Crypto assets emerged as a salient phenomenon in 2021. They were the most frequently asked theme in the FIN-FSA's Innovation Helpdesk last year, and growing interest towards crypto assets has also been evident at the FIN-FSA in processing applications for registration of new service providers.

One factor behind the increased interest was the appreciation of the most widely known crypto asset¹, the virtual currency² Bitcoin, which hit the headlines in early 2021. Virtual currencies are not typically issued or guaranteed by central banks, and they do not have the same legal status as currencies or money. The provision of virtual currencies, and more generally of crypto assets, is digital business, which makes it easy to transfer them and expand from one area to another.

Current regulations are based on the EU's AML Directive

Current regulations in Finland specifically address services related to virtual currencies. The regulation is largely based on the EU Anti-Money Laundering Directive, and it is currently considerably more limited in scope than regulations on investment funds and investment activities, for example.

Current regulations seek to improve the detection of suspicious transactions and activities. In practice, this means that the service provider must retain the personal data and account numbers of the parties to a transaction. Before a transaction is executed, the service provider must also check whether the abovementioned information has been obtained on the sender.

Issuance of virtual currency in Finland subject to authorisation

In Finland, unlike many other European countries, the issuance of virtual currency requires authorisation granted by the authority. In accordance with the Virtual Currency Providers Act, only institutions registered as virtual currency providers may provide virtual currency services in Finland. Following the entry into force of the Act, the operation and competitive preconditions of the providers became more equitable in comparison with other supervised financial market participants. The FIN-FSA processes applications for registration by virtual currency providers and supervises compliance with the Act. At the end of 2021, there were six registered virtual currency providers in Finland.

The regulation of virtual currency services is still at a very early stage, however. The primary objective of the national act, which entered into force in 2019, was the prevention of money laundering and the establishment of related mechanisms.

Regulation on markets in crypto assets under preparation within the EU

A regulation on markets in crypto assets that seeks to improve investor protection is under preparation within the EU. As a concept, a crypto asset also includes virtual currencies. The purpose is to harmonise and tighten the requirements for service providers in the EEA. The upcoming EU package will delve more into the organisation of activities, investor protection and investor information. The package will clarify the activities and playing field of companies operating in the sector.

The draft legislation takes a stance, for example, on guaranteeing the best possible result for the customer, the avoidance of conflicts of interests and intervention into problems concerning inside information. Furthermore, it provides guidelines on minimum capital requirements, IT risk management and information to be disclosed to investors on crypto assets. The draft regulation also includes a centralised EU register of crypto asset providers and providers of related services: the position of consumers will improve when information on all new crypto assets is notified in the EEA and approved service providers are available from a single point of contact. Following the regulation, provisions on market abuse will also apply to these providers, where applicable.

The details of the regulation are currently subject to negotiation, and final decisions on the contents have not yet been made.

Unauthorised marketing and scams

In Finland, services related to virtual currencies may only be provided by entities registered here. In 2021, the FIN-FSA intervened in the unauthorised marketing of virtual currencies in Finland and issued a press release on the subject. The media embraced this subject, and there has also been active discourse on both virtual currencies and crypto assets more generally in social media, particularly on Twitter.

Cases where people have become rich fast by investing in crypto assets have been celebrated in the media. When investing in any crypto assets, however, one must be prepared for the scenario where their value declines sharply. They also involve elevated cyber risk owing to the fact that crypto assets only exist in a digital format and, for example, data security requirements concerning their storage and transfer are not harmonised across countries. Neither are all crypto assets readily exchangeable into money.

Crypto assets also involve an ever-growing number of scams, even though many cases are never revealed in public. In many cases, a consumer has been lured into investing in crypto assets, but the real intent of the scam has been phishing of online banking credentials.

Before one invests in crypto assets, such as virtual currencies, caution is advised. One should only invest via authorised providers: where virtual currency providers are concerned, it is possible and advisable to check in advance, for example, that the service provider is found on the list of registered providers maintained by the FIN-FSA or in another country and, moreover, that it is not found on supervisors’ warning list. There will be no material improvement in the protection of investors in crypto assets, however, until the adoption of tighter and more harmonised European regulations on crypto assets.

In spite of all the media attention received by crypto assets, their systemic significance remains rather small. Finnish financial sector incumbents have not embarked on virtual currency or crypto asset investments or on the provision of services related to virtual currencies. The main risks are related to individual investors, particularly in circumstances where the risks involved in crypto investments have not been assessed with sufficient care.

¹ There is no official definition of crypto asset, but crypto assets as a concept include virtual currencies. What crypto assets have in common is the use of cryptography.
² A virtual currency denotes value in a digital format, which has not been issued by a central bank or another authority and which is not legal tender; which can be used by a person as a means of payment; and which can be transferred, stored and exchanged electronically.