There is no uniform definition of blockchain or distributed ledger technology (DLT) in Portugal. Irrespective of the variations and different types of technology (eg, permissioned or permissionless, public or private), blockchain and DLT are usually used interchangeably to refer to a distributed database stored in a network of nodes and maintained by a consensus algorithm.
Therefore, except where expressly specified otherwise, these two terms will be used interchangeably to refer to the legal and regulatory challenges associated with this technology.
The Blockchain Market in the Last 12 Months
The Portuguese blockchain market is in the early stages of development, but the adoption of blockchain-based solutions across various industries has increased in recent years, particularly outside the financial sector. The effects of the COVID-19 pandemic on the Portuguese blockchain market over the past 12 months have been conflicting. On the one hand, adoption plans and the development of proofs of concept were postponed, especially by large national and international entities operating in the market. On the other hand, the need for secure digital transactions and operations has stimulated growing interest in the technology, particularly in the healthcare sector. The hype surrounding non-fungible tokens (NFTs) has also reached the Portuguese sports, media and entertainment industries.
The Portuguese blockchain market mainly consists of national and foreign large entities, SMEs and start-ups, as well as some spin-offs, local tech hubs and incubators. The main industries exploring blockchain, cryptocurrencies and smart contract technology applications are financial services, healthcare, supply chain and distribution, retail and energy.
Notwithstanding the above, the interest of foreign entities in the Portuguese blockchain market was boosted following the publication of Council of Ministers Resolution 29/2020 in April 2020, as part of the Portuguese government’s Digital Transition Action Plan, establishing the general principles for the preparation of the legislative framework for Technological Free Zones (Zonas Livres Tecnológicas – ZLTs). These aim to be real-life geographical areas set up as regulatory sandboxes aimed at promoting and facilitating research, demonstration and testing activities for innovative technologies, products and services, including blockchain applications, across all industries. The framework law on ZLTs is expected to be published soon.
Blockchain Market Issues in the Next 12 Months
Some of the trends identified in the past year are expected to continue (and possibly expand) over the next year, such as the increased use of NFTs and the application of blockchain technology in the healthcare industry.
Solutions and plans postponed due to the pandemic are also likely to be relaunched, especially in the distribution, retail and energy sectors.
The Portuguese government’s finalisation of the ZLTs framework will significantly contribute to the development, experimentation and adoption of the technology in the Portuguese market.
Moreover, considering that blockchain/DLT is not subject to uniform regulation in Portugal or in the EU, any EU-wide regulatory or policy initiative would have an impact on the national blockchain market.
In this regard, the following proposals included in the Digital Finance Package are expected to have a direct impact on the market, if approved:
Note that these proposals have an impact not only on the financial sector but also on other industries, as they cover matters related to tokenisation, including utility tokens.
The transposition of Directive (EU) 2019/770 on certain aspects concerning contracts for the supply of digital content and digital services into Portuguese law is expected during Q2 2021 and may have an impact on the tokenisation of assets and blockchain-based services. The tax treatment of crypto-assets is also an important issue shaping the market in the coming months.
Lastly, EU Blockchain Observatory publications and studies produced for the European Parliament show that European legislators have a growing interest in matters related to smart legal contracts, intellectual property, data protection, cybersecurity/cybercrime, territoriality and the enforceability of current regulations on actors in the chain. Any guidance in this regard will have a direct impact on the European and Portuguese blockchain markets.
Starting in 2018, major energy entities launched various projects and competitions leading to proofs of concepts for the development of alternative models of energy distribution using blockchain and smart contract technology.
Banking and Finance
While there is much interest and curiosity among major market players in confirming the advantages of blockchain models, it remains to be seen whether any of the announced projects will indeed be implemented.
Supply Chain Management
Some retail and large-scale distribution stakeholders have either announced their plans to use blockchain technology for supply chain management, or have already started doing so.
For instance, one large international retailer has used blockchain technology to provide information to consumers on the life cycle of certain controlled products and to ensure food quality and security. The same retailer has also announced its goal to integrate blockchain technology into its entire controlled production line.
