Portugal: Virtual Currencies Comparative Guide

1 Legal and enforcement framework

1.1 In broad terms, which legislative and regulatory provisions govern virtual currencies in your jurisdiction?

In Portugal, there is no specific legislation governing virtual currencies or cryptocurrencies. Therefore, there is no general prohibition on acquiring, holding or disposing of crypto-assets or virtual currencies.

Nevertheless, several laws regulate various aspects of businesses and transactions carried out using virtual currencies. The existing laws and regulations may apply directly or by analogy.

Depending on whether a given virtual currency qualifies as a particular asset class and whether a particular method of distribution and sale is used, the provisions of various statues may apply, such as:

• the Securities Code (Law 83/2017), as amended;
• the Anti-money Laundering and Prevention of Terrorism Financing Law;
• the Data Protection Law; and
• to some extent, consumer protection laws.

However, as the EU Regulation on Markets in Crypto-Assets (MiCA) will enter into force in 2024, new provisions will apply to virtual currencies such as e-money tokens in all EU member states, including Portugal.

MiCA will regulate the issuance, offer to the public and trading of virtual assets within the European Union. The new regulation will apply to a wide diversity of crypto assets, covering many cryptocurrencies that can be used for speculative purposes and tokens used for payment, such as stablecoins, or that refer to underlying assets.

Therefore, a case-by-case analysis is required to understand the legal consequences and implications of a given transaction.

1.2 In broad terms, which legislative and regulatory provisions govern entities that provide services relating to virtual currencies? Must they be registered or licensed by a regulatory authority?

There are no licensing requirements for users to acquire, hold or dispose of virtual currencies that do not qualify as securities.

Under the Anti-money Laundering and Prevention of Terrorism Financing Law, virtual asset service providers (VASPs) doing business in Portugal must register with the Banco de Portugal . Registration is required prior to commencing activity in Portugal.

VASPs include all individuals and corporations (or any other entities) that:

• engage in exchange services between virtual assets and fiat currencies;
• engage in exchange services between one or more forms of virtual assets;
• provide services that allow the transfer of virtual assets from one address or wallet to another; or
• provide custodian wallet services.

The transposition of EU Directive 2018/843 amending EU Directive 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directives 2009/138/EC and 2013/36/EU, into the Portuguese legal framework has led to the need to register VASPs.

1.3 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

The Banco de Portugal and the Securities Market Commission (CMVM) are the two main regulators that oversee the legal framework that generally applies to virtual currencies and crypto-assets.

The Banco de Portugal is Portugal's central bank and is responsible for the supervision of credit and payment institutions. The CMVM supervises and regulates the securities and financial instruments markets and entities operating within those markets. It is also competent for assessing compliance with the applicable legal and regulatory provisions governing the prevention of money laundering and terrorist financing.

The laws applicable to each asset will vary significantly depending on its specific characteristics – in particular, whether the asset qualifies as either:

• a security (ie, a security token); or
• a utility token.

The issuance of security tokens falls within the scope of the CMVM's regulatory powers.

Insofar as virtual currencies do not qualify as financial instruments, advisory and management services will fall outside the scope of the laws regulating investment services and the CMVM's licensing powers.

1.4 What is the regulators' general approach to virtual currencies?

The Portuguese regulators are keen to point out the risks of investing in virtual currencies and crypto-assets and have issued several warnings and notices on this matter.

The Banco de Portugal has been vocal on consumer/investor protection. It has issued several public statements and warnings concerning cryptocurrencies, in line with the regulatory practices of other eurozone central banks and European regulatory authorities, such as the European Central Bank and the European Banking Authority.

The CMVM has published several warnings addressed to investors, also in line with other European regulatory authorities such as the European Securities and Markets Authority.

1.5 Has there been any notable enforcement action relating to virtual currencies?

No.

2 Definitions

2.1 How are 'virtual currencies' defined in your jurisdiction? Have there been any judicial decisions which have helped to define virtual currencies or their interplay with the existing body of laws (eg, contracts law, property law)?

There is no unified legal concept of virtual currencies or cryptocurrencies in Portugal.

The Portuguese regulators tend to adhere to the European Central Bank's definition of a 'virtual currency' as a "digital representation of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money".

The Anti-money Laundering and Prevention of Terrorism Financing Law sets out the concept of virtual assets. To this end, a 'virtual asset' is a digital representation of value that is not necessarily linked to a legally established currency and does not have the legal status of a fiat currency, security or other financial instrument, but which is accepted by individuals or legal persons as a medium of exchange or investment and which can be transferred, stored and traded electronically.

The Securities Market Commission (CMVM) has stated that:

In Portugal, virtual currencies do not have legal tender status, are not considered a type of currency and are not regarded as electronic money. Therefore, their usefulness as a means of payment is merely contractual.

2.2 How are 'initial coin offerings' and 'security token offerings' defined in your jurisdiction?

There is no legal concept of initial coin offerings (ICOs) or security token offerings in Portugal. However, the CMVM has issued notices and warnings on ICOs and virtual currencies.

The CMVM considers that an ICO is "a way of raising funds from the public through crypto-assets using blockchain technology. In this operation, the issuer, which may be a natural or a legal person, issues crypto-assets that are paid in legal tender or other cryptoasset currencies".

On 23 July 2018, the CMVM issued a formal notice on ICOs mentioning the aspects of an offering that could lead to its characterisation as a securities offering. Tokens with the following characteristics may be deemed to be securities by the CMVM:

• tokens that may be considered documents (whether dematerialised or physical form) that are representative of one or more rights of a private and economic nature; and
• tokens which, given their particular characteristics, are similar to typical securities under Portuguese law. In this regard, the CMVM will take into account all characteristics and documentation involving the token, including information documents such as white papers, that may establish the issuer's obligation to undertake any actions from which the investor may draw an expectation to have a return on its investment, such as:
• • granting the right to income; or
  • undertaking certain activities to increase the token's value.

The CMVM has advised that if a coin or token qualifies as a security and is offered to Portuguese investors, the relevant national and EU securities laws will apply, including rules on:

• the representation and transmission of securities;
• public offerings, leading to the mandatory drafting of a prospectus to be approved by the CMVM unless a prospectus exemption applies under general rules;
• the marketing of financial instruments for the purposes of the Second Markets in Financial Instruments Directive; and
• information quality requirements.

2.3 Are stablecoins treated as virtual currencies in your jurisdiction or do they fall under an existing category (eg, electronic money)?

No.

Cryptocurrencies of any kind are not considered to be a currency and do not have legal tender status of any sort. In 2013, the Banco de Portugal issued a notice that Bitcoin is unregulated and unsupervised, and not a secure currency.

3 Virtual currencies market

3.1 Which virtual currencies have become most embedded in your jurisdiction? Does this vary depending on the specific use?

Virtual assets are not generally accepted as a means of payment and do not have legal tender status in Portugal.

The Portuguese market follows all international trends and official information is not available – and is not expected to be available – in relation to the market share of each asset. Thus, in line with global market practices, Bitcoin and Ethereum are the most commonly used virtual currencies in Portugal.

3.2 What different products and services are offered?

There are currently 11 licensed virtual asset service providers (VASPs) in Portugal that deal in the trade and intermediation in virtual currencies, providing fiat to crypto and crypto to fiat conversion services and crypto to crypto services. In addition, Bitcoin ATMs are available.

3.3 How are virtual currency service providers generally structured? How are they generally financed?

VASPs operate in Portugal in the form of either limited liability quota companies or joint stock companies. Trusts and foundations are not used.

Financing flows have not been publicly disclosed, but equity, venture capital and the sale of crypto assets are the most common financing options.

3.4 Are virtual currency trading platforms subject to a specific regulatory regime in your jurisdiction? Must they be registered or licensed by a regulatory authority? Does this vary depending on whether the platform accepts legal currency or whether the platform is custodial? Are virtual currency trading platforms subject to any form of 'market abuse' regulation?

Please see question 1.2.

4 Crossover with banking

4.1 How are virtual currencies positioned within the broader banking landscape in your jurisdiction?

On the whole, the Portuguese banking sector is wary of virtual currencies and often deems any related transaction to be risky and susceptible to money laundering.

The virtual currency market is still viewed as a fringe market and Portuguese banks are unfriendly towards virtual asset service providers (VASPs): they are known to have repeatedly terminated the accounts of individuals, businesses and even licensed enterprises. In addition, some banks have internal guidelines that prohibit the establishment of relations with entities that deal with virtual currencies.

4.2 What impact could mainstream adoption of virtual currencies have on the ability to control inflation in your jurisdiction?

Despite virtual currencies being viewed as a hedge against inflation, they currently lack the ability to control inflation in Portugal due to the lack of mainstream adoption and the ongoing inflationary market, which is partly due to non-currency-related factors.

4.3 What other implications could the mainstream adoption of virtual currencies have for the banking system in your jurisdiction (eg, with respect to payment services)?

The mainstream adoption of virtual currencies in a purely decentralised fashion would require the adaptation of banking regulations and would lead to profound changes in the banking sector itself.

Once a transformative level of adoption has been reached, market practices may also require the regulators to adopt a different stance regarding the status of virtual currencies as legal tender. Arguably, however, mass adoption is contingent on such change; this leads to a 'catch-22' scenario, whereby mass adoption is hindered by the lack of legal tender status and the status requiring mass adoption.

The use of decentralised virtual currencies would reduce the role of banks as intermediaries and in relation to compliance enforcement regarding anti-money laundering and tax laws, among others. Therefore, the existing checks and controls on the use of the banking system would have to be replaced.

Furthermore, the role of banks as deposit takers and loan providers would be undermined, impacting consumer credit practices.

4.4 Regarding decentralised finance, do the banking regulations in your jurisdiction apply to loans of virtual currencies or interest-bearing deposits of virtual currencies? Does this vary depending on whether stablecoins are loaned or deposited?

In a strict sense, banking regulations do not apply to the lending of virtual currencies. The current licences granted to VASPs are not banking or money transmitter licences, and virtual currencies are not considered currency.

If VASPs provide regulated financial services, the regulatory regime that applies to any regulated companies that provide these services in the Portuguese market will apply. The overarching regulations governing the issuance and borrowing of securities may or may not apply, depending on the characteristics of the asset involved.

Depending on the business model, peer-to-peer lending and crowdfunding platform regulations may also apply. In addition, the management bodies of crowdfunding platforms are subject to licensing and registry requirements with the Securities Market Commission.

There is no differentiation in treatment for stablecoins.

5 Technology

5.1 Is blockchain technology in itself regulated in your jurisdiction and what specific legal issues are associated with its use?

Blockchain in itself is unregulated in Portugal. The Portuguese government and regulators are neutral in relation to the regulation of technology.

5.2 What other implications could the mainstream adoption of virtual currencies have from a technological perspective?

The mainstream adoption of virtual currencies may lead to a need to regulate the practical and legal aspects of smart contracts and other issues concerning ledger technology that interact directly with the use or transfer of such assets.

In turn, if the validity of a particular smart contract is legally established or controlled, changes to the legal framework will impact on the construct and architecture of protocols and technological solutions that present themselves as compliant.

6 Data security and cybersecurity

6.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have for virtual currencies?

The Data Protection Law (58/2019), directly transposed and adopted from EU Regulation 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and the free movement of such data, applies to all sectors. Therefore, issues may present themselves due to the public and immutable nature of blockchain.

Difficulties experienced in identifying controllers and processors of blockchain, technical obstacles to the anonymisation of blockchain-stored personal data and the exercise of the right to be forgotten may result in blockchain solutions breaching legal provisions. However, solutions based on the storage of data off chain may be applicable.

6.2 What is the applicable cybersecurity regime in your jurisdiction and what specific implications does this have for virtual currencies?

The Portuguese legal regime for cybersecurity is set out in Law 46/2018, which transposed EU Directive 2016/1148 into national law.

It applies to organisations operating in the following sectors:

• drinking water;
• energy (electricity and gas);
• nuclear power;
• finance;
• telecommunications;
• transport; and
• water control.

However, there are no specific cybersecurity rules on virtual currencies in Portugal.

The National Centre for Cybersecurity is responsible for cybersecurity compliance and protects the national interest through a Computer Emergency Response Team.

7 Financial crime

7.1 What provisions govern money laundering and other forms of financial crime in your jurisdiction and what specific implications do these have for virtual currencies?

The penal law concept of money laundering is defined in the Criminal Code as the act of converting or transferring property (directly or indirectly obtained by the offender or by a third party) or intervening or aiding such operations to conceal or disguise its unlawful origin.

The prevention of money laundering is governed by the Anti-money Laundering and Prevention of Terrorism Financing Law, which is directly applicable to transactions involving virtual currencies carried out by or with the intervention of covered entities. Please see question 1.2.

