Virtual currencies, also known as crypto-currencies, are a form of digital money which is not issued or guaranteed by a central bank and which can act as a means of payment. Virtual currencies have risen greatly in prominence and popularity in recent years. An increasing number of Irish traders (19 according to the Irish Bitcoin Foundation web site) now accept payment in Bitcoins; on 13 March 2014, Ireland’s first Bitcoin ATM was unveiled in Dublin, and in the same month Ireland acquired its first native crypto-currency, the Gaelcoin.
Despite this surge in awareness, crypto-currencies remain largely unregulated in Ireland. A virtual currency has yet to be recognised as legal tender in any jurisdiction, and their future treatment under both the primary applicable legislation, including Irish tax, consumer protection and deposit guarantee legislation, together with secondary legislation, including inheritance law, remains uncertain. This article examines the legal position of crypto-currencies under Irish law. In areas where Irish legislation remains silent on the issue, the legal position adopted in other relevant jurisdictions is noted, as that may constitute a source of inspiration for Irish legislators. I am describing the position current in June 2014.
Tax Implications
As yet, no legislation has been passed or official guidance issued in Ireland regulating how virtual currencies will be treated for tax purposes. On Tuesday 10 December 2013, Minister for Finance Michael Noonan, in response to a Parliamentary question relating to the legality and potential tax treatment of Bitcoins, remarked that the Revenue Commissioners had advised him that the use of virtual currencies presents a challenge to tax administrations throughout the world. He stated ‘regarding the possible use of crypto-currencies (including Bitcoin) to circumvent taxes, the Revenue Commissioners and tax administrations in other countries are actively monitoring developments’.[1] Offering his guidance on the issue of how crypto-currencies will be treated for taxation purposes, the Minister went on to state: ‘Because Bitcoin is a combination of some factors that constitute a commodity and some that constitute a currency, the implications for taxation are varied. If Bitcoins are received as payments in commerce, then the same rules in place for payments received in other foreign currencies also apply. If speculation on Bitcoin occurs, the taxation rules that would apply to any gain are applicable.’ These non-binding Ministerial comments essentially represent current Irish guidance regarding the tax treatment of crypto-currencies.
In seeking to predict how the Revenue Commissioners will opt to treat crypto-currencies when they do issue official advice on the issue, it is suggested that guidance may be drawn from the UK position. On 27 March 2014 HMRC issued a brief entitled ‘Tax treatment of activities involving Bitcoin and other similar crypto-currencies’. The brief stated that transactions involving crypto-currencies will be charged using the usual corporation tax, income tax and capital gains tax rules. It also confirmed that VAT will be charged in the normal manner when virtual currencies are used to pay for goods and services. The value of the transaction will be calculated on the basis of the sterling value of the crypto-currency when the supply occurs. In contrast, income from crypto-currency ‘mining’ will generally fall outside scope of VAT, as ‘mining’ is not considered by HMRC to constitute an economic activity. HMRC’s caution, if not uncertainty, in relation to the appropriate treatment of crypto-currencies is apparent from the fact that the guidance is expressed as ‘provisional VAT treatment pending further developments’, and as effective only ‘unless and until HMRC announces any changes’.
It should be noted that not all jurisdictions have adopted positions equivalent to the UK’s. In January 2014 the United States Law Library of Congress released a report entitled ‘Regulation of Bitcoin in Selected Jurisdictions‘ in which it examined the legal position of Bitcoin in 40 jurisdictions and the EU. The report documents the myriad of approaches that have been adopted worldwide. While jurisdictions such as the US[2] and Norway have engaged with the question of how virtual currencies should be taxed and opted to treat Bitcoin as an asset subject to capital gains taxation, others such as China, the Russian Federation and India have avoided the question of taxation and have instead made their distrust of virtual currencies clear by issuing statements warning (or, in the case of China, compelling) national bodies not to deal with Bitcoin at all.
In the absence of any official guidance from the Irish authorities on the issue, it remains to be seen what approach will be adopted in this jurisdiction. It is suggested that the more natural approach may be to follow the UK’s lead and treat crypto-currencies as they are intended to be used: as currencies. To view virtual currencies as assets for taxation purposes may lead to the imposition of a level of tax reporting requirements that users would find both burdensome and difficult to comply with, as trading platforms are not established to comply with national tax requirements.
The launch of a material Irish specific crypto-currency or an international crypto-currency with material impact on Ireland may well prompt the Revenue Commissioners to adopt a formal position. We are aware of at least one potential forthcoming initiative which could satisfy these requirements.
Deposit Guarantee Scheme
The Deposit Guarantee Scheme, administered and run by the Central Bank of Ireland, guarantees all deposits of up to €100,000 held by Irish authorised banks, building societies and credit unions. Should such an institution fail, all deposits up to and including this amount per customer will be repaid to the account holder within 20 days. In this way, customers with deposit accounts in authorised institutions are offered a level of protection against such entities failing or being unable to discharge their debts.[3]
Crypto-currency deposits (which are held online in an ‘online wallet’ or via a virtual exchange platform), do not fall within the ambit of this scheme. The European Banking Authority (EBA) released a brief entitled ‘Warning to Consumers on Virtual Currencies‘ on 12 December 2013. The document cautions customers on the risks of virtual currencies, stating: ‘exchange platforms are not banks that hold their virtual currencies as a deposit. If an exchange platform loses any money or fails, there is no specific legal protection… even when the exchange is registered with a national authority’.