Several national SMEs have developed apps to ensure the security of information exchange, especially in the healthcare sector and in collaboration with hospitals in Portugal.
Smart Contracts and Self-sovereign Identity (SSI)
There is growing discussion around the combination of smart contract technology with DLT, for either B2B or B2C applications across various industries. Similarly, some Portuguese companies have started exploring the possibility of providing SSI-related services.
As the use of NFTs soared worldwide over the past few months, especially in the fields of entertainment, sports and art, in Portugal two football players issued their own NFTs, a gaming start-up offering a football simulation platform also launched NFTs, and an art gallery developed a series of NFTs as part of a digital show over a period of five weeks.
Other applications currently explored on a smaller scale involve the deployment of blockchain technology in the mobility and real estate sectors.
Although no decentralised finance projects have yet been completed and become fully operational in the Portuguese jurisdiction, the ecosystem is interested in such developments and is paying close attention to what happens in this respect.
As mentioned in 1.1 Evolution of the Blockchain Market, blockchain/DLT and cryptocurrencies are not subject to uniform regulation in Portugal nor in the EU.
Considering that Portugal is a member of the European Union and that European legislators are aiming for EU-wide harmonisation when it comes to emerging technologies, the Portuguese legal framework is expected to closely follow European initiatives, and any EU-wide regulatory or policy initiative will have an impact on the national blockchain market.
For specific policy initiatives and regulations, please refer to 1.1 Evolution of the Blockchain Market.
In line with the above, the opinions, guidelines and recommendations of the following European authorities issued in relation to blockchain and cryptocurrencies, both sector-specific and non-sector-specific, are expected to shape the opinions of the respective national authorities:
Those respective national authorities are as follows:
Portugal has been a member of the Financial Action Task Force (FATF) since 1990, and BdP and CMVM are also parties thereto.
BdP further participates in the Bank for International Settlements (BIS).
While both regulators recognise the recommendations of the FATF and BIS, there is no specific Portuguese legislation formally implementing them.
Banking and Finance
Since 1 September 2020, BdP has been the entity responsible for the registration and supervision of compliance with the AML Law (Law No 83/2017 on money laundering and terrorist financing) and related rules for entities operating with virtual assets. However, the BdP’s responsibility is limited to AML prevention, and does not cover other domains of prudential banking conduct or conduct of any other nature.
CMVM is the regulator responsible for supervising the financial instruments market. Accordingly, the scope of its jurisdiction relates to those virtual assets that are legally classified as securities (valores mobiliários). CMVM shall only supervise crypto-assets that may be legally qualified as such.
ANACOM (Autoridade Nacional de Comunicações) is the Portuguese Telecommunications Authority responsible for regulating the communications sector, including electronic and postal communications. It is therefore of relevance for the application of blockchain in these industries.
Data Protection, Privacy and Cybersecurity
CNPD is the national supervisory authority responsible for monitoring any data processing activity that takes place in the Portuguese territory or targets Portugal-based individuals, and it has the ability to impose administrative fines.
CNCS is the national authority responsible for ensuring the cybersecurity of state entities, operators of critical infrastructure, essential services pursuant to the NIS Directive, and digital service providers.
The Directorate-General for Consumer Protection (Direção-Geral do Consumidor) is the entity responsible for ensuring consumer protection in the Portuguese territory, including in relation to the provision of digital products and services, and has the ability to impose administrative fines.
Pursuant to 1.2 Business Models, the following authorities are of relevance in relation to other sectors that have been developing blockchain-based projects:
There are no self-regulatory organisations or trade groups that perform regulatory or quasi-regulatory roles with respect to businesses or individuals using blockchain in Portugal.
There are no judicial decisions or ongoing litigation regarding blockchain or cryptocurrencies in Portugal.
In any case, please note that, as a civil law jurisdiction, Portuguese case law does not rely on the doctrine of binding precedent.
Moreover, the European Court of Justice (ECJ) has not issued a decision on blockchain, with the exception of C-264/14, which could have provided some guidance.
