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Introduction to the legal and regulatory framework
The first attempt to regulate distributed ledger technology (DLT) and cryptoassets by the Italian legislator was through Article 8 ter of Law Decree No. 135 of 14 December 2018, which provides the definition of smart contracts and DLT but without providing any other specific effect to them. Indeed, the Italian legislator instructed the Agency for Digital Italy (AgID) to issue a regulation implementing this definition, to identify the specific standards that DLTs must adopt to produce the effects of an electronic timestamp and to set out the identification process smart contracts should adopt to fall within the scope of Article 8 ter of Law Decree No. 135. Nonetheless, at present, no such regulation has yet been issued by AgID.
This first initiative has been followed by a public consultation conducted between 2019 and 2020, by the National Commission for Corporations and Stock Exchanges (CONSOB). Here, the Italian Authority stated in its final report of January 2020 that the use of DLTs is not an element that per se defines the category of cryptoassets, because some types (e.g., investment tokens) still fall within the scope of other existing regulations.2 For instance, as specifically emphasised by CONSOB, investment tokens could be deemed to be financial instruments, with the consequence that Italian regulations on financial instruments and financial products would be triggered.
This also means that, until Markets in Crypto-Assets Regulation 2023/1113/EU (MiCA Regulation) enters into force, the issuance of utility tokens in Italy can be carried out without either the publication of a prospectus or the need to comply with specific requirements (which are lacking at present). However, this does not exempt cryptoassets (and their holders) from the scope of the anti-money laundering (AML) regime.
Securities and investment laws
i Qualification of cryptoassets as financial instruments
To fall within the scope of the current financial regulatory framework, cryptoassets should fall within the definition of financial instruments. This will be the case if a cryptoasset has the characteristics to be considered, inter alia, as: (1) transferable securities;3 (2) units in collective investment undertakings; or (3) financial derivatives.
Investment tokens usually fall within the definition of financial instruments. In contrast, this is not the case for cryptocurrencies and utility tokens.
However, a case-by-case analysis is always required. Indeed, to the extent that utility tokens may also confer governance rights on their holders (e.g., the right to vote on the governance of the undertakings that lead the project), such tokens might also be considered financial instruments, if they function in a similar way to traditional shares of a company.
ii Qualification of cryptoassets as financial products
If a cryptoasset does not meet the definition of financial instrument, it should be verified whether it falls under the definition of a financial product before excluding the application of securities and investments laws. In this regard, the Supreme Court of Cassation, in decision No. 26807 of 2020, specifically clarified that the offering of cryptoassets may be considered an offering of financial products falling under the scope of Article 1, Paragraph 1, letter (u) of the Consolidated Financial Act if it is accompanied by a promise or expectation of financial returns.
To be more precise, the definition of financial products under Italian law is an ‘open’ definition. To help define this concept and therefore clarify the interpretation of ‘promise of financial returns’, it is worth referring to Supreme Court of Cassation decision No. 2736 of 2013, where the Court stated that:
the agreement has a financial nature when the reason for entering into the agreement – and not simply the motive behind it (which is not relevant for regulatory purposes) – consists precisely in the investment of capital (the commitment of the invested money) in view of an increase in the invested amount, with the investor only providing money as his or her contribution.4
In other words, the financial nature of financial products consists in the fact that the client expects to increase the capital invested with the returns potentially generated by the activities carried out by the provider; this expectation does not come from the client’s will to ‘invest’ alone, but it is triggered by specific promises of the provider.
Therefore, to qualify a cryptoasset as a financial product, a case-by-case analysis is required. For instance, utility tokens or cryptocurrencies that are offered to the public accompanied by promises of financial returns may constitute financial products.
iii Obligations under Italian securities and investment law
Entities offering tokens qualifying as financial instruments or as financial products are required to file with CONSOB a request for authorisation to publish a prospectus to offer such tokens to the public, pursuant to Article 94 et seq. of the Consolidated Financial Act, implementing Article 3 of Regulation EU 1129/2017.
Notably, however, this requirement shall not apply provided that:
- the total value of the capital raised with the offering of the tokens is less than €8 million in a 12-month period;
- the tokens are offered only to qualified investors; or
- the minimum investment per investor is at least equal to €100,000.
iv Italian implementation of the EU DLT Pilot Regulation
On 16 May 2023, Decree-Law No. 25 of 17 March 2023 (DL 25/2023) – converted into law by Law No. 52 of 10 May 2023 – has entered into force. The mentioned Law implements Regulation (EU) 2022/858 (DLT Pilot Regulation) and, in addition, introduces significant innovative measures that permit the issuing of financial instruments on distributed ledgers (‘digital financial instruments’).
