Business Review has spoken to experts at EY Romania, the professional services firm, about the challenges of regulating cryptocurrencies and the role of Initial Coin Offerings (ICO) in helping entrepreneurs secure funding for their startups.
Are we going to see any attempts to regulate cryptocurrencies in Europe in the foreseeable future?
Gabriel Sincu | Associate Partner | Tax Advisory Services, EY România:
Being the hottest topic in the beginning of the year, when the news in this field were making the headlines in media, discussions on the topic went down in the second half of the year. This is due (among others) to the fact that the domain remains non-regulated and even more, some countries like China and South Korea decided to ban the transactions with cryptocurrencies. In this context, and considering the risks and lack of a clear understanding of the phenomenon, Europe is not rushing to make a decision in the direction of regulating the cryptocurrencies and we are not aware about any clear initiatives. Most probably, it will be the call of the largest EU countries how and when the regulations in this area will be introduced.
Elena Lăzărescu, senior lawyer, Radu și Asociații SPRL | EY Law:
The Romanian legislation does not regulate cryptocurrencies – currently, they do not benefit from a legal definition and/or qualification at a local scale.
Banking Supervisory Approach – Virtual Currency – In spite of this legislative gap, the National Bank of Romania (“NBR”) has addressed this topic via official communications, mostly aiming at triggering the attention to the potential risks deriving from cryptocurrency schemes, in line with the European Central Bank’s standpoint in this respect. European Central Bank has defined cryptocurrencies as a subset of decentralized virtual currencies – i.e., “not money or currency from a legal perspective” , but “a digital representations of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money.”
Such definition has been adopted also by the NBR in its official communication referring to virtual currency schemes, issued in 2015 . The National Bank of Romania concluded in the sense that: “A virtual currency is neither a national currency, nor a foreign currency, and the acceptance for payment thereof is not mandatory from a legal point of view. In the same time, a virtual currency does not represent an electronic currency [as per the local electronic money legislation].” The above standpoint has been enhanced in 2018, when the NBR issued a subsequent official communication within the context of the exponential increase of most virtual currencies’ prices (with an increasing volatility). Practically, the perspective of the NBR was, as at February 2018, that “virtual currencies, such as Bitcoin, are qualified as speculative assets, extremely volatile and risky”.
Financial Services Supervisory Approach – Financial Instruments – In line with the above NBR statement, it appears that (at least in part), the qualification-spotlight turned from the concept of “currency” to the concept of “speculation” and, thus, tackled also the capital markets’ realm, supervised by the local financial conduct authority. Until the time being, the Romanian financial conduct authority has not issued any official statement/standpoint vis-à-vis cryptocurrencies and/or block chains. In contrast, the German supervisory authority (i.e., Federal Financial Supervisory Authority) “has qualified Bitcoin with legally binding effect as financial instruments in the form of units of account (…) similar to foreign currencies and not of legal tender. They include value units having the function of private means of payment in barter transactions, as well as any other substitute currency used by virtue of private-law agreements as a means of payment in multilateral settlement accounts (…).”
Start-ups are starting to use Initial Coin Offerings to finance their operations. Most of the ICOs fail. What risks do ICOs entail for investors and entrepreneurs? What are the advantages of ICOs?
Gabriel Sincu | Associate Partner | Tax Advisory Services, EY Romania:
As mentioned above, this new model is only in the beginning, the technology behind it is promising, but its applicability to a business or another is questionable. The risk for an entrepreneur starting such an operation is close to nil, but it is huge in case of the investor, as we can notice from the high volatility of the market, even for the main cryptocurrencies. The lack of a regulator is also a factor increasing this risk. On the other hand, the main advantage lies exactly in the flexibility given by the lack of rules. Once again, we say that the blockchain technology which is backing-up the domain has a fantastic potential, but the question mark is how this technology can be implemented in one business or another? And how this technology can make that business more successful?
Elena Lăzărescu, senior lawyer, Radu și Asociații SPRL | EY Law:
Within the context of the rapid ICOs growth registered at the end of 2017, the European Securities and Markets Authority (“ESMA”) has issued a statement whereby it declared that, depending on their structure, “ICOs may fall outside the regulated space, in which case investors do not benefit from the protection that comes with regulated investment.” As per the above statement, the main risks of investing in ICOs are, in ESMA’s opinion, the following: (i) unregulated space, vulnerable to fraud or illicit activities; (ii) high risk of losing all of the invested capital; (iii) lack of exit options and extreme price volatility; (iv) inadequate information; and (v) flaws in the technology.
In addition to such statement, ESMA issued a complementary one, whereby it urged firms involved in ICOs to meet the relevant regulatory requirements – “(…) where the coins or tokens qualify as financial instruments it is likely that the firms involved in ICOs conduct regulated investment activities, such as placing, dealing in or advising on financial instruments or managing or marketing collective investment schemes. Moreover, they may be involved in offering transferable securities to the public”. In such circumstances, the relevant firms have the obligation to comply with the applicable rules, including prospectus, (alternative) investment services regulations, etc.
Consequently, if and to the extent ICOs fall within the scope of the above regulations on financial instruments, the observance thereof becomes mandatory. In this context, it is worth mentioning a legislative initiative undertaken by the Maltese financial authority at the end of 2017 . With the aim of supporting ICO schemes, the Maltese regulatory authority proposed, for public debate, a legislative proposal setting forth the introduction of a mandatory test for determining the potential legal qualification as “financial instruments” of an ICO. In accordance with such test, a firm would be able to assess if it has the obligation to comply with the relevant financial-related provisions and ensure, where applicable, an adequate investor protection.
A similar legislative initiative is expected at a local scale, in respect of the (re)insurance industry. The Romanian financial conduct authority has issued a decision for the creation of the group InsurTech which has a series of objectives, including the creation of a testing and support environment for, inter alia, the companies developing (re)insurance innovative solutions for consumers, implying, amongst others, block chain-related activities . Once materialised, such initiatives will lead to a clearer image on how such operations are performed and what risks and advantages are entailed.