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Legal aspects of cryptocurrencies


The problem of anticipating the development of technology and legal regulation

Legal regulation usually deals with traditional spheres of life, which is why there is a thesis that only stable relations in the four main spheres of public life are regulated by law - economic, political, spiritual and social. However, this thesis meets sharp objections in modern life[1], due to the rapid and dynamic development of relations happening before our eyes. In this regard, it is reasonable and justified to include more spheres to the so-called traditional ones - e.g. internet management. There is no doubt that some social relations are not subject to regulation (love, friendship) and others cannot be regulated (religious feelings and convictions). But there are also such spheres that, although they obviously should and can be regulated, in practice they are not yet[2], and numerous questions and problems arise from this, which should be given constant attention. Such a field is generally speaking the activity with crypto-assets, virtual currencies, or their more common name as cryptocurrencies[3].

Attempts to define cryptocurrencies

Terminologically, several clarifications should be made, insofar as digital currencies, electronic money, virtual means etc. terms and phrases that are similar in meaning actually have almost nothing to do with cryptocurrencies, apart from digitization. For example, according to Art. 5, par. 2 and Art. 6, par. 1, b. a) of Directive 2009/110/EC of the European Parliament and of the Council on the undertaking, exercise and prudential supervision of the activities of electronic money institutions ("DEP II Directive") "electronic money" "means a monetary value stored in electronic, including magnetic form, representing a claim to the issuer, which is issued upon receipt of funds for the purpose of performing payment transactions within the meaning of Art. 4, item 5 of Directive 2007/64/EC and is accepted by a natural or legal person other than the electronic money issuer". In this sense, it is part of Opinion of the Advocate General presented in CJEU Case C‑389/17, formed on the preliminary question "Is e-money fake money and even worthless money?” in which he says that known examples of electronic money are Proton in Belgium, miniCASH in Luxembourg, Moneo in France or Geldkarte in Germany (all in card form), but also PayPal on a global level (money is stored only in a network and the medium is "digital" or virtual) — while bitcoin is not electronic money. It's more about virtual money, who "they also do not meet the definition of means of payment within the meaning of the Financial and Monetary Code (of France), and in particular the definition of electronic money, as long as Bitcoin is not issued against the transfer of funds. Furthermore, unlike electronic money, bitcoin is not coupled with a legal guarantee of redemption at any time and at face value"[4]. The same definition of "electronic money" is laid down in the Bulgarian legislation - Art. 34, para. 1 of the Payment Services and Payment Systems Act (PSPSA) and § 1, item 8 of the SP of the Measures Against Money Laundering Act (MAMLA).

In its practice, the CJEU has had the opportunity to specifically analyze Bitcoin as a cryptocurrency more than once. In Its decision of 22 October 2015 in case C‑264/14 CJEU assumes that the virtual currency “Bitcoin” is contractual means of payment, on the one hand, and she cannot be considered either a current account or a deposit, payment or transfer. On the other hand, unlike debts, checks and other transferable instruments under Art. 135, par. 1, b. d) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax it is a means of direct payment between the operators that accept it. It is taken for granted that the virtual currency "Bitcoin" is neither a security materializing ownership of shares of legal entities nor a security of a similar nature. The two-way virtual currency "Bitcoin" to be exchanged against traditional currencies in exchange transactions, cannot qualify as a "tangible item" within the meaning of Article 14 of Directive 2006/112/EC, since this virtual currency has no other purpose than to be used as a means of payment. Therefore, the considered transactions, which consist in the exchange of different means of payment, do not fall within the scope of the concept of "delivery of goods" under the mentioned Art. 14 of Directive 2006/112/EC. In this situation "Bitcoin" transactions represent supplies of services in the sense of art. 24 of Directive 2006/112/EC.

