Crypto-digest 04.30: France is cutting the tax rate for retail crypto traders, ICBC’s first Blockchain patent is now public, ICO promoters can expect Canada to be as tough as the US, Binance and Bermuda Ink $15 million crypto investment agreement, Court forces Chile’s banks to reopen crypto exchange accounts, Bigger blocks and smarter contracts: what’s in Bitcoin Cash’s next fork?
France is cutting the tax rate for retail crypto traders
Amateur cryptocurrency investors in France are currently stung heavily when it comes to tax day, but that is about to change, reports indicate.
The French Council of State, the body that advises the government on legal matters and acts as the supreme court for administrative matters, announced Thursday that profits arising from cryptocurrency sales should be considered as capital gains of “movable property” – a decision that will see the tax rate levied drop significantly, according to a report from Le Monde,
Currently, gains from the sale of cryptocurrency trading are normally considered “industrial and commercial profits” (BIC), while those from occasional transactions are treated as “non-commercial profits.”
This means that tax on crypto gains can be as high as 45 percent for higher-band taxpayers, and that’s also in addition to the country’s generalized social contribution (CSG) of 17.2 percent, the report says.
Classifying cryptos as movable property (as the name suggests, these are assets that are not fixed in place like buildings), however, brings a flat CGT liability of 19 percent, plus CSG.
Le Monde adds, however, that the Council of State said certain types of transaction may however “fall under provisions relating to other categories of income,” and that proceeds from cryptocurrency mining as well as commercial activities related to the technology will still be taxed at the BIC rate.
The move comes after several investors took a case to the supreme court over the harsh tax regime, according to the report.
ICBC’s first Blockchain patent is now public
The Industrial and Commercial Bank of China (ICBC), one of the country’s four largest state-owned commercial banks, is exploring a way to authenticate digital certificates and store data in a sharable blockchain.
According a patent application filed with China’s State Intellectual Property Office (SIPO), the bank aims to use a blockchain system to improve the efficiency of certificate issuance and save users from repetitively filing the same document to multiple entities.
The technology, based on the patent, touts a system where a certificate issuer will first match a user’s credential with a particular certificate digitally. After it’s approved, the data will be encrypted and moved onto a blockchain which will update the distributed ledger held by different entities that could potential require this certificate.
By further decrypting the data with users’ specific credentials, the system will allow entities to view an authenticated document digitally to streamline its operation flow.
The patent, currently the first blockchain-related one filed by the bank with the SIPO, was first submitted in November 2017 and released on Friday.
It explained that the technological exploration stems from the current pain point where consumers are constantly being required to submit the same certificate – such as for birth, marriage or education – by different entities they are dealing with.
“Traditionally users have to obtain a certificate from an authority that issues it, which does that manually. And then they present it to entities that require the certificate. This process is inefficient and poses the counterfeit issue,” the bank wrote in the document.
The patent application marks another effort taken by a Chinese state-owned commercial bank to utilize blockchain technology in data storage and sharing.
Recently, Bank of China has also detailed in a patent application its move to develop a technology that it claims to be better able to enhance blockchain’s data storage and process capacity.
ICO promoters can expect Canada to be as tough as the US
Unlike in the United States, Canada’s securities laws fall into the domain of the provinces. Arguably no area of provincial law has seen more activity as a result of the crypto boom than securities law, mainly due to the advent of initial coin offerings (ICOs).
On Aug. 24 of last year the Canadian Securities Administrators (an umbrella organization of Canada’s provincial securities regulators) published CSA Staff Notice 46-307 on cryptocurrency offerings, in which the authors posit that “[A] coin/token may still be a ‘security’ as defined in securities legislation of the jurisdictions of Canada. Businesses should complete an analysis on whether a security is involved.”
The Staff Notice goes on to confirm that Canada, through the seminal Pacific Coast Coin Exchange v. Ontario Securities Commission decision, has adopted the United States’ Howey Test in determining whether a particular investment constitutes an investment contract and therefore a security.
Although the authors of the Staff Notice admit that “Every ICO/ITO is unique and must be assessed on its own characteristics,” we believe provincial securities regulators in Canada wouldn’t take a radically different approach than the U.S. Securities Exchange Commission in analyzing whether tokens and coins are securities.
We believe the provincial securities regulators in Canada would be as equally inquisitive and systematic as the SEC has reportedly been in its recent analysis of Simple Agreement for Future Tokens (SAFT) contract based coin and token offerings. Indeed there is evidence that similar investigations have begun in Canada.
An issuer selling tokens in an ICO to Canadians would certainly have its work cut out for it in attempting to argue it was in fact selling utilities, commodities or licenses to use some sort of yet-to-be developed platform.
There are a number of examples in Canadian case law where issuers were attempting to sell “utilities” or something similar to modern day tokens and coins, where the court simply didn’t buy the argument.
The Furtak decision
Take for example the 2016 Ontario Securities Commission (“OSC”) decision of Furtak. The issuers in this case were selling licenses to use relatively complex financial software agreements which granted users the right to use the financial software to trade futures contracts.
However, as part of the arrangement, the “users” would then contract with an affiliate of the issuer to operate the software. Users did not share in any profits or losses as a result of the use of the trading software but received certain trade report fees. In effect, users paid a licensing fee in expectation of generating a return through no effort of their own.
The issue for the securities regulators was, were the licenses investment contracts or something else, such as a set of contracts that created a business? The OSC ultimately found that the licenses were investment contracts.
In arriving at its decision, it noted that:
“The salient feature of a securities transaction is the public solicitation of venture capital to be used in a business enterprise…this subjection of the investor’s money to the risks of an enterprise over which he exercise no managerial control is the basic economic reality of a security transaction.”
The nature of the business enterprise can vary to a large extent. As the OSC noted, investment contracts have been found in Canadian and U.S. cases in arrangements as diverse as the use of solar panels, in proprietary software that would generate profits based on volatility, in fractional interests in death benefits of life insurance policies, in dental services sold by the promoter under sales agency agreements, in arrangements to share in the ownership and revenue from blood alcohol testing machines in pubs and even in payphones (remember those?).
The fact is, existing Canadian securities laws would probably already categorize most ICO tokens and coins as investment contracts, no matter how novel and supposedly unique they are. Some would argue the courts have seen it all before.
Provincial regulators in Canada have at least shown a willingness to work with crypto entrepreneurs, but to date the only published examples we have of where this cooperation occurred was when those entrepreneurs accepted the fact that their coins were securities and proceeded to move forward with the regulators on that basis. Even then the relief granted from securities laws was limited at best.
Around the time of the publication of the OSC Staff Notice, a number of provincial securities regulators granted limited relief from dealer registration requirements under securities laws where coins issued in an ICO were offered as securities.
For example, in August 2017, the responsible-investing firm Impak Finance Inc. received limited relief from certain registration requirements in conjunction with its ICO by the Autorité des marchés financiers in Quebec. Two months later, the OSC granted similar relief in conjunction with an ICO by Tokenfunder Inc., a company established to, among other things, facilitate the issuance of third party coins and tokens.
In our opinion, the two aforementioned examples demonstrate that where coins are issued in an ICO not only might they be treated as securities, but if exemptive relief from some securities laws is granted by a securities regulator, the relief won’t be dramatic or earth shattering.
The parameters that have accompanied the exemptive relief in these cases appear excessively obstructive to some in the crypto community, and may simply serve to highlight the scope of the jurisdiction of the securities regulators and the difficulties which arise given the application of securities laws.
For example, in both cases, each purchaser in the ICO is prohibited from purchasing more than $2,500 worth of coins (unless detailed know-your-client and suitability reviews on the purchaser are conducted) and Impak and Tokenfunder are restricted from listing and trading their coins on any cryptocurrency exchange unless prior approval is obtained from their respective provincial securities regulators.
Further, the coins in each ICO are subject to resale restrictions under securities law which impose a fairly stringent hold period where further trading and transfer of the coins are prohibited indefinitely (unless certain rigid criteria are met). This may be frustrating to some as certain coins and tokens need to be freely traded on the blockchain by many different participants in order to fulfill their intended purpose.
Despite the exemptive relief from dealer registration requirements provided by the securities regulators in these decisions, issuers should bear in mind that under applicable Canadian securities laws a person is only required to register as a dealer if they are engaging in or holding themselves out as engaging in the business of dealing in securities. Consequently, if an issuer is not “in the business”, then registration is not required, nor would exemptive relief from dealer registration requirements be necessary.
Simply because a corporation has issued shares in an initial public offering (IPO) to raise capital to fund its business, and those shares are listed on a stock exchange, does not mean the corporation is in the business of dealing in securities.
By extension, simply because a coin is issued in an ICO and subsequently traded on the blockchain does not necessarily mean the issuer of the coin is in the business of dealing in securities. In fact, unlike shares of a corporation, at the time a coin is traded on the blockchain, it may have its intended utility and essentially lost any security characteristic it initially had.
