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CVA Initiative Regarding FATF Guidance for Virtual Assets

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The Financial Action Task Force (FATF) has recently updated its Guidance on the treatment of Virtual Assets (VA) and Virtual Asset Service Providers (VASP), which lays out due diligence measures that must be implemented to prevent money laundering and terrorism financing.

The Crypto Valley Association (CVA) recognizes that this new Guidance presents significant challenges to members who may issue or deal in VAs and who may be classified as VASPs (defined below).

With this in mind, the CVA will be conducting one or more information session(s) in the upcoming months in order to inform members and the DLT community of requirements and possible solutions regarding compliance with the new Guidance, which will soon be reflected in domestic regulations.The CVA will equally liaise with relevant authorities and counterparts in Switzerland and abroad to support the implementation of the Guidance.

What is a VASP?

Virtual Asset Service Provider (VASP) means any natural or legal person who conducts one or more of the following activities for or on behalf of another natural or legal person:

  • exchange between virtual assets and fiat currencies;
  • exchange between one or more forms of virtual assets;
  • transfer of virtual assets;
  • safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets (i.e. custody / custodial wallet solutions); and
  • participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset (i.e. initial token or crypto offering).

The new FATF guidance includes recommendations on several key points, including;

1. VASPs must join the fight against money laundering / terrorism finanicing

Exchanges, crypto banks, issuers of payment tokens and the like will need to be licensed and implement a program to manage AML/CTF (identify and verify the authenticity of clients, monitor transactions, etc.) for transactions above USD 1,000.

2. Travel rule

VA transfers that take place between a VASP and other financial intermediates (i.e. other VASP, banks) will require the originating party (ie. sender) to obtain, hold and transmit required information on both the sender & recipient, including names, residential and wallet addresses. Similar requirements are placed on receiving / beneficiary VASPs.

3. SRO

VASPs should be supervised or monitored by a competent authority, not a self-regulatory body. FINMA-licensed SROs should be considered competent authorities in Switzerland.

Note: During the process of refining its Guidance (first issued in 2015), the CVA’s Regulatory and Policy Working Group provided input to the FATF, with consideration to the needs and experience of Crypto Valley companies and the industry as a whole.

Read the CVA’s submission to the FATF.

The CVA encourages all of its members to join in the conversation and attend the information  sessions – and be prepared to follow developments in the space with careful attention.

 

Final ESTV / SFTA VAT guidance on supplies in connection with blockchain and DLT

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By Thomas Linder, Tax Partner MME and Monika Molnar, Tax Partner MME, both members of the Crypto Valley Association Working Group Tax / Accounting / Structuring

After a long-lasting drafting procedure including two public review rounds, the VAT Department of the Swiss Federal Tax Administration (FTA VAT DEP) published on 17 June 2019 its long-awaited practice adjustments for VAT on supplies in connection with blockchain and distributed ledger technology. This blog is based on an initial publication prepared by MME and has been complemented with further input from other members of the CVA Working Group Tax / Accounting / Structuring (CVA WG TAS).

The adjustments to the Swiss VAT practice have been made under the following different publication titles:

publication title number title Published Status as of
04 VAT object 2.7.3.3 Use of cryptocoins/tokens 17.06.2019 01.06.2019
04 VAT object 2.7.3.5 Validating and Verifying Transactions via the Blockchain 17.06.2019 01.06.2019
04 VAT object 2.7.3.4 Transmission, trading and storage of cryptocoins/tokens 17.06.2019 01.06.2019
04 VAT object 2.7.3.2 Issuance of cryptocoins/tokens in the context of an initial coin offering 17.06.2019 01.06.2019
04 VAT object 2.7.3.1 Basis 17.06.2019 01.06.2019
04 VAT object 2.7.3 Supplies related to blockchain and distributed ledger technology 17.06.2019 01.06.2019
07 Tax assessment and tax rates 1.1.4 Remuneration in cryptocoins/tokens 17.06.2019 01.06.2019
16 Accounting and invoicing 2.4.5 Invoices in foreign currency 17.06.2019 01.06.2019
06 Retail 1.10 Charges in cryptocoins/token 17.06.2019 01.06.2019
12 travel agencies and tourist associations 7.2 Calculation of the remuneration in special cases 17.06.2019 01.06.2019

 

General comments by MME & CVA WG TAS

The published practice adjustments to supplies in connection with blockchain and distributed ledger technology have undergone some important and correct changes compared to the revised first practice draft of 29 January 2019 on crypto currencies. However, from our point of view, unfortunately, they still do not fully reflect the economic, accounting and cybernetic, self-governing aspects of a decentralized, public open-source blockchain system. These would have to be considered for the legal effect of transactions on the blockchain. The VATability of a token transaction depends strongly on whether the token is synchronized with relative or absolute rights or not. If the transmission of a token in a cybernetic system does not trigger a synchronous transmission of an underlying legal relationship, the transaction should be irrelevant for VAT purposes.

