This article is meant to be a legal doctrinal analysis on one minor aspect of cryptocurrencies and blockchain. We would like to approach this subject from the legal point of view, disregarding technical aspects or the impact of this technology in our lives. Crypto-sites are fully engaged to providing this sort of information enabling us to resort to them and go deep into the many possibilities this new disrupting technology has brought into our lives. Taxation will not be analyzed deeply as well. The question here is: (from the legal point of view) what is a cryptocurrency?
Brief technical description
Considering the technical aspects (and as far as I know) cryptocurrencies are blockchains with unique algorithmic codes (similar to bank notes serial numbers), virtually stored and securely recorded in a blockchain, that can be traced by means of a specific program and can be transferred and validated virtually. Cryptocurrencies are one of the first uses of these new platforms which value can be converted into legal currencies (dollar for example). In principle, digital currency was purported to replace cash electronically.
This instrument, which is periodically issued through a technique known as “mining” (but in a moderate way compared to Argentina currency issue) quotes in several markets with big fluctuations due to the fact that “it is not backed by bank reserves”(according to some opinions) and because it does not depend on any jurisdiction, opposed to traditional national currencies. Considering these basic aspects, we can say it is a new type of asset, different from shares, legal tenders, commodities… and, like any new regime, requires to be legally outlined.
Crypto transactions contain public data (such as amounts, confirmations and identification of the transferred blocks) and private data (identities of the parties involved) and are carried out without monitoring by Banks or Governmental entities. Transfers are traceable and, at the same time, anonymous and irreversible. The cryptocurrency ecosystem is threatened all over the world by cyber attacks that block the infected devices allowing cyber criminals to demand the payment of a ransom (“ransomware”) in order to release the unblock code.
Within this context, security forces and anti-money laundering entities are focused to dealing with several risks emerged from crypto platforms, especially considering the market growth (when launched in 2011 Bitcoins quoted USD 0,10, today quote USD 18,000 approx.). Considering the above, it is of the utmost importance to set tax guidelines for the crypto market worldwide, estimated in USD 270billion.
Taxation on cryptocurrency was initially introduced with the Tax Amendment of 2017 falling in the category of disposition of assets within the Income Tax.
“Virtual currency” can be defined – according to UIF (Financial Information Unit) Resolution 300/2014 – as “… the digital representation of value that can be traded in e-commerce and serves as a medium of exchange and/or a unit of account and/or a store of value, with no legal tender status in any jurisdiction and is neither issued nor guaranteed by any government or jurisdiction. In this sense, virtual currencies differ from e-money which is a mechanism by which ‘fiat currencies’ are digitally transferred, i.e., legal tender can be electronically transferred”. In my opinion, a vague definition which could even leave cryptocurrencies aside from it. Anyway, it was important for the 2010’s since they are clearly distinguished from transfers in dollars, euros or in any other currency. Same Resolution applies to Obligated Subjects within the scope of the Financial Entities Law, public companies, etc. who are obliged to report all transactions made with virtual currencies.
This definition was complemented by GAFI Grupo de Acción Financiera Internacional (FATF Financial Action Task Force) stating that “digital currencies” can be defined as “…. a digital representation of any virtual currency (non-fiat currency) or of e-money (fiat currency)…” (GAFI, 2014) (non-binding concept in Argentina).
The Comisión Nacional de Valores (CNV) (National Securities Commission) has given poor information on this issue focusing on the high risks due to the volatile market. The Banco Central de la República Argentina (BCRA; Central Bank of the Argentine Republic) has given some notions on virtual currencies in 2014 upon issuing a rule confirming that they are not issued by currency authorities and re-affirming the lack of legal tender status; also, cryptocurrencies have been mentioned in other rules and resolutions but with few arguments to be able to set a lawful guideline.
The growing expectations on cryptocurrencies market in Argentina and the many investment opportunities involved have opened the path for the Argentine authorities to start publishing general information on the site www.argentina.gob.ar reflecting as well the risks involved (in full adherence to the CNV). However, the lack of legal framework still remains.
In spite of the exchange restrictions in force, Argentine investors can buy cryptocurrencies. For the time being, it is possible to buy in pesos at the exchange rate of the dollar con liquidación (this dollar is an instrument by means of which it is possible to exchange pesos by dollars abroad), still pending the final decision on this issue by the exchange control authority. Despite the fact that the BCRA rules on cryptoassets it is of the utmost importance to define the legal status thereof in order to set forth the scope of the transactions involved and to reinforce legal security conditions (additional to professional reliable advice of lawyers and accountants).