It is important to point out that the understanding of the legal nature of cryptocurrencies is evolving. For example, in 2019 The European Securities and Markets Authority determines that certain cryptoassets meet the conditions to be considered financial instruments as defined in Art. 4, par. 1, item 15 of Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments, and as such are regulated by the current legislation, but precisely as financial instruments[5]. For the purposes of tax law, the Bulgarian courts also define Bitcoin as “other negotiable instruments" in the sense of Art. 135, § 1, b. d) of Council Directive 2006/1/2/EC of 28 November 2006 on the common system of value added tax (Decision No. 2047 of 25.11.2019 under Adm. d. No. 1395/2019 of the Administrative Court - Burgas, Decision No. dated 09.04.2019 under adm. No. 668/2018 of the Administrative Court - Pernik), referring to the Advisory Committee on VAT, established on the basis of Art. 398 of Directive 2006/112/EC, unanimously adopted this opinion at the 101st session of 20.10.2014.

Next, as "virtual currency" or "monetary virtual unit" in Bulgarian jurisprudence has imposed the name of a foreign currency used for calculating the amount of the principal, interest, as well as repayment installments for bank loans, when the credit is actually used in another currency (and not in the virtual currency used only for calculations)[6], which has nothing to do with cryptocurrencies and similar technologies. In Bulgarian legislation, there is a definition of "electronic means" in the Public Offering of Securities Act (POSA), Public Procurement Act (PPA) and Concessions Act (CA), which, however, has nothing to do with virtual money, currencies or funds etc., and refers to electronic communication equipment.

Current Bulgarian legislation

The first legal definition, aimed at specifying and defining cryptoassets, is contained in item 24 (SG, No. 94 of 2019) of § 1 of the SP of MAMLA, stating that “Virtual currenciesare a digital representation of value that is not issued or guaranteed by a central bank or public authority, is not necessarily linked to a legally established currency and does not have the legal status of currency or money, but is accepted by natural or legal persons as a medium of exchange and may be transferred, stored and traded electronically. Item 1 of § 1 of the SP of Ordinance No. H-9 of 7.08.2020 on the terms and conditions for entry in the register of persons who by occupation provide exchange services between virtual currencies also refers to the same definition of "virtual currencies" currencies and non-gold-backed recognized currencies, and to wallet providers that offer custody services to the Treasury.

In addition to the definition of virtual currencies, the definition of "A wallet provider that offers custodial services" as "a natural or legal person or other legal entity that provides private cryptographic key custody services on behalf of its clients for the holding, storage and transfer of virtual currencies", according to Item 25 (SG, No. 94 of 2019) of § 1 of the SP of MAMLA.

For persons who professionally provide exchange services between virtual currencies and non-gold-backed recognized currencies and for wallet providers who offer custodial services MAMLA introduces mandatory measures (art. 4, items 38 and 39) for the prevention of the use of the financial system for the purposes of money laundering, consisting in a complex verification of customers, collection and preparation of documents and other information under the conditions and in accordance with the rules of the MAMLA, storage of the documents, data and information collected and prepared for the purposes of the MAMLA, assessment of the risk of money laundering and financing of terrorism, disclosure of information regarding suspicious operations, transactions and customers, disclosure of other information for the purposes of the MAMLA, according to Art. 3, m.p. 1-6 of MAMLA.

Additional obligation for persons who by profession provide exchange services between virtual currencies and recognized non-gold-backed currencies and for wallet providers who offer custodial services MAMLA introduces the need for entry in a public register, according to Art. 9a of MAMLA, under the terms of Ordinance No. H-9 of 08/07/2020, before starting the activity (Art. 2, Para. 1 of the Ordinance).

Licensing requirements for companies operating with cryptoassets

The lack of legal regulation regarding cryptocurrencies and attempts to define them have necessitated the solution of one of the main questions, namely, whether there is an effective regulation for the persons who acquire, trade, make payments and financing with virtual currencies and whether they are subject to any licensing. As an answer to this question, until now there has been formed judicial practice, which assumes that the subject of a company's activity as "trading and mining of virtual currencies, financing through virtual currencies" or "mining and buying and selling virtual currency, buying and selling machines and devices for mining virtual currency" are activities that do not fall within the scope of Art. 12, para. 3 of the PSPSA and Art. 4 of the PSPSA, which comprehensively lists the payment services for which a license is required.

IN Decision No. 32 of 15.01.2018 under Case No. 17/2018 of the District Court - Plovdiv it is assumed that the activity of "virtual currency mining and trading, virtual currency financing" does not constitute a payment service within the meaning of the ZPUPS, resp. not subject to licensing under the same law. The activities of acquiring, trading and paying with virtual currencies are not regulated by the current Bulgarian and European legislation and are not subject to licensing. Virtual currencies do not constitute a financial instrument within the meaning of Art. 3 of the MFFI, as the declared subject of activity lacks unequivocally defined activities of an investment intermediary or activities and services within the meaning of Art. 5, para. 2 and 3 of the Markets in Financial Instruments Act (MFIA), for which licensing by the Financial Supervision Commission is required. In its decision, the district court referred to Decision No. 834 of 24.04.2015 under para. d. No. 984/2015 of the Court of Appeal - Sofia, as well as the letter requested in the case ex. No. BNB – 108809/19.09.2014 of the deputy governor of the Bulgarian National Bank and letter ex. No. 07-00-114/23.10.2014 of the Financial Supervision Commission.

Agreed 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. The activities of acquiring, trading and paying with "Bitcoin" are not regulated by the current national and European legislation and are not subject to licensing or registration. The purchase and sale of virtual currencies and payments with them, including "Bitcoin", do not fall within the scope of Directive 2009/110/EC of the European Parliament and of the Council of 16.09.2009. on the undertaking, exercise and prudential supervision of the activities of electronic money institutions and Directive 2007/64/EC of the European Parliament and of the Council of 13.11.2007 on payment services in the internal market, respectively, within the scope of the PSPSA, by which the mentioned European acts were transposed into the Bulgarian legislation.

With letter ext. No. 07-00-114/23.10.2014 the Financial Supervision Commission has expressed the opinion that activities related to acquisition, trading and payment with "bitcoins" are not regulated by current European and national legislation and are not subject to a license and registration regime. In Art. 3 of the MFIA explicitly lists the financial instruments that are subject to regulation by the FSC. Currently, "Bitcoins" or other virtual currencies are not recognized and are not treated as financial instruments within the meaning of the MFIA and should not be subject to the requirements of the MFIA. To enter into transactions with "bitcoins" it is not necessary to issue a license from the FSC for carrying out investment activities and providing investment services within the meaning of art. 5, para. 2 and 3 MFIA. It is reflected that given the nature of "bitcoin" and other similar "cryptocurrencies" exceeding 200 different types, they could represent and/or serve as the underlying asset of derivative financial instruments, which is currently not reflected in the current regulations. It is concluded that the rules of the MFIA would be applicable to this activity only if it involves activities related to the offering of financial instruments whose underlying asset is "Bitcoin" such as contracts for difference or derivative instruments, for which it is necessary the possession of a license to carry out activity as an investment intermediary. If the company does not intend to carry out such transactions with the base asset electronic currencies, then its activity will not be subject to licensing by the FCS.

It is in a similar sense Explanation ex. No. 94-g-80 of 05.06.2019 of the National Revenue Agency on the tax treatment under Value Added Tax Act (VATА) and under the Corporate Income Tax Act (CITA) of the supply of a service for the provision of software (payment gateway) through which payment for goods is made with virtual currency and on the exchange of virtual currency in dollar/euro, which states that the fact that a company is not a financial institution and does not hold a cryptocurrency trading license is legally irrelevant to the scope of the regulated tax exemption.

For the sake of completeness, it should be noted that the lack of regulation and lack of licensing regime is not absolute. So e.g. in Decision No. 1399 of 12.07.2017 pursuant to No. 1313/2017 of the Sofia City Court has been considered violation of the prohibition of Art. 6, para. 1 of the Credit Institutions Act (CIA) on the use of the word "bank" by a person in its name, in its advertising or in other activity or some of its derivatives in a foreign language or another word denoting the performance of banking activity, if he does not have a license to carry out banking activities. In its decision, the court ruled that company with trading company "Bitcoin Bank” violates the said prohibition and should be terminated, as it does not have a banking license.

