An extract from The Virtual Currency Regulation Review, 3rd Edition
Introduction to the legal and regulatory frameworki Definition of virtual currencies
Various industries have long used virtual 'currencies' tailored for their respective purposes, such as online gaming and social gaming, where operators often use self-created currencies or currency units for placing stakes or making certain payments inside a game, albeit in most cases not based on blockchain technology.2 While there have been several initial coin offerings (ICOs) in Austria, by the beginning of 2019, this hype and the market around cryptocurrencies as a whole have since slowed down, even though several projects, such as the crypto-stamp of the Austrian Post Office, attracted some media attention.
Nevertheless, the Austrian Parliament passed an amendment to the Austrian Financial Markets Anti-Money Laundering Act (FM-GwG) to implement the provisions of the Amendments to the Fourth EU Anti-Money Laundering Directive3 (known as the Fifth AML Directive) in July 2019. Although this amendment entered into force on 1 October 2019, the most relevant provisions apply as of 10 January 2020. One of the key provisions of the amendment is Section 2 Paragraph 21, which for the first time defines virtual currencies under Austrian law:
Virtual currencies: a digital representation of value that is not issued or guaranteed by a central bank or a public authority, and is not necessarily attached to a legally established currency, and does not possess a legal status of currency or money, but is accepted by natural or legal persons, as a means of exchange, and which can be transferred, stored and traded electronically.
This definition is based on Article 1(2)(d) of the Fifth AML Directive and relates to function rather than form of virtual currencies.4 Furthermore, the definition does not make a distinction as to whether virtual currencies are generated using blockchain technology and represents a technology-neutral approach taken by the legislators of the Fifth AML Directive and consequently also by the Austrian legislature.
With this technology-neutral approach, the EU legislature intended to cover all types of virtual currencies. The best known and economically most relevant form of virtual currencies are cryptocurrencies, which are commonly understood to be special forms of virtual currencies characterised by certain technical features: payment systems and the storage and management of cryptocurrencies are organised by a decentralised computer protocol and protection is ensured by cryptographic signature sequences. However, there may be blockchain-based coins, often referred to as tokens, that are not created by a decentralised network of miners by solving complex mathematical problems, but rather issued by an individual or company in the course of an ICO or initial token offering (ITO).
Even though the Austrian definition of virtual currencies does not necessary cover all kinds of coins and tokens, the regulation of both coins and tokens will be analysed accordingly in the following sections.ii Virtual currencies and general civil law
From a very general perspective, Austrian civil law – in particular the Austrian Civil Code (ABGB) – does not contain a definition of virtual currencies or specific regulation targeted at virtual currencies. Rather, it distinguishes only between the notions of persons and objects. As virtual currencies obviously cannot be qualified as persons, they need to be qualified as objects. Within the term 'objects', a distinction is made between objects that are movable and immovable, and physical and non-physical. Virtual currencies constitute data records in an account book. Neither a data record nor an account book are (necessarily) physical objects as they are not perceptible to the senses, which is a prerequisite for physical objects, and therefore virtual currencies are classified as non-physical objects under general civil law.5 Although the distinction between movable and immovable objects only applies for physical objects, the prevailing opinion in Austria is nevertheless in favour of applying the rules on movable property to virtual currencies.6 However, storage media on which an entire blockchain, and thus also the private key of a Bitcoin owner, is stored, are qualified as physical objects according to Section 302 ABGB if they are regarded as a single unit in legal transactions. Therefore, a card containing a blockchain and a digital key of Bitcoin could be regarded as a physical object. However, as a digital key, which may be temporarily stored on a physical storage medium, but can also be transferred separately (i.e., digitally), Bitcoin shall be still qualified as a non-physical object pursuant to Section 292 ABGB.7iii Virtual currencies and the term 'money'
The mainstream use and understanding of the word currency in terms of virtual currencies implies that – at least under certain circumstances – virtual currencies could be considered as money from a legal perspective. However, the legal definition of currencies is legal tender recognised by the state that is subject to compulsory acceptance, also referred to as fiat currencies.8 Money as qualified by Austrian law is created by a sovereign act in which the state determines a certain currency and raises it to the status of legal tender.9 The Euro Act further qualifies what is considered as legal tender.10 Virtual currencies, on the other hand, are (generally) not a state product, but are either created decentralised and online (as in the case of Bitcoin), or issued by a non-governmental person, company or agency (e.g., a company that carries out an ICO). Virtual currencies (generally) lack an official act of a state government, which is why they are generally not regarded as money.