8 Consumer protection

8.1 What consumer protection provisions apply to virtual currencies in your jurisdiction?

No consumer protection provisions apply specifically to virtual currencies and the Consumer Rights Law does not explicitly cover virtual currency transactions. However, despite the lack of specific rules, general consumer protection rules apply to all business-to-consumer transactions with Portuguese consumers, unless particular rules – such as those relating to investor and market protection – take precedence.

Therefore, contracts with consumers regarding virtual currencies should meet the standard requirements in relation to information obligations and the right to withdraw from the contract.

On the consumer protection side, the EU Regulation on Markets in Crypto-Assets will provide the right of withdrawal to anyone that buys crypto-assets directly from the offeror. For 14 days thereafter, withdrawal from the agreement to acquire the crypto-assets will be possible:

• without incurring fees or costs; and
• without the need to justify such withdrawal.

The reimbursement will be made through the same means of payment as the retail holder used for the initial transaction.

8.2 What other implications could the mainstream adoption of virtual currencies have from a consumer perspective?

The mainstream adoption of virtual currencies will require the amendment of the existing legal framework and expedite the introduction of additional restrictions, which would probably destroy all of the privacy benefits of blockchain.

9 Competition

9.1 Do virtual currencies present any specific challenges or concerns from a competition perspective?

Given the lack of mainstream use of virtual currencies, it is difficult to predict any competition issues under the current legislation.

It is possible to scrutinise practices under the existing competition laws; but in theory, the decentralisation aspect of the underlying blockchain technology should help to prevent anti-competitive practices.

10 Taxation

10.1 How are transactions in virtual currencies treated from a tax perspective in your jurisdiction?

Currently, no specific legal framework regulates the taxation of virtual currencies.

The Portuguese tax authorities have published several rulings under the binding rulings regime. Binding rulings bind the Portuguese tax authorities to a particular case and taxpayer and lack erga omnes effects.

Under Portuguese tax law, individuals are subject to personal income tax on several income categories. However, individuals are not taxed in respect of gains derived from the purchase and sale of cryptocurrencies, provided that:

• they are not professional traders of cryptocurrencies; and
• this is not their primary activity.

Otherwise, gains will be characterised as self-employment income and taxed under the general rules. Furthermore, transactions using cryptocurrencies as means of payment covered by other personal income tax categories are still taxable, such as:

• salaries;
• contractor fees;
• investment income; and
• rental income.

The Portuguese tax authorities have confirmed the decision of the Court of Justice of the European Union in Skatteverket v David Hedqvist (Case C-264/14,), ruling that Bitcoin transactions are analogous to a 'means of payment' and, although subject to value added tax (VAT), are exempt from VAT.

Income/profits derived from virtual assets are taxable under the Corporate Income Tax Code. The taxable basis must be determined according to the Portuguese General Accounting Principles and adjusted by any applicable provision of the code.

11 Trends and predictions

11.1 How would you describe the current landscape and prevailing trends in your jurisdiction as regards virtual currencies? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Further developments are anticipated in this field due to the entry into force of the EU Regulation on Markets in Crypto-Assets (MiCA) in 2024. As the market grows, players are becoming more sophisticated and are either embracing regulation or keeping one step ahead of it. As it evolves, the cryptocurrency market is known to spill over into unregulated areas, so it will be interesting to watch the development of market practices alongside additional regulation.

MiCA's enforcement under Portuguese law will enhance legal certainty by establishing a robust legal framework for virtual assets that fall within its scope, provided that they are not covered by the existing financial services legislation.

MiCA will protect the rights of consumers and investors against crypto-asset risks. The European Union has sought to ensure financial stability by:

• including safeguards to address potential risks; and
• imposing disclosure obligations on entities that issue virtual assets.

An increase in the number of registrations of virtual asset service providers (VASPs) with the Banco de Portugal is also expected. The licensing regime in place has prompted growth in the domestic market and has enabled players to operate with confidence. However, recent events regarding the termination of licensed VASPs' bank accounts are indicative of a conflict between traditional incumbents and disruptive insurgents.

12 Tips and traps

12.1 What are your top tips for virtual currency providers seeking to enter your jurisdiction and what potential sticking points would you highlight?

Service providers entering Portugal should carefully analyse the implications of doing business in and from Portugal, and should understand the financial backing required for licensing and compliance.

Businesses should familiarise themselves with the landscape regarding anti-money laundering/know your customer requirements, financial services regulation and taxation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.