Virtual Currency Regulation In 2020: Shedding Light On Austria’s Blockchain Landscape – Technology

The recent presentation of the draft Electronic Securities Act
(Gesetz über elektronische Wertpapiere, eWpG) by
German lawmakers, has reignited debates surrounding the adequacy of
the existing Austrian financial services and securities law
framework and the adoption of measures supporting the
digitalisation of its capital markets. Unlike its neighbour,
Austria has thus far refrained from establishing a specific
regulatory regime governing crypto-related activities or
transactions.

The following will consider the current legal mechanisms
governing blockchain-based financial services in Austria. While
intended as a short overview concerning the jurisdiction’s
general approach to the regulation of cryptoassets and fintech
businesses, matters such as taxation, data protection and
money-laundering will also be briefly touched upon.

Overview

Developments in the area of blockchain-based services and
virtual currencies have attracted considerable attention in recent
years. Beyond forming the backbone of the cryptocurrency Bitcoin,
blockchain technology purports to establish a decentralized,
disintermediated and distributed digital ecosystem. As such, it is
said to innovate and permeate through a wide array of industries
ranging from healthcare to retail, government as well as banking
and finance.

In light of recent trends towards the wider-use of distributed
ledger technology, the need for digitisation of securities has
become an inevitable and necessary endeavour. As start-ups
increasingly ‘base their business models on cryptocurrencies
and resort to the use of blockchain technology to drive
innovation’,¹ legislators, courts as well as
regulators are tasked with establishing a legal framework that
enables corporate financing through the utilization of blockchains
and electronic issuance of securities.

Given that cryptoassets are comparatively novel manifestations
whose ‘societal use, economic worth, and technical design are
still in flux,’² the challenge lies in the adoption
of appropriate measures and provisions to facilitate the fusion of
cryptocurrencies and the fabric of an existing national regulatory
framework.

Debates on blockchain technology and its regulation in
Austria

For a considerable period of time, cryptocurrencies have been
exempt from regulation³ in Austria. Prior to 2017,
public authorities, such as the Austrian Financial Market Authority
(Österreichische Finanzmarktaufsicht,
FMA),⁴ assumed a particularly sceptical position
concerning blockchain technology. In a similar vein to the
criticism voiced by the European Securities and Market Authority
(ESMA) as well as other supervisory agencies,⁵ its
warnings centred on the volatility and consumer protection risks
associated with digital asset-based business and investment
models.

By 2017, the Ministry of Finance published guidance on the tax
consequences (income and value added) flowing from the practice of
trading with bitcoins and other cryptocurrencies, including
Ethereum, Ripple and Litecoin.⁶ The establishment of an
advisory board (Fin-Tech Beirat) in 2018, marked a vital
shift in terms of the receptiveness of policymakers towards
alternative financing methods.

Seeking to address concerns over the use of cryptocurrencies
(particularly with regard to money laundering or the financing of
terrorism), regulatory and supervisory proposals continued to be
debated in 2018. Although these discussions were accelerated by a
suspected bitcoin-related fraud scheme known as
“Optioment”,⁷ concrete legislative action was
not taken.

Austria and its importance as a Fintech Hotspot

Considered a pioneer in the field of eGovernment in Europe,
Austria has displayed an open attitude to new technologies and
cryptocurrencies, allowing it to become the preferred business
location to numerous startups. ⁸ Bitpanda is only one
example of many notable fintechs that have set up their operations
in Austria. Founded in 2014, the Vienna-based crypto-based company
of more than 160 team members, offers its services to more than one
million users. At present, there are 112 Austrian companies
qualifying as fintech businesses.⁹ With a growth rate
exceeding that of the financial industry and an annual turnover of
EUR 130 million,¹⁰ its impact on social and corporate
life can no longer be denied.

It is this rapid evolution of the fintech landscape that has
prompted legislators to start monitoring developments in this area
more closely.

