Blockchain Projects Regulation

Over a decade ago blockchain technology, or Distributed Ledger Technology (DLT), was put into the limelight by the first and most popular cryptocurrency Bitcoin where it was utilised as a public transaction ledger. Since then it’s been used to build innovative projects in healthcare, cybersecurity, entertainment, voting, payments, supply chain and other areas.

By its definition, blockchain is a decentralised, disintermediated database that is distributed across multiple servers linked in a peer-to-peer network. Each block of data is linked together cryptographically as it stores information about the preceding one which is how they form a chain that prevents the data from being modified. It’s basically impossible to alter a set of recorded data within a block without having to change all the linked blocks.

A blockchain can be either permissionless or permissioned. While a permissionless blockchain is publicly accessible and allows any party to join the network without being vetted, a permissioned blockchain is controlled by a ledger administrator who evaluates the participation of each party. Adoption of any type of blockchain transforms human-based trust models into algorithm-based trust models which can improve transparency, increase operational efficiency and consequently lead to reduction of costs.

Due to its inherent nature, blockchain technology solves such problems as:

• Data security – decentralised storage units are immune to security breach as there is no way to compromise or steal the data stored on a blockchain
• Mediation – thanks to smart contracts, exchange of value in the digital environment can be performed in real-time without the need for a third-party (e.g., in the cases of payment transactions or sales, such costly intermediaries as banks or brokers are eliminated as the performed activities are automatically and securely recorded on a blockchain)
• Integrity of elections – blockchain-powered voting solutions enable anonymity and verification of authenticity of every vote that’s recorded on blockchain as well as immutability and real-time tracking
• Interoperability of healthcare systems – blockchain can keep nationwide electronic health records synced and integrated

Individual European countries are beginning to understand the significance of this groundbreaking engine of the digital economy which is why we see the emergence of various blockchain-related innovation hubs and sandboxes. That said, most current or envisaged regulatory frameworks focus mainly on cryptocurrencies. Therefore, when it comes to regulation, other blockchain projects should mostly adhere to the existing legislation and be evaluated individually for supervision, taxation or other purposes.

At the EU level, there is a need for the harmonisation of blockchain legislation across the member states. The European Blockchain Partnership (EBP) is responsible for fostering collaboration between the EU countries and is currently partnering with the European Commission to design a pan-European regulatory sandbox for use cases within the European Blockchain Services Infrastructure (EBSI) and outside of it. The use cases include data portability, business-to-business data spaces, smart contracts, and digital identity in such sectors as healthcare, environment, mobility and energy. The sandbox should be launched in 2022.

However, at present, the most urgent concerns of the EU authorities are crypto-related AML/CFT regulations and the integrity of financial markets, reflected in 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 which could be potentially solved through a standardised 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 mainly increasing in Fintech but the national authorities and non-governmental organisations are keen to welcome, support and embrace new groundbreaking blockchain solutions in other sectors.

Thanks to the government’s positive approach, Lithuanian blockchain ecosystem already boasts 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, the BCCS cluster and its member SuperHow founded the first Lithuanian blockchain competence centre Blockchain Lithuania. Its goal is to unite representatives of the private and public sectors and create and implement innovative solutions based on blockchain technology. Blockchain entrepreneurs are given an opportunity to join the fast-growing community as well as gain access to the relevant research and professional development courses aimed at growing relevant business competencies as well as the talent pool.

The Bank of Lithuania, Lithuania’s financial market regulator, has developed a blockchain-based technological sandbox LBChain, the aim of which is to serve Fintech market participants by providing regulatory and technological infrastructure that allows testing of new business solutions in a controlled environment. Startups and maturing companies are enabled to conduct blockchain-related research, experiment with new solutions and offer their innovations to customers.

When it comes to the formation of a blockchain-related company, the majority of the steps are identical to the establishment of companies planning to engage in traditional activities. The most popular legal business structure in Lithuania is a Private Limited Liability Company (UAB) which you can establish electronically within days using templates founding documents through the self-service system of the State Enterprise Centre of Registers.

In addition to the usual company formation steps, depending on your chosen business activities, you may need to take one more essential step – obtain a licence. For instance, companies engaging in crypto-related economic activities can’t operate in Lithuania without having a crypto licence which can be granted within a month with no application fees. There are no annual supervision fees either.

Lithuania offers two types of crypto licences:

• Crypto Wallet Exchange Licence, enabling licensees to manage crypto wallets possessed by their customers
• Crypto Exchange Licence, enabling licensees to provide cryptocurrency-to-fiat-currency exchange services and vice versa as well as cryptocurrency-to-cryptocurrency exchange services

Lithuanian economy is ranked 6th in the EU for ease of paying taxes which makes it a favourable jurisdiction for running a blockchain-related business. The State Tax Inspectorate, Lithuania’s national tax authority, hasn’t introduced any blockchain-specific taxes. All companies engaging in blockchain-related economic activities are subject to paying such general taxes as the Corporate Income Tax (15%) and VAT (21%).

