his horse in front of Bratislava Castle on a hill above Bratislava, the capital of Slovakia. (Photo by Wolfgang Kaehler/LightRocket via Getty ImageLightRocket via Getty Images
Slovakia’s Cryptocurrency Puzzle: A nation that hosts almost ten times more Virtual Asset Service Providers (VASPs) than France, while having less than a tenth its population.
Cryptocurrency adoption has rapidly spread across the EU, including jurisdictions that have traditionally taken a more conservative approach to their financial markets. Slovakia is one of those jurisdictions that continues to view crypto assets as outside the confines of the financial market. As a result, the National Bank of Slovakia (NBS) currently does not exercise supervision over the Virtual Asset Service Providers (VASPs) under its jurisdiction. We review regulatory structures and potential risks, including fraud, economic sanctions and anti-money laundering.
The NBS is mandated to oversee the entire financial market, including the banking, capital markets, insurance and pension savings sectors. In the EU, most Member States have split the prudential responsibilities between two supervisors – one supervising banks and one supervising the rest of the financial market, as different regulatory approaches are required. In the case of Slovakia, the responsibility for overseeing the entire financial market rests on the shoulders of the NBS. The entire financial market, with one exception, completely disregards the oversight of crypto from its financial market regulator.
“Robust oversight of digital assets is critical to market growth, investor protection, crime prevention, market stability and user confidence as a regulatory vacuum risks stifling innovation and enabling global criminal havens.” -Philipp Amann – Former Head of Strategy at Europol’s Cybercrime Centre
This lack of oversight has led to an intriguing Density Anomaly of Crypto Companies, Slovakia is home to over 550 Virtual Asset Service Providers (VASPs). These VASPs include both cryptocurrency exchanges and virtual wallet providers. The sheer number of VASPs would indicate that Slovakia is the leading crypto jurisdiction in Europe with a booming crypto industry. However, why there are so many VASPs is possibly very far from reality. The number is astronomical, for comparison: According to the French market authority, there are currently 71 registered VASPs in France. In Denmark, which is a similar country to Slovakia in size and with a highly active fintech and crypto ecosystem, there are only 26 VASPs.
“Slovak regulatory oversight of the crypto landscape feels like a version of the EU’s Wild West,” says Dr. Alexandra Andhov, Associate Professor of Law at the University of Copenhagen, who previously practiced law in Slovakia. “The lack of apparent government oversight and the sheer number of exchanges and wallet providers operating under a trade registration issued registration could lead to a breeding ground for criminal activity, including circumventing sanctions against Russia.”
When reviewing Slovakia’s regulatory framework, several elements could be identified as potentially worrisome. First, these businesses do not require extensive licensing to operate, just being at least 18 years old, having a clear criminal record, and completing general secondary education or vocational secondary education. A VASP is then registered with the Trade Licensing Office for a small fee and can start operating.
This has raised concerns among industry experts and stakeholders, who argue that this lax approach to regulation leaves the floodgates open to criminal activity. The trade office only (automatically) registers the VASPs. There is no actual verification mechanism for the people involved in VASPs, their experience or their understanding of the operation of VASPs, which is current practice in EU Member States. Once these entities are registered, they are free to operate. There is no after-the-fact oversight of VASPs’ general business activities. According to the NBS, the VASPs are not considered part of the financial market and thus fall outside of their jurisdiction and oversight. The fact that there is no competent body that would oversee the activities of VASPs poses a significant problem in terms of both consumer protection and financial market stability.
An additional challenge is the disconnected nature of AML mechanisms. According to the Money Laundering Law No. 297/2008, this is the Financial Intelligence Unit (FIU). The FIU in Slovakia serves as the central body dedicated to detecting and combating money laundering and terrorist financing activities.
By collecting, analyzing and sharing financial information with the relevant authorities, the Financial Intelligence Unit (FIU) maintains the integrity of the Slovak financial system and protects it from illegal activities and criminal exploitation. Positioned within the police force, the FIU reports to the Home Office and serves as the sole body that oversees VASPs for anti-money laundering (AML) compliance. However, it is important to note that FIUs are primarily designed to process and interpret incoming data and do not act as regulators or enforcement agencies. A more reactive institution, the FIU focuses on investigating and enforcing Slovakia’s AML laws, but may not provide significant resources to assist obligated companies.
