EMERGENCE OF A BITCOIN MARKET IN SWITZERLAND / SITUATION IN MALTA AND EU
Bitcoin market Switzerland: The Swiss regulator FINMA has recently authorized the creation of the first digital currency exchange platform headquartered in Zurich, called ECUREX, which is compliant with both the Swiss Banking Act and the Swiss Anti-Money Laundering Act.
The US company Xapo, specialized in bitcoin development, is moving its headquarters from California to the Swiss canton of Zug.
From its end, the Swiss Federal Tax Administration ruled that the transfer of bitcoin does not constitute a delivery of goods and services, and therefore is not subject to VAT (See Giulo Prisco, Swiss Tax Authorites Confirm that Bitcoin is VAT-free in Switzerland, 12 June 2015, https://bitcoinmagazine.com/articles/swiss-tax-authorities-confirm-bitcoin-vat-free-switzerland-1434140401 ).
It has also been reported that preparations are underway for the establishment of the first bitcoin bank in Switzerland (ibidem).
As a result, Switzerland is becoming more and more a hub for bitcoin trading. However, its value has decreased over time and is now more or less stable. In addition, the election of this stable regulatory environment as the headquarters for bitcoin miners may have a price. Unlike using bitcoin as a means of payment, the task of miners is very costly in terms of time, material and energy costs.
General considerations
The total number of bitcoin is slowly increasing and is limited to 21 million in order to restrain the currency supply. There are currently about 13 million in existence.
There are three ways to acquire bitcoin by:
- successfully participating in mining;
- accepting bitcoins as payment for a good or service; and
- purchasing them on a trading platform where bitcoins can be exchanged for official currencies.
On 22 September 2015, the value of the electronic currency was worth approximately USD 225. In November 2013, this value had hit a high of approximately USD 340. At that time, some have predicted that in the future bitcoin could go to
USD 1 million. Maybe it was because bitcoin is in a relatively short supply.
The reality is that in the past three years, bitcoin has traded as low as USD 5, as high as
USD 1,200, and now changes hands at around USD 225.
It has been reported that more than 50% of bitcoin are held by no more than 20 individuals.
The price of bitcoin could potentially collapse, as it still has not become widely accepted as “money”. At the same time, it could also make people very rich.
This is maybe the reason why Switzerland offers now one of the most regulated environments in respect of the Bitcoin market Switzerland.
Swiss regulatory framework
Regulated Activities in general
The Swiss government does not regulate the simple use of bitcoins as a means of payment. Thus, it usually does not require the issuance of a license by the Swiss regulator FINMA.
However, individuals who are willing to do more and to trade bitcoins must ensure that they comply with any relevant licensing requirements under financial market legislation, as we will see hereunder.
In other words, there are initially no specific concrete provisions regarding virtual currencies pursuant to Swiss regulation. It is, however, possible, depending on the business model, that trading in bitcoins is subject to a FINMA license.
It can be subject to private law (Swiss Code of Obligations, art. 1), the Swiss Criminal Code (in particular article 305bis, or articles 137 et seq., and/or articles 143, 144bis, 147, 156) and/or the financial market laws (Federal Act on Banks and Saving Banks; Federal Act on Stock Exchanges and Securities Trading; and the Anti-Money Laundering Act).
Anti-Money Laundering
- When one acts on a commercial basis, the purchase and sale of bitcoins is subject to the Swiss Money Laundering Act.
- This is also the case for the operation of trading platforms which are used to transfer amounts in bitcoins or in traditional currencies from users to others.
- Bitcoin mining is not subject to the Swiss Money Laundering Act per se. The applicability of the Money Laundering Act depends on whether, as part of the operator’s activities, the operator accepts credit balances in money or bitcoins from the users of the platform. If this is not the case and if the operator’s activities are limited to bringing parties together for the purchase and sale of bitcoins or to assigning purchase and sale offers to each other, the Money Laundering Act does not apply.
