BILLS FOR CRYPTO ASSETS REGULATION

Por 10 febrero, 2021 No Comments

In early October 2020, two national bills and one provincial bill for crypto assets regulation in Argentina emerged (the provincial bill stands for the Province of Misiones and will not be analyzed in this article). Although neither of them is supported by the main leaders of the blockchain and / or cryptocurrencies industry (local and / or international) and none of them were involved in these drafts, it is relevant in terms of importance and economic effects both for the governing party as well as for the opposition.

When two opposed political parties intend to rule over the same subject, it clearly indicates that, sooner or later, the regulation will come, aligned with global tendencies. We strongly recommend to read our article on Nature of cryptocurrencies within Argentine legal framework since it clearly reflects the current legal status of crypto market in Argentina.

Juntos por el Cambio (Opposition coalition party)

We will begin with this bill, which was the first to be introduced, even when it has less chances to be passed. It sets forth a long-time expected legal framework by the parties conforming the blockchain and the cryptocurrencies ecosystem and by those parties willing to operate with crypto-assets but, that feel unsure due to the lack of regulation.

In first place, the bill defines the scope and goals of the law with special emphasis in a legal framework for all crypto-transactions as well as in the protection, monitoring, inspection and control of all crypto-assets transactions, defining the two parties involved in this type of business relationship:

Buyer: Natural or legal person, who purchases cryptocurrencies.

Service Providers: Natural or legal person performing some of the following activities: exchange between virtual assets and FIAT currencies; exchange between one or more forms of virtual assets; transfer of virtual assets (to conduct a transaction on behalf of a third party); safekeeping and /or virtual assets administration, participation and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

The bill not only defines the parties involved in crypto-asset transactions but also approaches a definition for crypto-aAssets in Argentina, which could be defined as a digital representation of value working as an encrypted financial asset with Blockchain technology, essential for its operation. It can be used as a medium of exchange, as a store of value and as a unit of account.

One of the most controversial aspects of these type of assets worldwide is if they should be treated as investment instruments (bonds, shares, etc.) or as cash. Those supporting the first alternative base their opinion in the large transfer amounts and market cap, especially Bitcoin since its price spike last year. Those supporting the second option argue that not all cryptocurrencies have reached such price and that to send them from one wallet to another is as simple as handling a banknote (or even easier), reason why they could be considered as a payment method for big or minor transactions.

This appears to be a trivial matter but, indeed, there are key differences between both treatments. Crypto-currencies treated as investment instruments should be subject to anti-money laundering rules, should require the disclosure of the identity of the parties involved (also known as “Know Your Customer” procedures or “KYC”), should comply with antidumping policies, minimum and maximum prices, could be banned in the event of important debacles, etc.  If they are considered as cash, the only regulation should rely on the legitimacy of the crypto-currency that is being traded. This bill seems to stick to the second alternative although regulatory details could be evaluated after the enactment thereof.

Going back to our analysis, the above definition gives an insight of the required legal status in order to operate safely within an adequate Argentine legal framework. The blockchain technical definitions will not be analyzed here in detail but we shall focus on the following definition stated in the bill: the blockchain constitutes the technological infrastructure for crypto assets operation, it is decentralized (no public nor private entity has full records of crypto transactions), and works as a ledger where all purchase-sale transactions and other operations are recorded and stored in a safely and permanent way. 

Just to clarify, the meaning of “Decentralized” in this context is that the blockchain works completely independently from the issuance or control of governmental bodies or central banks (at least today). In the crypto-market, the meaning attributed to “decentralized” would be the difference among transactions performed through exchanges (with certain control) or from wallet to wallet.

Regulatory sandbox – Definition: According to the bill introduced by Juntos por el Cambio, it is defined as “a closed testing environment designed for experimenting safely new business models, allowing the companies that work in new developments and business models to launch and test their projects in a controlled environment, enabling them to audit and evaluate the related risks before the application thereof.” The bill introduced by the Frente de Todos does not define this platform, assuming it is known. 

These type of platforms, already used in other countries such as United Kingdom and Spain, are very important in this bill since they represent an innovation in crypto-assets sale and services that are still not protected by current legislation, granting some “legal protection” to service providers. This platform shall need to be ruled since it is new in Argentina, in line with the European legal framework. The bill only states that licenses should be granted by more than one competent authority and each Licensee will be in charge of generating a sandbox. The actual application of these shall be defined in further regulations if the bill is passed. 

