Current trends in the Swedish crypto market – Commentary
Introduction
Response to increasing trade
The Future of Cryptocurrencies
Comment
Introduction
Over the past few years, cryptocurrency trading has increased in Sweden. The most common cryptocurrency is Bitcoin. Cryptocurrencies are often held for investment purposes, rather than for payment purposes. Therefore, the Swedish authorities find that “crypto-assets” is a more precise term than “cryptocurrency”. However, the crypto market is largely unregulated within the EU and in Sweden. Therefore, there are almost no restrictions when it comes to trading cryptocurrencies, and Sweden can be described as a “crypto-friendly nation”. Despite this, Swedish banks are restrictive in offering crypto-related services. In fact, there are almost no Swedish banks that offer crypto as an investment option.
Unlike traditional currency, such as Swedish kroner, cryptocurrencies are not issued by a national central bank. Instead, cryptocurrencies can be issued by anyone through a specific software. However, the most common way to trade cryptocurrency in Sweden is through crypto exchanges and brokers.
One of the few regulations that apply to cryptocurrencies in Sweden is the Currency Exchange and Other Financial Activities Act (CEFA Act), which implements EU Directive 2018/843. Under the CEFA Act, entities that intend to provide “other financial activities”, which include services relating 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 kroner or foreign currency;
- electronic money (e-money); or
- other cryptocurrencies.
Cryptocurrency management includes services to protect cryptographic keys on behalf of clients to hold, store and transfer cryptocurrencies.
The CEFA Act mainly aims to prevent money laundering and the financing of terrorism. Due to the anti-money laundering and anti-terrorist financing regulatory compliance requirements that come with the banking license, banks do not need to be registered. However, the SFSA expects that entities providing services related to the trading of cryptocurrencies will be phased out of the scope of the CEFA Act, due to the fact that such entities may be subject to an authorization requirement in the upcoming EU Regulation, the Market Crypto-Assets Regulation (MiCA).
Response to increasing trade
Some of the potential advantages of trading in cryptocurrencies are that the trade is anonymous, and the exchange is fast and can be associated with lower costs than trading in traditional assets. However, the SFSA considers trading in cryptocurrencies inappropriate for consumers and has warned financial market participants about trading and investing in these currencies. In addition to this recommendation from the SFSA, several other authorities and banks, including Sweden’s central bank (Riksbank), have pointed out the risks of cryptocurrency trading. Roughly speaking, these risks can be summarized in the following ways.
Firstly, there is a lack of regulation regarding cryptocurrencies in Sweden. The current regulation focuses mostly on compliance with anti-money laundering and anti-terrorist financing rules. As a result, unlike traditional currencies, cryptocurrencies lack consumer protection. For example, cryptocurrency is not covered by deposit insurance in the Deposit Insurance Act. However, it can be assessed whether cryptocurrencies have consumer protection through other regulations. For example, cryptocurrencies may be covered by the regulations on separation of funds. According to the Fund Accounting Act, the banks must allocate funds which they are obliged to account for on behalf of the customers. At the time the regulations were passed, the meaning of “funds” was money. According to the 80-year-old preparatory work, the regulation can apply analogously to exchangeable assets. (1) Such exchangeable assets can potentially be, for example, cryptocurrencies. However, due to the lack of recent guidance, this legal issue remains unclear.
In the absence of regulation, there is still no legal definition of cryptocurrency in Sweden. However, cryptocurrencies could potentially be defined as a negotiable security in the Markets in Financial Instruments Directive II (MiFID II), implemented through the Securities Markets Act. To be defined as a “transferable value”, cryptocurrency must be tradable and tradable on the capital market. This includes, among other things, the acquisition of legal rights upon registration under Swedish law. Registrations on a contractual basis do not usually meet this requirement. (2) If cryptocurrency is classified as a tradable 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. Furthermore, as an effect of the growing trade in cryptocurrencies, new products have been developed, such as tracker certificates. A tracking certificate is a financial instrument with an underlying crypto asset or assets. Since these financial instruments are based on the price of the underlying crypto-asset, MiFID II applies to it and enables indirect trading of cryptocurrencies on regulated markets.