Notwithstanding, please refer to 2.8 Tax Regime regarding the rulings of the Portuguese Tax Authority (PTA) on cryptocurrencies.
Without prejudice to the decisions of the PTA mentioned in 2.8 Tax Regime, there are currently no enforcement actions being taken in Portugal vis-à-vis activities using blockchain.
There is currently no regulatory sandbox in Portugal specifically geared towards blockchain-based projects.
Nonetheless, Council of Ministers Resolution 29/2020, mentioned in 1.1 Evolution of the Blockchain Market, aims to establish Free Technological Zones, which are regulatory sandboxes.
Portugal Finlab (an innovation hub) was set up by the banking, securities and insurance regulators to develop innovative fintech projects, which can naturally also include DLT/blockchain.
Moreover, Portugal is a member of the Pan-European Blockchain Association, which together with the European Commission is preparing the parameters for a regulatory sandbox on data portability, B2B data spaces, smart legal contracts and SSI for critical sectors, such as health, environment, mobility and energy. This sandbox is expected to become operational during 2021/22, and the results thereof may lead to a regulatory initiative from the European Commission.
For clarity purposes, it should be noted that the Portuguese tax regime has not been updated to consider the use of blockchain or cryptocurrencies.
Transactions with Cryptocurrencies
Although the law is silent on this matter, the PTA has already issued binding rulings on the Value Added Tax (VAT) and Personal Income Tax (PIT) implications of transactions with cryptocurrencies.
In line with the ECJ’s interpretation (in Case C-264/14, Skatterverket v David Hedqvis) of the VAT treatment of transactions with cryptocurrencies, the PTA ruled that transactions such as the exchange of cryptocurrency for traditional currency (and vice versa) and mining activities should be exempt from VAT.
Following the CJEU’s judgment, which should apply in all EU Member States, the binding rulings issued by the PTA were an important step forward in the definition of the VAT treatment of cryptocurrency transactions. With these binding rulings, entities exchanging cryptocurrencies, as well as start-ups and users, are now operating in a safer environment in Portugal from a VAT perspective. Buying, selling, sending, receiving, accepting and spending cryptocurrencies in exchange for legal tender currency (and vice versa) will not trigger a VAT liability, thus allowing economic agents to deal with cryptocurrencies as they would with legal tender currency or other types of money.
For PIT purposes, the PTA ruled that any gains derived from the exchange of cryptocurrency for legal tender currency (and vice versa) should not be considered as income for PIT purposes, to the extent that this activity does not constitute a business or professional activity. Indeed, the PTA concluded that gains derived from the sale of cryptocurrency would not fall under the concept of capital gains or investment income as defined by the Portuguese PIT Code and, consequently, that those gains are not covered by the taxable base of the Portuguese PIT. The PTA was, however, silent on the criteria to qualify the exchange of cryptocurrency as a trading activity that amounts to a business or professional activity.
Nevertheless, it should be noted that binding rulings only bind the PTA towards the taxable person who submitted the ruling request and in relation to the specific facts and questions presented to the PTA in this request.
Despite posing very complex challenges (such as the allocation of taxing rights for income and VAT purposes, the relevance of (identifying) the place of human and technical resources, and the qualification of tokens for tax purposes), tax issues related to blockchain-based transactions have not yet been addressed by the Portuguese legislator or the PTA.
Automatic Exchange of Information between EU Member States
Regarding the automatic exchange of information in tax matters, the PTA recently reported the release of the initial impact assessment of the European Commission’s Proposal for a Directive (so-called DAC 8) amending the Directive on administrative co-operation in the field of taxation as regards cryptocurrencies and electronic money. Developments in this area are awaited.
A public consultation launched by the European Commission is open from 10 March 2021 to 2 June 2021 to collect data and evidence needed to evaluate the need for new rules on the reporting and exchange of information for tax purposes on e-money and crypto-assets, as well as new rules on penalties and compliance measures for the various reporting obligations under the DAC framework and the potential scope of those provisions. To this aim, the public consultation will gather stakeholders’ views on the use of e-money and crypto-assets, what information is available and which reporting mechanisms could be used. It also aims to gather views on appropriate penalties and compliance measures and the co-ordination of such measures among EU member states.
