Intrinsically linked to cyberspace, cryptocurrencies have burst into our economy in recent years even though there is still a lack of legislation on them.
The cryptocurrency revolution
Cryptocurrencies are alternative currencies, as they do not have legal tender in any country, are not regulated by any bank and function as a peer-to-peer payment system. Revolutionizing our way of thinking about money, the emergence of these currencies has also shown the public’s growing desire to emancipate themselves from a sometimes excessively regulated financial world. Many cryptocurrencies have been developed, but most work in a similar way and derive from the first full implementation: Bitcoin.
Created in 2008 by an individual who goes by the pseudonym Satoshi Nakamoto, Bitcoin represents the archetype of cryptocurrency, so to speak. Its value having experienced an exponential increase by the end of 2017, reaching nearly $20,000 and having subsequently experienced strong fluctuations, is only symptomatic of the craze and fascination that cryptocurrency has aroused.
It remains true, however, that the law is struggling to adapt to what is arguably one of the biggest revolutions in recent years.
Bitcoin, a currency?
Not falling under any of the pre-existing legal categories, Bitcoin cannot be recognised as legal tender, or even an electronic currency. It is often substituted for the status of “financial index” or even simply a “valuable intangible asset” that can be the subject of a transaction.
In fact, a currency is conventionally considered as a particular asset issued by the State and whose value is guaranteed by the latter. From the perspective of the law of obligations, a currency is further characterized by its universal discharging effect: the debtor is in fact discharged of his debt once he has turned over to his creditor the amount of money due. The discharging effect is considered to be universal to the extent that the creditor does not need to agree to release the debtor of his debt. This discharging effect is deemed to be automatic, given the power that the law attaches to the currency.
However, Bitcoin does not have universal discharging effect insofar as a debtor who would like to pay in Bitcoin must first obtain the agreement of the creditor. Thus, a creditor who refuses such a payment would not be exposed to the sanctions under Article R. 642-3 of the French Penal Code which prohibits the refusal to accept euro banknotes and coins having legal tender.
Bitcoin does no longer fulfils the requirements of an electronic currency. Indeed, Article L.315-1 of the French Monetary and Financial Code, which transposes Article 2.2 of Directive 2009/110/EC, defines electronic money as a monetary value which is stored in an electronic form, representing a receivable from the issuer and which is issued against the remittance of funds for payment transactions.
Since Bitcoin is not issued against a remittance of funds, it cannot be classified under this definition.
The Court of Justice of the European Union has nevertheless considered that as Bitcoin “is a means of contractual payment, it cannot, on the one hand, be regarded as a current account, or as a deposit of funds, a payment or a transfer. On the other hand, unlike receivables, claims, cheques and other commercial paper (…), it constitutes a means of direct settlement between the operators who accept it”. In this respect, it had determined that Bitcoin could benefit from the VAT exemptions provided for financial transactions, without giving a more specific definition of the status of cryptocurrencies.
Taxation of Bitcoin
The darkness around the legal status of Bitcoin does not mean that it is exempt from any regulation. The TRAFCIN unit, an agency of the French Ministry of Economy and Finance, in charge of the fight against money laundering and the financing of terrorism, published a report in 2014 on the taxation of Bitcoins.
This report specifies that the capital gains on Bitcoins are thus subject to income tax in France as of 11 July 2014, under the category of non-commercial profits if the gains are occasional, or that of industrial and commercial profits if it is a normal activity. This tax is, however, only valid for Bitcoin sales, and does not apply when the cryptocurrency is simply stored in a virtual wallet.
Bitcoins are also subject to inheritance and gift tax. As a result, Bitcoins that would be given could be re-qualified as a disguised donation and give rise to the gift tax which could reach up to 60% for non-relatives.
This bit of information given by the TRAFCIN unit, as well as that given by the CJEU provide some clarification of the contours of the legal status of cryptocurrencies, even though they remain unclear. It is therefore important to remain attentive to the understanding of both French and European case law and future legislation on the characterisation of such currencies.