Blockchain Projects Regulation

It is more than a decade since blockchain, or otherwise known as Distributed Ledger Technology, was brought to the fore by the first and most popular cryptocurrency, Bitcoin, where it was used as a public transaction ledger. Since then, many projects have cropped up with innovation in health, cybersecurity, entertainment, voting, and even in payments, supply chain, among others.

By definition, Blockchain is a database that is decentralized, disintermediated, and distributed across multiple servers interlinked via a peer-to-peer network. The crypto linking between data sets within each block forms a chain because each keeps information about the previous one; exactly how they get interlinked. In other words, to alter some sets of recorded data within a block, one would need to change the linked blocks-which is practically impossible.

A blockchain may be permissionless or permissioned. While a permissionless blockchain is an open network and doesn’t allow any party to join without vetting, a permissioned blockchain is controlled by an administrator of the ledger who screens the participation of each party. The adoption of any form of blockchain transforms human-based trust models into algorithm-based trust models, which may enhance transparency and raise levels of operational efficiency, leading to cost reductions.

Due to its very nature, blockchain technology provides a solution to such problems as:

• Data security: decentralized storage units are immune to security breach because the data stored on a blockchain simply cannot be tampered with or stolen.
• Mediation: this is an advantage brought about by smart contracts. Exchange of value in the digital environment can be executed immediately without third-party mediation. For instance, intermediaries such as banks and brokers are costly as far as payment or sales transactions are concerned. They are not needed to carry out their activities since activity is recorded automatically and securely on a blockchain.
• Integrity of elections: It has enabled anonymity, verification of authenticity for each vote recorded on the blockchain, immutability, and real-time tracking using blockchain-powered voting solutions.
• Interoperability in healthcare systems: Blockchain is able to maintain integrated nation-wide electronic health records.

It is only now that individual European countries are starting to realize the significance of this revolutionary engine for the digital economy; hence, a variety of innovation hubs and sandboxes related to blockchain emerge in great numbers. Be that as it may, most of the currently existing or conceptual regulatory frameworks have the main focus on cryptocurrencies. Thus, with respect to all other projects using blockchain, the regular legislation should apply for the most part, with individual assessment for the purpose of supervision, taxation or otherwise.

It even calls for harmonization at the EU level in blockchain legislation within the member states. The European Blockchain Partnership-EBP is a vehicle to promote collaboration among the EU countries. Presently, it collaborates with the European Commission to develop a pan-European regulatory sandbox for both the EBSI use cases and those outside EBSI. Only some examples of use cases may include data portability, business-to-business data spaces, smart contracts, and digital identity for fields like healthcare, environment, mobility, and energy. This sandbox’s launch date should be in 2022.

Currently, however, the most urgent issues from EU authorities regarding crypto-related AML/CFT regulations and the integrity of the financial markets are under the 6th Anti-Money Laundering Directive (6AMLD) and the recent Proposal of a Pilot Regime for market infrastructures. Blockchain-based projects are yet to possibly become a separately regulated area, as the application of this disrupting technology starts to reveal its challenges that could be potentially solved through a standardized and yet dynamic regulatory approach.

Nevertheless, there are several European jurisdictions, prepared to welcome blockchain entrepreneurs and offer a regulatory environment open to innovation, experimentation, and a constructive dialogue between the national authorities and market participants.

Lithuania

In Lithuania, blockchain application is primarily growing in Fintech; however, national authorities and NGOs are keen to welcome, support, and embrace new advanced blockchain solutions in other sectors.

Thanks to the government’s positive approach, the Lithuanian blockchain ecosystem already has plenty of successful startups willing to collaborate with and provide the most innovative services to new blockchain project creators, which can accelerate and sustain their growth.

Last year, the Crypto Economy Organisation, BCCS cluster and its member SuperHow founded the very first Lithuanian blockchain competence centre Blockchain Lithuania. Its goal is uniting private and public sectors in the development and implementation of innovative blockchain technology-based solutions. With this, blockchain entrepreneurs get the opportunity to enter into a fast-growing community that provides access to relevant research and professional development courses in developing relevant business competencies and the talent pool.