Trade transactions, cryptocurrency mining and consumer protection

Of interest at the moment is the question of whether the parties to cryptocurrency mining or trading transactions can be consumers, as well as whether the transactions can be qualified as commercial, affecting the procedural order in the claim process.

So e.g. in Decision No. 308 of 24.07.2019 under Criminal Procedure Code No. 424/2019 of the Court of Appeal - Plovdiv, which is confirmed Resolution No. 495 of 15.05.2019, pursuant to No. 21/2019, according to the inventory of the Kardzhali District Court it is assumed that The transfer of cryptocurrency is not a commercial transaction according to art. 286, para. 2 of the Commerce Act (CA) in conjunction with Art. 1, para. 1 of the CA, as it does not fall under the hypothesis of banking and currency transactions, which are specified in the law - Commerce Act, Payment Services and Payment Systems Act, Markets in Financial Instruments Act, Foreign Exchange Law. In this regard, Disputes regarding cryptocurrency transactions are handled under the General Claims Procedure, not the Commercial Disputes Procedure.

About the acquisition of cryptocurrency by an individual for investment purposes – to sell it and trade with it, s Decision No. 2597 of 12.12.2019 under Administrative Law No. 2635/2019 of the District Court - Plovdiv it is assumed that this circumstance does not give the person the status of "user" in the sense of § 13, item 1 of the SP of the Consumer Protection Act (CPA), or according to the special Insurance Code (IC) or Energy Act (EA), which is why the same cannot seek special protection in this connection, or benefit from the rules for elective jurisdiction of the dispute. In the same sense, the natural person - a party to a contract for the sale of cryptocurrency mining services is not a user, as it is in a similar position to the tenant of production capacity and has the quality of a producer of cryptocurrency. In this sense, even if it is assumed that the subject of such contracts is the use of a service providing the opportunity to acquire cryptocurrency, it is not used by the person for personal use, but for possible mining of financial instruments, which can subsequently be use as a regular means of payment or be resold (Resolution No. 235 of 24.01.2020 under Criminal Code No. 60/2020 of the District Court - Varna).

Also of interest is the question of whether the one-time payment of the price for the continued provision of computing power for cryptocurrency mining constitutes a contract with a continuing effect, and whether the same can be rescinded with retroactive effect - i.e. in case of failure to provide the full computing power, a refund of the full price is due. With Decision No. 146 of 12.11.2020 under City Decree No. 1125/2020, III Mr. Fr. of the Supreme Court it is accepted that to the extent that under the contract for the provision of computer power, the consideration is carried out with a one-time performance (payment of the amount), it in case of culpable failure of the supplier, the user has the right to unilaterally cancel the contract with unilateral notice (Art. 87, Para. 1 Obligations and Contracts Act (OCA)), as in this case cancellation of the contract will have a retroactive effect, because at least one of the counter performances is a one-time performance (art. 88, para. 1, pr. 1 OCA).

The future pan-European regulation of cryptoassets

The Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions on a strategy for the digitization of financial services in the EU, COM(2020)591 of 24/09/2020 begins with the following words: "The future of financial services is digital (…)". This initiates Procedure 2020/0265/COD, COM(2020)593: Proposal for Regulation of the European Parliament and of the Council on crypto-asset markets and amending Directive (EU) 2019/1937 and the text of the same has been introduced. Thus, the beginning of the end of the vacuum in the legal framework of cryptocurrencies has been set. Justifying the need for its adoption in 79 considerations, the proposed future Regulation sets itself four main objectives: legal certainty, promoting innovation, appropriate levels of consumer and investor protection, as and fair market relations, and guarantee of financial stability[7], which he developed into 126 articles.

