I INTRODUCTION TO THE LEGAL AND REGULATORY FRAMEWORK
In Spain, there is no legislation specific to virtual currencies, except for a preliminary draft law launched in February 2020 implementing the Fifth Anti-Money Laundering Directive (see Section IV) and a piece of draft legislation, approved by the government in February 2020, which indirectly relates to virtual currencies, which will be debated in the Spanish parliament in the coming months. The draft legislation includes measures for the digital transformation of the financial system, including the legal framework for a regulatory sandbox.2
In 2018 the Spanish securities regulator (CNMV) and the Bank of Spain issued joint advice on the risks associated with purchasing virtual currencies or investing in products tied to them,3 and the CNMV has issued two other documents setting out its opinion and position on several matters related to virtual currencies. However, only the CNMV has issued a statement to clarify that it has not authorised any prospectus, nor has it exercised any authorisation for, or power to verify, any transaction in connection with cryptocurrencies.4
The Spanish tax authorities have also issued several binding rulings on the tax aspects of activities involving virtual currencies.
II SECURITIES AND INVESTMENT LAWS
i Classification and commercialisation of virtual currencies
The CNMV has unofficially stated that virtual currencies per se should not be considered as securities. However, following reports from the European Securities and Markets Authority and the European Banking Authority (EBA) (both published in January 2019), cryptoassets can be classified into four categories: (1) currency tokens (cryptocurrencies with no rights or investment purposes); (2) security tokens, which usually provide property rights, interest rights or dividends attached to a business; (3) utility tokens, which facilitate access to a product or a service, but do not serve as a payment method for other products or services; and (4) hybrids, which can fall under more than one of the first three categories.
Without prejudice to the above, the CNMV has acknowledged that the offering and commercialisation of virtual currencies can have investment law implications as follows.5
Where virtual currencies are acquired through platforms operating on the internet (exchanges) and through cryptocurrency automatic teller machines (ATMs), the CNMV considers that investors do not actually directly own the virtual currencies, and instead only have rights in relation to an unsupervised exchange or intermediary. As a consequence, purchasers are exposed to the risk of an intermediary becoming insolvent or not complying with basic rules on proper record-keeping, diligent custody and recording of assets, and the correct management of conflicts of interest.
Contracts for differences
Entities offering these products should be authorised by the CNMV to provide investment services and meet all reporting obligations and other applicable rules of conduct.
Futures, options and other derivatives
If these types of products have been authorised by a regulated supervisor, their active marketing under a public offering by market professionals to retail investors might require a prospectus approved by the CNMV or another EU authority under the passporting arrangements.
Specific investment funds and other collective investment vehicles that invest in virtual currencies
These types of vehicles and investment funds should be approved or registered by the CNMV. The CNMV6 has acknowledged that, in accordance with Article 2.1 of Law 22/2014, a closed-ended collective investment scheme can invest directly in virtual currencies, but it has to be registered with the CNMV. In this regard, the CNMV has pointed out that the divestment policies of its participants or partners must meet the following requirements: divestment must take place simultaneously with respect to all investors and participants; and investors and participants must be remunerated according to the articles of association or regulations for each class of shares or participations.
This type of fund cannot be marketed to retail investors.
Acquiring structured bonds where the underlying asset is a virtual currency
The marketing under a public offering regime of exchange-traded products and exchange-traded notes requires the approval of the supervisors of an explanatory prospectus that has also been subject to the relevant EU passporting procedure.
ii Initial coin offerings
The CNMV7 understands that transactions structured as initial coin offerings (ICOs) in many cases should be treated as issues or public offerings of transferable securities given the broad definition of transferable security under Spanish law.8
The CNMV sets out the following factors as being relevant in assessing whether transferable securities are being offered through an ICO:
- tokens that assign rights or expectations of a share in the potential increase in value or profitability of businesses or projects or, in general, that they constitute or assign rights equivalent or similar to those of shares, bonds or other financial instruments governed by Spanish securities law; or
- tokens that entitle access to services or to receive goods or products, that they are offered referring explicitly or implicitly to the expectation that the purchaser or investor will obtain a profit as a result of their increase in value or some form of remuneration associated with the instrument, or reference is made to its liquidity or tradability on equivalent or allegedly similar markets to regulated securities markets.