The Bank of Lithuania, a Lithuanian financial market regulator, developed the blockchain-based technological sandbox LBChain, with the aim of serving Fintech market participants in providing regulatory and technological infrastructure to test new business solutions in a controlled environment. Thus, startups and maturing companies are enabled to carry on blockchain-related research, experiment with new solutions, and offer their innovations to customers.

In general, when it comes to the establishment of an enterprise related to blockchain, most of the actions are alike with founding companies that would plan traditional activity. The most popular form of business entity in Lithuania is a Private Limited Liability Company (UAB). It can be founded electronically in a matter of days using templates of founding documents through the self-service system of the State Enterprise Centre of Registers.

Depending on your chosen business activities, apart from the usual steps of company formation, you may need to take one more essential step – obtain a licence. For example, companies that provide crypto-related economic activities cannot be carried out in Lithuania without having a crypto license can be granted within a month with no application fees. The procedure is very fast and smooth. There are no annual supervision fees either.

Lithuania offers two types of crypto licenses:

• Crypto Wallet Exchange Licence, in order for licensees to be able to provide custodial crypto wallet services for their customers.
• Crypto Exchange Licence: which would enable the licensee to provide exchange services between a cryptocurrency and a fiat currency, both ways, and an exchange service between different kinds of cryptocurrencies.

Among EU countries, Lithuanian economy ranks 6th for ease of paying taxes, which puts it as one of the most favorable jurisdictions for running a blockchain-related business. The State Tax Inspectorate under the Ministry of Finance is Lithuania’s national tax authority hasn’t introduced any blockchain-specific taxes yet. All the companies involved in blockchain-related economic activities are obliged to pay general taxes: Corporate Income Tax – 15%, VAT – 21%.

They also benefit from such tax advantages as 200% allowance on the volume of qualified R&D expenses. FEZ enterprises whose capital investments have reached at least 1 mill. EUR are fully exempt from paying the Corporate Income Tax in the course of 10 taxable periods, starting with the tax period in which the investment sum reached the mentioned threshold, and enjoy a 50% reduction of the Corporate Income Tax rate for six more subsequent years.

Estonia

During many years Estonia was a very popular jurisdiction for blockchain startups and in particular crypto companies, because of its friendly attitude towards innovation and a beneficial system of taxation. Now crypto-related business is under much stricter regulations. However, insightful entrepreneurs can turn to less volatile sectors where regulations are well established and consistent and therefore more easy to get through.

Since the legislation of blockchain technology heavily relies on the nature of the products and services it underlies, it would be best to look carefully at legislation specific to your chosen sector or industry. If you need further legal consultative services regarding the information provided, feel free to contact us here at Regulated United Europe.

As for crypto regulation, no crypto activities can be initiated in Estonia without obtaining a crypto license. Crypto-licenses are issued by Estonia’s Financial Intelligence Unit to those that are ready to pay a state fee of 10,000 EUR and are willing to wait up to three months. In case updates are applied to an already existing license, the state fee charged is 4,000 EUR.

Estonia has been ranked at the top for many years in the International Tax Competitiveness Index, which means there are low tax burdens on business investment and a sufficient level of neutrality via a well-structured framework of tax codes. The Estonian tax system is supervised and administered by the Estonian Tax and Customs Board who hasn’t yet introduced any taxation framework specific to blockchain technology.

Blockchain companies are liable to pay the same general taxes as any other business. Standard Corporate Income Tax rate is 20% but it’s not levied on retained and reinvested corporate profits, what definitely is beneficial to growth-oriented blockchain companies. The important thing to note, however, is that depending on the industry to which your blockchain project is trying to provide a solution, some taxes may come into play.

Switzerland

Switzerland, home to so-called Crypto Valley, is putting extensive effort into encouraging and accelerating the adoption of blockchain-based products and services. Among the supportive initiatives to encourage this integration of blockchain technology, based-in-Zug is the strong Crypto Valley Association.

The purpose of the Association is to enable the creation of the world’s best blockchain ecosystem by facilitating collaboration among market participants and authorities. As for the key performance indicators of their work, the figures speak volumes – today Switzerland’s blockchain sector already comprises 14 companies with a valuation of over 1 bln. USD (more than 932 mill. EUR).

Along with the promotional activities and support of the Association, the economic area of Zug had always been famous for its low tax rates, business-friendly environment, huge talent pool, service-oriented cantonal administration that enables one to make decisions in a very efficient manner regarding time. The local authorities also show their readiness for cooperation with the participants of the industry and development of business-friendly politics.

Switzerland-based blockchain companies will, of course, be able to benefit from the decentralized taxation system. Generally speaking, taxes in Switzerland are handled by the Federal Tax Administration FTA, the cantons, and the municipalities. Each has a different tax system, and hence tax rates are dependent upon the location of choice for your blockchain company and, of course, the purpose of your business activities.

Cryptocurrencies are more avidly adopted there. Among other things, taxes can already be paid in cryptocurrency. Salaries paid in cryptocurrency are levied with Income Tax (approx. 23%) that shall be indicated on the salary statement. All cryptocurrencies are to be declared as other funds and shall be subject to the Wealth Tax of up to 3%.

On the other hand, founding a blockchain company in Switzerland may be quite expensive. For example, the minimum share capital of the cryptocurrency companies intending to begin their activities in Switzerland is 300,000 CHF (approximately 289,000 EUR) and they must obtain a Fintech license from the Swiss Financial Market Supervisory Authority (FINMA).

The application fees start from 1,750 EUR, and the duration could take several months since it depends heavily on the project’s complexity and the quality of the application. Successful applicants are further subject to paying an annual supervisory fee of at least ​​3,500 EUR.

Poland

Although Polish blockchain technology startups and companies offer solutions to various industries-real estate, advertising, gaming, betting, etc.-so far only the crypto business is a separately regulated area that is managed by the Tax Administration Chamber in charge of maintaining the register of crypto activities, under the name of the Register of Virtual Currencies. Registration in the Register is an obligation that has to be made before starting crypto-related economic activity on the territory of Poland.

Applications can be submitted only in electronic form through the Electronic Platform of Public Administration Services- ePUAP. If a crypto company is able to fulfill all the formal requirements, it will be entered in the Register within 14 days from the date of submitting the application. The application fee is paid in the form of Stamp Duty in the amount of 616 PLN (approx. 133 EUR). No supervision fees regarding crypto activity are imposed.

Other blockchain-type companies may be established in line with the procedures that are identical for the incorporation of a company in any other form of economic activity. The most popular legal type of business entity in Poland is a Limited Liability Company (Sp. z.o.o.), which can be founded within several weeks by one or more resident or non-resident shareholders. It is important to note, however, that a number of blockchain companies will require permission or a license for the particular sector their blockchain project is solving a problem for.

There is no special blockchain tax in Poland, and all the companies operating in the field of blockchain are obliged to pay the main taxes. Some the most common taxes applicable to a Polish Limited Liability Company have Corporate Income Tax-19%, VAT-23%, Dividend Withholding Tax-19%, and Social Insurance-1.61%-2.49%.

The Blockchain and New Technologies Chamber of Commerce supports blockchain companies from Poland and represents their interests according to the applicable Polish law in a dialogue with national authorities. All their objectives relate to taxation that includes, but is not limited to, paying taxes in cryptocurrencies, and not hampering blockchain innovations with outdated legislation.

Another supporting initiative is Innovation Hub, the place where the Polish Financial Supervision Authority consults the financial market companies operating in Fintech, Suptech, and Regtech and provides virtual sandboxes with a view to creating new startups.

UK

The UK’s regulatory plans are mainly focused on the blockchain companies operating in the financial market as most of the blockchain-based products and services have been created to solve problems pertaining to banking and finance. A handful of them operate in healthcare, media, real estate, supply chain and retail which means new visionary entrepreneurs have plenty of untouched business areas begging for innovative solutions.

Those who would like to jump into the ever-booming crypto industry would have to be ready to follow strict AML/CFT regulations. All businesses that plan crypto activity in the UK need to be registered with the Financial Conduct Authority (FCA) for the Part 4A Permission authorisation. The applications are filed through Connect, together with all the documents and information. It takes up to six months and the application fees vary from 2,000 GBP up to 10,000 GBP.

FCA also provides assistance to those blockchain companies that seek to launch innovative financial products and services in the UK and who require guidance regarding the applicable legislation through the Innovation Hub
.

The initiative is divided into the following categories:

All innovative businesses which are newly authorised by the FCA are also supported and overseen by the Early and High Growth Oversight initiative. This provides guidance on how to meet new regulatory obligations in the first few years following authorisation.