They also have the right to access such tax reliefs as 200% allowance on the volume of eligible R&D expenses. Free economic zone companies whose capital investments amount to at least 1 mill. EUR are exempt from the Corporate Income Tax for 10 taxable periods beginning with the tax period in which such amount was reached, and are subject to a 50% reduction in the Corporate Income Tax rate for six subsequent tax periods.

Estonia

For years Estonia has been a leading jurisdiction for blockchain startups, particularly crypto companies, due to its friendly approach towards innovation and favourable taxation system. Although crypto-related businesses are currently facing much stricter regulations, insightful entrepreneurs can turn to less volatile sectors where regulations are well established, consistent and therefore easier to navigate through.

The regulation of blockchain technology heavily depends on the nature of products and services that it underlies, which is why it’s best to carefully examine legislation specific to your chosen sector or industry. Our team here at Regulated United Europe (RUE) will be delighted to provide a tailored consultation, should you need comprehensive legal advice.

In terms of the crypto regulations, no crypto activities can be initiated in Estonia without obtaining a crypto licence. Crypto licences are issued by Estonia’s Financial Intelligence Unit (FIU) to those who are prepared to pay a state fee of 10,000 EUR and are willing to wait up to three months. In case of updates applied to an existing licence, a state fee of 4,000 EUR is charged.

Estonia has been consistently ranked first in the International Tax Competitiveness Index which translates into low tax burdens on business investment and a sufficient level of neutrality through a well-structured framework of tax codes. The Estonian tax system is supervised and administered by the Estonian Tax and Customs Board (ETCB) who hasn’t yet introduced any taxation framework specific to blockchain technology.

Blockchain companies are subject to paying the same general taxes as other businesses. The standard Corporate Income Tax rate is 20% but it’s not levied on retained and reinvested corporate profits which is certainly beneficial to growth-oriented blockchain companies. However, it’s important to note that depending on the sector which your blockchain project is aiming to provide a solution for, specific taxes may apply.

Switzerland

Switzerland, the home for the world-famous Crypto Valley, is dedicating a lot of efforts to encourage and accelerate the adoption of blockchain-based products and services. One of the supportive initiatives promoting the integration of blockchain technology is the Crypto Valley Association, based in Zug.

The aim of the Association is to build the world’s leading blockchain ecosystem through the facilitation of collaboration between the market participants and authorities. When it comes to measuring their success, the numbers speak for themselves – today Switzerland’s blockchain industry boasts 14 companies with a valuation of over 1 bln. USD (over 932 mill. EUR).

Besides the Association’s promotional activities and support, Zug’s economic area has always been known for its low tax rates and business-friendly environment with its huge talent pool and service-oriented cantonal administration facilitating time efficient decision-making. Local authorities demonstrate their willingness to collaborate with the industry participants and develop business-friendly policies.

Switzerland-based blockchain companies can certainly benefit from the decentralised taxation system. Taxes in Switzerland are generally administered by the Federal Tax Administration (FTA), the cantons and the municipalities. Each canton has a different taxation framework which means that the tax rates will vary depending on your chosen location for your blockchain company and the purpose of your business activities.

In Zug, the epicentre of blockchain-based businesses and the birthplace of Ethereum, cryptocurrencies are more eagerly adopted. For instance, taxes can already be paid in cryptocurrency. Salaries paid in cryptocurrency are subject to the Income Tax (approx. 23%) which must be reflected in the salary statement. All cryptocurrencies must be declared as other funds and are subject to the Wealth Tax (up to 3%).

On the other hand, establishing a blockchain-based company in Switzerland might be rather costly. For instance, cryptocurrency companies planning to start operating in Switzerland must have the minimum share capital of 300,000 CHF (approx. 289,000 EUR) and obtain a Fintech licence from the Swiss Financial Market Supervisory Authority (FINMA).

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

Poland

Although Polish blockchain technology startups and companies offer solutions to a variety of sectors (real estate, advertising, gaming, betting, etc.), currently only cryptocurrency businesses are a separately regulated area, administered by the Tax Administration Chamber who keeps a register of crypto activities, titled the Register of Virtual Currencies. It’s mandatory to apply for the entry into the Register prior to starting crypto-related economic activities in Poland.

Applications may only be submitted electronically via the Electronic Platform of Public Administration Services (ePUAP). If a crypto company is capable of satisfying all the legal requirements, it will be included in the Register within 14 days from the date of receipt of the application. The application fee is applied in the form of the Stamp Duty in the amount of 616 PLN (approx. 133 EUR). There are no crypto supervision fees.