As virtual currencies are not qualified as money (or legal tender or currency), transactions involving the exchange of virtual currencies for other objects are therefore generally not subject to the special civil law rules on making a purchase, but rather are subject to the more general rules of exchange in kind (i.e., qualified as exchanging one object for another).11 This also corresponds to the definitions of the Fifth EU Anti-Money Laundering Directive and the FM-GwG, which refer to virtual currencies as means of exchange accepted by natural or legal persons.12 With regard to exchanging virtual currencies for fiat money (such as the euro), the transaction is considered a purchase contract because, in this case, an object (virtual currency) is exchanged for fiat money.
Securities and investment laws
The following provides a brief overview of the applicability of the Austrian (Alternative) Investment Fund Managers Act and the Austrian Capital Markets Act to virtual currencies.i Alternative Investment Fund Managers Act
Since many people regard and use virtual currencies as an investment, the provisions on collective investments might be relevant. These can be found in the Alternative Investment Fund Managers Act (AIFMG) and in the Investment Fund Act (InvFG). Both Acts govern investment undertakings (including sub-funds) that collect funds from a number of investors to invest them for the benefit of those investors in accordance with a specified investment policy as long as the funds do not serve the operational activity of the investment undertaking. Undertakings pursuant to the InvFG (investment funds) shall only invest the funds in transferable securities, whereas undertakings pursuant to the AIFMG (alternative investment funds) may invest the funds in a wider variety of assets. The managing of both investment funds and alternative investment funds requires a licence issued by the Financial Market Authority (FMA).
With respect to purchasing virtual currencies themselves, the FMA states that an ICO or ITO might fall within the scope of the AIFMG if the funds of the token or coin holders are invested for their benefit pursuant to a defined investment strategy.13 Additionally, the FMA took the view that business models requiring participation in the mining of cryptocurrencies such as Bitcoin may constitute an alternative investment fund (AIF) and may therefore fall within the scope of the AIFMG.14
Apart from that, virtual currencies may be part of the assets of investment funds or AIFs. Investment funds shall only invest their funds in virtual currencies in case the virtual currencies are structured as transferable securities (see subsection ii). With respect to virtual currencies being part of the assets of an AIF, the explanatory notes to the AIFMG expressly emphasise that the AIFMG should apply to all AIFMs that manage the full range of funds not covered by the UCITS Directive.15 An Austrian AIF can thus be used to implement any investment strategy in which virtual assets are invested.16ii Prospectus requirement
When financial instruments or other investment opportunities are offered to the public, there is usually an information imbalance in the market. To compensate for this, the Austrian legislation requires the issuer to provide a prospectus.
With respect to the prospectus requirement in Austria, there is a dualism regarding the applicable legal sources: for transferable securities, the prospectus obligation arises from the Prospectus Regulation;17 for investments, the prospectus obligation is stipulated in the Capital Markets Act 2019 (KMG 2019), which entered into force on 21 July 2019 and repealed the Capital Markets Act 1991 (KMG 1991).
The EU legislature understands transferable securities in accordance with the Markets in Financial Instruments Directive II (MiFID II).18 These mainly include equities and equity-type securities, as well as non-equity securities, such as debt securities and other securitised debt securities.19 The FMA stated that certain factual characteristics are required for the qualification of securities pursuant to the Prospectus Regulation in addition to the formal criteria mentioned above.20 Those criteria include transferability, tradability and the granting of rights similar to stocks, bonds, etc. The securitisation of the right in a document is not a mandatory requirement for a security. Securities are transferable if they can be transferred without their legal or technical substance changing. The decisive factor for tradability is that the security is sufficiently standardised and uniformly structured. Virtual currencies usually fulfil these two requirements. Whether virtual currencies grant rights that are similar to stocks, bonds, etc., depends on the individual structure of a virtual currency. Coins typically do not grant such rights and the same applies for utility tokens. With respect to tokens representing a claim to future payouts against the issuer (security tokens), this could be the case. In summary, the FMA is of the opinion that security tokens regularly qualify as transferable securities pursuant to the Prospectus Regulation and consequently, the public offer of such tokens triggers the prospectus obligation pursuant to the Prospectus Regulation. The requirements that a prospectus for the public offer of securities must meet can be found in the annexes to the Prospectus Regulation.