Without prejudice to the initiatives described in 1.1 Evolution of the Blockchain Market and 2.7 Regulatory Sandbox, the Portuguese government, through Portugal Digital, as well as the national authorities, especially CMVM, are making efforts to raise awareness and increase the digital literacy of citizens and investors regarding blockchain and cryptocurrencies by offering training sessions or informative documents and periodically organising conferences and seminars in collaboration with blockchain market stakeholders and universities.
There are currently no specific rules or regulations addressing the ownership of cryptocurrencies or blockchain-based digital assets in Portugal.
In any case, the rules on ownership/entitlement will depend on the nature of the asset. A digital asset could be a representation of an underlying asset or a natively digital asset. In this regard, a digital asset could qualify as digital content or could be equated to the nature of the asset that it is representing.
Rules on the ownership of goods or assets are generally determined in accordance with the Portuguese Civil Code and basically relate to the type of assets at stake and, in particular, whether they are subject to mandatory registration (such as real estate assets or other types of movable assets, including vehicles or aircrafts).
From a finance perspective, the closest resemblance to the ownership of digital assets is that related to dematerialised/book-entry securities, such as shares. Pursuant to the Portuguese Securities Code, the ownership of shares not represented through physical paper certificates is evidenced through certificates of ownership issued by the registering entities where the individual registration accounts are held.
Without prejudice to MiCA and the fintech sector, there are no specific laws, regulations or judicial decisions addressing the categorisation or nature of digital assets and tokens. Please see 3.1 Ownership regarding the nature of digital assets in general and matters of ownership/entitlement.
At this stage, there is still no legislation enacted in Portugal providing for an appropriate characterisation of digital assets; such legislation is expected to closely follow the MiCA categorisation. Notwithstanding, the approach taken so far by CMVM is to consider that if those tokens qualify as securities or financial instruments, they may fall under CMVM’s supervision.
This qualification is to be conducted on a case-by-case basis and will depend on a given number of features of the token. A token may be qualified as a security if it corresponds to a document representing one or more private legal entitlements (rights and/or obligations) and in relation to which the corresponding holders are entitled to an income (for example, interest or profit sharing). Similarly, a token may be qualified as a utility token when it has non-financial purposes but, on the contrary, it intends to provide digital access to a good or service that is available on a blockchain.
In this respect, in the context of the documents made publicly available by the issuer of digital assets (including, among other elements, the “white paper”), it will be particularly relevant to assess whether the issuer creates a legitimate expectation among investors that there will be a return on investment. This return may be either the granting of a right to a dividend or interest, or the increment of the asset value by reference to the issuer or to a third party action for that effect.
As mentioned in 3.2 Categorisation, there is no formal treatment of tokens in Portugal, nor distinctions made between them. Therefore, there is no formal distinction between stablecoins backed by deposits of fiat currency and “algorithmic” stablecoins. The exercise to be carried out in relation to this type of assets would therefore be to assess, on a case-by-case basis, whether they can qualify as security/financial instruments.
However, it should be noted that stablecoins are expressly mentioned in the MiCA Proposal as an asset-referenced token or e-money token (when functioning as a means of payment), and specific rules are proposed for this type of asset. According to MiCA, “algorithmic” stablecoins should not be considered asset-referenced tokens, provided that they do not aim to stabilise their value by referencing one or several other assets.
If the Proposal is approved, this classification will also apply in the Portuguese jurisdiction.
There is no prohibition on the use of cryptocurrencies as a means of payment. However, since cryptocurrencies are not recognised as fiat currency in Portugal, their acceptance as a means of payment is not legally mandatory.
As mentioned in 1.2 Business Models, some NFTs have already been offered in Portugal, notably in the fields of art, entertainment and sports. However, similar to other tokens, NFTs are not subject to specific regulation in Portugal.