Other blockchain-based companies can be established following the procedures identical to the process of establishing a company for any other economic activity. The most popular legal business structure 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’s important to note that some blockchain companies may be required to obtain a permission or a licence specific to the sector which their blockchain project is solving a problem for.

In Poland, there is no blockchain-specific tax and all companies engaging in blockchain-related activities are normally subject to paying general taxes. The most common taxes applicable to a Polish Limited Liability Company include Corporate Income Tax (19%), VAT (23%), Dividend Withholding Tax (19%) and Social Insurance (1,61%-2,49%).

Poland-based blockchain companies are supported by the Blockchain and New Technologies Chamber of Commerce who represents the interests of the industry under the applicable Polish law in a dialogue with the national authorities. Their objectives mainly focus on cryptocurrency taxation, including an ability to pay taxes in cryptocurrency, and on preventing blockchain innovations from being hampered by the out-of-date legislation.

Another supportive initiative – the Innovation Hub where the the Polish Financial Supervision Authority consults financial market companies operating in Fintech, Suptech and Regtech as well as provides virtual sandboxes to underpin the development of 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 prefer to dive into the booming crypto industry, shall be prepared to adhere to strict AML/CFT regulations. All companies planning to carry out crypto activities in the UK must register with the Financial Conduct Authority (FCA) in order to obtain the Part 4A Permission authorisation. The applications are submitted via Connect along with all the required documents. The process takes up to six months and the application fees range from 2,000 GBP to 10,000 GBP.

The FCA offers support through the Innovation Hub to those blockchain companies who’re looking to launch innovative financial products and services in the UK and are in need of learning about the applicable legislation.

The initiative includes the following categories:

• Regulatory Sandbox – designed to provide access to regulatory expertise and enable testing of innovative solutions in the financial market with real consumers
• Innovation Pathways – created to explain the complexities of regulations, including the implications for blockchain-based business models, particularly when products or services don’t fall under one clear regulatory framework
• Digital Sandbox – built to provide access to a variety of synthetic data sets needed to test and validate prototype technology solutions that can be observed by regulators and other interested parties

All innovative businesses, newly authorised by the FCA, are also supported and supervised by the Early and High Growth Oversight initiative. The aim is to provide guidance in meeting new regulatory obligations in the first few years after authorisation.

Apart from sector-specific licensing, the process of establishing a blockchain company in the UK is nearly identical to starting any other type of business.  One of the most popular legal business structures in the UK is a Private Limited Company (Ltd) which can be set up from abroad and has no requirements for a minimum share capital. It’s mandatory to have at least one shareholder and one director who can be the same person and a non-resident of the UK.

Ireland

In Ireland, a comprehensive regulatory framework for blockchain-based businesses is yet to be introduced but that doesn’t stop innovative companies from taking advantage of Ireland’s favourable tax regime.

Taxes in Ireland are administered by the Revenue Commissioners who hasn’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 regulated to some extent. To ensure compliance with the AML/CFT legislation, the Central Bank of Ireland maintains the Registry of Virtual Asset Service Providers (VASPs) which crypto businesses can get into by submitting a VASP pre-registration form. Neither application, nor supervision fees are applied which is advantageous to startups. The duration of the application process varies based on the number of pending applications and the applicant’s ability to submit all the required information.

Setting up a blockchain company is relatively easy, provided that you have all the required documentation and are eligible for obtaining an appropriate licence. To open a Limited Company (Ltd), you’ll need at least one director and a secretary who can also be company shareholders. Having a physical address in Ireland is also a prerequisite. It normally takes up to 10 days for the Companies Registration Office (CRO) to register a new company in Ireland.

All blockchain companies are supported by the Blockchain Ireland, an industry’s innovation network whose current main goal is to establish Ireland as a knowledge hub for cryptoasset businesses and decentralised financial services. Its functions include promoting and sharing information about blockchain technology, crypto and Web3 through industry events and other channels.

Cyprus

Cypriot regulatory framework is currently focused on cryptocurrency businesses, while other blockchain application areas aren’t separately regulated. In spite of it, blockchain technology is slowly penetrating such areas as gaming, e-commerce and telecommunication.

Companies planning to start crypto-related economic activities in Cyprus must comply with the AML/CFT Law and register with the Cyprus Securities and Exchange Commission (CySEC) as crypto asset service providers (CASPs) by submitting an application form. The application fee is 10,000 EUR which also includes the first year’s registration fee. The annual renewal of registration costs 5,000 EUR.

The applications are processed within six months, provided that all the mandatory information is supplied in an orderly manner. There are three categories of crypto licences and depending on the licence, requirements for the initial capital range from 50,000 EUR to 150,000 EUR. Having at least four directors and appropriate operational policies in place are also mandatory.