UIF (Financial Information Unit) Control: any subject registered as “service provider” shall be obliged to disclose information to the Financial Information Unit pursuant to the provisions of Sections 20 to 22 of Law 25.246, as for example:

  • To make available to the Financial Information Unit (UIF) any and all documentation relating to customers
  • To report to the Financial Information Unit (UIF) of any transaction made by natural or legal persons suspected of money laundering or terrorism financing.

It is also set forth that any Services Provider license could be revoked for lack of compliance with the rules of the BCRA (Central Bank of the Argentine Republic), the UIF and/or the CNV (National Securities Commission).

Notwithstanding the inspection, monitoring and control should be in charge of the enforcement authority appointed by the government (probably a new board supervised by the UIF or the CNV), it is established -with good criteria- “that the provisions of Law 24.240 for Protection of Consumers and of Law 27.742 for Protection of Competition shall apply and their authorities shall be reported, whenever necessary,  in cases of e-commerce, offers, tricky advertising and the like encompassed within such legislation.” This wording reflects transparency and compliance with Argentine legislation.

Finally, the bill sets forth that any natural or legal person “trading” with crypto assets without the duly license will be sanctioned with suspensions and/or fines. The bill is not clear in this matter since the license requirement only applies to “service providers” and not to other traders or business willing to receive crypto assets in exchange for goods or services. It appears to be a technical defect considering that licenses should only be granted to service providers and not to every single user willing to trade with crypto-currencies; if so, the delay in transactions would be an obstacle in this dynamic market.

The bill makes no mention to the role of the AFIP (Federal Administration of Public Revenue) as controller authority nor explains how earnings and profits would be added to tax calculations. In the case of Argentina with such a tax burden, it drew our attention. Taking into account that the crypto-market is extremely volatile, a subsequent legislation is likely to be required. We assume that the bill abides for the application of current tax laws and that, eventually, crypto-assets assessments or appraisals would be made according to AFIP technical regulations.

Frente de Todos (Governing party)

Almost simultaneously, the governing party presented its bill for crypto-assets regulation, very similar to the previous one though more extensive. We will approach a review of the more outstanding issues; besides, this bill is more likely to be passed than the other one due to the majority vote of the governing party at the National Congress.

To begin with, the definition given to a crypto-asset is very similar to the other one, being considered: “A digital representation working as an encrypted financial asset, defined by a technological protocol, that can be traded in the digital market and which may constitute a medium of exchange and/or of payment and/or a unit of account and/or a store of value and/or a financing investment tool and/or a financing medium. It is not considered legal tender and it is decentralized, being the price subject to the markets supply and demand.” There are other definitions such as “Fork”, “Soft Fork”, “Hard Fork”, “Crypto assets Farming” among others. Let us give you some notions of this terminology: A fork or split is an update of the software code used by crypto assets; when this happens, a new crypto asset is created (hardfork) or may occur that “mining” becomes more complex without creating a new crypto asset (softfork).

Enforcement authority: unlike the previous bill, this one sets forth that the CNV would be the enforcement authority supervised by the UIF. As already mentioned in our article referred to Crowdfunding, we think it is a mistake to delegate this activity in such a traditional and bureaucratic entity, unsuitable for such a dynamic and volatile technological tool operating 24 hours a day, 7 days a week. It would require the creation of a sub-commission within the CNV with experts being able to evaluate the crypto assets markets; otherwise, control over this activity would not be effective and wrongful rules are likely to be issued (as this bill itself), being an obstacle for a smooth market operation.

Previous consent: the bill sets forth that all crypto–asset related entities (not defined in this bill) shall comply with the duty of informing the purchasing party relevant details and associated risks related to virtual currency transactions, the different ways of purchasing crypto-assets and any other relevant information for an adequate comprehension of the market performance. We support the previous consent in order to avoid investors from sticking to “fashions” or to prevent them from fraud or misconducts, enabling them to be well acquainted with the market conditions.

These entities are compelled to inform that : A) Crypto assets are not legal currencies and are not backed by the National Government nor by the Central Bank of the Argentine Republic; B) Transactions are irreversible; C) Digital currencies and related markets are highly volatile and control is subject to market conditions; D) Crypto transactions are highly associated with fraud, technological and cyber risks; E) Transactions can be made at any time without limit of working days and working hours. If new risks should emerge, this information should be updated as well as the consent given by the consumer or the buyer (which is not defined either in the bill).

