Overview of regulation of cryptocurrencies in the Czech Republic
Electronic money? Intangible assets?
26 November 2019
The Czech Republic regards itself as a pioneer in cryptocurrencies – Prague was home to the world's first Bitcoin-only café, the city has one of the highest densities of Bitcoin ATM machines in the world, the first hardware wallet and the first mining pool were developed in the Czech Republic and you can pay your gas bill with Bitcoin. However, the Czech regulatory authorities – like others – are still grappling with ways of addressing cryptocurrencies.
The European Central Bank has made it clear that cryptocurrencies do not represent a currency or a payment instrument and that they are not to be regulated at the EU level, leading to individual EU Member States enacting different regulations.
Around the globe, there are generally three scenarios applied to the regulation of cryptocurrencies: (i) complete prohibition, (ii) thorough government regulation or (iii) a liberal approach with the crucial aspects such as anti-money laundering covered by regulation. The Czech Republic, takes the third approach.
Under Czech law, there is no specific piece of legislation governing cryptocurrencies, their trading or ICOs. Cryptocurrencies are not considered to be a legal currency in the Czech Republic and the Czech National Bank (CNB) seems to maintain a rather laissez-faire stance towards any regulation of cryptocurrencies. In the words of its former vice-governor, the CNB is "not hindering their development, but it is also not actively helping or promoting them and it is not protecting them or the customers that use them."
However, the Czech AML Act (Act No. 253/2008 Coll., on Selected Measures against Legitimisation of Proceeds of Crime and Financing of Terrorism, as amended) contains a list of obliged entities for the purpose of the AML Act, which includes persons providing services connected with virtual currencies, i.e. those who buy, sell, store, manage, or mediate the purchase or sale of virtual currencies or provide other services related to such currencies as a business. A virtual currency is defined in the AML Act as a 'digitally stored unit regardless of the existence of its issuer, which is not a fiat currency under the Act on Payment System, but it is accepted as a payment for goods or services by a person other than the issuer.' As this definition is rather broad, it also covers cryptocurrencies. As a result, the online payment gate operators that enable the transfer of virtual currencies, virtual currencies exchanges or virtual currencies trading platforms are required to conduct identification checks on their clients, to notify suspicious trades, to archive the clients' information and to fulfil other obligations stipulated by the AML Act.
However, under Czech law, cryptocurrencies do not generally fall within the definition of electronic money as defined by Act No. 370/2017 Coll., on Payment System, as amended, under which electronic money is a monetary value which (a) represents a claim against the person that issued it, (b) is stored electronically, (c) is issued against the receipt of funds for the purpose of executing payment transactions, and (d) is received by a person other than the person that issued it.
In most cases, cryptocurrencies do not meet the first definition requirement as they do not constitute a claim for a currency of a certain country towards this country's central bank, credit institutions or other payment systems providers. Thus, no license issued by the CNB is required to issue or to make transactions with cryptocurrencies. However, a license from the CNB is required if a digital token is linked to a fiat currency and represents the right of its holder to have the token exchanged for this fiat currency.
As regards other definitions (and the resulting regulation) used by the Czech laws, it is generally (though not unilaterally) agreed that cryptocurrencies fall within the definition of intangible assets contained in the Czech Civil Code but do not qualify as securities or book-entry securities as defined by the same law. Moreover, cryptocurrencies do not generally meet the requirements for a financial instrument under Act No. 256/2004 Coll., on Capital Market Business, as amended, as no right is incorporated into them. Therefore, the cryptocurrency trading business does not require a license from the CNB (the CNB cannot even issue such a license) and thus it is not under CNB's supervision. The same also applies, for example, to those doing business involving the exchange of cryptocurrencies for Czech crowns or any other legal currency or exchange of cryptocurrencies for goods and services. In any case, a trading license is required to conduct business in the area of cryptocurrencies. The license can be obtained upon simple notification of the Trade Licensing Office.
An amendment of the AML Act and Act No. 455/1991 Coll., the Trade Licensing Act, as amended, is currently being discussed. The amendment aims to give the State better control over those conducting business in the area of cryptocurrencies and, therefore, proposes to introduce a requirement for these businesses to obtain a special license for providing services in relation to virtual currencies. Such businesses will be listed in a special registry maintained by the Trade Licensing Office which will be accessible to the Czech Financial Analytical Office in order to enable it a more effective control in this area. The license will still be obtainable upon simple notification of the Trade Licensing Office. If the cryptocurrency firms fail to register their operations, they will face the possibility of a financial penalty of up to CZK 500,000 (approximately EUR 19,500).
The regulation of cryptocurrencies is still in its infancy and it remains to be seen whether the European Union will eventually decide to address this issue at an EU-level or whether it will leave it up to the Member States. However, it will be important for the possible upcoming regulation to respect the characteristics that the cryptocurrencies possess and offer to the public.
Martin Urban, Junior Lawyer, contributed to the writing of this article