The rest of the process for setting up a blockchain business in the UK is, other than the licensing related to the sectors, almost exactly the same as for any other type of business. One of the most used legal business forms in the UK is a Private Limited Company (Ltd), which can be incorporated remotely without requirements to a minimum share capital. The minimum requirement is to have at least one shareholder and one director, who can be one person and also a non-resident of the United Kingdom.

Ireland

In Ireland, there is no overarching regulatory framework in regard to businesses based on blockchain technology, but that has not stopped the innovative companies from setting up shop there in order to take advantage of Ireland’s favorable tax regime.

Taxes in Ireland are administered by the

Revenue Commissioners

who haven’t introduced any rules specific to blockchain project creators. Instead, such general taxes as Corporation Tax (12.5%), Capital Gains Tax (33%) and VAT (23%) are levied. Newly established blockchain businesses can enjoy a three-year exemption from the Corporation Tax if their Corporation Tax due is 40,000 EUR or less in a single tax year.

Crypto companies are subjected to some regulation. With the AML/CFT legislation in mind, the Central Bank of Ireland maintains the Registry of Virtual Asset Service Providers (VASPs) in which crypto businesses may enter by filing a VASP pre-registration form. No application and supervisory fees are taken; quite a pleasing fact for startups. The length of the processing time is directly proportional to the queue of pending applications and your ability to provide all the necessary material.

Incorporating a blockchain company in Ireland is easy, as long as you have all the relevant documentation and are entitled to obtain an applicable license. You can set up a Limited Company (LTD) with at least one director and secretary; these may also be your shareholders at the same time. It also requires a physical address in Ireland. Usually, registration of a new company in Ireland with the Companies Registration Office takes up to 10 days. Blockchain Ireland represents that country’s industry innovative network which supports all blockchain companies. For now, the main focus of this innovation network is to position the country as a knowledge hub in cryptoasset businesses and decentralised financial services. This includes promotional activities for blockchain technology, crypto, and Web3. Industry events are one of such channels.

Cyprus

Nowadays, the Cypriot regulatory framework focuses on cryptocurrency businesses, while other fields of blockchain application are not separately regulated. Despite this, blockchain technology is finding its way into various fields like gaming, e-commerce, and telecommunications.

Firms that want to start crypto-related economic activities in Cyprus should comply with the AML/CFT Law and become registered as crypto asset service providers with the Cyprus Securities and Exchange Commission (CySEC) by submitting an application form. An application fee is 10,000 EUR and also includes the fee for registration for the first year. The renewal of registration on a yearly basis will also entail a fee of 5,000 EUR.

These applications are processed within six months, given that all the required information is provided in an orderly fashion. There are three types of crypto licenses and, depending on the licence, the requirements for initial capital range between 50,000 EUR and 150,000 EUR. The statutory requirements are a minimum of four directors, with appropriate operational policies being in place.

Companies that intend to start blockchain-related economic activities in other sectors are generally not required to have any minimum share capital and may have at least one director and a secretary. Other general company formation requirements include a fully functional office in Cyprus, a local bank account, the submission of an application with the Cyprus Registrar of Companies and the company registration fees.

The tax treatment of blockchain products and services depends on the nature of their application and also on the residency status of the company. Currently, most of the blockchain companies are subject to the payment of such general taxes as Corporate Income Tax – 12.5%, Capital Gains Tax – 20%, VAT – 19%, Special Defence Contribution – 3%. The Cypriot Tax Department hasn’t introduced any blockchain-specific taxes.

Meanwhile, the Innovation Hub supports innovative solutions being developed in the financial market. Among the major goals of the Hub is safeguarding the integrity of the financial systems of Cyprus and Europe while, at the same time, continuously offering support to local authorities and market participants in relation to regulations through a constant dialogue trying to give answers to all the emerging risks and opportunities that are connected with blockchain technology.

Malta

Malta has been working permanently to become a prosperous blockchain island through the introduction of a clear regulatory framework for blockchain-based businesses.

The Malta Digital Innovation Authority Act-the MDIA Act-mandates the establishment of the Malta Digital Innovation Authority, whose lead role will be to promote the creation of such technology innovations as blockchain, apart from assuming supervisory and regulatory functions. Uniformity in supervision will result in quicker and safer adoption of blockchain-based products and services.

