Introduction
Response to increased trade
Future of cryptocurrencies
Comment
In recent years, cryptocurrency trading has increased in Sweden. The most common cryptocurrency is Bitcoin. Cryptocurrencies are often held for investment purposes, rather than payment purposes. Therefore, the Swedish authorities consider that "crypto asset" is a more precise term than "cryptocurrency". However, the crypto market is essentially unregulated within the European Union and in Sweden. Therefore, there are almost no restrictions regarding cryptocurrency trading, and Sweden can be described as a โcrypto-friendly nationโ. Despite this, Swedish banks are restrictive in providing cryptocurrency-related services. In fact, there are hardly any Swedish banks that offer cryptocurrency as an investment option.
Unlike traditional currency, such as the Swedish krona, cryptocurrencies are not issued by a national central bank. Instead, anyone can issue cryptocurrencies through specific software. However, the most common way to trade cryptocurrencies in Sweden is through cryptocurrency exchanges and brokers.
One of the few regulations that apply to cryptocurrencies in Sweden is the Foreign Exchange and Other Financial Activities Act (CEFA Act), which implements EU Directive 2018/843. Pursuant to CEFA Law, entities intending to provide "other financial operations", which include services related to the management and trading of cryptocurrencies, must apply for registration with the Swedish Financial Supervisory Authority (SFSA). Trading, in this case, is defined as an exchange between cryptocurrencies and:
- Swedish crowns or foreign currencies;
- electronic money (electronic money); either
- other cryptocurrencies.
Cryptocurrency management includes services to safeguard cryptographic keys on behalf of clients to hold, store and transfer cryptocurrency.
The main objective of the CEFA Law is to prevent money laundering and the financing of terrorism. Due to the anti-money laundering and anti-terrorist financing compliance requirements that come with a banking license, banks do not have to be registered. However, the SFSA expects that entities providing services related to cryptocurrency trading will be phased out from the scope of the CEFA Law, as such entities may be subject to an authorization requirement in the upcoming EU regulation. , he Regulation of the Crypto Asset Market (Mica).
Some of the potential advantages of trading cryptocurrencies are that trading is anonymous, and the exchange is fast and may be associated with lower costs than trading traditional assets. However, the SFSA considers cryptocurrency trading inappropriate for consumers and has warned financial market participants against trading and investing in these currencies. In addition to this SFSA recommendation, several other authorities and banks, including the Swedish central bank (Riksbank), have pointed out the risks of trading cryptocurrencies. Broadly, these risks can be summarized in the following ways.
First of all, there is a lack of regulation regarding cryptocurrencies in Sweden. The current regulations are mainly focused on compliance with anti-money laundering and terrorist financing regulations. As a result, unlike traditional currencies, cryptocurrencies lack consumer protection. For example, cryptocurrencies are not covered by deposit insurance in the Deposit Insurance Law. However, it can be considered whether cryptocurrencies have consumer protection through other regulations. For example, cryptocurrencies may be covered by the regulation on segregation of funds. Pursuant to the Fund Accounting Law, banks are required to set aside funds that they are required to account on behalf of clients. At the time the regulation was promulgated, the meaning of "funds" was money. Based on 80 years of preparatory work, the regulation can be applied analogously to consumables.(1) Such fungible assets can potentially be, for example, cryptocurrencies. However, due to the lack of more recent guidance, this legal matter remains unclear.
In the absence of regulation, there is still no legal definition of cryptocurrency in Sweden. However, cryptocurrencies could possibly be defined as a transferable security in the Markets in Financial Instruments Directive II (MiFID II), implemented through the Securities Market Law. To be defined as a "transferable security", cryptocurrency must be transferable and tradable on the capital market. Among other things, this includes obtaining rights in rem through registration under Swedish law. Enrollments for contractual reasons do not usually meet this requirement.(2) If the cryptocurrency is classified as a transferable security, it can be traded on a regulated market. However, according to the European Securities and Markets Authority, this depends on the characteristics of the specific currency. In addition, as a result of the growing cryptocurrency trade, new products have been developed, such as tracking certificates. A tracking certificate is a financial instrument with an underlying crypto asset or assets. As these financial instruments are based on the price of the underlying crypto asset, MiFID II applies and allows indirect trading of cryptocurrencies on regulated markets.