The scope of the future Regulation does not include financial instruments according to art. 4, par. 1, it. 15 of Directive 2014/65/EU, electronic money according to art. 2, item 2 of Directive 2009/110/EC, except when they are considered electronic money tokens according to the Regulation, deposits according to art. 2, par. 1, item 3 of Directive 2014/49/EU of the European Parliament and of the Council, structured deposits according to art. 4, par. 1, item 43 of Directive 2014/65/EU, securitizations according to art. 2, item 1 of Regulation (EU) 2017/2402 of the European Parliament and of the Council. The regulation applies to persons involved in the issuance of cryptoassets or who provide services related to cryptoassets.

In Art. 3 of the Regulation for the first time the terms and corresponding definitions are given on the concepts of "crypto asset", "issuer of cryptoassets", "asset-backed token” (often referred to as “stable cryptocurrencies”), “electronic money token” (often referred to as “stable cryptocurrencies”), “crypto asset service provider", "token for goods or services" and other, and the various services related to cryptoassets are also defined.

The regulation defines for the first time the so-called "white paper", which must contain certain information according to the type of cryptoasset it is supposed to describe, similar to prospectuses in public offerings of securities. The same is mandatory (there are exceptions introduced) for the public offering of crypto-assets, other than asset-backed tokens and electronic money tokens (Art. 5), for issuers of asset-backed tokens (Art. Art. 16-19 and annexes I and II), for electronic money tokens (Article 46). It also introduces requirements and conditions under which marketing messages can be distributed, which must adhere to the content of the relevant white paper.

For the first time, they are also introduced licensing conditions on asset-backed token issuers (Art. 15), on electronic money token issuers (Art. 43), and for the latter it may be referred to the licensing regulation as a credit institution or as "electronic money institution"[8] in the sense of art. 2, par. 1 of Directive 2009/110/EC. Conditions are introduced for the licensing and operating conditions for cryptoasset service providers (Art. 53), which will be valid throughout the European Union, regardless of which Member State it was issued in (Art. 53, item 3).

Capital requirements are introduced for asset-backed token issuers, according to Art. 31, providing for different mechanisms for determining its minimum size, which it should not be less than EUR 350,000 or their equivalent. In addition to the capital requirements, the Regulation also provides for an obligation to set aside a separate reserve of assets (Article 32) for each secured token. Asset-backed token issuers are provided conditions under which they can invest part of the reserve assets (Art. 34) – only in highly liquid financial instruments with minimal market and credit risk. Investments should be able to be liquidated quickly with minimal negative effect on price.

It is important to note that with the Regulation requirements are imposed that apply to all cryptoasset service providers, for example the obligation to act honestly, impartially and professionally (Art. 59), the prudential guarantees introducing permanent minimum capital requirements of €50,000 for the most basic crypto-asset services (Art. 60 and Annex IV), organizational requirements (Art. 61), rules regarding the protection of client cryptoassets and funds (Art. 63), as well as an obligation to establish a procedure for handling complaints (Art. 64), rules regarding conflicts of interest (Art. 65), as well as rules regarding the outsourcing of activities. Requirements are also defined in relation to specific services: custody of crypto-assets (Article 67), trading platforms for crypto-assets (Article 68), exchange of crypto-assets against fiat currency or against other crypto-assets (Article 69), execution of orders ( Art. 70), placement of cryptoassets (Art. 71), receipt and transmission of orders on behalf of third parties (Art. 72), as well as consultations regarding cryptoassets (Art. 73).

A special share is also allocated to prevent market abuse of cryptoassets (art. art. 76-80), covering the disclosure of inside information and prohibition of its abuse and prohibition of market manipulation.

For the control of compliance with the Regulation, significant control and supervisory powers of the European institutions and obligations for the member states to introduce control mechanisms and to determine sanctions for individuals and legal entities acting in violation, but not in the focus of the exhibition, and are yet to be introduced by individual member states.