General Approach

1. The FMA

The FMA, introduced above, is the ‘independent, autonomous
and integrated supervisory authority for the Austrian financial
market’,¹¹ whose statutory aims include: 1)
increasing confidence in the efficient functioning of Austria’s
financial market; 2) protecting investors, creditors and consumers
in accordance with legal provisions; and 3) acting in a preventive
manner with respect to compliance with supervisory standards, while
also punishing breaches committed in a consistent
manner.¹²

In adopting a technology-neutral approach, the FMA focuses on
the application of existing laws and ensures both new and
traditional products or services are subject to the same laws and
regulations in order to safeguard rather than diminish the
technological achievements of this digital era. Seeking to maintain
integrity, security and investor protection, it may exercise
sovereign powers by issuing ‘binding standards, like
regulations and administrative decisions, [or taking] coercive
measures, such as withdrawing licences, to remove directors or to
impose administrative penalties.’¹³

Given the complexity and rise in number of these businesses
transacting with cryptoassets and the speed of their development,
the FMA has created a Fintech Contact Portal and designated a
specialist team to give companies the chance to submit queries
concerning the regulatory treatment of their operations.

2. Sandbox Programme

As of 01.09.2020, an amendment to the Austrian Financial Market
Authority Act (Finanzmarktausichtsbehördengesetz,
FMABG) has entered into force. With the addition of section 23a,
the FMA has introduced a ‘regulatory sandbox’, enabling
companies to test products/services that are still under
development and assess their viability. An application is to be
submitted to the FMA provided specific conditions are met, e.g. the
business model is designed to further the public interest; it does
not destabilize the financial market or inhibiting consumer
protection; it is innovative in nature and will accelerate market
maturity (a full list of requirements is set out under section 23a
para 2 sentence 1). In determining whether the respective business
model offers sufficient public value, i.e. is serving the wider
economic interest, the Advisory Board¹⁴ must be
consulted (section 23a para 3).

Taking part in the sandbox programme is limited to a period of
up to two years, but can be terminated earlier upon application
(section 23a para 4). Quarterly reports are to be submitted to the
Minister of Finance by the FMA. As part of the assessment, the
latter may be asked to provide further details as to the parties
involved in the operation of the regulatory sandbox business model
under consideration (section 23a para 7).¹⁵

Austria’s Regulatory Framework

Austrian law neither bans nor restricts blockchain technology,
but rather seeks to adequately regulate it.

In determining the regulatory status to be applied to a business
model involving crypto assets, a case-by-case assessment is to be
conducted. Depending on the nature, content or features of the
product/service offered, different licence obligations may arise
pursuant to:

• Austrian Payment Services Act (Zahlungsdiestgesetz,
  ZaDiG);

• Austrian Banking Act (Bankwesengesetz, BWG);

• Austrian Electronic Money Act (E-Geldgesetz,
  EGeldG);

• Austrian Alternative Investment Fund Manager Act (Alternative
  Investmentfonds Manager-Gesetz, AIFMG);

• Austrian Securities Supervision Act
  (Wertpapieraufsichtsgesetz, WAG);

• Austrian Act on Alternative Investment Fund Managers
  (Alternatives Investmentfonds Manager-Gesetz, AIFMG);

• Austrian Capital Markets Act (Kapitalmarktgesetz,
  KMG).

Unlike the FMA, which supervises crypto-related business
activities ‘that fall within the scope of banking, payment and
investment services or funds and securities
regulation’,¹⁶ virtual assets that are commodities
as stipulated under Austrian law, are overseen by the Austrian
trade authorities.¹⁷ There is no designated court that
holds jurisdiction over legal matters centring on cryptocurrency
transactions. Lastly, there are neither border restrictions in
place, nor is the operation of fintech businesses prohibited in
Austria.

Special Laws

1. Money-Laundering

• Anti-money laundering (AML) requirements apply to
  cryptocurrency-based activities that require a licence under
  financial services regulation, e.g. payment service providers;

• AML requirements may also arise under commercial law, e.g.
  auctioneers making/obtaining cash payments of at least EUR 10 000
  pursuant to the Austrian Trade Code (Gewerbeordnung,
  GewO).