As mentioned before, the disposal of cryptocurrencies is subject to the Income Tax given their treatment as intangible assets (like a brandname but still there is no definition for “digital currency”). There are two methods to determine the amount to be paid: the variation of the cryptocurrency against the dollar or the one of the dollar against the peso within the period of time elapsed between the purchase and sale of the asset. Since this article is not purported to be an accounting report we will only mention that cryptocurrencies purchase/sale transactions are subject to the Income tax depending on the settlement thereof -whether local or foreign transactions- and the type of investor or trader involved (individual or legal person). Due to the lack of tax guidance regarding tax rates, we suggest to seek for professional accounting advice. Also, due to the lack of definition by the Consejo Profesional de Ciencias Económicas (Professional Board of Public Accountants) regarding Personal Property Tax, cryptocurrencies are generally excluded from this tax since they are treated as intangible assets. Finally, the crypto market is not subject to the payment of IVA Impuesto al Valor Agregado (VAT Value Added Tax).
The analysis of the tax aspects helped us to approach a definition for cryptoassets, of basic importance for the purpose of this article. Notwithstanding the lack of legal status for cryptocurrencies worldwide, there are some interesting definitions as follows: according to the Justice Court of the European Union, cryptocurrencies are defined as “non-traditional currencies” (interpreted like a different type of money). In the United States, IRS (tax authority) treats them as cryptoassets (in full adherence to AFIP treatment). Following this line, Chile has concluded they are digital assets and French jurisprudence refers to bitcoin as a fungible and intangible asset. To conclude, Japan treats all cryptocurrencies as “cryptographic assets”.
Nature of the goods
Considering the uncertainty and no legal framework for crypto in Argentina, it will be necessary to adapt current operation standard documents to the rules in force. Under section 16 of the CCCN (National Civil and Commercial Code) cryptocurrencies are considered “goods” given their economic value, but not “things” since they are not material; holders of cryptocurrencies are entitled to the rights over them and make up their assets. The first obstacle we can find is that in the Civil Code “things” are divided into categories but not “goods”.
Considering that we are trying to approach a definition for such an omission of law, we assume that the categories of things may be applied by analogy to intangible assets. Even more considering the provisions of section 16 which reads “The dispositions referring to things are applicable to the energy and to natural forces susceptible of being put at the service of mankind”. It can be assumed that the legislator intended to apply said provisions to other analogous cases; pursuant to section 764, rules relative to giving things shall apply “to those cases where the performance of an obligation consists of transmitting or making available to the creditor, a good that is not a thing”.
Following with this exercise, things could be defined as movable property (section 227), divisible (section 228), primary (229), consumable (231), fungible (232), capable of producing benefits (233) within commerce (by contrast, 234) and of individuals (238). These definitions are of vital importance when celebrating contracts that encompasses this type of assets.
Obligations to give
A more detailed analysis in the matters of liability and obligations will reveal that any obligation undertaken to give cryptocurrencies shall differ from the obligation to give money (in spite of our belief). The only similarities are: it is an obligation to give determinate goods (even if not “things”), deliverable through tradition (section 750) of interchangeable things (it is the same to deliver one bitcoin for another).
Under section 765 the obligations to give money shall only apply to currency of legal tender. Any other currency shall be considered as an obligation to give a specific thing. As cryptocurrencies are not even considered “currencies”, is has been interpreted as an obligation to give or deliver specific goods.
Settlement in pesos
Other aspect for debate is the option to settle in currency of legal tender. As in the case of contracts executed in foreign currency, part of section 765 is contrasted to section 766 that reads “the debtor is obliged to deliver the corresponding quantity of the specified kind”. It is up to the ability of the person drafting the contract and to the agreement reached by both parties if the obligation can -in effect- be fulfilled in pesos, in dollars, exchange rates applied and other details that may impact disproportionally in the transaction amount. Depending on the site, conversion rates BTC/USD may vary considerably. The difference between BTC conversion at a low official dollar exchange rate in order to settle in pesos may differ up to 100% from the amount in hard currency to be paid in USD notes at a higher BTC conversion rate. That is why it is so important to rest on reliable professional advice when transacting in cryptocurrencies.