However, with regard to point (b) above, if it cannot be reasonably established that there is a correlation between the expectations of a profit or an increase of value and the evolution of the underlying business or project, then the token should not be considered a financial instrument.9
If ICOs qualify as financial instruments, then the regulation contained in, relating to or arising from the Markets in Financial Instruments Directive II, the Prospectus Directive and the Alternative Investment Fund Managers Directive should apply to them.
Even if an ICO does not qualify as a public offer (because it is either aimed at fewer than 150 investors, or involves a minimum investment of €100,000 or a total amount of less than €5 million), if the placement is made using whatsoever form of advertising (including websites in Spanish offering the tokens), an entity authorised to provide investment services should intervene in relation to its marketing.10 The CNMV understands that this requirement is fulfilled if the entity authorised to provide investment services intervenes:
- on the occasion of each individual subscription or acquisition of the securities or financial instruments as a placement agent, broker or adviser, subject to the rules applicable in each case; or
- by validating and supervising the offer in general and, in particular, the information provided to investors, and the placement or marketing procedure used (without an authorised entity having to intervene on the occasion of each subscription or acquisition). With regard to the validation of information, the authorised entity must ensure that the information is clear, impartial and not misleading, and that it refers to the characteristics and risks of the securities issued, as well as the company's legal, economic and financial situation, in a sufficiently detailed manner to allow the investor to make a well-informed investment decision. Likewise, the information for investors shall include a warning on the novel nature of the registry technology and on the fact that the custody of the tokens is not carried out by an authorised entity.
To date, the CNMV has not authorised any ICOs, although it has analysed several potential ICO structures. The action of the CNMV in connection with those projects on the issue of tokens, which could be equivalent to transferable securities, has been limited to confirm that in the event of complying with the requirements set out in the Spanish legislation not be considered as a public offer, the transaction would not require the approval of a prospectus; nor would it be subject to verification or prior intervention by the CNMV, although the participation of an investment firm is necessary.
III BANKING AND MONEY TRANSMISSION
The Bank of Spain, the Spanish authority responsible for banking and money transfer matters, has not issued any statement or otherwise set out its position on virtual currencies other than in the joint warning issued with the CNMV mentioned in Section I.
According to the joint warning, and although they acknowledge that virtual currencies are occasionally presented as an alternative to legal tender, the Spanish authorities note that the former differ greatly from the latter in that their acceptance as a means of payment of a debt or other obligations is not mandatory, their circulation is very limited and their value fluctuates widely, meaning that they cannot be considered as a sound store of value or a stable unit of account.
In this regard, the advice of the EBA on cryptoassets of 9 January 2019 provides that a competent authority will consider a token to be electronic money if it: is electronically stored; has monetary value; represents a claim on the issuer; is issued on receipt of funds; is issued for the purpose of making payment transactions; and is accepted by persons other than the issuer.11
At present, no virtual currency, including Bitcoin, is recognised by Spanish law as a digital currency, electronic money or as a payment method. The main concern is consumer protection as an important part of the activities related to cryptocurrencies cannot be included within the scope of European regulations for financial services (EDM2 and PSD2) and, in the instances when some activities do fall within their scope, not all risks attached are adequately addressed and mitigated.
IV ANTI-MONEY LAUNDERING
In addition to the warnings issued by the Bank of Spain and the CNMV on money laundering risks regarding virtual currencies themselves and the activities related to them, on 12 June 2020 the Spanish government launched a preliminary draft law12 amending the current anti-money laundering (AML) legal framework and transposing some EU AML provisions, including the Fifth Anti-Money Laundering Directive.13
Thus, the new Article 1 of the current Law 10/2010 of 28 April on the prevention of money laundering and terrorist financing will include the following definitions:
- virtual currency: a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and that can be transferred, stored and traded electronically;
- exchange between virtual currencies and fiat currencies: the purchase and sale of virtual currencies through the delivery or acceptance of euros or any foreign legal tender or electronic money accepted as medium of exchange in the country where it has been issued; and
- custodian wallet provider: a legal or natural person that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies.