All told, ICO promoters should exercise caution in Canada when attempting to market a utility token without consideration of securities laws.
Further, if you’ve come to accept that your token is an investment contract, then based on these decisions, expect to be treated like any other issuer of securities.
The authors would like to acknowledge Amanpreet Sran for her research, contributions and assistance with this article.
Binance and Bermuda Ink $15 million crypto investment agreement
Binance plans to set up its new global compliance center in Bermuda over the next few months, Premier David Burt has announced.
Speaking at a joint press conference on Friday, Burt announced that a memorandum of understanding has been signed, under which the Binance Charity Foundation will put $10 million toward educational programs related to the tech. An additional $5 million will be invested in blockchain startups.
On top of that, Binance will help the Bermuda government develop a regulatory framework for cryptocurrencies and blockchain, as well as establish a new office in the country.
Burt said during the press conference:
“Through this partnership, Binance proposes to develop its global compliance base here in Bermuda, creating at least 40 jobs in Bermuda with at least 30 jobs for Bermudians … [and] as soon as practical, develop a digital asset exchange in Bermuda subject to all required legal and regulatory processes, and finally, work collaboratively with the government of Bermuda and all necessary oversight agencies in the development and improvement of the robust legal and regulatory framework.”
Binance CEO and founder Zhao Changpeng said Bermuda’s government and regulatory bodies “are one of the most approachable on the planet,” and said his company would “commit to helping the local economy.”
The exchange has already begun working with a local law firm to ensure the startup’s new office would be compliant with relevant laws, he added.
During the press conference, Zhao also addressed the recent lawsuit filed against Binance, noting that “the Hong Kong high court has already rejected it and ordered Sequoia to repay our legal fees.”
In his closing remarks, Burt also mentioned the new legislation Bermuda intends to pass regulating initial coin offerings. Burt claimed that Bermuda intends to “comprehensively govern” initial coin offerings that are conducted within the country’s borders.
“We want to ensure that Bermuda is the world’s number-one place for regulation inside of this space. We have a reputation to protect, we will protect it but we will work with all persons who we believe represents future growth for the people of this country and future opportunities and jobs,” Burt said.
Court forces Chile’s banks to reopen crypto exchange accounts
Chilean banks cannot close their doors on cryptocurrency exchanges just yet, a judge has ruled.
In late March, Bank Itau and state-owned bank Banco del Estado de Chile informed exchange Buda.com that its account would be closed. Eight other banks in the country also dropped crypto exchanges without explanation around the same time.
This prompted Buda.com to sue all 10 institutions for “the abuse of dominant position,” the company’s CEO, Guillermo Torrealba told CoinDesk in an interview.
After the initiation of the lawsuit, Torrealba said the banks claimed that they terminated the accounts due to a “lack of regulation, which is a very bad excuse,” he added, since, “they’re not the ones that decide what should be regulated and what [should] not.”
The banks later shifted their position and cited concerns over money laundering.
On Wednesday, though, the exchanges achieved a victory – if only a temporary one – when the country’s Free Market Court ruled that Bank Itau and Banco del Estado must reopen Buda.com’s accounts until the lawsuit concludes.
The decision is a “good sign of what the trial is going to be,” Torrealba said, adding that the ruling has importance for Chile more broadly:
“Basically the industry will continue to develop and it’s also very important for the country, not only for the cryptocurrency industry because banks here have too much control over everything. So the fact that they can just kill an industry – a whole industry, a whole technology – just because they didn’t like it is very risky for a country.”
Elsewhere in South America, several major Brazilian banks are also embroiled in lawsuits with crypto exchanges over closed accounts.
The issue is not confined to South America, either. The Reserve Bank of India recently announced that the institutions under its regulatory domain are prohibited from engaging with crypto-related firms. This prompted aspiring exchange CoinRecoil to file a petition with the High Court of Delhi in hopes of overturning the decision, with the next hearing due in May.
South Korea and Japan have also recently strengthened regulations governing exchange bank accounts by implementing anti-money-laundering and know-your-customer requirements.
Bigger blocks and smarter contracts: what’s in Bitcoin Cash’s next fork?
Bitcoin cash’s next software upgrade may be even more ambitious than its first – and that’s no small feat given last time it broke off from bitcoin in acrimonious fashion.
In fact, the update, announced in November and slated for May 15, packages together a number of features that all seem about helping the network process more transactions than the original bitcoin (while adding more variety to features). Perhaps most notably, the change will quadruple bitcoin cash’s block size parameter from 8 MB to 32 MB, allowing for vastly more transactions per block.
But while that might sound aggressive given bitcoin’s more limited approach, those who have been following the cryptocurrency might be surprised that such an aggressive shift wasn’t pursued sooner.
After all, last fall, bitcoin cash’s developers chose to ignore the protests of bitcoin’s more seasoned developers, who had long argued that increasing the block size and moving the cryptocurrency forward too fast could jeopardize the more than $157 billion network.
But that contrarian mentality has proved, at least partially, attractive – one bitcoin cash is going for a little less than $1,500 a coin, making it’s market cap more than $24 billion.
Indeed, Joshua Yabut, who contributes to the bitcoin cash protocol’s main software implementation, BitcoinABC, said he doesn’t expect any protest at all when users are finally given the choice to upgrade software.
Yabut told CoinDesk:
“Block size increases are kind of non-controversial at this point, but it’s nice to see on-chain scaling happen.”
Another area where the upcoming bitcoin cash hard fork looks to scale up is through the increase of the “OP_RETURN field,” where users can store added data on the blockchain, from 80 to 220 bytes.
It’s an easy change, but one that bitcoin cash developers say could have positive consequences, as the OP_RETURN function has been traditionally used by services that require time-stamping, asset creation, rights management and other use cases that expand the capabilities of blockchains
Return of the smart contracts
Not only did bitcoin cash developers pack in features, but they’ve also added back some of the old capabilities that bitcoin creator Satoshi Nakamoto stripped from the protocol early on.
The most notable here is the addition of new kinds of smart contracts, or dynamic if-then programming statements that can give added functionality to how bitcoin cash tokens can pass between users.
In this case, the specific smart contracts in question were deactivated after Satoshi Nakamoto realized they could provide an attack vector, but bitcoin cash developers believe they’ve had enough time to seal up the holes.
“Essentially out of an abundance of caution and lack of time to fully explore and fix the edge cases that needed to be addressed, the decision was taken to simply disable any opcodes around which there were doubts or even hints of doubts,” said nChain developer Steve Shadders, in a blog post describing the features in bitcoin cash’s hard fork.
It’s notable that bitcoin cash is rolling these out now since bitcoin contributor Johnson Lau proposed re-adding these same smart contracts to bitcoin in February, a context that adds a bit of competition to the mix.
“Seven years have passed and the edge cases around these opcodes are much better understood now. Additionally, the decision to disable them was taken hastily and under duress,” Shadders continues in the blog post. “The [bitcoin cash] community now has had the luxury of time to address these issues thoroughly.”
Yet, since there are still potential vulnerabilities in some of the smart contracts, bitcoin cash will only be unveiling a few of them this time.
Yabut told CoinDesk:
“It’s the first step for enabling smart contracts with the protocol which will allow us to compete with ethereum later on.”
The future of bitcoin cash
But while most of the bitcoin cash community is excited about the change, there has been some pushback – or at least skepticism – from a minority of users.
Much of those concerns stem from the fact that these sweeping changes weren’t put to a community-wide vote before being coded. As such, some worry about the “governance model” of bitcoin cash, a term that denotes how developers and the miners of the cryptocurrency organize around the future upgrades.
Users, this group says, are simply not getting a chance to debate on the merits of specific changes.
Even still, the bundle of code changes doesn’t seem to be so controversial it puts bitcoin cash in any danger from something serious like the network split that created it.
All software implementations of bitcoin cash, including bitcoinABC, bitcoin unlimited and bitcoin classic, have agreed to upgrade. And there hasn’t been a huge uproar from miners, node, exchanges, wallets and other services, which will also need to upgrade to the new software to support the changes.
One of the reasons many feel good about this hard fork is that the developers decided to eliminate several features that were potentially more contentious.
For instance, OP_GROUP, a change aimed at launching features for asset creation on bitcoin cash, was thrown out when it became known that competing proposals for these features might be on the horizon. Yet, if those proposals don’t make it to the protocol relatively quickly, bitcoin cash developers don’t plan on waiting – putting the opcode up for consideration on the cryptocurrency’s next hard fork, slated for October.
Meanwhile, some bitcoin cash users wonder whether the block size parameter needs to be much (much) bigger to make room for an onslaught of data-heavy bitcoin cash projects, such as Memo, a recently launched censorship-resistant social network.
As such, bitcoin cash might continue to display ambition that can’t be slowed down.