The Italian legislator provides that the issuance and transfer of digital financial instruments are carried out by means of entries in a distributed ledger (Ledger, as defined by Article 2(2) of the DLT Pilot Regulation) operated by a person responsible for the Ledger, a market operator of a DLT settlement system (DLT SS) or DLT trading and settlement system (DLT TSS), the Bank of Italy, the Ministry of Economy and Finance or any other entities identified by CONSOB’s regulation. The legislator exempts digital financial instruments issued pursuant to DL 25/2023 from the application of the rules concerning central counterparties, central depositories and centralised administration activities.
According to DL 25/2023, in Italy it is now possible to issue on a DLT the following instruments: shares, bonds, other forms of securitised debt, including depositary receipts in respect of such securities, money market instruments and units in collective investment undertakings.5
Concerning the requirements of the Ledgers that host the issuance of digital financial instruments, they must guarantee the integrity, authenticity, non-repudiability, non-duplicability and validity of the entries attesting to the ownership and transfer of the digital financial instruments and the related encumbrances; furthermore, Ledgers shall allow for the identification, at any time, of the persons in whose favour the entries are made; they shall also allow the party in whose favour the entries are made to access, at any time, the entries in the Ledgers and to extract a copy in electronic format, as well as ensure access by CONSOB and the Bank of Italy for the exercise of their functions.
The information that must be disclosed in accordance with the Italian Civil Code for each type of financial instrument, such as the limits on shares transfers set forth in Article 2355 bis of the Civil Code, shall be made available in an electronic form that is accessible and may be consulted, at any time, possibly also through the Ledger itself.
Arguably the most important addition introduced by the Italian legislator is the framework governing the issuance of digital financial instruments booked with the person responsible for the Ledger, thus expanding the list of subjects that can operate a Ledger. Entities that may operate as persons responsible for the Ledgers are (1) banks, investment firms and market operators established in Italy; (2) financial intermediaries registered pursuant to Article 106 of the Consolidated Banking Act, payment institutions, electronic money institutions, asset managers and insurance or reinsurance undertakings established in Italy, provided that the activity is carried out exclusively with reference to digital financial instruments issued by themselves or by members of their group established in Italy; (3) issuers whose headquarters are in Italy, different from the foregoing entities, who intend to operate as persons responsible for the Ledgers exclusively with respect to digital instruments issued by themselves; and (4) entities established in Italy who intend to act as persons responsible for the Ledgers for third parties and to which stringent requirements apply – among which are those relating to honourability, internal control systems, outsourcing and management of conflicts of interest. In addition, CONSOB, by regulation, may extend the list of entities who may act as persons responsible for the Ledgers. Differently, Italian central depositories, subject to authorisation pursuant to Articles 16 and 19 of Regulation (EU) 909/2014, who intend to carry out the activity of persons responsible for the Ledgers, as ancillary service, shall be automatically included in the list of persons responsible for the Ledgers.
The person responsible for the Ledger shall be liable for damages resulting from the operation of the Ledger towards the issuer, if different from the person responsible for the Ledger, and towards the person in whose favour the entries were made or should have been made, unless it proves that it took all appropriate measures to avoid the damage. It shall also be liable for damages caused to the person in whose favour the entries were made on account of false information or information otherwise likely to mislead, whether or not arising from the omission of due information, unless it proves that it has taken all due care to ensure the correctness and completeness of the information.
Banking and money transmission
While waiting for the entry into force of MiCA Regulation in Italy, at present, no specific provisions concerning banking or electronic money profiles have been issued by the Italian legislator.
Similarly to the qualification of cryptoassets as financial instruments or financial products, a case-by-case approach should be adopted to verify whether a cryptoasset falls under the definition of electronic money provided by Article 1, Paragraph 2, letter (h) ter of Legislative Decree No. 385 of 1 September 1993 (the Italian Consolidated Banking Act), implementing Directive 2009/110/EC.
According to these definitions, it is rather unlikely that cryptoassets (and particularly, ‘traditional’ cryptocurrencies, such as Bitcoin) will fall under the definition of electronic money. Indeed, under both the Consolidated Banking Act and Legislative Decree No. 11 of 27 January 2010 (implementing Directive (EU) 2015/2366), cryptoassets and cryptocurrencies may not qualify as funds.
However, this might not be the case for some stablecoins.
To the extent that a specific stablecoin is issued in exchange for the deposit of fiat money and the client maintains the right to redeem the deposited funds, giving back the stablecoin received, their issuance may count as the issuance of electronic money.
Therefore, the issuance of fiat-backed stablecoins may be deemed to be an issuance of electronic money.
Conversely, non-fiat-backed stablecoins, such as crypto-collateralised6 and algorithmic stablecoins,7 should not fall under the definition of electronic money provided under the Consolidated Banking Act.
Anti-money laundering
While cryptoassets do not have a specific regulatory status in Italy, as highlighted in previous sections, the only Italian laws and regulations that provide a definition applicable to them are those concerning anti-money laundering regulations. Article 1, Paragraph 2, letter (qq) of Legislative Decree No. 231/2007 (also known as the AML Regulation), implementing, inter alia, the Fifth Anti-Money Laundering Directive, provides the definition of a virtual currency.8 Modifying the definition provided by the Fifth AML Directive (upon its implementation), virtual currencies are defined in the AML Regulation as:
the digital representation of value that is not issued or guaranteed by a central bank or a public authority; is not necessarily attached to a legally established currency accepted as a means of exchange to buy goods and services or for investment purposes; and can be transferred, stored and traded electronically’.9
The introduction of this definition implies that offering of services related to the use of cryptoassets will fall under the definition of ‘providing services related to the use of cryptocurrencies’ in accordance with Article 1, Paragraph 2, letter (ff) of the AML Regulation.
The said regulation also concerns the offering of crypto custody activities, through the introduction of the definition of companies ‘providing custodian wallet services’ in accordance with Article 1, Paragraph 2, letter (ff) bis of the AML Regulation.
In addition to the above, the European Parliament and the Council of the EU have also approved Regulation (EU) 1113/2023 of 31 May 2023 (the Travel Rule Regulation).
The Travel Rule Regulation lays down specific requirements concerning transfers of cryptoassets between users through exchange platforms.
In particular, pursuant to Article 14 of the said Regulation, cryptoassets service providers must ensure that when a transfer of cryptoassets is executed, that transfer is accompanied by a range of information regarding the originator and the beneficiary of that transfer (such as: the name of the originator and of the beneficiary, the originator’s and beneficiary’s ledger address or account numbers, the originator identification data, documents and residential address, etc.). In case of a transfer of cryptoassets made to a self-hosted address (also known as ‘unhosted wallet’), the cryptoasset service provider of the originator is required to obtain and hold the information relating to the transferring party and shall ensure that the transfer of cryptoassets can be individually identified.
Pursuant to Article 17 of the said Regulation, the beneficiary’s cryptoassets service provider shall apply Article 13 of Directive (EU) 2015/849 and, thus, shall establish risk-based procedures pursuant to such provision in order to decide to execute or refuse the transfer in case the information received from the originator’s provider are missing or incomplete. Providers, in such case, must immediately either refuse execution and give back the transferred cryptoassets to the originator or require the missing information to the originator’s provider.
Moreover, when the beneficiary’s providers have to assess the suspiciousness of the transfer (and, therefore, when the provider must assess whether the transfer must be reported to competent AML authorities, which in Italy is the Financial Intelligence Unit (UIF) established within the Bank of Italy), they can consider the fact that the information transmitted by the originator’s provider is missing or incomplete.
Regulation of exchanges
Apart from the application of the AML Regulation and the rules concerning the enrolment in the register of Foreign Exchange Providers kept by the Association of Loan Agents and Credit Brokers, Italian laws do not provide a specific regime for exchanges or other cryptoasset service providers (e.g., wallet service providers), provided that those exchanges do not deal with cryptoassets that can be qualified as financial products.
With regard to the business model adopted by the exchange, it is first necessary to clarify that the recent decentralised finance developments have led to the rise of new protocols that could potentially revolutionise multiple areas of the traditional financial ecosystem. In the past two years we have witnessed, above all, a significant spread of decentralised exchanges (DEXs) functioning as automated market makers (AMMs). AMMs are computer protocols that allow users to trade cryptoassets in a permissionless and decentralised way, without the need for a central entity acting as market maker. The lack of a central entity is permitted by directing the liquidity supplied by users, according to specific mathematical formulas, to pools of cryptoassets, rather than deploying a traditional order book.
With reference to the above-mentioned protocols, the decentralised nature of DEXs impedes the application of traditional rules regarding regulated markets, multilateral trading facilities or organised trading facilities.
Regulation of miners
Miners of cryptocurrencies in Italy are not subject to any specific regulatory regime. In addition, the particular nature of the mining activity does not subject miners to any other existing regulation.
