Crypto Regulations in Europe
While some jurisdictions remain hostile to the world-changing blockchain technology, others are much more welcoming in terms of the recognition of various crypto activities as a separate industry which gradually leads to the creation of transparent and efficient regulatory frameworks, clear taxation system and growth-focused developmental support.
Although European countries are at different stages of the construction of comprehensive crypto legislation, most of them have one fundamental aspect in common – intensifying crypto activities supervision for the purposes of anti-money laundering and counter-terrorist financing. Needless to say, it’s a means to build trust in the vastly dynamic industry.
Estonia’s efforts to build a robust regulatory framework for crypto businesses are reflected in the Money Laundering and Terrorist Financing Prevention Act (Estonian AML Act) which is now aligend with the Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, published by the Financial Action Task Force (FATF).
The regulations apply to the companies engaged in such activities as:
- Virtual currency exchange
- Crypto wallet services
- Brokerage services
- Virtual currency transfer services
- Issuance of virtual currencies
- Services of delegating transactions to third parties
Estonia’s Financial Intelligence Unit (FIU) is responsible for enforcing the regulations, including the issuance of crypto licences. Applicants must pay a state fee of 10,000 EUR and be prepared to wait for up to 12 weeks to receive a licence. A state fee of 4,000 EUR is applied to licence updates caused by a change in crypto activities.
Key requirements for the applicants:
- Internal risk management policies that comply with AML regulations and cover customer, jurisdictions, products, communication and other aspects; it includes appointing an internal AML auditor, responsible for inspecting AML-related procedures, documentation, senior management’s decisions, employee competences and other related areas
- Processes for KYC and the Travel Rule
- Effective and secure IT infrastructure for the provision of the authorised services, including customer data management
- A two-year business plan, including business continuity plan, organisational structure and financial projection
- Senior managers, board members and investors must be fit and proper (have appropriate education and experience as well as prove the absence of convictions for a criminal offence)
- A fully operational office in Estonia where local staff (including AML compliance officer and a competent board member) is employed
- Transparency in the source of funding
- Crypto wallet, exchange, ICO and similar service providers must have a share capital of 100,000 EUR, whereas virtual currency transfer service providers must possess a share capital of 250,000 EUR
- Fulfil own funds requirements which vary depending on the type of crypto services
- Transparent documentation about the shareholders and the number of shares
There’s no particular crypto taxation framework in Estonia. Crypto companies are currently taxed in the same way as other businesses. The standard Corporate Income Tax rate is 20% but it’s not levied on retained and reinvested corporate profits which might be beneficial to growth-oriented crypto companies.
It’s mandatory to conduct an audit if at least two of the following apply:
- Sales revenue exceeds 4,000,000 EUR
- Total assets are valued more than 2,000,000 EUR
- Average number of employees is at least 50
Auditing is also mandatory when at least one of the following conditions is applicable:
- Sales revenue exceeds 12,000,000 EUR
- Total assets are valued more than 6,000,000 EUR
- Average number of employees is at least 180
Lithuania’s rapidly evolving cryptocurrency ecosystem is currently considered the most favourable jurisdiction in Europe for running a cryptocurrency-related business. Local authorities are responsive to the dynamic nature of the industry and are therefore prepared to guarantee efficiency, clarity, reliability and support to those who are looking to start a crypto project without having to deal with extensive bureaucracy, unrefined procedures and high costs.
The main legislation regulating crypto activities in Lithuania is the Law of the Republic of Lithuania on the Prevention of Money Laundering and Terrorist Financing, the amendment of which includes virtual currencies exchange operators and deposit virtual currencies wallet operators.
Virtual currencies exchange operator – a company established in Lithuania or a branch of a company of an EU country or a foreign state established in Lithuania providing virtual currency exchange, purchase and/or sale services for a fee.
Deposit virtual currencies wallet operator – a company established in Lithuania or a branch of a company of an EU country or a foreign state established in Lithuania providing services of management of deposit virtual currency wallets.
Cryptocurrency businesses are supervised by the Bank of Lithuania who’s also responsible for the issuance of crypto currency licences. Furthermore, the authority strives to accelerate the development of the crypto industry through the blockchain-based sandbox “LBChain” which provides regulatory and technological infrastructure and therefore enables testing of new business solutions in a controlled environment.
