Cryptocurrency regulation in Europe

Endy Callahan

Cryptocurrencies have already made a big entrance on the financial market and with every passing year, they are expanding their influence further and further. Today, their capitalization is estimated in the tens of billions of dollars. Many private investors and funds put their trust and huge sums in digital assets investment. Naturally, they all want legal protection. However, the crypto industry is still in the gray area. And yet in European countries, the authorities carry out regulation at the legislative level in the field of digital money.

What is cryptocurrency

The European Central Bank (the ECB) in 2012 issued a report on the schemes of digital money. The document focused on the problem of their rapid spread, the consequences for the reputation of European Central banks, and the economy.

According to the Directive, digital money is an entity that is on an electronic medium and can be accepted as a means of payment by both the Issuer and other legal entities.

From the legal point of view, cryptocurrency cannot act like a currency or money. It does not fully meet the three main functions of money:

  • Medium of exchange
  • Accounting method
  • Preservation of value

The European Central Bank noted that digital money cannot act as a means of preserving value. The reason is their increased volatility. In 2015, the ECB defined cryptocurrency as a digital representation of value not issued by a credit institution or Bank which can be used as an alternative to money.

Thus, European legislation regards digital money mainly as a means of exchange, rather than a payment.

Taxation in the field of cryptocurrencies

In the European Union, there is no single legislation regarding the tax regime of digital money. In 2015, the European Court of Justice issued a preliminary ruling and some countries of the economic bloc supported it.

In 2015, there was a trial between David Hedquist and the Swedish tax service against the background of the need to impose VAT on the sale and purchase of bitcoin on the exchange. The parties interpreted the current legislation differently. The highest European court released the work of David Hedquist from VAT. In his opinion, BTC when trading on the exchange acts as a currency, not a commodity. The judicial authority referred to Council Directive 2006/112/EC from 28.11.06. It exempts "currencies, banknotes and coins" from VAT. The final judgment was made on 22.10.2015.

Laws against terrorist financing and money laundering

In July 2016, the European Commission proposed amendments to the fourth anti-money laundering Directive. It also pointed out blind spots in the supervision of funds used by terrorists. Among them are cryptographic currencies. Aiding and abetting terrorism is considered the main legislation problem of digital money. They allow for completely anonymous transactions. As a result, terrorists receive funding and the opportunity to hide from the authorities.

The last text of the Directive 5AML confirmed the European Parliament from 30.05.2018. It establishes cryptocurrency as a digital representation of value, not provided by the Central Bank or Government Agency. It is not tied to legally valid currencies and does not have the status of money or currency. At the same time, digital money can be used by individuals and organizations as a means of exchange.

Cryptocurrencies need the development of state regulation. There are still many blind spots and gray areas. Filling them will lead to increased investment as private buyers and organizations want to have maximum protection for their digital assets. Follow the latest news on our portal, so you will always be aware of the latest changes in the legislation on cryptocurrencies.