Lithuania’s Regulatory Landscape for Virtual Assets Evolves with MiCA Implementation

The implementation of the Markets in Crypto Assets (MiCA) Regulation marks a pivotal moment in Lithuania’s regulatory landscape for virtual assets. In response to the evolving challenges and risks associated with the crypto-asset sector, Lithuanian authorities are proactively shaping a robust regulatory framework. The MiCA Regulation, scheduled to take effect on December 30, 2024, introduces comprehensive measures aimed at fostering transparency, accountability, and consumer protection.

Lithuania’s regulatory bodies, including the Bank of Lithuania, the Ministry of the Interior, the Ministry of Finance, and the Financial Crime Investigation Service (FCIS), are spearheading initiatives to fortify legal requirements for companies offering crypto services in the country. The proposed legislative amendments set forth new operational standards for Crypto-Asset Service Providers (CASPs) and streamline the licensing process. The overarching goal is to position Lithuania as a trustworthy jurisdiction, ensuring the integrity of its financial system and fostering a secure and sustainable crypto-asset ecosystem.

In response to the burgeoning risks associated with the crypto-asset sector, Lithuanian authorities have embarked on a comprehensive regulatory overhaul. The heads of the Bank of Lithuania, the Ministry of the Interior, the Ministry of Finance, and the Financial Crime Investigation Service (FCIS) are collectively reinforcing legal requirements for companies offering crypto services in Lithuania. This strategic move aims to safeguard the country’s reputation as a trustworthy jurisdiction and protect its financial system, investment climate, and fintech enterprises.

The Bank of Lithuania’s Perspective

Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, underscores the importance of controlling the crypto-asset market due to its susceptibility to money laundering and fraud. Recognizing the innovative potential of the sector, Šimkus emphasizes the need for strengthened legal regulation. The Bank is actively contributing its expertise to formulate concrete measures, signaling a proactive stance towards addressing potential risks.

To achieve this goal, government authorities, preempting the full enactment of MiCAR requirements, have proactively drafted multiple laws delineating fresh operational prerequisites for Crypto-Asset Service Providers (CASPs) and instituting a licensing framework. Noteworthy alterations include:

1. Bank of Lithuania’s Licensing Authority: The Bank of Lithuania assumes the responsibility for licensing CASPs and, in collaboration with the Financial Crime Investigation Service (FCIS), will jointly oversee their operations in the realms of preventing money laundering and terrorist financing.

2. FCIS Empowered for Oversight: The FCIS is granted the authority to scrutinize CASPs’ compliance with mandated capital requirements, evaluating whether CASPs possess a minimum of EUR 125,000 in obligatory capital through investigations into their bank accounts or employing other physical measures.

3. Exclusion of Transitional Period: A pivotal aspect of the proposed laws is the omission of an 18-month transitional period to obtain a MiCAR license in Lithuania. Consequently, all CASPs established in Lithuania must secure their MiCAR license by the culmination of 2024. This decision is motivated by the imminent and substantial risks of money laundering, terrorist financing, circumvention of international sanctions, and fraud in the sector, necessitating prompt preparation and implementation of the Regulation in Lithuania.

4. Application Deadline for Existing CASPs: According to the draft laws, CASPs currently operational in the market are mandated to submit their license applications to the Bank of Lithuania no later than July 1, 2024.

5. Emphasis on Compliance: The Bank of Lithuania underscores that only CASPs demonstrating vigilant adherence to compliance, anti-money laundering protocols, terrorist financing requirements, and service quality will be deemed eligible for a license. This underscores a fundamental shift, aligning crypto-asset service providers with the regulatory standards applied to other financial market participants and incorporating consumer protection requirements.

In a final note, the Bank of Lithuania reiterates its stance that regulated financial market participants are barred from direct engagement in crypto-asset services, as outlined in its current publication for more comprehensive details.

Enhanced Supervision and Collaboration

Agnė Bilotaitė, Minister of the Interior, highlights the intention to intensify supervision of crypto-asset service providers to detect and prevent money laundering and terrorist financing. A collaborative approach between supervisory authorities, particularly the FCIS and the Bank of Lithuania, is deemed crucial for effective risk management.

Early Legislative Initiatives

Vaida Markevičienė, Vice-Minister of Finance, reveals that draft laws have been initiated to set new operational requirements for crypto service providers and streamline the licensing process. The proposed amendments aim to create a transparent and high-quality environment for crypto-asset companies, differentiating between those adopting sustainable business models and those needing to reassess their strategies.

Enforcement Measures and Sector Maturation

Rolandas Kiškis, Director of the FCIS, underscores the enforcement measures imposed on companies violating anti-money laundering laws. The sector’s immaturity and lax compliance have prompted ongoing inspections and regulatory interventions to ensure stability and mitigate potential risks.

MiCA Regulation: A Pivotal Step Forward

The impending Markets in Crypto Assets (MiCA) Regulation, scheduled to take effect on December 30, 2024, is a crucial development in Lithuania’s regulatory landscape. The regulation, aimed at creating uniform requirements for crypto-assets and service providers across the European Union (EU), has spurred proactive preparations by Lithuanian authorities.

Accelerated Implementation of MiCA

To address emerging risks promptly, Lithuania proposes not to apply the transitional period provided by MiCA. Instead, the country aims to commence implementation from December 30, 2024, requiring controlling authorities to initiate preparatory work beforehand. The move underscores Lithuania’s commitment to staying ahead in regulating the crypto-asset sector.

Key MiCA Provisions

MiCA introduces a comprehensive regulatory framework that extends beyond crypto-asset service providers to cover entities involved in the issuance, offering, and trading of crypto-assets. The regulation grants the Bank of Lithuania responsibility for licensing crypto-asset market participants, emphasizing compliance, anti-money laundering measures, and service quality.

Changes for Crypto-Asset Service Providers

The implementation of the Markets in Crypto Assets (MiCA) Regulation heralds substantial changes for crypto-asset service providers, ushering in a comprehensive authorization process. This entails strict compliance with elevated capital standards, the establishment of robust business continuity policies, formulation of disaster recovery plans, implementation of internal controls, and the development of procedures for rigorous risk assessment. In addition to these pivotal changes, providers are now required to formalize written agreements with customers, institute mechanisms for compensating asset loss resulting from cyber-attacks, and prioritize transparent dissemination of information. These measures underscore MiCA’s commitment to fortifying the operational integrity and consumer protection standards within the crypto-asset sector.

Conclusion

In essence, the proposed amendments aim to create a level playing field, ensuring that companies adhering to compliance, anti-money laundering, and terrorist financing requirements stand eligible for licenses. The regulatory framework underscores the commitment to consumer protection, marking a fundamental shift for crypto-asset service providers and emphasizing the need for meticulous adherence to the forthcoming regulations. As Lithuania positions itself at the forefront of MiCA implementation, its authorities are actively paving the way for a robust and compliant crypto-asset ecosystem. The country’s proactive approach and collaborative efforts among regulatory bodies are indicative of a comprehensive strategy to shape a secure and sustainable crypto landscape within the EU.

As Lithuania navigates the evolving crypto landscape, the MiCA Regulation emerges as a pivotal tool to enhance transparency, accountability, and consumer protection. The nation’s proactive approach in tightening regulations and aligning with EU standards positions it as a leader in fostering a secure and sustainable crypto-asset ecosystem. As the implementation deadline approaches, companies operating in the sector must diligently prepare to meet the stringent requirements set forth by MiCA and contribute to the maturation of the crypto-asset industry in Lithuania.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation. 


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European VASP regulation review

In 2023, law firm Manimama never stopped searching for the perfect jurisdiction to set up a cryptocurrency business.

If we talk about Europe, we have gained practical experience in incorporation and obtaining licenses for companies in Poland, the Czech Republic, Lithuania, Estonia, Italy, Croatia, Bulgaria, Slovakia, Germany.

We are ready to share our experience and knowledge with you and have prepared a global report on crypto regulation throughout the European Economic Area.

Our analytical review provides answers to questions on how to set up a company to operate a cryptocurrency business in all EEA countries.

The report is available in two languages:

European VASP regulation report_EN
European VASP regulation report_RU

The Regulatory Landscape for Virtual Assets: A Comprehensive Analysis of MiCA’s Supervisory Framework and Licensing Procedures in Europe: What to expect?

Introduction

The adoption of the Markets in Crypto-Assets Regulation (MiCA) in Europe marks a pivotal moment in the transition towards a unified legal framework for the cryptocurrency sector within the European Union (EU). Ratified by the EU Council on May 16, 2023, MiCA came into effect on June 29, 2023, shaping a new normative and legal environment for crypto-businesses and aiming to bring transparency, consistency, and security to the digital assets sphere.

The Markets in Crypto-Assets Regulation (MiCA) has ushered in a new era for the cryptocurrency industry in Europe, signaling a shift towards a more unified and comprehensive regulatory framework. As the dust settles on this transformative legislation, it is imperative to delve into the details of the institutions tasked with supervising the burgeoning virtual assets industry and the anticipated changes in licensing procedures.

Key Objectives of MiCA

MiCA seeks to replace disparate laws and rules across EU member states with a comprehensive and unifying structure. The regulation establishes clear frameworks for crypto-asset service providers and token issuers, ensuring regulatory certainty in cases not covered by existing financial regulations. Foremost among these objectives is the ambitious goal of replacing the patchwork of individual laws and regulations that currently exist across EU member states with a unified and all-encompassing structure. By doing so, MiCA seeks to streamline and harmonize the legal landscape governing the crypto industry, facilitating clarity and consistency for market participants. Another pivotal objective involves establishing clear and comprehensive frameworks specifically tailored for crypto-asset service providers and token issuers. This initiative aims to bring about transparency, coherence, and security to the digital assets realm, safeguarding the interests of investors and consumers alike. Furthermore, MiCA endeavors to address the inherent challenges posed by the innovative and dynamic nature of crypto space. By introducing the term “Crypto-Asset Service Providers” (CASP) and defining their roles and responsibilities, the regulation aims to create a structured regulatory framework that can adapt to the constant evolution of the crypto ecosystem. In essence, MiCA emerges as a visionary milestone in the EU’s journey towards providing a robust, future-proof regulatory foundation for the burgeoning crypto-assets market.

MiCA Regulatory Scope

The crypto-assets sector, known for its innovative nature, constantly introduces new cryptographic products, posing challenges to effective regulation. To address this, MiCA introduces the term “Crypto-Asset Service Providers” (CASP), defining them as entities providing crypto-asset services to third parties on a professional basis. These services include storage and management of crypto-assets, operating trading platforms, exchanging crypto-assets for fiat currency, and more.

MiCA and Crypto-Asset Types

MiCA, in its comprehensive approach to regulating the crypto-assets landscape within the European Union, delineates three primary categories of digital assets. Firstly, Electronic Money Tokens (EMT) represent a subset of crypto-assets specifically designed to stabilize their value by pegging them to a single official currency. This inherent linkage to a fiat currency aims to mitigate the volatility often associated with cryptocurrencies, offering stability and predictability to users and investors. Asset-Referenced Tokens (ART), as the second category, play a crucial role in the stabilization of their value. ARTs achieve this by anchoring their worth to another asset, right, or a combination thereof, including one or more official currencies. This diversified approach to value stabilization reflects MiCA’s recognition of the multifaceted nature of digital assets and their potential applications. The third and most expansive category covered by MiCA encompasses a wide array of crypto-assets beyond EMTs and ARTs. This category encapsulates various tokens, including utility tokens, security tokens, and other innovative forms of digital assets that contribute to the dynamic crypto ecosystem. Notably, MiCA places a significant emphasis on stablecoins, particularly those tethered to the value of diverse assets. In a concerted effort to preserve the stability of the Euro, the regulation imposes stringent limitations on non-Euro stablecoins, seeking to prevent their proliferation at a scale that could potentially displace the Euro. By doing so, MiCA demonstrates a forward-thinking approach to fostering financial stability while acknowledging the unique challenges posed by stablecoins in the evolving digital landscape.

New Requirements for CASPs

MiCA introduces new requirements for CASPs, including the necessity of having an office within the EU and at least one resident director. CASPs must implement policies for Anti-Money Laundering (AML), ensure service continuity, comply with General Data Protection Regulation (GDPR), adhere to marketing communication rules, and deploy methods to prevent market abuse. 

Foremost among these requirements is the imperative for CASPs to establish a physical office within the EU, coupled with the mandate of having at least one resident director. This geographical presence is designed to enhance regulatory oversight and ensure accountability within the EU jurisdiction. Additionally, MiCA mandates CASPs to implement comprehensive Anti-Money Laundering (AML) policies, aligning with global efforts to combat financial crimes and illicit activities. This includes stringent measures for customer due diligence, transaction monitoring, and reporting of suspicious activities, reinforcing the commitment to safeguarding the integrity of the financial system.

Ensuring service continuity is another critical facet of MiCA’s requirements for CASPs. The regulation emphasizes the need for CASPs to develop robust business continuity plans, ensuring the uninterrupted provision of services to clients. This directive aims to enhance consumer confidence and mitigate operational risks associated with potential disruptions.

Compliance with the General Data Protection Regulation (GDPR) is a fundamental requirement for CASPs under MiCA. As custodians of sensitive client information, CASPs are obligated to adhere to the highest standards of data protection and privacy. This involves implementing robust data security measures, obtaining explicit consent from clients for data processing, and promptly reporting any data breaches, fostering a secure and trust-based environment for users.

Furthermore, MiCA sets clear guidelines for CASPs regarding marketing communication rules. CASPs are expected to adhere to transparent and fair marketing practices, ensuring that information provided to clients is accurate and unbiased. This measure promotes a level playing field for market participants and safeguards against misinformation or deceptive marketing strategies within the crypto industry.

Preventing market abuse is a paramount concern addressed by MiCA, necessitating CASPs to deploy effective methods and mechanisms to detect and deter manipulative practices. This includes monitoring trading activities, implementing surveillance tools, and promptly addressing any signs of market abuse. By instating these measures, MiCA aims to foster market integrity and maintain a level of fairness and transparency in the trading of crypto-assets.

In essence, MiCA’s requirements for CASPs embody a comprehensive regulatory framework that prioritizes consumer protection, market integrity, and operational soundness. The regulation’s proactive approach reflects an understanding of the unique challenges posed by the crypto industry and establishes a solid foundation for responsible and sustainable growth within the EU’s crypto-assets market. Compliance with these requirements not only strengthens the regulatory fabric but also contributes to the maturation and legitimacy of the broader crypto ecosystem.

Consumer Protection and CASP Responsibility

In response to the inherent risks associated with the crypto-space, MiCA emphasizes consumer protection and accountability for CASPs. This includes written agreements with clients, compensation for losses due to cyber-attacks or operational failures, and transparent communication about the characteristics, functions, and risks of crypto-assets.

Measures Against Illicit Activities

MiCA incorporates measures to counter market manipulation, prevent money laundering, terrorist financing, and other criminal activities. The European Securities and Markets Authority (ESMA) is tasked with establishing a public register for non-compliant crypto-asset service providers operating without authorization in the EU. The regulation recognizes the unique challenges posed by the decentralized and often pseudonymous nature of cryptocurrencies, underscoring the need for proactive measures to ensure the integrity of the financial system.

Market manipulation, a persistent concern in the volatile crypto space, is addressed through MiCA’s provisions, which require Crypto-Asset Service Providers (CASPs) to implement effective methods and systems to detect and deter manipulative practices. By fostering transparency and monitoring trading activities, MiCA aims to mitigate the risks associated with market abuse, ensuring a fair and level playing field for all participants.

In the realm of financial crime prevention, MiCA places a strong emphasis on Anti-Money Laundering (AML) measures. CASPs are obligated to adhere to stringent AML policies, encompassing customer due diligence, transaction monitoring, and reporting of suspicious activities. By aligning with international efforts to combat money laundering, MiCA seeks to fortify the resilience of the crypto ecosystem against illicit financial activities.

Similarly, MiCA addresses concerns related to terrorist financing, acknowledging the importance of safeguarding the financial system from exploitation for nefarious purposes. CASPs are required to institute measures to detect and prevent any involvement in terrorist financing activities, contributing to the broader global efforts to combat terrorism financing through enhanced regulatory oversight.

To further strengthen the regulatory framework, MiCA assigns a pivotal role to the European Securities and Markets Authority (ESMA). ESMA is tasked with the responsibility of establishing a public register specifically for non-compliant crypto-asset service providers operating without proper authorization within the EU. This public register serves as a powerful tool to enhance transparency and accountability, allowing authorities and the public to identify and take action against entities operating outside the regulatory purview. 

By incorporating comprehensive provisions to counter market manipulation, money laundering, terrorist financing, and other criminal activities, MiCA not only fortifies the regulatory environment but also underscores the EU’s commitment to fostering a secure and responsible ecosystem for the digital assets market. The collaboration with ESMA, through the establishment of a public register, exemplifies the dedication to transparency and regulatory effectiveness in safeguarding the financial interests of both consumers and the broader society.

