Commercial – Crypto & NFTs
What are the biggest investment opportunities in digital – and how can clients decide on the best entry point for them?
Blockchain and distributed ledger technology (DLT) are presented as revolutionary technologies in the financial sector, termed disruptive by some. One of their main applications is crypto-assets.
At the moment there is not a common European framework that regulates the crypto-asset market. There is a proposal for a Regulation of the European Parliament and the Council on Markets in Crypto-assets, and amending Directive (EU) 2010/1937 (MiCA). The proposal is pending approval by the European Parliament.
In Spain, the definition of crypto-assets is in rule 2. e) of Spanish National Securities Market Commission (CNMV) Circular 1/2022 of 10 January, on the advertising of cryptoassets presented as a means of investment (BOE nº. 14, of 01/17/2022) as follows: “Crypto-asset: digital representation of value, a right, or an asset that can be transferred or stored electronically, using distributed ledger technologies or other similar technology”. Cryptocurrencies fit into this concept.
In Spain there is a legal definition of virtual currency. Art. 1. 5 of Law 10/2010, of April 28, on the prevention of money laundering and terrorist financing (BOE nº. 103, of 4/29/2010), introduced by Royal Decree-Law 7/2021 of April 27. Virtual currency shall be understood as a digital representation of value that is not issued or guaranteed by a central bank or 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 as means of exchange and can be transferred, stored and traded electronically.
Beyond cryptocurrency purchases (Bitcoin and other Altcoins) there are investment opportunities in digital assets, among others: non-fungible tokens (NFTs); future contracts for difference (CFDs); derivatives with crypto-assets such as underlying assets; life insurance policies linked to investment funds with crypto-assets as underlying assets; ETFs acquiring structures bonds whose underlying assets are cryptocurrencies; staking; etc.
Volatility and lack of regulation make investment in crypto assets very risky. Knowing your own profile as an investor helps you decide. You should never invest in products that you don’t understand.
Crypto can be a volatile market: how do you advise your clients to mitigate risk when trading in digital currencies?
On the 17th March 2022, The European Supervisor Authorities (EBA, ESMA and EIOPA – the ESAs) published a warning to consumers on the risks of crypto-assets (ESA 2022 15). They identify the following key risks: extreme price movement; misleading information; absence of protection; product complexity; fraud and malicious activities; market manipulation, lack of price transparency and low liquidity; hacks, operational risks and security issues.
Investing in crypto-assets is not regulated, may not be suitable for retail investors, and the entire amount invested may be lost. The cross-border and global nature can make it very difficult to claim damages.
To find a suitable product, you must find out about the profitability (the remuneration to be obtained), the risk (credit, market, liquidity, fraud, operational, volatility, etc.) and the expenses and costs that will influence the final profitability (commissions, expenses associated with operations, taxes, etc.). Knowledge is essential. It is important to be informed and understand the information about the product and all the risks, and be especially prudent if the ability to assume risks is severely limited by the particular financial situation.
You should not invest in products whose characteristics and risks are unknown.
“Volatility and lack of regulation make investment in crypto-assets very risky. Knowing your own profile as an investor helps you decide”
How is your jurisdiction managing the legal challenges of NFTs: for instance, taxation on purchases, IP, ownership and theft?
On NFTs, the issues are complex and novel. The lack of specific regulation makes it necessary to address case-by-case to be able to fit it into existing regulation. It is not possible to establish a general criteria.
There are some interesting decisions on sales operations of NFTs for the purposes of value added tax (VAT).
Directorate General of Taxes (DGT), Ministry of Finance and Public Function, Spain, in two recent binding opinion (V2274-22, of 10/27/2022 and V0486-22, of 3/10/2022), understood that sales of NFTs are operations subject to and not exempt from VAT (because NFTs subject to consultation should not participate in the nature of cryptocurrencies and other digital currencies since they are not configured as currencies or are fungible goods).
To determine whether the operation is a delivery of goods or a service, DGT understood classification as delivery of goods would not proceed (because the object of transaction was the digital certificate of authenticity that represents the NFT, without having a physical delivery of the image file or the digital file associated with it itself).
So, transmissions, under those conditions, should be classified as electronic supplies service that, if understood to be carried out in the territory of application of the Tax, had to pay VAT at the general rate of 21%.
In relation to intellectual property rights, NFTs may be considered as an object of intellectual property under Spanish Intellectual Property Law (Royal Legislative Decree 1/1996, of April 12, BOE nº. 97, of 4/11/1996). Article 10.1 says that all original literary, artistic or scientific productions expressed in any mode or form, whether tangible or intangible, known at present or that may be invented in the future, are subject to intellectual property.
Problems arise, for example, when the person uploading and trading the NFTs is not the original creator and it becomes necessary to determine whether converting a work into an NFT implies a transformation that may affect the rights of its author or, if on the contrary, the ownership of a physical work allows to transform it into an NFT, and those are new issues on which there are no precedents.
