Most people think they know what crypto currencies and blockchain are. But do they really know how it will impact business and what are the ramifications for the future? Essential Business eavesdropped on a webinar organised by the British-Portuguese Chamber of Commerce who invited Hugo Volz Oliveira from the instituto new.economy and lawyer Fernando Pereira Pinto from RMV & Associados to find out more.
The Portuguese Government rejected two bills to tax crypto in 2022, but a new bill is now on he books to tax and regulate crypto assets starting from this year.
“Under current Portuguese tax law, capital gains from crypto investments are seen as a form of payment — a currency, but not an asset — and are not taxed so long as they do not serve as an individual’s main source of income. This is a result of a lack of legislation rather than an active policy by Portuguese lawmakers”, says Hugo Volz Oliveira, secretary-general of the New Economy Institute, a Portuguese nonprofit founded by leading Web3 companies and backed by the Near blockchain, the web browser Brave and several Portuguese universities.
Hugo says that the New Economic Institute is a fintech and crypto sector lobbying association which strives to keep Portugal crypto friendly and help consolidate its position as the crypto and blockchain hub which it has become in recent years.
This success was thanks, in part, to the Covid-19 pandemic and the Non-Habitual Resident tax regime. However, it was also due to the lack of a clear taxation framework resulting in a lot of expats deciding to move to Portugal and setup their companies and tap into the local talent scene.
In 2022 an amendment was put forward that would compel tax authorities to tax capital gains from personal crypto investments beyond €5,000 ($5356).
The other was to have imposed a flat rate tax of 28% on all crypto gains, which is the normal capital gains tax in Portugal for residents. But final version of the 2022 budget, didn’t include these bills when approved by the Portuguese parliament.
Then things changed. The Government announced a new proposal for taxing cryptos in October 2022, which was to be included in the budget for 2023. However, Portuguese Finance Minister Fernando Medina decided to hold off until policymakers in Brussels reached a new European consensus on the matter.
That consensus was finally reached last Thursday when the EU Parliament voted 517 in favour and 38 against to pass the Markets in Crypto Act, or MiCA. The legislation, which seeks to reduce risks for consumers buying crypto assets, will mean providers can become liable if they lose investors’ crypto-assets.
In Portugal, under Category C of its tax regime, sales of crypto owned for less than 365 days will now be taxed at a flat tax rate of 28% on the capital gain when made for fiat money, or at progressive tax rates between 14,5% and 53% if the income is received by a Portuguese tax resident who choose to aggregate it.
The New Economy Institute, which Hugo Volz Olivera is the Secretary and a Founding member, was created in 2021 to present a single “face” to the government with clear and coherent arguments. However, its member had been working in the space even before Bitcoin was created in 2009.
The association started with just 20 members, but has been growing rapidly in the Portuguese community. Its strategy has three vectors: to educate and influence key stakeholders and the public, transform and shape favourable regulation and legislation, and help build strong relations both locally and globally.
“We work with crypto and some of our customers are really interested in knowing what the future holds but this is a journey on which we are all learning together,” he says.
But for those who are still new to the world of crypto, it is worth starting off by explaining some of the basic terms.
What is blockchain?
Blockchain is the most popular application of distributor ledger technology. It is just a way to keep a ledger of entries for accounting in a distributed way with all participant guardians in the network keeping a copy of that ledger to ensure they agree its content. Basically, it is the latest evolution of accounting. It is a linear change that organises transactions in blocks of transactions lining them through mathematical formulae called hash (Grouped into hash tables) and using public key encryption (cryptography). It is tamper proof.
The core idea is not actually new, but the technology is. For example, in Medieval times tally sticks with notches were widely used as an alternative to currency to record bilateral exchange and debts, particularly in England when silver currency ran short in certain reigns (Henry IV and V for example).
The longer part was called ‘stock’ and was given to the party which had advanced money (or other items) to the receiver. The shorter portion of the stick was called a ‘foil’ and was given to the party which had received the funds or goods.
Using this technique each of the parties had an identifiable record of the transaction. It is where the word ‘stock’ originates from and the idiomatic saying ‘it just doesn’t tally up’ when someone is telling a lie or half truth, or that something doesn’t make sense.
What is Bitcoin?
Bitcoin (BTC) is a cryptocurrency, a virtual currency designed to act as a currency or measure of value and a form of payment outside the control of any one person, group, or entity, thus removing the need for third-party involvement in financial transactions. The first prototype was created in 2009. However, it is NOT fiat money.
