A Global Guide for In-House Counsel: Doing business in a rapidly changing world

Commercial – Crypto & NFTs

What are the biggest investment opportunities in digital – and how can clients decide on the best entry point for them?

Given the volatility of cryptocurrencies and the fact that they are not considered legal tender in Colombia, it may be more interesting to invest in or develop NFTs, although this does not mean you can leave aside the challenges they bring from a legal point of view.

NFTs in areas such as logistics operations, traceability of origin (e.g., for products whose value proposition is vegan or animal cruelty-free), assignment of copyrights in musical and artistic works, among others, can be investment opportunities, provided that it has been determined that the blockchain is the best way to record transactions and that a simple centralised database is not sufficient.

It is important that the market is demanding and valuing the use of clean energies in the development of these operations to reduce the environmental impact they represent (due to the high energy consumption that servers allow for the storage and management of large amounts of information).

Crypto can be a volatile market: how do you advise your clients to mitigate risk when trading in digital currencies?

In Colombia, as in several countries around the world, cryptocurrencies are considered intangible assets and not legal tender. In other words, they do not constitute foreign exchange currencies, since they do not meet the conditions established by law. As intangible assets, they can be exchanged for other goods and, as they are likely to increase the wealth of the holder, they must be considered in the income tax return, either as an intangible asset (investment) or inventory.

The recent news of the FTX bankruptcy has destroyed confidence in the industry, which has been reflected in the fall in the price of several currencies, bringing back to the table the discussion whether to regulate this market.

It is interesting to learn from the situations that, according to market participants, have generated this debacle, such as high energy costs (for those who do mining), compliance questioning and risky investments.

To mitigate the risk that volatility represents it is suggested to:

  • Seek expert advice to gain a thorough understanding of the characteristics of crypto-assets and the risks involved in holding them.
  • Understand blockchain in-depth and the characteristics of crypto-assets.
  • Verify that the cryptocurrency holder’s territories have exchanges through which cryptocurrencies can be exchanged for legal tender or for goods or services.
  • Conduct due diligence on the exchanges operating in each territory, so that their reputation is verified, as well as reviewing that they have no money laundering or terrorist financing issues and that they have the licenses that each territory has established.
  • Diversify, so that all investments are not solely in cryptos.
  • Verify that mining companies have overcome energy costs or use clean energy.

How is your jurisdiction managing the legal challenges of NFTs: for instance, taxation on purchases, IP, ownership and theft?

The Colombian Superintendency of Companies has pointed out that crypto-assets are not legal tender, are not backed by the Central Bank, are not currency, are not cash, nor are they financial assets, so their issuance or any transaction involving them that seeks an exchange of goods, services or returns without reasonable financial explanation or guarantee of the promised returns or benefits, could constitute illegal money collection – especially if it is carried out by an entity that is not part of the financial system. It is therefore essential to seek expert advice when entering the NFT market to ensure that the planned transaction does not in any way constitute an operation to collect funds from the public that could be questioned.

It is important to note that in Colombia there is a regulatory sandbox for entities supervised by the Financial Superintendency for innovative technological developments. The National Tax and Customs Administration (DIAN) in turn has indicated that, as they are not legal tender, they constitute crypto-assets and define them as “intangible or incorporeal assets that can be valued, form part of the patrimony and can lead to obtaining income. Although it is not a recognised currency, and therefore does not have unlimited liberating power, it is clear that crypto-assets are recognised as an asset. An asset that, by its nature, and for tax purposes, will be considered as an Intangible asset”. It has also indicated that in their condition as an asset, Colombian residents who have them in their patrimony must declare them in their income tax return. On 14th October 2022, DIAN issued a compilation of the relevant tax doctrine on crypto-assets that answers several questions, such as how to make adjustments for exchange differences, how to declare the income, and how to make the income, among other questions.

The Superintendency of Companies, in the regulations on Money Laundering, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction (SAGRILAFT), defines Virtual Assets as “the digital representation of value that can be traded or transferred digitally and can be used for payments or investments. Virtual assets do not include digital representations of fiat currency, securities and other financial assets that are already covered elsewhere in the FATF Recommendations”. It also includes companies belonging to the Virtual Assets sector among those that must comply more strictly with SAGRILAFT precisely because of the ML/TF risk posed by the use of pseudonyms in blockchain transactions.

Colombia has regulated other relevant matters in the NFT and Smart Contracts market, such as intellectual property, competition law, unfair competition, data privacy, electronic signature mechanism, validity of electronic documents, and consumer protection laws, among others, which must be observed when operating NFTs in the country, so again, it is relevant to have adequate legal advice if you want to enter this market.

Top Tips

Exploring digital asset investments

  • Learn as much as you can about blockchain.
  • Understand what Smart Contracts are and how they are programmed.
  • Be aware of what physical assets are being tokenised. This is where NFTs are going.
  • Know about the Internet of Things, and what assets it is being implemented in, as this will facilitate the development of NFTs.
  • Track technology developments in innovative assets that financial firms are working on with support from reputable technology and real sector firms.
  • Demand and promote the use of clean energy in the technology services you contract and use.
  • Seek expert advice before engaging in a transaction you don’t fully understand.

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