In accordance with Section 1(1)(3) KMG 2019, investments are uncertificated property rights (rights to claims, membership rights or rights in rem)21 for the direct or indirect investment of several investors who carry the risk, either alone or jointly with the issuer, and do not administer the invested funds themselves. Typical investments pursuant to the KMG are uncertificated profit participation rights, limited partnerships and silent participations.22 For assessing whether virtual currencies qualify as investments, one must assess whether the token or coin in question grants its holder a property right (in the broadest sense) against the issuer.23 With respect to security tokens, this is regularly the case. However, since the FMA believes that most security tokens are securities, security tokens that are investments will be the exception rather than the rule. Utility tokens might grant their holders a property right against the issuer depending on the individual structure of the token. With regard to payment tokens and coins, there usually is no property right against the issuer. Furthermore, the investment arising from these tokens or coins is usually achieved only when their holders transfer them. This activity is performed by the token or coin holder and therefore by the possible investors. Pursuant to the KMG 2019, there is no investment if the investors administer the funds themselves, therefore payment tokens and coins are not investments. Based on current market standards, it is unlikely that virtual currencies qualify as investments pursuant to the KMG 2019, but if they do, a prospectus would be required.
A distinction must be made between genuine decentralised virtual currencies such as Bitcoin and Ether, and those coins and tokens that can be created centrally by a certain individual or company in any number and are not open to mining by other users, such as is generally the case with ICOs or ITOs.24 Decentralised cryptocurrencies usually do not trigger a prospectus requirement, rather such cryptocurrencies are created by a large number of users on the basis of protocol calculations (mining). Cases in which a cryptocurrency is created by a central party must be evaluated individually as to whether there is an investment pursuant to the KMG 2019 or even a security pursuant to the Prospectus Regulation. With respect to investments, there were indications that a security token would meet the requirements for a prospectus requirement under the KMG 2019.25 The FMA has now clarified that the public offer of a token or coin, which is not or only partially transferable, embodies claims to capital or yield and in which all token or coin holders form a risk community, is subject to the prospectus requirement for investments pursuant to the KMG 2019.
Issuers have to decide from an ex ante consideration at the time of an ICO or ITO whether the token or coin to be issued requires a prospectus according to the KMG 2019 or the Prospectus Regulation. If the issuer comes to the conclusion that the ICO or ITO would qualify as a public offer of an investment or a security, there are some options to make use of exceptions to the prospectus obligation: if tokens or coins are offered for a minimum of €100,000 each, the offer only addresses either an unlimited number of qualified investors or fewer than 150 persons per Member State of the European Economic Area who are not qualified investors, the prospectus obligation does not apply for investments or securities.
The exact requirements regarding a prospectus for the public offer of either securities or investments depends on the total consideration. Generally, for the public offer of securities or investments with a total consideration of less than €250,000, no prospectus is required. If the total consideration of a public offer of either securities or investments is between €250,000 and €2 million, the Alternative Financing Act (AltFG) applies and stipulates eased rules with respect to the prospectus obligation. Only if the total consideration exceeds €5 million is the aforementioned dualism shown: for the public offer of securities, a prospectus shall be disclosed in accordance with the Prospectus Regulation; for the public offer of investments, the provisions of the KMG 2019 apply. Of course, it is permissible to publish a prospectus that is only intended for the next highest value threshold. In certain cases, this might even be advantageous (e.g., passporting if the public offer is made in other EU Member States as well).