Likewise, the new Article 2(u), in turn, will consider providers engaged in exchange services between virtual currencies and between virtual currencies and fiat currencies and custodian wallet providers as obliged entities, including non-resident entities providing services through branches or agents, or providing services without a permanent establishment that provide similar services to those referred to above. The entities must be registered with the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences (SEPBLAC), the Spanish competent authority on anti-money laundering.
The preamble of the preliminary draft explains that although the Financial Action Task Force extends the application of the AML rules to the issue and trading of virtual assets considered as negotiable securities (security tokens), it is understood that no further amendments to the law are required for this purpose because, to the extent that a virtual currency will be considered as a negotiable security by the CNMV, it will be already included within the scope of Law 10/2010.
V REGULATION OF EXCHANGES
The regulation to which an exchange is subject under Spanish law depends on whether or not the assets are traded as financial instruments and on the type of activity performed within the exchange.
Although there is no specific regulation on trading platforms for virtual currencies or other cryptoassets, the CNMV14 has indicated that to the extent that the assets traded in an exchange are not considered as financial instruments, at a very minimum they should be subject to rules related to custody, registration, management of conflicts of interest between clients and transparency on fees (in addition to anti-money laundering regulations). Therefore, the CNMV recommends that these platforms voluntarily apply the principles of securities market regulations relating to the aforementioned matters to ensure the proper functioning of their activities. If they qualify as financial instruments, Spanish securities market legislation applies, which means the corresponding authorisations must be obtained, including, where appropriate, an authorisation as a trading venue (such as a regulated market, a multilateral trading system or an organised trading facility), or as an investment firm or credit institution that operates as a systematic internaliser. On this matter, in response to the consultation document on an EU framework for markets in cryptoassets, the independent committee of the CNMV noted that the mains risks of exchanges are the following: (1) absence of transparency in the information requirements and regulatory status of the companies involved; (2) operational resilience and good risk governance (in case of loss of cryptoassets, for instance); (3) absence of solutions to mitigate conflicts of interest; and (4) absence of adequate advertising standards.
However, the Bank of Spain has not given any guidance as to whether activities performed by an exchange would qualify as payment services or currency exchange services for regulatory purposes where virtual currencies are used solely for payment purposes (not as securities or similar).
To the extent that regulated markets, multilateral trading facilities (MTFs) and organised trading facilities (OTFs) located in Spain require that the instruments traded on or through them be represented in book entries, tokens cannot be traded in Spanish regulated markets, MTFs or OTFs because they cannot be represented in book entries.
VI REGULATION OF MINERS
With the exception of the tax issues explained in Section IX, there is no regulation of miners in Spain, and the Bank of Spain and the CNMV have not expressed their views on this matter.
However, to the extent that miners would not be considered as issuers of financial instruments or electronic money, or as placing financial instruments, no licence or authorisation would be required under Spanish law to mine.
VII REGULATION OF ISSUERS AND SPONSORS
To the extent that virtual currencies could be classed as financial instruments or as electronic money, their issuers must obtain the corresponding authorisations from the CNMV and the Bank of Spain. In terms of virtual currencies as financial instruments, see Section II.ii regarding ICOs. Neither the Bank of Spain nor the current legislation considers a virtual currency as electronic money; therefore, its issuance falls outside the scope of the Spanish legislation on electronic money institutions, although the assessment has to be made on a case-by-case basis.
The concept of sponsor does not exist under Spanish law.
VIII CRIMINAL AND CIVIL FRAUD AND ENFORCEMENT
In recent years, fraud through improper acts of disposition relating to cryptocurrencies such as Bitcoin has been increasing. As with any other type of asset, there are certain criminal liabilities associated with virtual currencies, given that the conduct of a third party (such as a wealth manager) may cause a loss to the investor's equity.
First, it is worth noting that equity as a whole is the legal interest protected from the crime of fraud and that cryptocurrencies are a part of this equity because they are considered valuable assets. As a consequence, improper acts of disposition of cryptocurrency assets are protected under criminal law. Article 248 of the Criminal Code sets out the ways in which the crime of fraud can be considered to have been committed. If the behaviour is considered to be fraud, it will be punishable.
