The Finnish Ministry of Finance recently published a draft government bill for legislation on virtual currency providers. The proposed legislation would partly implement the fifth Anti-Money Laundering Directive (2018/843/EU) in Finland.
If the bill is passed, Finnish law would for the first time regulate virtual currencies and their providers. According to the draft rules, anyone offering virtual currencies in Finland would need to register with the Finnish Financial Supervisory Authority (the “FIN-FSA”) and be subject to obligations regarding safeguarding clients’ funds and marketing, among other things.
The new legislation will not, however, remove the risks associated with virtual currencies. Trading in virtual currencies would not fall within investment protections rules, unless the activities constitute regulated activities under some other financial services regulation.
In addition to the above obligations, any firms involved in the issue of virtual currency, such as Initial Coin Offerings (“ICOs”), must also carefully consider whether their activities constitute regulated activities (for instance, an issue of an equity or debt security, or an investment fund). If so, the issuer may need to comply with the national rules implementing the Prospectus Directive, the Alternative Investment Fund Managers Directive, or the Markets in Financial Instruments Directive (as applicable), each of which contains obligations on the marketing and offering of financial instruments.
What Are Virtual Currencies?
Under the proposed rules, virtual currency means a value that:
- is in digital form;
- is not issued or guaranteed by a central bank or other public authority;
- is not a legal means of payment; and
- can be transferred, stored, and traded electronically.
The proposed Finnish definition of virtual currency corresponds to the definition in the fifth Anti-Money Laundering Directive. In practice, virtual currency is a digital commodity in the form of a code which can be transferred, traded, and stored. The code can be based on blockchain, just as Bitcoin, or other technology, as long as the virtual currency is in digital form.
Virtual currency cannot be used to pay for goods and services. Therefore, the seller does not have to accept virtual currency (such as Bitcoin) as a payment for the goods or services, unless the parties agree otherwise.
Who Is a Virtual Currency Provider?
In its current form, the proposed legislation will apply to the offer of services that relate to virtual currencies. Anyone offering such services must register as a virtual currency provider.
A virtual currency provider is:
- a provider who is engaged in exchange services between virtual currencies and other currencies;
- a custodian wallet provider; or
- an issuer of virtual currencies.
The proposed legislation does not specify what constitutes “services that relate to virtual currencies”. It is therefore unclear whether the legislation is intended to apply only to virtual currency providers (providing only the above services), or also to entities that provide other types of services (such as investment advice or portfolio management services) in relation to virtual currencies.
It is also unclear whether a virtual currency provider that is engaged in exchange services between different virtual currencies (instead of virtual currencies and fiat currencies) will fall under the new legislation.
Importantly, the Finnish draft legislation will go further than the fifth Anti-Money Laundering Directive as it also encompasses issuers of virtual currencies.
Trading in virtual currencies involves high risks and therefore there is a need to also regulate issuers. After a significant increase in ICOs recently, both the European regulators and the FIN-FSA are concerned about the risk of an “ICO bubble” and possible related frauds. Also, regulating issuers means that obligations, such as know-your-customer requirements, can be imposed on the issuers in ICOs. However, this will not be possible in the case of public decentralised systems, such as Bitcoin, where there is no one central issuer.
What Are the Obligations of Virtual Currency Providers?
Under the proposed legislation, virtual currency providers will need to register and be supervised by the regulator. The new legislation would also introduce obligations relating, among other things, to the trustworthiness and character of the virtual currency provider, safeguarding clients’ funds, and marketing.
Is There More to Come?
The new legislation is due to enter into force on 1 January 2019.
The draft legislation still requires some fine-tuning, and overall, the proposed regime on virtual currency providers is still lightweight in comparison to the regulation of other similar types of financial services, such as payment services. The proposed registration obligation for virtual currency providers is not a licence, and it does not involve any assessment by the regulator of the provider’s internal governance and risk management systems or financial resources.
However, it is a start and it is likely that further regulation will follow, in particular at the EU level. The European Commission has stated in its FinTech Action Plan that an assessment of the suitability of the current EU regulatory framework with regard to ICOs and crypto-assets more generally is necessary, and based on the assessment, regulatory action at EU level may be required. We understand that the Commission is expecting to complete its regulatory mapping of crypto assets later this year.
Hannes Snellman Assists in Virtual Currency Matters
Hannes Snellman is happy to assist in matters relating to virtual currencies, registration of virtual currency providers, and ICOs, as well as any other financial services-related issues.
Counsel at Hannes Snellman
Associate at Hannes Snellman