Nonetheless, since NFTs are a representation of a digital or physical asset, in principle the Portuguese Civil Code will apply to their sale, depending on the type of asset they represent, as mentioned in 3.1 Ownership.
The Portuguese Consumer Protection Framework may also be applicable, including the Distance and Off-Premises Law (Decree-Law 24/2014, as amended) and, once transposed into Portuguese law, Directive (EU) 2019/770 on certain aspects concerning contracts for the supply of digital content and digital services.
Furthermore, there is currently regulatory ambiguity in relation to cases where NFTs are used for the sale of artworks and other copyright-protected creations. Therefore, the transfer of ownership of the work will depend on the agreement between the parties.
At this stage, there are no specific markets in the Portuguese jurisdiction for digital assets.
There are no formal processes or a specific legal framework in Portugal under which exchanges of fiat currency for cryptocurrencies are conducted. Based on publicly available information, such exchanges are made at the initiative of interested parties – including individuals or entities – through exchange houses or similar entities operating on a cross-border basis, mostly online.
Law 83/2017 on the prevention of money laundering and terrorist financing (the AML Law) already includes certain rules on activities carried out with virtual assets (ativos virtuais). For instance, entities operating with virtual assets can only exercise such activity following prior registration with the Bank of Portugal. These same entities are also subject to certain AML-related obligations, including due diligence and identification duties, provided that certain thresholds are met.
For the purposes of these rules, the definition of “activities carried out with virtual assets” corresponds to any of the following economic activities, when exercised for and on behalf of a client:
Digital assets markets are not currently regulated in Portugal and there have been no enforcement actions on the matter (see 2.6 Enforcement Actions). Please see 1.1 Evolution of the Blockchain Market regarding the relevant regulatory initiatives and 2.3 Regulatory Bodies regarding the national competent authorities.
There is no specific regulation applicable in this respect in Portugal.
There are no regulations in Portugal specifically addressing the provision of online or offline storage solutions for private cryptographic keys that control the ability to give instructions with respect to digital assets.
Note, however, that the 5AMLD (Directive (EU) 2015/849) was transposed into Portuguese law in August 2020, amending the national law on money laundering and terrorist financing.
The national law covers wallet providers providing services in the Portuguese territory, although, following the definition of 5AMLD, it does not distinguish between online or offline storage solutions. Please see 4.3 KYC/AML regarding the obligations applicable to wallet providers.
Notwithstanding this, the Portuguese Consumer Protection Framework and the GDPR may further apply in relation to consumer and data protection, respectively.
Should the initial coin offering (ICO) be addressed to investors who are resident in Portugal and if the tokens issued are qualified as securities, the ICO shall be ruled in accordance with the Portuguese Securities Code and the applicable EU legal framework on the public offering of securities. These rules will include obligations relating to the following:
There are no regulations specifically applicable to fundraising through the sale of tokens. Nonetheless, as stated in 5.1 Initial Coin Offerings, if and to the extent that such tokens resemble securities, the Portuguese and EU rules on offers for exchange of securities may be applicable.
At the same time, if and to the extent that there are crowdfunding activities that use tokens, then the Portuguese legal regime on crowdfunding may be applicable.
Although there is no specific law or regulation on investment funds or collective investment schemes that invest in digital assets, CMVM recently stated that in cases where such vehicles intend to invest in this class of assets, they should be set up as a collective investment scheme investing in non-financial assets or a specialised alternative investment fund, subject to the respective rules. Under Portuguese law, both types of vehicles are considered alternative investment funds, within the meaning and for the purposes of Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers.
CMVM highlighted the importance of these investment funds making proper disclosure and identification of their intention to invest in digital assets, namely in the description of the investment policy. Moreover, the definition of the evaluation rules for digital assets comprised in the portfolio, as well as the way in which the fund manager will address and manage the risks associated with these volatile assets, constitute key items to be analysed by CMVM during the process of registration or approval of the fund, as the case may be.
