French quarterly crypto legal & tax briefs - March 2024

Regulatory

Why is a crypto ETF not possible in Europe? 

ETFs (exchange traded funds) are investment funds admitted to trading on a stock exchange. In the language of the financial markets, ETFs are a sub-category of ETPs (exchange traded products), i.e. listed financial products. However, this acronym has different legal meanings depending on which side of the Atlantic you look from. 

In Europe, the ETF craze focuses almost exclusively on so-called "UCITS" ETFs, i.e. listed investment funds whose asset mix, among other things, complies with the very precise requirements of Directive 2009/65/EC of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS). It is these requirements in terms of asset composition, i.e. the type of assets in which a UCITS may invest or to which it may gain exposure and the investment ratio limits to which it is subject, which do not allow a UCITS to hold or gain exposure (for example via futures or by replicating an index) to crypto-assets. Consequently, a UCITS ETF, which is nothing other than a listed UCITS, cannot hold or gain exposure to crypto-assets either.

Alongside UCITS ETFs, there are very marginally so-called "AIF" ETFs, i.e. alternative investment funds whose asset composition is not subject to the UCITS Directive and which could therefore, in theory, hold or gain exposure to crypto-assets (this is possible, for example, in France for Specialised Professional Funds or even within certain limits for Professional Private Equity Funds). However, the advantages of an ETF in Europe are twofold, and above all incompatible with the qualification of an AIF:

1. Firstly, admission to trading on a regulated market, enabling ETF units or shares to be acquired by the general public in the 27 Member States of the European Union. AIF are not generally open to public subscription or subject to investment constraints similar to those imposed by the UCITS Directive; nor are they generally freely marketable to non-professional clients in the European Union, but rather reserved for professional clients or for non-professional clients in their home Member State only.

2. Secondly, European institutional investors (e.g. banks, insurers, pension funds, etc.) are themselves subject to fairly strict constraints when it comes to investing their capital. While most of them can theoretically invest in or gain exposure to volatile and risky assets, their room for manoeuvre in this respect is often very limited, so that the vast majority of capital is directed towards financial products that are either risk-free (e.g. sovereign bonds) or highly regulated (e.g. UCITS). For example, a UCITS ETF with exposure to emerging market equities, although volatile and risky, benefits from the regulatory sesame of the "UCITS" label, which allows institutional investors to invest more widely in this type of financial product. An AIF ETF does not have this sesame.

As European regulations stand, a crypto ETF in Europe has very little chance of seeing the light of day. However, this has not prevented other players from positioning themselves on economically similar products, ETNs (exchange traded notes) or ETCs (exchange traded commodities) which, like ETFs, are a sub-category of ETPs but rather than taking the legal form of an investment fund (issuing units or shares), take the form of debt securities. These ETN/ETCs are also admitted to trading on stock exchanges and are generally structured to reflect the performance of underlying assets (in our case crypto-assets) for the benefit of their holders.

While the craze is not the same as with US ETFs, or even European UCITS ETFs, there is every chance that the recent approvals by the Security Exchange Commission (SEC) of Bitcoin cash ETFs in US will also stimulate the European crypto ETN/ETC market.

Taxation

Guidance on the VAT regime applicable to NFT (non-fungible tokens or NFT).

On 14th February 2024, the French tax authorities published a guidance to clarify and secure the VAT regime applicable to NFTs. NFTs are crypto assets that differ from cryptocurrencies such as Bitcoin in that they are non-fungible. NFTs are generally used as "digital certificates certifying the ownership of a tangible or intangible asset".  

*The approach adopted, whereby NFTs are not subject to a specific regime and are governed by the standard rules of VAT, leads the administration to conclude that, where an NFT is used as a certificate of ownership of a tangible or intangible asset, a transaction involving the transfer of an NFT does not relate to the token itself, but to the good or service underlying; consequently, the applicable VAT regime must be determined on a case-by-case basis, with regard to the underlying. * 

Several examples are then developed by the administration to illustrate the analysis method to be applied in order to determine the VAT regime applicable to an NFT. 

• Digital cards associated with NFTs are intangible goods, and their transfer therefore constitutes a supply of services which can be qualified as a supply of electronic services (taxable in the country in which the consumer is established);

• Transfers of digital graphic works associated with NFTs are treated in the same way as transfers of the underlying digital works (with, in particular, the possible application of the reduced rate of 10% provided for transfers of certain intellectual works, provided that the copyright is transferred with the graphic work).

• The issue of NFTs as part of the financing of the creation of a video game, to which are attached elements of the game that can be used from the time the game is made available, is analysed as the provision of intangible property, i.e. a supply of services whose chargeable event occurs at the time the game is made available. The taxable basis for VAT is equal to the consideration received by the taxable person when the tokens are issued (VAT being included). On the other hand, the VAT charged on the expenditure paid by the developer and necessary for the development of its video game is immediately deductible by the issuing company, even before the game is made available.

Debates on the taxation of staking income postponed by a year

Staking consists, in the context of a blockchain whose validation system is a PoS (Proof of stake), of becoming a "validator" by tying up a large quantity of crypto-assets over a certain period, in return for a fee. 

An amendment was submitted by MP Eric Bothorel during the examination of the Finance Act for 2024 by the National Assembly; it aimed at clarifying the tax treatment of the staking revenues by establishing the principle whereby such income would be subject to income tax in the non-commercial profits category, and establishing the taxable event at the time the income is received.

However, the amendment, that had been initially adopted,  was not included in the Government's final project adopted under the so called article 49.3 procedure; thus any measures that might be taken in this area is postponed until the next Finance Act.