09 Mar CRYPTOCURRENCY IN LUXEMBURG
What is the current status and what is the current regulatory approach in Luxembourg?
While cryptocurrency and crypto-assets are a technological and economic fact, there are still high legal and regulatory uncertainties regarding so-called “tokenomics”. At EU level, it is safe to say that there is no specific legal framework in place yet. However, the Luxembourg financial regulator, the Commission de Surveillance du Secteur Financier (CSSF), was a pioneer in the European Union (EU) with its official “Bitcoin Communiqué 2014” of 14 February 2014. It stated that even in the absence of a specific legal framework, existing traditional financial regulation can apply and that Bitcoin can be considered “book money” if it is widely used as a means of payment by its users.
Taking the Bitcoin effort one step further, the CSSF licensed the first EU-licensed crypto exchange Bitstamp, the oldest crypto trading platform in the world. This move was very innovative from a regulatory perspective, as the CSSF granted Bitstamp a payment institution licence under the EU Payment Services Directive (EU 2015/2366). Such licences give recipients an EU passport for the entire European Economic Area (EEA): currently all EU Member States plus Iceland, Liechtenstein and Norway.
In addition to Bitstamp, another well-known company, bitFlyer, originally from Japan, received the same licence from the CSSF in 2018. This means that bitFlyer is licensed in Japan, the EEA (via Luxembourg) and in 43 of a total of 50 US states.
The license granted by the CSSF to payment institutions is very attractive to global crypto companies due to its broad territorial coverage. However, it is important to note that the CSSF is known for its rigorous vetting process and will only license companies that have demonstrated their potential and commitment to strong know your customer (KYC) policies and money laundering or terrorist financing (AML/CTF) controls.
In addition to the two EU financial payment institution licences mentioned above, a third licence, namely an EU-compliant electronic money institution licence (Electronic Money Directive 2009/110/EC), has been granted to the Luxembourg-based company Snapswap. Snapswap’s platform, based on blockchain technology, mirrors legal tender and enables instant money transfers in daily life.
What happened to the CSSF’s “Bitcoin Communiqué 2014”?
The different treatments of crypto trading platforms (e.g. Bitstamp, bitFlyer) and an e-money platform (e.g. Snapswap) could indicate that the CSSF has a different regulatory approach for each platform.
This could also be a reason why around mid-February 2018 the CSSF quietly took the “Bitcoin Communiqué 2014” offline without officially cancelling it. We therefore point out that the “Bitcoin Communiqué 2014” is still valid and that the CSSF still considers Bitcoin as book money.
What is the CSSF’s current position on cryptocurrency?
On 14 March 2018, four years after the publication of its “Bitcoin Communiqué 2014”, the CSSF issued two new press releases:
- “VC Warning 2018” warned cryptocurrency and bearer token investors against virtual currencies (VC) (i.e. cryptocurrency) and
- “ICO Warning 2018” warned against so-called Initial Coin Offering (ICO) and tokens, while at the same time pointing out the associated risks for investors. The CSSF based its warnings mainly on the lack of a specific investor protection regulation and the fact that these transactions are not back-guaranteed by a government or a central bank.
The CSSF stated that ICOs are subject to all applicable existing legal regulations, in particular the AML/CTF regulations. The CSSF also highlighted that it does not want to hinder blockchain, recognising the benefits of distributed ledger technologies for innovation and more transparency in the financial markets. The CSSF even encourages ICO – initiators to contact them prior to a possible launch in order to examine the various applicable legal frameworks. This consultation-based approach is in line with the CSSF’s usual behaviour with regard to new technologies and innovations.
Furthermore, we would like to highlight that the CSSF states in its “VC Warning 2018” that cryptocurrency are actually not currencies but a “medium of exchange”, which seems to contradict the CSSF’s definition of “book money” that was included in the “Bitcoin Communiqué 2014” four years ago. Even though – as mentioned above – this communiqué was quietly taken offline in mid-February 2018, it is important to remember that it was not officially withdrawn. It is included in the CSSF’s official Newsletter No. 157 of February 2014 and is still online at the time of this publication.
For more information on the warnings issued by the CSSF on 14 March 2018, see this article.
What is the conclusion for Luxembourg?
In general, we have the impression that the European Commission, the European Parliament and the European Court of Justice tend to interpret cryptocurrency as a ” payment instrument “. On the other hand, national governments – financial market regulators and central banks – advocate for a legal definition that favours a “medium of exchange”.
At first glance, the difference in interpretations may seem trivial, but this distinction is crucial for e.g. the tax treatment of cryptocurrency. For more on the current tax treatment of cryptocurrency in Luxembourg, see this article.
Your tax advisor in Luxembourg for cryptocurrency