Dividend distribution in cryptocurrencies or tokens

A few days ago a company of trading from Switzerland asked for our help to clarify whether it would be possible to distribute dividends in a currency, which is not the functional currency[1] of the company or the official currency of the country in which the entity is registered.

The main reason for evaluating this possibility is that most cash flows are generated in a currency other than the functional currency, something that is quite common in companies of trading actively participating in international trade.

Thus, the questions asked were: a.) Whether the distribution of dividends in a currency other than the functional currency would be possible, and, if so, b.) What exchange rate should be used for the conversion.

During the elaboration of the legal opinion, a question that went one step further in my head turned around: would it be possible to pay dividends in cryptocurrencies or Tokens? As we know, having a bank account is no longer an indispensable requirement for the constitution of a legal person and, in addition, one of the main problems of companies operating in the industry blockchain it is the opening of an operational bank account.

We are moving towards a new economic model in which cryptocurrencies will be used simply like any other currency in the ordinary course of business and economic activity. In this short article we are going to analyze the generalities and regulatory principles of this figure. During the generalities no reference will be made to any specific legislation. Towards the end of the article, the possibility of executing a dividend distribution in cryptocurrencies or Tokens from the perspective of Spanish company law.  

Let's start with the basics: what are dividends?

Dividends are the main economic right of the shareholders or partners of a commercial company. The approval of the annual accounts is the responsibility of the ordinary general meeting of the company. After the allocation of the legal reserves, the resulting profit can be distributed among the shareholders or partners of the company. From the moment of the adoption of said decision, a credit right of the partners against the company is born. From there, most entities will follow the traditional path, that is, dividends are paid to partners in the functional currency.

Reasons to pay dividends in a currency other than the functional currency

If we understand that the agreement adopted by the general meeting creates a credit right, the question we must ask ourselves is whether the company has the possibility of making the payment in a currency other than the functional currency. Most company legislation in different countries does not clearly determine that dividends must be paid in a given currency. Therefore, in most cases in company law we must understand that the principle of permission applies, that is, everything that is not expressly prohibited is allowed.

Thus, if there is no express legal or statutory prohibition, why should the company not be able to pay the partners, for example, in US dollars, an equivalent amount of the approved dividend in euros? The partners would receive the amount to which they are entitled in said distribution and the debt of the company would be canceled.

The silence of the law on these and other issues related to dividends gives freedom to decide how to execute and structure the payment of dividends.

The reason for raising these kinds of questions comes from the environment of international trade operations. It is common for a European Union company to sell goods to the United States and for payments for such operations to be made in US dollars. The European company would accumulate the majority of its reserves in US dollars. It is clear that there is the possibility of converting dollars into euros, but the company would suffer from the applied exchange rate that might not be the most advantageous when it comes time to distribute and pay the dividend to the partners.

Dividends don't always mean money: distribution in kind and scrip dividends

Although the dividend is legally configured as a naturally monetary credit, the distribution of dividends does not always have to be made in money. During the past crisis, we could see how even large listed companies chose to propose reinvestment plans for dividends, allowing partners to reinvest their dividend, obtaining new shares in the company either through the sale of their treasury stock. (treasury stock) or through the issuance of new shares to meet the payment of dividends (scrip issue).

Most countries allow the distribution of dividends in kind that works as a dation in payment, canceling the credit right with the distribution.

Dividend distribution policy and partner acceptance

Companies that opt ​​for this type of system must approve a dividend distribution policy that includes their main guidelines. Depending on the thesis adopted by the legislators and regulators of the different countries on the legal nature of cryptocurrencies, we must consider that the payment of dividends in cryptocurrencies would have the treatment of payment of dividends in fiat money (if the country accepts the cryptocurrency thesis = money) or the distribution treatment in kind (when you have understood the legal nature of the cryptocurrency as a good).

Dividend distribution in cryptocurrencies or tokens: a perspective from Spanish company law

There may be multiple reasons why a company may consider making a dividend distribution in cryptocurrencies or Tokens. Many innovative projects working on the development of new technology-based business models blockchain They may value making dividend distributions in digital assets instead of money either for convenience, for fiat currency liquidity issues, and for tax reasons.

From the point of view of operations, a company that is operating with digital assets will be easier to dispose of them on its balance sheet without having to change them to fiat money, pay additional commissions and expose itself to closing a position with exchange rates that could be unfavorable. It is also common for entities operating with digital assets to experience liquidity strains in fiat currency as it would be used to service smaller payments.

Lastly, dividends can be used as an interesting tool to stimulate the team holding the project shares. Thus, the payment of dividends in cryptocurrencies or Tokens It may be interesting for project partners from a tax point of view, since the taxation of capital income is more advantageous than the taxation applied to labor income. It is common in this type of project that team members have shares in society and also a salary. Modulating the different forms of remuneration can be interesting for this kind of profiles.

We make express mention of the Tokens as another digital asset capable of being used for the payment of dividends, which is an interesting option for those projects that have issued a token that has gained market value by trading on secondary markets.

Royal Legislative Decree 1/2010, of July 2, which approves the consolidated text of the Capital Companies Act, does not expressly mention the payment of dividends in money, making it possible to make a dividend payment in kind. . For this, the statutes of the company must expressly contemplate this possibility, a statutory amendment that must be approved by all the partners. In this sense, the general meeting may configure the distribution of dividends in kind as dation in payment in which the debt of the company with the partner is paid through the delivery of cryptocurrencies or Tokens regarding the money that would correspond to him. It is also possible to raise the dividend as an alternative obligation in which the choice between the two benefits (money or digital assets) is left in the hands of the partner-creditor or also as an optional obligation in which a payment obligation is agreed. in kind that the partner-creditor can make effective in money. 

In Spain the legal nature of cryptocurrencies and, by extension, also of Tokens they are not considered money. The Supreme Court, determined in STS 326/2019, of June 20, that it is an intangible asset that can be used as a means of payment. Therefore, a Spanish capital company may agree to pay dividends in cryptocurrencies or Tokens configuring it as a dividend in kind without major problem.

A more problematic issue that will arise when making a dividend distribution in cryptocurrencies or Tokens It will be to fix the value of the digital asset at the date on which it is agreed to make the distribution. The distribution agreement or, if there is one, the dividend policy approved by the general meeting, must indicate very clear mechanisms on how to calculate the applicable exchange rate.

[1] The currency or functional currency of a company is the currency of the main economic environment in which the entity operates.

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Rafael del Castillo Ionovhttps://delcastillo.law/
Rafael is a lawyer specialized in commercial law, blockchain and entrepreneurship. Member of the Madrid Bar Association, he is a Doctor of Law, Coordinator of the Chair of Law of Financial Markets at the CEU San Pablo University and Corresponding Academician of the Royal Academy of Jurisprudence and Legislation of Spain. Author of the first book on the legal aspects of Initial Coin Offerings (ICOs), he is a regular speaker at conferences, round tables, workshops and colloquia.


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