• The Financial Markets Anti-Money Laundering Act
  (Finanzmarkt-Geldwäschegesetz, Fm-GwG),
  which came into force on 10.01.2020, transposes the Fifth
  Anti-Money Laundering Directive (AMLD5), it:

• Adopts the same definition of virtual currencies as the AMLD5,
  namely describing service providers offering one or more of the
  following:¹⁸
  • Services to safeguard private cryptographic keys to hold, store
    and transfer virtual currencies on behalf of a customer (custodian
    wallets);

  
  

  • Exchanging virtual currencies into fiat currencies and vice
    versa;

  
  

  • Exchanging one or more virtual currencies into each
    another;

  
  

  • Transferring virtual currencies; and

  
  

  • The provision of financial services for the issuing and selling
    of virtual currencies.

• Extends AML requirements to:
  
  • Electronic wallet providers; and

  
  

  • Service providers involved in the exchange of
    fiat/cryptocurrencies.

• Requires national virtual currency providers and foreign
  entities performing financial services in Austria to register with
  the FMA.¹⁹

2. Taxation

• Cryptocurrencies intended for purposes of generating interest
  income are taxed at 27.5% (private individuals) or 25%
  (companies);

• Cryptocurrencies not intended for interest generation purposes
  and concerning private sales as well as non-business assets give
  rise to a taxable event to be taxed at 55% (private individuals) if
  acquired and sold within 12 months;²⁰ capital gains are
  exempt from taxation if EUR 440 per annum; if held for longer than
  12 months they will not be subject to taxation.²¹

• The exchange of crypto into fiat currency and vice versa is
  VAT-exempt;²²

• Since virtual assets are treated in the same manner as
  traditional means of payment, purchases of goods and services are
  subject to VAT.

• Mining is regarded as a commercial activity and treated in the
  same fashion as tradition payment methods; it is not
  regulated.

3. Data Protection

• Both the European General Data Protection Regulation (GDPR) as
  well as the Austrian Data Protection Act provide a legal basis for
  the regulation of the use, transmission and collection of
  personal/sensitive data;

• Rights of the data subject are found under Articles 12-23 GDPR
  and include inter alia:

• Right to transparent information, communication and modalities
  relating to the data being processed;




• Right to obtain rectification of false data;




• Right to erasure;




• Right to restriction of processing;




• Right to data portability;




• Right to object.

• Remedies and penalties are listed under Articles 77-84. The
  data subject may e.g. lodge a complaint with a supervisory
  authority or be awarded compensation from the controller or
  processor for potential (non-)material damage suffered.
  Infringements of GDPR provisions can also result in administrative
  fines between EUR 10 to 20 million and 2% to 4%, respectively, of
  the annual turnover of the preceding year (whichever higher).

Recent Developments

The incremental rise in the number of young cryptocurrency-based
start-ups in recent years, has prompted Austrian policymakers to
acknowledge and analyse the potential of cryptoassets and
blockchains. Austria has adopted a positive attitude towards new
technologies. By introducing numerous pilot projects (e.g. Culture
Token Project),²³ it has proven to be an attractive
location for crypto-based businesses. Other contributing factors
include significant equity and debt financing opportunities (i.e.
low-interest ERP loans, grants, guarantees made available by the
Austrian federal investment and business promotional bank) and
incentive schemes (implemented by e.g. Austrian Business Agency or
the Austrian Research Promotion Agency), made available to
companies to fully develop their innovative
potential.²⁴

To this end, the following recent events are also worth
highlighting:

18.05.2020 National Digital Currency Pilot: Raiffeisen Bank
Austria working on new form of national currency tokenization using
blockchain technology.²⁵

02.07.2020 Austrian Telecom Provider A1 adding cryptocurrencies
to cashless payment network, enabling Austrian crypto owners to
accept cryptocurrencies (i.e. ETH, Bitcoin, Dash) via payment
processor Salamantex.²⁶

02.09.2020 Vienna Stock Exchange listing Bitcoin and
Ethereum.²⁷

Comment

Austria’s neutral approach to the supervision of crypto
companies has proved to be a fruitful in terms of facilitating
rather than hampering the endeavours and innovations of new
business models. Unlike jurisdictions like Liechtenstein, Austria
has not established an independent legal mechanism for the
regulation of cryptocurrencies and the respective service
providers. Yet, in light of the EU Commission’s mandate to
examine and draft legislative proposals for further regulatory
measures by 11 January 2022,²⁸ alterations to the
current Austrian approach are to be expected.

Footnotes

1 Dr. Völkel, O.; Dr. Stadler, A. (2020)
Austria’s business location advantages in the fields of
cryptocurrencies and blockchain. Invest in Austria Blog.
Available at: https://investinaustria.at/en/blog/2020/03/austria-locational-advantages-cryptocurrencies-blockchain.php
[accessed 23.10.2020].

2 Quintais, J. P.; Bodó, B.; Giannopoulou, A.;
Ferrari, V. (2019) Blockchain and the Law: A Critical
Evaluation. Stanford Journal of Blockchain Law and Policy
(2)1. Available at: https://stanford-jblp.pubpub.org/pub/blockchain-and-law-evaluation/release/2
[accessed 22.10.2020].

3 Dr. Völkel, O.; Dr. Stadler, A., (n
i).

4 FMA (2019) European Supervisory Authorities Publish
Joint Warning on Virtual Currencies. FMA Österreich.
Available at: www.fma.gv.at/en/europaeische-regulierungsbehoerden-veroeffentlichen-gemeinsam-eine-warnung-zu-virtuellen-waehrungen/
[accessed 20.10.2020]; Pittl, R.; Steiner, C. (2020)
Blockchain-Bssed Financial Services and Virtual Currencies in
Austria. Journal of European Consumer and Market Law Volume 9
Issue 2. Available at: https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/austria
[accessed 22.10.2020], p81.

5 ESMA (2017) ESMA alerts investors to the high risks
of Initial Coin Offerings (ICOs). ESMA News. Available at: https://www.esma.europa.eu/sites/default/files/library/esma50-157-829_ico_statement_investors.pdf
[accessed 19.10.2020]; Pittl, R.; Steiner, C., (n iii),
p81.

6 For a detailed account please refer to: https://www.wolftheiss.com/fileadmin/content/6_news/Newsletter/2017_Q3/17_09_29_Wolf_Theiss_Tax_Newsletter_Ed3_2017.pdf.

7 Groendahl, B. (2018) Austrian Bitcoin
‘Scam’ Triggers Police Search Across Europe. Available
at: https://www.bloomberg.com/news/articles/2018-02-15/austrian-bitcoin-scam-triggers-police-search-across-europe
[accessed 28.10.2020].

8 Dr. Völkel, O.; Dr. Stadler, A., (n
i).

9 Fletzberger, B. (2020) Austria: Fintech Laws and
Regulations 2020. ICLG. Available at: https://iclg.com/practice-areas/fintech-laws-and-regulations/austria
[accessed 19.10.2020].

10 Fletzberger, B., (n viii).

11 FMA. The Austrian Financial Market Authority
Integrated Supervision in Austria. FMA
Österreich. Available at: www.fma.gv.at/en/financial-market-supervision-in-austria/
[accessed 15.10.2020], p1.

12 FMA, (n xi), p1.

13 FMA. Financial Market Supervision in Austria.
FMA Österreich. Available at: www.fma.gv.at/en/financial-market-supervision-in-austria/
[accessed 15.10.2020].

