Can a merchant receive payments in crypto-currencies?
The emergence of the crypto phenomenon has fuelled both opportunities and obstacles in equal measure, and in light of this innovative concept a series of questions have arisen whose answers remain uncertain. Diachronically, the revolutionary shift from commodity money to fiat money was thought to mark the end of the evolution of money, yet the 21st century brings an economic reality in which crypto-currency takes on the role of facilitator of digital barter and brings a new understanding to the global economic space.
Of undeniable relevance is the fact that, whereas at the time crypto-currencies first appeared it was primarily the experimental side of this technological product that was being exploited, it is now becoming increasingly plausible that crypto-currencies will be used just as naturally as fiat currencies. This is also happening because, in recent years, our relationship with money increasingly takes place in the absence of its physical representation, which creates a favourable environment for crypto technology.
But how will crypto-currencies be used? To what extent will legal systems be willing to build a legal and fiscal framework suited to this technology? To what extent will merchants contribute to the implementation of payment in crypto-currencies? These are some of the uncertainties that this paper seeks to clarify by reference to the economic, legal and even political stakes surrounding crypto technology.
Preliminary aspects
The use of crypto-assets, whether we refer to crypto-currencies or other types of tokens, is not limited to the speculative trading of these assets on various markets. Moreover, this was not the purpose for which they were created, but rather to serve as trading tools within a “peer to peer” (directly from one person to another) system, without the intervention of a “middle man”, that is, of a financial institution such as a bank. This element of novelty for our modern payment system is, in fact, the essence of this technology and the element that makes it revolutionary.
In Romania, payment is regulated by the Civil Code as “the remittance of a sum of money or, as the case may be, the performance of any other act that constitutes the very subject-matter of the obligation”. In light of this definition, given that the subject-matter of the contract would be an exchange between a good and a number of crypto-assets, payment is valid under the Civil Code.
Therefore, crypto-assets can be used to purchase a wide range of goods, both material and digital. Indeed, this mass adoption process is already well under way, with payment in crypto-currencies already integrated by well-known brands. The best-known example is that of electric car manufacturer Tesla.
For a certain period of time, the company accepted payment for any car in Bitcoin, and it currently accepts Dogecoin1. In this way, a direct exchange took place between the virtual currency and the car, without any other intermediary step. Another example is that of the well-known McDonalds brand, which, starting this year, in the city of Lugano in Switzerland, accepts payment in the crypto-currencies Bitcoin and Tether2.
In Romania there is growing interest among companies in accepting payments in crypto-assets, though they are often reticent because they do not understand how these work from a fiscal and accounting perspective.
Regulation of payment in crypto-assets in Romania
National legislation currently has a legislative vacuum with regard to the accounting treatment of crypto-currencies, with no concrete regulations in place to guide merchants in recording them in their accounts. In the legislation of other European Union member states, they are frequently classified for accounting purposes as inventory or intangible assets.
Although the National Bank of Romania initially classified crypto-currencies as “speculative assets, highly volatile and extremely risky, with a high potential to generate financial losses for investors”3, the recent approach has been more open-minded, with the NBR announcing that it will run a pilot project for the issuance of a digital leu4. This announcement gives hope to those who support this ecosystem that fiscal and accounting regulations will soon appear allowing both the purchase and sale of products or goods.
How payments can be made using crypto-currencies
Payment through crypto-assets can be made by:
- offering crypto-assets in exchange for goods;
- (ii) offering crypto-assets in exchange for utility tokens, incorporated into the merchant's system, through which goods can be purchased; or
- (iii) using a payment intermediation platform.
As regards the first payment method, it should be noted that the main disadvantage is represented by the irreversibility of payments. Whereas a payment made through an intermediary can easily be reversed by notifying the bank that the product has been returned, this is not possible under the peer-to-peer. system. In concrete terms, if you are a consumer dissatisfied with the product and return it, you depend on the goodwill of the merchant to send you the value of the products in crypto-currencies to your digital wallet address. If the merchant refuses, the only option is to go to court, which obviously involves a lengthy and costly process.
Currently, the second option appears to be one of the most viable. Large companies such as Microsoft or Starbucks have implemented systems whereby certain virtual currencies can be used to purchase points, which the user can then use to purchase goods or services. Given that there is no prohibition on offering utility tokens, such as the well-known loyalty points, an exchange agreement between these and virtual currencies could offer greater freedom to the merchant.
The main disadvantage of this type of crypto-asset transaction is that it locks the user's funds within a network that is limited in terms of the goods and products it can access. Moreover, once the conversion has been made, converting these points back into crypto-assets is impossible, or at least unlikely.
The third method of transacting outlined above is the closest to an ordinary payment made through an intermediary such as banks or payment processing services like Mastercard or Visa. In line with this system, services such as those offered by Netopia have been created.
