Europe: Laws Related to Token Sales, Blockchain, and Digital Proof

28 EU member states will meet on September 7th in Vienna, Austria, to review virtual currencies, challenges posed by the growing popularity of virtual assets and the possibility of tightening rules and regulation for the digital assets will be discussed. More on Bloomberg.

While the EU has passed no specific legislation relative to the status of bitcoin (and other cryptocurrencies) as a currency, various EU bodies have issued statements and reports. In October 2012, the European Central Bank issued a report on virtual currencies that discussed cryptocurrency.

Some have suggested that cryptocurrency may fall within the definition of the EU’s Electronic Money Directive, which defines electronic money based on the following criteria: electronic storage, issuance upon receipt of funds, and acceptance as a means of payment by a legal or natural person other than the issuer. Cryptocurrencies meet the first and third criteria. Others have suggested that cryptocurrencies fall under the Payment Services Directive, which outlines rules related to the execution of payments using electronic money.

In 2013, the European Banking Authority, which advises EU institutions on banking, e-money regulation, and payments, issued a warning on the dangers associated with cryptocurrency transactions, specifically focusing on potential dangers to consumers.

In October 2015, the EU Court of Justice ruled that “the exchange of traditional currencies for units of the ‘bitcoin’ virtual currency is exempt from VAT.” In addition, it noted that “Member States must exempt, inter alia, transactions relating to ‘currency, bank notes and coins used as legal tender.’”

The European Central Bank has noted that traditional financial sector regulation does not apply to cryptocurrency because it does not involve traditional financial actors. It classifies bitcoin as a convertible decentralized virtual currency. In 2014, the European Banking Authority advised European banks not to deal with virtual currencies until regulations were in place.

Mario Draghi, President of the European Central Bank, declared in fall 2017 that “no member state can introduce its own currency; the currency of the Eurozone is the euro.” This was in response to Estonia’s attempt to create a state-backed cryptocurrency called “estcoin.”

The European Supervisory Authorities (made up of the European Securities and Markets Authority, the European Banking Authority, and the European Insurance and Occupational Pensions Authority) have warned investors of the “high risks of buying and/or holding so-called virtual currencies.” They have warned that since cryptocurrencies do not fall under regulated financial services, businesses and consumers are not protected. They have also declared cryptocurrency regulation to be a top priority for 2018.

Recently, in February 2018, Vice-President Dombrovskis participated at the Roundtable on Cryptocurrencies. In this roundtable, it was concluded that “virtual currency exchanges and wallet providers should be subject to the Anti-Money Laundering Directive.” The EU Commission has also proposed to amend the 4th Anti-Money Laundering Directive to include virtual currency exchange platforms and wallet providers, which means exchanges and wallets will be legally required to perform Know Your Customer (KYC) checks on each account as well as assess the risk of them performing money laundering.

With regard to blockchain, the European Commission has been supportive and interested in connecting with the private sector to explore its potential. In 2017, the European Commission’s Small and Medium Enterprise (SME) Group began supporting startups using blockchain to develop digitial identity and payment servies. In February 2018, the European Commission launched the EU Blockchain Observatory and Forum, which encourages member states to explore new opportunities offered by blockchain. The European Commission is primarily focused on developing open technical standards to allow blockchains to be interoperable across borders. Furthermore, European officials are exploring establishing Europe-wide standards for blockchain. In April 2018, 23 EU countries signed a Declaration on the Establishment of a European Blockchain Partnership.


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