MEP Perspectives and Compromises

The perspectives of Members of the European Parliament (MEPs) on the Markets in Crypto-Assets Regulation (MiCA) shed light on the far-reaching implications of this legislative milestone within the EU. Recognizing the transformative potential of MiCA, MEPs articulate its crucial role in positioning the European Union at the forefront of the burgeoning token economy. The regulatory clarity provided by MiCA is hailed as a distinctive feature that sets the EU apart from other jurisdictions, signaling a commitment to fostering innovation while maintaining a robust regulatory framework.

Stefan Berger, a prominent MEP, underscores the paramount importance of consumer protection within the crypto industry. Emphasizing the need to restore trust following past setbacks and controversies, Berger views MiCA as a pivotal tool for instilling confidence in consumers and investors alike. By prioritizing consumer protection measures within the regulation, including stringent requirements for Crypto-Asset Service Providers (CASPs) and measures against market manipulation, MiCA seeks to address the challenges associated with the often-volatile nature of the crypto-assets market. Berger’s perspective aligns with the broader objective of creating a secure and transparent environment that encourages broader adoption of digital assets.

Ernest Urtasun, another influential MEP, focuses his attention on MiCA’s role in closing loopholes in Anti-Money Laundering (AML) frameworks. Acknowledging the potential risks of financial crimes within the crypto sector, Urtasun sees MiCA as a crucial tool for bolstering AML measures and ensuring that the regulatory framework remains adaptive to the evolving nature of crypto-assets. By proactively addressing potential vulnerabilities and strengthening AML frameworks, MiCA aims to fortify the overall resilience of the financial system against illicit activities and enhance the EU’s standing in the global fight against money laundering.

The MEPs’ perspectives reflect a nuanced understanding of the challenges and opportunities inherent in regulating the dynamic crypto-assets industry. The emphasis on consumer protection, trust restoration, and closing regulatory gaps aligns with the broader objectives of MiCA. As the EU positions itself as a trailblazer in the token economy, the compromises and perspectives articulated by MEPs underscore the delicate balance between fostering innovation and safeguarding against potential risks. MiCA, in its regulatory approach, signifies the EU’s commitment to a balanced and adaptive framework that not only embraces the transformative potential of crypto-assets but also prioritizes the protection of consumers and the integrity of the financial system.

Future Implications

As MiCA prepares to come into full force, companies are gearing up for compliance. Coinbase, for example, has applied for a universal MiCA license in Ireland, aiming to utilize the EU passport to extend its services across member states. The legislation’s impact on the industry, combined with efforts to reduce the environmental footprint of cryptocurrencies, is poised to reshape the European crypto-asset landscape.

Transitional Phase and Supervisory Convergence

During the transitional phase of MiCA, ESMA collaborates with national competent authorities (NCAs) to ensure alignment on supervisory expectations across EEA jurisdictions. Transitional measures include a ‘grandfathering’ clause and a simplified authorization procedure for entities already operating under national laws.

The transitional phase of MiCA poses unique challenges as a mix of regulatory regimes coexist across member states. Supervisory convergence becomes paramount during this period, addressing potential disparities in consumer protection and ensuring a harmonized approach to the authorization regime.

MiCA envisages a robust supervisory framework to ensure the integrity and stability of the virtual assets market. The European Securities and Markets Authority (ESMA) emerges as a key player in this arena. Collaborating with national competent authorities (NCAs), ESMA aims to foster supervisory convergence, aligning expectations across the European Economic Area (EEA). This collaborative approach seeks to establish consistent practices, particularly during MiCA’s transitional phase.

ESMA’s efforts in supervisory convergence involve creating a forum for NCAs to exchange views, identify best practices, and share insights on practical cases within their jurisdictions. This collaborative platform aims to foster a common understanding of MiCA provisions, mitigating potential challenges arising from the coexistence of different regulatory frameworks. The mapping of the current landscape for entities providing crypto-asset services among member states is another key element of ESMA’s supervisory convergence strategy. By surveying jurisdictional approaches to optional transitional measures, ESMA seeks to identify areas of alignment and divergence, laying the groundwork for a cohesive regulatory landscape. ESMA’s role extends to the creation of a public register, a critical tool in the fight against non-compliant crypto-asset service providers operating without proper authorization. The register, once established, will enhance transparency and serve as a deterrent against illicit activities, including money laundering, terrorist financing, and other criminal endeavors within the virtual assets space.

Changes in Licensing Procedures

MiCA introduces significant changes in the licensing procedures for Crypto-Asset Service Providers (CASPs). To facilitate a smooth transition, the regulation outlines specific measures during the transitional phase, allowing entities already providing crypto-asset services under national laws to continue until July 1, 2026, or until they receive a MiCA authorization. 

The ‘grandfathering’ clause is a noteworthy provision, permitting entities operating in accordance with national laws before December 30, 2024, to continue their services under certain conditions. This clause provides a bridge between existing legal frameworks and MiCA, offering stability and a phased approach to regulatory compliance.

Additionally, a simplified authorization procedure is outlined for entities already authorized under national laws by the end of 2024. This streamlining of processes acknowledges the existence of well-established entities and aims to minimize administrative burdens while ensuring compliance with MiCA’s standards.

Conclusion

MiCA’s comprehensive approach to supervision and licensing is a positive step towards establishing regulatory clarity in the dynamic virtual assets industry. The involvement of ESMA and NCAs in supervisory convergence reflects a commitment to harmonizing practices and addressing potential challenges associated with the transitional phase.

The ‘grandfathering’ clause and simplified authorization procedures acknowledge the need for a pragmatic and phased approach to regulation. This recognition of existing entities and frameworks provides stability while encouraging compliance with MiCA’s standards.

While the regulatory landscape is evolving, it is essential to recognize the potential impact of these changes on innovation and market dynamics. Striking the right balance between consumer protection, industry growth, and regulatory compliance will be crucial in fostering a vibrant and sustainable virtual assets ecosystem.

MiCA’s supervisory framework and changes in licensing procedures represent a landmark development in the regulation of the virtual assets industry in Europe. As ESMA and NCAs collaborate to ensure supervisory convergence, stakeholders must adapt to the evolving regulatory landscape. The phased approach to licensing and the commitment to transparency and consistency signal a maturation of the regulatory environment, providing a foundation for the continued growth and responsible development of the virtual assets market in Europe.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation. 


Author: Ganna Voievodina, a licensed attorney, 

СЕО and co-founder of Manimama Legal & Growth Agency

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Australia’s Crypto Regulation: Safeguarding Digital Assets in a Transformative Landscape

Introduction

In the midst of a global economic shift and rising concerns over the security of digital assets, Australia is taking decisive steps to regulate its crypto landscape. Treasurer Jim Chalmers recently unveiled a comprehensive proposal aimed at protecting Australians who own digital assets.

The plan involves subjecting crypto exchanges and digital asset platforms to existing financial service laws and introducing licensing requirements for platform operators. This article delves into the details of Australia’s crypto regulation proposal, its implications, and the broader context of the evolving digital asset landscape and the implications for various digital assets, including the increasingly popular Non-Fungible Tokens (NFTs) and Decentralised Finance protocols.

Current Scenario

Australia’s financial service laws currently apply to digital assets classified as financial products. This categorization subjects businesses providing financial services related to digital assets to the Australian Financial Services License (AFSL) framework. However, it’s important to note that NFTs are not recognized as specific legal assets or financial products under current Australian law.

The Digital Assets (Market Regulation) Bill 2023 (Cth) has been proposed to regulate crypto asset providers, but the Senate Committee reviewing the Bill has recommended further consultation rather than immediate passage.

Australia’s Proposed Regulatory Regime for Digital Asset Platforms

On October 16, 2023, the Australian Federal Treasury released a public consultation paper outlining a proposed regulatory regime for digital asset platforms. This encompasses crypto exchanges, brokers, market makers, and introduces a new financial product called a ‘digital asset facility’ for specific asset holding arrangements.

Acknowledging that many digital assets fall outside the realm of financial products, the consultation paper proposes a ‘financialised functions’ regime. This regime aims to cover activities that, while not involving financial products, still need to adhere to additional minimum standards. One notable aspect is the proposal for digital asset platforms with a funding tokenization function to ensure fair distribution of facility tokens to backers in the form of NFTs or fungible tokens.

NFTs and Regulatory Considerations

While many NFTs may not involve financial or investment functions, the regulatory treatment depends on the nature of the NFT and its underlying rights. Australia’s regulatory stance emphasizes that the legal status of NFTs is determined by their representation and attached rights, not merely their name or marketing. Entities involved in NFTs, including issuers, intermediaries, exchanges, and trading platforms, are urged to consider all rights and features of the cryptocurrency. If an NFT project is deemed a financial product or security under the Corporations Act 2001 (Cth), significant regulatory consequences may follow.

Definition of Financial Product and Security

Australia’s legal approach defines a financial product broadly, encompassing facilities that involve making a financial investment, managing financial risk, or making non-cash payments. Crypto assets like NFTs can be classified as financial products if they fall under securities, interests in a managed investment scheme (MIS), or derivatives.

A security, according to the Corporations Act, includes shares, debentures, and legal or equitable rights in them. An NFT may be considered a security if it represents such rights.

Managed Investment Scheme (MIS)

MIS, a collective investment vehicle, is defined under the Corporations Act. It involves contributors pooling money or assets for financial benefits. If an NFT project resembles an MIS, it may trigger regulatory obligations.

Financial Services Business and AFSL

Entities carrying on a financial services business in Australia must hold an AFSL or have an exemption. NFT projects that constitute financial products may fall under the AFSL regime, subjecting them to disclosure obligations and regulatory compliance.

DeFi

Chapter seven of the Corporations Act gives mixed messages – a DeFi protocol can be a managed investment scheme, an equity or a derivative. Currently, there are no specific laws or regulations tailored for the utilization of distributed ledger technology (DLT) or blockchain. Australian regulatory frameworks are designed to be technology-neutral, requiring individuals and entities to assess the nature of the services offered to determine the applicable laws and regulations.

ASIC’s Information Sheet 219 presents an evaluation tool to assist businesses in determining whether an Australian Financial Services Licence (AFSL) is necessary for blockchain-based services. This tool considers various factors, including the blockchain platform used, its operational aspects, legal implications, data utilization, and impacts on stakeholders.

Several existing laws in Australia may be relevant to Decentralized Finance (DeFi), including the Corporations Act 2001 (Cth), the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act), the National Consumer Credit Protection Act 2009 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), and the Australian Consumer Law.

According to the Corporations Act, a business engaging in or issuing a financial product must hold an AFSL. The same requirement applies to individuals “arranging” for others to deal in or issue financial products. Challenges arise in the context of DeFi, where protocols operate autonomously and may not neatly align with the existing regulatory framework.

The legal status of DeFi protocols remains uncertain, and it is unclear how regulators might seek to establish liability or accountability for decentralized autonomous organizations (DAOs) and their participants. The unique characteristics of DeFi, particularly its decentralized and autonomous nature, pose challenges in fitting within traditional regulatory structures.

ASIC’s Evolving Approach

The Australian Securities and Investments Commission (ASIC) emphasizes a technology-neutral approach, placing responsibility on entities to justify whether their NFT involves a regulated financial product. ASIC’s Information Sheet 225 “Crypto-assets” outlines the need for entities to consider all aspects of their proposed cryptocurrency. Australia’s proactive approach to crypto regulation is highlighted by its recent proposal to subject platforms holding over $1,500 of an individual’s assets or $5 million in aggregate to existing financial service laws. The move aims to mitigate risks associated with online platforms, as highlighted by the collapses of digital asset platforms globally, resulting in the loss of assets for Australians.

Notably, about a quarter of Australians own some form of cryptocurrency, with online platforms holding billions of dollars in assets. The proposed reforms seek to enhance operational standards and oversight to reduce the risk of platform collapses. Treasurer Chalmers emphasizes the government’s commitment to protecting consumers while fostering innovation in the rapidly evolving crypto space. The proposed rules draw inspiration from frameworks used in the UK, Canada, and Singapore. The proposed regulations were open for public feedback until December 1, 2023. The consultation period provides stakeholders, industry players, and the public an opportunity to share insights and concerns. A draft legislation covering licensing and custody rules for crypto asset providers is expected to be released in 2024, with a 12-month transition period for exchanges to comply with the new regulations. Moreover, The Reserve Bank of Australia and Treasury plan to release a joint report in mid-2024, providing a comprehensive overview of their research into a central bank digital currency and outlining a roadmap for future endeavors.

Conclusion

Australia’s crypto regulation proposal marks a significant step toward creating a secure and transparent environment for digital assets. As the nation navigates the evolving landscape of cryptocurrencies, the proposed regulations aim to strike a balance between consumer protection and fostering innovation. The ongoing consultation period allows for a collaborative effort in shaping a regulatory framework that addresses the unique challenges posed by the crypto industry. As Australia paves the way for crypto regulation, the global community watches closely, recognizing the importance of creating a sustainable and secure digital asset ecosystem. Stakeholders are encouraged to stay abreast of regulatory developments to navigate the nuanced regulatory framework effectively.  As the regulatory landscape unfolds, rest assured that our team remains your steadfast ally, combining legal expertise with a commitment to excellence and stands ready to provide comprehensive guidance, ensuring that your business aligns seamlessly with the latest regulatory standards.


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New Financial Promotion Regime for Cryptoassets in the UK

1. Introduction

The regulation of crypto assets in the UK has only recently come under the scrutiny of

the Financial Conduct Authority (FCA). However, growing concerns over consumer protection and potential offenses related to misleading cryptocurrency advertising have prompted authorities to expand the FCA’s regulatory reach.

The new financial promotion regime, which will come into force on October 8, 2023, now falls under the restrictions on financial promotion of certain crypto assets set out in Section 21 of the Financial Services and Markets Act 2000 (FSMA). This means that promotions involving “qualified crypto assets” must either receive approval from FCA or qualify for certain exemptions.

The regime aims to address risks that misleading adverts on returns could lead consumers new to crypto markets suffering large losses. Rules on clear risk disclosure have therefore been implemented to ensure promotions paint a fair picture of cryptoassets’ high-risk status. This article examines the qualifying cryptoassets included, available exemptions from approvals, the promotion rules now applicable, and provisions related to direct offer promotions.

2. What are qualifying cryptoassets under the new rules?

The financial promotion regime applies to a newly defined category of “qualifying cryptoassets”. The definition covers cryptoassets that are fungible (that is, interchangeable) and transferable. 

Specifically, a qualifying cryptoasset is:

  • “any cryptographically secured digital representation of value or contractual rights that can be transferred, stored or traded electronically, and uses distributed ledger technology (DLT)”

This is a broad definition intended to capture major cryptocurrencies like Bitcoin, Ethereum and other most popular crypto currencies. However, certain cryptoassets are excluded:

  • Non-fungible tokens (NFTs) – as these are traded more like digital collectibles
  • Security tokens – those meeting the definition of a specified investment under FSMA
  • E-money tokens – such as stablecoins pegged to fiat currency
  • Fiat currency itself

The definition focuses on transferable cryptoassets with speculative potential that give rise to consumer protection concerns if promoted in a misleading way. The exclusion of NFTs, on the other hand, reflects their current use more akin to digital memorabilia.

3. Restriction on financial promotions for qualifying cryptoassets

Section 21 of FSMA imposes a general restriction on financial promotions of investments. Since qualifying cryptoassets are specified as an investment, any invitations or inducements to engage with these cryptoassets now fall under this restriction.

As a result, unauthorized cryptoasset firms have two main options for issuing financial promotions legally:

Relevant exemptions include communications to certified high net worth individuals, sophisticated investors, or professional advisers like accountants and lawyers.

Importantly, an FPO exemption introduced in 2023 allows cryptoasset businesses registered under anti-money laundering (AML) regulations to approve their own promotions for qualifying cryptoassets only. Registered crypto firms can’t approve other controlled investments’ promotions though.

4. Rules applicable to cryptoasset financial promotions

All financial promotions relating to qualifying cryptoassets must now meet the FCA’s core standards of being fair, clear, and not misleading.

Specific conduct requirements from the FCA Handbook also apply, mainly found in chapter 4 of the Conduct of Business sourcebook (COBS). This includes high-level principles, appropriate risk warnings based on clients targeted, and more.

Given the market volatility and lack of regulatory protections, qualifying cryptoassets further fall under the FCA’s treatment for high-risk investments. This means cryptoasset promotions must follow strict disclosure rules outlined in COBS 4.12A.