In our view, this appears to be the most viable solution to the accounting and legal dilemmas surrounding the purchase of goods or services using crypto-assets, since the merchant does not actually receive crypto-currencies, but rather their equivalent value in lei at the time of payment.
The distinction between these three methods is relevant to analysing the conditions and the number of contracts that need to be concluded for the transaction, in its entirety, to be completed.
How crypto-currencies can be recorded in accounting
With regard to how crypto-assets should be recognised in accounting, at the request of the International Accounting Standards Board, the IFRS Interpretations Committee issued a view on the accounting treatment of virtual currencies, provided they meet the following three conditions:
- they are digital or virtual currencies recorded on the basis of distributed ledger technology that uses cryptography for security;
- they are not issued by a jurisdictional authority or any other third party; and
- they do not give rise to a contract between the holder and another party. According to this material, crypto-currencies could be classified either as inventories (in which case they fall under IAS 2 Inventories, including the exception applicable to brokers/traders) or as intangible assets (in which case they fall under IAS 38 Intangible Assets).
As regards the use of crypto-currencies, it is worth noting that the amendment of OMFP no. 1.802/2014 introduced the possibility of opening separate accounts in which companies investing in such assets can record them.
It should not be overlooked that, despite the absence of concrete regulations on the mechanism for recording such transactions in accounting, there are views expressed in specialist doctrine, as well as recommendations de lege ferenda issued by CECCAR regarding how such transactions could be reflected in companies' accounts.
Thus, CECCAR specialists consider that a merchant wishing to accept crypto-currencies as a means of payment should, first and foremost, classify them in accounting as intangible assets. However, in order to avoid recording difficulties, they recommend amending OMFP no. 1.802/2014 to introduce new accounts, as well as to allow a derogation from the rules applicable to intangible assets with regard to the absence of amortisation. The amendment of OMFP no. 1.802/2014 should also address the introduction of criteria for recognising impairment, which should take into account not temporary fluctuations, but rather factors indicating an actual depreciation in the value of crypto-currencies.
From a tax perspective, it is recommended that any gains obtained from the sale, transfer or use of crypto-currencies be recorded as taxable income, while expenses arising from decreases in their fair value, or losses on their sale, transfer or use, should be deductible.
Finally, we note that such recommendations may become irrelevant in the future, in the context of the emergence of concrete accounting regulations.
Tax treatment with respect to corporate income tax
Even though the Fiscal Code contains no specific provisions on the tax treatment of crypto-currencies for corporate taxpayers, whether for corporate income tax or micro-enterprise income tax purposes, the tax treatment of such transactions generally follows the accounting treatment.
More specifically, under the Fiscal Code:
(i) for corporate income tax payers, the general rule is that taxable profit is determined on the basis of income and expenses recorded in the accounts, adjusted for tax items (e.g. non-deductible expenses, non-taxable income, etc.); thus, accounting income generated by crypto-currency transactions will be fully taxable, while recorded expenses should be deductible on the basis of supporting documents (although there may be situations in which expenses arising from the use of crypto-currencies could give rise to non-deductible expenses - e.g. expenses arising on set-off); or
(ii) for micro-enterprise income tax payers, the tax base starts from the income recorded in the accounts, from which certain categories of income are deducted
- given that income related to the costs of inventories of goods/work in progress is deducted from the taxable base of micro-enterprise income tax, it could be argued, by analogy, that income related to the costs of crypto-currencies should likewise be deducted from the calculation base of this tax.
Lastly, we note that in this case too there is a risk that such arguments may not be accepted by the tax authorities, who, in the absence of concrete regulations, may put forward their own interpretations of these tax issues.
CONCLUSIONS
There is an increasingly pronounced tendency among economic actors to view crypto-currencies as a viable alternative to the traditional conduct of payments. However, a considerable number of impediments arise, justified by the risk that still looms over this technology. Without a fiscal framework covering the use of crypto-currencies as a method of payment, this practice will continue to be an aspiration, but its implementation will be delayed.
At present, this payment option does not exist in Romania either, as the necessary accounting and fiscal instruments are still lacking. Nevertheless, the possibility that this practice will come to characterise the economic landscape in the near future is undeniable, all the more so as European influences regarding the use of crypto-currencies will shortly make their way into the national arena as well. Thus, the view that crypto-currency will become a fully-fledged participant in the financial system is justified, and the history of money will gain a further stage, perhaps as significant as the emergence of currency itself.
It is important to note that, against this backdrop, but in the absence of a legislative framework exhaustively regulating the dynamics of crypto-assets, major economic actors are embracing the introduction of payments in crypto-currencies. Heightened attention to fiscal processes, coupled with a legal vision adapted to the vulnerabilities raised by the presence of these currencies, can contribute emblematically to reducing risks and shaping a different, yet secure, commercial space.