Digital assets and legal gap

2023 was a year of recovery for cryptocurrency markets, with asset prices and market sentiment improving over the course of the year after a challenging 2022, according to American blockchain analytics firm Chainalysis. Vietnam ranked third in the 2023 global crypto adoption index, following India and Nigeria, and also ranked third globally in cryptocurrency profits last year, with investors pocketing an impressive $1.18 billion, following the US with $9.36 billion and the UK with $1.39 billion.

At a Vietnam Blockchain Association workshop on a legal framework to regulate virtual assets and virtual asset service providers, held in Ho Chi Minh City on June 5, Chainalysis was quoted as saying that inflows of virtual assets into Vietnam’s crypto market totaled $120 billion from January to July 2023.

Many countries and territories in the region have introduced laws and policies to establish a legal framework that encourages these assets to positively contribute to their economies, rather than being viewed negatively as a potential threat to national economic stability. In Vietnam, however, the legal framework in this sector remains “fragile”, highlighting the urgent need to finalize regulations that both encourage the growth of technology companies and ensure full compliance with tax obligations.

Assets allowed, payment method denied

Mr. Do Ngoc Quynh, General Secretary of the Vietnam Bond Market Association (VBMA), observed that whether it is officially acknowledged or not, digital asset transactions are a reality, with billions of dollars at play. Many individuals in the community view these assets as investments, believing in their intrinsic value. This is a complex area, requiring that State agencies carefully balance the benefits and risks in managing digital asset policies.

When cryptocurrencies were first introduced, he continued, they were an innovative invention, offering significant benefits and resolving issues related to costs and time, especially considering that each country issues its own currency. However, from a regulatory standpoint, each country seeks to maintain monetary sovereignty and control over policies through actions like money issuance and economic management, ensuring macro-economic stability and promoting growth. The introduction of cryptocurrencies could disrupt monetary policy and distort markets, leading most countries and territories to adopt a stringent regulatory stance.

Nevertheless, some countries and territories have accepted this asset class and introduced the concept of digital assets, or crypto assets, while ensuring they do not become a form of currency or a payment method. This approach avoids impacting money supply and demand within the economy, allowing countries and territories to maintain control over monetary policy.

“When addressing digital assets, many countries and territories do not classify them as a form of money but rather as an investment vehicle or a type of asset,” Mr. Quynh emphasized. “Instead of ignoring or avoiding the issue, they confront it directly, seeking transparency and proactive management of activities in society, balancing the impacts, and in some cases, collecting taxes.”

This approach aims to mitigate negative impacts and prevent illegal money laundering, particularly as the digital asset market expands and presents significant management challenges. By recognizing digital assets as a form of property, countries and territories acknowledge legal property rights and use this as a basis for taxation. They also establish regulations, procedures, and mechanisms to allow citizens to invest in these assets transparently.

Mr. Phan Duc Trung, Vice Chairman of the Vietnam Blockchain Association, highlighted that according to a survey conducted by the Atlantic Council in 60 countries and territories, as of the end of 2023, 33 out of 60 countries and territories worldwide had officially legalized cryptocurrencies and digital assets. Notably, 12 of these, representing 52 per cent of global GDP, have established legal frameworks and issued regulations for managing virtual property and virtual asset service providers. “Out of the 60 surveyed countries and territories, 33 have recognized the legality of digital assets, 17 have partially-clear policies, and ten have completely banned them,” Mr. Trung said.

According to the Association, countries and territories generally categorize their legal frameworks into four key areas: (i) tax policies; (ii) anti-money laundering and counter-financing of terrorism standards; (iii) consumer protection policies; and (iv) virtual asset service provider licensing regulations. Of these, Thailand has implemented all four. Cambodia also has licensed digital asset service providers. Vietnam, meanwhile, hasn’t implemented any such policies.

Closing the legal gap

Mr. Truong Ba Tuan, Deputy Director of the Department of the Tax Policies, Fees and Charges Supervisory Authority at the Ministry of Finance (MoF), highlighted the significant global growth of digital assets driven by technological advancements. Though Vietnam currently lacks a legal framework for digital assets, transactions involving these assets are still occurring through foreign exchanges and individual efforts.

He stressed the importance of establishing a legal framework for digital assets, which should clearly define what constitutes a digital asset, its legal status, and its unique characteristics. With this clarity, State management agencies can implement consistent legal measures and policies.

Notably, the Ministry of Information and Communications is drafting the Law on the Digital Technology Industry, with Article 8 stating that:

            - Digital assets are digital technology products created, issued, transferred, and authenticated using blockchain technology, with prices and property rights governed by civil and relevant laws.

            - The Ministry of Finance is responsible for overseeing and coordinating with ministries and branches to develop or propose regulations on digital asset management and digital asset service providers for approval by competent authorities.

            - Ministries and branches are responsible for developing and submitting management regulations related to digital assets within industries and fields under their respective management for approval by competent authorities.

Mr. Trung emphasized that tax policies must be clear and should broaden the definitions related to account creation, investment, and resident versus non-resident status to fully tap into potential resources. He advised that tax laws be amended cautiously, step-by-step, with ongoing feedback and consideration during implementation.

The Vietnam Blockchain Association acts as a bridge to the community, offering international insights to balance consumer protection, tax policies, anti-money laundering measures, and the licensing of service providers on digital asset platforms. “Digital assets are assets that can be traded under cross-border transactions, which are not allowed to have a ripple effect on other sectors and, if managed effectively, can attract foreign investment, similar to FDI,” Mr. Trung noted.

Mr. Tran Huyen Dinh, Founder and CEO of blockchain project developer AlphaTrue, said his company, in collaboration with the Vietnam Blockchain Association, has provided feedback on the draft Law on the Digital Technology Industry to better align Vietnamese legislation with global standards and support the growth of Vietnamese businesses. “These regulations will bring greater transparency and specificity, creating favorable conditions for businesses in this sector while also preventing brain drain and attracting more foreign investment to Vietnam,” he believes.

However, he cautioned against focusing too narrowly on blockchain technology, as the field is rapidly evolving. For example, early European legal documents mentioned virtual asset service providers, but the first unified market rules for crypto assets in Europe introduced a broader term: Market in Crypto-Assets, or tokenized assets.

Tax matters

If the draft Law on the Digital Technology Industry is passed and defines digital assets and related matters, Mr. Tuan indicated that the MoF would implement relevant policies, including tax regulations. If digital assets are recognized under this law as a type of asset, there will be a legal foundation for tax collection under existing tax laws.

Currently, three tax policies govern the sale, transfer, and transaction of assets: the Law on Personal Income Tax, the Law on Corporate Income Tax, and the Law on Value Added Tax. Under the Law on Personal Income Tax, residents are generally required to pay taxes on income earned both within and outside of Vietnam. The law clearly outlines taxable income, including income from business activities exceeding VND100 million ($4,000)  per year or income from asset transfers.

Similarly, the Law on Corporate Income Tax requires organizations and businesses generating income from production, business, and other activities to pay taxes. The Law on Value Added Tax, meanwhile, regulates the taxation of goods and services used for consumption.