The State of Crypto Adoption in Denmark
Source: Freepik
Denmark is gradually establishing itself as an open adopter of cryptocurrency. While it hasn’t gone as far as countries like El Salvador in making Bitcoin legal tender, Denmark allows Bitcoin to operate as both a payment token and an investment asset with relatively light regulation.
Although there's a diversity in the views of the Government, individuals and institutions on the long-term impact of cryptocurrency. There is still a progressive adoption of cryptocurrencies in Denmark.
“The user penetration rate in Denmark's Cryptocurrencies market will be 38.53% in 2024 and is expected to reach 38.56% by 2025.” - Statista
Government Adoption
The Danish government is open to the use of blockchain technology but remains wary of cryptocurrencies. It focuses on preventing illegal activities, like money laundering, associated with crypto transactions. Discussions have been held about implementing more precise regulations to bring transparency to the sector.
The Danish Financial Supervisory Authority (FSA) has issued warnings about the risks of investing in cryptocurrencies. It also highlighted that these investments can be complex and risky compared to other financial products.
Danmarks National bank has also expressed concerns about the risks associated with cryptocurrencies. This includes price volatility, market manipulation, and the potential for financial instability. They have emphasized the need for regulation to mitigate these risks and protect consumers.
This stance could shift if crypto adoption grows or connections to traditional finance deepen.
Individual Adoption
A recent survey by EY and K33 Research indicates a significant rise in cryptocurrency ownership among younger adults in Denmark. Approximately 300,000 Danes, or 7% of the population, now own digital currency.
The survey reveals that younger adults dominate this trend, with 60% of Danish crypto owners being under 40. Most Danish crypto owners entered the market after 2019, indicating that interest surged during the COVID-19 pandemic.
The survey predicts that over the next decade, cryptocurrency ownership in Denmark could triple. More than 900,000 Danes, or about 20% of the adult population, might own digital currency.
"Considering the positive reception and quick adaptation to cryptocurrency among Danes, especially the young adults, we are looking at a potential threefold increase over the next ten years." Mads Ribe, Associate Partner at EY Tax & Law.
Institutional Adoption
Despite the Central Bank of Denmark's reservations about the impact of cryptocurrencies on the country's financial system. Some banks have taken a more favorable stance towards crypto.
Saxo Bank introduced a crypto FX product for trading between major cryptocurrencies and fiat currencies.
Danske Bank stated in 2021 that it would not provide cryptocurrency services but would not block or interfere with transactions involving cryptocurrency platforms.
"For customers that deposit funds that stem from investments in cryptocurrencies, we will treat them in the same way as deposits of funds from other types of investments."
Danske Bank, while not directly offering crypto services, permits transactions with crypto platforms and allows its credit cards to be used on these platforms.
Although most crypto use is still in the investment and trading space rather than for everyday purchases. Some businesses in Denmark accept cryptocurrencies as payment. Businesses that do accept crypto tend to cater to tech-savvy consumers and younger generations.
Interest in cryptocurrencies is growing, especially among younger Danes. They view crypto as an alternative investment and are becoming more familiar with how digital assets function. Still, many people remain skeptical due to the market's volatility and regulatory concerns.
Crypto Law in Denmark
Source: Freepik
As a member of the EU, Denmark follows the decisions and guidelines of the European supervisory authorities on virtual currency regulation. Denmark does not have a specific legal framework for virtual assets, but cryptocurrency is indirectly regulated through existing laws. Primarily the Act on Measures to Prevent Money Laundering and Financing of Terrorism (AML Act).
Although virtual currencies are not directly categorized as financial instruments under Danish law, the FSA may still evaluate them on a case-by-case basis to determine if they fall under existing financial regulations. Initial Coin Offerings (ICOs) may be subject to Danish securities laws if they grant decision-making power to investors, similar to IPOs.
There is no specific license for virtual asset service providers in Denmark. However, businesses must register with the FSA to operate legally and comply with AML rules. The registration ensures that companies meet the requirements for preventing money laundering and terrorist financing.
AML requirements
The AML Act defines virtual currency as a digital form of value that is not issued by a central bank and is accepted as a medium of exchange by individuals or entities.
The AML Act was updated in 2020 and 2021 to align with EU directives. Its coverage includes providers involved in virtual currency exchanges, transfer services, and custodial wallet services. These entities must follow know-your-customer (KYC) procedures when starting business relationships, handling large transactions, or if there is suspicion of illegal activity.
The KYC requirements include verifying customer identities using reliable sources to ensure compliance with the law.
Taxation of Cryptocurrencies in Denmark
Source: Freepik
Cryptocurrencies are classified as personal assets in Denmark. This classification distinguishes them from traditional currencies like the Danish Kroner or the Euro. As a result, any profits from the sale or disposal of cryptocurrencies are taxed as income, not capital gains.
Individuals Tax
Cryptocurrency gains or losses are subject to income tax. Income from airdrops, mining, and other sources must also be reported.