Regulation of issuers and sponsors
The legal framework applicable to issuers depends on the cryptoasset issued. Where the issuance concerns cryptoassets that qualify as financial instruments (i.e., investment tokens and, in rare cases, utility tokens), Article 94 et seq. of the Consolidated Financial Act apply. In contrast, where the issuance concerns cryptoassets that are not of a financial nature (i.e., assets other than financial instruments or financial products), no specific regulation applies.
To date, CONSOB has only proposed implementing a specific regime in its discussion document of March 2019 on initial coin offerings (ICOs). According to these rules, which are not in force yet, issuers of non-financial cryptoassets would be exempt from the rules set out in the Consolidated Financial Act and an opt-in regime could apply.
CONSOB’s proposed regime has not been followed since the MiCA Regulation has been published in the EU Official Gazette. This means that, until the MiCA Regulation enters into force, issuers are not subject to any particular regulation in Italy provided that they issue cryptoassets that cannot be qualified as financial instruments.
Criminal and civil fraud and enforcement
To date, major criminal or civil enforcement actions on cryptoassets have concerned the way cryptoasset services have been offered to the public. As noted above, the offering and distribution of cryptoassets under Italian law are still not regulated. This means that an issuer is free to distribute those cryptoassets to the public and need only respect the AML requirements.
However, we have also seen that the way in which a cryptoasset is offered to the market may change its nature. A non-financial cryptoasset (e.g., a cryptocurrency such as Bitcoin) may became a financial product and so acquire a financial nature.
According to the definition of a financial product provided above, the activity of distributing non-financial cryptoassets together with the promise of specific financial returns amounts to an offering of a financial product. This offering constitutes a criminal offence under Article 166, Paragraph 1, letter (c) of the Consolidated Financial Act.
Notably, under the Consolidated Financial Act, CONSOB is entitled to exercise specific powers to combat abusive financial activities that are carried out by anyone who provides investment services or activities in cryptoassets that can be qualified as financial instruments or products.
In particular, Article 7 octies of the Consolidated Financial Act states that with respect to anyone who offers or performs investment services or activities through the internet without being authorised under the Consolidated Financial Act, CONSOB is entitled:
- to make public, also as a precautionary measure, the circumstance that the subject is not authorised to provide investment services; and
- to order the cease of such infringement.
Furthermore, the scope of such powers has been broadened by Article 36, Paragraph 2 terdecies of Law Decree of 30 April 2019, No. 34 (as converted by Law 28 June 2019, No. 58) and Article 4, Paragraph 3 bis, second sentence, of Law Decree 30 December 2019, No. 162 (as converted by Law 28 February 2020, No. 8).
In essence, Article 36, Paragraph 2 terdecies of Law Decree 34/2019 gives CONSOB the power to order Internet Service Providers (ISPs) to block the website used by the entity (or the person) suspected of carrying out abusive financial intermediation in Italy. Indeed, CONSOB has been de facto granted the power to block the access by Italian investors to the websites of anyone who is suspected by CONSOB of carrying out abusive financial intermediation in Italy.
Therefore, persons carrying out abusive intermediation services in Italy are indirectly (even though substantially) affected by the exercise of such power.
Tax
The taxation of income from cryptoassets in Italy underwent a significant regulatory overhaul with Law No. 197 of 29 December 2022 (Law No. 197/2023). This intervention primarily affected the income tax treatment of non-entrepreneurial taxpayers, outlining a specific discipline and introducing new reference rules within the Presidential Decree No. 917 of 22 December 1986 (Italian Consolidated Law on Income Tax).
i Income tax treatment of individual investors
The new provisions, effective from the 2023 tax period, categorise gains from cryptoassets for individuals as ‘miscellaneous income’. This includes capital gains and other income from the redemption, sale, exchange or holding of cryptoassets, including potential income from decentralised finance platforms via staking, yield farming, liquidity mining, etc.
Income from cryptoassets is taxed through a substitute tax at a rate of 26 per cent. Capital gains are calculated as the difference between the consideration received or the normal value of the cryptoassets and the cost or purchase value. Capital losses can be offset against capital gains in subsequent years up to a limit of four years, provided they are declared. However, expenses incurred to obtain income from holding cryptoassets, such as borrowing fees or staking fees, cannot be deducted.
Capital gains and other income realised through redemption, sale, exchange or holding of cryptoassets, and correspondingly, capital losses are tax-relevant only if they exceed, in aggregate, the threshold of €2,000 in the tax period.
The taxpayer is responsible for documenting the cost or purchase value of the cryptoassets with certain and accurate evidence. In the absence of such documentation, the cost is assumed to be zero. The Law No. 197/2023 also provides an optional redetermination mechanism for the value of cryptoassets for individual taxpayers, allowing them to assume, instead of the cost or purchase value, the normal value of the cryptoassets as of 1 January 2023, by paying a substitute tax of 14 per cent.
