The legal regulation of transactions with virtual currencies and Initial Coin Offerings / Initial Token Offerings is a topic of ever more frequent discussion in the Czech Republic. The ano-nymity of cryptocurrency transactions has been reduced by the introduction of Anti-Money Laundering (AML) rules, while the Czech regulator’s approach to the regulation of trading with virtual currencies is very liberal.
Reference to virtual currency appeared for the first time in the Czech legal system in Janu-ary 2017, when an amendment to the AML Act came into force. The amendment introduced the definition of virtual currency and extended the list of persons subject to the law to per-sons providing services related to virtual currencies. Consequently, the obligation to identi-fy customers and fulfil further obligations deriving from AML rules now applies, for example, to providers of online payment gateways allowing payments in bitcoins for goods in e-shops, virtual wallet providers, and virtual currency exchange platforms.
The 2017 amendment was introduced because there had not previously been any specific requirements for trading with virtual currency, so that, in general, a mere business license was sufficient to do business in this area. Due to the anonymity of users, the potential to lose the trail of the transferred currency, and other aspects of these services, the use of virtual currencies is considered risky from an anti-money laundering perspective both by the European Banking Authority and the Czech legislator.
Out of Sight of the CNB
Despite the nomenclature, “virtual currencies” are not actually considered currency from the Czech legal perspective. The Czech National Bank does not consider virtual currencies to be a non-cash means of payment, nor their purchase or sale as payment services, and the exchange of virtual currencies for Czech crowns or other currency are not considered exchange transactions. According to the Czech National Bank, virtual currencies also do not bear the characteristics of an investment instrument. Therefore, the Czech National Bank has concluded that trading with virtual currencies does not require a license or other ap-proval from the Czech National Bank, and is not subject to its supervision.
From recent statements of the Czech National Bank, it is obvious that it has no plans to regulate virtual currencies and has a relaxed approach to the regulation of cryptocurrencies. In February 2018, the Vice-Governor of the Czech National Bank, Mojmír Hampl, said that the Czech National Bank does not want to ban cryptocurrencies and is not hindering their development, but that they are also not actively promoting or protecting them or the cus-tomers that use them.
The approach of market authorities to Initial Coin Offerings (ICOs), i.e. to the issuance of virtual currencies and their sale to the public for traditional (fiat) currencies or for other vir-tual currencies, is not uniform. The European Securities and Markets Authority (ESMA) points out that, depending on how the ICOs are structured, they can fall outside the regu-lated area, and therefore investors do not benefit from the traditional protections for regu-lated investments, and it is alerting investors to the high risk of losing all the capital they have invested.
At the same time, the ESMA informs companies engaged in ICOs of their obligations under EU law and regulations in the event that virtual currencies or tokens qualify as financial in-struments. They need to carefully assess whether it is possible to classify the virtual curren-cies or tokens that they issue as financial instruments, in which case the issuances would likely be a regulated investment activity, and they will need to comply with applicable EU legislation, such as, for example, the Prospectus Directive, the Markets in Financial Instru-ments Directive, the Alternative Investment Fund Managers Directive, and the AML Di-rective.
Raising funds through ICOs is not regulated by Czech law, and the Czech National Bank has not yet provided any guidance on ICOs beyond publishing the ESMA’s statements on its website. We therefore assume that the approach of the Czech National Bank to ICOs will follow ESMA’s statements, and the companies involved in ICOs should carefully consider whether their activities constitute regulated investment activity to prevent breaches of rules applicable to investment activities under Czech law.
By Natalie Rosova, Head of Banking & Finance, Schoenherr Czech Republic
This Article was originally published in Issue 5.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.