Jersey Cryptocurrency Laws Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology
ICOs
Companies that issue ICOs in Jersey are subject to the Control of Borrowing Order 1958 (COBO). COBO requires companies issuing ICOs to first obtain consent from the Jersey Financial Services Commission (JFSC) for their offerings. These are also known as “COBO consents.” ICOs that have not obtained the necessary COBO consents are unauthorized ICOs and are presumed to be illegal in Jersey.
In Jersey, cryptocurrency offerings are regulated by the JFSC. The JFSC has broad powers and can refuse issuing COBO consents at their own discretion. Additionally, the JFSC has the discretion to attach any conditions on COBO consents as they see fit. Accordingly, the JFSC has the full authority to grant or deny ICOs in Jersey. Therefore, ICOs in Jersey are largely regulated because they are subject to the broad authority of the JFSC.
Generally, any local or international firm that offers shares or securities to the public of Jersey must obtain COBO consents from the JFSC. Specifically, all companies engaging in any of the following activities are required to obtain authorization from the JFSC before operating in Jersey: (1) companies issuing shares; (2) foreign corporations registering shares or other securities in Jersey; (3) Jersey companies issuing any securities other than shares; or (4) companies circulating a prospectus or offer of securities in Jersey. Under COBO, securities are broadly defined, including shares, bonds, notes, debentures, and debenture stocks. Therefore, virtually all companies offering securities to the public will be required to obtain COBO consents from Jersey authorities.
Like companies offering IPOs, ICO issuers are required by COBO to acquire consent from the JFSC before launching a public offering in Jersey. Applications for consent addressed to the JFSC must specify whether the ICO tokens are a security or not for COBO purposes. Therefore, firms must determine whether their ICO tokens are classified as securities. If an ICO token is a security, then the issuer must receive additional consent under COBO. Therefore, ICO issuers that offer securities are subject to stricter statutory requirements under COBO and more JFSC regulation than other non-security issuers.
In classifying an ICO token, the JFSC emphasizes that they will focus on the token’s economic function and purpose and whether the tokens are tradeable or transferable.
Generally, ICO tokens that share characteristics associated with traditional securities will be classified as securities. Similar characteristics include: (1) a right to participate in the profits or earnings of the ICO issuer or a related entity; (2) a claim on the issuer or a related party’s assets; (3) a general commitment from the ICO issuer to redeem tokens in the future; (4) involvement in the ownership or running of the ICO issuer or a related party; and (5) expectation of a return of the amount paid for the tokens, with or without interest or another form of gain. Any ICO tokens that share these characteristics will likely be classified as a security under Jersey law.
In contrast, companies that are not offering securities through their ICOs are not required to obtain additional consent from the JFSC. ICO tokens that are not securities are either classified as utility tokens or cryptocurrency tokens. A utility token confers the holder the right to use or access a product or service, with no economic rights or any right to redeem the token for value. In contrast, a cryptocurrency token is designed to behave like a currency and act as a means of payment. Since the JFSC can lessen conditions for COBO consents, non-security ICO issuers are probably subject to less burdensome requirements than issuers offering security tokens.
Although there is discrepancy between how security tokens and non-security tokens are regulated, all ICO issuers must satisfy ten requirements regardless of what token they are offering:
Be incorporated as a Jersey company (i.e., not be a foundation or limited partnership or another form of vehicle);
Receive consent under COBO before undertaking any activity;
Apply relevant AML requirements to persons that either purchase tokens from or sell tokens back to the issuer of those tokens;
Appoint and maintain a duly regulated Jersey “Corporate Service Provider” (CSP);
Appoint and maintain a Jersey resident director on the board of the ICO issuer, where the Jersey resident director is also a principal person or key person of the CSP;
Obtain the JFSC’s prior approval to any change from either the issuer’ administrator or the Jersey resident director of the issuer;
Prepare and file annual audited accounts with the Jersey Companies Registry;
Have procedures and processes to mitigate and manage the risk of retail investors investing inappropriately in the ICO and ensure retail investors understand the risks involved;
Prepare and submit to the JFSC for its approval an Information Memorandum (which may be in the form of a White Paper) that complies with specific content requirements of a prospectus issued by a company under the Companies (Jersey) Law 1991; and
Ensure that any marketing material (including the information memorandum) is transparent, fair, and not misleading.
As stated above, all ICO issuers must be represented by a CSP acting as the ICO administrator. A CSP must weigh the following factors before deciding whether or not to act as a company’s ICO administrator:
The honesty and integrity of the issuer and the persons associated with it;
The issuer’s approach to act in the best interests and needs of each and all of its customers;
The adequacy of the issuer’s financial and non-financial resources;
How the issuer will manage and control its business effectively and ensure that it will conduct its business with due skill, care, and diligence;
The effectiveness of the issuer’s arrangements in place for the protection of client assets and money when it is responsible for them;
The effectiveness of the issuer’s corporate governance arrangements;
What systems the issuer has in place to prevent, detect, and disclose financial crime risks such as money laundering and terrorist financing; and
The issuer’s marketing strategy, including the types of persons to whom the ICO will be marketed, how it will be marketed, and the jurisdictions in which it will be sold or marketed (including consideration of any relevant laws or restrictions that may apply in other jurisdictions).
