Italy is one of the few countries in the world where cryptocurrencies and blockchain technologies are regulated at the legislative level. In 2017, Legislative Act № 90 was issued, according to which service providers in the cryptocurrency market are classified as ordinary currency exchange operators. In other words, we can say that this document equates cryptocurrency with traditional currency. In addition, this Act directs the Ministry of Finance and Economy to issue a decree that would regulate the mechanism of operations with cryptocurrency, the work on which was completed on February 2, 2018. In it, the Italian government expressed the opinion that cryptocurrencies are the most suitable instrument among others for laundering funds obtained by criminal means and the financing of terrorism, in connection with which legal regulation should make it impossible to use them for criminal purposes. The regulation gives the following definition of cryptocurrency: it is a virtual currency used as a medium of exchange for goods or services. At the same time, cryptocurrency is not issued by the central bank and is in no way correlated with other currencies, therefore, it is not a means of payment.
The decree refers to the creation of a public register of service providers in the cryptocurrency market, in which they will need to register. In this case, registration is temporary, and therefore it will also need to be renewed at the end of the period. Such rules, according to the Italian government, will allow controlling the cryptocurrency market.
An important issue remains the problem of taxation of transactions with cryptocurrency. In September 2016, the Italian Tax Agency issued a resolution clarifying certain aspects of the taxation of transactions with bitcoin and other cryptocurrencies, taking into account the results of the Hedqvist case by the Court of Justice of the European Union.
One of the questions that were sent by the Supreme Administrative Court of Sweden to the EU Court of Justice as a pre-judicial request was whether the transaction for the sale and purchase of bitcoin is subject to VAT. In other words, is the exchange of cryptocurrency for regular currency and vice versa a rewarding service? If so, then the fees charged by the provider of such a service are tax-deductible. However, another question arose before the court: is the transaction of purchase and sale of cryptocurrency exempt from VAT taxation in accordance with paragraph “d” of Article 135 of the EU Directive of November 28, 2006, on the common value-added tax system? According to this rule, the member states of the Union must exempt from tax (VAT) transactions, including the assignment of rights, relating to deposit and current accounts, payments, transfers, debts, checks, and other payment instruments, with the exception of collection of debts. It was on this point that the applicant, in this case, David Hadquist, relied on, believing that the purchase and sale of cryptocurrency should not be subject to VAT since cryptocurrency is “another payment instrument”. This position was supported by the European Commission.
The opposite point of view was held not only by the government of Sweden but also by a number of other member states of the European Union (in particular, Estonia and Germany). They believed that the sale and purchase of cryptocurrency should be subject to VAT, since according to paragraph “e” of Article 135 of the above Directive, transactions, including assignments, concerning currency, banknotes, and coins used as legal tender are exempt from value-added tax, with the exception of collectible items, i.e. gold or silver and other metal coins, as well as banknotes not usually used as legal tender, or coins of numismatic interest. Accordingly, since cryptocurrency is not a legal tender, it means that transactions with it are not subject to this regulation of the Directive and are not exempt from VAT.
The Court of Justice of the European Union considered that transactions for the sale and purchase of cryptocurrencies were exempt from VAT, but argued this not by paragraph “d” of Article 135 of the Directive, to which D. Hadquist referred, but by paragraph “e” of the same Article of the Directive used by the Swedish authorities in support of their position. The court motivated its decision by the fact that bitcoin and other cryptocurrencies from the point of view of European tax legislation should be considered by analogy with ordinary currency, and not with other payment instruments.
The 2016 Italian Tax Agency resolution reflects the findings of the Court of Justice of the European Union and additionally notes that profits and losses arising from exchanges of cryptocurrency for traditional currency and vice versa are subject to corporate income tax. According to the resolution, transactions with cryptocurrency must be registered. In particular, information about the parties to the transaction, its amount, date, and other information are subject to registration.
Thus, Italian law, like German law, considers cryptocurrency as a medium of exchange for a product or service. At the same time, Italian acts emphasize that the key task of legal regulation is to protect public interests related to money laundering and terrorist financing, and to implement the provisions of the relevant EU Directive, in connection with which it is necessary to register professional participants in the cryptocurrency market, as well as record data on transactions using cryptocurrency. In Italy, they seek to control the cryptocurrency market, for this purpose in 2012 such a state body as the Italian Digital Development Agency (Agenzia per l’Italia Digitale, AgID) was created, authorized to regulate this sector of the economy.
In addition, on 24 January 2019, the Senate of the Italian Parliament approved a draft Simplification Ordinance (Decreto Semplificazioni 2019), which legalizes transactions using an Electronic and Distributed Database (DLT). On February 7, 2019, the document was approved by the Council of Deputies, as a result of which Italy became the first country in the world in which there is legal regulation of blockchain technologies.
The law gives the following definition of blockchain: it is a technology or protocol based on a distributed, reproducible, immutable, accessible, decentralized data registry, created on the basis of a cryptographic key, which allows registration, validation, updating, and storage of encrypted and decrypted information, in the reliability of which everyone is convinced network member.
This definition of blockchain raises doubts and controversy in doctrine. According to Davide Carboni and Massimo Simbula, the phrase “decentralized ledger based on cryptography” is inconsistent and vague because the concept of “based on cryptography” is not disclosed, and furthermore, cryptography is access to the decentralized ledger, not the ledger itself. In addition, critics point out that immutability is not an indispensable property of distributed data registers, since they can differ in the level of immutability. Finally, critics saw a contradiction in this definition of the ability to update information in an immutable ledger.
The law under consideration obliges the Italian Digital Development Agency to develop technical standards for distributed data registers by March 2019, which were to enter into force within three months from the date of entry into force of the law.
It should be noted that blockchain technologies have been actively used in the banking sector for a long time. The Association of Italian Banks on September 29, 2018, announced the successful testing of an interbank communication system based on blockchain technology. 14 Italian banks, using distributed ledger technology, plan to optimize interbank transactions. Thus, in particular, the Association intends to speed up operations, increase the transparency of banking information, and make it possible to verify and exchange information directly within the network. About 1.2 million transactions of interbank information exchange using blockchain technology have already been successfully completed, in connection with which banks are starting to record daily transactions in a distributed data register.
In addition, the law also pays attention to a smart contract, defined as a program based on blockchain technology that automatically enforces a contract in accordance with specified conditions determined by two or more parties. At the same time, the smart contract is an alternative to the usually written contract: according to the blockchain expert of the Ministry of Finance and Economy Fulvio Sarzan, “the legal regulation of the smart contract gives the contract executed by the program the legal status of an ordinary written contract.” He also notes that the goal of legal regulation of a smart contract is to give legal effect to a transaction made using blockchain technology, without the need for notaries and central certification bodies.
The law also obliges Italy’s Digital Development Agency to develop a legal guide on the use of smart contracts. Thus, the legal regulation of blockchain technology in Italy is not limited to the adoption of this law. In the development of the law, technical standards and guidelines should be adopted that should ensure control over the use of blockchain technologies and smart contracts in commodity and financial markets.
The smart contract as a financial instrument is of great interest to large Italian banks. In particular, Banca IMI notes such a striking advantage of a smart contract as the impossibility for a counterparty not to fulfill its obligations, as is possible under a regular contract. Bank spokesman Massimo Morini emphasizes that from a financial point of view, blockchain provides much more guarantees than previously used technologies. For example, a smart contract blocks part of the funds to ensure that if the counterparty stops paying, then in a couple of hours such a contract will be terminated without loss. This is indeed a completely different business model than the one we are used to seeing, but from a financial point of view, it works.