This is just one of many topics Coinlaw discussed recently with Thomas Kulnigg and Ursula Rath, partners at one of Austria’s most dynamic law firms – Schoenherr.
How long have you been involved in the crypto sphere and what piqued your interest in it?
We have been involved in the crypto sphere since around 2016, as part of our firm’s wider focus on technology and digitalization, which Thomas is heading. You can learn more about those through our dedicated focus group and our LinkedIn group.
Since then digital assets and distributed ledger technology (DLT) have become increasingly important worldwide, piquing the interest of more established global players in the financial industry such as stock exchanges and banks. This increased interest led the European Union (EU), along with national governments and authorities, to begin assessing the benefits and burdens of appropriate regulation.
This encouraged us, both personally and as a law firm, to actively engage in these developments by becoming founding members of thinkBLOCK tank, a Luxembourg-based non-profit organization which brings together some of the most respected blockchain and distributed ledger experts from, currently, more than 15 countries. Thomas was also appointed as a member of the advisory board of Austria’s Digital Asset Association and Ursula is actively involved with the Austrian Ministry of Finance’s FinTech Advisory Board, which consults on priority actions around start-up financing, ICOs, and digital assets.
What should be, according to you, the key features of a regulatory regime for cryptoassets?
We believe that the ideal regulatory regime should:
- Be proportionate to foster innovation.
- Provide as much regulatory certainty as possible.
- Be technology neutral.
Given the increasingly global scope of investment and fundraising possibilities provided by new technologies such as DLT, a harmonized and coherent global framework would certainly be desirable. Such a framework would help discourage regulatory arbitrage, provide a level playing field, and appropriately safeguard investors across the globe.
You co-authored the Austrian chapter of Global Legal Insight’s Blockchain & Cryptocurrency Regulation 2019. Can you summarize the current Austrian regulatory landscape for cryptoassets?
Austria does currently not have any dedicated cryptocurrencies or digital assets legislation; rather, the general legal framework also applies to business models involving cryptocurrencies or digital assets. The Financial Markets Authority (FMA), the Austrian securities and financial services regulator, applies a “technology neutral” supervisory approach to regulating cryptocurrencies, digital assets, new technologies, and fintech.
Given the diversity, complexity and rapid evolution of business models in these areas, the regulatory treatment of business models involving cryptocurrencies, digital assets, or fintech, need to be assessed on a case-by-case basis. The FMA, therefore, encourages discussion of the regulatory treatment prior to engaging in any business activity and has published further guidance on the regulatory treatment of certain activities around cryptocurrencies, digital assets or fintech on its dedicated fintech navigator section.
Key areas to note are the following:
- Purely technical services generally are not required to be licensed under financial services regulation. If, however, a provider offers additional services (e.g. transferring of funds) they would no longer be considered a purely technical service.
- Alternative currencies or tokens may trigger a licensing requirement if they are intended for payment by third parties and if the network where they can be used to purchase goods or services is large, in terms of geographical reach, types of products or services and/or the number of accepting parties.
- If capital is raised for investment via cryptocurrencies, digital assets or mining, this may constitute a regulated activity. If the capital raising is structured through the issuance of securities, or tokens with features akin to securities such as shares or notes, this may also trigger prospectus requirements under Austrian securities laws.
- Intermediaries such as online platforms for trading of virtual currencies or digital assets may be required to become licensed as securities brokers, trading platforms, or payment service providers.
How does Austria’s regulatory stance towards cryptoassets compare to other jurisdictions, both in Europe and worldwide?
Austria has traditionally been known as one of the strictest European jurisdictions in terms of financial services legislation and enforcement. However, in the area of cryptocurrencies, digital assets or fintech, the FMA is known to apply a “technology neutral” supervisory approach to regulating these activities.
True to the government’s motto – “advice rather than sanctions” – the Austrian Ministry of Finance is currently preparing to set up a dedicated regulatory sandbox program that is expected to go live in 2019. As part of this program, companies that require a financial services authorization shall be able to clarify regulatory requirements for innovative business models swiftly and comprehensively – through constant dialogue with the regulator and testing of their business model. The selection criteria for admission to the program, as well as other details, are currently being evaluated. They will be based on international best-practice and are expected to be available soon for public consultation.
Are there any examples of cryptocurrency or blockchain regulation, or any particular approach, that could be replicated in Austria? Or, the other way around, are there any Austrian regulations that deserve to be copied in other jurisdictions?
While neither cryptocurrency nor blockchain specific, Austrian securities laws have historically been very much paper-based – requiring a global note, effectuated with the handwritten signatures of the issuers, in order to validly issue securities.
This causes a significant hurdle to decentralized, paperless systems such as blockchain-based solutions. The Austrian Ministry of Finance is therefore currently working on a legislative proposal to issue securities in a dematerialized form. Going forward, when issuing securities, issuers shall have the option to replace the traditional paper version (the aforementioned global note signed by the issuer) with a book-entry registration of the securities – issued in a register of so-called “book entry property rights” (Wertrechte). This will not only facilitate issuances by permanent issuers such as credit institutions but is also expected to significantly ease the process of raising capital by means of blockchain technology. The respective legislative changes are currently under preparation but shall be implemented in 2019.
