CASP (crypto-asset service providers)

Publication date: December 18, 2023

Legal status of crypto money and cryptocurrency exchanges without financial authorities supervision – Polish and global perspective.

The concept of creating a decentralized electronic payment system was created in the 1990s, but this movement gained momentum during the last financial crisis, which peaked in 2008-2009. Cryptocurrencies are a form of decentralized digital money based on blockchain technology. As an introduction, it is worth mentioning that the first cryptocurrency to enjoy increasing popularity was Bitcoin. The date of its creation and the beginning of the growing popularity of virtual currencies is set at 2009. Even before the appearance of the first Polish cryptocurrency exchanges, there was a Polish currency exchange office operating on the market, allowing the exchange of digital currencies. The first bitcoin exchange was established in 2010, but like many others, it did not stand the test of time.

Polish law currently has no provisions prohibiting the operation of cryptocurrency exchanges and currency exchange offices and their mining. In a sense, they operate according to the Latin paremia quod lege non prohibitum, licitum est. This means that the activities of cryptocurrency exchanges in Poland are legal. It should be emphasized that Polish law does not include the obligation for cryptocurrency exchanges to obtain a special license. The basic legal act regulating activities in the field of virtual currencies is the Act of March 1, 2018 on counteracting money laundering and terrorism financing. Entities operating in the field of cryptocurrency exchanges and currency exchange offices became obligated institutions with its introduction. The main obligations that these entities must meet include: appointing a person or member of the management board responsible for implementing the requirements of the Act, regularly updating the risk assessment related to money laundering and terrorist financing, documenting the financial security measures applied and introducing internal anti-laundering procedures related to money laundering and financing terrorism. Additionally, these companies are obliged to train their staff in this area and inform relevant institutions about the transactions carried out. Due to this regulation, the first cryptocurrency exchange in Poland was established and obtained permission from the Polish Financial Supervision Authority in 2019, the BitClude exchange – after rebranding – now Egera. Due to the fact that CASP (crypto-asset service providers) activities are not licensed, they are not subject to the so-called passporting /notification, which enables supervised entities, e.g. banks, national payment institutions, to conduct supervised activities in all EU Member States, on the basis of a permit issued in one of the Member States. Therefore, if CASP clients need to pursue claims for non-execution or improper execution of orders by these entities, the competent authority will be the court having jurisdiction over the seat of the stock exchange or currency exchange office. However, the lack of a special regulation does not deprive entities providing services in the field of virtual currencies from the requirement to obtain an entry in the register kept by the General Inspector of Financial Information. The activities of these entities are regulated activities within the meaning of the provisions of the Act of March 6, 2018, Entrepreneurs’ Law, and may be performed after obtaining an entry in the register for activities in this area. The competent authority for the register of activities in the field of virtual currencies is the Minister of Finance, and information about the register is published on the website of the Chamber of Tax Administration in Katowice. However, despite everything, this matter is associated with certain risks, such as: very high volatility of the value of the cryptocurrency, highly speculative nature caused by the lack of effective and proven valuation methods, lack of a clear and generally accepted economic value, operational risk of losing access to one’s own funds related to the early phase development and high complexity of the technology used, a high risk of failure of business ventures financed with cryptoassets, and a very high risk of fraud and loss of investments due to the lack of regulation. This may result in difficulties in future claims or lack of supervision as a result of this fraud. In addition, the Polish Financial Supervision Authority indicates the most popular forms of illegal activity on the cryptocurrency and cryptoassets market. These include practices such as:

1. Creating pyramid-type promotional systems in which the consumer provides services in exchange for the possibility of receiving material benefits that depend primarily on introducing other consumers to the system and not on the sale of products.
2. Creating financial pyramids according to the Ponzi scheme. In this case, disproportionately high investment returns are offered by inviting more people to participate in the investment. Then, such acquired investors must entrust the entity with a specific amount or purchase a “package” entitling them to use the solution. Currently, such criminal activity is not separately sanctioned, but fraud proceedings are always conducted, i.e. in accordance with Art. 286 of the Penal Code.
3. Creating collections aimed only at extorting a specific amount. First, such a collection reaches a certain percentage of the declared goal, after which the issuer ceases operations. It often happens that the issuer never even intended to start any business, and the value of its issued cryptoassets drops significantly or ultimately cannot be assigned any value.
4. Creating solutions modeled on the traditional financial market. Investors allocate significant financial resources to specific investments that are carried out by people who do not have appropriate permits and therefore do not ensure a minimum level of security.
5. Offering investors “instruments” with misleading names. The name of such a “tool” coincides with an appropriately selected law, for which this law provides for a number of requirements regarding the process of their creation and circulation. However, these “instruments” do not meet them at all, and therefore their subsequent trading is simply illegal. In such a case, investors have a much more difficult time pursuing any claims or taking security measures.
6. Offering their services by entities based outside the territory of Poland and other European Union Member States. This makes it impossible or creates significant difficulties to effectively pursue claims in the event of harm to investors, e.g. issuing tokens by companies from third countries that operate only to obtain financial benefits. The General Inspector of Financial Information draws attention to the disturbing phenomenon of using virtual currency trading to carry out criminal activities, including money laundering. Due to the increasing attractiveness of this type of currencies, GIFI (General Inspector of Financial Information) warns potential clients about the risks and abuses related to trading in virtual currencies. The above mentioned entities are not obligated institutions within the meaning of the Act of March 1, 2018 on counteracting money laundering and terrorism financing and are not subject to the provisions of this Act. They may also be registered in countries that do not have implemented rules on counteracting money laundering and terrorist financing equivalent to EU regulations, which increases the risk of their use in money laundering or terrorist financing. Using the services of this type of entities may pose a much greater risk for customers of becoming a victim of fraud or extortion of funds. Investing in cryptocurrency trading also involves risks, including: with relatively large fluctuations in their exchange rates.
7. Exploiting the credibility of public authorities. Currently, an increasingly popular phenomenon is offering the purchase or sale of cryptocurrencies, while indicating that these transactions are supervised by the Polish Financial Supervision Authority. Moreover, during telephone conversations during which these types of financial services are offered, callers are often informed that the “The Polish Financial Supervision Authority requirements regarding recording the transaction process will be met during the transaction”, which will include, for example, providing access to the computer desktop. The callers also inform that an employee of the Polish Financial Supervision Authority will be present during the exchange operation to monitor the transaction. People who plan their investments should remember that the cryptocurrency market is not a regulated or supervised market in Poland. The Polish Financial Supervision Authority does not license, supervise or exercise any other authority in relation to cryptocurrency trading activities.
8. Encouraging people participating in affiliate programs to purchase cryptoassets without reliable information about the risks. Due to the increasing occurrence of this type of investment offers, the participants should be particularly careful when making investment decisions.

As we are dealing with a relatively young trend, there is currently no single legal act regulating the issue of cryptocurrencies in a detailed, comprehensive and complex manner. Due to the growing popularity of these means of payment, the need to create separate regulations for cryptocurrencies and other virtual currencies seems justified. Moreover, from the point of view of the construction of the Act, a precise and clear definition of virtual currencies is important in the context of determining obligated entities providing services in the field of virtual currencies. Due to the global dimension of this phenomenon, activities related to the prevention of money laundering should be consistent with the arrangements made in international bodies, which will subsequently allow for the creation of a consistent definition throughout the European Union and a coherent approach to preventing money laundering in this area. These expectations are met by Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on crypto-asset markets and amending Regulations (EU) No. 1093/2010 and (EU) No. 1095/2010 and Directives 2013/36/ EU and (EU) 2019/1937, more on which later.

The concept of cryptographic currency, as indicated above, is included in the Act on Counteracting Money Laundering and Terrorism Financing. Art. 2 section 2 point 26 of this Act states that a virtual currency is: “a digital representation of value that is not:

a) legal tender issued by the National Bank of Poland, foreign central banks or other public administration bodies,

b) an international unit of account established by an international organization and accepted by individual countries belonging to or cooperating with that organization,

c) electronic money within the meaning of the Act of 19 August 2011 on payment services,

d) a financial instrument within the meaning of the Act of 29 July 2005 on trading in financial instruments,

e) bill of exchange or check

– and is convertible in commercial transactions into legal tender and accepted as a means of exchange, and may be electronically stored or transferred or may be the subject of electronic commerce;