Interest in cryptocurrencies
As a general rule, interest shall always be paid in currency of legal tender, but the Civil and Commercial Code enables the parties to agree upon on special conditions, with a clear distinction between compensation, interest on arrears and penalty interest. It is generally agreed upon that interest shall be paid in currencies of legal tender but it is not customary to agree on payment of interest other than in currencies or things (since it would be nearly impossible to set forth payment in kind and relative aspects).
There are basically two types of interests: those derived from the non-compliance to deliver cryptocurrencies and interests accrued as agreement conditions (such as loans). In both cases, contracts should be drawn-up by reliable professionals and within the regulatory framework to enforce payment of interests in the conditions set forth; on the contrary, the debtor could choose to pay them in pesos at the official exchange rate.
Types of Agreements
Crypto legal nature is relevant in order to determine the most suitable type of agreement to be executed involving cryptocurrencies. Apart from payments in crypto (analyzed further on), the nature of these assets affects the nature of the contracts where crypto are the subject-matter. The analysis of the loan agreements is specially relevant for this issue.
Pursuant to the Civil and Commercial Code there are two types of loans: mutuum and commodatum agreement. The mutuum is commonly used for loans of money and the second one for another type of property. In the Comparative Law there are lot of definitions but we will analyze those adopted by our Civil Code.
Under section 1525 mutuum is defined as “A type of loan agreement pursuant to which the lender delivers to the borrower a certain quantity of fungible things and the borrower –in return- binds himself to return to the lender same amount of the same kind and quality.” With regards to the commodatum agreement, it is defined under section 1533 as “pursuant to commodatum, the bailer delivers to the bailee a non-fungible thing, movable or immovable, for gratuitous use, binding himself to return to the bailer the same thing received.”
The Code only refers to things excluding other chattels and property, but –as mentioned before-the provisions of “things” can apply by analogy to cryptocurrencies. Focus is made on the type of things and the term “money” is left aside, it only refers to fungible or non-fungible things. In this sense –as mentioned before- one bitcoin is equal to another, therefore it is assumed that any loan of cryptocurrencies should be considered as mutuum. Commodatum conditions shall only apply if expressly agreed upon under the provisions of section 1534: “The loan of fungible things shall only be governed by the commodatum provisions if the bailee binds himself to return same things received”. This could only apply in limited cases such as giving cryptocurrency as security for compliance. Another important aspect of the Code definition is that bailment is always gratuitous whilst the mutuum is presumed to be onerous except as otherwise agreed.
This issue is particularly complex since payments are normally made in legal tender though payment in kind can be agreed. In any case, always things are given as settlement and it is not customary to deliver other sort of goods or chattels. From the commercial point of view, needless to say, if someone transfers a certain amount in cryptocurrencies in exchange for goods or services, is paying for them; but, as commented before, the regulatory framework concerning this new technology remains uncertain. Payment through crypto urges an overall regulation and redefinition of goods, things, currencies and payment instruments.
Payment is defined in the Civil Code under section 865 as “the performance of the subject-matter of an obligation”. This ample concept enables us to deduce that, if the obligation is agreed in cryptocurrency, payment as such should be acceptable and considered as a valid means of payment. However, the allocation process can be more complex.
Payment shall be considered to have extinguished an obligation if it is identical (same obligation), complete (total as agreed), punctual (at the time agreed) and at the proper place (agreed place). Any obligation shall be deemed extinguished whenever payment satisfies creditor’s interest.
Notwithstanding the Code sets forth the evidentiary aspect of payment under section 895, it is advisable to have supporting evidence whenever payments are made, to apply or allocate the same and to make clear if such payment extinguishes the obligation or not. These emerging trends of new technologies became massified after their regulation. So, in view of this uncertain market, it is advisable to have documentary support in traditional formats (like a receipt to which debtor is entitled upon making a payment). Specially in obligations to give a specific thing, burden of proof rests on the party invoking payment.
If the debtor fails to allocate expressly any payment by any reliable and trustworthy means, the creditor may do so. To conclude, we strongly suggest to keep documentary evidence of allocations and receipts and of any other type of discharging document when transacting with cryptocurrencies (specially considering that such payments will be subject to variation depending on the cryptocurrency quote in dollars and the applicable exchange rate dollar/peso within such a volatile investment market).
Diego J. Nunes
Estudio Nunes & Asoc.