Virtual currencies have stabilised their role as mediums of exchange
The number of virtual currencies is growing rapidly, and not all of them can be given a monetary value. Virtual currencies are often also referred to as cryptocurrencies, as most of them are digital currencies based on cryptography. Regarding the virtual currencies for which a monetary value can be calculated, the one with the highest market value is Bitcoin.
Virtual currencies do not have any position of a legal payment instrument, but they can be used as mediums of exchange. Some virtual currencies are accepted as a means of payment, for example, in internet services or at shops. A good example is Bitcoin, which is generally accepted as a payment instrument.
As virtual currencies are becoming more and more common, markets also include mediums of exchange which are not necessarily, in reality, virtual currencies, even though they are marketed as such. It may be difficult for consumers to differentiate fraud attempts from genuine virtual currencies, and special attention must be paid when investing in these. In addition to potential frauds, virtual currencies also involve a significant risk due to high fluctuations in their value. This may result in considerable financial losses for investors.
Because virtual currencies can often be used almost completely anonymously, they are also exploited in illegal exchange and money laundering, for example. The origin of virtual currencies may be difficult to confirm, and they may originate directly from criminal activities. When criminal assets are exchanged into a virtual currency, their tracing becomes laborious, but not impossible. The blockchain of Bitcoin, for example, is public, which means that currency transactions can be accessed and confirmed by others.
Act on virtual currency providers
The act on virtual currency providers (laki virtuaalivaluutan tarjoajista 572/2019) [.ﬁ]› entered into force in Finland in May 2019. The act implements the requirements laid down in the EU’s fifth money laundering directive at a national level. As a result, many definitions related to virtual currencies have been adopted.
According to the act, “virtual currency” means value in digital format which:
a) a central bank or other authority has not issued and is not a legal payment instrument;
b) a person can use as a payment instrument; and
c) can be transferred, saved and exchanged electronically.
Crimes involving virtual currencies on the rise
The value of criminal activities associated with virtual currencies is several billions of euros. According to international estimates, some 1.1% of all virtual currency transactions are associated with crime. Other estimates indicate that the proportion of criminal virtual currency transactions is noticeably higher. Accurate estimates are not easy to make due to the international scope of the phenomenon, the large number of service providers and anonymity associated with virtual currencies. According to the European Commission’s report on terrorist financing, the significance of Bitcoin in money laundering and terrorist financing is low, and there is not much evidence of its use for these purposes.
In Finland, the number of suspected crimes involving virtual currencies which have come to the attention of the Police has grown every year. The number of frauds related to virtual currencies remains low, while they have also increased clearly. The increased use of prepaid cards involving different virtual currencies in Finland may partly be linked to criminal money laundering and the use of assets acquired from illegal sources.
In Finland, suspected crimes related to virtual currencies that have come to the attention of the authorities typically involve drug offences and frauds. The use of a virtual currency also enables a variety of economic crimes, such as tax crimes, accounting offences and offences by a debtor. At least part of the drug and fraud criminality related to virtual currencies is international and well-organised. Money obtained by fraudulent means is quickly exchanged into a virtual currency which makes the tracing and return of the assets more difficult. Virtual currencies are also connected to a variety of cybercrime phenomena.
Taxation on virtual currencies
In Finland, virtual currencies are subject to taxation. According to the yearbook ruling (2019:42) on the taxation of virtual currencies issued by the Supreme Administrative Court on 29 March 2019, virtual currencies are regarded as assets as laid down in section 45(1) of the income tax act (tuloverolaki) when applied in situations in accordance with the income tax act, meaning that the income tax act’s provisions on capital gains apply to the transfer of virtual currencies. This ruling means that, in situations where the income tax act applies, the income tax act’s provisions on capital gains apply to different transfers of virtual currencies, including the deduction of capital losses and the tax exemption of minor capital gains. The Finnish Tax Administration is aware of about 500 cases involving the evasion of capital taxes during 2013–2016, in which the evaded tax income has amounted to a total of approximately EUR 9 million.
More detailed instructions on taxation on virtual currencies can be found from vero.fi/en [.ﬁ]› .
Deployment of regulations challenging
The skills, analytical tools, resources and powers of authorities must be up to date to effectively prevent the exploitation of virtual currencies in crime. Because regulation on virtual currencies is a novelty, its deployment and interpretation, both in Finland and globally, are only taking their first steps.
The intergovernmental Financial Action Task Force (FATF), established for the prevention of money laundering and terrorist financing, has issued recommendations on virtual currencies that have been deployed globally. The EU’s fifth money laundering directive, its provisions on virtual currencies and the Finnish act on virtual currency providers form the legal frame of reference around this phenomenon. In practice, compliance with all these different regulations presents challenges for governments and in the private sector.
However, there has been positive development, and providers of virtual currency services are currently obligated, for example, to be registered with financial supervisory authorities, identify their customers, monitor their customers and transactions, and notify the authorities of any suspicious business transactions. As a result of obligations derived from the act, the level of quality and detail of information collected by the Finnish Tax Administration from Finnish providers of virtual currencies will improve considerably. Then again, it can be assumed that certain customers will replace Finnish providers of virtual currencies with providers located in other countries, meaning that access to information will decrease.
Due to the novelty of regulations, the best practices and operating methods are still in the making, and the act on virtual currency providers is constantly under development. As a result of the cross-boundary character of virtual currencies, international cooperation between authorities plays a significant part. For example, there are signs that, in the near future, global regulations will be enforced, through which governments will automatically obtain information about their taxpayers who use foreign virtual currency providers. This would make the exchange of information and tax control related to virtual currencies significantly more effective.
The Finnish Financial Supervisory Authority supervises virtual currency services. The Financial Intelligence Unit of the National Bureau of Investigation aims to prevent, identify, uncover and investigate any crimes related to virtual currencies.