The youngest member of the family of financial products are crypto assets, or ‘cryptocurrencies’. They are not known by the masses, but their highly erratic price movements ensure that they are regularly discussed in the media. They are particularly popular among young people. But what exactly are these crypto assets? In this FAQ, we want to give a first answer to this.
What are cryptocoins?Show less info
A cryptocurrency is a “currency” that only exists in the digital world. So forget about coins and banknotes that you can hold in your hands or put in your wallet.
In fact, you can’t really compare crypto currencies with the euros or dollars you know either. A euro or dollar is created (issued) by the government. It’s also provided in the law that you can actually make payments with that euro/dollar. They are legal tender.
A cryptocurrency, however, is made (“mined”) by private individuals or enterprises. Thus, everyone can make a cryptocurrency and that’s why there are thousands different types of them. They aren’t an official means of payment at all and nobody is obliged to accept them as a payment method. Therefore, only in a limited number of places goods or services can be purchased with cryptocurrencies.
Euros and dollars are also pretty stable in value. Only price increases undermine their value. By contrast, the value of cryptocurrencies is only determined by the demand for them, just like an art object or a stamp for a collector. That’s why they have little to no value by themselves. Consequently, the value of cryptocurrencies can fluctuate a lot day by day, and the relatively limited supply - for example, only 21 million bitcoins can be issued - is no guarantee of value stability either.
What can you use cryptocoins for?Show less info
You can use a cryptocoin to buy goods or services. However sellers are not obliged to accept them at all. In practice, you can only actually use them in a very limited number of places in Belgium.
The value of these coins can fluctuate very strongly depending on the demand for them. You could therefore speculate on increases in value. However, as there is no intrinsic value, this is actually like gambling and definitely not a form of investing or saving.
How can you use them? Show less info
Cryptocurrencies only exist within their own decentralised, virtual data network. This network relies on distributed ledger technology (DLT) and is made out of blockchains. Such a blockchain is a secure virtual database that stores the entire transaction history of its users in 'blocks' chained together. That history is constantly completed in real time and nothing can be deleted from it. This allows users to view additions and see who made them. How much you own of a particular cryptocurrency is also registered within this network.
In that blockchain, all cryptocurrencies are given an address. You need it to use the cryptocurrencies. Such an address is very similar to a bank account number and is considered a public key. With that key, you can receive cryptocurrencies. Do you want to send cryptocurrencies from your address to another address? Then you need to confirm that transaction with a private key. Think of it as a personal pin or verification code.
DLT, however, is just an IT technology and has many possible application areas besides cryptocurrencies, such as smart contracts or agreements that are automatically executed or completed based on predetermined conditions. Interests can then, for example, be paid automatically once a certain term has expired.
Not one crypto is the same. Show less info
Coins and stable coins There are not only very many different cryptocurrencies, but there are also different types of coins. Some coins, such as Bitcoin, Ethereum, Ether, Ripple,....are freely traded and their value can fluctuate completely freely according to supply and demand. Other coins, the stable coins or also called Asset Referenced Tokens (AST), such as Tether, for example, try to lock their value to (a basket of some) other financial values. For instance, there are stable coins that try to ensure that 1 coin is always equal in value to 1 dollar or 1 euro. Several techniques exist to achieve this price link: fiat collateralised stable coins, crypto collateralised stable coins, algorithmic stable coins. However, it is never really certain whether this price link can be realised in all market conditions. For example, there have been many problems with some algorithmic stable coins in 2023.
Tokenised assets and digital native assets In a DLT network, any kind of asset (a financial one, such as a share, or other ones, such as a part of an artwork) can in principle be registered in the form of a digital symbol, or "token", which can be exchanged directly between participants without the need for a trusted third party to manage the accounts. Such a token is a unit of digital information that can represent a real asset, like a security registered in a central securities depository ("tokenised asset"). The digital token can also be the asset itself, for example a security issued directly as a DLT token (i.e. a "digital native asset"). Febelfin is actively engaged in monitoring new evolutions and technologies like distributed ledger technology in the large-scale settlement of securities transactions (wholesale settlement), e.g. within the framework that is elaborated by the ECB for this purpose.
Where can you buy cryptocurrencies?Show less info
A bank isn’t necessary to obtain cryptocurrencies. In Belgium you have access to online crypto trading platforms or crypto brokers where you can buy them. For providers that are established in Belgium, specific rules with regard to services with cryptocurrencies apply since 1 May 2022. So before making a purchase, it is best to get thorough info about that crypto trading platform and check where it is located. After all, your holdings of crypto currencies are just encrypted on an IT network. You should never forget that the security of such a crypto trading platform is never 100% foolproof. Finally, you keep the keys to your crypto coins in a crypto wallet.