Transaction arrangements: the bill sets forth that parties transacting with crypto-assets are free to agree on mutual terms within the legal scope but they should not be used to extinguish alimony or labor obligations. It is reasonable for alimony obligations since crypto-assets are not easily disposed of in order to buy “basic survival” goods but they could apply to labor obligations between employers and employees; especially since the Labor Law sets forth that employers are entitled to pay up to 20% of the compensation due in kind. For further comprehension you can read our article: Payment of wages and salaries in dollars.

Regarding the technical discussion worldwide, this bill does not specify whether crypto assets are to be considered as money or as market securities but, considering that crypto assets are governed by the CNV and that are subject to some restrictions for payment purposes, they are more likely to be considered as market securities, in contrast with the other bill.

Obligated subjects: Just like the bill previously analyzed, this one sets forth that money-exchange offices or “exchanges” will be considered as obligated subjects before the UIF pursuant to sections 20, 20 bis, 21, 21 bis and 22 of Law 25.246. It is not clear who will be in charge of granting licenses, which the requirements are or if such licenses would be similar to those granted to money-exchange offices.  

Regulatory sandbox: the system foreseen in this bill is very similar to the other one.  Only the implementation thereof will reflect if this system is effective for software developers as well as for future exchanges willing to operate in Argentina.

A key section in this bill, which has not been foreseen in the other one, is the “contract of collective financing”, by means of which a tokens issuer binds itself to transfer the ownership over the tokens issued with the purpose of financing the overall proposition outlined in the corresponding whitepaper, and the other party, called investor, binds itself to pay a price in legal tender, in foreign currency or in crypto assets of whatever nature. Together with the first token transfer, issuer shall have to deliver a copy of the whitepaper in digital format or in paper.

It basically deals with new crypto-currencies ready to be launched within a particular scheme set out by their developers. It is very beneficial for the crypto ecosystem that the developers of new crypto currencies can rely on clear rules as long as they are not an obstacle for new developments. We think that  the consideration of this type of transactions is very positive since the financing of the “ICO’s” (Initial Coin Offerings) is an habitual practice in the crypto-ecosystem and enables crypto-assets to start transacting with a big volume on the market, with more chances of being listed and traded on an exchange.

White paper: prior to the token initial offering, issuer shall have the duty to release a whitepaper which is a public instrument comprising relevant information of the overall proposition. This document is meant to be a trustworthy and reliable guideline for prospective investors to understand exactly what is being offered in order to avoid fraud or misconduct. A copy of this whitepaper should be sent to the UIF prior to the coin or token initial offering. We decided not to go deeper on legal details since we assume the UIF shall be in charge of issuing the corresponding regulations.

Monitoring by Central Bank: Pursuant to Section 21 of this bill, the Central Bank of the Argentine Republic is empowered to monitor the information on crypto-asset transactions within the domestic market and performed by national residents in foreign markets, to issue reports reflecting their impact and evolution in the domestic and foreign economies, to define their effects in monetary policies and to collect updated information on this matter issued by relevant international entities and bodies.

As regards this item, legislators seem to have forgotten or disregarded crypto-assets decentralized nature, being nearly impossible for a public entity the monitoring of all transactions performed in the market. It could be possible for the Central bank to control capital inflow in national banks or the purchase of crypto-assets with legal tender made by public or private bodies within Argentina but, once the crypto-asset starts operating in the market, no state control is possible. Even it would be easier for the AFIP to audit such transactions through tax returns rather than for the Central bank, especially considering that we are dealing today not only with Bitcoins but with thousands of Altcoins (Alternative Coins) throughout the world.

Finally, other key factor foreseen in this Bill is the “obligatory training program” stating that all state officers dealing with crypto assets matters shall be required to attend the training program to be created by the CNV. We consider the CNV is not the most suitable body for this task but we celebrate an intensive training has been foreseen for those who will act in such leading-edge markets.

Regardless of the personal opinions regarding both bills, we hope a debate will take place at Congress in the short term since -as well stated in the second bill- the world is moving forward towards a strong “crypto-moneytization”. Argentina has a rapidly growing digital currency market with an estimate of 900.000 users saving with, at least, in one crypto-asset. Notwithstanding the results, it is essential to outline a legal framework for any type of emerging industry (especially at early stages) in order to enhance its potential and positive features in such a volatile market.

Marco Dadone

Diego J. Nunes

Lawyer

Estudio Nunes & Asoc.