Crypto licensees are obligated to report to the Lithuanian Financial Crime Investigation Service (FCIS) for the purposes of meeting AML/CFT requirements. Thanks to the reliable performance of the FCIS, Lithuania is ranked 9th among the lowest risk jurisdictions which is an indication of a safe business environment.
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
Applications for a cryptocurrency licence are submitted to the Bank of Lithuania. Another advantage of the Lithuanian regulatory framework is that it takes less than a month to process a crypto application and it’s free of charge. There are no annual supervision fees either.
To apply for the Lithuanian cryptocurrency licence, it’s necessary to start with establishing a Limited Liability Company (UAB) in Lithuania (minimum share capital – 2,500 EUR) which may be done electronically. Company’s owners and directors don’t have to be permanent residents of Lithuania and there is no prerequisite for the employment of local staff.
Applicants and licensees must adhere to the following legal requirements:
- Create effective customer identification procedures
- Design and implement AML/CFT policies and workflows, overseen by an AML compliance officer who’s obligated to provide reports to the FCIS
There’s no crypto-specific tax in Lithuania. However, licensed crypto businesses are subject to paying such regular taxes as Corporate Income Tax (15%). They also have the right to access existing tax incentives.
Limited Liability Companies are obligated to carry out audit when at least two indicators exceed the following values on the last day of the financial year:
- The value of the assets shown in the balance sheet – 1,800,000 EUR
- Net sales revenue for the financial year – 3,500,000 EUR
- The average annual number of employees during the reporting financial year – 50
After the introduction of new crypto regulations in 2021, Poland is gradually becoming one the most crypto-friendly countries in Europe. Cryptocurrency businesses are now regulated by the Tax Administration Chamber who administers the Register of Virtual Currencies. They can also expect support from such organisations as The Blockchain and New Technologies Chamber of Commerce and The Innovation Hub.
The latest legal act regulating Poland-based cryptocurrency businesses is the amendment to the Anti-Money Laundering and Counter Terrorism Financing Act of 1 March 2018 (the New AML Act), enforced from the 1st of November 2021. It defines virtual currencies and stipulates crypto businesses registration rules so as to achieve effective AML/CFT regulation.
Under the new law, companies engaging in the following activities are obligated to get into the Register:
- Exchange of virtual currencies for fiat money
- Exchange of virtual currencies one for another
- Provision and maintenance of crypto wallets
- Cryptocurrency brokerage
Applications for the Register are to be submitted electronically via the Electronic Platform of Public Administration Services (ePUAP). The processing starts after the receipt of the stamp duty (616 PLN or approx. 133 EUR) which must be paid to the bank account of the Katowice City Hall. If the applicant is capable of meeting all the conditions, the Tax Administration Chamber will enter the company into the Register of Virtual Currencies within 14 days from the date of receipt of the application. It’s quite advantageous that the regulator hasn’t set out any periodic fees for the supervision of the registrants.
Successfully registered businesses will have to prove continuous AML/CFT compliance by submitting AML reports to the General Inspector of Financial Information.
Depending on the legal structure, every Polish crypto company is subject to paying regular taxes, such as Corporate Income Tax (19%), VAT (23%) and Dividends Withholding Tax (19%). Crypto companies may also be eligible for already existing tax incentives. For instance, if a company’s annual revenue doesn’t exceed 2 mill. EUR, the Corporate Income Tax is reduced to 9%.
Auditing and reporting requirements are no different from requirements imposed on other businesses. An audit is mandatory only if a Limited Liability Company meets at least two of the following criteria: 1) annual net revenue exceeds 5 mill. EUR, 2) annual turnover exceeds 2,5 mill. EUR, 3) annual employment is 50 or more full-time employees.
Malta was set to become a thriving blockchain island when several years ago a crypto-specific regulatory framework was introduced by its innovation-oriented government. The industry is supervised by the Malta Financial Services Authority (MFSA).
The regulation framework consists of the following legislation:
- The Malta Digital Innovation Authority Act (the MDIA Act) which defines the formation of the Malta Digital Innovation Authority (MDIA) whose core responsibility is to promote the development of technological innovation
- The Innovative Technology Arrangements and Services Act (the ITAS Act) which lays out principles for the registration and behaviour of innovative technology service providers
- The Prevention of Money Laundering Act and the Prevention of Money Laundering and Funding of Terrorism Regulations specify AML/CFT related requirements which are enforced by the Financial Intelligence Analysis Unit (FIAU)
- The Virtual Financial Assets Act (the VFA Act) which specifically focuses on crypto assets – classification, licencing and operational principles; 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
If a crypto company is convinced that it’s capable of complying with all the relevant legislation, it can either register a whitepaper or apply for a licence through a registered VFA agent. The application process usually takes 3-6 months.
Depending on VFA business classification, application fees vary from 3,000 EUR to 12,000 EUR. Furthermore, successful registrants are obligated to pay annual fees that range from 2,750 EUR to 25,000 EUR.
Moreover, licensed businesses must pay applicable taxes, administered by the Commissioner for Revenue (CFR) who’s issued VFA-specific guidelines determining the application of the Income Tax, Stamp Duty and VAT rates to the transactions or arrangements involving Distributed Ledger Technology (DLT) assets.
Generally, VFA service providers are obligated to prepare annual audited financial statements which are also required for the purpose of the preparation of the annual income tax return form. Audit exemption may apply to new crypto businesses that meet the criteria of annual turnover (no more than 80,000 EUR) and of qualifying shareholders (educational studies completed at least at MQF Level 3).
Without a doubt, Switzerland is one of the most crypto-welcoming countries due to its dedication to adopt blockchain-based products and services as well as create a friendly regulatory environment. Ethereum is one of the crypto giants currently benefiting from the Swiss hospitality which indicates that this jurisdiction is valued by the industry leaders.
The Swiss crypto industry is supervised by the Swiss Financial Market Supervisory Authority (FINMA) whose goal is to ensure compliance with the AML regulations and licensing requirements.
Cryptocurrency tokens are divided into the following categories:
- Payment tokens – a means of payment that can be used for money or value transfer
- Utility tokens – provision of digital access to an application or service
- Asset tokens – functionally similar to stocks and bonds which makes them subject to securities regulations
One of the key pieces of legislation regulating crypto activities in Switzerland is the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (the DLT Act). It provides a legal basis for the trading of rights through electronic registers, sets rules for the separation of crypto assets in case of bankruptcy and adds a new licence category for the DLT trading systems.
AML obligations are laid out in the following AML legislation:
- Anti-Money Laundering Act
- Anti-Money Laundering Ordinance
- FINMA Anti-Money Laundering Ordinance
Cryptocurrency companies planning to start operating in Switzerland must obtain a Fintech licence which allows them to accept public deposits of up to 100 mill. CHF (approx. 96 mill. EUR) or crypto-based assets which can’t be invested and no interest can be paid on them.
Key requirements for the applicants:
- Legal structure – a Company Limited by Shares, a Corporation with Unlimited Partners or a Limited Liability Company
- A business plan and a detailed review of company’s activities
- A registered office in Switzerland, where its business activities are carried out
- Minimum share capital – 300,000 CHF (approx. 289,000 EUR)
- Internal AML/KYC/CFT procedures
- A regulatory auditor recognised by 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.
The development of the cryptocurrency industry is promoted by the Crypto Valley Association, the aim of which is to build the world’s leading blockchain and crypto ecosystem through the facilitation of collaboration between the market participants and authorities.
Each canton has different tax treatments which means that tax rates and rules vary depending on the location of a cryptocurrency company and the purpose of the cryptocurrency use. In Zug, the epicentre of cryptocurrency businesses and the birthplace of Ethereum, where taxes can be paid in cryptocurrency, Corporate Income Tax is proportional and can reach 15.1%. Furthermore, all cryptocurrencies must be declared as so-called other funds and are subject to the Wealth Tax (up to 3%). Salaries paid in cryptocurrency are subject to the Income Tax (approx. 23%) which must be reflected in the salary statement.
Gibraltar was the first jurisdiction in the world to start regulating blockchain-based businesses through the Distributed Ledger Technology Framework (the DLT Framework) and is currently striving to enhance crypto market integrity and promote adoption of crypto products and services by introducing new legislation.
One of the main pieces of legislation regulating DLT activities in Gibraltar is the Financial Services Law which is now supplemented with the 10th Regulatory Principle, requiring that all DLT providers operate in a way that maintains and enhances market integrity. The aim is to combat market manipulation and insider trading.
AML regulations remain aligned with the EU’s 5th and 6th AML Directives which means DLT businesses must meet such requirements as implementation of internal policies mitigating risks related to customers, countries of operation, designing systems enabling collection of relevant data, KYC procedures as well as proven competence of the senior management.
The following activities are regulated in Gibraltar:
- Exchange between virtual assets and fiat money
- Exchange between virtual assets
- Transfer of virtual assets
- Administration of virtual assets or instruments allowing control of virtual assets
- Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset
The Gibraltar Financial Services Commission (GFSC) supervises the rapidly developing industry by overseeing compliance with the AML legislation and by being responsible for the issuance of DLT providers licences.
Stages of the application process:
- Pre-application engagement (the GFSC provides guidelines on a specified application proposal and the business model as well as confirms if it falls within the scope of the DLT framework)
- Initial application assessment (submission of the application via the Cloud, enabling the GFSC to assess risks and complexity of the business) which can take up to 2 weeks
- A non-refundable initial application assessment fee of 2,000 GBP (approx. 2,347 EUR) is paid to the authority
- Full application and presentation (applicants are invited to deliver a presentation to the GFSC which must include information about the competence of the founders (directors), business plan, financial projections and evidence of compliance with the applicable regulations)
To accelerate the development of the blockchain and crypto industry, the government partnered with the University of Gibraltar and several leading crypto businesses to launch the New Technologies in Education (NTiE) group whose role is to offer technology-related education. This approach enriches the market with the workforce possessing the skills necessary for the formidable growth of innovative businesses.
One of the biggest advantages of having a DLT company in Gibraltar is relatively low tax rates. The standard Corporate Income Tax rate is 12.5%. However, it’s worth noting that any foreign income sourced from the activities that aren’t covered by the DLT licence, is also subject to taxation.
Cyprus is one of the most attractive jurisdictions for cryptocurrency businesses due to the government’s friendly approach towards the industry and because of the relatively low corporate taxation. For instance, Cypriot businesses are required to pay Corporate Income Tax at the rate of 12.5% which is among the lowest rates in the EU.
Cypriot cryptocurrency businesses are supervised by the he Cyprus Securities and Exchange Commission (CySEC) under the Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007 (the AML/CFT Law) which also determines activities of crypto asset service providers (CASPs).
CASPs engage in the following activities:
- Exchange between crypto assets and fiat currencies
- Exchange between crypto assets
- Management, transfer, holding and/or safekeeping, including custody, of crypto assets or cryptographic keys or means which allow the exercise of control on crypto assets
- Offering and/or sale of crypto assets, including the initial offering
- Participation and/or provision of financial services in relation to the distribution, offer and/or sale of crypto assets, including initial offering
Key legal obligations that CASPs are subject to:
- A company incorporated in Cyprus with an appropriate minimum share capital as well as fully operational office and local staff
- Designing internal policies for customer identification and for the tracking of sources of funds
- Monitoring clients’ crypto asset transactions and wallet addresses and reporting suspicious activities
- Creating effective workflows and systems for secure data management
Companies planning to start crypto activities in Cyprus must comply with the AML/CFT Law and register with the CySEC as CASPs by submitting an application form. Normally the applications are processed within 6 months.
The directive on the Register of Providers of Services Regarding Crypto Assets (the CySEC Directive) regulates the creation, maintenance, operations and changes of the CASPs Register.
A type of crypto licence is determined by the following classification:
- Class 1 (initial capital – 50,000 EUR) – CASPs providing investment advice
- Class 2 (initial capital – 125,00 EUR) – CASPs providing the service referred to in Class 1 and/or any of the following services:
- Reception and transmission of client orders
- Execution of orders on behalf of clients
- Exchange between crypto assets and fiat currency
- Exchange between crypto assets
- Participation and/or provision of financial services related to the distribution, offering and/or sale of crypto
- Assets, including the initial offering
- Placement of crypto assets without firm commitment
- Portfolio management
- Class 3 (initial capital – 150,000 EUR) – CASPs that provide any of the services referred to in Class 1 or 2 and/or:
- Administration, transfer of ownership, transfer of site, holding, and/or safekeeping, including custody, of crypto assets or cryptographic keys or means enabling control over crypto assets
- Underwriting and/or placement of crypto assets with firm commitment
- Operation of a multilateral system, which brings together multiple third-party buying and selling interests in crypto assets in a way that results in a transaction
The development of Cypriot cryptocurrency businesses is supported by the Innovation Hub, the function of which is to provide guidance on regulations and ensure a continuous dialogue between the local authorities and market participants.