The relevant thresholds for the public offer of securities and investments are shown in the following table.
|Threshold (12 months)||Securities||Investments|
|No prospectus requirement||No prospectus requirement|
|€250,000 to €2 million||Information obligation pursuant to the AltFG||Information obligation pursuant to the AltFG (exception: outstanding amount exceeds €5 million within seven years)|
|€2 million to €5 million||Simplified prospectus according to Annex D to the KMG 2019; optional prospectus according to Annex I to the Prospectus Regulation||Simplified prospectus according to Annex D to the KMG 2019; optional prospectus according to Annex A to the KMG 2019|
|> €5 million||Prospectus pursuant to Annex I to the Prospectus Regulation||Prospectus pursuant to Annex A to the KMG 2019|
Banking and money transmissioni Banking Act
Virtual currencies might also be relevant for banks or might relate to services that shall be performed exclusively by banks. It is therefore vital to assess the Austrian banking law as to whether virtual currencies might fall under its scope. The most important legal source of Austrian banking law is the Banking Act (BWG), which, inter alia, contains an exhaustive list of banking transactions in Section 1(1). The provision of these banking transactions requires a licence issued by the FMA if they are carried out for commercial purposes – this means carrying out banking transactions regularly, as opposed to only occasionally.26 However, the Austrian courts rarely exempt an activity from the licensing requirement on the grounds of lack of commerciality as they often interpret it very broadly.Deposit business (Section 1(1)(1) BWG)
Deposit business pursuant to Section 1(1)(1) BWG is the receipt of external funds for administration (first case) or as a deposit (second case). Funds are accepted within the meaning of Section 1(1)(1) BWG for administration (first case) if the recipient has a 'certain degree of discretion' with regard to these funds in order to use them as agreed in the interest of the depositor.27 The depositor thus has an unconditional claim for repayment of the amount remaining under contractually agreed administration. The realisation of an administrative activity does not conflict with the fact that the depositor can decide for him or herself in individual cases or intervene with instructions, as long as the recipient has 'the power of limited independent action'. However, in cases where the depositor specifies in each case how the funds shall be invested, and thus the receiving institution lacks any discretionary power, money is not considered as being accepted for administration. In addition, if the repayment claim depends on the economic condition of the company in which the investor participates by acquiring company shares, this is not considered a deposit business.28
According to prevailing opinion, the acceptance of repayable funds from the public that are used as a means of investment is considered a deposit subject to Section 1(1)(1) BWG (second case). A deposit pursuant to Section 1(1)(1) BWG (second case) is subject to the depositor having an unconditional claim for repayment with respect to the money deposited.29 A conditional repayment claim, which also includes a loss participation of the depositor, therefore does not qualify as a deposit within the meaning of the law.30
The issuance of genuine virtual currencies shall not be qualified as a deposit business according to Section 1(1)(1) BWG. As there is no issuer for such virtual currencies, users also have no repayment claim. The situation may be different with centrally issued virtual currencies. According to the FMA, an ICO or ITO might lead to receiving funds for administration if the conditions of the ICO or ITO provide for the repayment of these funds.31Safekeeping and administration of securities for other parties (Section 1(1)(5) BWG)
If cryptocurrencies qualify as securities, their safekeeping and administration requires a licence for the custody business issued by the FMA. The term 'securities' in this respect differs from the term used in prospectus law, because the definition of securities for the purpose of custody business stems from the Depot Act (DepotG). Section 1(1) of the DepotG stipulates that only shares, participation certificates, bonds, certificates and other fungible securities qualify as securities. According to the prevailing opinion, fungibility and embodiment do not automatically qualify a right as a security – the right must serve as a capital investment.32 Consequently, coins and most tokens would not qualify as securities for the sake of the custody business. However, security tokens regularly fulfil those criteria and the safekeeping of such tokens therefore triggers a licensing obligation that, pursuant to the BWG, has priority over the registration obligation pursuant to the FM-GwG. Custodians of tokens that qualify as securities therefore 'only' need to obtain a licence pursuant to the BWG.Issuing and managing means of payment (Section 1(1)(6) BWG)
Virtual currencies may have payment functions. Instruments with such payment functions are subject to strict regulations that can be found in the BWG and in the Payment Services Act (ZaDiG). The BWG regulates means of payment, whereas the ZaDiG is targeted at payment instruments. The main difference between the two Acts is that a payment instrument can only be used for performing or initiating a payment order,33 whereas a means of payment represents the payment itself.34 Additionally, a payment instrument shall be personalised and – contrary to means of payment – can only be used by a certain person.
