seven cryptocurrency exchanges in Hong Kong or with connections to Hong Kong warning them that they should not trade cryptocurrencies which are "securities" as defined in the SFO without a licence. The statement disclosed that the SFC had also written to seven ICO issuers. Finally, the statement noted that whilst the SFC may not have jurisdiction over cryptocurrency exchanges and ICO issuers if they have no nexus with Hong Kong or do not provide trading services for cryptocurrencies which are "securities" or "futures contracts" as defined in the SFO, if there is suspicion of fraud the SFC is open to refer cases to the Hong Kong Police Force for investigation.

On 28 March 2019, the SFC published a statement on STOs, again reminding investors to be wary of the risks associated with virtual assets, but this time focusing on tokens which are the subject of STOs (“Security Tokens”). This is discussed further in the response to question 13 below.

Whilst some have expressed the view that the SFC has at times overreached in its proclamations concerning types of virtual assets or ICOs / STOs which fall outside the scope of its regulatory jurisdiction, the general consensus is that it has acted in a manner consistent with its functions as a front-line financial regulator in Hong Kong, in particular that of investor protection. The SFC’s approach to the regulation of activities relating to virtual assets falling within the scope of its regulatory jurisdiction is discussed below.

As described in the response to question 3 above, on 1 November 2018 the SFC published a circular on the distribution of virtual asset funds (the “November 2018 Circular”) and a statement on a regulatory framework for virtual asset portfolio managers, fund distributors and trading platform operators (the “November 2018 Statement”), which together set out a new regulatory approach for virtual assets. The new measures aim to regulate the management and distribution of virtual asset funds so that investors’ interests are protected at either the fund management level or distribution level or both. The measures do not, however, amend the law or the definitions of “securities” or “futures contracts”. Instead they clarify existing requirements and impose new requirements primarily in the form of licensing conditions on intermediaries.

  • The purpose of the November 2018 Circular is to: (i) remind intermediaries licensed or registered for Type 1 regulated activity (dealing in securities) or Type 9 regulated activity (asset management), to the extent that these intermediaries are engaged in distributing virtual asset funds under their management, about the existing regulatory requirements; and (ii) provide guidance on the expected standards and practices in relation to the distribution of virtual asset funds. The key takeaways are summarised below. Distributors of collective investment schemes (“Funds”), typically being mutual funds or unit trusts, are required to be licensed by the SFC for Type 1 (dealing in securities) regulated activity, unless an exemption applies. The distribution of Funds that invest in virtual assets, including cryptocurrencies, is therefore regulated (regardless of whether or not the virtual assets contained in the Funds are “securities” or “futures contracts” as defined under the SFO). Distributors (including asset managers distributing under the incidental exemption) are already required under paragraph 5.2 of the SFC Code to ensure the suitability of any recommendation or solicitation to a client is reasonable. This is subject to certain exemptions, in particular institutional professional investors (as defined in the SFC Code). The November 2018 Circular provides that, in addition, where a Fund: (i) is not authorised by the SFC for distribution to retail clients (non-authorised); and (ii) has a stated investment objective to invest in virtual assets, or intends to or has invested more than 10% of gross asset value in virtual assets (directly or indirectly e.g. derivatives with virtual assets as underlying), then SFC licensed distributors should adhere to enhanced selling restrictions (targeting professional investors only, assessment of investor knowledge of virtual assets, and ensuring that the amount invested by a client into non-authorised virtual asset Funds is reasonable considering the client’s net worth), due diligence (on the Fund, its manager and its counterparties) and information to be provided to clients (in a clear and easily comprehensible manner, and accompanied by a number of specified warning statements).
  • The primary purpose of the November 2018 Statement is to provide guidance on the regulatory standards expected of virtual asset portfolio managers and fund distributors, in order to address the significant risks associated with investing in virtual assets. The key takeaways are summarised below. The November 2018 Statement explains that the SFC supervises the following types of virtual asset portfolio managers: (i) managers who manage and distribute a Fund that invests in virtual assets (including managers who do not require a Type 9 (asset management) licence because the Fund does not invest in “securities” or “futures contracts” as defined under the SFO, but who distribute the Fund and hence require a Type 1 (dealing in securities) licence, unless an exemption applies); and (ii) managers who are asset managers of a Fund that holds “securities” or “futures contracts” as defined under the SFO (and who therefore require a Type 9 (asset management) licence to manage such securities or futures contracts). Where such managers falling within (i) or (ii) above manage portfolios which invest solely or partly in virtual assets that are not “securities” or “futures contracts” as defined under the SFO, this will be subject to SFC oversight through the imposition of licensing conditions. This oversight is subject to a de minimis threshold that the Fund has a stated investment objective to invest in virtual assets, or there is an intention to invest 10% or more of the gross asset value of the Fund portfolio in virtual assets (the “De Minimis Threshold”). The managers falling within (i) or (ii) above should observe essentially the same regulatory requirements, regardless of whether or not the Fund invests in virtual assets. With this in mind, the SFC has developed a set of ‘Terms and Conditions’ for licensed corporations, capturing the essence of the existing requirements, adapted as needed in the context of virtual assets. They will likely be imposed as licensing conditions, subject to minor variations depending upon the particular asset manager. As well as the De Minimis Threshold exemption, the Terms and Conditions will also not apply to licensed corporations which only manage fund of funds that have portfolios investing in virtual asset funds. Some of the key Terms and Conditions are set out in Appendix 1 to the November 2018 Statement.
  • The November 2018 Statement also set out (in Appendix 2) details of a conceptual framework to explore the regulation, on a voluntary basis, of virtual asset trading platform operators. Those platforms that become regulated and thereby adhere to a high level standards and practices would be set aside from unlicensed operators. Such interested platforms would first be placed in the SFC Regulatory Sandbox for observance by the SFC (which would include assessing whether the platform is indeed appropriate to the regulated by the SFC, and whether inherent risks can be appropriately dealt with). To date, the SFC has not agreed to regulate voluntarily any platform operator, perhaps due to the substantive hurdle of demonstrating equivalent protections, checks and balances in the virtual asset space, compared to traditional products.

