Cryptocurrencies appeared in the digital world around ten years ago and are now experiencing significant growth and democratization.
A virtual means of payment that can be used primarily on the Internet, using cryptography to secure transactions and the creation of units, and escaping any control by regulators and central banks, there are now more than 4,000 cryptocurrencies in circulation.
However, their legal framework is sometimes confusing and difficult to understand. This article will therefore aim to study the legislative framework for cryptocurrencies in France, Canada, and the United Arab Emirates, as well as their tax regime. We will then examine, in a non-exhaustive manner, Initial Coin Offerings, a new fundraising phenomenon based on cryptocurrencies.
What exactly are cryptos?
A cryptocurrency is a virtual means of payment that relies on cryptography to secure transactions and the creation of units, and is outside the control of regulators and central banks. Cryptocurrencies are therefore based on a computer protocol for encrypted and decentralized transactions, called blockchain.
The best known is bitcoin, which is a virtual unit of account stored electronically. However, there are now more than 4000 cryptocurrencies in circulation in the world, the best known outside of bitcoin being for example Ethereum, Ripple or even EOS, XRP, Tether, Cardan, Stellar, Chainlink, Uniswap, Polkado or even USD Coin.
Cryptocurrencies are part of the broader framework of crypoactives, which represent " virtual assets stored on an electronic medium allowing a community of users accepting them as payment to carry out transactions without having to resort to legal currency ".
The issue and circulation of digital cryptoassets is notably linked to Initial Coin Offerings (“ICO”)Unlike an IPO, the ICO is financed on digital media known as tokens (tokens). The ICO thus represents a fundraising operation operating via the issuance of digital assets exchangeable for cryptocurrencies during the start-up phase of a start-up or business project.
I – THE LEGAL FRAMEWORK FOR CRYPTOCURRENCIES IN FRANCE, CANADA AND THE EMIRATES
The law is struggling to come to terms with cryptocurrencies, with the main question being whether they should be categorized into existing legal categories or whether new ones need to be created.
This choice of qualification depends on the States.
- IN FRANCE
THE French law decided to create a specific legal framework for cryptocurrencies through the PACTE law defining the term digital asset in the Monetary and Financial Code (the “CMF”).
Article L54-10-1 2° of the CMF defines digital assets as “ any digital representation of a value (…) which is accepted by natural or legal persons as a means of exchange and which may be transferred, stored or exchanged electronically» (emphasis added). Cryptocurrencies are therefore neither legal tender, nor electronic money, nor a means of payment recognized by law.
Regarding the cryptocurrency regime, the CMF allows for transfer, storage, and exchange operations to be carried out using cryptocurrencies through the drafting of legal contracts. For example, it is possible that cryptocurrencies could constitute a contribution in kind (and not in cash, which is not a currency) as part of a contribution to a company.
The regime established by article L54-10-1 2° of the CMF thus clearly rejects the qualification of cryptocurrencies as a means of payment but admits it as a means of exchange, as consideration for the performance of a contractual commitment.
- IN CANADA
Most other legal systems, including the Canada have preferred to attach cryptocurrency to existing legal categories but are faced with the difficulty of qualifying cryptocurrencies. Canadian regulators admit that cryptoassets do not meet the classic definitions provided by Canadian securities laws.
For example, some " utility tokenss » involve an investment of securities in the form of an investment contract, while other cryptoassets called “crypto tokens" are classic securities in the form of tokens. Finally, Bitcoin has characteristics that make it similar to a commodity. Therefore, in Canada, the way in which trading is carried out will have to be assessed on a case-by-case basis to determine whether it qualifies as a cryptocurrency.
- AT EUROPEAN LEVEL
At the European Union level, the European authorities initially considered that cryptocurrencies as such could not be classified as a payment service, but that the transaction of exchanging currency for a cryptocurrency could be classified as a payment service, within the meaning of the Payment Services Directive.
Subsequently, the European Banking Authority (EBA) and the European Securities Market Authority (ESMA) clearly stated that cryptocurrencies should be understood as means of exchange rather than as means or payment services.
In order to qualify and define cryptocurrencies within the meaning of European law, the European Banking Authority and ESMA have developed a specific definition of cryptocurrency in 3 points:
- an asset that relies on cryptography and a DLT (Distributed Ledger Technology) or equivalent technology as part of its perceived or intrinsic value;
- an asset that is not issued or guaranteed by a central bank or public authority; and
- an asset that can be used as a medium of exchange and/or for investment purposes and/or to acquire goods or services.
4. IN THE UNITED ARAB EMIRATES
In any event, as of July 1, 2021, cryptocurrency is still officially and legally prohibited in the United Arab Emirates.