“Looking at the crypto-asset ecosystem, fragmented regulation, poor coordination and lack of data sharing can prevent timely action by authorities to address risks such as money laundering, terrorist financing and consumer protection.” – Arushi Goel, former judge; Specialist, Data Policy and Blockchain, C4IR India, World Economic Forum
This in itself should be addressed if Slovakia wants to improve the general understanding of companies’ AML obligations. This in itself should be addressed if Slovakia wants to improve the general understanding of companies’ AML obligations.
Another element contributing to the fragmentation of AML oversight is the NBS’s control over other financial service providers.
When it comes to AML oversight of other financial institutions, the NBS has the oversight authority. This ultimately divides AML oversight and opens the door for various criminal activities to take place on the doorstep of these two agencies’ jurisdiction.
This agreement implies that Slovakia, specifically its Ministry of Finance and the National Bank of Slovakia (NBS), are not allowed to consider Virtual Asset Service Providers (VASPs) as financial intermediaries. As a result, there could be a significant underestimation of the potential risk and exposure to the financial market. Across the European Union, regulators have warned against spying on virtual assets, with financial regulators typically overseeing VASPs. However, in the case of Slovakia, the NBS claims that it has no obligations towards crypto service providers, although according to Law No. 747/2004, the institution is responsible for financial market supervision, including macroprudential supervision – which aims to improve the stability of the entire financial system ensure – and the protection of financial consumers.
In a warm exchange on social media, the National Bank of Slovakia clarified that while it does not currently oversee crypto-asset service providers, there are existing regulations governing their operations. Businesses involved in virtual currency exchange and custodian services are required to register with the Trade Licensing Office and comply with national anti-money laundering (AML) laws.
Highlighting the variability in the number of exchanges, the bank noted that some providers exclusively offer wallet services, others are foreign companies with limited Slovak activity, and some do not offer crypto-related services to the public.
Despite these statements, critics claim that neither the NBS nor the Trade Licensing Office have the necessary expertise to navigate the intricacies of the crypto market, leaving open the rationale for this assignment of diplomatic investigation responsibilities.
Slovak lawyer and AML and compliance specialist Lucie Schweizer explains: “It is worrying to see how easy it is to set up a crypto-related company in Slovakia without proper oversight. This not only poses a risk for investors, but may also damage the reputation of the Slovak AML system.”
The application documents for registering a VASP in Slovakia available here can be viewed as easily as applying for registration of an imported car or foundation in certain countries.
“Although platforms are required to comply with AML/CTF regulations, a confidential review and dialogue with VASP representatives revealed that out of 550 active companies in Slovakia over the past three years, only a handful have been audited annually. The limited oversight of these high-risk companies suggests insufficient oversight and room for improvement.” – Nicoll Coralius, AML and Cryptocurrency Expert
In the fast-moving space of digital assets, it is imperative for stakeholders to be proactive and vigilant to mitigate unexpected challenges such as money laundering or sanctions evasion. With the Crypto Assets Markets Regulation (MiCA) approved, expectations are high that the National Bank of Slovakia (NBS) and other relevant authorities will take a more proactive stance to understand and regulate the burgeoning crypto market.
By allowing high-risk VASPs to sign up through a Trade Licensing Office that has experience in areas unrelated to that application. In addition, scarce resources are allocated and only a small number of companies are audited annually, despite a VASP volume ten times larger than in France with a population of less than a tenth. This approach undoubtedly helps maintain the pinnacle of regulatory standards and excellence, wouldn’t you agree?
Editor: Grace Marshall
Legal review carried out: Dr. Alexandra Andhov
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I have specialized in the topics at the interface between information systems, fintech, insurtech, cryptocurrency, blockchain – distributed ledger technologies (DLT), regulation and other innovations in the financial sector. I contribute to reports and articles dedicated to FinTech such as the high profile Stockholm FinTech Report 2018, co-author of the book “The Rise And Development of FinTech” and the InsurTech and RegTech report 2017 “The Next Wave of FinTech” . I have worked in senior positions for FinTechs in equity crowdfunding, cryptocurrency and lending to develop their business abroad. Sweden is my seventh country of residence.
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