According to the above article, the definition was defined by describing what it is not. The construction of a negative definition in the case of a virtual currency results from its complete newness of meaning in relation to the existing conceptual designates. The impossibility of simple inclusion in an already known conceptual framework results from the strong individuality of this new phenomenon. A simple analogy equating virtual currencies with anything else seems impossible. Moreover, it should be noted that the definition was prepared based on the Financial Action Task Force and Directive 2018/843 of the European Parliament and of the Council. Under Polish law cryptocurrencies are also defined in the Personal Income Tax Act and the Corporate Income Tax Act. Virtual currencies are classified as assets. They are a means of economic transactions that can be exchanged for other legal tenders. According to the position of the tax authorities, persons who trade in cryptocurrencies as part of their business activities should classify the revenues from cryptocurrency trading as “income from non-agricultural business activities”. Therefore, if certain conditions are met, it is possible to tax income obtained from cryptocurrency trading with a flat tax. To confirm this position, it is worth citing the judgment of the Supreme Administrative Court of March 6, 2018, reference number II FSK 488/16, which agreed with the position presented by the tax authorities and ruled that revenue from the sale of Bitcoin should be classified as property rights revenue and constitutes type of property within the meaning of Art. 44 of the Act of April 23, 1964 – Civil Code. Virtual currency is currently subject to a tax of 19%, with the reservation that activities related to their initial acquisition – “mining” are not taxed, which was confirmed by the Director of the National Tax Information. Even though cryptocurrencies are included in tax regulations, the legislator does not directly regulate issues related to stock exchanges and currency exchange offices, which are not under the supervision of the Polish Financial Supervision Authority. This fact implies that there is no guarantee of ensuring stability and fairness in the financial market, protecting consumer interests and preventing abuses and irregularities. In this case, the lack of such supervision is related to the inability of the Polish Financial Supervision Authority to act in the interests of investors.

In 2023, the European cryptocurrency regulatory package entered into force Markets in Crypto-Assets Regulation (MiCA). It is to be effective from December 30, 2024. However, there may be a transition period until July 1, 2026, during which Crypto-Asset Service Providers (CASPs) will be able to continue providing services as before in an unregulated manner.

MiCa Regulation is defined in Art. 1. The Regulation concerns the establishment of uniform requirements for the public offering and admission to trading on a trading platform of cryptoassets other than asset-linked tokens and e-money tokens, as well as requirements for service providers in the field of cryptoassets. The Regulation includes in particular: transparency and disclosure requirements in relation to the issuance, public offering and admission of cryptoassets to trading on a cryptoasset trading platform, requirements for the authorization of cryptoasset service providers, issuers of asset-linked tokens and issuers of e-money tokens, supervising them, as well as regarding their activities, organization and management principles, requirements regarding the protection of holders of crypto-assets in the framework of the issuance, public offering and admission of crypto-assets to trading, requirements regarding the protection of customers of crypto-asset service providers and issues of introducing measures preventing insider trading, unlawful disclosure of confidential information and market manipulation related to cryptoassets, to ensure the integrity of cryptoasset markets. The MiCA Regulation defines crypto-assets as a digital reflection of a value or right that can be transferred and stored electronically using distributed ledger technology or similar technology and regulates, among others: issuance, sale and brokerage services, including exchange, investment advisory and custody services. Licensing, legal, organizational, prudential and information obligations will be imposed on professional market participants, including issuers and intermediaries. The purpose of the regulation is, among other things, to improve: investors’ access to information about products, services and risks of the cryptoasset market, reliability and honesty of trading, including the quality and security of using services, and the stability and resilience of professional participants of this market.

In art. 2 the scope of application was defined. It provides that the Regulation applies to natural and legal persons and certain other undertakings participating in the issuance, public offering and admission to trading of crypto-assets or providing services related to crypto-assets in the Union.

Sources:

1. Behan Adam, Virtual currencies as the subject of crime – Monograph, Lex.
2. ary.
3. Act of March 1, 2018 on counteracting money laundering and terrorism financing.
4. Personal Income Tax Act.
5. Corporate Income Tax Act.
6. Announcements – Polish Financial Supervision Authority (knf.gov.pl).
7. The best Polish cryptocurrency exchanges in 2023 – wGospodarce.pl
8. Eger – Wikipedia, the free encyclopedia
9. Bitcoin – a short history worth knowing – CIRE 24 INFORMATION SERVICE
10. Regulation 2023/1114 of the European Parliament and of the Council of 31 May 2023 on cryptocurrencies markets and amending Regulations EU No. 1093/2010 and EU No. 1095/2010 and Directives 2013/36/EU and EU 2019/1937.
11. Information from the Polish Financial Supervision Authority “The Polish Financial Supervision Authority reminds about the rules of operation of cryptocurrency exchanges and currency exchange offices in Poland and warns about the risks”.