The question of the applicability of cryptocurrencies is gaining popularity in parallel with the increase in their value. Originally created to be "free" from any form and method of regulation, cryptocurrencies are intended to be a fast and untraceable substitute for money. However, cryptocurrencies are not legal tender[1], are not regulated and not subject to "control", the same can serve to acquire rights, including real ones, by agreement of the parties[2], i.e. may represent contractual means of payment /in this meaning Decision of 22 October 2015 in case C‑264/14 of the CJEU/. However, in this case, when a cryptocurrency serves to acquire rights, the question arises of the type of contract and, accordingly, of the rules that apply to this type of transaction.
When acquiring rights against cryptocurrency, the rules for exchange contracts should apply[3], and not for purchase and sale, although the difference between the two types of contract is not so significant[4], insofar as according to Art. 223 of the Obligations and Contracts Act (OCA), the rules for the sale shall be applied accordingly to the exchange[5]. In exchange contracts, it is assumed that both parties-substitutes are both seller and buyer, i.e. in the present case – seller of property and buyer of cryptocurrency and vice versa.
Fees and taxes on the transaction and material interest
The main practical problem faced by all parties and participants in the transaction is the determination of the value of the exchanged goods, from which the notary fees, the local tax and the fee for recording the notarial deed should be calculated. The problem is not so much in determining the value of the real estate, but in determining whether the consideration in cryptocurrency is of higher value, and accordingly whether the same should be taken into account when calculating the fees and taxes, according to Art. 96, para. 1, item 2 of the Notaries and Notarial Practice Act (NNPA) and Art. 45, para. 1 of the Local Taxes and Fees Act (LTFA).
In Art. 96, para. 1, item 2 of the NNPA states that when transferring and certifying the right of ownership of things the certified material interest is the market price of the more expensive item - upon exchange. Next, the law also regulates special cases, e.g. para. 3 of Art. 97 of the NNPA says that in the case of remunerative transactions, the certified material interest is the contract price, if it is higher than determined in any of the other ways – i.e. from the market value. The law further stipulates in § 2 of the SP of NNPA that the market price is determined according to the price that could be obtained in the usual market relations, taking into account the nature of the item and all the factors that affect the price when selling or renting. The assessment is determined in accordance with Art. 33 of the Local Taxes and Fees Act. Art. 33 of the LTFA in its relevant part accordingly regulates that the property is defined and valued in BGN at the time of the transaction at market value - Art. 33, para. 1, item 5 of the LTFA, and in § 1, item 5 of the SP of the LTFA, respectively, it is revealed what is market value – the price, net of taxes and fees, that would be paid under the same conditions for similar immovable property or other property between unrelated persons. The market value does not include the amount of the discount or reduction. Therefore, when determining the material interest, the legislation allows two possibilities - determine market value of the cryptocurrency, or specifying the contract price.
Market value of cryptocurrency
However, determining the market value of cryptocurrencies may not be as easy as it seems. This stems from their volatility seen over the years, with some cryptocurrencies being able to change their value multiple times within hours due to continuous and round-the-clock stock exchange trading.
A comparison can be made with the evaluation of the shares of a publicly traded company (whose value theoretically changes every second while the exchange is open), when the same are evaluated for the purposes of transactions, according to Ordinance on the requirements for the content of the justification of the price of the shares of a public company, including the application of valuation methods. It is stated in the Ordinance (Article 5, Paragraph 1) that the fair price of the shares is based on their current price (last trade) on a regulated market, when the company's shares are traded on internationally recognized and liquid securities markets included in a list approved by the State Securities Commission. Art. 6 of the Ordinance, next, determines that the fair price of shares that are not actively traded on a regulated securities market is determined by the following valuation methods: 1. discounted net cash flow method; 2. net book value of assets method, and 3. price/earnings method of peer companies.
Despite the obvious inapplicability of said Ordinance, as cryptocurrencies are currently traded on decentralized exchanges that in no way meet the requirements to qualify as regulated markets[6], it can be assumed, taking into account the requirements for NNPA and LTFA, that the way to determine material interest in cryptocurrency transactions is accordingly their current price at the last trade, which would be paid on the same terms between unrelated persons (§ 1, item 5 of the SP of LTFA).
Legally, this means that only after the transaction of the cryptocurrency will it be necessary to establish what the value of the assets is at the time of their transfer, when converting them into Bulgarian leva at the price at the time of the operation. Some types of cryptocurrencies and their supporting systems allow the market value of each transaction to be recorded in another type of currency or cryptocurrency, thus avoiding any doubt about the value of transfers. However, this option could create some difficulties, since practically all cryptocurrencies are traded in US dollars, which means that at least two "reconversions" will take place - first from cryptocurrency to dollar, and then from dollar to lev.
This inconvenience can practically be overcome at the determination of the cryptocurrency to be paid on the notarial deed, as value in Bulgarian levs, after which, regardless of the change in its exchange rate, the corresponding amount of cryptocurrency should be paid, which corresponds to the determined BGN value at the time of payment.
This applies only to cryptocurrencies, the value of which is not tied to another currency. With the so-called "asset-backed token"[7] – stablecoins (e.g. Tether: USDT, USD Coin: USDC, TerraUSD: UST) the value of the cryptocurrency is tied to the value of the US dollar, and it does not vary independently - one unit of cryptocurrency is always exchanged for one unit of monetary currency. In the case of stablecoins, the market value is tied to the exchange rate of the corresponding monetary currency, and the determination of the material interest should be carried out through currency conversion at the exchange rates of the central banks, according to market value, without specifying a contract value. With this type of subject of exchange, the practical problems of notarial proceedings should be rather formalities.
Contract price and equivalence of performances
The other option for determining the material interest in the transaction is when specifying the contract price, i.e. the value of the property to be indicated by the parties - price of the transferred real estate, and/or price of cryptocurrency regardless of its market value. In the literature, cases of "valued exchange" are considered, which does not depend on the market value of the services, but only on the value that the parties transfer to the services, the subject of the exchange contract, at the time of its conclusion[8]. Here, however, the question arises as to whether the freedom in determining the value of the property subject to exchange is absolute, or suffers some limitations, in view of the principle of equivalence of benefits. In exchange contracts, this rule of equal performance is rather an exception[9].
It is indisputable that e.g. are completely eligible real estate transactions where the sale price is lower than their tax assessment /Decision No. 452 of 25.06.2010 of the Supreme Court of Appeals under City Decree No. 4277/2008, IV year o., GK/. At the same time, the concept of "good manners", according to Art. 26, para. 1 of the OCA, presupposes a certain equivalence of the counter-performances, and in the case of their obvious inconsistency, a violation is concluded, leading to the nullity of the transaction. This inequality should be such that it is practically reduced to a lack of performance.
As an example from the judicial practice of extreme inequality of benefits can be indicated Decision No. 287 of 5.12.2018 of the Supreme Court of Appeals of Ukraine under Case No. 388/2018., with which the court declared void the transaction for exchange of real estate for shares. He accepted that the transfer of a property with a value of BGN 421,860 for shares with a value of BGN 22,278, and another transfer of a property with a value of BGN 68,500 for shares with a value of BGN 4,631 are void transactions, due to non-equivalence of performances – a difference of 10 to 20 times in the price of the exchanged property. In Decision No. 615 of 15.10.2010 of the Supreme Court under No. 1208/2009 of III G.O. of the Supreme Court for example it is accepted that there is nullity due to the 12 times lower price than the market price, and in Decision 119 of 22.03.2011 under c.d. No. 485 according to the inventory for 2010 of I G.O. of the Supreme Court - at 28 times lower price.
In this line of thinking, for the practical avoidance of the inconvenience of determining a market value of the exchanged cryptocurrency against real estate, parties can specify an approximate value of the cryptocurrency, within reasonable limits of the difference with the actual market value at the time of the transfer or at the time of the confession of the transaction, which they perceive as fair for the counter-transfer of ownership. The same this one contract value of the cryptocurrency determined by the parties to the transaction should, however, be the higher of the market value of cryptocurrency, so that it can be considered a material interest in the transaction, according to Art. 97, para. 3 of the NNPA, unless, of course, the interest in the transaction is determined by the value of the property, as higher.
Proof of payment
There is no dispute in the literature[10] and in practice[11], that by virtue of Art. 24 of the OCA, in conjunction with Art. 183 OCA, in accordance with Art. Art. 222-223 OCA, the purchase and sale contract, respectively for exchange, is consensual[12], and that the transfer of rights takes place by virtue of the contract itself (consent), without the actual delivery of the items being necessary. The delivery itself is an obligation of each of the parties, the absence of which constitutes non-performance of the contract, but does not affect its validity, but only regarding liability for non-performance. That being said, it is important to the extent that proving cryptocurrency transactions on the one hand can be easy if the infrastructure supports such a possibility[13], but on the other hand – it can be untraceable and unprovable.
For the purposes of the notarial confession it would be sufficient for the recipient of the cryptocurrency to confirm and declare that he received it at the address indicated by him (digital wallet), or otherwise (actual transmission of a physical medium containing the relevant keys). It is not really necessary to present evidence to the notary for the transfer of cryptocurrency, since as stated the contract is consensual and only consent is required for its conclusion, and furthermore payment in cryptocurrency is not covered e.g. of the Cash Payment Restriction Act. It is not necessary for the recipient of the cryptocurrency to be the holder of the digital wallet, on which the same will be received, if he himself has indicated the address for receipt, since the payment will be made in good faith to a person in relation to whom there are unambiguous circumstances indicating his authorization, according to Art. 75, para. 2, proposition 1 of the OCA /Decision No. 237 of 11.01.2019 of the Supreme Court of Appeals under Case No. 2687/2017, Item I, TC, Decision No. 15 of May 4, 2011 of the Supreme Court of Appeals under Case No. 1575/ 2009, IV year o., GK, Decision No. 487 of 17.06.2004 of the Supreme Court of Appeals under City Law No. 1792/2003, TC/.
Carrying out an inspection under ZMIP
In the case of contracts, including exchange, which exceed certain values of the transfer of property, e the relevant (complex) checks must be carried out, according to Art. 11 of Measures Against Money Laundering Act (MAMLA). However, these checks in this case would be limited to clarifying the origin of the respective cryptocurrency, which would be proven by invoice statements, hashes of transactions for paid mining fees or hashes of transactions made from exchanges, statements with payment history in applications of fintech e-money providers, an exchange statement showing the acquisition of the cryptocurrency, verification emails for the transfer made and other verification methods, or, respectively, when combining and with verification of the origin, the means of acquisition are not the corresponding cryptocurrency.
However, the difficulties in proving the origin and ownership of cryptocurrency should not be the only reason for the notary to refuse a transaction, unless the totality of circumstances leads to only that choice. MAMLA in Art. 72, para. 1, expressly regulates that when a report is filed on suspected money laundering, the persons are obliged to delay the operation, and only if a complex inspection cannot be carried out under Art. 10, items 1 - 4 of the MAMLA, the person obliged to carry out the inspection (the notary) should refuse to carry out the transaction - art. 17, para. 1 of MAMLA. It would follow similar cases not be viewed with the presumption that the origin of funds is being concealed, but to take into account the circumstances that cryptocurrencies themselves are designed to be somewhat untraceable and anonymized. And similar types of transactions - buying real estate against cryptocurrency, would in practice clarify the possession of this type of medium of exchange, due to the formality of the notarial process and accompanying checks, which should only encourage the authorities with public authority to tolerate their execution.
Ivan Nikolaev, attorney-at-law
[1] Details on the issue - Tsvetanova-Mincheva, A. Is the virtual currency Bitcoin a means of payment according to the Payment Services and Payment Systems Act? Electronic edition "Challenging the Law!", 2018 - https://www.challengingthelaw.com/informacionno-pravo/platejno-sredstvo-li-e-bitcoin/
[2] According to a letter ext. No. BNB – 108809/19.09.2014 of the deputy governor of the Bulgarian National Bank, the virtual currency "Bitcoin" is not legal tender.
[3] It is permissible to talk about the exchange of money and coins when they are individually determined, or for example with a numismatic value, or when talking about foreign currency, which is a special type of commodity, and only then "money" in a broad sense - Panayotova- Chalakova, A. Exchange and Bulgarian civil law. Sofia, "Feneia", 2013, pp. 61 and 62.
[4] Panayotova-Chalakova, A. Exchange and Bulgarian civil law. Sofia, "Feneia", 2013, p. 74.
[5] An interesting difference is that according to Art. 45, para. 1 of the LTFA, the property acquisition tax for exchange contracts is paid by the person who acquires the property with a higher value, unless otherwise agreed.
[6] Public Offering of Securities Act (POSA), Art. 152, para. 1 and para. 2 state that a regulated market is a multilateral system organized and/or managed by a market operator that meets or facilitates the meeting of the interests of buying and selling financial instruments of multiple third parties through the system and in accordance with its non-discretionary rules in a manner, the result of which is the conclusion of a contract in relation to the financial instruments admitted to trading according to its rules and/or systems, licensed and functioning regularly in accordance with the requirements of this law and its implementing acts. A regulated market is also any multilateral system that is licensed and operates as a regulated market in accordance with the requirements of Directive 2014/65/EU (MiFID II).
[7] According to the proposal for a Regulation of the European Parliament and of the Council on cryptoasset markets and amending Directive (EU) 2019/1937 (MiCA).
[8] Panayotova-Chalakova, A. Exchange and Bulgarian civil law. Sofia, "Feneia", 2013, p. 76.
[9] Teneva, L., Nikolova, N. Handbook of notarial activity. Sofia, "Feneia", 2008, p. 144.
[10] Braykov, V. The sales contract. Sofia, "Sibi", 2014, p. 47.
[11] E.g. Decision No. 309 of 04/09/2009 of the Supreme Court of Appeals pursuant to Administrative Order No. 719/2008, III of the Civil Code, Decision No. 649 of October 23, 1995 pursuant to Administrative Order No. 345/ 95, 5-member s-v.
[12] Panayotova-Chalakova, A. Exchange and Bulgarian civil law. Sofia, "Feneia", 2013, p. 36.
[13] E.g. it is possible to monitor real-time transactions of some types of cryptocurrencies in pages such as https://www.blockchain.com/explorer