How can I cash in my crypto profits?Show less info
Basically, you do so by selling your cryptocoin via an online trading platform and by converting it into euros. However, this sounds easier than it is. After all, the fees you will be charged for this can be high, and these fees also often vary from one day to another or even during the day. In other words, you are never really sure in advance of the true value in euros. It can also take a while before your euros are transferred onto your account.
Do Belgian banks accept cryptocurrencies?Show less info
The anti-money laundering rules impose an obligation on banks to only accept money of which the origin can be proven. In the case of crypto investments, it’s not easy to document the full trajectory of the money, also because it often consists of multiple transactions. It is therefore difficult to trace where cryptocurrencies exactly came from. Cryptos are also often used by criminals to launder illegally obtained money. This is why banks are very careful with profits from crypto investments. It’s not simple to bring the capital invested in crypto coins or the profits made from these investments back into the traditional circuit. It is crucial that investors in cryptocurrencies keep records proving the origin of their invested capital. The bank has no other choice but to assess and evaluate this case by case.
What about taxes?Show less info
When you sell your cryptocurrencies and you have a capital gain, you might have to pay taxes. There are 3 possible situations:
You have kept your cryptocurrencies for a long time, you can prove that you have not taken any major risks and you only sell the coins very occasionally (a typical buy-and-hold strategy). In this case, you will not have to declare the capital gain in your tax return and you will therefore not have to pay taxes on it.
If you buy and sell more often and try to exploit price differences, the tax authorities will consider this to be the behaviour of a speculator. In this case, you have to declare the capital gain in your tax return under “miscellaneous income”. You will 33% tax on it.
Are you speculating with crypto’s on a professional level? In this case, you have to declare the capital gains as professional income.
What is the legislation?Show less info
As cryptocurrencies are not recognised as a financial instrument, they are within the scope of the MiCA (Markets in Crypto Assets) Regulation. This is European crypto legislation that applies to issuers of cryptocurrencies that are not recognised as a financial product and crypto service providers. Cryptocurrencies such as Bitcoin or Ethereum are not within the scope of MiCA and are therefore not regulated at all, but stable coins are. The purpose of this legislation is to protect consumers and investors from the dangers and to support innovation. Note, however, that MiCA is not expected to come into force until 2025 and that the timing of the implementation at member state level may be complex.
MiCA imposes requirements on cryptocurrency issuers and cryptocurrency service providers (so-called CASPs, Crypto Assets Service Providers, say crypto exchanges or dedicated cryptobrokers). Issuers of crypto's must provide complete and transparent information about the cryptocurrencies they issue. Crypto service providers must be registered and implement security measures, as well as comply with money laundering prevention measures.
There is also the DLT pilot regime. This constitutes the European legal framework for the trading and settlement of crypto assets that are recognised as financial instruments. It is a legal test environment ("sandbox") within which crypto assets and their infrastructure can be developed for an indefinite period of time.
Who exercises supervision?Show less info
The Financial Services and Markets Authority (FSMA) is the Belgian supervisor. It deals mainly, but not exclusively, with financial market supervision, product supervision and behavioural supervision. Consumer protection is of paramount importance to the FSMA.
The FSMA has issued a regulatory framework for the commercialisation of virtual currencies among consumers. These regulations were approved by royal decree of 8 February 2023 (Belgian Official Gazette of 17 March 2023). It entered into force on 17 May 2023 and introduces several obligations. More information can be obtained on the FSMA's website.
The FSMA is also authorised to licence crypto exchanges established in Belgium. No licence has been issued so far.
Commercialisation of financial products on virtual currencies, for example a tracker on cryptocurrencies or a fund consisting of crypto currencies, to non-professional clients is also prohibited in accordance with the FSMA regulations of 3 April 2014 (Belgian Official Gazette 20/05/2014). This is not the case in all countries. For instance, the US supervisor did approve the creation and commercialisation of trackers on cryptocurrencies in early 2024.
How safe are cryptocurrencies? Show less info
This question can actually be divided in two sub questions: what is the likelihood of losing value and what is the likelihood of losing the coins themselves through theft or scams, for instance.
We have already answered the first question. A cryptocurrency has no inherent value of its own and in the legal circuit you can hardly use it as a means of payment. The price of the coin is only determined by the demand for it. So there is no reason why that price should not eventually be reduced to 0. Moreover, in the meantime, very large fluctuations in value (think tens of percent) can occur. So buying or holding them is more like gambling than investing.
The second question has to do with cybersecurity. After all, crypto currencies are nothing but bits and bytes. The data network on which the coin is created itself is maintained by all users. There is no central party managing or controlling this network. Network security consists of several layers: the information stored cannot be deleted or changed afterwards, only new information can be added, all users must validate this new information, and finally, transactions are cryptographically encrypted. The weakest links in terms of security are online exchanges and dedicated wallets where you store your crypto coins. These can be hacked or go bankrupt. Problems with those crypto service providers, loss of coins and theft have occurred repeatedly in the past. Furthermore, there is no guarantee fund as for regular bank deposits.