News release 29 December 2022 – 21/2022

Uncertainty in the virtual currency market – Financial Supervisory Authority is investigating Finnish virtual currency providers’ links with international providers that have encountered problems

During 2022, there has been unprecedented uncertainty in the virtual currency market. Underlying the uncertainty are the problems of a number of international (considered to be established) virtual currency providers, which have potentially resulted in losses of client assets. The Financial Supervisory Authority (FIN-FSA) is currently conducting an investigation into the possible links of Finnish virtual currency providers with providers that have encountered problems.

What are the risks associated with virtual currencies?

Value formation in virtual currency systems is not covered by the supervision of the FIN-FSA nor any other authority. Although domestic virtual currency providers are subject to the obligation to safeguard client assets, the assets invested in the operators’ services are not covered by a deposit guarantee.

The FIN-FSA strives preventively to identify problems occurring in the market. In Finland, a virtual currency provider must apply for registration as a virtual currency provider from the FIN-FSA. At the registration stage, entities are asked to provide clarifications required by law and to verify their appropriateness. The FIN-FSA also generally supervises procedures in customer relationships. It is not the task of the FIN-FSA to intervene in the settlement or resolution of individual disputes. The FIN-FSA does not participate in the recovery of any lost assets.

The European Supervisory Authorities and FIN-FSA have warned about the risks associated with virtual currencies on several occasions, most recently in spring 2022.

How virtual currency providers should protect their client assets

The key regulations governing virtual currency providers are provided by the Act on Virtual Currency Providers (572/2019), the Act on Preventing Money Laundering and Terrorist Financing (444/2017) and the FIN-FSA’s Regulations and guidelines 4/2019 Virtual currency providers. The investment Services Act, the Credit Institutions Act or the Securities Market Act, for example, do not apply to virtual currency providers. The generally understood concept of investor protection does not therefore apply to virtual currency operations.

Virtual currency providers are subject to the obligation to safeguard client assets. Client assets in this context means client assets in the form of virtual currency. The obligation to safeguard client assets means the virtual currency provider’s

  1. obligation to safeguard assets and virtual currencies received for the purpose of exchanging virtual currencies;
  2. obligation to hold assets received for the purpose of exchanging virtual currencies in a manner that prevents them from being commingled with the assets of another service user, service provider or its own assets;
  3. obligation to reliably distinguish each client’s virtual currencies from virtual currencies belonging to other clients and from the virtual currency provider’s own virtual currencies, and
  4. obligation to monitor malfunctions and errors arising in the safeguarding and holding of client assets and the damage caused thereby.

The obligation to safeguard client assets means safeguarding client assets from, among other things, the company’s own bankruptcy. The virtual currency provider must arrange its management of client assets in a manner that, in the event of a possible bankruptcy, client assets are not included within the bankruptcy estate.

The obligation to safeguard client assets is specified in more detail in chapter 4 of the FIN-FSA's Regulations and guidelines 4/2019.

Tighter regulations in the future

Although requirements have been set for the safeguarding and holding of client assets, there are risks associated with virtual currencies. From the client’s perspective, investing in virtual currencies is a high-risk investment activity. Current regulations for virtual currency providers are based on the EU’s Anti-Money Laundering Directive and are significantly more limited than, for example, regulations on investment activities. There are, for example, no regulations on investor protection, and the obligation to provide information to clients is on a comparatively general level.

In late September 2020, the European Commission published, as part of its digital finance package, a proposal for a Regulation on Markets in Crypto-assets (MiCA), covering the provision of services related to virtual currencies. The Regulation will tighten regulations governing virtual currency providers, and entities will be required, among other things, to meet solvency requirements, introduce a complaint handling procedure and notify clients of conflict of interests. The Regulation will also set out more precisely the information to be disclosed to clients, for example in the form of a prospectus obligation. The final decisions on the content of the Regulation have not yet been made, however.

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