Article 248.1 specifies that fraud is committed when the perpetrator, for financial gain and by means of deception, induces the victim to act in error, resulting in him or her carrying out an act of disposition to his or her own detriment or to the detriment of a third party. There needs to be a link between the perpetrator's deception and the victim's act of disposition (see Supreme Court judgment 531/2015 of 23 September).
Article 248.2.a) provides for another type of fraud (computer fraud) in cases in which perpetrators use manipulation through a computer or similar device to carry out an unauthorised transfer of an asset to the detriment of the victim or a third party (Supreme Court judgment 860/2008 of 17 December). This provision sets out the same scheme as described above except that it requires no deception – which is interpreted narrowly – as it is replaced by manipulation through a computer. Where traditional fraud requires some form of deception, computer fraud requires manipulation through a computer or similar device. This means that this crime can be committed in different ways, given the breadth of the expression 'manipulation through a computer or similar device'. Thus, for example, the offence would be committed when an individual alters an email address or bank account number, or implants files that unlock a user's passwords.
Judgment 326/2019 of 20 June of the Criminal Chamber of the Supreme Court ruled on Spain's first case of fraud regarding cryptocurrencies under Article 248.1 of the Criminal Code. In this case, the Supreme Court upheld the sentence of imprisonment given to an investment manager as the perpetrator of the fraud. According to the judgment, the defendant signed several high-frequency trading agreements with the aggrieved parties under which he committed to (1) manage Bitcoins that were delivered to him as a deposit, (2) reinvest the potential dividends and (3) finally, at maturity, deliver the profits obtained in exchange for a commission. However, it was proven that at the time of signing those agreements the defendant did not intend to fulfil his contractual obligations (in fact, he did not carry out any investment transactions at all), and his only intention was to seize the received Bitcoins and simulate the execution of the agreements.
As regards the civil liabilities arising from the criminal offence, the Supreme Court denied the aggrieved parties' request to be compensated with cryptocurrencies rather than with their equivalent value in euros (their motion for this was driven by the fact that Bitcoins had undergone a significant increase in value since the time the high-frequency trading agreements were signed). According to the Supreme Court, Bitcoins are intangible assets that cannot be reinstated, nor are they considered 'electronic money' in the legal sense set out by Spanish Law 21/2011 of 26 July. Thus, although the aggrieved parties delivered cryptocurrencies (and subsequently lost them because of the fraud), the perpetrator was ordered to pay back the equivalent value in euros of the cryptocurrencies at the time when they were delivered (plus additional compensation for the profitability that those Bitcoins would have offered up until the agreements expired).
The criminal proceedings through which these offences are prosecuted in Spain do not contain any special provision for when the disposition of assets relates to a type of cryptocurrency instead of a traditional currency. Therefore, the procedure for summary proceedings will apply if the penalty does not exceed nine years in prison.
These proceedings are divided into three phases. The first is the pre-trial phase, in which the judge will try to obtain evidence to determine whether the investigated behaviour may be considered criminal and, if so, discover the identity of the perpetrator. The second is the intermediate phase, in which the prosecution and defence will draft their respective briefs. The third phase is the oral trial, in which the admitted evidence is examined.
The main procedural difficulties Spanish authorities face when it comes to prosecuting these crimes are the lack of jurisdiction and competence. The anonymity with which perpetrators act, the places from which they do so (in most cases outside Spain) and the fact that the funds usually go to other countries prevent action being taken against them through judicial avenues in Spain. Having said that, when determining the authority of Spanish courts with regard to cybercrimes committed over the internet, the Spanish Supreme Court has embraced the 'theory of ubiquity', under which the offence should be regarded as having been committed on Spanish territory if any substantial element of the criminal activity (unlawful action, damage, profit of the perpetrators, etc.) took place in Spain.15
Virtual currencies perform an economic function (store of value or medium of exchange), which means that their possession and use may have tax implications. In addition, they pose a higher-than-average risk of being used as a means to commit tax fraud given that it is very difficult to determine the true identity of their owners (to the point that they are almost anonymous), and that the transactions are peer-to-peer and may have a cross-border element, and therefore the ability of tax authorities to monitor them is reduced. All this has put them under the spotlight of the Spanish tax authorities, albeit the tax regime and reporting obligations regarding virtual currencies are still at an early stage.
i Income tax and value added tax (dynamic approach)
The tax treatment of virtual currencies and their trading differs within the country, depending on the tax. From an accounting standpoint, the Spanish Accounting Board considers virtual currencies to be an intangible asset or a commercial stock, depending on their use.