Building on the key Terms and Conditions set out in Appendix 1 to the November 2018 Statement, on 4 October 2019 the SFC published more detailed proforma terms and conditions for virtual asset portfolio managers (the “Proforma Terms and Conditions”). The Proforma Terms and Conditions will be imposed as licensing conditions on licensed corporations that manage a fund (or portion of a fund) that invests in “Virtual Assets” as defined in the Proforma Terms and Conditions and which meet the De Minimis Threshold. The Proforma Terms and Conditions define “Virtual Assets” as: “digital representations of value which may be in the form of digital tokens (such as digital currencies, utility tokens or security or asset backed tokens), any other virtual commodities, crypto assets or other assets of essentially the same nature, irrespective of whether they amount to “securities” or “futures contracts” as defined under the SFO”. The key areas covered by the Proforma Terms and Conditions include: (i) general principles (similar to those under the Code of Conduct for Persons Licensed by or Registered with the SFC (the “SFC Code”) but tailored for virtual assets); (ii) organisation and management structure (including detailed risk management control techniques and procedures at Appendix 2); (iii) virtual asset fund management; (iv) custody of fund assets and client money; (v) operations; (vi) dealing with the fund and fund investors (including provision of adequate information to investors); (vii) marketing activities (including only allowing professional investors to invest in Virtual Asset funds (other than other than collective investment schemes authorised by the SFC)); (viii) fees and expenses; and (ix) reporting to the SFC. Contravention of a licensing condition is likely to be considered as misconduct under the SFO which will reflect adversely on the fitness and properness of a Virtual Asset fund manager to remain licensed and may result in disciplinary action by the SFC. However, the SFC notes that it will adopt a pragmatic approach taking into account all relevant circumstances, including the size of the Virtual Asset fund manager and any compensatory measures implemented by its senior management.

Building on the conceptual framework set out in Appendix 2 to the November 2018 Statement, on 6 November 2019 the SFC published a position paper setting out a new regulatory framework for virtual asset trading platforms. Like the original conceptual framework, the new regulatory framework effectively applies on a voluntary basis. This is achieved under the new framework by platform operators who wish to be licensed ensuring that they offer trading on their platform of at least one “security token” – being virtual assets which fall within the definition of "securities" under the SFO. This means that the platform operator will fall within the regulatory jurisdiction of the SFC and require a licence for Type 1 (dealing in securities) and Type 7 (providing automated trading services) regulated activities. The position paper emphasises that the SFC will only grant licences to platform operators which are capable of meeting robust regulatory standards, being standards comparable to those which apply to licensed securities brokers and automated trading venues but which also incorporate additional requirements to address specific risks associated with virtual assets. For example, the SFC will impose licensing conditions requiring that platform operators offer their services exclusively to professional investors, only service clients who have sufficient knowledge of virtual assets and maintain stringent criteria for the inclusion of virtual assets on their platforms. In addition, licensed platforms will be placed in the SFC Regulatory Sandbox for a period of close and intensive supervision. However, the position paper also makes it clear that virtual assets traded on licensed platforms will not be subject to the same kind of regulation which applies to traditional offerings of securities or collective investment schemes. Moreover, the SFC has no power to grant a licence to or supervise platforms which only trade virtual assets or tokens which are not “security tokens” – i.e. which do not fall within the definition of "securities" under the SFO.

Updated: November 20, 2019