Publication date: 15/11/2019
The era of cryptocurrencies has come: whilst they were initially used as a specific means of payment and as a source of investments other functions are now being explored, such as the possibility of cryptocurrencies being directly contributed to a company in the context of its incorporation. This new function has been successfully implemented in several countries in Europe, including Switzerland and Luxembourg where several companies have been incorporated through contributions consisting of cryptocurrencies. And in Belgium? To our knowledge, there is virtually no precedent and no specific legal framework governs cryptocurrencies and their use.
According to the European Central Bank’s definition, a virtual currency, which encompasses cryptocurrencies, is a digital representation of value, not issued by a central bank or a public authority, but which is accepted as a means of payment by natural or legal persons and can be transferred, stored or exchanged electronically. Cryptocurrencies often tend to experience much greater fluctuations in value than typical currencies do, which is prompted by speculation and the uncertain nature of regulatory reforms.
The distributed ledger technology underlying cryptocurrencies is called blockchain. Blockchain is a transparent information storage and transmission technology that operates without a central control body. It operates as a database that contains the history of all exchanges between its users since its creation. This database is secure and distributed: its various users, without intermediaries, share it, which allows everyone to check the validity of the chain. This technology is comparable to a large notebook in which each new transaction (date, sender and receiver account, amount of the transaction) is written after the preceding ones, without the power to delete them.
Currently, there are around 2,200 virtual currencies using blockchain. Among them is Bitcoin, a highly secured, decentralised currency created in 2009 by Satoshi Nakamuto as an alternative to fiduciary money. In April 2019, Bitcoin’s value was around 5,000 USD whereas it was worth around 0.001 USD when the first Bitcoin/dollar exchange rate was published. Other examples of such currencies are Litecoin and Ether.
Capital requirements under the new Belgian Code of Companies and Associations
The concept of corporate capital has been one of the main topics addressed during the recent reform of Belgian corporate law. Whereas the incorporation of a public limited liability company (“société anonyme”/“naamloze vennootschap”) requires subscribed and paid up corporate capital, the private limited liability company (“société à responsabilité limitée”/“besloten vennootschap”) can be incorporated with contributions that guarantee that the company has sufficient assets to carry out its planned activities. Fixed corporate capital is no longer required in order to allow more flexibility in the incorporation process.
The common element to both legal forms is the requirement that the founders make contributions, which can either be in kind or in cash.
Contribution in kind
The new Belgian Code of Companies and Associations, despite its modern approach, does not specifically provide the right to make contributions consisting of cryptocurrencies.
The main requirement for an asset to be contributed to a company is that it can be subject to valuation, i.e. that an economic value can be assigned to it. We believe this requirement is verified for any cryptocurrency as the value is either determined by the market or through valuation methods (most of the time a price/earning ratio).
Cryptocurrencies cannot be used as a contribution in cash: cryptocurrencies cannot be qualified as a(n) (electronic) currency in the legal sense as they are not legal tender in Belgium.
However, cryptocurrencies can be contributed in kind, which is very broadly and residually defined under the new code as the contribution of any other tangible or intangible asset (other than cash). This view is supported by the French Council of State, which qualified cryptocurrencies as contributions in kind in a decision of 26 April 2018.
High volatility as the main constraint
Cryptocurrencies in general and Bitcoins in particular are well known for their high volatility. For example, from 26 June to 2 July 2019, Bitcoin’s value plunged from about $14,000 to nearly $9,600. This high volatility has several causes: lack of liquidity, uncertainty around regulatory treatment, the likelihood of security breaches, etc. The valuation of highly-volatile assets can be very tricky. In the context of contributions made using cryptocurrencies, issues around their valuation might occur that include:
– the company founders have to draw up a report including, among other things, a justification of the valuation of the contributions made. The volatility of the value of the contribution itself could trigger issues for the founders who could be held jointly and severally liable vis-à-vis third parties for any harmful consequence deriving from an obvious overvaluation of the contributions;
– another report must be drawn up by an auditor on the valuation made by the founders and the methods of valuation that have been used. The liability of the auditor itself could be established if the report confirms an incorrect valuation made by the founders.
Money laundering issue
Another issue concerns the risk of money laundering that such contributions could generate. How can one verify that cryptocurrencies and their contribution to companies are not being used as a means of money laundering? To our knowledge, no verification procedure exists in that respect. We are convinced that this element will be a source of discussion.
There is currently no specific Belgian direct tax legislation in place for cryptocurrencies.
Despite this situation, certain advanced tax rulings have already confirmed that certain realisations (i.e. transfer or exchange of cryptocurrencies, such as a sale or contribution) by a physical person, could be tax exempt.
As regards the contribution of cryptocurrencies by a company, no specific tax exemption is provided. Therefore, a contribution could result in the recognition of taxable profit.
Given the popularity of cryptocurrencies and the existing practice in most of Belgium’s neighbouring countries, we believe that contributions consisting of cryptocurrencies is something that will happen in the near future, despite the significant volatility risk associated with such contributions. We are confident that pragmatic solutions will be found in this regard, such as, for instance, a valuation of these contributions based on their average value over the past 6 or 12 months. We hope that in the near future, precedents or an initiative by the legislator will provide guidelines and sufficient comfort for the different actors in the incorporation process.