To date, the Spanish tax authorities have considered that any operation (except mining) with virtual currencies constitutes a barter transaction for income tax purposes (personal income tax, corporate income tax and non-resident income tax), which means that users of virtual currencies make a capital gain or loss with any delivery of virtual currencies; and tax compliance becomes complicated and burdensome for both the taxpayer and the tax authority.
The Spanish tax authorities set out in binding tax ruling V0808-18 of 22 March that the use of virtual currencies outside of the performance of an economic activity may result in capital gains or losses at the moment in which the transaction takes place (Article 14.1.c) of Law 35/2006 of 28 November on personal income tax (the PIT Law)), with a tax rate of up to 23 per cent for individuals. According to binding tax ruling V1604-18 of 11 June, fees charged by the exchange increase and the decrease the acquisition and sale price, respectively, if they are directly related to the transaction. The first-in, first-out principle applies. The income obtained from mining is considered business income, and the applicable tax rate could be as much as 48 per cent for individuals, depending on the autonomous region where they reside. The corporate income tax rate is 25 per cent, while the non-resident income tax rate is 24 per cent (19 per cent for residents of the European Union and European Economic Area). The Spanish tax authorities also state in binding tax ruling V1149-18 of 8 May that the exit tax regulated in Article 95 bis of the PIT Law does not apply to virtual currencies.
As regards value added tax (VAT), the Spanish tax authorities' position, as set out in binding tax rulings V1274-30 of 6 May and V1748-18 of 18 June, is aligned with that of the European Court of Justice, which considered in Hedqvist 16 that virtual currencies constitute a currency in the sense of Article 135(1)(e) of the VAT Directive and are a direct means of payment; therefore, services related to those currencies (including mining) are covered by the VAT exemption granted by that Article. Consequently, input VAT will not be deductible.
ii Net wealth tax and reporting obligations (static approach)
Virtual currencies, as an asset, fall under the scope of Law 19/1991 of 6 June on net wealth tax (the NWT Law) and therefore must be declared by filing Form 714 with the Spanish tax authorities by 30 June each year. According to Article 24 of the NWT Law, taxpayers must report their virtual currencies' market value in euros on 31 December. There is no official market value, so taxpayers will have to rely on the most widely used websites (such as www.coindesk.com). The Spanish tax authorities endorsed this conclusion in binding rulings V0590-18 of 1 March and V2289-18 of 3 August, among others. The net wealth tax rate can be up to 2.75 per cent, depending on the autonomous region of residence (there are some regions with a zero per cent rate).
In addition to the net wealth tax, there are three independent obligations to declare all assets held abroad worth more than €50,000 (bank accounts, securities and real estate). Taxpayers must submit Form 720 (informative report of assets and rights held abroad) by 31 March each year. To date, virtual currencies have not been considered to be securities or held in a bank account for tax purposes; therefore, it seems they need not be included in a Form 720 declaration. However, this approach will probably change in the near future. In this regard, on 19 October 2018 the government made public a draft bill on measures to prevent and fight tax evasion (the Draft Bill), including a new obligation to report the amount of virtual currencies held in Spain or abroad (through Form 720), identifying the owner and the beneficial owner; and report all transactions involving virtual currencies (acquisitions, sales, barter transactions or transfers). The legislative proposal was published for public consultation on 23 October 2018 but was withdrawn because of the call for a general election (see below).17
The Annual Tax and Customs Control Plan for 2018, published in the Spanish Official Gazette of 23 January 2018, pointed out that, in the context of the prevention and suppression of smuggling, drug trafficking and money laundering, the tax authorities 'will detect and prevent the use by organised crime of the deep web to trade in any illicit goods, as well as the use of cryptocurrencies such as Bitcoin or similar as a means of payment'. In addition, the National Anti-fraud Office attempted to identify all entities that operate with virtual currencies, and sent them requests to provide specific information. Thus, the pre-filled tax forms that the Spanish authorities make available to the taxpayers each year include that the taxpayer has carried out transactions with virtual currencies. The Annual Tax and Customs Control Plan for 2020 published in the Spanish Official Gazette of 28 January 2020 reiterates that the Spanish tax authorities will continue gathering information and designing control initiatives to ensure that transactions with crypoassets are duly reported and that the funds have a licit origin.
