Recent events across the EU, and elsewhere in the world, expose growing attempts at implementing blockchain technology. This, combined with investment dynamics in the IT/fintech sector, raises new questions about the upcoming digital disruption. Both in Polish and EU cross-border cases, blockchains are not subject to an explicit regulatory framework. Open issues on the EU-level include anti-money laundering, data protection and payment services.
Quick definition recap
Blockchain is a distributed ledger, where peer-to-peer transactions with the use of Bitcoin, Ethereum or another protocol for transferring value and data are verified, recorded and stored as “blocks”. Each new block is created and time stamped every few minutes and must be compatible with the previous block in a chain (blockchain). This serves verification purposes to ensure the system cannot be manipulated. The idea is to eliminate a third-party intermediary such as bank or a public official for reasons of speed, security and reduced transaction costs.
The year of blockchain
In May 2016, the Japanese parliament passed a bill to formally allow cryptocurrencies in transactions and to make cryptocurrency exchange operators subject to state registration and supervision.
The fall of DAO, a digital blockchain fundraising campaign of over USD 150 million in the ether cryptocurrency, launched in April 2016 and hacked about two months later, did not deter fintech companies and venture capital investors, of which the latter have invested over USD 1.1 billion in blockchain startups. Prominent financial institutions, including Citibank, UBS, Barclays and Goldman Sachs, are also interested in blockchain technology.
In the UK, an IT startup named Credits has negotiated a framework agreement to supply blockchain technology to the UK public sector, while Sweden conducts test to possibly switch its land registry to blockchain. The European Securities and Markets Authority (ESMA) analyses regulatory, governance and privacy aspects of blockchains, which may also play a significant role in the EU Digital Single Market as part of the Europe 2020 Strategy.
Polish law perspective
From the Polish private law angle, cryptocurrencies operating on blockchain technology such as bitcoin may be classified as property rights. Such a classification may have several implications, due to general contract law, which provides that property rights can be subject to various private law contracts, family law or even commercial company law. From a regulatory perspective, the Polish Ministry of Finance in its statement dated 28 May 2015 (file no. FN7.054.9.2015) explicitly stated that virtual cryptocurrencies neither fall within the scope of the Polish Payment Services Act, nor can they be regarded as any of the financial instruments under the Polish Act on Trading in Financial Instruments.
Taxes are always certain
On the EU level, in a ruling passed by the Court of Justice of the EU on 22 October 2015 in the Hedqvist case (C-264/14), the Court of Justice stated that although services consisting of exchange of Bitcoin units for traditional currencies constitute supply of services for consideration within the meaning of the 2006/112/EC VAT Directive, transactions effected in the provision of such services are exempt from VAT under the said VAT Directive.
On the Polish national level, the issue of blockchain and Bitcoin has been addressed in the context of private income tax. Under recent administrative court rulings dated 11 September 2015 and 16 December 2015 (file nos. III SA/Wa 3374/14 and I SA/Gd 1551/15, respectively), revenue obtained from sales of Bitcoin virtual currency should be considered as revenue from property rights and is subject to taxation under the Polish Personal Income Tax Act.
The future of blockchain
Blockchain technology may bring about a genuine breakthrough in the global financial sector and in the way transactions (and payments) are made. Blockchains can potentially be used to record any type of documents, to conduct public registers, complete transactions and to facilitate public elections. By eliminating the third-party intermediary, speeding up transactions and reducing the costs involved, blockchains may prove their true value to private citizens, whole countries and cross-border operations. One question is, how to effectively transition from the initially rather anarchic idea of Bitcoin to a market-fit, tangible technology solution that can be applied by countries, banks and other institutions. Another question is, how to combine the advantages and leverage the disadvantages of open versus closed blockchains. It seems that the next step is to ensure that closed blockchains, that may better serve the purposes of being a ledger of commercial transactions, remain as open, transparent, cost efficient and secure as the original open blockchain.
The full briefing note can be found here.