The law also provides a tax exception for crypto-to-crypto transactions. Such transactions are not considered relevant for tax purposes if they involve cryptoassets with the same characteristics and functions. For example, the exchange between virtual currencies is not considered relevant, while the use of a cryptoasset for the purchase of goods or services or for conversion to traditional currency should be subject to taxation.
However, some uncertainties remain in the tax definition of cryptoassets, especially for hybrid tokens that may have characteristics of different types of cryptoassets. Reference could be made to the MiCA Regulations for further guidance.
The new rules have another significant shortcoming: they lack any indication about the criterion of movement of cryptoassets for the purpose of determining their cost or purchase value. Miscellaneous income of a financial nature is typically based on the Last In First Out (LIFO) criterion,10 according to which assets acquired at a more recent date are considered to be sold first. It is quite clear that the LIFO criterion is ill-suited to the movement of non-fungible cryptoassets (such as NFTs).
In conclusion, the determination of income from cryptoassets still has some ambiguities and interpretative uncertainties. Further clarification by Italian tax authorities is needed to provide precise and uniform guidelines.
ii Corporate income tax
From the perspective of an enterprise, because of the lack of specific regulations, international accounting standards (IFRS/IAS) apply. Cryptoassets can be considered intangible assets, if not used in business operations, or inventories, if intended for sale, in corporate financial statements.
The Law No. 197/2023 introduced specific articles to regulate corporate tax from income generated by operating in cryptoassets: in particular, it excludes changes in the value of cryptoassets from corporate taxable income.11 Capital gains and other income from the redemption, sale, exchange or holding of cryptoassets are instead subject to taxation as with any other corporate income.
iii Value-added tax regime
The Italian fiscal authority, referencing the Skatteverket v. Hedqvist decision of 2015, has confirmed that the purchase and sale of cryptoassets are generally exempt from value-added tax (VAT).12
Other issues
Licensing requirements for cryptoassets service providers and wallet service providers
The Italian legislator recently introduced licensing requirements for the provision of services related to cryptoassets by Crypto Assets Service Providers (CASP) and Wallet Service Providers (WSP).
Article 8(1) of Legislative Decree No. 90 of 2017 extends the provisions of Article 17 bis of Legislative Decree No. 141 of 2010 to CASP, and Article 5 (2), letters (a) and (b) of Legislative Decree No. 125 of 2019 extends the provisions of Article 17 bis of Legislative Decree No. 141 of 2010 to WSP. Most recently, the Italian Ministry of Economy and Finance (MEF), by Decree of 13 January 2022, set out the modalities and timing by which providers of services relating to the use of virtual currency and providers of digital wallet services are required to notify their operations in Italy, as well as forms of cooperation between the MEF and the police forces.
In particular, according to Article 17 bis (8 bis) of Legislative Decree 13 August 2010, No. 141 (on loan brokerage services referred to by the AML Regulation, known as the Loan Broking Rules), to provide services related to the use of cryptoassets, CASP and WSP, as defined in Article 1(2) letters (ff) and (ff) bis of Legislative Decree No. 231 of 2007, are required to enrol in a special section of the Register of Foreign Exchange Providers (OAM Register), which is kept by the Association of Loan Agents and Credit Brokers (OAM) in accordance with Article 17 bis (1,2).
CASP and WSP, which are legal persons, are required to establish their registered or administrative office in Italy, and European legal persons shall have a stable organisation in Italy, while those who are natural persons shall be citizens of Italy, of a European Union Member State or of a third country. The provision of services related to the use of cryptocurrencies by natural or legal persons that are not enrolled in the OAM Register is considered unlawful.
After being enrolled in the register, CASP and WSP shall transmit data on transactions carried out in Italy to the OAM quarterly. The data that shall be provided are client identification data and data on the operations carried out by each client.
With regard to sanctioning powers, the Association of Loan Agents and Credit Brokers may suspend from the special section of the register any natural or legal person that violates the reporting duties or remove them should they not meet any of the requirements for carrying out their activity, should they repeatedly violate the data reporting obligation, should they be inactive for more than one year unless there is a justified reason or should they terminate their activity.
Looking ahead
Unlike other European countries, Italy does not have a complete legal framework for cryptoasset issuers and intermediaries. As indicated above, CONSOB’s legal framework proposal has been stopped by MiCA Regulation. This means that Italy is a potential hub for cryptoasset start-ups, as there is no specific regulation that might block or impair a development of this kind.
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