The Spanish tax authorities are also assessing the possibility of imposing new reporting obligations, regulating 'human ATMs' (persons carrying out physical transfers of virtual currencies using apps such as Meetup18) and establishing a sanctioning regime for non-compliance with these reporting obligations. In fact, the Draft Bill requires: (1) wallet providers to provide information on virtual currencies balances (segregated by virtual currency), owners, authorised persons or beneficiaries of these balances; and (2) exchanges to provide information on the transactions carried out, identifying the parties involved, address, tax identification number, class and number of virtual currencies, and price and date of the transaction. These reporting obligations also apply to issuers of ICOs with tax residence in Spain.
However, the dissolution of the Spanish parliament and the calling of a general election in spring 2019 implied the automatic withdrawal of the Draft Bill. It is likely that the new government will relaunch this initiative but, to date, there is no information in this regard.
X LOOKING AHEAD
While no specific legislation has been adopted in Spain on virtual currencies, the need for comprehensive regulation (of, inter alia, tax, consumer protection and regulatory aspects) regarding this matter has been already discussed in both Spanish legislative chambers by all political parties.
On the other hand, the Spanish supervisory bodies (the CNMV, the Bank of Spain and SEPBLAC) understand that, given the transnational nature of virtual currencies and the activities related to them (issuance, deposit, marketing, etc.), their regulation should be addressed at an international level or, at the very least, at an EU level, so that as many regulators and supervisory bodies as possible adopt and share common positions, otherwise uncoordinated regulatory approaches may prove ineffective and create incentives for regulatory arbitrage. The first step is Directive 2018/843 of 30 May 2018, amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, which directly regulates virtual currencies for the first time at an EU level and is in the process of being implemented in Spain.
Despite the potential risks that virtual currencies pose as a consequence of their lack of regulation, both the Spanish legislator and supervisory bodies are aware of their importance and of the technological developments behind them, and they are therefore pressing for the speedy adoption of regulations and common positions on this matter.
1 Pilar Lluesma Rodrigo is counsel and Alberto Gil Soriano is a managing associate at Uría Menéndez. The authors would like to thank Alberto Gómez Fraga and Arianna Vazquez Fernández for their collaboration on this chapter.
5 See CNMV considerations on cryptocurrencies and ICOs addressed to market professionals, 8 February 2018.
6 See Questions and Answers for FinTech companies on activities and services that may be within the CNMV's remit, last updated 12 March 2019.
7 See CNMV considerations on cryptocurrencies and ICOs addressed to market professionals, 8 February 2018.
8 Article 2.1. of the Spanish Securities Law: 'Any patrimonial right, regardless of its name, which, because of its legal configuration and system of transfer, can be traded in a generalised and impersonal way on a financial market.'
9 See CNMV Criteria in relation to ICO, 20 September 2018.
10 Article 35.3 of the Spanish Securities Law.
12 Draft Law --/2020, amending Law 10/2010 of 28 April on the prevention of money laundering and terrorist financing and transposing EU Directives in the field of the prevention of money laundering and terrorist financing, https://www.mineco.gob.es/stfls/mineco/ministerio/participacion_publica/audiencia/ficheros/ECO_TES_20200612_AP_V_Directiv_Blanqueo.pdf.
13 Directive (EU) 2018/843 of 30 May 2018.
14 See Questions and Answers for FinTech companies on activities and services that may be within CNMV's remit, last updated 12 March 2019.
15 See agreement of the non-jurisdictional plenary session of the Criminal Chamber of the Supreme Court dated 3 February 2005.
16 Judgment of 22 October 2015, Hedqvist, Case C-264/14.