Key requirements relate to:

  • Promotions should include clear and prominent risk warnings, outlining the potential risks associated with investing in cryptoassets
  • Financial promotions must be clear, fair, and not misleading. The information provided should accurately represent the features and risks associated with the cryptoassets
  • Banning incentives to invest like bonuses or unrealistic returns promotion
  • Ensuring consumers are appropriately categorized and assessed before allowing investments

Additionally, non-Handbook FCA guidance also sets rules on financial promotion of cryptoassets:

  • To safeguard consumers, firms are required to carefully assess potential harm associated with cryptoasset stability claims. Claims must not be misleading, and firms should substantiate the authenticity of asserted stability to instill confidence in consumers.
  • Promotions related to complex yield cryptoasset models demand meticulous attention to detail. Firms must provide clear evidence supporting advertised rates of return, transparent disclosure of legal and beneficial ownership, fees, and risks associated with the model to safeguard consumer interests.
  • Recognizing the broad reach of social media, firms must adhere to existing guidance on financial promotions in these channels. Disclosure of commercial relationships and adherence to equality and diversity considerations are imperative, with a reminder that existing rules apply regardless of the communication format.
  • Firms must conduct thorough due diligence on the cryptoasset and associated claims before communicating financial promotions. This includes checks on authenticity, risks, technological aspects, legal compliance, and the potential impact on consumers.

With many consumers still unfamiliar with the cryptoasset sphere, applying conduct standards around financial promotions is viewed as an important first regulatory step. This aims to address misconduct risks like misleading adverts without being overly restrictive on market development.

5. Direct offer financial promotions

The COBS 4.12A rules allow the communication, or approval, of direct offer financial promotions for cryptoassets only to high net worth investors within the context of the rules relating to restricted mass market investments (RMMIs) (that is, to restricted, high net worth and certified sophisticated investors). Providing this exemption within the rules is intended to prevent the regime from being too restrictive to those more able to absorb losses. Cryptoasset promotions communicated to these investors must still be clear, fair and not misleading and must contain appropriate risk warnings. The exemption does not apply to the self-certified sophisticated investor.

However, “positive friction” rules still apply to help inform decision making and guard against over-exuberance. For first-time investors this includes:

  • Personalized risk warnings explaining volatile, complex crypto investments could lose all value
  • Before communicating a direct offer financial promotion, firms are required to categorize retail clients based on factors such as whether they are high net worth investors, sophisticated investors, or restricted investors
  • A 24 hour cooling off period before allowing the investment

Also, other rules made for financial promotions are applicable to direct offer promotions, for example those, established by non-Handbook FCA guidance.

Initially firms were struggling to implement IT systems to facilitate the direct offer rules in time for October 2023. So the FCA granted modifications delaying aspects related to risk warnings, cooling off periods and assessments until January 2024.

6. Conclusion

Overall, the new cryptocurrency financial services regime in the UK, which came into force on October 8, 2023, expands the FCA’s supervisory scope to include “qualified crypto assets”. These include fungible and transferable digital assets that use distributed ledger technology, with the exception of certain categories such as NFTs and security tokens. 

The regime imposes basic standards on financial offers, requiring them to be fair, clear and not misleading. Recognizing the challenges of the industry, the FCA has made changes, demonstrating a pragmatic approach to balancing consumer protection and innovation in the emerging cryptocurrency market.

Thus, companies providing cryptocurrency-related services in the UK have faced stricter promotion requirements, but consumers can be sure that they are less likely to encounter fraudulent advertising.


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Singapore is proposing rules to control cryptocurrency speculation in retail markets. Here’s the latest update

Singapore is set to implement stricter regulations for cryptocurrency service providers, as confirmed by the city-state's financial authority

The Monetary Authority of Singapore stated on November 23, 2023 that the proposed regulations, informed by public feedback, outline business conduct and consumer access measures to mitigate potential harm.

Singapore’s Payment Services Act, a regulatory framework governing payment services and the provision of crypto services to the public, became effective in January 2020. Subsequently, Singapore has intensified its oversight of crypto firms. In July, it mandated companies to safeguard customer assets through a statutory trust by the year’s end. The Monetary Authority of Singapore (MAS) also imposes restrictions on firms, barring them from facilitating lending or staking of retail customers’ assets.

In January 2022, Singapore implemented a ban on crypto service providers promoting their services in public spaces or through intermediaries such as social media influencers. Marketing or advertising by crypto service providers is now limited to their official corporate websites, mobile applications, or designated social media accounts.

The Monetary Authority of Singapore (MAS) has put forth revised guidelines aimed at mitigating the escalating phenomenon of digital asset speculation within retail markets. These measures encompass prohibiting crypto service providers from accepting locally issued credit card payments, disallowing incentives for cryptocurrency trading, and restricting financing, margin, or leverage transactions for retail customers. The finalized measures are scheduled to be phased in, commencing in mid-2024, according to MAS. 

The regulator will additionally introduce rules related to business conduct, including the mandate for crypto service providers to publish policies, procedures, and criteria governing the listing of a digital payment token. They are also required to establish effective procedures for handling customer complaints and resolving disputes.

 In a recent publication, the Central Bank issued modified regulations applicable to digital payment token providers and affiliated cryptocurrency entities, focusing on market activities with a specific emphasis on diminishing price speculation. As per the documentation, companies will be prohibited from offering trading incentives to customers, aligning with authorities’ sustained argument that certain users are enticed into speculative activities, potentially leading to substantial gains but with an associated risk of significant losses.

Highlighted incentives, subject to the proposed guidelines, encompass the provision of leverages and margins, with certain forms of financial support now facing potential prohibition. These regulatory measures align with the government’s broader strategy to fortify safeguards against fraud and minimize risks within the retail market. Against the backdrop of cryptocurrency firm implosions causing significant market losses, both local and global authorities are increasingly advocating for measures to enhance investor safety in financial markets.

Financial limitations and wider retail regulations

The financial regulatory authority additionally suggests the cessation of credit lines for acquiring specific assets, as companies are set to be barred from accepting transactions facilitated through domestically issued credit cards. 

Moreover, the newly proposed guidelines impose restrictions on referrals that provide incentives for onboarding new clients, and learn-to-earn programs face limitations as well. It’s noteworthy that these fresh regulations extend their applicability to all retail investors, encompassing both accredited and unaccredited users.

Geographically, the guidelines have a reach that extends to retail traders situated just beyond the confines of the city-state. Scheduled to come into effect in mid-2024, these rules have been proposed following a year-long series of public consultations, aiming to establish comprehensive regulations for digital asset payment token providers.

In addition to the global crisis instigated by Terra and FTX last year, investors in Singapore were also impacted by the fallout from Three Arrows Capital. The collapse of Three Arrows Capital prompted a renewed regulatory scrutiny of the market, prompting authorities to reassess and strengthen regulatory measures to bolster investor protection and market stability.

The Deputy Managing Director for Financial Supervision at MAS emphasized that despite the proposed rules, it would remain challenging to entirely shield users from succumbing to the inherently speculative and high-risk nature of digital assets. MAS is encouraging consumers to stay vigilant and exercise the highest level of caution when engaging in Digital Payment Token (DPT) services, and to refrain from transactions with unregulated entities, including those operating from abroad.

Singapore enhances broader regulatory frameworks

Singapore is undergoing a broad regulatory overhaul, solidifying its position as a significant crypto hub in Asia. Numerous firms are converging on the country, and a multitude of others are actively pursuing licenses to provide services related to digital assets.

The nation has introduced regulations specifically addressing stablecoins, aligning with other jurisdictions that recognize their significance as pivotal instruments in assuming the role of digital currency alongside Central Bank Digital Currencies (CBDC). The regulatory stance emphasizes that private cryptocurrencies are deemed suboptimal, citing their lackluster performance as a medium of exchange or store of value, susceptibility to sharp speculative fluctuations, and the substantial losses experienced by many cryptocurrency investors. 

Singapore’s forward-thinking ecosystem and tax-friendly regulations position it at the forefront of the Crypto Adoption Index. The city-state stands as a global leader in nurturing innovation and technology within its cryptocurrency sector. Our team will closely monitor regulatory developments in Singapore and provide timely updates as they unfold.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.


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Cryptocurrency Compliance: Georgia’s Approach to VASP Regulation

Georgia, which is located at the crossroads of Eastern Europe and Western Asia, has made significant strides in the world of cryptocurrencies and blockchain technology.

As the world's interest in digital assets has grown in recent years, Georgia has not only embraced these innovative technologies, but has also taken steps to create a regulatory framework to govern their use. 

On June 13, 2023, the President of the National Bank of Georgia approved Order No. 94/04, which is a Rule of registration, cancellation of registration and regulation of the VASP at the National Bank of Georgia. So, from July 1, 2023, a new regulation came into force in Georgia, defining VASP and requiring registration with the National Bank of Georgia. 

Main features

According to Organic law of Georgia “On the National Bank of Georgia” regarding amendments to the Organic Law of Georgia, the virtual asset is not a legal tender. It is prohibited to make payments with a virtual asset, except for the cases defined by the legal act of the National Bank of Georgia, which are necessary for the implementation of the virtual asset service. 

Also Georgian legislation gives a definition of “convertible virtual asset” – meaning a virtual asset that has an equivalent value in the market in national or foreign currency, another virtual asset and/or financial instrument, in which it can be exchanged.

As for the VASP it is a person who provides virtual asset service for the benefit of another person. 

The types of virtual asset services include the following activities:

  1. Exchange (including via kiosks) between convertible virtual asset and fiat currencies (national or foreign), between one or more forms of virtual assets, between convertible virtual asset and financial instrument.
  2. Transfer of convertible virtual asset.
  3. Safekeeping and/or administration of convertible virtual assets or of the instrument enabling control over virtual assets.
  4. Portfolio management of convertible virtual assets (excluding collective portfolio management).
  5. Administration of the trading platform of the convertible virtual assets.
  6. Lending of convertible virtual assets.
  7. Initial Coin Offering of convertible virtual asset and/or service related to initial coin offering.

The VASP is authorized to transfer the cash (national or foreign currency) received as a result of the exchange of the convertible virtual asset within the scope of the service provided by the user in a non-cash form to the payment service provider, intermediary provider or acquirer (including the sub-acquirer) of the recipient included in the service scheme. In addition, it is also authorized to receive a commission/interest/benefit from the user within the scope of the services provided by him for the virtual asset he provides.

VASP registration 

So, the VASP is obliged to register with the National Bank of Georgia and meet the requirements established by it.

All that is required is to submit a fully filled VASP registration form (all Appendixes) and the relevant documents to the National Bank such as but not limited to:

  • a business plan (at least with the budget forecast for the next 3 years);
  • schematic description of the implementation of the virtual asset service;
  • documentation that confirms the right to use or own the real estate where the head office and branch/service center of the VASP will be located;
  • the internal instruction (policy-procedure) developed by the VASP for the implementation of the compliance control system, including the organizational risk assessment document for ML and TF.

The registration fee is 5000 GEL (approximately EUR 1715).

The National Bank, within 60 calendar days from the submission of the relevant registration information/documentation, makes a decision on the registration of the VASP or refusal to register. 

Requirements for VASP

Legislation of Georgia stipulates that the VASP must meet the following requirements (not exclusively):

  • it can only be a legal entity (limited liability company or joint-stock company) established and registered under Georgian legislation. The LLC in Georgia has no requirements for a minimum share capital. The joint-stock company minimum capital shall be GEL 100,000 (approximately EUR 34,304), 25% of which shall be contributed by the respective shareholders immediately upon incorporation;
  • the legal entity that has only 1 shareholder/partner who is also a director of this legal entity must have at least 2 directors;
  • VASPs should have an administrator – who is a member of the supervisory board of the VASP, a member of the directorate, as well as a person who is authorized to assume obligations on behalf of the VASP independently and/or together with one or more persons;
  • one of the persons authorized to represent the VASP must be in the territory of Georgia for at least 14 calendar days during a calendar month;
  • the VASP is obliged to place its head office in the territory of Georgia, from where its administrator(s) will carry out the actual management of the VASP’s activities;
  • it is obliged to implement the preventive measures specified in Article 10, paragraph 1 of Law of Georgia “On Facilitating Prevention of Money Laundering and Financing of Terrorism” in the presence of the following ground: in the case of concluding a one-time transaction related to the service of a convertible virtual asset – 1000 USD, 1000 EUR or 3000 GEL;
  • it is obliged to implement a software (electronic) system before starting the activity, which is proportional to the nature, volume, ML and TF risks associated with it and ensures the automatic detection of noteworthy/unusual transactions by processing the available information based on the distributed ledger technology.

Prohibitions for VASPs

Georgia has established such prohibitions for VASPs:

  1. It is not allowed to provide virtual asset services by a person who is not the VASP registered by the National Bank or a representative of the financial sector, who is authorized to provide virtual asset services by the activity regulatory legislation.
  2. VASPs are prohibited to provide virtual asset services through an agent.
  3. It is not allowed to lend virtual assets to physical persons.
  4. VASPs are prohibited from receiving commission, interest or any monetary or non-monetary benefits from anyone other than the user while managing the portfolio of convertible virtual assets.
  5. VASPs are prohibited from providing services with such a virtual asset (anonymity-enhanced coin/privacy coin) and/or using such technological methods/mechanisms that prevent the VASP from identifying and tracing information about the transaction and the parties involved in it in a distributed manner.

Georgian tax system on virtual assets

As for taxation of virtual assets, it is worth referring to the Public Decision No. 201 “On the taxation of operations for the supply of crypto-assets and computing speed (power) for its extraction” from June 28, 2019.

According to the Article 3 of the decision:

  1. supply of a crypto-asset by individuals (exchange of a crypto asset for national or foreign currency) is exempt from VAT;
  2. the income received by an individual from the supply of crypto-assets is exempt from income tax.

However, cryptocurrency companies must pay corporate tax on profits, including those earned abroad. Companies must pay a 15% tax on each transaction if they make a profit from it.

Also since January 1, 2017, Georgia has switched to the “Estonian model” of taxation, the essence of which is that only distributed profits are taxed. In this system, if a company decides not to pay dividends but to reinvest the profit received in the development of the company, it is not obliged to pay income tax.

In case the company is interested in tax benefits, consider setting up the company in Georgia’s free industrial zone (FIZ). The following are the main benefits:

  • Exemption from property tax for registered companies in FIZ Georgia
  • No VAT and import duties on goods imported into FIZ territory
  • No VAT on transactions between companies registered in FIZ
  • If the conditions stipulated by the Tax Code of Georgia are met, the company’s profits may be excluded from income tax
  • There are no restrictions on repatriation of capital

So, it is better to register the company in such FIZs as Tbilisi, Kutaisi or Poti to obtain privileges. 

Conclusion

In summary, VASPs in Georgia are an integral part of the rapidly evolving digital asset industry. Georgia, with its innovative spirit and desire to modernize, is focused on embracing cutting-edge technology while striving to ensure cryptocurrency security and legal compliance. The country not only recognises the potential that cryptocurrencies and blockchain hold, but is also improving its regulation to create an enabling environment for the industry.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.


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Crypto in Seychelles: lawless frontier or opportunity awaits?

The global crypto-asset regulatory landscape is developing at an unparalleled rate as the world quickly learns and adapts to digital currencies and blockchain technology. 

Based in the Indian Ocean, Seychelles is known for its stunning environmental beauty, which attracts tourists from all over the world. But beneath the spectacular scenery and pure blue waters hides a booming crypto-economy with no official regulations or supervision.

While countries are struggling to deal with crypto-assets issues, the small island nation of Seychelles finds itself in a singular position – it stands out for not having a comprehensive regulation of crypto-assets.This article gives you an overview of the specifics of crypto regulation in this jurisdiction.

Current situation with regard to the cryptoregulation in Seychelles 

It should first be noted that Seychelles law, namely the AML and CFT Act, 2020 (consolidated to 19th May, 2022), enshrines the definition of virtual asset (“VAs”) that means a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes and does not include digital representation of fiat currencies, securities and other financial assets.

In Seychelles, legal tender is considered as cash and non-cash payment methods. Under Part V of the Central Bank of Seychelle (“CBS”) Act, 2004, notes and coins issued by the Central Bank shall be legal tender in Seychelles by cheques, payment orders, collection orders, bank cards and other payment instruments as defined in part VII of the Act. Payment instruments outside of this scope are deemed to be illegal. VA falls outside the range of CBS’s defined legal tender payment instruments and is not recognised as a means of payment in the country. Nor has the government of Seychelles or the CBS provided an avenue for using VA as legal tender. Internally, Seychelles has no lawful means for using VA as legal tender, and it is also not captured under Foreign Exchange Act 2009 as foreign currency.

It is necessary to mention that currently there is no legal framework in Seychelles regarding the regulation of virtual assets related activities. Thus, this jurisdiction does not have a Virtual Asset Service Provider (“VASP”) licensing law and there is no VASP supervision and the existing countering the financing of terrorism (“AML/CFT”) and financial services legislative framework is out of step with the rapid transactional activities happening in the VAs space and digital financial transformation.

No guidance on VA and VASPs has been issued in Seychelles to enable potential VASPs to understand and act upon the regulator’s expectations and ML/TF risks associated with VA and related activities, as well as compliance requirements. Due to the lack of legislation, no active engagement with the sector has been undertaken for this purpose.

The general conclusion is that all VASPs domicile or operating from Seychelles are unregistered, unlicensed, unregulated, and unsupervised for AML/CFT purposes.