Tax rates include:
- A base tax rate of 12.10%.
- A municipal tax rate of 25%.
- An additional tax of 15% for incomes exceeding DKK 552,500 (€75,000).
Legal Entities Tax
The principle of territoriality applies. Danish companies are not taxed on worldwide income but only on income earned within Denmark.
The corporate income tax rate stands at 22%.
Tax-Free Transactions
Certain transactions involving cryptocurrencies are tax-exempt in Denmark:
- Purchasing cryptocurrency with fiat currency
- Transferring cryptocurrency between wallets
- Holding cryptocurrency
- Donating cryptocurrency
Crypto Regulations in Denmark
Source: Freepik
Denmark's approach to crypto regulation is influenced by both the Markets in Crypto-Assets (MiCA) framework from the EU and the Basel standards for banking institutions. These frameworks shape how crypto-assets and related services are handled within the country's financial system.
MiCA's Influence on Denmark
MiCA, which took effect on June 30, 2023, provides the main structure for regulating crypto-assets in Denmark and other EU member states. It sets requirements for crypto-asset issuers and service providers, aiming to integrate these into existing financial standards. Danish crypto-asset service providers registered before MiCA's full implementation have an 18-month period to comply with the new rules.
MiCA divides crypto-assets into three categories: Asset-Referenced Tokens (ART), E-Money Tokens (EMT), and other crypto-assets. Issuers of ARTs and EMTs in Denmark need authorization from local authorities, while the European Banking Authority (EBA) may oversee more significant cases. The regulation ensures that stablecoin issuers are well-capitalized, maintain proper reserves, and offer clear redemption rights to protect investors.
Danish central banks have a specific role under MiCA, with the authority to limit or veto the issuance of ARTs that might threaten financial stability or monetary policy within the country. This power is crucial for protecting the local economy from potential risks posed by crypto-assets linked to the Danish krone.
Basel Standards Implementation
The Basel standards govern how Danish banks and financial institutions handle crypto-assets. These standards, proposed by the Basel Committee on Banking Supervision (BCBS), outline how banks should manage their exposure to crypto-assets, focusing on capital and liquidity requirements.
The standards classify crypto-assets into two groups based on risk:
- Group 1: Includes tokenized assets and those with strong stabilization mechanisms. If they meet the criteria, they're treated like traditional assets.
- Group 2: Covers all other crypto-assets, considered high-risk. Banks must fully fund these holdings with equity and face a strict exposure limit of 1% of their core capital.
Denmark's banks must follow these standards to ensure that their crypto-asset holdings do not compromise the stability of the broader financial system. The requirements for Group 2 assets, with a risk weight of 1250%, are particularly strict to minimize the potential impact on the banking sector.
Challenges of Crypto Adoption in Denmark
Source: Freepik
Lack of regulation and supervision
Currently, there are little to no regulatory frameworks or a supervisory authority laying down requirements and overseeing the financial resilience of the crypto-asset in Denmark. This uncertainty can deter businesses and individuals from using or investing in cryptocurrencies.
Security Concerns
The risk of experiencing fraud in the crypto-asset market is high. There are currently no or few safeguards against fraud in the crypto-asset market unlike in the traditional financial markets. Concerns about fraud and hacking make some users in Denmark wary of cryptocurrencies.
Volatility
Volatility is higher among crypto-assets than other, traditional asset classes. Large fluctuations expose investors to market risks and may result in large and
sudden losses. For this reason, Danish and European financial authorities have warned private investors about the risks of investing in crypto-assets
Potential Benefits of Crypto Adoption in Denmark
Source: Freepik
Faster Transactions
Crypto transactions are quicker compared to traditional banking. This speed benefits Denmark businesses with global operations, enabling instant cross-border payments.
Diversification of Investment Options
Cryptocurrencies offer new avenues for investment. This diversification could appeal to Danish investors looking to spread risk across different asset classes.
Increased Financial Inclusion
Cryptocurrencies offer financial services to those without access to traditional banks. This could empower people in remote areas of Denmark.
Innovation Hub
Denmark could position itself as a global leader in blockchain technology and cryptocurrency development. Crypto Adoption could attract startups and tech companies, boosting job creation and economic development.
Conclusion
Denmark’s approach to cryptocurrency reflects a mix of openness and caution. The central bank remains unconvinced about its benefits for the financial system. However, the country continues to provide an environment where crypto can be used for everyday transactions.
Financial institutions like Saxo Bank are capitalizing on the demand for crypto-related products. At the same time, traditional players such as Danske Bank are not offering direct services but still permit crypto transactions.
Challenges such as lack of regulation, security concerns, and volatility remain obstacles to widespread adoption. Nevertheless, the potential benefits of faster transactions, investment diversification, and financial inclusion provide opportunities for future growth.
The country’s evolving stance suggests that while crypto may not become a cornerstone of the financial system, it will likely play an increasing role in the broader economy.
