In Expanded Russia Sanctions, EU Suggests It Defines Cryptocurrencies as Securities

In announcing an expansion and tightening of the sanctions imposed after the Russian invasion of Ukraine, the European Union may have inadvertently thrown a stick of dynamite into the argument over whether most cryptocurrencies are securities.

In a March 9 statement announcing the expansion of sanctions imposed after the Ukraine invasion from Russia to Belarus, the European Commission added a formal — and, frankly, pro-forma — clarification that crypto assets were, in fact, covered by sanctions.

Specifically, the EU “confirmed the common understanding that loans and credit can be provided by any means, including crypto assets, as well as further clarified the notion of ‘transferable securities,’ so as to clearly include crypto-assets, and thus ensure the proper implementation of the restrictions in place.”

Unpack that, and you’ve got a statement that crypto assets are “transferable securities.”

While it may not be as exciting as arguing about whether Russian, and now Belarussian, oligarchs are using bitcoin to hide assets from mega-yacht-seizing sanctions enforcement agencies, the question of the status of cryptocurrencies is one that can have a huge impact on the industry’s future, both in the U.S. and EU.

While the EU may be far ahead of the U.S. in creating a regulatory framework for crypto assets — the Markets in Crypto Assets (MiCA) directive, scheduled for a vote on March 14 — it doesn’t directly address the crypto-as-security question.

See also: EU Crypto Regulation May Need Clarification From Day One

MiCA rules would only apply to cryptocurrencies that are not financial instruments, but they don’t clearly define the rules for making that determination. That, PYMNTS noted on March 8, has the potential to spark just as heated a debate in Europe as it has in America.

Unless, of course, the new EU sanctions just ended it.

Across the Pond

If virtually every digital asset other than bitcoin and ether is, as Securities and Exchange Commission (SEC) chairman Gary Gensler argues, a financial instrument regulated by his agency, it makes it a whole lot harder to use them or anything other than an investment on a day-to-day basis.

Read more: Gensler: SEC Is Coming for Crypto Exchanges

In the U.S., it not only makes it harder to sell tokens at the launch of a blockchain or decentralized application (DApp), it makes any profit a capital gain that must be accounted for on the spender’s taxes — which is fine for token traders playing the market.

But, if you want to use the litecoin (for example) stored on a crypto credit card or PayPal wallet to buy something as small as a cup of coffee, you have to compare the price of the crypto token on the day you bought it with its price when you spent it. Any increase in value, and you’ve got a taxable capital gain — and now, do that a couple of hundred times for your daily cup of java.

That interpretation has been behind hundreds of lawsuits, fines and enforcement action the SEC has leveled on everything from 2017 initial coin offerings (ICOs) to the Valentine’s Day announcement that crypto exchange and financial services provider BlockFi received an unprecedented $100 million fine for providing interest to customers who invested their holdings in a lending platform.

Related: BlockFi’s $100 Million Settlement With SEC Raises Internal Discussion

The problem is that the law on how cryptocurrencies should be classified is unwritten, nor has the SEC’s interpretation even been tested in a court of law — although cross-border payments firm Ripple is in the middle of doing just that — as most companies are afraid of the consequences of losing.

However, with the precedent of the EU’s potentially hasty statement defining crypto assets as “transferable securities,” Gensler has a big new tool on his belt.

That’s particularly timely as President Biden’s March 9 “Executive Order on Ensuring Responsible Development of Digital Assets” started the clock on a six-month process to create a full regulatory framework for cryptocurrencies.

Now, Gensler can go into those meetings wielding the precedent the EU has perhaps unintentionally set.

See also: Biden’s Executive Order Set to Fast-Track Crypto Policy