Crypto mining from regulatory perspective

Crypto Mining: State of Global Regulation

There is generally no widely accepted statutory definition of “mining” or “mining operations”. Mining of cryptocurrency as such remain mostly unregulated around the world. Bitcoin and other cryptocurrencies are “mined” in accordance with mechanisms and procedures of specific protocols on the basis of specifically designated software.

Most of the CRYPTO-mining countries, such as Canada, United States, China, Russia, Iceland or Sweden, have not adopted specific crypto-mining laws and regulations.

There is no fully set regulatory framework for crypto mining in vast majority of jurisdictions. Existing regulations are fragmented and include regulatory measures such as introduction of taxation on proceeds from mining operations, imposition of import bans or restrictions on mining equipment, introduction of registration requirements for mining sites. etc. Some other measures may also include introduction of special construction permits and mining equipment certification requirements.

The legitimacy of mining operations in a particular country generally depends on recognition of cryptocurrency and overall attitude of the state towards crypto.[1] There are few exceptions, however. For example, in Iceland, it has been declared illegal to trade in cryptocurrencies, but mining is recognised and even deemed an acceptable type of activity.

Description of Regulatory Base in Some Jurisdictions Popular for Mining Operations: US, Canada, Russia and China.

United States of America

No mining operations are prohibited in the United States. However, some states demonstrate their unwelcoming approach to mining operations by implementing specific regulations. For example, the temporary ban on mining operations has been recently introduced in Plattsburg[2]. On 28 August 2018, the commissioners of a public utility district in central Washington State have raised energy rates for cryptocurrency miners. The cost will increase by 15 percent beginning next year, 35 percent the following year, and 50 percent thereafter.

Neither possession, nor use or trading of Bitcoin or other cryptocurrency has been prohibited. The United States has followed a “restricted” approach towards cryptocurrency. According to the U.S. regulators, the legal status of cryptocurrencies may evolve over the time and certain activities involving Bitcoin and other cryptocurrencies are initially, or may become, subject to existing securities regulations.

On taxation, according to Internal Revenue Service (IRS) Notice 2014–21 (the Notice 2014–21), “the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.” Under the Notice 2014–21, cryptocurrencies are treated as “property” for U.S. federal tax purposes and this position was reaffirmed by the IRS in a reminder issued in March 2018 (IR-2018–71). Mining, selling, and transacting in cryptocurrencies are all potentially taxable events.

Canada

There is no specific regulation on mining operations in Canada. However, “Quebec is considering a province-wide halt on new mining operations in the region. (…) For now, Quebec has decided to halt cryptocurrency mining for a period of 90 days, to give legislators time to “think about adopting a rule to better formulate construction permits for these types of businesses in our territory”[3].

Importing, selling and operating mining machines within Canada are not prohibited under Canada law, provided that natural persons or legal entities engaged in activities involving mining Bitcoin or other cryptocurrencies comply with Canadian federal and local provincial and territorial laws regarding consumer and personal data protection, conduct of business, health, safety, employment and taxation as well as Canadian federal laws governing the use and transmission of proceeds of crime, anti-money laundering, economic and other sanctions, as well as import controls.

Canada has also followed a “restricted” approach towards cryptocurrencies: cryptocurrency activities are not prohibited, but under strict supervision by Canadian regulators.

Russian Federation

Mining operations in Russia do not violate any Russian laws or regulations, provided that legal entities and natural persons engaged in mining activity comply with general data protection, intellectual property, export/import, taxation or similar rules applicable to any other business in Russia.

Russian regulators strongly opposed cryptocurrencies in the past. In January 2014, the Central Bank issued a letter, in which it suggested (although not explicitly) that under existing regulations cryptocurrencies should be qualified as “money surrogate”. It further stated that due to the anonymous nature of cryptocurrencies, their use may get the respective parties involved (even if unintentionally) in unlawful activities, such as money laundering and terrorism financing. The Central Bank further stated that entities that use exchanges that trade in virtual currencies will be subject to suspicion based on the potential use of virtual currencies for money laundering or other criminal activities.

The legal nature of bitcoin and other cryptocurrencies remains unclear.

Turning to be less negative, during spring this year, the draft laws on “Virtual Financial Assets”, “On attracting investments via Investment Platforms” and “Amendment to parts 1,2 and 4 of the Civil Code of the Russian Federation” (the Draft Bills) has been submitted to state duma by a group of members of the parliament. In May 2018, the Draft Bills has been approved in the first reading by State Duma. The second reading is expected to take place during autumn this year. It has been reported that revised drafts are currently being prepared with the alternative approach.

Key points to note relevant for mining operations: introduction of the “mining” definition by reference to the activities aimed at the creation of cryptocurrency with the purpose of receiving compensation in the form of cryptocurrency. Mining is treated as an entrepreneurial activity subject to taxation if the miner exceeds the energy consumption limits established by the government for three months in a row.

The issue of taxation on cryptocurrency operations has not been resolved by the Russian government yet. According to Russian Minsvyaz’s plans crypto mining activity will become taxable.

It was Russian Minsvyaz that has been preparing legal concept for regulating mining operations implemented in the Draft Bills. The Draft Bills required holders of digital financial assets to transact in their assets only through the authorised digital financial assets exchange operator. There is a risk that if the Draft Bills are adopted in their current version, it may adversely affect certain structures of mining operations, such as those which contemplate hosting of mining equipment to foreign person who in turn provides mining computation capacites to mining pool. Under the concept, crypto miners detection system will be created allowing to monitor that mined cryptocurrency is being realised via authorised operator in Russia, including for reporting and taxation purposes. The concept also has provided for introduction of quotas and increased electricity rates for miners.

Press reported recently about new initiatives to establish domestic mining pools.

People’s Republic of China (PRC)

The process of mining cryptocurrencies is not regulated in the PRC. Legal entities or natural persons are not prohibited from engaging in mining activity in PRC. Some restrictions may apply to regulated financial and payment institutions in China that are restricted from engaging in businesses related to Bitcoin. Designing, producing, selling or exporting mining machines as well as purchasing, importing and running them do not violate any PRC laws and regulations currently in effect, provided that such activities comply with Circular on Prevention of Risks Associated with Bitcoin of 2013 and the general regulatory rules in relation to the administration of industry and commerce registration, taxation, fire control and environmental protection and the relevant policies and requirements imposed by any PRC governmental authorities.

On 4 September 2017, PRC governmental authorities issued position declaring offering and financing of cryptocurrencies, including initial coin offerings, illegal. The attitude towards cryptocurrencies has been changed by Chinese government to negative. It has also been reported in press, that the Central Bank of China favours more stringent regulation of energy use for mining operations.[4] Crypto mining has been used to circumvent the restrictions on capital export from China.

As far as taxation of profits from mining operations is concerned, press reported that Chinese government officials are considering to introduce taxes for domestic power markets and digital currency operations.[5]

[1] https://coincentral.com/bitcoin-mining-legal-regulations-around-the-world/

[2]https://medium.com/@minerone.io/crypto-regulation-around-the-world-who-is-crypto-friendliest-373e58141660

[3]https://medium.com/@minerone.io/crypto-regulation-around-the-world-who-is-crypto-friendliest-373e58141660

[4] http://infocoin.net/en/2018/04/26/bitcoin-mining-regulations-grow/

[5] https://www.bloomberg.com/news/articles/2018-02-04/power-hungry-crypto-mines-clean-up-as-cost-of-electricity-grows

_____________________________________________________________

INGVARR

With recognised expertise in Corporate, M&A, Tax and Finance INGVARR team provides small and medium enterprises, emerging technologies start-ups and high net worth individuals with strategic turnkey legal and tax advice on business and product launches, joint ventures, investments, worldwide acquisitions, financing and business operations. INGVARR takes care of all transactional and regulatory work and can handle day-to-day matters, operating as in-house legal department. For more information on INGVARR please visit http://ingvarr.com/