“Bitcoin was not always secure. Today it is because of the size of the network and it is almost impossible to hack,” says Hugo.
What is crypto?
Crypto is a digital currency in which transactions are verified and records maintained by a decentralised system using cryptography, rather than by a centralised authority like a central bank. Decentralised cryptocurrencies such as Bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation.
Crypto started with Bitcoin, a concept unveiled to the world in 2009 in the aftermath of the financial crisis. Satoshi Nakamoto is the pseudonym used by the creator (or creators) of Bitcoin. The identity of Satoshi Nakamoto is not publicly known. One of the first major public investigations ended with Dorian Nakamoto being identified as Bitcoin’s creator, but he continues to decline the claim.
Put simply, it is just a computer network in a similar way that the Internet is also a computer network. It enables the user to exchange the Bitcoin or other digital currencies without having to rely on an intermediary such as a bank. It is why it is sometimes referred to as peer to peer digital cash.
What made it different from previous peer-to-peer transactions was that it was the first to solve a number of issues related to trust and it did so through Blockchain technology.
Today there are many other cryptocurrencies which are smaller, the most commonly known being Etherium, Dodge, Tether, BNP, USDC, XRP, Cardano and OKB.
What are miners?
These are the people validating the blocks while mining is the process of creating new digital coins with miners being incentivised to act in the interest of the network.
Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger’s maintenance and development. “Mining” is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.
Are crypto currencies money?
Although crypto it is called a currency, they are actually tokens or units of measure or units of account and not money from a legal perspective. The only thing that can be called money in the Euro Zone is the Euro for now. When you owe money, you have a specific type of currency units that can be used to settle the debt. For example, you cannot pay your taxes in bitcoin. Cryptos can be seen as a store of value but not actual money because it is not backed by any assets, such as gold or silver — but neither is the US dollar. However, the US dollar is backed by the federal government and the Euro by the European Central Bank. Cash money and crypto are different because crypto is decentralised and not backed by any government or institution.
Crypto coins and tokens – what is the difference?
Crypto coins are designed to be used as currency, while crypto tokens are intended to represent an interest in an asset and facilitate transactions on a blockchain.
Crypto tokens and cryptocurrencies share many similarities, but cryptocurrencies are intended to be used as a medium of exchange, a means of payment, and a measure and store of value.
Crypto tokens, on the other hand, are often used to raise funds for projects and are usually created, distributed, sold, and circulated through an initial coin offering (ICO) process, which involves a crowdfunding round.
The single most important concern about crypto tokens is that because they are used to raise funds, they can be and have been used by scammers to steal money from investors. People like Hugo and other experts in the crypto world are working hard at different levels to ensure this can’t happen.
Crypto tokens operate on a blockchain, which acts as a medium for the creation and execution of decentralised apps and smart contracts. The tokens are used to facilitate transactions on the blockchain. In many cases, tokens go through an ICO and then transition to this stage after the ICO completes.
While crypto tokens generally facilitate transactions on a blockchain, they also can represent an investor’s stake in a company or serve an economic purpose, just like legal tender. This means token holders can use them to make purchases or trades just like other securities to make a profit.
Non-fungible tokens are unique cryptographic tokens. They are digital watermarks that can be used to establish provenance and ownership of many types of assets, from tweets to artwork and real estate.
The market for NFTs is still nascent. As physical assets increasingly become digitised, it is expected to multiply in the future.
Physical money is fungible. It can be exchanged at parity: one unit of physical currency is always equal to another unit. This fungibility characteristic makes money an ideal medium for daily transactions.
As their name indicates, non-fungible tokens cannot be exchanged at parity with each other. Instead, they are used for unique artefacts with unequal valuations. For example, it is difficult to establish the price for a valuable painting.
Non-fungible tokens are ideal for business transactions that do not have the frequency or rapidity of daily transactions. For example, an NFT can be used to digitally encode attributes pertaining to paintings to speed up the transactions, confirming when the painting was made, if there are counterfeits, and if it has the artist’s signature.
The new European regulations will not be viewing NFTs as crypto assets unless they are issued in a way that they are seen as regular tokens, in which case under the new MiCA regulation they will be viewed under the crypto-asset category.
One thing that will become mandatory when creating a cryptocurrency is the issuance of a comprehensive document outlining the technical and economic aspects of a specific cryptocurrency. This is called a white paper. (Nothing to do with UK parliamentary legal bills)
It is typically written by the cryptocurrencies development team or core members and serves as a guide for potential investors, miners and users.
A good white paper should explain how the technology will work, so if you can’t articulate what problem the project solves and how it does so, the white paper is not considered good. You need to lay out a compressive description of the activity to provide to your customers.
What is MiCA?
The EU’s new MiCA regulation, which demands these white papers, is a way to protect customers and the financial institutions against abuses and illicit activities that up until now have not been regulated.
If you go over certain limits of crypto transactions, either as a stable coin or project, there are certain restrictions aimed at mitigating system risk by ensuring that the systems are distinct and ensure that crypto does not negatively impact the banks as was the case with Silicon Valley Bank.
The impact for MiCA in Portugal is that if you get a licence in Spain, you can operate in Portugal. If you get one in Portugal, you can operate in the Netherlands and the other EU countries, which will incentivise efficient licensing processes.
Either way, MiCA means that regulation has arrived and is here to stay, but regulations are also becoming more complex and lawyers will be of the essence to give legal advice.
While until now crypto currencies are not money, under the new MiCA framework with stablecoins* (*A cryptocurrency which has a value that is pegged or tied to another currency, commodity or financial instrument) and e-money being issued on the blockchain, it will, in the opinion of Fernando Pereira Pinto of RMV & Associados, become money eventually and could become a new norm for settling transactions.
How do businesses account for crypto price volatility?
Just as in finance where you have swaps to deal with financial volatility, in crypto it is the same. You can short your long positions on future markets and so are hedged. All of the traditional financial instruments have now been developed in crypto if businesses don’t want the volatility. In other words it is like any other financial or non-financial asset and companies need to balance and spread the risk in their portfolios accordingly.
Is crypto a valid payment method in Portugal?
Fernando Pinto stresses it is not legal tender or an official currency and you cannot pay your taxes with it. However, if someone accepts it as a means of payment it can be used to settle a transaction.
How is crypto taxed in Portugal?
Although a tax framework was approved for taxing companies dealing in crypto assets in November 2022, to come into practice in 2023, until December that year there had been no clear tax regime for the taxation of crypto assets for individuals. “We had not got the news that the Government and tax authorities wanted to change the situation regarding IRS tax on capital gains made from crypto transactions by individuals, despite some things like gold, art and wine trading not being subject to individual IRS taxes”, says Hugo.
“Portugal was forced by the European Union to close the loophole since most of the other countries in the EU had a tax framework”. Slovenia was the only country apart from Portugal to have 0% taxes, while Bulgaria and Rumania had 10% taxes on individual capital gains on crypto asset transactions, with Croatia at 12%, and Czech Republic, Greece and Hungary at 15%”, he adds.
For the future the EU wants to create a harmonised tax regime for crypto, but this could take time to develop. Outside the EU there are countries which offer a very attractive tax regime on crypto like Switzerland, UAE, Lichtenstein, Singapore and the UK included, the latter making plans to make London a global crypto marketplace and the financial capital of the crypto world.
“We in Lisbon are in direct competition with London now; a partnership of 700 years seems to be doomed by the crypto domain”, he jokes.
At present the main tax regime is on capital gains, paying 20% taxes unless you hold the asset for 365 days in which case you pay 0% on net capital gain.
However, if you sell a crypto and exchange it for another crypto currency you pay no taxes. You can make a profit by selling Bitcoin to a stablecoin – a stablecoin, as explained before, is a digital currency that is pegged to a “stable” reserve asset like the US dollar or gold. Stablecoins are designed to reduce volatility.
An example would be to sell crypto in exchange for a stablecoin, wait for 365 days, and then sell it for fiat currency and in that case any profit would not be taxed.
Companies that provide services related to cryptocurrency, on the other hand, are taxed on capital gains on a scale between 28 and 35 percent.
In Portugal, if you trade bitcoin as your primary source of income, you must file a tax return and pay taxes on your earnings.
Fernando Pinto says that some aspects to take into consideration to determine if your trade activity will be considered as your profession by the Portuguese tax authorities are: the frequency of your trade (on a daily/weekly/monthly basis), how many trading platforms you’re using, your profit level, and your main activity to generate income from.
If you are an individual trading on a regular basis you get taxed on the applicable brackets (Category B) for personal income.