Furthermore, the often anonymous nature of cryptocurrencies results in a lack of transparency and traceability. However, these properties 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 anyone to read. The transactions of Bitcoin are therefore traceable. However, the information about Bitcoin owners remains undisclosed, making it difficult for banks to operate crypto services while meeting the requirements of anti-money laundering and anti-terrorist financing regulations. Additionally, the price of cryptocurrencies is solely based on demand and lacks an underlying value, making them volatile. Therefore, it is difficult to reliably value cryptocurrencies, which poses a significant risk to customers who intend to invest in them.
Finally, issuing and trading multiple cryptocurrencies can hinder the transition to a sustainable financial system. Unlike traditional assets and as mentioned above, cryptocurrencies are not usually produced by a national central bank. Instead, cryptocurrencies like Bitcoin can be issued by anyone through a specific software. Bitcoins are issued when this specific, 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 process of issuing cryptocurrencies requires computing power on a large scale and is therefore energy intensive. However, new, less energy-intensive methods of mining cryptocurrencies have been developed. For example, some currencies, such as Ethereum, are issued using a so-called “proof-of-stake” method. The proof-of-stake method requires fewer resources and uses 99.95% less energy than the proof-of-work method.
The Future of Cryptocurrencies
With the increasing trade, cryptocurrencies will probably be more acceptable as an investment option. As a response to this, there is now a process towards a more regulated field of cryptocurrencies within the EU. However, according to the Riksbanken, the volatile nature of cryptocurrencies makes them unsuitable for use in payments. Instead, the Riksbank is currently investigating the possibility of issuing a digital central bank e-krone, as a supplement to the traditional Swedish krone.
In 2020, the European Commission presented MiCA, which is expected to enter into force in 2024. MiCA is expected, among other things, to impose an authorization requirement for legal entities that intend to:
- issue asset reference tokens or e-money tokens; or
- provide services regarding any cryptocurrency.
Furthermore, MiCA is expected to introduce an obligation for issuers of any cryptocurrency token to publish information about it in a so-called “white paper”. This white paper will provide customers with relevant information on the characteristics, functions and risks of the currency that customers can invest in. MiCA may also impose rules on reserve of assets and segregation of funds with respect to asset reference tokens, which is expected to further strengthen customer protection.
According to the SFSA, MiCA is expected to reduce some of the risks associated with cryptocurrencies. However, Finanstilsynet has emphasized that MiCA will not deal with all risk-related issues and maintains its warnings about investing in cryptocurrencies.
Comment
In the absence of regulation, there is a great deal of discretion when it comes to how cryptocurrencies are handled. This applies not only to entities that provide services regarding cryptocurrencies, but also to Swedish authorities. For example, in 2022, the Swedish Companies Register (SCRO) rejected a company’s application to create a new Swedish limited liability company on the grounds that Bitcoin could not be used as a contribution capital due to its lack of intrinsic value. However, following an appeal from the company to the administrative court, the court stated that it was not correct to refuse the registration on this basis. SCRO has appealed against this judgment.
The forecast is that MiCA will clarify the legal field for cryptocurrencies and solve some of the risks associated with this in Sweden. But even if MiCA is expected to impose rules to strengthen customer protection, the Norwegian Financial Supervisory Authority has emphasized that some challenges will remain. For example, certain cryptocurrencies will still have a volatile and speculative value, making them difficult to estimate. Furthermore, an interesting question is how the banks will react to MiCA. Until the risk is eliminated, or at least manageable, it is likely that Swedish banks will remain restrictive in offering services regarding cryptocurrencies.
For more information on this topic, please contact Andreas Becker or Lisa Antman at Wigge & Partners by phone (+46(0)72 062 60 86) or e-mail ([email protected] or [email protected]). