{"id":4595,"date":"2015-11-19T00:00:00","date_gmt":"2015-11-19T22:04:43","guid":{"rendered":"https:\/\/staging.voelkerrechtsblog.org\/articles\/the-ecjs-first-bitcoin-decision-right-outcome-wrong-reasons\/"},"modified":"2020-12-09T13:40:53","modified_gmt":"2020-12-09T12:40:53","slug":"the-ecjs-first-bitcoin-decision-right-outcome-wrong-reasons","status":"publish","type":"post","link":"https:\/\/voelkerrechtsblog.org\/de\/the-ecjs-first-bitcoin-decision-right-outcome-wrong-reasons\/","title":{"rendered":"The ECJ\u2019s first Bitcoin decision"},"content":{"rendered":"<p style=\"text-align: justify;\">On 22 October 2015, the Court of Justice of the European Union issued its first ever <a href=\"http:\/\/curia.europa.eu\/juris\/document\/document.jsf?text=&amp;docid=170305&amp;pageIndex=0&amp;doclang=en&amp;mode=req&amp;dir=&amp;occ=first&amp;part=1&amp;cid=604646\">ruling on the digital currency known as Bitcoin<\/a>. For those who haven\u2019t been following this phenomenon, Bitcoin was the first and so far remains the most commercially successful of the recent wave of \u2018cryptocurrencies\u2019\u2013 a term defined by the online <a href=\"http:\/\/www.oxforddictionaries.com\/definition\/english\/cryptocurrency\">Oxford Dictionary<\/a> as \u2018a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank\u2019.<\/p>\n<p style=\"text-align: justify;\"><!--more--><\/p>\n<p style=\"text-align: justify;\">The latter element helps explains why cryptocurrencies and their derivative technologies may well prove incapable of effective state-based regulation. If one considers in addition the facts that the technologies are:<\/p>\n<ul style=\"text-align: justify;\">\n<li>decentralized (over peer-to-peer networks);<\/li>\n<li>globally distributed (like the internet, but without geospatially-linked IP addresses); and<\/li>\n<li>pseudonymous (thanks to the encryption),<\/li>\n<\/ul>\n<p style=\"text-align: justify;\">it\u2019s easy to see why they might be natural candidates for some kind of international or transnational rather than national regulatory regime. This suggestion quickly gets tricky, of course; it is difficult to think of many policy areas more central to the historical concept of sovereignty than control over the nation\u2019s money supply. Still, the short annals of cryptocurrency uses and abuses suggest that some kind of cross-border regulation of the technologies is warranted.<\/p>\n<p style=\"text-align: justify;\">In point of fact, until this month\u2019s <a href=\"http:\/\/www.economist.com\/news\/leaders\/21677198-technology-behind-bitcoin-could-transform-how-economy-works-trust-machine\">Economist cover story<\/a> painted virtual currencies in a considerably more favorable light, most people had heard about them only in connection with illicit activities. Last year, for example, a group of Swiss artists made the news when their robot \u2018<a href=\"http:\/\/www.cnbc.com\/2015\/04\/21\/robot-with-100-bitcoin-buys-drugs-gets-arrested.html\">Random Darknet Shopper<\/a>\u2019 \u2013 whom they had supplied with a weekly budget of $100 worth of Bitcoins \u2013 managed to purchase \u2018a Hungarian passport, Ecstasy pills, fake Diesel jeans, a Sprite can with a hole cut out in order to stash cash, Nike trainers, a baseball cap with a hidden camera, cigarettes and the \u201cLord of the Rings\u201d e-book collection\u2019, all before being arrested in a sting operation by the St. Gallen police. Less entertaining reports of cryptocurrency uses (like <a href=\"http:\/\/www.theguardian.com\/technology\/2015\/may\/29\/silk-road-ross-ulbricht-sentenced\">drug trafficking<\/a>, <a href=\"http:\/\/www.ibtimes.co.uk\/bitcoin-tumbler-business-covering-tracks-world-cryptocurrency-laundering-1487480\">money laundering<\/a>, and <a href=\"https:\/\/www.cryptocoinsnews.com\/tag\/isis\/\">terrorist financing<\/a>) unfortunately also abound.<\/p>\n<p style=\"text-align: justify;\"><strong>The EJC case<\/strong><\/p>\n<p style=\"text-align: justify;\">It may therefore come as a surprise that the CJEU\u2019s first foray into this veritable digital revolution involved something as mundane as the <a href=\"http:\/\/eur-lex.europa.eu\/legal-content\/EN\/TXT\/?uri=uriserv:l31057\">European VAT directive<\/a>. A Swedish national, Mr. Hedqvist, sought to open up a company in Sweden enabling customers to exchange traditional currencies for Bitcoins and vice versa.\u00a0 The company planned to make its money in the usual manner of currency exchanges:\u00a0 on the margin between bid and ask prices. Mr. Hedqvist had obtained a preliminary opinion from the Swedish Revenue Law Commission stating that the services he intended to provide would be exempt from VAT under Article 135 of the European VAT Directive.\u00a0 The Swedish Tax Authority disagreed, however, and appealed the matter to the Supreme Administrative Court of Sweden.\u00a0 Uncertain as to how to apply the Directive\u2019s exemptions to virtual currencies, the Swedish court referred the matter to the CJEU for a preliminary ruling.<\/p>\n<p style=\"text-align: justify;\">To paraphrase paragraph 21 of the CJEU\u2019s judgment, two questions were referred:<\/p>\n<ol style=\"text-align: justify;\">\n<li>Is the exchange of virtual currency for traditional currency and vice versa a service effected for consideration under Article\u00a02(1) of the VAT Directive?<\/li>\n<\/ol>\n<ol style=\"text-align: justify;\" start=\"2\">\n<li>If so, should Article\u00a0135(1) of the Directive be interpreted to mean that such transactions are nevertheless tax exempt?<\/li>\n<\/ol>\n<p style=\"text-align: justify;\"><strong>The Court\u2019s findings<\/strong><\/p>\n<p style=\"text-align: justify;\">Not surprisingly, the Court answered the first question in the affirmative.\u00a0 Buying and selling a currency on margin is a form of supply of services for consideration.\u00a0 This, as the Court pointed out, was fairly obvious under the ECJ\u2019s prior settled case law. Hence, in principle, cryptocurrency trading should be subject to VAT unless it falls under one of the Directive\u2019s enumerated exemptions.<\/p>\n<p style=\"text-align: justify;\">But here\u2019s where the analysis gets interesting.\u00a0 Notice that embedded in the Court\u2019s answer to the first question is the conclusion that Bitcoin is indeed a currency \u2013 and <u>not<\/u>, as some have argued, a commodity, a speculative asset, a contract or property right, or some other form of legally enforceable claim against others.\u00a0 According to paragraph 24 of the Court\u2019s opinion:<\/p>\n<p style=\"text-align: justify;\">\u201cthe \u2018bitcoin\u2019 virtual currency with bidirectional flow, which will be exchanged for traditional currencies in the context of exchange transactions, cannot be characterised as \u2018tangible property\u2019\u2026 given that, as the Advocate General has observed\u2026 that virtual currency <em>has no purpose other than to be a means of payment<\/em>.\u201d (Emphasis added.)<\/p>\n<p style=\"text-align: justify;\">This last phrase will no doubt come as a surprise to the many individuals and firms who have already <a href=\"http:\/\/www.bloomberg.com\/bw\/articles\/2013-04-10\/meet-the-bitcoin-millionaires\">made and lost small fortunes investing in Bitcoin<\/a>, using it as a hedge against real currency fluctuations, and <a href=\"http:\/\/www.economist.com\/news\/briefing\/21677228-technology-behind-bitcoin-lets-people-who-do-not-know-or-trust-each-other-build-dependable\">layering all kinds of for-profit products and services<\/a> on top of the Bitcoin <a href=\"https:\/\/en.wikipedia.org\/wiki\/Block_chain_%28database%29\">blockchain<\/a> (the latter being the underlying technological innovation that makes the whole thing work).\u00a0 The same can be said of pretty much all other cryptocurrencies in use today.\u00a0 They can and do serve as means of payment, of course, but it does not therefore follow that their purposes and uses stop there.<\/p>\n<p style=\"text-align: justify;\">The gross oversimplification which the Court indulged in with its sweeping statement becomes even more obvious when considering how it answered the second of the referred questions:\u00a0 whether any of the VAT Directive\u2019s article 135(1) exemptions should apply to a cryptocurrency exchange like the one proposed by Mr. Hedqvist.<\/p>\n<p style=\"text-align: justify;\">Here, after paying homage to the usual interpretive niceties, the Court followed the <a href=\"mailto:http:\/\/eur-lex.europa.eu\/legal-content\/EN\/TXT\/%3Furi=CELEX:62014CC0264\">Advocate General\u2019s opinion<\/a> in homing in on article 135(1)(e) of the VAT Directive as the relevant provision, which reads:<\/p>\n<p style=\"text-align: justify;\">\u201c(1) Member States shall exempt the following transactions:\u00a0[\u2026]\u00a0(e)\u00a0transactions\u2026 concerning currency, bank notes and coins used as legal tender, with the exception of collectors\u2019 items\u2026 which are not normally used as legal tender or coins of numismatic interest\u201d.<\/p>\n<p style=\"text-align: justify;\">The source of the Swedish court\u2019s confusion is easy to spot upon reading this text.\u00a0 The difficulty lies in the words \u201clegal tender\u201d.\u00a0 While it may be reasonable to regard Bitcoin as a type of currency (even if from a technological standpoint it is not <em>only<\/em> that), it is quite plainly not <em>legal<\/em> tender.\u00a0 Neither Sweden nor any other country in the world yet accepts it as such.<\/p>\n<p style=\"text-align: justify;\">The CJEU sidestepped this problem with a classic European law move:\u00a0 linguistic differences.\u00a0 The AG had noted that although the German version requires all of the exchanged currencies to be legal tender in order to qualify under the exemption, the English version might allow for only one of them to be legal tender, the Finnish version might require only bank notes and coins (but not currencies) to be legal tender, and the Italian version might not care about the legal status of any of them.\u00a0 It does not take a doctorate in EU law to recognize that when the Finnish translation is mentioned, we have entered the territory of purposive interpretation.\u00a0 On this basis, the Court held that Mr. Hedqvist\u2019s transactions would be VAT exempt.<\/p>\n<p style=\"text-align: justify;\">Fair enough.\u00a0 The Directive, after all, dates from 2006, and Bitcoin didn\u2019t enter circulation until 2009.\u00a0 The Court had little choice but to come up with a sensible way of applying the former to the latter.<\/p>\n<p style=\"text-align: justify;\"><strong>Parsing the reasoning<\/strong><\/p>\n<p style=\"text-align: justify;\">Slightly more troubling, however, was the Court\u2019s speedy disposal of paragraphs (d) and (f) of article 135(1).\u00a0 Those paragraphs exempt:<\/p>\n<p style=\"text-align: justify;\">\u201c(d) transactions\u2026 concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments\u2026<\/p>\n<p style=\"text-align: justify;\">(f) transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods\u2026\u201d<\/p>\n<p style=\"text-align: justify;\">As it happens, Bitcoin is a type of distributed ledger which can be used to keep track of all of the things mentioned in (d) \u2013 in other words not only Bitcoin transactions themselves, but also <a href=\"http:\/\/www.americanbanker.com\/bankthink\/how-cryptocurrencies-could-upend-banks-monetary-role-1057597-1.html\">non-Bitcoin \u201cdebts, cheques and other negotiable instruments<\/a>\u201d.\u00a0 The Bitcoin network can likewise function as a means of establishing title to all of the things mentioned in (e).\u00a0 The government of Honduras, for example, is busy figuring out how to <a href=\"mailto:http:\/\/cointelegraph.com\/news\/114280\/honduran-govt-to-build-land-registry-initiative-on-bitcoin-blockchain\">transition all of the country\u2019s real property titles onto a public blockchain<\/a>.\u00a0 <a href=\"https:\/\/www.cryptocoinsnews.com\/chain-partners-nasdaq-bring-block-chain-technology-private-market\/\">Nasdaq is using private blockchains to keep track of the assets traded<\/a> on its private shares market.<\/p>\n<p style=\"text-align: justify;\">A recent <a href=\"mailto:http:\/\/www.weforum.org\/reports\/deep-shift-technology-tipping-points-and-societal-impact\">World Economic Forum survey<\/a> even predicted that by 2023 the first governments will begin collecting taxes via blockchains, and by 2025 over 10% of global gross domestic product will be stored on blockchains.\u00a0 There are, in short, many possible uses of the technology \u201cother than to be a means of payment\u201d.\u00a0 Some of those uses may well be VAT exempt under various provisions of the European VAT Directive; others <a href=\"https:\/\/www.irs.gov\/uac\/Newsroom\/IRS-Virtual-Currency-Guidance\">won\u2019t be exempt at all<\/a>.<\/p>\n<p style=\"text-align: justify;\">The CJEU\u2019s opinion in the Hedqvist case is thus likely to be only the opening regional salvo in the barrage of global legal quandaries to come.\u00a0 It is the lot of courts to pour new wine into old wine skins.\u00a0 Lawmakers, policymakers, and the academics who advise them, on the other hand, should start thinking long and hard about whether what we are drinking is wine at all anymore.<\/p>\n<p>&nbsp;<\/p>\n<p style=\"text-align: justify;\"><em><a href=\"http:\/\/www.mpil.de\/en\/pub\/institute\/personnel\/academic-staff\/jmaupin.cfm\">Dr. Julie Maupin<\/a>, JD\/MA (Yale) is a Senior Researcher at the Max Planck Institute for Comparative Public Law &amp; International Law in Heidelberg.<\/em> \u00a0<em>An earlier version of this post was published on <a href=\"http:\/\/verfassungsblog.de\/\">Verfassungsblog<\/a>.\u00a0<\/em><\/p>\n<p>&nbsp;<\/p>\n<blockquote>\n<p style=\"text-align: justify;\">Cite as: Julie Maupin, \u201cThe ECJ\u2019s First Bitcoin Decision: Right Outcome, Wrong Reasons?\u201d,\u00a0<em>V\u00f6lkerrechtsblog<\/em>,\u00a0\u00a019 November\u00a02015, doi: 10.17176\/20170925-174324.<\/p>\n<\/blockquote>\n","protected":false},"excerpt":{"rendered":"<p>On 22 October 2015, the Court of Justice of the European Union issued its first ever ruling on the digital currency known as Bitcoin. For those who haven\u2019t been following this phenomenon, Bitcoin was the first and so far remains the most commercially successful of the recent wave of \u2018cryptocurrencies\u2019\u2013 a term defined by the [&hellip;]<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[6639],"tags":[],"authors":[5973],"article-categories":[6000],"doi":[5974],"class_list":["post-4595","post","type-post","status-publish","format-standard","hentry","category-uncategorized","authors-julie-maupin","article-categories-article","doi-10-17176-20170925-174324"],"acf":{"subline":"Right outcome, wrong reasons?"},"meta_box":{"doi":"10.17176\/20170925-174324"},"_links":{"self":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts\/4595","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/comments?post=4595"}],"version-history":[{"count":0,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/posts\/4595\/revisions"}],"wp:attachment":[{"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/media?parent=4595"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/categories?post=4595"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/tags?post=4595"},{"taxonomy":"authors","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/authors?post=4595"},{"taxonomy":"article-categories","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/article-categories?post=4595"},{"taxonomy":"doi","embeddable":true,"href":"https:\/\/voelkerrechtsblog.org\/de\/wp-json\/wp\/v2\/doi?post=4595"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}