Crowdfunding activities such as Initial Coin Offerings (ICOs), with which companies raise funds (in legal currency or crypto currency) for a specific entrepreneurial or open source project, are to be distinguished from these. An ICO usually consists of a bunch of contractual or factual obligations promised by the fundraiser. These can be related to the token function but can also exist independently of it. If, for example, the fundraiser also provides various supplies (e.g. production order/software development or transfer of ownership of an intellectual property right), the transaction may be relevant for value-added tax, irrespective of the token function.

Unfortunately, the published practice adjustments in these areas are incomplete. The following is a brief summary of the most important points.

Main types of tokens

According to FTA VAT DEP, the following three main types of cryptocoins/token can be distinguished:

  • Payment coins/token: Cryptocoins/token which are designed as pure payment coins/token serve no purpose other than the use as means of payment for the purchase of supplies and/or services from one or more service providers. Payment coins or tokens therefore do not entitle the holder to certain or determinable services, but merely represent the contractually agreed means of payment.
  • Utility coins/token: If cryptocoins/token entitle to certain or determinable services and/or grant you access rights to a platform, application or similar (licence or licence-like right), this is referred to as usage coins/token.
  • Asset coins/token: For example, if cryptocoins/token are entitled to participate in earnings, turnover, profit, a certain part of earnings or turnover, derivative rights or the like, they are so-called assetcoins/token. Investment coins/token are always based on a contractual legal relationship and therefore do not establish a corporate ownership relationship and do not entitle the holder to repayment of the amount originally paid in.

MME & CVA WG TAS comments:

The categories discussed are very narrowly defined, disregard the dual function of DLT-based tokens (i.e. always existing technical function that may be synchronized with a legal function) and show large gaps. In our view, comments on “native tokens” or tokens with voucher, equity, debt or investment fund character are missing. In addition, mixed forms are insufficiently covered.

  • According to FTA VAT DEP, payment coins/token can only be used as a means of exchange, i.e. as digital currencies. However, this individual functionality could only be ensured in a self-contained payment system, in which an alternative use (centrally controlled) can be excluded. However, it is not considered that especially with open, decentralized protocols and applications, the corresponding “native tokens” (e.g. BTC, ETH, XTZ, ADA) are only digital information and settlement units without synchronized legal content. An agreement on the use shall only be concluded between the parties outside the blockchain.

    For example, a BTC would not qualify as a pure “payment token” as defined, since a BTC per se is not necessarily a means of payment or exchange and can in fact also be used for other purposes. The Bitcoin blockchain does not define a purpose, but only posts transactions according to the algorithmically recorded transaction and consensus rules. The basic function of a BTC is therefore a technical, Bitcoin protocol-specific usage functionality. Use as a means of payment is neither guaranteed by the system nor by a counterparty and there is no contractual relationship with an operator. Although a BTC can de facto be used as a means of payment between two parties, such an agreement is only ever concluded outside the block chain “peer-to-peer”. BTC, on the other hand, can in fact also be used as an information carrier without assuming a payment function (e.g. “colored coins”).

    The FTA VAT DEP has unfortunately ignored the dual function of DLT-based tokens (i.e. always existing technical function that may be synchronized with a legal function). A definition for “native tokens”, whose function is limited to programmed technical functionalities in a cybernetically functioning blockchain system, would also have to be supplemented and assessed separately.

  • Utilization coins/token entitle according to FTA VAT DEP to the purchase of certain or determinable services and/or grant an access right to a platform, an application or similar (license or license-like right). To meet these requirements, the token must be synchronized with the underlying relative or absolute right.

    However, a general qualification of all technical functionalities as a utility goes too far. For example, the usage and settlement functions of “native tokens” in decentralized protocols or applications are usually only factual usage options, but not corresponding enforceable rights. A concrete supply is missing. Only the transfer of defined, determinable usage rights would be taxable. Furthermore, a (taxable) prepayment character is only given if both the supply itself and the location of the supply could be determined. However, this is not the case for “native tokens” (no supply) or tokens with voucher function (supply only when redeemed). The qualifications of native tokens and vouchers must therefore be assessed separately.