In conclusion, ICOs in Jersey are largely regulated. All ICO issuers must obtain COBO consents and authorization from the JFSC to operate in Jersey regardless of whether or not they offer security tokens or non-security tokens. Furthermore, ICO issuers are required to obtain the assistance from a Jersey CSP before making public offerings. Presumably, this means that ICO issuers must receive the support of the Jersey government and a Jersey CSP. Additionally, ICO issuers must follow the ten requirements listed above. For these reasons, ICOs are largely regulated in Jersey.
Overall, Jersey supplies cryptocurrency traders with a favorable tax environment for several reasons. First, cryptocurrency transactions within Jersey’s borders are exempt from capital gain taxes. Accordingly, investors in Jersey are exempt from paying capital gains on their profits from cryptocurrency transactions. Second, Jersey companies may be zero-rated for income tax purposes if the company does not offer financial services. In other words, companies that do not offer financial services are subject to a 0% tax rate on their income taxes for cryptocurrency transactions.
Third, cryptocurrency holders in Jersey are exempt from capital transfer taxes or other similar taxes. A “capital transfer tax” is a tax paid on an asset given to someone as a gift. Accordingly, capital transfer taxes are also known as an inheritance taxes. Consequently, if a Jersey citizen receives cryptocurrency as a gift, they will not have to pay a capital transfer tax or an inheritance tax on their cryptocurrency. Four, share transfers are not subject to stamp duties in Jersey. “Stamp duties” are taxes placed on legal documents, such as documents that transfer assets or property.
Finally, out-of-state residents can utilize Jersey’s favorable tax laws without living in the country. Under Jersey law, foreign investors can be Jersey residents for tax purposes while living out of the country as long as they meet specific residency requirements. Presuming these requirements are satisfied, foreign investors can probably classify as Jersey residents and pay lower taxes.
Despite offering a cryptocurrency-friendly tax environment, Jersey has no legislation that explicitly addresses cryptocurrency or other digital assets. Nonetheless, Jersey’s Comptroller of Taxes issued guidance on cryptocurrency tax treatment. In the guidance, the Comptroller of Taxes specifically addressed how cryptocurrency relates to Jersey’s income taxes and service taxes. According to Jersey’s Comptroller of Taxes, cryptocurrencies are taxed according to Jersey’s general tax principles and provisions like other financial instruments. Therefore, cryptocurrency is taxed under the general tax framework of Jersey in the same manner as traditional assets.
Although there is no cryptocurrency-specific legislation, further guidance has been issued addressing three cryptocurrency activities: (1) cryptocurrency mining, (2) exchanging cryptocurrencies into conventional currencies, and (3) using cryptocurrencies as a means of payment for goods and services.
Cryptocurrency mining on a small or irregular skill is generally not considered a trading activity and is not subject to income taxes in Jersey. However, the substantial expenses associated with cryptocurrency mining are not deductible as expenses of trading. So, while cryptocurrency miners pay no income taxes, they cannot take advantage of tax deductions because mining alone is not a trading activity.
However, an exception applies, and miners can take advantage of tax deductions when their mining activities are accompanied by cryptocurrency trading on a sufficiently commercial scale. Trading on a commercial sale subjects the cryptocurrency to to “Badges of Trade” principles. Therefore, cryptocurrency mining operations traded at a commercial scale will be subject to income taxes. Accordingly, large-commercial operations can make tax deductions from cryptocurrency mining expenses. Nevertheless, the majority of mining operations are presumed to be done at a non-commercial scale. Accordingly, most mining operations cannot deduct business expenses from their taxable income.
Like cryptocurrency mining operations, companies that exchange cryptocurrencies to and from conventional currencies are liable to income taxes unless they are not classified as trading entities. Companies that only facilitate occasional cryptocurrency transactions are not taxed on their gains or losses from the transactions and are not authorized to deduct associated expenses. Presumably, individuals who occasionally buy and sell cryptocurrency are not subject to income taxes if treated similarly to companies under Jersey law. Accordingly, most companies and individuals cannot deduct their cryptocurrency losses from their taxable income. Nevertheless, most individuals and companies are probably exempt from Jersey income taxes on their cryptocurrency trades.
Furthermore, using cryptocurrencies as a means of payment may subject both parties to income taxes. Accordingly, companies that accept cryptocurrency for goods or services must reflect the transactions on their tax returns since they are taxable under Jersey’s traditional tax principles. For tax purposes, cryptocurrency payments must be converted into sterlings, which is Jersey’s fiat currency. Reports of transactions that are not sterlings, such as cryptocurrency transactions and US dollar transactions, must be converted to the sterling equivalent for income tax purposes. Therefore, cryptocurrency transactions for good and services are taxable under the laws of Jersey.
For the above reasons, Jersey offers a favorable tax regime for cryptocurrency. Despite paying lower taxes than other jurisdictions, Jersey investors must diligently record the prices at which they bought and sold their cryptocurrency and then convert their calculations to sterlings. Although there is no cryptocurrency-specific legislation, virtual currencies are regulated under the general tax framework of Jersey like other traditional financial instruments. Therefore, cryptocurrency taxation is largely regulated in Jersey. Consequently, cryptocurrency traders in Jersey must declare their crypto assets on their annual tax forms to avoid civil liability.
P.S. Insights on Cryptocurrency Legal Issues
Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.
Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.
However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.
Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency. The globe below provides links to country-by-country summaries:
