Digital Asset Trading & Staking Services: How to Avoid VAT and Regulatory Pitfalls?

Transcript

so ladies and gentlemen we are going to move directly to the last round table again I haven't seen the table up front so um the table the round table will take place without the table but it will be an interesting one nonetheless we will be talking about VAT and Regulatory topics with regards to digital asset trading and staking services and to talk about this we will have four experts from various backgrounds legal trading Banking and advisory let's please welcome Thomas Linder from mme Fabio andreote from Bitcoin Swiss Ren Langer from Lieutenant

Kon alog and Kevin leard from th advisory and one final note after this panel there will be a very important thing which you will not want to miss please pay attention there will be lunch and it will be served outside by the main entrance just to keep in mind no pressure thank you Ian um ladies and gentlemen welcome to this round table hosted by mme my name is Thomas Linder I'm a tax porner and as said so we're talking about digitalized trading and staking services and uh we will focus on Regulatory and tax uh pitfalls so with

me is uh Renee longer he's a head of trading services at lerer Cal Bank his team is responsible for the execution of exchange traded products and he's the Project Lead for the technical implementation of the cryptocurrency uh in in the bank then we have Fabio andreotti uh Deputy General Council of Bitcoin Swiss um he did a PhD at the University of surich about regulatory qualification of Texas very very interesting and finally we have Kevin lart he provides Financial CFO advisory Services um is a board member at K

Foundation was previously with safe and with RV and we're actually co-chairing uh the tax and accounting working group of crypto valy Association together um so thank thank you all for coming and um let's just start with the trading uh topic so Rene maybe you can just very shortly tell tell us what is actually the service offering at lurn Cal bank for for trading yeah we started uh in March this year with our offering uh we do trading and custody by ourselves we are also will introduce the transfer in

and and transfer out of cryptocurrencies uh through the year this is quite significant for a cal bank or a Traditional Bank um so far uh we focus on the on the main tokens and um and what's really special for us where we don't use a a white label solution that means that we do self custody by our own and if you so so far you I think you have Bitcoin e ether usdc so if you want to list a token uh what what are the internal procedures that you you follow from a regulatory and tax perspective yeah we have a token listing

process in place uh which really is important uh and we also use the BCP framework from mme which is a a legal risk and also a tax assessment and one of the first steps is uh the question whether the utility token or the governance token could be subject to value added tax um since it's was kind of surprising for me that a regular trade or regular transaction could be really relevant for value added tax so it was kind of a horrible scenario if we would recognize this afterwards so that's why uh we have a dedicated uh step in in our process where have the

accounting specialist uh takes care care of that actually we have right now a tax ruling uh what we are going to to start uh with Federal Tax Administration uh in Switzerland for a certain token so we take that really seriously yeah so most of you most probably you know the finmark qualification of tokens right with the payment utility and and asset token and and for V so for tax uh there are the the same category is um but there are different definitions so the federal tax authorities use different definitions than finma so with finma comes to the

conclusion this is a utility token it doesn't mean that for Vi it is also a utility token because the the definition the definitions are are different and then the consequence would be utility tokens are subject to V that that means every trade would be plus 8.1% if you sell a to Swiss people so I don't think that customers would be very happy if you you need to pay 100 bucks but actually it's 108 um so Kevin maybe what's really the difference if if we we look at the utility token and and the specifics from a v perspective which which ones are taxable which are are not non- taxable

yeah and I think you just described very uh nicely this I will call it Con um where you want to achieve for example certain outcomes for from a regulatory point of view but uh this might actually run against the the target outcome at the tax level at V level and as you said right we have like the same categories but like um there's kind of something I think was 2019 right the the SD the sfda published their um that information on the token categories at First Sight they look very similar right you have again like the utility token the asset token the payment token but yeah I think um there's some nuances

and I think particularly it changed also over time how the sfta so the sow looks at these categories unfortunately not much has been really publicly communicated so I think especially for you right in your daily practice you of course get across this F nuances um for outsides is a bit more hard to grasp and I think essentially I think they really challenged in the beginning everything was basically a utility token for that purposes as soon as you had like a governance right attached to the Token as soon as you could claim well there's a platform out there you can use it as a native token on the platform to get for example like I don't know a decentralized decentralized storage uh