  • According to FTA VAT DEP, investment coins/token (so-called asset coins/token) entitle the holder, for example, to a share in earnings, turnover, profit, a certain portion of earnings or turnover, derivative rights or similar rights and are always based on a contractual legal relationship.
    However, the most important categories of asset tokens, which reflect shareholdings under company law (equity) or entitle to repayment of the amount originally paid in (debt capital / investment funds), are excluded from this definition. This does not go far enough for a comprehensive presentation. A capture of all asset token types would be desirable.

Initial Coin Offerings / Token Generating Events

In an Initial Coin Offering (ICO), Token Generating Event (TGE), Initial Token Offering (ITO) or Security Token Offering (STO), a company raises funds (in legal or crypto currency) for a specific business or open source project. The donors are usually assigned blockchain-based coins/token, which are generated on a newly developed blockchain or by means of a digital, self-executing computer program (so-called Smart Contract) on an existing blockchain and stored decentrally. This can happen step by step or only at the start of a new blockchain (so-called Genesis block) or application.

The FTA VAT DEP qualifies ICOs in the practice adaptations as follows:

  • The transfer of financial resources within the framework of an ICO represents a remuneration for a service ( 18 para. 1 in conjunction with art. 3 lit. f of the VAT Act) on the basis of the contractual obligations of the company, unless it is a matter of a payment coin/token.
  • The issuance of payment coins/token against means of payment represents an exchange of cash that is not relevant for VAT purposes.
  • The issuance of investment coins/token against means of payment is exempt from VAT without credit based on 21 para. 2 ch. 19 lit. e of the VAT Act. The corresponding revenues do not constitute non-remuneration for the company (art. 18 para. 2 of the VAT Act ).
  • The issuance of usage coins/token against means of payment constitutes a supply of services or goods and is taxable, provided that no exemption under 21 para. 2 of the VAT Act applies.
  • If a company only (?) undertakes to develop a platform or software with the funds collected, for example, a taxable supply can be assumed. The supply is provided by the company and the location is determined in accordance with 8 para. 1 of the VAT Act. It does not matter whether the company has the prospect of a later allocation of cryptocoins/token at the time of borrowing.
  • In order to prove the place of performance, the taxable person uses, for example, identification as part of a know-your-customer process or, in the case of electronic services, the information suitable as evidence in this respect.

MME & CVA WG TAS comments:

The concrete design of an ICO (hereinafter also referred to as TGEs and lTOs) and the coins/token created in this way differ substantially in technical, functional and legal respects. However, the focus is usually on raising capital for the project. In return, the fundraiser enters into a bunch of contractual or factual obligations, which are related to the token function, but can often exist independently of it. The VAT assessment of an ICO, therefore, depends to a large extent on its individual structure. The respective tax consequences must be examined on a case-by-case basis and are difficult to describe in general terms.

In general, we believe that the same VAT rules should apply as for crowdfunding in general. Therefore, the close link between the VAT consequences and the token qualification falls short.

A link to the bookkeeping of ICOs according to the Q&A of the Commission for Financial Reporting of EXPERTsuisse (German / French),which has published the following positions (as of April 30, 2019) in collaboration with the CVA WG TAS, would have been particularly recommended here:

  • Development and access to open source blockchain protocol in AG / GmbH; utility token (“native token”); logic of long-term production orders; prepayments
  • Development and access to open source blockchain protocol in foundation; utility token (“native token”); logic of use of foundation capital / donation; foundation capital or prepayment
  • Development and access to open-source blockchain protocol in foundation with dual financial statements according to OR/FER 21; utility token (“native token”); logic of use of earmarked fund; earmarked fund (debt)
  • Development and temporary access to blockchain protocol; utility token (“voucher”); analogy to investment subsidy; deferred revenue; advance payments
  • Investments in real estate; Asset Token; Analogy to investment funds / capital contribution; PS capital
  • Development and marketing of robots and payment of revenue participation; asset token; analogy to investment subsidy; ongoing accrual for revenue participation; prepayments

The decentralized character of DLT-based systems must also be taken into account when verifying the place of supply.

Mining / Staking

FTA VAT DEP distinguishes between block reward and transaction fee and links different tax consequences to these qualifications. This can also influence the right to deduct input tax.

MME & CVA WG TAS comments:

The decentralized character of blockchain protocols is also insufficiently considered when it comes to mining / staking. An analysis of the corresponding tax consequences must be carried out on a case-by-case basis.

Invoicing

Settlement must be carried out in the local currency. The supplier must convert the remuneration for supply rendered on the reporting date into a legal (domestic or foreign) currency at the current rate for a fee in cryptocoins/token at the time the remuneration is received or invoiced (art. 40 of the VAT Act).