There is still work to be done on clarifying reporting requirements, and this work is being done with the Ministry of Finances so that by later this year the rules will be clearer so that individual know in April 2024 when they have to report their crypto profits and transactions. “We know it will be fairly simple and the goal is to make it attractive for everyone who is engaged in crypto in Portugal”.
Another aspect to be taken into consideration is the FIFO rule which stands for “first in first out.” It is a rule that has applied to Forex trading since 2009. For crypto, it would mean that, of a given coin, you would have to sell your oldest holdings first and newest holdings last. In other words, for tax purposes, the FIFO method considers that the first coins you purchased are also the first coins you sold when calculating the cost of goods sold (COGS) and associated taxes on profits.
But if the first one you bought was over one year ago, you would have to report that, but it would be subject to 0% tax. This is very attractive for long-term investors and will steer people away from day trading and speculative trading since most people, unless they really know what they are doing, lose money from that. For those who are speculative traders, they can benefit from the 7.2% tax up to a maximum of €200,000 per year.
Can you buy houses with crypto?
It is now possible to buy a property with bitcoin in Portugal. The first time this happened was in May 2022, when an investor bought a Portugal crypto house in the northern city of Braga. However, as Fernando Pinto points out, you are not actually buying a property with crypto currency, you are swapping crypto currencies for a house. For a purchase and sale agreement you need money, otherwise you are just swapping or doing a ‘permuta’ as it is called in Portugal.
The IMT, which is the big tax on real estate purchases in Portugal, is only charged on the difference of the value of the assets being swapped.
That means that if you sell a house foe €1.5 million, the buyer offers the equivalent of €1.2 million in digital currency you only are taxed on the difference. In other words you just pay the 0.8% stamp duty.
However, the tax authorities will tax the person on their capital gains they have made for any transaction, houses or other, and so will get their money one way or the other in the end.
Was is the practical extent of crypto in corporate finance?
Cryptocurrency can also help improve financial transparency and reduce corruption by creating a decentralised and transparent ledger, which can help to increase trust in financial systems globally. The use of smart contracts can help automate the execution of financial agreements and reduce the need for intermediaries.
Crypto also provides a new avenue for enhancing a host of more traditional Treasury activities, such as: Enabling simple, real-time, and secure money transfers, helping strengthen control over the capital of the enterprise, and managing the risks and opportunities of engaging in digital investments.
“Right now it is an emerging field so there are no mature or sophisticated corporate finance platforms based on crypto, but they are emerging, with many banks and other financial institutions doing trials and pilots. It can be about improving the financial infrastructure, with better and faster settlement, and certain countries are using blockchain (ratter than crypto) for this because it is transparent and trustworthy”, explains Hugo.
here have been some cases where Etherium has been used to settle international trade finance deals, and to settle ledgers of finance and credit in different countries.
It should also be noted that a positive result of crypto when it arose in 2009 is that if forced the banks to come with easy digital payments systems for customers to use, an example being MB Way in Portugal.
Crypto and the metaverse
One aspect that is heard a lot and baffles the ordinary man in the street is the relationship between the Metaverse and cryptocurrencies.
The metaverse is a vision of what many in the computer industry believe is the next iteration of the internet: a single, shared, immersive, persistent, 3D virtual space where humans experience life in ways they could not in the physical world.
Investors have so far generally been favouring Bitcoin, Ethereum, Solana and Bicance Coin. However, since the rise of the metaverse, the crypto world as become even more diverse.
Users of the metaverse can develop a digital life similar to the one they know in the physical world. However, they have no real banknotes or coins. The concepts of metaverse and cryptocurrencies are linked by the need to operate with a virtual currency with which to make transactions in this digital space.
Cryptocurrencies are the money of the virtual world, and are therefore necessary to buy land, art, clothes or even experiences. In this way, a property in the metaverse can increase or decrease in value just as it does in the real world. In addition, major luxury brands such as Balenciaga, Gucci and Louis Vuitton have already entered this new dimension.
In this context, metaverse and cryptocurrencies function just like official currencies and the physical world. And although the transactions are virtual, the acquisition of virtual currency is the result of a purchase or sale transaction with real currency.
“The metaverse right now is enabling companies to promote their services in this digitised world. People are locking their savings into this and trying to capitalise on them in the metaverse.