- The situation is different if the operator is also involved in the settlement of the payment process, because if the operator acts on a professional basis, the operator must in general be deemed a financial intermediary. One is considered a financial intermediary if they perform payment transaction services on a professional basis. Providing “professional services” includes the following :
- achieving a gross revenue of more than CHF 20,000 per calendar year;
- taking on business relations with more than 20 contracting parties per calendar year which are not limited to a one-time activity or maintains at least 20 such relations per calendar year;
- having unlimited power of disposal over assets belonging to third parties that exceeds CHF 5 million at any single point in time; or
- executing transactions whose total volume exceeds CHF 2 million per calendar year.
Such a service may be considered a payment transaction service if it transfers liquid assets to a third person on behalf of the financial intermediary’s contracting party, where it physically takes possession of such assets, has them credited to the financial intermediary’s own account or orders their transfer in the name of and on behalf of the contracting party.
Before beginning any business activities, the providers of such services must either become a member of a self-regulatory organization or file a license petition with FINMA to operate as a directly supervised financial intermediary.
If bitcoin trading activities are subject to the Money Laundering Act, several duties of diligence have to be fulfilled, particularly regarding clients’ identification.
Banking License
The following commercial activities with respect to bitcoins require a banking license:
- when assets of clients are accepted on own accounts on a commercial basis; or
- when providers accept the bitcoins of clients and manage bitcoin holdings for them.
Bitcoin Mining
Such a service may be considered a payment transaction service if it transfers liquid assets to a third person on behalf of the financial intermediary’s contracting party, where it physically takes possession of such assets, has them credited to the financial intermediary’s own account or orders their transfer in the name of and on behalf of the contracting party.
According to the Federal Council report on virtual currencies, “mining comprises carrying out complex mathematical tasks. This applies to both creating and transferring bitcoins. These tasks require significant computing capacity and also high levels of power. The overall consumption, depending on the source, is estimated to be equivalent to the power consumption of a medium- sized town.”
Switzerland, being one of the most expensive countries in the world, should be taken into consideration by bitcoin miners who are willing to establish in Switzerland. This likely explains why many miners have chosen other countries, such as Luxembourg, to conduct their activities.
Malta Regulatory Framework
Malta presently has no regulatory framework in relation to bitcoins. As bitcoins are not deemed to be a regulated instrument under MiFID, companies dealing in bitcoins are not at present required to undertake a licensing process with the Malta Financial Services Authority (”MFSA”).
It is to be noted that the European Central Bank (“ECB”) issued a report on 12 December 2013on digital currencies, arguing that bitcoins pose risks that potentially require future regulation. An increase in the use of virtual money could potentially lead to a decrease in the use of ‘real’ money, which would in turn substantially reducing the size of central banks’ balance sheets and their ability to influence the short-term interest rates.
The ECB furthermore indicated in its report that bitcoins cannot fall under the Electronic Money Directive (2009/110/EC) (“EM Directive”) because it does not fulfil all the criteria outlined in the EM Directive to meet the definition of electronic money, since it is not issued as a claim on the issuer. Bitcoins would also fall outside the scope of the Payment Services Directive (2007/64/EC), since this directive does not regulate the issuance of electronic money. One potential way forward identified by the ECB is that virtual currency scheme owners undergo a similar trajectory to the one taken by PayPal, where they seek authorization as financial institutions.
This means that any regulation of Bitcoin is currently left to the Member States.
The MFSA considers any application for dealing in bitcoins on a case by case basis and examines the activities that will be performed in order to determine whether a license is required and what conditions need to be satisfied for such license.
Furthermore, the ECB stated in its report that “When using virtual currencies as a means to pay for goods and services you are not protected by any refund rights under EU law offered, for example, for transfers from a conventional bank or other payment account. Unauthorised or incorrect debits from digital wallet can therefore not usually be reversed. Acceptance of virtual currencies by retailers is also not permanently guaranteed and is based on their discretion and/or contractual agreements, which may cease at any point and with no notice period.”, which is raising concerns.
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