According to FTA VAT DEP, the invoice must show the fee for the supply separately and the VAT amount divided according to tax rates in a legal currency. Reporting the remuneration for individual supplies only in cryptocoins/token does not constitute separate invoicing under VAT law. The conversion can be carried out using suitable conversion portals, whereby the selected conversion source must be kept constant. For certain cryptocoins/token the FTA publishes daily courses (course lists of the FTA). It should be possible to check the documentation of the conversion easily and immediately at any time.

This procedure according to the VAT Act must also be applied to the declaration of supplies subject to acquisition tax (art. 45 para. 1 of the VAT Act). Further information on acquisition tax can be found in the VAT information on acquisition tax.

Losses suffered in the sale of cryptocoins/token against legal currency or in the use of cryptocoins/token to obtain services may not be deducted from the fee.

MME & CVA WG TAS comments:

A “prohibition” of invoicing in crypto currency only, diametrically contradicts the qualification of a “payment token” as a means of exchange and payment. If such a token is assigned a payment function, it must also be possible to issue a corresponding invoice. Anything else seems impractical. If a fiat equivalent is missing in an invoice statement, application of the published rates of the FTA (or the effective rate at the time of invoice creation/transaction time stamp, based on any other stable source of crypto currency exchange rates) for the preparation of VAT declarations should be sufficient to provide appropriate results for all parties involved.

In addition, Bitcoin, for example, is in several countries already equal to the legal national currency, so that a statement of the remuneration would only have to be permissible in Bitcoin accordingly. Equal treatment of cryptocurrencies and foreign currencies is therefore necessary.

Finally, example c) under “2.4.5 Invoices in foreign currency” illustrates the difficulties of implementation in a vivid way: 2 pizzas are sold as of 22 May 2019 for BTC 10,000 and a receipt for USD 30 is issued, which should be relevant for Swiss VAT. It is not comprehensible how the conversion was carried out. At a BTC rate of around USD 8,000 per invoice date, the equivalent of BTC 10,000 BTC would have been around USD 80 million! An invoice with USD 30 does not only seem wrong to us under these circumstances, but also latent criminal. The example is, therefore, useless in practice and should be changed or even removed.

What’s next

Given the still prevailing need for clarity in tax matters (in particular VAT) for many of the crypto businesses, the CVA WG TAS is currently planning for an upcoming meet-up (scheduled for late September 2019) to discuss the current different Swiss tax practices. Further details will be shared once they are available.

CVA Contribution to Consultation on Framework Conditions for Blockchain/DLT

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The Swiss State Secretariat for International Finance (SIF) recently closed a round of public consultations aimed at gathering input on the possible framework improvements to for DLT and blockchain.

As with previous such consultations, the Crypto Valley Association was active in gathering input and providing an opinion paper to the SIF, in particular with the support of the CVA’s Regulatory and Policy Working Group chaired by Thomas Stoltz and Tobias Kallenbach.

Read the CVA’s Position Paper here.

The 5th ICO/STO Report published by PwC Stratetgy& and CVA

By | Articles, CVA in the News

This week saw the publication of the 5th ICO/STO (IEO) report in collaboration with PwC and Strategy&.

The key takeaways are as follows:

Token Offerings and IEO

  • Jan until May 2019: total of 250 token offerings completed, USD 3.3 bnraised capital
  • Since the beginning of 2019, the development of IEO strongly accelerated. The IEO Bitfinex, with USD 1 bncapital raised, was the biggest token offering in 2019.
  • New concept: Initial Exchange Offering, a new crypto fundraising format, by which an ICO/STO is basically conducted on one or multiple platforms of crypto exchanges
  • The innovation of IEO can be seen as a response of established exchangesmoving into crypto emphasizing higher institutionalization and credibility

Cyber Security

  • Cybersecurity, key custody, KYC/AML and capital requirements are the key themes in today’s crypto finance ecosystem
  • Recent cases of large lossescaused by cyberattacks: Binance & bithumb (wallet), SpankChain (smart contract), Coinbase (attack in terms of double spending)
  • Key custody solutions gain more attention and relevance

Read the full report here.

 

 

EXPERTsuisse issues Swiss ICO accounting guidelines for asset tokens

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Author: Markus Vogel, Chair CVA Tax / Accounting / Structuring Working Group and Tax Partner at KPMG Switzerland

After the release of the Q&A on special accounting topics last December 2018 (Accounting of ICO’s with Utility Tokens), EXPERTsuisse in collaboration with CVA’s Working Group for Tax and Accounting has further clarified the Swiss accounting guidelines for asset token ICOs. The accounting guidelines for asset token ICOs have been jointly published by the EXPERTsuisse with the Crypto Valley Association. This reinforces the commitment of the leading institution in the Swiss accounting landscape to further clarify the accounting treatment of crypto transactions.

EXPERTsuisse, the Swiss Expert Association for audit, tax and fiduciary practitioners, has mandated its Accounting Standards Committee to establish the Swiss ICO accounting guidelines for asset tokens in close collaboration with the CVA Working Group Tax / Accounting / Structuring. The result of this continued great collaboration can be accessed below and also contains:

  • Additional clarifying statements in respect of the Swiss accounting guidelines for utility token ICOs which have been published in December 2018:
    • Treatment of genesis block generation in light of a subsequent token sale;
    • Swiss foundations as token issuing entities,
    • Treatment of capital gains and losses in cryptocurrency holdings raised through an ICO;
    • Treatment of development of proprietary blockchain protocols.
  • The accounting principles applicable to cryptocurrencies such as Bitcoin.

Read the guidelines – in German / in French.

What are the new guidelines?

The new accounting guidelines detail the accounting treatment of so-called asset tokens. Asset tokens generally represent any kind of tokenised asset which carry either an ownership right in respect of an asset or company resp. a relative right regarding future profits or cash flows.

Within these accounting guidelines, the accounting treatment is illustrated at hand of two distinct case studies. The first case study represents the issuance of the IMMO Coins which are legally structured as participation certificates (Partizipationsschein) for the financing of real estate acquisitions. The accounting treatment at hand does not materially deviate from the one applied to the issuance of non-tokenised participation certificates.

The second case study – “ROB” – entails the issuance of ROB Coins in the context of the pre-financing of the development and marketing of a robot. In exchange for this pre-financing, the token purchasers acquire the right to a 10%-revenue participation in the issuing company. The accounting treatment closely follows the same analogy as used for the utility token of the advance payment without any repayment obligation.

At the case at hand, there are two factual obligations borne by the ICO company: i) a development obligation of a robot as well as ii) a marketing obligation of the robot. Hence, the respective ICO company has the implicit order from the token purchasers to put sincere efforts into the development and marketing of the robot. These efforts are considered to be financed at hand of so-called advance payments without repayment obligations.

Any product development expense directly attributable to the ICO project can be deducted from the received advance payments (without repayment obligations). Further on, if there is still an excess amount of advance payments (without repayment obligations) after the completion of the product development stage of the robot, any relevant marketing expense for the robot can be deducted from this liability until it’s fully absorbed.

Final remarks

As outlined in the beginning, the publication of the Swiss ICO accounting guidelines for asset tokens confirms the commitment of leading accounting institution in Switzerland to further improve the local conditions for crypto businesses. The CVA Tax / Accounting / Structuring Working Group maintains close ties to EXPERTsuisse and will inform you in due time about the planned meet-up activity relating to these new accounting guidelines.

CVA Tax / Accounting / Structuring WG submits its opinion regarding the latest draft VAT guidance

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CVA Tax / Accounting / Structuring Working Group submits its opinion regarding the latest draft VAT guidance on the electronic supply of services to the Swiss Federal Tax Administration

Author: Markus Vogel, Chair CVA Tax / Accounting / Structuring Working Group and Tax Partner at KPMG Switzerland

 

In the context of a public review of the draft VAT guidance on electronic supplies of services issued by the Swiss Federal Tax Administration (SFTA) on 11 April 2019, the CVA Tax / Accounting / Structuring Working Group (CVA TAS WG) has submitted on Thursday, 9 May 2019, its opinion to the SFTA.

In particular, the CVA TAS WG asserts that:

  • There is a need for a clear differentiation between decentralised blockchain platforms (cybernetic networks and protocols) and traditional digital platforms such as e-commerce applications;
  • Whether there is an electronic supply of services in case of a decentralised blockchain platform needs to be assessed in accordance with its factual use and use possibilities as well as its legal structuring;
  • The regulatory classification of a token issued on a decentralised blockchain platform is solely an indicator but not conclusive for the VAT treatment;
  • The simplification of blockchain technology (and the respective application of procedural techniques based on decentrally stored algorithms) as electronic supplies of services is factually inaccurate and constitutes an unjustified uniformisation;
  • The topic of electronic supplies of services within the blockchain / crypto industry should be rather subject of an independent industry information and needs to be clearly distinguished from the VAT industry information n° 13.

The CVA TAS WG looks forward to monitoring the developments at the SFTA and keeping you up-to-date.

If you are interested in viewing the draft VAT guidance resp. the submission made to the SFTA, please check out the attachments to this contribution here:

CVA Input to SFTA

Draft VAT guidance

 

 

CVA Position on FATF Draft Interpretive Note on Virtual Assets and Virtual Asset Service Providers

By | Articles, Public Announcements

The CVA position was drafted and submitted to the Financial Action Task Force on 26 April 2019 by the CVA Regulatory and Policy Working Group Task Force with the guidance and support from Christine Gschwend (WG Task Force Leader), Thomas Stoltz, Tobias Kallenbach (Co-Chairs), and Dr Mattia Rattaggi (CVA Board Member).

 

On February 22, 2019, the FATF published guidance to Members and Observers on the application of Recommendations 10, 15 and 16 to Virtual Assets and Virtual Asset Service Providers (VASPs). The FATF also requested that comments be provided on the proposed amendments to Recommendation 16 captured under item 7(b) of the Draft Interpretive Note.

The CVA recognizes that regulated VASPs provide a reliable source of information for law enforcement in the detection, investigation and prosecution of money laundering and other forms of criminal activity. In order to allow VASPs to provide services that compete with those alternatively offered by decentralized technologies, the CVA has crafted comments and recommendations that support the prevention of money laundering and the financing of terrorism, while allowing VASPs to remain competitive in the quickly evolving market of Distributed Ledger Technologies (DLTs).

The comments and recommendations presented below in principle reflect Switzerland’s legal framework for DLTs.

  • Executive Summary

The CVA recommends the following:

  1. The definition of Virtual Assets should not be broadened. The term VASPs and custodial services should be clearly defined.
  2. Recommendation 16 on wire transfers should restrict the activity of VASPs to recording and screening beneficiary information, but should not include the transfer of such information to the beneficiary.
  3. Recommendation 17 should allow alternative means of identity validation.
  4. Support for the strengthening of global private – public partnerships in the area of information sharing should consider relevant data privacy laws.
  • Position of the CVA

1. Definition of Virtual Assets

The FATF uses the term “virtual asset” to refer to “digital representations of value that can be digitally traded or transferred and can be used for payment or investment purposes, including digital representations of value that function as a medium of exchange, a unit of account, and/or a store of value.”

The FATF emphasises that virtual assets are distinct from fiat currency (a.k.a. “real currency,” “real money,” or “national currency”), which is the money of a country that is designated as its legal tender.

In its Draft Interpretive Note, the FATF further clarifies that “countries should consider virtual assets as “property,” “proceeds,” “funds”, “funds or other assets,” or other “corresponding value”. Countries should apply the relevant measures under the FATF Recommendations to virtual assets and virtual asset service providers (VASPs).”

The CVA is of the opinion that the term Virtual Assets should not be expanded to include these additional references and that the scope should be limited to a digital representation that can be used by third parties as a means of payment for goods and services.

The definition of Virtual Assets could, however, be further clarified by identifying the categories of tokens that do not fall under the definition of Virtual Assets due to their legal or technological characteristics. We note in particular that utility tokens, which solely provide access to a digital function or non-financial service, cannot be used as a means of payment. The same can be said of asset tokens that represent the equivalent of a share, bond, derivative or other financial instrument, which equally do not have the properties of a payment token. The issuance of such tokens should not be subject to money laundering regulations. 

We further recommend that VASPs and “Custodial Wallet Service Providers” be defined as follows:

Virtual Asset Service Provider (VASP)

Persons or legal entities that, on a professional basis; (i) accept cash of more than EUR/USD 100,000 as part of a commercial transaction, (ii) accept or hold deposited Virtual Assets belonging to others as a CWSP, (iii) assist in the investment of Virtual Assets, or (iv) assist in the transfer Virtual Asset from one party to another. Examples may include: centralized trading platforms or exchanges, issuers of Virtual Assets, Virtual Asset fund managers or CWSPs.

Custodial Wallet Service Providers (CWSP)

A VASP that has access to its client’s private keys and therefore can trigger a transaction on behalf of its clients (power of disposal over 3rd party assets).

  1. Customer Due Diligence (Rec. 10)

VASPs should be required to undertake customer due diligence (CDD) measures when carrying out occasional transactions above USD / EUR 3,000, rather than USD / EUR 1,000 as recommended under 7(a) of the Draft Interpretive Note. Implementation of CDD below this threshold will add administrative costs to VASPs, further disadvantaging them over decentralized DLT services, with little gain in terms money laundering prevention. Maintaining a low enough threshold of USD / EUR 3000 will, however, allow CDD efforts to capture transactions which may be financing terrorism.

  1. Wire Transfers (Rec. 16)

“Countries should ensure that originating VASPs obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers, submit the above information to beneficiary VASPs and counterparts (if any), and make it available on request to appropriate authorities.”

