What should you know if you provide crypto services in Bulgaria?
There are a wide range of requirements that must be considered before starting to provide crypto services in Bulgaria, and failure to comply with them exposes providers to various risks
Crypto assets, as well as recent crypto services, have emerged and developed as one of the innovative trends in the financial sector in recent decades. It is widely accepted that the provision of crypto services is currently an unregulated activity in most of the world, including the EU and Bulgaria. Although this is very much true for cryptocurrencies and a large part of other cryptoassets, there are still some regulatory requirements that potential crypto service providers should take into account before starting to provide services to the Bulgarian market, write in material Known by Deloitte, lawyers Adelina Mitkova, Miglena Micheva, Christian Nemtsov and Nadia Elchinova.
This article aims to highlight some necessary requirements that we believe currently apply and will be supplemented/amended by the new legal framework on the subject proposed by the European Commission, and in particular the Regulation on the Market of Crypto-assets (MiCA Regulation) .
I. Considerations for payment and investment services legislation and anti-money laundering
1. Which activity is currently unregulated
After a number of discussions on the issue, both the EU authorities and the Bulgarian financial supervisory authorities (the European Banking Authority and the Securities and Markets Authority, respectively the Bulgarian National Bank and the Financial Supervisory Commission) came to the conclusion that cryptocurrencies (and are associated with services) fall outside the scope of legislation in the field of payment and investment services. This is because, on the one hand, cryptocurrencies are not legal tender issued by a central bank or other competent authority, nor are they funds (banknotes and coins, money on account and electronic money) within the meaning of the legislation on payment services. On the other hand, it is unlikely that cryptocurrencies also qualify as financial instruments. Therefore, at this stage, no licenses are required for the provision of crypto-services such as transfer, exchange (crypto-to-crypto, crypto-to-fiat and vice versa) and custody of virtual currencies.
2. What activity can be regulated?
Services related to cryptoassets other than cryptocurrencies may appear within the scope of the current legal framework for investment services. This happens in cases where crypto-assets can be qualified as financial instruments, i.e. when the assets have an investment purpose or are associated with an expectation of return. This means that the provider of such services may need to obtain an investment intermediary license under the Markets in Financial Instruments Directive II (transposed in Bulgaria in the Markets in Financial Instruments Act) in order to provide services such as transfer, exchange and custody of such cryptoassets.
In addition, according to the low securities and markets authorities, when crypto-assets qualify as financial instruments, all relevant EU financial regulations apply, including the Prospectus Regulation, the Transparency Directive, the Market Abuse Directive, the Short Selling Regulation, The Regulation on Central Securities Depositories and the Settlement Finality Directive (all transposed and applicable in Bulgaria).
3. Which activity is regulated
The usual provision of cryptocurrency transfer and exchange services requires the presence of a fiat currency payment account in the name of the customer, with a designated IBAN, to serve as a platform for buying and selling the cryptocurrencies. In other words, the customer transfers fiat funds to this individual payment account with which he can buy the chosen cryptocurrency, and vice versa, when he sells a certain cryptocurrency, the customer receives monetary value in fiat currency on this payment account. In addition, some providers offer cashless fiat currency exchange services, as well as payment transfers to your own or a third party’s account. Finally, many providers offer their customers the issuance of a physical or digital payment card that allows the customer to withdraw or otherwise dispose of the fiat money available on a completed payment account through the payment card (for example, for online shopping and/ or POS device payment).
Services such as currency exchange (fiat to fiat currency only), issuing and processing prepaid physical or digital payment card transactions, and opening and operating payment accounts (even if the payment account is only used as a platform for buying and selling cryptocurrencies ), may qualify as payment services under the Payment Services Directive (introduced in the Payment Services and Payment Systems Act). The provision of such services in Bulgaria always requires a license for a payment institution or issuer of electronic money.
In addition, payment institutions, electronic money issuers, companies that provide exchange services between virtual currencies and fiat currencies, as well as wallet providers that offer custodial services are liable persons under the Money Laundering Measures Act. You must implement in your measure an activity to support the use of the financial system for money laundering purposes (e.g. to perform due diligence on the customer, to perform risk assessments, to report test transactions and operations to the Bulgarian competent authority for anti-money laundering, etc.). Also, companies that provide exchange services between virtual currencies and fiat currencies, as well as wallet providers that offer custodial services, are subject to registration with the National Revenue Agency for anti-money laundering purposes.
4. What are the next steps if it appears that you need a license
In order to assess whether licenses are required, a thorough analysis of the chosen business model and the types of services to be provided should be carried out. This is also the recommendation of the EU financial regulators. If licenses are required, there are various options: for example obtaining a license in Bulgaria; obtaining a license in another EU country and its subsequent passporting in Bulgaria (and carrying out activities through a branch or directly); acting as an agent of a licensed supplier, etc.
II. Considerations from the point of view of the operation of legislation in the field of consumer protection, competition and protection of personal data
1. Contracts with consumers (B2C)
Contract with users objects with a range of requirements. First, crypto service providers should anticipate applicable laws to protect consumers, including providing advance information to consumers before providing services. The information must, among other requirements, be communicated in writing or by other appropriate means for the user to understand, be true, complete, clear and comprehensive, and include a definition of minimally comprehensible elements. Prior information should also be available online when online platforms or other electronic means are used.
Also, crypto service providers should take measures to avoid including unfair clauses in user contracts (such as a clause allowing only the provider to terminate the contract without stating the reason).
Unequal clauses are initially void unless individually agreed.