Furthermore, the often anonymous nature of cryptocurrencies results in a lack of transparency and traceability. However, these characteristics vary depending on the currency in question. Bitcoin, for example, is based on a blockchain process. In the blockchain process, all transactions are archived in a journal, which is open for everyone to read. Therefore, Bitcoin transactions are traceable. However, information about Bitcoin owners remains unrevealed, making it difficult for banks to run crypto services while also meeting the requirements of anti-money laundering and terrorist financing regulations. Furthermore, the price of cryptocurrencies is based solely on demand and lacks underlying value, making them volatile. Therefore, it is difficult to value cryptocurrencies reliably, which poses a significant risk for clients who intend to invest in them.
Lastly, the issuance and trading of various cryptocurrencies may discourage the transition to a sustainable financial system. Unlike traditional assets and as mentioned above, cryptocurrencies are generally not produced by a national central bank. Instead, anyone can issue cryptocurrencies like Bitcoin through specific software. Bitcoins are issued when this specific and demanding software is run through a computer using the so-called "proof of work" method. The issuer is rewarded with Bitcoins and transaction fees for the work done. The cryptocurrency issuance process requires a large scale of computing power and therefore consumes a lot of energy. However, new and less energy intensive methods have been developed to mine cryptocurrency. For example, some coins, such as Ethereum, are issued using a so-called "proof of stake" method. The proof-of-stake method requires fewer resources and consumes 99.95% less power than the proof-of-work method.
With the increase in trading, cryptocurrencies will likely become more acceptable as an investment option. In response to this, there is now a process towards a more regulated cryptocurrency field within the European Union. However, according to Riksbank, the volatile nature of cryptocurrencies makes them unsuitable for payments. Instead, the Riksbank is currently investigating the possibility of issuing a central bank digital electronic krona, as a supplement to the traditional Swedish krona.
In 2020, the European Commission introduced the MiCA, which is expected to enter into force in 2024. The MiCA is expected, among other things, to impose an authorization requirement for legal persons who intend to:
- issue asset reference tokens or electronic money tokens; either
- provide services in respect of any cryptocurrency.
In addition, MiCA is expected to introduce an obligation for issuers of any cryptocurrency token to publish information about it in the so-called "white paper." This white paper will provide clients with relevant information on the characteristics, functions and risks of the currency in which clients can invest. MiCA may also enforce rules regarding asset pooling and segregation of funds from asset reference tokens, which is expected to further strengthen client protection.
According to the SFSA, MiCA is expected to lessen some of the risks associated with cryptocurrencies. However, the SFSA has emphasized that MiCA will not handle all risk-related issues and will maintain its warnings about investing in cryptocurrencies.
In the absence of regulation, there is a great deal of discretion when it comes to how cryptocurrencies are handled. This not only applies to entities that provide cryptocurrency-related services, but also to the Swedish authorities. For example, in 2022, the Swedish Companies Registration Office (SCRO) rejected a company's application to establish a new Swedish limited liability company on the grounds that Bitcoin could not be used as in-kind contributed capital due to lack of of intrinsic value. However, following an appeal by the company to the Administrative Court, the Court fixed that it was not correct to reject the registration for these reasons. The SCRO has appealed this sentence.
The forecast is that MiCA will shed some light on the legal field of cryptocurrencies and resolve some of the risks associated with cryptocurrencies in Sweden. However, even if MiCA is expected to impose rules to strengthen client protection, the SFSA has stressed that some challenges remain. For example, certain cryptocurrencies will continue to have a volatile and speculative value, making them difficult to estimate. Also, an interesting question is how banks will respond to MiCA. Before the risks are eliminated, or at least manageable, Swedish banks are likely to remain restrictive in providing cryptocurrency-related services.
For more information on this topic, please contact Andreas Becker either Lisa Antman at Wigge & Partners by phone (+46(0)72 062 60 86) or email ([emailย protected] either [emailย protected]). The Wigge & Partners website can be accessed at www.wiggepartners.seโ.
final notes
(2) Prop. 2006/07:115, p. 281.