(INR 15, 7(b) R.16)

3.1    Transferring Transactional Data

As the infrastructure for sharing originator and beneficiary information via blockchain technology in a cost-effective manner is limited, VASPs would need to rely on existing technology to transmit beneficiary and originator information on DLT transactions (email, sms, internal databases, etc.).

Such additional steps for each individual transaction would not only generate significant administration and operational expenses, but would also be impractical when applied to the transfer of assets between custodial accounts hosted by VASPs and private wallet addresses. Implementing such a requirement would therefore require a multi-process solution depending on the nature of the recipient.

Of greater importance is the risk to an individual’s data privacy that would come with the transmission of data between an originating VASP and a beneficiary, which contains both blockchain address information and a person’s name and residential address. Given the ease of tracing transaction histories via block explorers, mandating the exchange of such data between parties with no or inadequate security framework can potentially expose personal data to privacy breaches, leading to exploitation based on a person’s discoverable transaction history, account balance, or worse.

With the understanding that the transmission of such basic information aims at providing financial intelligence units with originator and beneficiary information, in order to support the investigation of suspicious or unusual activity, we propose that the recording of such information continue to be completed by the originating VASP without the proactive transmission of the information to the beneficiary.

3.2    Obtaining Beneficiary Information

As VASPs have the right of disposal over 3rd party assets, they initiate asset transfers on behalf of their originator clients. To fulfill their due diligence obligation of AML transaction screening, the originating client could therefore be prompted by the VASP to provide beneficiary information prior to a transaction, much like in traditional banking where an originating account holder must identify the beneficiary’s IBAN, but also the name and address of the person to which funds shall be sent.

While it is true that IBANs contain more information on the beneficiary than a blockchain address, VASPs can nevertheless establish a technical solution that prompts the user to provide beneficiary name and address prior to a transfer. Whether the beneficiary’s address is private or hosted by another VASP is irrelevant, and therefore does not need to be known by the originator. AML due diligence must be conducted on the beneficiary itself, not the service provider of the beneficiary’s wallet address.

Information provided by a VASP’s client on the ultimate beneficial owner (UBO) of the destination address can easily be falsified or circumvented. However, VASPs can incentivize honesty in the disclosure of UBO in various ways, including by denying services in the event of a confirmed false declaration. The accuracy of the identity of the UBO can be confirmed by blockchain analysis service providers (e.g. Chainalysis, Elliptic, Coinfirm) or additionally, for very high risk / high value transactions, by requesting the UBO to prove their access and control of the beneficiary address by technical means, including digitally signing a message or sending a microtransaction, both which require access to the private key of the beneficiary address.

3.3    VASP Identification

The investigation of criminal activity can be supported by the identification of the originating VASP via blockchain analysis services, or alternatively in the free text field available under the various blockchain transaction types.  Both UTXO and account-based transaction types provide for very limited textual data to be added to each transaction. Requiring VASPs to add an identifier (i.e. equivalent to a bank’s BIC) to each outgoing transaction could provide law enforcement with a source for additional investigative information, a less costly endeavor than transmitting external data between parties off-chain.

3.4    Conclusion

For the above reasons, we recommend that the following changes be made to the proposed Interpretive Note to Recommendation 16:

“Countries should ensure that originating VASPs obtain and hold required and accurate originator information and required beneficiary information on virtual asset transfers, submit the above information to beneficiary VASPs and counterparts (if any), and make it available on request to appropriate authorities. It is not necessary for this information to be attached directly to virtual asset transfers. Countries should ensure that beneficiary VASPs obtain and hold required originator information and required and accurate beneficiary information on virtual asset transfers, and make it available on request to appropriate authorities. Other requirements of R.16 (including monitoring of the availability of information, and taking freezing action and prohibiting transactions with designated persons and entities) apply on the same basis as set out in R.16″

  1. Reliance on Third Parties (Rec. 17)

Increasingly, a number of blockchain-based services are providing platforms for individuals to manage their personal data, including information relating to each individual’s personal identity. Such services rely on a number of different identity validation methods, not all of which are regulated, supervised or stem from a national authority itself. Recommendation 17 relating to the Reliance on third parties should therefore be amended to allow room for innovative solution to develop in this space.  In particular, to allow alternative means of identity validation to be recognized as legally valid.  Such solutions will ensure that children born in locations where identification documentation cannot be issued or individuals whose central national identity register is no longer available due to regional instability can be included in the financial services provided by VASPs and other entities.

  1. Powers of Law Enforcement and Investigative Authorities (Rec. 31)

The CVA welcomes the ideas presented by Global Digital Finance in its input on the FATF Public Statement of April 7, 2019, in which it details under point 2.2 the process for exchanging information on Virtual Asset addresses of interest under a global private – public partnership. If implemented, such an initiative should be compatible with data privacy laws enforced within each jurisdiction.

