Government attitude and definition
While the Irish Government has, to date, remained largely silent on its attitude towards cryptocurrencies, the Irish Department of Finance issued a Discussion Paper on Virtual Currencies and Blockchain Technology in March 2018. The Paper discusses various aspects of both, such as risks and benefits of currencies, but also gives examples and details of countries which are either proponents or opponents of cryptocurrencies and/or blockchain technology.
While the Discussion Paper does not outline or represent the attitude of the Irish Government on this topic, it states that no one policy measure or State agency has the ability to comprehensively address all the risks and opportunities in the area. Instead, it states that to evaluate each of these issues, the Irish Government will require the expertise of multiple State agencies such as the Department of Finance, the Revenue Commissioner, the Data Protection Commission and the Department of Business, Enterprise and Innovation to allow for the development of holistic policy measures that encourage innovation while addressing risks to consumers, investors and businesses.
In order to facilitate this process, the Department of Finance established an interdepartmental working group on blockchain and cryptocurrencies in March 2018 to, amongst other things, monitor international developments in the area, engage with other areas of Government, assess possible involvement, and consider if policy recommendations will be necessary.
In Ireland, cryptocurrencies are not regarded as either "money" or "currency". The Central Bank of Ireland (CBI) has issued a warning on its website that cryptocurrencies are not legal tender and are neither guaranteed nor regulated by the CBI. The dangers associated with such currencies, as mentioned by the CBI in its warning, include their extreme volatility, the absence of regulatory protection, and the risk of being given misleading or incomplete information.
The CBI also issued an "Alert on Initial Coin Offerings" in December 2017. The purpose of the alert is to warn against, amongst other things, the high risk of losing all invested capital due to the lack of regulation and the associated risk of becoming the victim of fraud or other illicit activities. Extreme price volatility was also mentioned as one of the risks. There are currently no cryptocurrencies which are backed by either the Irish Government or the CBI. While other jurisdictions around the world are investigating the use of digital currencies, no such plans have been announced to date by either the Irish Government or the CBI.
There is no specific cryptocurrency regulation in Ireland, but there is also no specific prohibition in Ireland on any activities related to cryptocurrency.
The CBI is the competent authority in Ireland for the regulation of financial services including electronic money, payment services and securities law. The CBI has yet to indicate the extent to which existing financial regulation will apply. The CBI has issued warnings in relation to ICOs and cryptocurrencies and has also contributed to the European Securities and Markets Authority (ESMA)'s warnings to both consumers and to firms engaged in ICOs (see also "Government attitude and definition").
In respect of cryptocurrency regulation, we expect that the CBI will focus on securities law and the recognised EU concepts of "transferable security" and "financial instruments" as defined in the 2014 European Union Markets in Financial Instruments Directive (MiFID II) and the characteristics which they view as bringing cryptocurrencies or tokens within those definitions. Depending on their structure, cryptocurrencies could be classified as transferable securities, which would bring them within scope of a range of securities laws. For example, the issuer of a cryptocurrency may be required to publish a prospectus (or avail of an exemption) prior to their being offered to the public, or certain activities in respect of the cryptocurrency may require authorisation as an investment firm under MiFID II.
A pure, decentralised cryptocurrency is unlikely to be a transferable security, while a token with characteristics similar to a traditional share or bond may be. It is also possible that true "utility" tokens intended for exclusive use on a platform or service will not be transferable securities. The definition of transferable security is non-exhaustive and it is for each issuer and their advisers to determine whether their cryptocurrency or token is a transferable security.
In January 2019, ESMA published advice to the European institutions on ICOs and cryptoassets recognising the gaps and issues with existing EU rules and calling for a harmonised EU-wide approach in this area.
As in many jurisdictions, the regulatory environment in relation to cryptocurrencies and their interaction with securities law is not yet settled and ESMA acknowledges that, depending on how an ICO is structured, it may fall outside the regulated space entirely.
Depending on the structure of an ICO or token, it may fall within the regulated space and require the publication of a prospectus (or availing of an exemption from that requirement, see above) prior to it being offered to the public.
There are no specific rules for dealings in cryptocurrencies, and normal basic principles apply. The Irish Revenue confirmed this in a publication issued in May 2018. The taxation of dealings in cryptocurrencies will generally follow the underlying activities. Thus the receipt of cryptocurrency by a trader in lieu of cash for goods or services rendered will generally be taxed as income. Dealing in cryptocurrencies of themselves will depend on the nature and level of activity of the dealer. Occasional investment in and disposals of cryptocurrencies would likely be treated as a capital receipt, currently taxed at 33%. Where there is significant and regular dealing, this could be considered to be trading, which for a company would be taxed at 12.5%, or the marginal higher rates for individuals. The actual tax position will depend on an analysis of the specifics of each transaction, and would need a case-by-case consideration, as is normal in trading activity. Cryptocurrencies are not a functional currency, and therefore accounts should not be prepared in cryptocurrencies for tax purposes. If it is assumed that the profit may be taxable under some heading, the next issue is valuing the profit generated. This is naturally a challenge, and indeed records of trades through various exchanges may be difficult, if not impossible to obtain. It is likely that this area will be the subject of further guidance from the Irish Revenue in due course, but in the interim, those dealings in cryptocurrencies should keep all relevant contemporaneous records to assist in the valuation.
Originally published by Global Legal Insights.
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This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.