The Innovative Technology Arrangements and Services Act (the ITAS Act) lays out principles concerning the registration and conduct of providers of innovative technology services. Principles concern the software and coding involved with blockchain, smart contracts, technical administration and review services.

The Virtual Financial Assets Act (the VFA Act) addresses issues on the classification, licencing, and operational principles of crypto-related entrepreneurial activities. It distinguishes three types of licencing – registration of VFA agents who act as an intermediary between the authorities and VFA service providers, and registration of whitepapers and applications of VFA service providers.

The cryptocurrency industry in Malta is regulated by the Malta Financial Services Authority (MFSA) who are responsible for the issuance of the authorization. Companies that plan to conduct crypto-related economic activities in Malta will have to adhere to AML/CFT related requirements imposed by Malta’s Financial Intelligence Analysis Unit (FIAU) under the Prevention of Money Laundering Act and the Prevention of Money Laundering and Funding of Terrorism Regulations.

Only then is it possible to apply for either a whitepaper application or a licence application, through a registered Virtual Financial Assets agent. The application process may take as long as six months. With regards to the class of VFA business classification, the application fee ranges from 3,000 to 12,000 EUR. Annual fees for registrants are in the range from 2,750 to 25,000 EUR.

Crypto licensees and other blockchain companies are required to pay general taxes, which are collected by the Commissioner for Revenue (CFR). Taxes that apply include Corporate Income Tax (35%), VAT (18%) and Stamp Duty (2-5%). Even though the tax treatment of blockchain application in several industries is still unclear, crypto companies can already rely on CFR’s clarifications on the Income Tax, Stamp Duty and VAT.

Gibraltar

Gibraltar has always been considered one of the friendliest jurisdictions for blockchain-based businesses as the country was one of the first ones in the world to introduce a blockchain regulatory framework. The Distributed Ledger Technology Framework (the DLT Framework) came into effect in 2018 and laid out key principles for businesses seeking to use blockchain technology in the financial market.

These are principles that deal with fitness and propriety, transparency in communications, adequacy of financial resources, risk management, effective corporate governance, security of systems, and AML/CFT policy observance.

The set of principles is then enforced by the Gibraltar Financial Services Commission through the licensing of DLT Providers. The application process is divided into three stages: 1) pre-application engagement, 2) initial application assessment, and 3) full application and presentation. An applicant in the second stage has to pay a non-refundable fee of 2,000 GBP (approximately 2,347 EUR).

Further, the jurisdiction of Gibraltar has been doing everything possible to improve the regulation of blockchain-based business conduct in the financial market through the implementation of new legislation. The 10th Regulatory Principle has been added to the Financial Services Law to take care of market manipulation and insider trading. In line with this principle, it shall be required that providers of blockchain products and services conduct their operations in a manner that promotes and enhances the integrity of the market.

The adoption of blockchain technology by the NTiE group is supported by the government, whose role is to offer relevant education and thus build a skilled workforce that could drive blockchain-based companies forward. The group was set up in partnership with the University of Gibraltar and a number of leading crypto businesses.

Gibraltar imposes taxes on the following: Corporation Tax – 12,5%, Social Insurance – 20%, Stamp Duty – 0-3% of real estate or 10 GBP, 12 EUR per share. Taxes are under the control of the Income Tax Office. Exemptions include capital gains, sales, gifts, wealth, consumption and dividends. No blockchain or crypto-related tax is taken either.

Data security, transparency, and integrity are becoming of paramount importance in the digitalised world, for which blockchain technology can be positioned to revolutionize many industries. The application of it is still considered uncharted waters where various private and public sectors are experimenting with its utilisation. With a view to avoiding unexpected implications and maximizing business success, every blockchain project should be the subject of careful legal risk and opportunity evaluation.

If you’re determined to initiate a blockchain project in one of the European countries, our highly experienced and dynamic team of Regulated United Europe is here to support you. We can provide professional advice on blockchain regulations, company formation, taxation, and licensing. In addition, we are going to be happy to step in with accounting services should you need them. Rest assured that we guarantee efficiency, confidentiality, and careful attention to every detail that influences your business performance. Contact us to schedule a one-on-one consultation.