In terms of other digital assets, Austria could adopt regulations that clarify the digitalization of property rights (e.g. ownership). Currently, ownership rights can only be tokenized on a contractual basis, which means that the holders of such “property tokens” would not benefit from the legal regime that applies to property rights, in particular in rem rights (The right not to have your land, buildings, or other possessions interfered with). To allow digital ownership would certainly increase the security of digital assets. Countries like Liechtenstein and Switzerland have adopted, or are about to adopt, regulations to that effect.
How about taxation of cryptoassets in Austria? What is the current state of regulation?
Capital gains from the sale of cryptocurrency units held as business assets, and income from commercial activities related to cryptocurrencies (e.g. mining, brokerage), are subject to progressive income tax rates of up to 55 percent for individuals and a corporate income tax of 25 percent for corporations.
Special rules apply to cryptocurrency units treated as investment assets and other (non-business) assets. Units are treated as investment assets if the taxpayer uses them to generate income in the form of interest. In this case, capital gains from a subsequent sale are taxed at 27.5 percent for individuals (individuals can opt for progressive income tax if the tax rate would be lower) or at 25 percent for corporations.
In case the units are not used to generate income from interest, but rather only acquired and sold occasionally (private sales) and not as part of a business (non-business assets), capital gains are only subject to taxation of up to 55 percent for individuals – if the units are acquired and sold within 12 months (speculation period). A tax exemption applies if the capital gains do not exceed EUR 440 per calendar year. In case the units are held longer than 12 months, capital gains are not taxable.
Despite the fact that tax authorities are increasingly publishing guidelines on how to tax cryptocurrency transactions, the foregoing view of the Austrian Ministry of Finance not been reflected in law yet.
What do you see as the biggest challenges to establishing coherent cryptocurrency and blockchain regulations?
Those challenges appear two-fold: firstly, given the global reach of these assets and technologies, regulations would also need to be global to be effective. Secondly, given the rapid evolution of new technologies and new types of cryptoassets, regulation will need to be flexible enough to effectively capture the various types of assets and fundraising structures so as not to lag behind technological possibilities.
As has been observed in the context of ICOs and ITOs, a key challenge for regulators lies in properly classifying the range of cryptoassets and related business models that exist. However, the problem with strictly classifying all tokens as securities, is that they can simultaneously function across multiple categories: as currencies, as instruments for betting or voting, or as traditional securities. Moreover, regulators have viewed cryptocurrencies differently: while some define cryptocurrencies as monetary equivalents, others view them as digital goods or commodities.
As of today, a global legal vacuum exists because such products and services very often do not fit traditional regulatory concepts. This is pronounced by the diverging regulatory stance towards overseeing cryptoassets and related business models which vary widely – closed in China, open but strict in the United States, or rather crypto-friendly in the Cayman Islands, Bermuda, Gibraltar, Malta, and Switzerland.
However, regulatory uncertainty limits institutional investment in cryptoassets. So far, various banks and asset managers have been unable to invest in such assets due to issues such as the lack of digital assets traded on recognized trading platforms, and related pricing transparency and liquidity, or the requirement for independent custodians to intermediate trades. Additional challenges include the need for regulated firms to be covered by professional indemnity, directors’ and officers’ liability insurance (which can be difficult to obtain) and reputational issues around cryptocurrencies.
Building investor trust through appropriate and proportionate regulation that does not hamper innovation will thus be key, but it’s a major challenge to address.
In addition, we would like to add that the success of DLT will also depend on whether global standards of technologies will be established. Such global standards would allow users and adopters to focus more on the applications, rather than the DLT itself. We would compare this to the internet: no one is talking about the underlying technology anymore – it is all about the applications.
Blockchain projects are increasingly raising money through STOs rather than ICOs. What is your position on this shift?
We certainly welcome this development. The traditional ICO concept, which came with the crypto hype in 2016/17 was often all about distributed and unregulated, and thus quick and easy, fundraising. Very often, little meaningful information about the issuer, the project and/or the technology was disclosed to investors.
Within the last 18 months, the fundraising trend has gravitated more towards STOs – those initial heydays appear to be gone. Security tokens come with rights and obligations that are ensured by securities laws and established financial services regulation applicable to securities. Thus, STOs are subject to increased legal scrutiny when compared to ICOs or pure utility token issuances. This has resulted in more serious issuers and investors entering the funding side, a development which is both beneficial to investors and adds much-needed credibility to these new forms of raising capital.
As a lawyer, do you see blockchain technology as an opportunity or as a threat?
As with any type of innovation, we see blockchain technology as an opportunity rather than as a threat. While the technology still appears to be struggling with certain infancy issues (e.g. slow transaction speed, interoperability, reversal of transaction entries, forking, energy consumption, privacy, software bugs or lack of security, and also Ponzi schemes and fraud), we believe that DLT/blockchain technology will contribute to reducing costs in transaction management, documentation, and settlement and thus increase efficiency in the long run. In a few years’ time, DLT will be as normal as the internet.
Taxation expertise by Marco Thorbauer