The term means of payment generally comprises accepted monetary surrogates in circulation that are accepted by a larger group of persons, such as credit cards, travellers cheques and e-money. Thus, the issuance of vouchers or regional currencies, as well as the issuance of coins or tokens created within the framework of an ICO or ITO, may well be subject to the provisions of Section 1(1)(6) BWG. However, a means of payment within the meaning of Section 1(1)(6) BWG requires that it is accepted by a larger group of persons.35 Genuine virtual currencies do not fall under the scope of Section 1(1)(6) BWG because they either lack a central issuer or they do not function as means of payment in a sufficiently big network.ii Securities Supervision Act
As mentioned in subsection i, virtual currencies may qualify as securities, depending on their individual structure. If such virtual currencies are issued, the prospectus obligation governs the issuance. However, the issuance and other services related to virtual currencies that qualify as securities are regulated in the Securities Supervision Act, whose obligations require a financial instrument.
The Austrian legislature did not expand the definition of financial instruments to include units of account or virtual currencies.36 Rather, the relevant provisions (of the WAG, KMG, etc.) are to be applied by taking a technology-neutral approach. However, the FMA stated that security tokens in particular might qualify as transferable securities pursuant to MiFID II.37 Consequently, the following services fall under the WAG if they relate to one or more security tokens: investment advice; portfolio management by managing portfolios on an individual basis with the discretion under a power of attorney of the client; and acceptance and transmission of orders. These security services are subject to holding a licence issued by the FMA as an investment firm or to cooperate with an investment firm.iii E-Money Act
Although virtual currencies are currently not legal tender in Austria (see Section I.iii), they could be regarded as e-money pursuant to the E-Money Act (E-GeldG). Section 1(1) E-GeldG defines e-money as any electronically (including magnetically) stored monetary value in the form of a claim against an e-money issuer issued against payment of a sum of money. Therefore, there must at least be the possibility of a three-party relationship (issuer–buyer–third point of acceptance).38 The criteria must be cumulative.39 However, virtual currencies are different from e-money because a virtual currency, unlike e-money, does not express capital in conventional units of account (e.g., euros) but in virtual units of account.40 Decentralised cryptocurrencies such as Bitcoin or Ether also do not have a single issuer, but are created in the network via a specific algorithm; they also do not create a claim against an issuer. The situation may, of course, be different in the case of virtual currencies issued in the course of an ICO or ITO. Frequently, participants in an ICO acquire only a claim against the issuer for the transfer of the respective volume of coins or tokens to a wallet. In general, this requirement is immediately fulfilled by transferring coins or tokens to a participant's wallet. In ICOs, there may thus be cases in which an issuer would require a licence as an e-money institution pursuant to the E-GeldG if the exceptions from the licence obligation – such as found in the case of a limited network (see also Section III.i) for the acceptance of the issued coins or tokens – are not met.iv Payment Services Act
The commercial provision of payment services may trigger a concession obligation, in particular if a virtual currency is qualified as a means of payment within the meaning of the BWG (see Section III.i) or as a payment instrument. A payment instrument within the meaning of Section 4(14) of the Payment Services Act (ZaDiG) is any personalised instrument, such as a credit card including the cardholder's code or signature, or any personalised procedure agreed between the payment service user and the payment service provider that can be used by the payment service user to issue a payment order, such as the access code of the payment service user and the transaction numbers and transaction codes in online banking.41 Owing to the lack of personalisation, virtual currencies frequently do not constitute payment instruments pursuant to the ZaDiG, as they are usable and are transferable by anybody. Furthermore, the FMA also applies the limited network exception to the ZaDiG (Section 3(3)(11) ZaDiG; see also Section III.i).