Decentralization of assets

Created as an alternative to money, cryptocurrencies are about to be fully legalized as an asset that will find its place in the financial system of Europe and the world. A brief overview of their legal acceptance shows that interest in them will increase as the lack of control on which they have thrived over the years fades. However, with the introduction of a single licensing system in the European Union, new opportunities will appear for the development of the industry with an equal start in all member states, which can only be welcomed. With this, the idea of decentralization of crypto-assets, which is one of the reasons for which they were created, can be continued to some extent.

Ivan Nikolaev, attorney-at-law

[1] Kolev, T. Theory of law. S. Siela, 2015, p. 100 et seq.

[2] It should be clarified that even if they do not have a strict legal framework, cryptocurrencies in practice still have some regulation in various aspects worldwide. As of 2018 indirect ban on the use of cryptocurrencies there are in China, Taiwan, Saudi Arabia, Iran, Qatar, Oman, Colombia, Bahrain, Bangladesh, Dominican Republic, Indonesia, Kuwait, Lithuania. Absolute prohibition has been imposed in Iraq, Egypt, United Arab Emirates, Algeria, Bolivia, Pakistan, Morocco. At least 20 countries, including Bulgaria, the United Kingdom, Russia, Austria, Poland, Canada, Denmark, Japan, Switzerland and Norway have some tax regime for cryptocurrencies, while at least they still have that much regulation on measures against money laundering, including Hong Kong, Liechtenstein, Luxembourg, Gibraltar, etc. Next, as of 2018, at least 13 countries are developing their own government cryptocurrencies, including China, Ireland, Lithuania and Venezuela. For more on the regulation of cryptocurrencies worldwide, see The Law Library of Congress, Global Legal Research Center, Regulation of Cryptocurrency Around the World, 2018.

[3] The history of virtual currencies began decades ago when, in the late 1980s, a gas station in the Netherlands, in an attempt to stop the physical theft of currency from its registers, introduced smart cards, related to accounts in fiat (book) money through which payments are made. Before that, in 1983, David Chaum created a project for an anonymous payment system using transaction encryption ("Blinded cash"), and the main idea was that the servicing bank could see the amount of the payment, as well as the parties to it, but never understand the subject of the transactions. In the 1990s, David Chaum's concept was developed by companies such as PayPal and E-Gold, who were the first to use the Internet for transactions. In 1998, Wei Dai created B-Money – an electronic money system based on anonymity through digital pseudonyms and a distributed ledger, without the use of a third party for transactions. In the same year, Nick Szabo developed Bit-Gold, a decentralized digital currency “powered” by solving cryptographic math problems. A year before, in 1997, it was also developed HashCash – a system to prevent spam and DDoS attacks, but also generate digital coins using decentralized computer problem solving. However, HashCat faces the problems of modern cryptocurrencies – the increasing need for computing power and increasingly complex algorithms. See more in Panda, S., Elngar, E., Balas, V., Kayed, M., Bitcoin and Blockchain. History and current application. New York: CRC Press, 2021, p. 2.

[4] Banque de France, Les dangers liés au développement des monnaies virtualles: l'exemple du bitcoin, Focus 10, 5 December 2013.

[5] Opinion of the European Securities and Markets Authority of 9 January 2019 to the Commission on Initial Coin and Crypto Asset Offerings.

[6] See e.g. Decision No. 384 of 29.03.2019 of the Supreme Court of Appeal pursuant to Item No. 2520/2016, Item I, TC, Decision No. 260002 of August 24, 2020 pursuant to Item No. 153/2020 of the Court of Appeal - Plovdiv and others.

[7] Item 1 of the Explanatory Memorandum to the Proposal for a Regulation of the European Parliament and of the Council on cryptoasset markets and amending Directive (EU) 2019/1937.

[8] It is also important to say that for the first time it is regulated that holders of e-money tokens have the right to claim against the issuer: e-money tokens should be issued at face value and upon receipt of the funds, and upon request by the holder of these tokens, the issuers should redeem them at any moment and at nominal value (Article 44). E-money token issuers and crypto-asset service providers are prohibited from providing interest to e-money token holders (Article 45).