UPDATE – Cyber Security Working Group

By | Cyber Security

On February 25th, the CVA board discussed the continuation and strengthening of the Cyber Security Working Group together with Dr. Petar Tsankov, who was asked to drive the working group as its chair. The agreed objectives and action items are as follows:

Objectives:

  • Establish security best practices in three key areas related to blockchain projects and startups:
    1. Secure product development: trade-offs of blockchain platforms in terms of security, scalability, and performance; reliability of available libraries; state-of-the-art security tools
    2. Security audits: state-of-the-art techniques for auditing projects,  reliability levels offered by different techniques, criteria to evaluate the reliability of security audits
    3. Key management: User guidance to secure usage and management of private keys and wallets
  • Educate users on best practices and state-of-the-art security products and services available on the market.
  • Raise awareness about state-of-the-art security products and services provided by Swiss companies. Promote their adoption on the Swiss and global markets.

Action items:

  • Engage the members of the Cyber Security Working Group to contribute and collaborate on the proposed security best practices
  • Set up a landing page for the Cyber Security Working Group to provide a landing page for the upcoming security best practices
  • Organize security-focused events, one of which will be hosted as part of the Crypto Valley Conference

Update – CVA Statement on Blue Trading

By | Articles, Public Announcements

We have been following up on to the news of Blue Trading allegedly being a fraudulent Mauritius based organization since it was first brought to our attention a few weeks ago. We have blocked them from any existing or potential CVA membership and have taken appropriate measures to guide affected individuals to the correct authorities. Our newly elected Ethics Officer and his team are currently investigating the case and will provide, if applicable, any details to the appropriate authorities.

We are deeply disappointed with the actions of individual companies which undermine not only the brand of the CVA, but the adoption of blockchain and digital assets as a whole.  Be assured that the matter has our full attention and are aiming to provide the assistance we can to ensure the matter is resolved.

Our actions behind the scene are not reflected at the moment on the CVA website because we are legally restricted to share any information publicly on a case still being investigated. As soon as possible we will publish any updates to the extent that is legally permissible.

While honoring our commitment to full transparency the CVA is handling this matter with respect to the principles of fairness, proportionality and the presumption of innocence.

CVA Working Group Tax / Accounting / Structuring participates in the review process of the Swiss draft VAT guidance on cryptocurrencies

By | Articles, CVA in the News

The CVA Working Group Tax / Accounting / Structuring (CVA WG TAS) has successfully submitted on behalf of the CVA board last Friday, 15 March 2019, its statement regarding the revised first draft VAT guidance on cryptocurrencies issued on 29 January 2019 by the Swiss Federal Tax Administration (SFTA).

The statement has been prepared by Markus Vogel (Chair CVA WG TAS & Tax Partner KPMG), Monika Molnar (Member CVA WG TAS & Tax Partner MME) and Thomas Linder (Member CVA WG TAS & Tax Partner MME) and submitted with the approval of the CVA board to the SFTA. This action is another example of CVA’s diligent work on improving the state of blockchain resp. the business environment in Switzerland and also accounts for the CVA community’s demand to address the current uncertainties in respect of Swiss VAT duties for blockchain businesses.

Although the authors recognise that the revision of the first draft has been a move into the right direction, several aspects of the draft VAT guidance should be reassessed. An outline of the most material revision claims by the CVA WG TAS can be found below:

  • Missing reflection on the cybernetic and autonomous aspects of a decentralised, public open-source blockchain system
  • Necessity for a functional approach towards the classification of blockchain tokens under the consideration of the synchronisation with the respective legal effects:
    • Native tokens
    • Counterparty tokens
    • Ownership tokens
  • Differentiation between crowdfunding activities such as ICOs and other transactions involving blockchain tokens (transfer of blockchain tokens) for VAT purposes
  • VAT treatment of ICOs should follow a case-by-case assessment and cannot be generalised
  • Issuance of blockchain tokens should only result in a VAT liability in case there is a supply of services or goods in return for the provision of (crypto)currencies
  • VAT treatment should basically follow the principles applied to the treatment of the referenced non-tokenised transaction(s) (e.g. voucher token should be dealt as a voucher from a VAT perspective)

You can read the entire statement from the Working Group here [in German].

The CVA WG TAS is keen on hearing back from the SFTA and looks forward to the further finalisation of the VAT guidance on cryptocurrencies. Once sufficient clarity has been reached, the CVA WG TAS will gladly organize respective community events.