What last week’s European VAT ruling means for bitcoin fungibility
The European Court of Justice held that bitcoin is a currency for the purposes of VAT taxation. The decision will make it easier to exchange euros for bitcoin and could have implications for bitcoin fungibility down the line.
One of the more persnickety legal issues in the bitcoin space stems from whether liens attach to the bitcoins of a borrower, and whether they’d attach even if that borrower spent those bitcoins or sent them to someone else. Variously referred to as the “UCC 9 problem,” the “nemo dat problem” (i.e. no one can give what he does not have), and the “fungibility problem,” the plain english hypothetical is this: I have a business—alpaca beer cozies; I accept bitcoin as payment; I hold some bitcoins that I get in payment for my wooley even-toed ungulate wares. When I take out a small business loan (because I need to buy way more alpacas), the bank may obtain a creditor interest (some ownership claim) over all of my inventory, equipment, alpacas, etc. In the event I don’t pay my loans off, the bank can take these things from me. The laws that say that this can happen are state laws but they all generally mirror a “uniform law” that was created by the, you guessed it, Uniform Law Commission. That law is the Uniform Commercial Code, specifically Article 9. This gets messy because UCC 9 exempts “money” from these liens or creditor interests, which, if you think about it, is important. If dollars that I take into my alpaca business have liens on them, and if those liens apply even if I then trade those dollars to other people, then my bank can now seize other people’s dollars—now in their wallets(!)—if I default on my loan. And now maybe you can see the potential trouble with Bitcoin. Bitcoin isn’t necessarily “money” as the UCC defines it. In fact, between the IRS, FinCEN, and the CFTC, we have a growing body of persuasive rulings that bitcoin is not money but some sort of “property” or “commodity” that acts like money in some situations. And if Bitcoin is not money, if it’s a part of my business’ inventory/equipment/capital then the bank has a right to it, a right that isn’t necessarily extinguished when I give it to someone else. So if my friend Bob the alpaca groomer, takes some of my business’ bitcoins in payment for his services, and if my beer cozy business fails and I default on my loans, then my bank can go and claim some right to Bob’s bitcoins—even though Bob had no idea I had loans and has never dealt with this bank. Our friend Patrick Murck has thought about this issue for a while and presented his research during a recent event at the Berkman Center for Internet and Society, moderated by our own Jerry Brito: And, there’s also some new good news last week from the European Court of Justice! The ECJ held that bitcoin is a currency for the purposes of VAT taxation. Mostly this is important because VAT taxes can be high (15%-25% depending on the member state) and if Bitcoin is currency those taxes won’t apply to an exchange of bitcoin for euros. But! this is also, potentially important in the context of this nerdy nemo dat debate I’ve been describing. The UCC definition of money (which is exempted from those pesky leins) is as follows:
(24) "Money" means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.
So, when the ECJ holds that Bitcoin is currency, doesn’t that mean that a foreign government or intergovernmental organization just “authorized” bitcoin as a medium of exchange? Sure! Why not? “authorized” isn’t defined, and I’d say a court holding that Bitcoin is currency sure sounds like an authorization. And if that’s true then Bitcoin is money under the UCC and the liens don’t adhere; nemo dat no more. I’m sure we can continue to have persnickety arguments about that (like whether only states can “authorize,” while intergovernmental orgs like the ECJ must in fact “establish”) but… those are for another day. For now, thanks ECJ!
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