However, in May 2021, the launch of Dubai Coin was announced, a cryptocurrency supposedly launched by the United Arab Emirates. In less than 24 hours, the price of this cryptocurrency increased by 1000%, thus demonstrating the craze surrounding cryptoassets in the Emirates.
However, the reliability of this cryptocurrency was quickly challenged by the Dubai government, specifying that the currency had not been approved by any official authority.
However, the Dubai Financial Services Authority (DFSA) has announced plans to implement new regulations for cryptocurrencies as part of its business plan for 2021 to 2022.
In an effort " open for business "Regarding innovation in the financial services sector, the DFSA indicates that it wants to build on recent achievements in financial matters to develop a " regulatory regime for digital assets (such as tokenized securities and cryptocurrencies) ".
The authority thus wants to adopt " a regulatory approach that facilitates innovation while requiring strict compliance with DFSA requirements for authorization, prudence and conduct ".
II – THE TAX REGIME FOR CRYPTOCURRENCIES
- Tax regime for cryptocurrencies in France
a – Taxation of transactions on digital assets currently held
- Crypto loans or crypto loans
The legislature has not yet taken a position on the issue of crypto-lending taxation, but case law has had to decide. In a judgment dated February 26, 2020, the Nanterre Court classified Bitcoin lending as a consumer loan, a qualification that implies a transfer of ownership and therefore a taxable event.
It remains to be seen whether this position will be confirmed by other case law, and whether it will be applicable to other types of cryptoassets.
- Portfolio transfer abroad & expatriation
The transfer of tax residence outside France to a state other than the European Union constitutes a taxable event in accordance with article 167 bis of the General Tax Code which governs the regime ofexit tax.
For the moment, the scope of the exit tax does not seem to include digital assets, but given the very spirit of the measure, it seems very likely that the legislator will extend the scope of this article to cryptocurrencies due to the more attractive (or even zero) tax rates on the sale of cryptoassets abroad.
Furthermore, an expatriation that is poorly prepared and guided by a primarily tax-related motivation may give rise to the application of Articles L64 and L64A of the Book of Tax Procedures, for non-subjection of its asset portfolio with the exclusive or main objective of evading or reducing its tax burden, or even to the application of the exit tax for the same reason.
- The sale of cryptos
Finally, in case of transfer of digital assets, Article 150 VH bis of the CGI applies and defines the terms of taxation of capital gains on sales of digital assets made by individuals domiciled in France and on an occasional basis. This system also applies to sales made through an intermediary.
The sale of cryptos is therefore taxable when digital assets are transferred:
- for a sum in legal tender, such as the euro or the dollar; or
- in exchange for a good or service other than a cryptoasset; or
- in exchange for a cryptoasset with payment of a balance (conversely, when a digital asset is exchanged for another asset without a balance, the latent capital gain is not taxable).
Taxable capital gains made by individuals on an occasional basis are subject to income tax at the rate of 12.8 %, to which are added social security contributions on income from assets at the rate of 17.2 %. The overall tax rate for these capital gains is therefore 30 %.
b – Taxation of donations of digital assets
Cryptocurrencies may be intended to be transferred to an heir or a third party. The donation will have a dual benefit: an interest in the transfer of assets with partial/total cancellation of the capital gain. An individual can transfer all or part of their assets to one or more heirs, by way of donation or legacy:
- through a simple donation (article 922 of the civil code) but be careful because if the value of the crypto-asset transferred has increased significantly, an attack on the hereditary reserve may be noted; or
- through a donation sharing : under certain conditions, it is possible to retain the value of the asset transferred on the day of the donation, which implies that the value of the cryptoasset given would be fixed, regardless of its value given at the time of death.
Finally, donations of digital assets have the same tax advantages as traditional donations, namely no taxation on the donor's latent capital gain.
c – The reporting framework for digital assets
The reporting obligations for cryptoactives have not yet been clearly established and affirmed, either at national or European level.
In France, the method for calculating unrealized capital gains must result in an individualized calculation of the taxable capital gain. This calculation is complicated for cryptocurrencies, and the likely inability to trace all the acquisition prices of taxpayers' cryptoassets adds an additional difficulty.
Despite these difficulties, taxpayers must declare their cryptocurrencies through a Appendix No. 2086-2If the number of transactions to be declared is greater than twenty, it will be necessary to print form no. 2086-2 in several copies.
- Tax regime for cryptocurrencies in the European Union
HAS community scale, the European Commission has launched a public consultation to adopt a possible Directive on Administrative Cooperation No. 8 (DAC 8) for greater tax transparency on cryptoassets. This directive would propose a strengthening of existing rules and an expansion of the exchange of information in force, to include cryptoassets and virtual currencies. However, this community unification project is hampered by the difficulty for Member States to concretely understand the volume of use of cryptoassets, as well as the disparity of sanctions applied by different States.
