Cryptocurrency Update by GESSEL

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1. Davos

During the Economic Summit held in Davos last week, cryptocurrencies were one of the hottest topics. An official session devoted to the matter was held, followed by CNBC panels in the Sanctuary. Throughout the Summit, a specially designated space, called Crypto HQ, was devoted to matters relevant for the market.

Government leaders and experts praised blockchain technology but, at the same time, generally criticized Bitcoin. Politicians and economists expressed concerns relating to the highly speculative nature of the current cryptocurrency market and to the risks associated with growing presence of small, often reckless investors. 

The Leaders were also agreement as regards necessity of market regulation, especially in the context of AML. Concern was expressed as to the possible illicit use of cryptocurrencies, for which Bitcoin is still being blamed. 

On the other hand, live discussions were held as to potential future applications of blockchain technology in financial sector and in other industries. Banks and corporations already express an utmost interest in solutions involving blockchains. Rapid development within this sphere is expected.

The fact that the anonymity, the lack of transparency and the way in which it conceals and protects money laundering and financing of terrorism and all sorts of dark trades is just not acceptable.

Christine Lagarde, Managing Director, IMF

Did you know?

The first ever Bitcoin payment occurred on 22 May 2010 and was a transaction to buy … a pizza. Two Papa John’s pizzas were bought in Jacksonville for BTC 10.000, which is now worth over … 110 million USD !

2. Poland moving forward with AML amendments

On 18 January 2018, the Polish government formally presented a draft bill aimed at supplementing the current AML regulations with crypto-implications. The proposal implements changes to the legal framework adopted at the EU level by the AMLD IV Directive. 

The main aspects of the draft include:

• Introduction of a definition of a “virtual currency” – open-ended and broad definition, covering any “digital representation of value” which is tradable and is not any kind of representation of value already regulated by the state (fiat, electronic money, cheques etc.);
• Institutions falling within the scope of regulation – gatekeepers, i.e. entities providing services with regard to trading between fiat and cryptocurrencies or between cryptocurrencies as well as intermediaries and wallet holders;
• Scope of obligations – identification of users and real beneficiaries (if applicable), monitoring, analysis and registration of transactions;

Consequences of the amendments:

• Unification of regulations at the EU level;
• Users of most of the exchanges and wallets are already identifiable;
• Probable threat to currencies ensuring anonymity inside blockchains (Monero);
• Significant increase of obligations for the gatekeepers (especially with regard to analysis of transactions);
• Anonymity will not be full – some users don’t use the gatekeepers to trade;

We will either regulate cryptocurrencies or ban them in our country.

Mateusz Morawiecki, Polish Prime Minister

3 Taxation of crypto->crypto exchanges

Until recently, the Polish tax authorities regarded only profits from crypto -> fiat exchanges as taxable income. This was due to the fact that cryptocurrencies were not perceived as a source of value that could constitute an income. This, in turn, allowed for simple tax avoidance by engaging only in crypto->crypto exchanges or holding investment gains in relatively stable currencies like USDT. 

This policy is now about to change. One of the latest interpretations issued by the Polish tax authorities indicates that income from each crypto->crypto transaction should be taxed just likethe crypto->fiat transactions. The tax authorities stated that a conversion from one virtual currency to another may result in taxable income and refused to treat crypto->crypto transactions as currency trades (taxable only in certain circumstances).

This interpretation is unclear and engenders numerous questions – especially given the fact that the value of cryptocurrencies (hence the level of “income”) is abstract and changes every second, sothe level of “income” is virtually impossible to determine in a fair and justifiable way. On the one hand, transactions of sale or purchase of a non-existent asset of dynamically shifting value in considerationfor another asset of the same character results in a “real” income that is to be taxed. On the other, subsequent loss of value will normally not result in possible tax relief. 

The interpretation is particularly significant since it has been issued by the Director of the National Tax Information, who has the power to overturn previous interpretations issued by regional tax authorities. Please note that this interpretation can (and probably will) be appealed by the petitioner.

Also, further state actions geared at taxing profits from trade of cryptocurrency trades are to be expected this year. 

For more information on recent developments with regard to taxation of cryptocurrency-related income please contact us directly. 

4 Crypto-related legal services

To begin with a truism, technological development has never been so rapid. Regulators stopped keeping up with it years ago and, hence, lawyers are no longer called upon to merely analyse the regulations in place, but also to try to foresee future development of regulatory frameworks. This way, Clients may, hopefully, be afforded some degree of safety as they progress into uncharted territory.

GESSEL Tech Law was created exactly for this purpose. We respond to our Clients’ need for legal services in the most complex areas of innovative technologies, including in particular the cryptocurrencies environment. The future of cryptocurrencies has yet to be mapped out, and the field poses legal challenges we are keen to address.

GESSEL Tech Law | Cryptocurrencies 

Focus points:

• Taxation;
• Regulation;
• Currency development;
• Initial Coin Offerings in Poland;
• Smart contracts;
• Blockchain inclusion in “traditional” transactions;
• Crypto-wills and status within marriage;
• Out-of-exchange transactions regarding cryptocurrencies.

Blockchain has the potential of becoming one of the most revolutionary technologies in the history of the modern trading world. Its potential applications for finance, contracting or M&A is unbelievable.

Piotr Schramm, Partner, Head of GESSEL Tech Law

5 Safety concerns on the rise

Biggest crypto-hack in history |

Japan-based cryptocurrency exchange Coincheck announced that hackers had robbed it of tokens worth over USD 400 million. The exact method used in the heist was not revealed. Coincheck is one of the biggest cryptocurrency exchanges in the world. Its representatives stated that customers will be refunded to the full amount of the tokens stolen.

(Remember: Within the exchange, your coins are usually not protected by blockchain technology. The ledger does not register transactions within the exchange, but only those outside it).

ICO and safety of funds  | A recent report by Ernst & Young analyses the effectiveness of ICO funding. The firm examined 372 ICOs and found that nearly USD 400 million (10%) of all funds raised in this way by blockchain-technology companies has vanished into thin air, mostly due to phishing attacks.

ICO is a very popular alternative to issuing shares or bonds by a company in order to assemble financing. However, being as they are neither regulated nor supervised, most ICO-tokens come without any security for their buyers. Companies running ICOs have no product to offer beyond a whitepaper – a few pages of text painting the broad strokes of how the thing people just invested a trainload of money into should, theoretically, work.

Although Ernst & Young also reports a drop in the percentage of ICOs attaining their full estimated funding, it is worth noting that, to date, ICOs generated around USD 3.9 billion for companies.

Contact:

Piotr Schramm
Partner
p.schramm@gessel.pl
+48 22 318 69 34

Marcin Robenek
Managing associate
m.robenek@gessel.pl
+48 22 318 69 43

Paweł Kwiatkowski
Senior associate
p.kwiatkowski@gessel.pl
+48 22 318 69 42

Maciej Trąbski
Senior associate
m.trabski@gessel.pl
+48 22 318 69 74