An extract from The Virtual Currency Regulation Review, 3rd Edition

Introduction to the legal and regulatory framework

The Central Bank of Ireland (CBI) is the authority responsible for the regulation of financial services in Ireland. To date, the CBI has not issued specific guidance dealing with the status or the legality or illegality of virtual currencies or blockchain, and neither has any government department or other public authority. They have also remained largely silent on the applicability of existing financial regulation regarding this new and emerging area. However, the CBI has issued a warning on the dangers associated with cryptocurrencies as well as an Alert on Initial Coin Offerings to warn investors about the risk of losing part or all of their invested money (see Section II).

The Department of Finance issued a discussion paper on virtual currencies and blockchain technology in March 2018, stating that it believes that no single state agency has the capabilities to address all the risks and opportunities in these two areas. The Department has also established an interdepartmental working group whose task it is to monitor developments and consider any policy recommendations that will be necessary to manage risks and recognise opportunities.

A notable exception to the lack of clear guidance being issued is the Irish Revenue Commissioners. While there are no specific rules dealing with the taxation of virtual currencies, the Revenue Commissioners published information on the taxation of virtual currency transactions in 2018, which was updated in April 2020 (see Section IX).

Securities and investment laws

There is no specific virtual currency regulation in Ireland, and regulators have yet to indicate the extent to which existing securities regulation will apply to virtual currencies. The CBI is the competent authority for the purposes of securities law in Ireland, including regarding prospectus, transparency, market abuse and markets in financial instruments law. The principal legislation to be aware of in respect of virtual currencies has its roots in European Union law, and includes the Prospectus Directive, the 2014 European Union Markets in Financial Instruments Directive (MiFID II) and the Alternative Investment Fund Managers Directive.

The CBI has not only published its own warnings in relation to initial coin offerings (ICOs) and virtual currencies, but has also contributed to European Securities and Markets Authority (ESMA) warnings to both consumers and firms engaged in ICOs.

In respect of the application of securities laws to virtual currency regulation, we expect that the CBI will focus on the recognised EU concepts of transferable security and financial instruments as defined in MiFID II, and the characteristics that they view as bringing virtual currencies within those definitions. Depending on their structure, virtual currencies could be classified as transferable securities requiring the publication of a prospectus (or availing of an exemption) prior to their being offered to the public. A pure, decentralised cryptocurrency is unlikely to be a transferable security, while a token with characteristics similar to a traditional share or bond may be. It is also possible that true utility tokens intended for exclusive use on a platform or service will not be transferable securities. The definition of transferable security is non-exhaustive, and it is for each issuer and their advisers to determine whether their cryptocurrency or token is a transferable security.

As in many jurisdictions, the regulatory environment in relation to cryptocurrencies and their interaction with securities law is not yet settled, and ESMA acknowledges that, depending on how an ICO is structured, it may fall outside the regulated space entirely.

Banking and money transmission

In Ireland, virtual currency is not regarded as either money or fiat currency. Therefore, virtual currency is typically viewed as being outside the scope of many traditional financial regulatory regimes: for example, deposit taking, electronic money or payment systems.

There is a risk that certain ancillary services in connection with a virtual currency could be subject to regulation as a form of money remittance or transmission under the Second Payment Services Directive (PSD2), or, where PSD2 does not apply, under the Irish regulatory regime for money transmission. For example, the operator of a virtual currency platform who settles payments of fiat currency between the buyers and sellers of virtual currency could be viewed as being engaged in the regulated activities of money remittance or transmission. There are a number of exemptions that may be applicable where, for example, the platform operator is acting as a commercial agent or where the platform could be viewed as a securities settlement system. The application of an exemption would depend on the features of the trading platform.