To confirm the above, on January 10, 2023 Financial Services Authority (“FSA”) has issued “Advisory on Virtual Asset Service Providers alleged to be licensed and regulated by the Financial Services Authority”, in which informs that the FSA does not and has not licensed international business companies (“IBCs”) for the conduct of services linked to any type of VA, virtual currency exchange platforms and other related or similar services. As is the norm for any company, an IBC is required to seek and possess the appropriate authorisation to carry out specific activities in its jurisdiction of operation. Therefore, the FSA recommends that individuals wishing to use the services of any entities claiming to provide services as part of such activities should first conduct their own due diligence and due diligence on those entities, which may or may not be IBCs, and carefully consider the risks, such as loss of funds and potential difficulties in recovering them, in dealing with such services and entities before engagements.

However, it must be stated that Seychelles is in the process of developing a national policy VAs in order to deal with the increasing number of claims about cryptocurrency activities. Naadir Hassan, the country’s finance minister, said the move was pushed by a report on a national risk assessment (“NRA”) conducted by the FSA. As he explained, the financial sector worldwide has undergone a transformation in the last five to seven years in the way it does business, especially when it comes to payment methods.

The aim of the policy will be to establish a legal framework for a better regulation of VA related activities in Seychelles and to keep the public safe. Therefore, the policy will seek to establish legal rules for the registration of VA businesses and issue licenses according to the types of activities permitted in the country.

AML and CFT situation concerning virtual assets and VASPs

Recommendation 15 (REC15) of the Financial Action Task Force (FATF) in relation to New Technologies requires VASPs be regulated for AML/CFT purposes, licensed or registered and subject to effective systems for monitoring or supervision.

But the Seychelles Mutual Evaluation Report stated the following: Seychelles was deemed as being non‐compliant with regards to REC15.

Observing the growing popularity of VA use over a short period of time and the potential for misuse due to the lack of a specific regulatory and legislative framework, the FSA commissioned the Government of Seychelles to conduct an ML/TF risk assessment to cover all sectors that may be affected by VA and VASP activities in the country.

In summer 2022, the National AML and CFT Committee (“NAC”) received the endorsement of the Cabinet of Ministers for the adoption and publication of the National Risk Assessment Report on Virtual Assets and Virtual Assets Service Providers. The VA/VASP NRA was conducted over the first half of 2022 with the primary aim of aiding NAC and its constituent competent and supervisory authorities to assess the ML and TF risks associated with the existing activities within this area and the risks associated with having a VA/VASP regime in the Seychelles.

Based on the findings of the NRA, the exposure to ML/tTF risks in relation to VA/VASPs is very high due to the lack of a regulatory framework. 

The very high level of ML/TF threats to VAs and VASPs in Seychelles in particular is due to the nature of the products and financial secrecy prevalent in international business. Despite the removal of Seychelles from the European Union’s official blacklist of tax havens, the inherent threat remains, as it still lacks reliable financial and human resources, adequate training, and sophisticated technological systems to address the ML/TF risks associated with VA and VASP.

Important key findings of the NRA:

  1. Inherent cross-border risk – many unlicensed VASPs operate in Seychelles with different varieties of VA and offer enhanced anonymity facilities. 
  2. Regulatory arbitrage – patchy and scanty VA and VASP regulatory development globally is creating opportunities for regulatory arbitrage, and Seychelles may be exposed due to a lack of VA and VASP legal framework to regulate the activities of VASPs. Also, the absence of clarification of the taxation legislation on VA may allow tax dodgers to be domiciled in Seychelles
  3. Due Diligence – the fiduciary service and the capital and collective investment providers need to do more on KYC and KYCC information to identify IBCs operating as VASPs.
  4. VASP-related suspicious transaction reportings (“STRs”) – the number of STRs does not reflect the higher number of VASPs involved in the Law Enforcement Agencies enquiries, regulatory notices, and adverse media.
  5. NFT and stablecoins – a significant number of the VASPs are offering NFT, which may be for payment purposes, and stablecoins pegged with currency from unknown sources and consideration of financial risk is also unknown to the NRA. As regulation and supervision of NFTs and stablecoins are nascent or non-existent in many jurisdictions, Seychelles could be emerging as a hub for these activities.

As conclusion

Finally, the lack of cryptoregulation in Seychelles has both opportunities and risks. The authorities must properly take into account the potential benefits of fostering blockchain innovation and business attraction and the risks related to inadequate investor protection and the facilitation of illegal activities. Also, it’s essential to note that the crypto regulatory landscape can develop rapidly and new changes can be made at any time.

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.


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Breaking New Ground: South Africa Pioneers Crypto Regulation by Mandating Exchange Licenses

Your Guide to Complying with the FSCA's New Licensing Requirements

South Africa, with its diverse economy, abundant natural resources, and strategic location at the crossroads of continents, presents a compelling landscape for business ventures. This nation, known for its rich history and stunning landscapes, has evolved into a dynamic hub offering a range of opportunities across industries.

From the bustling financial centers to the flourishing technology sector, South Africa’s allure lies in its multifaceted advantages that beckon both local and international entrepreneurs. The Government of South Africa is diligently aligning its legal framework with contemporary technological advancements and actively pursuing competitiveness on a global scale, just like its counterparts across different continents. The article will analyze the recent regulatory developments and how these changes affect the businesses in the crypto industry. 

Crypto Assets  = Financial Products

On 19th of October of 2022, South African Financial Sector Conduct Authority (hereinafter:- “FSCA”) officially classified the Crypto assets as Financial Products under its Financial Advisory and Intermediary Services Act, 37 of 2002 (“FAIS Act”). In its official declaration, FSCA warned about the risks associated with the use of Crypto assets and emphasizes the importance of dealing only with authorized Financial Service Providers. The statement goes on saying that the Businesses offering financial services related to crypto assets must apply for a license with the FSCA starting from June 1, 2023. Importantly, the statement mentions that consumers are not required to wait until a specific date (in this case, November 30, 2023) to lodge complaints against businesses. This suggests that clients and consumers have the right to voice their concerns and report issues related to crypto asset services before the specified date, underscoring the importance of consumer protection and transparency.

South Africa’s financial regulatory authority has declared that all cryptocurrency exchanges operating within the country must obtain licenses by the end of 2023. The commissioner of the FSCA in its interview with Bloomberg stated that approximately 20 license applications have already been received since the recent commencement of this process, and additional applications are anticipated before the November 30th deadline. The commissioner additionally mentioned that in case crypto exchanges persist in functioning without licenses after the set deadline, the regulatory body aims to take “enforcement measures,” which could involve penalties or even the shutdown of non-compliant businesses, according to the provided information.

The introduction of a regulatory framework for cryptocurrency products is a prudent step considering the potential risks to financial consumers in the country. The necessity for time to gauge the effectiveness of these measures was also emphasized, with an assurance of ongoing cooperation with the industry to refine and implement any required adjustments. This development establishes South Africa as the first nation on the continent to mandate licensing for digital asset exchanges, aligning with the global trend of increasing oversight and control over the cryptocurrency sector. 

According to a representative from FSCA, individuals offering financial services related to crypto assets, with certain exceptions like crypto miners and NFT service providers, are obligated to obtain official authorization. Failure to adhere to this requirement constitutes a breach of the law, potentially leading to regulatory actions by relevant authorities. FSCA has been actively involved in shaping crypto and fintech regulations, collaborating with a “inter-governmental fintech working group” comprising major financial regulators and policymakers such as the National Treasury and the South African Reserve Bank.

The trend of tightening regulations is not limited to South Africa alone. On July 3rd, the Monetary Authority of Singapore announced a similar requirement for crypto service providers in the country to secure customer assets in a statutory trust for secure storage by the end of the year. This underscores the global movement towards more rigorous cryptocurrency regulation.

Getting a FAIS License for Businesses

Getting a Financial Advisory and Intermediary Services (FAIS) license in South Africa involves several steps to ensure compliance with the regulatory framework. Here’s a step by step guide on how to obtain a FAIS license:

Step 1: Understand the Requirements

Before you begin the application process, ensure you fully grasp the requirements for obtaining a FAIS license. This includes possessing the necessary qualifications, meeting the fit and proper criteria, and having a thorough understanding of the financial products and services you intend to provide advice or intermediary services for.

Step 2: Qualifications

Verify that you hold the appropriate qualifications recognized by the FSCA for the specific financial services your business plans to offer. Keep in mind that different categories of financial services have distinct qualification requirements.

Step 3: Regulatory Exam

Pass the regulatory exam(s) that correspond to the specific category of financial services your business intends to provide. These exams are administered by approved exam bodies. Register for the exams relevant to your business and adequately prepare for them.

Step 4: Register as an FSP

To initiate the FAIS license application, your business must first be registered as a Financial Services Provider (FSP). Use the FSCA’s online application portal to register and submit all the necessary documentation.

Step 5: Fit and Proper Assessment

As part of the registration process, your business will undergo a fit and proper assessment to ensure integrity, competence, and financial soundness. This assessment involves furnishing detailed personal and financial information as required.

Step 6: Compliance and Documentation

Compile all essential documentation, including your business’s qualifications, regulatory exam results, evidence of compliance with fit and proper criteria, and any other pertinent documents. It’s crucial that all documentation is accurate and up to date.

Step 7: Apply for a FAIS License

Submit your business’s FAIS license application via the FSCA’s online portal. Be sure to pay the necessary application fee, which may vary based on the category of financial services your business intends to provide.

Step 8: Await Processing

Following the submission of your application, the FSCA will review your materials and conduct the requisite checks. This part of the process may take some time, so it’s important to be patient and thorough.

Step 9: Compliance Monitoring

Once your business obtains the FAIS license, it will be subject to ongoing compliance monitoring by the FSCA. It’s imperative to consistently meet all regulatory requirements to maintain your license.

To Conclude

It can be understood that South Africa is committed to embracing technological change as a testament to their forward-thinking approach, aiming to harness the power of innovation while maintaining a regulatory environment that encourages responsible development. This proactive stance facilitates a better navigation of the challenges and opportunities that emerge from the digital revolution. No two businesses are the same. If you are interested in doing business in South Africa, our team is ready to analyze your unique business model and help you through the process of entering the market and our individualized approach will help you to better understand compliance requirements to effectively operate your business. 

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.


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Welcome to Hong Kong: The Government Extends Open Arms to Crypto Exchanges Amidst Global Regulatory Shifts

In the past, Hong Kong enjoyed a reputation as a hub for cryptocurrencies, hosting numerous initial coin offerings and exchanges.

However, the scenario changed when regulatory authorities started expressing concerns about retail investment bans, causing many industry players to seek safe havens in different regions. Presently, regulators are making efforts to entice these businesses back.

The introduction of Hong Kong’s licensing system for cryptocurrency firms serving individual traders, especially while the United States maintains a more cautious regulatory stance, could be seen as a potential opportunity for the city, according to insiders from the industry. The prospect of establishing operations in Hong Kong has garnered increasing attention from digital asset businesses, including exchanges. This interest has grown since local regulatory authorities unveiled their licensing initiative earlier this year.

Factors Driving Change: Overview of New Regulatory Framework

In October of the year 2022, Hong Kong issued a policy statement outlining the trajectory of cryptocurrencies, often referred to as “virtual assets,” through which the government expressed its readiness to adjust its legal and regulatory framework as a component of its endeavor to establish the facilitating environment, taking into consideration the dynamic nature and inventive approach of virtual assets. The policy states that in recent years, both the Government and regulatory bodies have collaboratively established an all-encompassing structure for overseeing Virtuaхфх Asset (VA) activities, adhering to the principle of aligning regulation with activities and associated risks. A comprehensive regulatory system has been initiated for granting licenses to VA Exchanges, utilizing an “opt-in” methodology; furthermore, within the realm of asset management, directives have been disseminated concerning the administration of VA funds and discretionary accounts. Additionally, the policy mentions that the financial institutions and banks have received instructive guidance pertaining to the dissemination, trading, and advisory aspects of products related to Virtual Assets.

Hong Kong’s securities regulator has implemented stricter rules for digital asset companies starting from June 1, 2023 as part of its cryptocurrency licensing framework. 

The newly established licensing structure comprises two tiers:

The focus is on safeguarding retail investors, as only licensed providers may engage in the provision of virtual asset services. The only Virtual Asset service currently regulated under the AMLO is the VATP transaction, whereby 

(i) mandatory sales and purchases of Virtual Assets are or are to be made, negotiated or entered into; and 

(ii) the customer’s money is received or the customer’s virtual assets are taken over by the VATP. Thus, the new licensing regime covers centralized VATPs and mechanisms that trade or support trading of virtual assets, excluding peer-to-peer platforms that simply provide a forum for offers and offers and do not trade or support trading of virtual assets on the platforms. 

The move to allow retail trading in cryptocurrencies follows a challenging year for the sector, marked by the collapse of FTX exchange. The new rules require licensing for all trading platforms and exchanges, with penalties for non-compliance. Operators must ensure compliance with local laws and regulations, and the measures include setting exposure limits for retail investors and restricting trading to established tokens. The regulations also cover marketing by unlicensed platforms, including through social media influencers.

Besides, local fund managers overseeing funds with 10% or more of their gross asset value in digital assets are required to seek an upgrade to their “Type 9” license. Initial interest has been relatively low, but there is now an increasing trend, with several managers making the upgrade in the last six months. The SFC is now more open to granting the ‘virtual asset license upgrade’ to fund managers, provided they have the necessary expertise, experience, and engage appropriate service providers such as trading platforms, custodians, fund administrators, and auditors.  

There exist certain stages within the application procedures that remain undisclosed to the public. It is believed that the licensing application process with the SFC has become smoother and quicker compared to the past. The licensing framework is designed to enable “crypto choices for individual traders,” along with facilitating “entry and exit points.” The latter aspect, in particular, holds significant importance.

Nevertheless, the city has potentially positioned itself to benefit from businesses searching for respite from regulatory crackdowns in other regions. This could involve either relocating entirely from the US or, at the very least, setting up a presence beyond its borders.

Moreover, financial regulatory bodies in Hong Kong established a scheme allowing fund managers who exclusively trade crypto investment products to register. This initiative opens avenues for alternative investment managers focusing on digital assets, particularly those associated with institutional limited partners.

Hong Kong has also taken steps to enhance its standing in the crypto sector through other avenues. The government established a Web3 “task force” earlier this year with the purpose of investigating and offering suggestions for the “sustainable and conscientious growth of Web3 in Hong Kong.” Regulators believe that the notion is that Web3 could potentially tackle and surmount obstacles in domains such as finance, trade, business processes, and even daily routines.

A significant development has occurred in Hong Kong’s legal landscape, as in April 2023, Hong Kong’s High Court has officially classified cryptocurrency as a form of property, and ruled that it is capable of being held on trust. This groundbreaking decision represents the first instance of such a determination concerning digital assets within the city-state. The significant judgment in the case of Re Gatecoin Limited (In Liquidation) brings Hong Kong in line with the stance of several comparable common law jurisdictions. This decision offers clear legal assurance regarding the validity of cryptocurrency transfers or loans, as well as the legal rights of parties should instances of fraud, theft, or breach of trust involving these assets arise. Undoubtedly, this ruling is a positive advancement for enterprises engaged in this swiftly evolving domain.

The initial response from the cryptocurrency industry to the new regulations

HashKey Exchange and OSL Digital Securities Ltd. have recently secured the first cryptocurrency exchange licenses in Hong Kong’s updated framework, allowing them to service retail clients. HashKey Exchange, affiliated with HashKey Group, revealed the license expansion to cover retail users alongside professional investors. Following suit, OSL Digital Securities, a subsidiary of BC Technology Group, also confirmed acquiring a license for serving retail customers. These two entities previously held licenses under Hong Kong’s former opt-in regime for crypto asset service providers, potentially facilitating their swift approval under the new system. 

While it’s still in the initial stages, prominent worldwide crypto exchanges like Huobi, OKX, and BitMEX have expressed their intention to establish a presence in this area. The allure surrounding Hong Kong’s cryptocurrency prospects may have been ignited by its accommodating business climate, attractive tax rates, skilled workforce, and strategic proximity to mainland China. It’s worth mentioning that the SFC is presently enabling managers to explore a broader range of digital assets for investment and create more intricate Web3-oriented products. Earlier this year, the city-state’s largest digital bank announced plans to service locally regulated cryptocurrency exchanges with fiat deposits and withdrawals.

The regulatory progress in Hong Kong seems favorable, especially as the US continues to grapple with regulatory measures for its domestic crypto sector. The Hong Kong administration is staying true to its commitment of expanding the virtual asset sector, aiming to position the region as a competitive hub for virtual assets in Asia. Hong Kong’s objective is not to impede financial innovation but to establish fairness among all stakeholders, thereby unleashing the industry’s potential, by using Web3 for the positive impact. To sum up, stricter jurisdictions’ loss is Hong Kong’s gain when it comes to crypto. 

The content of this article is intended to provide a general guide to the subject matter, not to be considered as a legal consultation.


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