- Cryptocurrency Tax Regime in Canada
a – Taxation of transactions on digital assets currently held
Taxation of income from holding cryptocurrency : The Canada Revenue Agency treats cryptocurrency as a merchandise. Income from cryptocurrency is therefore treated as a business income or like a capital gain depending on the circumstances (frequency of transactions, circumstances, taxpayer's intention, commercial nature).
Taxation of income from the use of cryptocurrency as a means of payment: Using a cryptocurrency to pay for goods or services, or to acquire another cryptocurrency, is considered a transaction. barter which is generally not taxable.
However, the taxpayer may be taxed if the barter is accompanied by one of the following operations:
- Sell or donate cryptocurrency; or
- Trading or exchanging cryptocurrency, including to obtain another cryptocurrency; or
- Convert cryptocurrency into government-issued currency; or
- Using cryptocurrency to purchase goods or services.
The income will then have to be classified as business income or capital gains.
Finally, when a taxable good or service is exchanged for cryptocurrency, the Goods and Services Tax (TPS)/Harmonized Value Added Tax (HST)) applies to the good or service being exchanged. The GST/HST is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
If a business accepts cryptocurrency as payment for taxable goods or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.
b – The reporting framework for digital assets
Regarding the cryptocurrencies held in Canada, any gain generated from the sale or exchange of cryptocurrencies must be declared as business income or as a capital gain.
If the cryptocurrency is owned by a business, the profits are considered business income, even if the purchase of cryptocurrency for the purpose of selling it is a one-time event.
Conversely, if the sale of a cryptocurrency does not constitute carrying on a business and the amount sold is greater than the purchase price, the taxpayer has realized a capital gain. 50% of such gain will be included in the taxpayer's income and subject to tax at the taxpayer's tax rate.
All Canadian taxpayers are subject to theobligation to keep books and records of accounts to establish the information that allows them to determine the amount of their taxes. For cryptocurrency, the CRA recommends that taxpayers periodically export their various cryptocurrency transactions, including recording the date of transactions, receipts for the purchase or transfer of cryptocurrency, the value of the cryptocurrency in Canadian dollars, etc.
Regarding the cryptocurrencies held outside Canada, any taxpayer having, at any time during the year, a total holding of more than CAD 100,000 in foreign property must file, in addition to their federal income tax return, Form T-1135. Failure to file a declaration subjects the taxpayer to a penalty.
In any event, whether the cryptocurrencies are held in Canada or not, the taxpayer will have to evaluate them and determine whether they are considered fixed assets or inventories :
- A fixed asset represents a long-term investment for the company;
- An inventory refers to the description of property the price or value of which is relevant to the calculation of a taxpayer's income from an agency for a tax year.
When cryptocurrencies are held as capital property, it will be necessary to record and track the adjusted cost base in order to accurately report the capital gain.
When cryptocurrencies are considered inventory, calculation methods will need to be used to value the inventory consistently from year to year.
III. The legal regime of ICOs
ICOs are, as we defined in the introduction, a new form of financing for businesses, particularly SMEs. As with cryptocurrency, governments have had to establish a legal framework to regulate these ICOs and public token offerings.
- IN FRANCE
There France has established a regulatory framework specific to ICOs through Article 26 of the PACTE law, creating a non-binding legal framework for the offering of tokens in order to encourage their location in France. This regime is based on a Visa optional, issued by the AMF to token issuers. This visa is an approval for a public offering of tokens. It is optional but has the very competitive advantage of the serious and verifiable nature of the public offering.
There are several terms obtaining a visa:
- Conditions relating to the actors : the procedure is aimed at any token issuer referred to in article L552-1 of the CMF which must be constituted in the form of a legal entity established in France.
- Conditions relating to operations : the visa only concerns the structuring of the offer and not the quality of the project, an offer which must be open to more than 150 people. It will also be necessary to draft an information document presenting the token issuance project.
The PACTE law also imposes a safeguard system for assets raised through an ICO; issuers must therefore have the means to ensure the safeguarding and monitoring of assets. A backup system is also in place in the event of technology failures.
To obtain this visa, the issuer must submit an application to the AMF. Within 20 days, the AMF will notify its visa based on all the mandatory documents submitted. After obtaining its visa, the issuer undertakes to disclose the amount of funds and digital assets collected, the total number of tokens of the same type issued, etc.
- IN CANADA
At Canada, if an ICO involves the distribution of securities, companies may need to be registered as broker or benefit from an exemption from registration. This condition will depend on whether the company trades the coins or tokens for commercial purposes.
Registration as a broker involves compliance with a wide range of obligations, including know-your-client rules and investor suitability checks.
It should be noted that issuers conducting ICOs may engage in various activities that could trigger a registration obligation, such as soliciting a broad base of investors, including retail investors, via the internet or at public events such as conferences.