14 https://digital.freshfields.com/post/102gbaq/new-regulatory-sandbox-for-austria

15 For further detail please refer to the following: FMA
(2020) FMA Sandbox. Available at: https://www.fma.gv.at/en/kontaktstelle-fintech-sandbox/fma-sandbox/
[accessed 12.10.2020]; Schneider, E.; Pachinger, S.; Klepp, S.
(2020) New regulatory sandbox for Austria. Freshfields
Digital. Available at: https://digital.freshfields.com/post/102gbaq/new-regulatory-sandbox-for-austria
[accessed 12.10.2020]; Library of Congress (2020) Austria:
Amendment of Financial Market Authority Act Establishes Regulatory
Sandbox for Innovative FinTech Companies. The Library of
Congress Global Legal Monitor. Available at:
https://www.loc.gov/law/foreign-news/article/austria-amendment-of-financial-market-authority-act-establishes-regulatory-sandbox-for-innovative-fintech-companies/#:~:text=Top%20Recent%20Articles-,Austria%3A%20Amendment%20of%20Financial%20Market%20Authority%20Act%20Establishes%20Regulatory%20Sandbox,entered%20into%20force%20in%20Austria
[accessed 13.10.2020].

16 Kulnigg, T.; Rath, U. (2019) Cryptoassets &
Blockchain in Austria. Lexology GTDT. Available at: https://www.lexology.com/library/detail.aspx?g=de76db61-81bf-4f91-9ff1-9a8e4c50d966
[accessed 23.10.2020].

17 Kulnigg, T.; Rath, U., (n xiii).

18 Art. 1 para. 1 No. 19 AMLD5; Art. 2 para 22 FM-GwG;
Kulnigg, T.; Rath, U., (n xiii).

19 FMA. Registration of Providers in relation to
Virtual Currencies. Available at: https://www.fma.gv.at/en/cross-sectoral-topics/prevention-of-money-laundering-terrorist-financing/registration-of-providers-in-relation-to-virtual-currencies/
[accessed 20.10.2020]; Steiner, C., (n iii), p81.

20 Kulnigg, T.; Rath, U., (n xiii), p212.

21 Menheere, A. (2017) BMF: Die steuerliche
Beurteilung in Österreich von Bitcoin und anderen
Kryptowährungen. Available at: https://steuernachrichten.pwc.at/blog/2017/08/01/bmf-die-steuerliche-beurteilung-in-oesterreich-von-bitcoin-und-anderen-kryptowaehrungen/
[accessed 31.10.2020].; CJEU 22 October 2015, C-264/14
Hedquvist [2015]; Kulnigg, T.; Rath, U., (n xiii),
p212.

22 Steuerliche Behandlung von Kryptowährungen
(virtuelle Währungen). BMF. Available at http://perma.cc/BU4Z-3BFY (archived) [accessed
13.10.2020].

23 For more information, please visit: https://digitales.wien.gv.at/site/en/culture-token-project-outline/.

24 Fletzberger, B., (n viii).

25 Hinchliffe, R. (2020) Billon polits digitised
national currency with Raiffeisen Bank. FintechFutures.
Available at: https://www.fintechfutures.com/2020/05/billon-pilots-digitised-national-currency-with-raiffeisen-bank/
[accessed 20.10.2020].

26 Helms, K. (2020) A1 Telekom Austria Adds Bitcoin
to Payment Service for Thousands of Retailers. Bitcoin News.
Available at: https://news.bitcoin.com/a1-telekom-austria-bitcoin-payment-service-thousands-of-retailers/
[accessed 20.10.2020].

27 Wiener Börse (2020) 21Shares brings first
crypto-currency products on Bitcoin and Ethereum to the official
market. Vienna Stock Exchange News. Available at:
https://www.wienerborse.at/en/news/vienna-stock-exchange-news/21-shares-crypto-currency-products-bitcoin-ethereum-official-market/#:~:text=(Vienna)%20The%20Vienna%20Stock%20Exchange,currencies%20is%20replicated%201%3A1
[accessed 19.10.2020].

28 Otto Waechter, O. (2019) Virtual Currency
Regulation. ILO. Available at: https://www.internationallawoffice.com/Newsletters/Banking-Financial-Services/Austria/Graf-Pitkowitz-Rechtsanwalte-GmbH/Virtual-currency-regulation
[accessed 18.10.2020].