service this was actually pretty much all accepted in the past as sufficient to provide for utility token categorization on the V considerations I think this changed pretty drastically I think they really want to see a clearly identifiable service relationship so a really clearly a clear understanding of uh what is actually exchanged so what's the service so a really narrow definition and if that's does not hold true and especially if the tokens can be used in very various ways they actually now go more into direction of either saying well you're actually a payment token because it's somehow used as a means of payment for various purposes or

if that does not hold through it's like this value voucher concept and the striking difference and I think that's probably what's here really worth uh to to to to um also emphasize particularly from an issuers perspective like with crypto foundation and Association if your token all of a sudden gets classified no longer for example classified as a utility token for that purposes you might actually lose the right to to re get the input V refunded in full or in portion which if you look at how many structures are implemented yeah um many projects actually import a lot of services from abroad so what you now can uh get back

the 8.1 import tax or acquisition tax it's pretty decisive and like if you think about the runway a burn of 10 million like really large projects a year we talk 810,000 swis strengths to have or not to have I hope that helps us a first perspective and also like I think as a first description of the conundrum between I think uh the Regulatory and the V perspective I think it's important to emphasize that we would all appreciate if the S comes up with updated clearer I think information on how they look at the tokens yeah I think so it certainly it's very important that you do the analysis from both sides so you do the regulatory analysis this on one side in order to

figure out are you in security yes or no are you subject to AML yes or no or are you a utility that is not subject to any regulations but then on the other hand you need to do the vat qualification in addition separately because there are defined utilities as you said they are subject to vit and they are kind of undefined ones that can be used for different purposes and they are then again treated uh the same way as as a means of payment so it's not subject to that Fabio what procedures do you follow internally to kind of solve this uh this uh situation so I'm not a tax lawyer but from what I heard uh from within our

institution is that of course the the tax um the maintenance of the token Universe for tax purposes is very um is very heavy on the resources um that's that's a lot of work um and of course uh it's not of course it scales on the knowledge side um but it doesn't really scale on the on all on the other aspects of of of a larg token Universe for us um as now speaking for the for the legal uh Department of Bitcoin Swiss for us the the security the legal classification of tokens is especially important for the re for regulatory reasons we at Bitcoin

swis we do not trade Securities so that's in German effect and we have to ensure that all the tokens that are listed and accessible to our clients are not Securities that's that's one thing and of course I think this is common sense you have to ensure that the project you on board uh in your trading and custody universe is safe secure Technic secure um you have to do due diligence on on that in that regard as well talking about still about trading what are other relevant topics so maybe outside of token qualification so I

could imagine their counterparty risks there are kind of best execution rules some code of conduct conduct that you need to follow maybe you can tell us a little bit from your practice how you manage such topics yeah um I think best execution is a really relevant topic that's why uh we work with three uh market makers that means that we don't really rely on one exchange or one counterparty that means that they are always in in competition so that means that the the best prize wins on that uh nevertheless uh it is so

that the Swiss regulation says that cryptocurrencies are not uh financial instruments especially around the finance te license cets with finsa uh also relevant to the finance Mark infrastructure cazette Serv is fmia so that means that um best execution is not really uh required but nevertheless we it really uh seriously and what's also important is uh counterparty risk as we know in the market uh the FDX event was quite horrible that's why uh we don't work with exchanges uh directly usually you

you have to pre fund uh your trading activity at the exchanges and this means you would have counterparty risk uh that's why we choose uh to work with market makers and uh and with them we don't post any collateral so that means that we can really trade with them uh on a you on a credit line which is pretty cool for us and pretty significant nevertheless since we are trading uh crypto against um Fiat that means that you still have the settlement risk in place settlement risk means that you compare to traditional Finance you you don't have that payment versus delivery

uh function which is really supportive in in the Swift Network that means you're always um you always be unsure uh whether uh well the Fiat is paid first or the crypto is paid first so we need to apply for a credit line so that means I have to go to my management and apply for credit lines and yeah and this is usually a topic since um what we see that a lot of counter part is we deal with are not fully licensed as Brokers or Banks and usually if they don't have that that large U balance sheet so for us it's uh kind of tricky to find the

right counterparties uh to deal with and I would be really grateful if the market would evolve uh that more and more regulate regulated entities come into the sector and I hope this will change over time yeah maybe uh to add on that I fully agree with um so Bitcoin swis has implemented a multi exchange setup and that basically means that we trade through uh Myriad of exchanges including uh centralized exchanges and OTC uh desks trading desks um and what we actually do is we have a credit

committee who that that um regularly meets that goes through the the counterparty risks uh on a regular basis that do that does those uh reassessments and then limits uh ourselves basically the trading of certain tokens but also with respect to certain counterparties um limits ourselves and and and basically introduces thresholds that cannot be exceeded for a certain counterparty and but overall I would say we've seen in the past um professionalization of the space um there is for example you see that Prime

Brokers are emerging and offering very similar um products and services that we um as the ones we already know from trfi so I think a lot a lot of a lot is going going on um many more things will probably uh come up but overall I agree with with you that the the counterparty risk management is and is and remains uh one of the key functions of every crypto broker what I also like to emphasize since uh uh it's also a topic uh it's in Forex Trading maybe some of you guys are also engaged in that we have here a

central clearing counter party which uh large Bank use which is uh the continuous linked settlement Network it's a CLS and which reduces or completely eliminates the settlement risk this is something uh quite interesting which might come up in the future for that sector and I think the larger in institution will focus on that but I think uh as a precondition uh we must solve also the problems about about the capital requirements in in place which are set out by the um the Basel committee that means if you would have uh Bitcoin on your balance sheet for example and as a

market maker you have to have U that on your balance sheet you would need to have the same amount of capital in place for that amount of Bitcoin yeah imagine that imagine that and this kills um a lot of um the activity or or the activity of regulated companies and that's why also a lot of Market participants um you try to be unregulated so I think this is a really important topic where Regulators should also focus on that the rules should be inclusive not exclusive and we also in the in the bankers with spos Association uh we will engage in that process to try

to um yeah convince them that these rules are not working as they should be how do you see the the the role of unregulated market makers bots so I I see there a risk of Market abuse inside of trading Etc so how do you see uh such uh such risk yeah I can respond to that question I think from a Project's perspective not necessarily from a fi Financial institutions perspective I think it's certainly something we should have all on the radar maybe also just to follow up what you discussed before over the last couple of years I think we definitely have seen a clear professionalization of the sector I think more more also like

traditional players joining I think the activities I think bringing in a different level of professionalization and I think yeah just following up on the question I think it's super important I think we have for example M around the corner so to say which introduces the concept of Market abuse also for non-security crypto assets um which I understand under the Swiss rules right like as long as you're not a financial instrument or a security these rules are kind of not relevant um so it's more less a fair and I think um it's important because I think if I guess like if if you have been involved in projects on the project side um you definitely have noted around listings

around certain Market events there's some fun patterns to observe and I think it's also important that the industry in this regard grows up gets more yeah matures because I think this is Tim also a question of trust because how shall we reach Mass adoption if we cannot really trust how uh this this is done it's my personal view also here yeah I think this is really an important remark since imagine that Luzan could be Lan Konan could be a counterparty in a defi trade where of afterwards it came out it it was Market abuse it's really horrible event uh let's imagine that so and if we don't have re rules in place

uh on a on a DEX level so we as a bank have to be really sure that our trading behavior is compliant but how can we be really sure if we are trading on that would be trading on that platforms that the trade has a has had a a a good price Discovery let's say it in this way a good price Discovery yeah and those I think um just on the matter of price Discovery I'm for examp pretty critical about the recent developments in the industry about around the topic of K's I do not want to put all of them into the same basket huh but I think some of them definitely engage in harmful practices if you just goes by the text of mic for example right if you just generate a hype just

to drive something in the short run to get some artificial like activity in place what's that I think yeah I'm not a lawyer but like it smells at least very strongly like potential Market abuse yeah I would I would agree with that um and you're a lawyer right yeah um I would say a lot is coming together now things we've uh we very we very familiar with uh from thread f um especially you mentioned the the best execution policy of course extensive conflicts of interest policies as well but then also with respect to Market Integrity um Mar Market fairness I think

the the M car will probably set um set the first um Milestone and um it's not everything good about I think the the scope of my car um there there are a lot of questions um we'll probably talk about it uh when we come to staking but maybe just one remark my car would at least that's the interpretation of esma uh would also be applicable to um consensus mechanisms so that basically means that um staking service providers or miners that um include uh transactions in a block could also be potentially be

subject to my car market abuse regulation yeah let's just jump to the St uh topic last summer there was a big fuss uh here in Switzerland about uh the finma kind of regulating staking uh activities everything kind of is more or less uh solved in a good way but maybe you can shortly summarize what was the topic and what is the kind of what are the important uh you kind of steps that you need to take if you want to provide staking service I think we've already heard it this morning on at least one panel that staking was a Hot Topic so it was summer 2023 was a hot summer for the

Swiss staking industry um it was overall a turbulent year um finma announced that it that it uh intends to consider custodial staking services at least certain types of custodial staking Services um uh to be Bank activity so basically they they argued that that um certain types of custodial staking services are not um in compliance with uh safekeeping requirements that uh would make uh make crypto assets bankruptcy remote and yeah finma um announced that to the industry there was a was heated discussion public

discussion many papers were written and then in December 2023 um I think the that was the lucky day uh the industry has hoped for and finma basically reversed their policy but at the same time they also tightened and I think uh for good reason they also tightened uh investor protection requirements customer protection requirements with respect to staking services but basically uh staking is now not subject to having a bank license you can still offer it as a non-bank um but you have to um you have to ensure that the staked crypto assets are um bankruptcy remote

in the event of bankruptcy and there's kind of as I understand so you need to make sure um so there's a to kind of manage the withdrawal key um and to be able to kind of re withdraw the funds without that uh especially if you use uh service providers that run validator notes Etc right so the validator key you might uh then transfer to to the validator node but you need to make sure that you're still in in control of the withdrawal key yeah that's exactly right um the thing with the staking guidance from finma is

that it's very ethereum specific that's uh I take an issue uh with that but um obviously the at least the Swiss staking industry was very interested a solution to ethereum staking uh so that's um explainable and we can accept that but I think the the main the main the key differentiator is the who at the end of the day has control over the fave fate of those staked crypto assets and if you can ensure that you have that you keep and maintain control on behalf of the of the customer uh and you comply with all the other requirements which are not uh few but quite many but then you are

still um allowed to offer those staking Services as a bank uh without the extra Capital requirements and as a non Bank uh without the banking license basically so maybe I jump in here please uh kudos for for you for you and your team you did an amazing job I've seen this in the background in the Swiss uh blockchain Federation was what was really great and the whole industry um when went together also we also within the SS Bankers Association we also participated in um let's say workshops with regulators and as a whole crypto industry uh we've kind of made it but nevertheless uh it's uh

really it was really a Hot Hot Topic and it's still a Hot Topic it's also um um the capital requirements topic is still in that and I would be really would like to emphasize uh since if State crypto assets would be treated as public deposits that really means we would have them on our balance sheet and if we would have them on our balance sheet then these Capital requirements would apply and to be really clear for you guys outside that means if you would have 100 million in state crypto assets when we would need to reserve 100 million in capital for it just to make

it clear to outside so and this is really I it would have killed the staking case within Switzerland to be really clear and honest yeah and it would be a really large disadvantage for whole for the whole industry uh within Switzerland also on a more broader or Global basis so which was really a great effort what we have done so that's why I also would like to emphasize uh on that and there are still some unclear topic uh since um the staking guideline said that if you would like to do direct staking what we would like to do that means that we would like

to have a withdrawal key it says that we as a bank has to do also staking by ourselves but what does that really mean do we really have to run our own valid data Noe which is really kind of unimaginable for country to do that so we need to have a solution in place or yeah it's still for me a bit unclear since uh we have just about to start the staking project but for us it's really also important since we would also uh love to provide um this service to our clients since I guess in one to three years every bank or entity which offers crypto custody needs to have also a

staking offering since it uh prevents also our customers uh from a delusion of a share of a network so it's an extra reward and kind of a must as a crypto custody provider it's my observation as a client actually that it seems to me the the staking offerings with the different service providers it's still very intransparent to the client at least what is really happening who is running the nodes where are where is my crypto um so what are actually the legal agreements is it yeah do I run a note do you run a node in my name is it someone

else um is this observation correct that uh that the that there is more transparency need transparency needed I mean as a as also as a customer I think you can always improve on those things be more transparent and disclose certain things in addition of course there's always um a trade-off uh from a business perspective um at Bitcoin SS we run most um infrastructure ourselves so that's um maybe a bit different um but of course Al also we see that there is specialized

infrastructure service providers emerging and uh being very efficient on the on on on because they have they have scale and and and so on um so I but I agree with uh I agree with you that um that it might be interesting for the client of course to know where exactly um where exactly is that client's uh crypto asset staked um maybe you can provide the client with the address that's that's usually possible depending on the protocol um yeah there they probably technical means uh that that would um provide the client with more um

information that is valuable valuable to the client especially institutional um um institutional investors and so on in addition to the finma discussion there was also uh federal administrative Court decision with regard to the V treatment of validating state King so maybe Kevin you can shed some light on that that was all or it's still some unclear how this is applied in practice right yeah absolutely and I think probably the most significant I think um change it did introduce is really that it got confirmed that let's say when it

comes to staking rewards that from a vat point of view there's a clear differentiation between block rewards which are out of scope of v and uh the transaction fees which are essentially like a compensation for an electronically supplied service um that was not clear before because I think the the the the original Al the still actually published that information um does not um detail this case where you basically have uh also like a scenario where um you can have uh basically empty blocks um and this was clearly confirmed that if you I think provided that actually it's also technically possible I think that that's a probably a fair uh

caveat disclaim we need to put uh that um this is not a single supply of service right it's it's not getting combined it needs to be looked at separately which sounds great at first sight because I think uh yeah you if you run like uh staking activities you should now really make sure that your accounting department gets the the the the accurate data input so what kind of transaction fees have you actually accumulated what can what share of um block Rewards yeah opening here the bracket it's not always so easy to get this data depending a bit on the Chain you're operating so that's also I think an accounting reporting challenge but at least it gives some perspective I think what's also important to mention it also

opened up new discussion areas um I think to keep it I think simple and brief probably around the question what does it take that the SFO uh looks at the crypto Network in a way that they're convinced that it is truly decentral ized the Court ruled uh provided some guidance by just I think looking at uh yeah the the distribution of the the the tokens available uh for voting but I think there's of course a big question is that now the total Supply do we just look at circulating Supply uh do we what if there are some maybe clusters between in sense of like you have Foundation you have DeVos you have maybe other related

entities there's some grouping I think there's there many many discussions and of course like if depending on the way uh it is interpreted they can have course they can have a sharp impact on your V bill that's why I think we need to keep pushing and I think I can speak for our working group at the crypto value Association right uh that we try our very best to to educate the authorities to share our five cents because that really matters because I think to me this V discussion to really put it very frankly um we do not have to move forward in the regulatory sphere and be very attractive we kind of get filed in the v Arena because um yeah and I think we should

keep pushing educating as much as we can because I think there's still a lot of uh um discussion points I think goes hand in hand what we previously talked about token classification right get an updated uh communic information um status also like respect of this recent Court ruling M yeah the main topic with v is that you always need a counterparty in order that the transaction can get taxable so you need a counterparty that pays for a service right and that's the discussion where in De centralized ecosystems is there a counterparty so now the the court kind of decided that the block

decentralized blockchain network is not considered a counterparty that's why the block Revol Bo is kind of tax-free um but on the other hand they also decided that the transaction fee knows a counterparty because someone paid it and uh that uh results in being a vable transaction and then they say and you need to know where the user is resident because that's important because only swiss-based uh transactions are subject to Swiss V8 and that's in practice impossible to know right and um um and and there are also other view viewpoints that they actually say why can a network not be a counter party because we know

which network it's there's only one ethereum network there are no different you always communicate with the same uh set of notes and they're performing certain activities and you pay them uh that they do it and um so these are these are here the topics and and and then I think around Absol like very important I think additions you have ented here because like for example with the single Supply um perspective right it's important that you have basically the same recipient and of course that could be argued theoretically if you have a certain level of C centralization that you say look the Swiss uh Foundation the Swiss Association is basically yeah the recipient of the

services and at the same time also like could be argu the Emer of of the service but that's yeah where it gets also a bit like blur and uh fun to to follow these discussions uh but yeah I think it can be qu in my view like we need to really closely follow up these discussions because like if this holds up right we should kind of avoid that we have like ecosystem organizations here in Switzerland with massive or significant I think token holders which I think historically right this was set up in a way as a hop basically you had like the this sharehold lless mless foundation for example who has like a large pile of tokens with the mission to

eventually distribute these tokens over time as part of the decentralization road map but now of course like if you cannot anymore as a possible outcome of this discussion allocate maybe just like 20% of the tokens to uh Swiss Foundation what do you do like you need to have like dual structures uh more complex structure do you do like more uh larg air drops what does this mean for the sell pressure in the market so on so on like uh it would be that's why I believe like it's equally as the regulatory discussion was taking we have still I think a lot to clear and that s also super exciting uh but we need to be careful that we don't get yeah disadvantage generated out of

this super thank you very much I think launch is approaching everyone is hungry and um that's why we uh finish now this panel and uh and gu [Applause]