On Wednesday 15 January 2014, Minister for Finance Michael Noonan confirmed the fact that Bitcoin and other crypto-currency deposits fall outside the ambit of the Irish Deposit Guarantee Scheme, stating ‘customers should be aware that [they are] not covered by any Irish regulatory protection and [do] not fall under the Deposit Guarantee Scheme or the Investor Compensation Fund, so consumers would be liable for all potential losses in full’.[4]
Without this safety net, users must take appropriate steps to safeguard their virtual deposits themselves. Users should use only exchange platforms that are well known and reputable. Care should be taken to prevent ‘online wallets’ from unauthorised interference, and large amounts of money should not be stored in such for extended periods of time. This is all sage advice, but what the user can do in terms of platform and service provider due diligence is limited. We have seen the recent collapse of Mt. Gox, a leading exchange platform, with resulting extraordinary allegations of apparent mismanagement. The new sector is working through its growing pains in the spotlight of keen public and governmental authority review.
Consumer Protection Legislation
EU consumer protection legislation and the Irish instruments giving effect to such contain a host of protective measures for consumers who purchase goods or services in any EU member state.[5] The EBA, in their warning of 12 December 2013, referred to above, cautioned consumers 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’. The warning also drew consumers’ attention to the fact that ‘unauthorised or incorrect debits from [a] digital wallet can… not usually be reversed’.
No Irish consumer protection legislation makes specific reference to the rights afforded to customers paying by way of a virtual currency. However, in light of the EBA briefing referred to above and bearing in mind the fact that crypto-currency platforms are as yet unregulated under Irish law, it is suggested that obtaining refunds in situations where payment has been effected by way of virtual currency may be difficult if not impossible. If nothing else, in respect of funds held on platforms located outside Ireland there are likely to be material jurisdictional obstacles to recovery.
Accordingly, customers should take care when using virtual currencies to purchase goods. A simple rule of thumb (of universal application) is that consumers should not spend larger amounts of money than they can afford to lose. Furthermore, it should be borne in mind that acceptance of crypto-currencies by virtual retailers is not permanently guaranteed, and a retailer could, at any point, cease to accept them with no warning or notice period.
Conclusion
In order for the law to support the long-term future of crypto-currencies, it must establish that they can be a stable and reliable medium of exchange appropriately supported by the law. In the absence of any specific Irish legislation in relation to virtual currencies, it remains to be seen how the challenges that they present in areas such as tax, consumer protection and banking will be resolved. At present, crypto-currencies are thriving despite the law rather than supported by it.
In the meantime, customers using virtual currencies should be aware of the associated risks. Deposits held in ‘online wallets’ are vulnerable to hacking, and the EBA has reported cases of customer funds in excess of $1 million being drained. Should a crypto-currency holder fail or go out of business, any losses sustained by customers will not be reclaimable under the terms of the Deposit Guarantee Scheme. There are interesting questions to consider in terms of scope of owner (effectively customers) personal redress against holders, which include complex questions of rights over virtual type assets, whether actions would be based on property rights or existing contract terms, and all made more complex by potential jurisdictional challenges to recovery.
The risks posed by virtual currencies do not necessarily stem from the fact that they are not ‘real’ money. After all, every fiat currency, deriving its value from government regulation rather than being backed up by any tangible commodity, is as devoid of ‘real’ or intrinsic value as crypto-currencies themselves. However, whilst ‘real’ money in Ireland has the governmental seal of approval and protection, crypto-currency does not. The price to be paid for lack of governmental regulation and legal enablement is unnecessary volatility and absence of a legally supported safety net should things go wrong.
Until crypto-currencies are legislated for both in Ireland and, recognising that most currencies are likely to be non-territory specific, by international instrument, users must take what steps are available to them to safeguard their interests.
There can be no doubt that crypto-currencies are here to stay. There will invariably be boom and bust before the sector finds its natural balance and we may be quite some way off that point – potentially years. The sector looks deserving of specific regulatory and legislative support. We follow technology and legal developments with interest.
Pearse Ryan is a partner in the Technology & Innovation Group at Arthur Cox, Dublin, Rob Cain is a partner in the Finance Group at Arthur Cox and Emma Dunne is a trainee in the Technology & Innovation Group there.
[1] http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2013121000054?opendocument. The tenor of this statement was reiterated by Minister Noonan on Wednesday 15 January 2014, in response to a parliamentary question on the tax treatment of Bitcoin: http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2014011500058?opendocument
[2] On 25 March 2014, the IRS announced that virtual currencies will be treated as property for U.S. federal tax purposes. http://www.irs.gov/uac/Newsroom/IRS-Virtual-Currency-Guidance
[3] http://www.consumerhelp.ie/deposit-guarantee-scheme
[4] http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2014011500058?opendocument#WRJ00650
[5] Examples of such Irish legislation include the Sale of Goods and Supply of Services Act 1893 (as amended), the Consumer Protection Act 2007 (which gives effect to Directives 2005/29/EC, 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No. 2006/2004 of the European Parliament and of the Council) and the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995 (as amended) (which gives effect to Council Directive No. 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts).