There are no special regulations in the Portuguese jurisdiction applicable to broker-dealers or other financial intermediaries that deal in digital assets. Nonetheless, as stated in 5.1 Initial Coin Offerings, when any such digital assets mirror some of the features qualifying an instrument as a security, then, following a case-by-case assessment, the Portuguese Securities Code and EU legal framework may apply to such brokerage or financial intermediation services.
There are no specific laws or regulations in Portugal addressing the legal enforceability of private contractual arrangements made in whole or in part using blockchain-based smart contracts.
Similarly, as stated in 2.5 Judicial Decisions and Litigation, there are no judicial decisions on the matter.
The enforceability of smart legal contracts has not been addressed at the European level either. However, as stated in 2.7 Regulatory Sandbox, it is safe to assume that the European Commission will launch a regulatory initiative on smart contracts in the coming years.
Smart legal contracts fall within the scope of electronic contracts and, as such, they are, in principle, admissible under the principle of contractual freedom and admissibility of electronic contracts recognised in the Portuguese Civil Code and the e-Commerce Law (Law 7/2004).
Contracts signed electronically, without human intervention, are also enforceable.
In addition, electronic declarations satisfy the legal requirement of written form, provided that the guarantees of reliability, legibility and conservation are met.
The following exemptions to the principle of admissibility of electronic contracts apply:
There are currently no specific laws, regulations or judicial decisions addressing the liability of blockchain stakeholders in Portugal, nor has this topic been addressed at the European level.
Notwithstanding, under the Portuguese Civil Code any legal or natural person can be held liable for damages. In this sense, a developer of a blockchain-based network or of the code that runs on the network could be held liable for losses arising through the use of this software, provided that there are losses, fault on the part of the developer (negligence or intentional misconduct) and a causal link between the fault and the losses.
There are currently no specific laws or regulations applicable to decentralised financial platforms.
Theoretically, to the extent that the digital asset has no physical representation, according to the Portuguese Civil Code the appropriate security interest to be taken over the digital asset would be a pledge over such digital asset.
While there are no specific rules in the Portuguese jurisdiction regarding the custody of digital assets, there are duties applicable to custodian roles with respect to securities and other financial instruments. Accordingly, given that some of the features usually attributed to digital assets are similar to those of securities, it would be expected that any future regulatory requirements on digital assets would mirror those already foreseen in the Portuguese Securities Code for custodians of securities.
There are currently no specific laws, regulations or judicial decisions in Portugal addressing blockchain-related data privacy issues. Similarly, this topic has not been addressed at the European level, with the exception of some reports and studies issued by the European Blockchain Observatory and on behalf of the European Parliament.
Nonetheless, the GDPR (Regulation (EU) 2016/679) and the Portuguese GDPR Implementation Law (Law 58/2019) will apply.
The application of the GDPR and, in particular, the exercise of individuals’ rights and compliance with data processing principles in a blockchain environment raise various questions.
The discussion on the GDPR and blockchain mostly revolves around the following topics:
Considering that, by design, the data included on the chain is immutable and blockchain is an append database, the tension between the technology and the GDPR is evident.
It should be noted that these challenges increase in the context of permissionless public blockchains.
In light of the above, solutions such as storing the data off-chain to allow for its rectification or ensuring that, following the end of the processing or when an individual requests the erasure of their data, the data is made inaccessible to third parties, including the data controller, by destroying any key or further encrypting it, have been proposed by academia as well as entities using DLT.
Notwithstanding the above, it is understood, both in Portugal and at the European level, that blockchain provides manifold opportunities for promoting data protection and security in line with the principles of data protection by design, therefore ensuring GDPR compliance.
In addition to the issues discussed in 8.1 Data Privacy, the use of blockchain technology, especially public blockchains, raises questions around the proper identification of data controllers or joint controllers and data processors due to the difficulty in identifying the actors involved.
This challenge further complicates the enforceability of data protection rules by individuals, data protection authorities and the courts.
There are currently no specific laws, regulations or judicial decisions regulating mining activities in Portugal.
Similarly, this topic has not been addressed at the European level.
There are currently no specific laws, regulations or judicial decisions regulating “staking” in Portugal.
Similarly, this topic has not been addressed at the European level.