Companies intending to start blockchain-related economic activities in other sectors normally aren’t required to possess any minimum initial capital and they can have at least one director and a secretary. Other general company formation requirements include a fully operational office in Cyprus, local bank account, submission of an application to the Cyprus Registrar of Companies and company registration fees.

Tax treatment of blockchain products and services depends on the nature of their application and the residency status of a company. Currently most of the blockchain companies are subject to paying such general taxes as Corporate Income Tax (12,5%), Capital Gains Tax (20%), VAT (19%) and Special Defence Contribution (3%). Cypriot Tax Department hasn’t introduced any blockchain-specific taxes.

The development of innovative solutions in the financial market is supported by the Innovation Hub, the goal of which is to safeguard the integrity of Cypriot and European financial systems. The Hub provides guidance on regulations, facilitates a continuous dialogue between the local authorities and market participants and aims to address emerging risks and opportunities inherent to blockchain technology.

Malta

Malta has been consistently seeking 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) defines the formation of the Malta Digital Innovation Authority (MDIA) whose core responsibility is to promote the development of such technological innovations as blockchain as well as exercise supervisory and regulatory functions. Consistency in supervision shall lead to faster and safer adoption of blockchain-based products and services.

The Innovative Technology Arrangements and Services Act (the ITAS Act) lays out principles for the registration and behaviour of innovative technology service providers. The principles pertain to the software and coding used in blockchain, smart contracts, technical administration and review services.

The Virtual Financial Assets Act (the VFA Act) focuses on the classification, licensing and operational principles of crypto-related business activities. It distinguishes three types of authorisations – registration of VFA agents who mediate between the authorities and VFA service providers, registration of whitepapers and applications of VFA service providers.

The Maltese cryptocurrency industry is supervised by the Malta Financial Services Authority (MFSA) who’s responsible for the issuance of the authorisation. Companies planning to engage in crypto-related economic activities in Malta must comply with AML/CFT related requirements that are enforced 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 can they either register a whitepaper or apply for a licence through a registered VFA agent. The application process can take up to six months. Depending on VFA business classification, application fees vary from 3,000 EUR to 12,000 EUR. Successful registrants are required to pay annual fees that range from 2,750 EUR to 25,000 EUR.

Crypto licensees and other blockchain companies are obligated to pay general taxes, administered by the Commissioner for Revenue (CFR). Applicable taxes include Corporate Income Tax (35%), VAT (18%) and Stamp Duty (2-5%). While tax treatment of blockchain application in various industries is yet to be clarified, crypto companies can already reference CFR’s guidance 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.

The list of principles covers fitness and propriety, transparency in communication, adequacy of financial resources, risk management, effective corporate governance, security of systems and adherence to the AML/CFT policies.

The Gibraltar Financial Services Commission (GFSC) is responsible for the enforcement of these principles through the issuance of DLT Providers licence. The process consists of the following stages: 1) pre-application engagement, 2) initial application assessment and 3) full application and presentation. During the second stage applicants are required to pay a non-refundable fee of 2,000 GBP (approx. 2,347 EUR).

Gibraltar continuously seeks to improve the regulation of blockchain-based businesses operating in the financial market through the introduction of new legislation. The Financial Services Law has been supplemented with the 10th Regulatory Principle which aims to combat market manipulation and insider trading. It requires all providers of blockchain products and services to operate in a way that maintains and enhances market integrity.

The government supports the adoption of blockchain technology through the New Technologies in Education (NTiE) group whose role is to offer relevant education, aimed at building a skilled workforce who could drive blockchain-based companies forward. The group was formed in partnership with the University of Gibraltar and several leading crypto businesses.

Gibraltar’s taxes, namely Corporation Tax (12,5%), Social Insurance (20%) and Stamp Duty (0-3% for real estate or 10 GBP (12 EUR) per share) are administered by the Income Tax Office. Taxes aren’t levied on capital gains, sales, gifts, wealth, consumption and dividends. There’s no blockchain or crypto-specific tax either.

In the digitalised world, data security, transparency and integrity are becoming of paramount importance which is why blockchain technology has the potential to revolutionise a wide range of industries. The application of it is still considered uncharted waters where various private and public sectors are experimenting with its utilisation. To avoid unexpected implications and maximise business success, every blockchain project should receive careful legal evaluation of risks and opportunities.

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 (RUE) is here to support you. We offer comprehensive advice on blockchain regulations, company formation, taxation and licensing. Furthermore, we’ll be more than happy to step in if you’re in need of accounting services. Rest assured, we guarantee efficiency, confidentiality as well as meticulous attention to every detail that impacts your business success. Contact us now to book a personalised consultation.