As we previously commented on our last blog post, spotting the fast growing pace of Bitcoin and its presence in Europe and how it is ultimately necessary to create a regulatory landscape for its use and trade, we must take a second look at what is currently available when trying to define the legal nature of Bitcoin. This leads us to ponder what will wait for Bitcoin users. From a legal viewpoint, while there is not a clear definition for crypto currencies at a EU regulatory level, the task is  sort of daunting. So how can lawyers work with clients that are seeking legal compliance with the different services relating to Bitcoin?

The regulation that is closest in nature to Bitcoin would be the Payment Service Directive 2007/64/ EC and the E-money Directive (2009/110/ EC). As we mention, they do not define or regulate digital assets, but we may find indications on what the service providers may comply with.

The Payment Service Directive – PSD - is intended for payment service providers, and it states a number of requirements that an entity must fulfill in order to be granted authorization to operate. In a way, it is an entity that acts as an intermediary for different types of capital transactions, which somehow relates to service providers that allow users to buy exchange or pay with Bitcoin. However, we do not have yet an official definition of whether Bitcoin transactions may be defined as a payment method or transfer of assets, or both. And all above considering that the PSD regulates money transactions, and thus Bitcoin seems to fall out of its scope.

It raises a question: if Bitcoin were to be regulated as an international currency, or whether it’d be way of payment solely, would be PSD be enough? We think not.

On the other hand, the E- Money Directive regulates services of such nature, acting as an intermediary, offering an official definition and also stating a number of requirements to fulfill, it is closely linked to the PSD and it is constantly referred throughout its content.  It is important to note that e-money is defined as a currency that is issued upon receipt of funds that the issuer of e-money cannot simply create e-money units at will (prepaid goods).

However, given its nature and decentralization, how can we fit Bitcoin when these are granted automatically and not issued, meaning they are disqualified from the scope of the E-Money Directive?

Such uncertainty in its definition and legal nature leads to those numerous risks that the European Banking Authority (EBA) informed in its official statement. And if all above it is not enough, we have  tax issues hanging on us:

A recent EU Tax Law may provoke negative incentives towards Bitcoin. The object of such law relies on the application of VAT in terms of location. It will force merchants to log users' location, and make the user pay VAT twice. The EU states that the reason of this change relies on “the VAT treatment of these services in line with one of the main principles of VAT that, as a consumption tax, revenues should accrue to the Member State in which goods or services are consumed.”  

In terms of digital services, Bitcoin fits in and would have to operate in terms of this legislation. So again, there is a problem in defining Bitcoin legally, yet there are rules that it should comply with that may be detrimental in the future.

But is Bitcoin a service or an asset? This is the question that asks for clear answers.

Some member states have been more clear than others, but it is interesting to observe that the path that Bitcoin is taking in terms of legal framework is pretty chaotic because of the institutional panic to regulate it even wrongly.

UK, Germany, Czech Republic and recently Sweden and Finland (Spain did too) have provided statements and/or recommendations about its tax treatment but guessing on what it could be, not ascertaining it.

In conclusion, it is still too early but that does not make it less necessary, to tackle the issue and maybe alongside with the USA – a global, or international, similar regulation shall provide more legal confidence and governments everywhere could benefit from it in the form of taxation, but charging both – merchant and user, or just one of them with two different tax concepts, as it was done in Sweden, misleads the need of definition of what Bitcoin is.

Lobbying and consumer adoption will be important in order for the EU generate a legal framework that is adept and with the lowest risk for users and businesses alike