Legal Nature in Bulgaria
11 Oct 2020
Cryptocurrencies are a modern phenomenon that enjoys increasing popularity. It is undoubtedly due to the most famous of them – the “Bitcoin”. This article will focus in brief on the clarification of the nature of the cryptocurrencies as well as it will make a comparison between them and the fiat currencies under Bulgarian law.
In its opinion, the European Banking Authority gives a definition of cryptocurrencies, which is based on its most significant characteristics. The latter defines cryptocurrencies as a digital representation of value. The cryptocurrencies are not issued by a central bank or other public institution, nor are they necessarily attached to any existing currency, but are also used by individuals and legal entities as a means of exchange that can be transferred, stored, or traded electronically. A digital representation of a value should first of all mean that the cryptocurrencies are in a digital form. The term “a digital representation of value” also approximates one of the immanent functions of money – to serve as a unit of account, but at the same time allows cryptocurrencies to be treated as “private” money or commodity.
Cryptocurrencies are not issued by a central bank or other governmental authority, nor have a fixed, nominal value. A significant difference between the cryptocurrencies and the money is the fact that the cryptocurrencies do not represent a legal way of payment (even though they are used as a means of exchange against which other fiat currencies, goods, or services can be acquired). A creditor is not obliged to accept payment through cryptocurrencies, nor does the latter have a mandatory nominal value that is accepted without any restrictions when it comes to regular currencies. Unlike the fiat currencies, cryptocurrencies cannot serve as a stock store of value, as it does not have the inherent stability of money.
The conclusion that cryptocurrencies do not constitute a legal way of payment is shared both in the doctrine and by the competent Bulgarian institutions. According to the Bulgarian National Bank and the Financial Supervision Commission, the cryptocurrencies do not represent financial instruments within the meaning of the Markets in Financial Instruments Act, either. The said institutions take the view that the activities of acquiring, trading, and paying with cryptographic data are not covered either in national or European legislation. That being said, under Bulgarian law cryptocurrencies should be considered as a financial asset. The Bulgarian tax administration treats them as such and deals with them as a supply of services. Income derived from transactions with them participates in the formation of the tax base and is related to the obligations deriving from the VAT Act.
The forgoing draws the conclusion puts that cryptocurrencies should be distinguished from fiat money and other legal means of payment. At the same time, it is acceptable that they should be treated as financial assets, as through the relevant exchanges the holder of the cryptocurrency could obtain another currency recognized as a way of payment, goods, or services.
Given that cryptocurrencies are not covered by a legislative framework, whether national or European, they cannot be defined as an object of rights. In this situation, it is difficult to talk about rights over cryptocurrencies. Indeed, blockchain technology allows the transactions with a given cryptocurrency to be traced, however, the access to an account / electronic wallet that indicates that certain units of particular cryptocurrencies are available is the only link between the cryptocurrency and the person claiming to be possessing it. That being said, the European Banking Authority considers that the lack of legal regulation is one of the main risks for those who have decided to trade and invest in cryptocurrencies.
Security tokens are a crypto asset type that represents an ownership stake in an asset or a business. A security token essentially serves a similar role to traditional securities such as shares so it warrants the same regulatory scrutiny as those types of financial instruments. At the same time, they can bring the benefits of the blockchain revolution to traditional financial markets and help create liquidity in typically illiquid sectors. This makes security tokens a very powerful tool for bridging traditional finance and DLT-powered fintech. It also makes them an interesting case from a legal standpoint.
Regulation of the blockchain and crypto space has been notoriously hard to work out, especially after cryptocurrencies like Bitcoin and Ether rose to prominence and kicked off a larger crypto boom in the latter part of the previous decade.
The majority of legal hurdles come as a result of the inability of current financial rules and regulations to cover the various aspects of the blockchain sector, as well as from the lack of a unified approach when it comes to blockchain and crypto regulation.