Currently a comprehensive crypto regulatory framework is in the making as the UK has recently announced new plans aimed at the safe adoption of the cryptocurrency industry. New regulations are to be introduced this year for the purpose of reducing economic crime. It’s also supposed to reduce bureaucracy and introduce a new competitive taxation system which crypto businesses will be given a chance to benefit from.
In the meantime, businesses intending to start a crypto project in the UK should take note of the AML/CFT requirements adopted from the EU’s 5th Anti-Money Laundering Directive (5AMLD) and the 6th Anti-Money Laundering Directive (6AMLD).
Cryptocurrency businesses planning to operate in or form the UK must meet the following criteria:
- Assess money laundering and terrorist financing risks which their company might be exposed to and implement appropriate internal procedures which must be overseen by competent AML/CFT compliance officers and implemented by trained staff
- Ensure data protection and maintenance of sufficient records for AML/CFT reporting
- Comply with KYC requirements by implementing required policies
- Monitor and report suspicious transactions
- Identify politically exposed persons
Companies that meet the above criteria are able to register with the Financial Conduct Authority (FCA) by submitting an application form via Connect in order to obtain Part 4A Permission authorisation which permits them to operate in the UK. The FCA is responsible for their authorisation and supervision for the purposes of consumer protection, market integrity and fair competition. Applications, depending on their completeness, are normally assessed within 6-12 months.
One of the key aspects to note is application fees. If the applicant’s income is less than 250,000 GBP (approx. 294,000 EUR), a fee of 2,000 GBP (approx. 2350 EUR) applies. If the applicant’s income exceeds this threshold, a fee of 10,000 GBP (approx. 12,000 EUR) must be settled.
Currently cryptocurrency companies pay the same taxes (such as Corporation Tax at the rate of 19%) and are subject to the same reporting requirements as businesses of other industries.
Ireland is one of the most desirable jurisdictions for running a cryptocurrency business due to such advantages as low tax rates and tax incentives, but when it comes to crypto legislation, a comprehensive framework is yet to be developed.
The Central Bank of Ireland supervises crypto businesses under the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021 which was implemented to harmonise local legislation with the EU’s Fifth Anti-Money Laundering Directive (5AMLD).
To ensure compliance with the AML/CFT legislation, the Central Bank of Ireland maintains the Registry of Virtual Asset Service Providers (VASPs).
VASPs are companies that supply the following services:
- Exchange between virtual assets and fiat money
- Exchange between one or more types of virtual assets
- Transfer of virtual assets (conduct of a transaction on behalf of another person that moves a virtual asset from one virtual asset address or account to another)
- Provision of custodian wallets
- Participation in, and provision of, financial services related to an issuer’s offer or sale of a virtual asset or both
Businesses planning to operate as VASPs in or from Ireland are required to submit a VASP pre-registration form to the Central Bank of Ireland. Currently there are no application or supervision fees. The length of the application process varies based on the number of pending applications and the applicant’s ability to submit a quality application along with all the mandatory documentation.
Detailed instructions on how to submit the application forms and supporting documentation via the Online Reporting System (ONR) are laid out in the guide created by the Central Bank of Ireland.
New and existing crypto businesses can expect support from the Blockchain Ireland, an industry innovation network whose functions include sharing information, organising industry events and promoting success stories. Its core goal is to establish Ireland as a knowledge hub for cryptoasset businesses.
There’s no crypto-specific tax in Ireland, however VASPs are obligated to pay regular taxes, such as relatively low Corporation Tax (12.15%) and Capital Gains Tax (33%).
Lastly, it’s worth noting that one of the most attractive aspects of the Irish taxation system is a three-year exemption from the Corporation Tax which for new startups can be reduced to 0% if their Corporation Tax due is 40,000 EUR or less in a single tax year.
Our team of dedicated and quality-focused lawyers will be delighted to provide you with tailored, value-added support in establishing a cryptocurrency company in one of these favourable jurisdictions, including the submission of a crypto licence application. From the very start of the process you’ll be backed with the expertise in the swiftly evolving AML legislation, company formation, reporting and tax advice.
At the moment, the main services of our company are legal and compliance solutions for FinTech projects. Our offices are located in Tallinn, Vilnius, and Warsaw. The legal team can assist with legal analysis, project structuring, and legal regulation.