Bitcoins, the regulatory perspective

1. Introduction

In our Financial Markets Report of November 2013, we reported that Bitcoins were not e-money, as defined under the relevant EU legislation. This is partly because a limited number of Bitcoins are created and then traded; there is no real issuer of Bitcoins in the sense of a company issuing Bitcoins in exchange for money or other funds.

However, we also reported that Bitcoins (and other cryptocurrencies such as Litcoin), have increasingly attracted the attention of legislators and regulatory authorities. One reason for this is that crypto-currencies are allegedly involved in illegal transactions.

Bitcoins can, of course, be traded or bartered in exchange for goods or services. However, in order to function in the economy, Bitcoins also need to be exchangeable for other currencies such as legal-tender currencies in various jurisdictions. These kinds of services are provided through online exchange platforms. These enable Bitcoins to be bought in exchange for funds denominated in regulated currencies.

Since November 2013, Bitcoin has also had to cope with the reported closure of well-known exchange platform provider MtGox, entailing the possible loss of funds invested in Bitcoins. Other providers of exchange platforms have been set up following the difficulties of MtGox.

2. The Reporting Duty Act

Under Swedish law, providers of certain financial services would be obliged to notify the Swedish Financial Supervisory Authority (SFSA) of their activities in accordance with the Swedish Certain Financial Operations (Reporting Duty) Act (lagen (1996:1006) om anmälningsplikt avseende viss finansiell verksamhet), (the ‘Reporting Duty Act’) and be registered as a financial institution by the SFSA. A registered financial institution is obliged to comply with Swedish Anti-Money Laundering (AML) law and thus adopt proper procedures for AML compliance.

The question arises as to whether providers of exchange platforms are obliged to notify the SFSA under the abovementioned act.

According to Section 2 of the Reporting Duty Act, a natural or legal person intending to engage in currency exchange on a significant scale or other financial operations must notify the SFSA of such operations. Furthermore, according to Section 1 of the Reporting Duty Act, “currency exchange” is defined as “professional trade in foreign currency and coins, as well as travellers’ cheques denominated in foreign currency” and “other financial operations” as “means of professional activities that primarily consist of conducting one or more of the operations set out in Chapter 7, section 1, second paragraph, subsections 2, 3 and 5-12 of the Swedish Banking and Financing Business Act (SFS 2004:297).”

The reference to “professional trade in foreign currency and coins, as well as travellers’ cheques denominated in foreign currency” is primarily to be understood as a reference to trade in foreign legal tender currency (i.e. the traditional currencies recognised as legal tender in other countries). It may be assessed that the exchange of or professional trade in Bitcoins for other currencies would not fall within this definition of currency exchange.

It remains to be tested whether such trade in Bitcoins could fall within the scope of “other financial operations”. The reference to Chapter 7, section 1, second paragraph, subsections 2, 3 and 5-12 of the Banking and Financing Business Act is of interest here as subsection 5 of that
section makes a reference to the provision of “means of payment”.

Subsequently, the question arises as to whether “means of payment” should be understood as a reference to any means of payment generally accepted in trade or as a reference merely to means of payment denominated in a legal tender currency.

It has been held in a decision by the Swedish Council for Advance Tax Rulings that Bitcoins constitute “means of payment” for the purpose of the Banking and Financing Business Act and the Reporting Duty Act and thus entail such services being exempt from VAT (1). This decision was
based on the finding that the SFSA had held the aforementioned Acts to be applicable since Bitcoins constitute “means of payment”.

On the other hand, for income tax purposes the Swedish Tax Authority (2) has held that Bitcoins cannot be considered a currency but rather an asset comparable to “goods”. The reasoning behind this is that Bitcoins are not legal tender.

3. Conclusion

In my opinion, the standpoint that Bitcoins are to be considered “means of payment” for the purposes of the Notification Act is well founded. In fact, Bitcoins are accepted as a means of payment by a limited but growing number of companies. This is also the case in Sweden. “Means of payment” is not necessarily to be understood as including only legal tender currencies. The decisive element behind such a standpoint is that Bitcoins are in fact accepted as “means of payment”. The standpoint that Bitcoins are “means of payment” thus focuses on the function of the currency being traded as currency rather than any endorsement by a state. This is also to say that a de-facto currency should be regarded as currency irrespective of its status as legal tender.

This view is in line with the ruling of the European Court of Justice (ECJ) in the Thompson Case, in which the court held that “Although doubts may be entertained on the question whether Krugerrands are to be regarded as means of legal payment it can nevertheless be noted that on the money markets of those Member States which permit dealings in these coins they are treated as being equivalent to currency” (3). The court thus concluded that Krugerrands fell within the definition of “means of payment” rather than that of “goods”.

The view that Bitcoins constitute “means of payment” entails, as mentioned above, AML standards applying to Swedish exchange providers (and other requirements on the board members of the companies providing such services). This would contribute to building confidence in cryptocurrencies, counteracting the use of crypto-currencies for illegal purposes and enhancing the use of crypto-currencies, such as Bitcoins, in day-to-day business.

(1) Advance ruling 14 Oct. 2013 (doc. No. 32/12/I). The Decision has been appealed.

(2) Swedish Tax Authority’s position at 23 April 2014 (doc. No. 131 212709-14/111).

(3) See also ECJ no. 7/78 Redina vs. Thompson.