Questions and answers on virtual currencies
Frequently asked questions and answers about virtual currencies
General information about virtual currencies
- What are virtual currencies?
Virtual currencies (including cryptocurrencies, such as Bitcoin), are a form of unregulated digital representation of value that is neither issued nor backed by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment, and can be transferred, stored or traded electronically.
The term virtual currency is in widespread use, but according to an opinion of the European Central Bank, “virtual currencies do not qualify as currencies from a Union perspective”. The ECB further states that “given that virtual currencies are not in fact currencies, it would be more accurate to regard them as a means of exchange, rather than as a means of payment”.
- Are entities that provide for the purchase, storage and trading of virtual currencies systemically regulated and supervised? What does this mean for users?
Stakeholders in virtual currency schemes that facilitate the purchase (e.g. trade platforms), storage (e.g. digital wallet providers) and trading of virtual currencies in Slovenia are not systemically regulated and supervised. This means that no authority licenses or supervises these entities from the perspective of the adequacy of their risk management (operational risk and cyber resilience are particularly relevant), the expertise of employees in providing the services in question, the adequacy of transactions with users, etc. In consequence, investors in virtual currencies should be aware of the specifics of this type of investment, and should weigh up whether the risks taken up align with their personal preferences and investment objectives.
For consumers thinking of purchasing virtual currencies
- What are the risks associated with holding virtual currencies?
The European Banking Authority has identified several attributes and risks that users of virtual currencies should be aware of. The following risks are the most notable of these:
- you can lose your money on the trade platform;
- your money can be stolen from your digital wallet;
- if you use virtual currencies as a means of payment, you are not protected as in the case of a transfer from a payment (current) account;
- the value of a virtual currency that you hold may be volatile and may even fall to zero.
Given the increased interest in virtual currencies, the Bank of Slovenia informed consumers back in 2013 of the relevant warning by the EBA. A warning with regard to the risks inherent in holding virtual currencies was additionally issued on 9 October 2017 by the Financial Stability Board, which is chaired by the Bank of Slovenia. Last year the FSB also established a working group for cyber risk and financial technology (fintech), which will also discuss issues related to virtual currencies.
- What should an individual be particularly attentive to when deciding to purchase virtual currencies?
Before purchasing virtual currencies, an individual should at least address questions such as the following:
- Who is the entity with whom I would purchase the virtual currency?
- How is the individual currency issued? How does the entity with whom I will obtain the virtual currency function? Have I been provided with sufficient information and clear answers to all of my questions?
- What are the fees (commission) that I will pay (i) to acquire units of virtual currency, and (ii) to transfer/sell these units.
- In which country is (the head of) the entity with whom I am concluding a contract, and what is the legislation there (tax arrangements, prevention of money laundering and terrorist financing, etc.)?
- What/who guarantees that I will be able to convert my virtual currency units back into fiat currency, and how? Will my inward payment be used to cover outward payments to the investors selling these virtual currency units (a Ponzi scheme)? How quickly can I carry out the process of converting the virtual currency into fiat currency?
- What entitlements do I earn by investing? Does the particular virtual currency scheme even allow for conversion back to fiat currency?
- How can I store the units of virtual currency that I obtain? How secure is this method of storage, and by whom and how is the security guaranteed? What fees (commission) will I pay for storing virtual currency units?
- What legal remedies are available to me should I be the victim of fraud or deception, and will I be refunded in such an event?
- What is the tax treatment of virtual currencies and investing in them? What are the resulting tax liabilities? Answers to this question can also be found in the clarifications by the Financial Administration of the Republic of Slovenia (in Slovene only).
We suggest that anyone who lacks the information to be able to answer questions such as those cited above should demand clear answers from the entity with whom he or she is purchasing the virtual currency, or should reconsider whether a purchase of this type is sensible. Even if a well-informed individual opts for such a purchase, it is recommended that the amount invested should not constitute an excessive exposure, and that he or she should be aware that it could be lost.
For potential providers of services related to virtual currencies
- Are virtual currencies foreign currencies?
Virtual currencies cannot be defined as foreign currencies, as the Foreign Exchange Act (ZDP-2) defines foreign cash, the purchase and sale of which is classed as the regulated activity of currency exchange operations, as banknotes and coins in a foreign currency issued by a central bank or government. Entities that provide the exchange of virtual currencies from and into traditional fiat currencies therefore do not require a Bank of Slovenia authorisation to provide currency exchange operations pursuant to the ZDP-2.
- Are virtual currencies electronic money? Can payment services be provided in virtual currencies?
According to all of the information at our disposal about the conceptual forms of virtual currency known today, the use of their own denomination means that they cannot be considered a digital replacement for banknotes and coins of traditional fiat currencies, but are instead units of a specific virtual currency (e.g. bitcoin or ether) or a digital form of entirely different content (a token with intellectual property rights, a token as the medium of a hybrid loan agreement, a token as proof of donation with a combination of the option of the use of a service or a refund, etc.). Virtual currencies of this type therefore do not satisfy the criteria for definition as electronic money, and consequently cannot be defined as the subject of electronic money issuance services in accordance with the Payment Services and Systems Act (ZPlaSS). Because according to their known attributes virtual currencies cannot be defined as either one of the two forms of money alongside electronic money, namely cash (banknotes and coins) and book scriptural money, they also cannot be the subject of payment services in accordance with the ZPlaSS.
- Can virtual currencies be used legally for payment?
The Euro Introduction Act (ZUE) defines banknotes and coins denominated in euros as legal tender in Slovenia (which points of sale are required to accept), and supervision of the implementation of this provision of the ZUE is conducted by the Market Inspectorate of the Republic of Slovenia. The cited provision of the ZUE does not place any constraints on merchants and points of sale in deciding to accept other means of payment, be they regulated (e.g. payment instruments, electronic money, foreign currencies) or unregulated (barter, new means of payment such as virtual currencies, etc.). It is not illegal to accept virtual currencies as means of payment in Slovenia (and in the EU). It is nevertheless recommended that holders of virtual currencies who wish would like to use them for payment check in advance with regard to (any) fees and commissions that they would pay to this end.
Virtual currencies are also subject of consideration by other institutions; some of the relevant links are cited below:
- ECB (Virtual currency schemes, Virtual currency schemes - a further analysis, OPINION OF THE EUROPEAN CENTRAL BANK of 12 October 2016 on a proposal for a directive of the European Parliament and of the Council amending Directive (EU) 2015/849
on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC)
- Security Market Agency Posvetovalni dokument v zvezi z urejanjem področja zbiranja sredstev z uporabo tehnologije podatkovnih blokov, Opozorila v zvezi z ICO