Regulatory framework in Europe
Regulating the crypto economy has always been a contentious topic, never more so than when FTX, the third largest ‘stock’ market of crypto assets collapsed and sent the value of currencies like Bitcoin tumbling.
But trading platforms like FTX, like a stock market, is just an interface with that market and has little to do with the technology or the applications of the crypto economy. The collapse of FTX was not down to a failure in technology or an apparent lack of regulation. Indeed, approved regulation already exists which could have prevented the meltdown if it had been in force.
Hugo says that on the one hand, regulation must be dissociated from new technologies, including the decentralised networks on which the crypto economy is based – such as Bitcoin, Ethererium or even the Internet – the regulation of entities that bridge the gap between crypto assets and the real economy – namely centralised exchanges and custody platforms.
The latter have already subject to considerable controls in the field of publicity and prevention of capital laundering and the financing of terrorism, with the supervision of various central banks since 2018.
But these operators have adopted traditional structures, such as financial institutions and payments institutions (like the banks and SIBS in Portugal) which are already regulated.
On the other hand, once the sector’s interaction with the financial system has been resolved, there is a general consensus, even among purist supporters, that the regulation of the crypto economy must involve, above all, the protection of consumers and investors and the mitigation of risks.
In both cases there is the new European Regulation of the Cryptoassets Market or MiCA, preparation on which began in 2018 and was completed in 2024.
This regulation, which came into force this year, and will be applicable from 2024, sought to balance the development of innovation and financial stability with an approach tailored for the different risks in the industry.
The main principle covers investment products, stablecoins and the entities that provide services with crypto assets, i.e., markets and custody platforms.
It is important to note that MiCA would not have been able to prevent the collapse of FTX since, for the time being, it is a European regulation and FTX was based between Antigua and Barbados and the Bahamas. However, FTX served Europe through a subsidiary licensed in Cyprus, meaning MiCA could have theoretically guaranteed that the funds of the accounts of EU citizens would be segregated from FTX own funds.
And although MiCA is a good first step to establish a clear regime, even if it is not yet simple, there is still a long way to go in terms of preparation so that regulators realise that this new system is not like the traditional one. This is because the crypto economy is based on different fundamentals – like own custody of funds and transparent access to distributed networks – and so therefore should not be regulated in the same way, except markets like stock markets and equivalent financial institutions, which should be regulated as such.
In either case Europe is leading the way in the evolution of regulations which started to counter money laundering and financing terrorism. Europe will be the first major jurisdiction to have a coherent regime focused on protecting users, setting clear rules for stablecoins, exchanges, custodians, and hopefully prevent any future fiascos such as FTX.
Regulatory framework in Portugal
Until now, Portugal has been considered as a ‘crypto-friendly’ country, not because the Portuguese government created a tax friendly regime for income derived from these assets, but because of a lack of any regulation at all.
Crypto has really taken off in Portugal as can be understood from the amount of crypto events that take place, not just the smaller events that take place on a weekly basis, but also the large International conferences that are hosted in Lisbon.
However, the interest from investors so far has been mainly from overseas, with the Portuguese not investing much in crypto. In 2020 only 1% invested, whereas in the UK it is 5%. Although Portugal does have some homegrown startups, most of the companies ecosystem is from overseas, but the market is maturing.
Of course, Portugal has already had an anti-money laundering regime for many years, and people who provide crypto services need to register with the Bank of Portugal.
The future of cryptocurrencies
Launched in 2014, smart contracts are code written into a blockchain that executes the terms of an agreement or contract from outside the chain. It automates the actions that would otherwise be completed by the parties in the agreement, which removes the need for both parties to trust each other.
It is essentially putting contracts into code digitally. Somewhat like a vending machine they run on a blockchain and cannot be activated without someone activating them. The main platform for these contracts is Etherium (it’s currency is called Ether or ETH) and was built to enable smart contracts.
It is likely that they will eventually replace modern platforms, so Air BnB, Uber and Spotify are good examples of these that impacted the world. Today they are for profit companies, but in the future they could be socialised smart contracts owned by everyone, and their managers who run them like associations, receiving a salary. The potential lies in reducing transaction costs, middle men and enhancing efficiency.
Hugo says that one major beneficiary of this system would be finance because it is already digital, particularly banks and their business deals with the transfer of value, which are already on the Internet. This technology could overtake Fintechs which are still run for profit and are still similar to the big banks. However smart contracts would extract the fat and make them more nimble.
Text: Chris Graeme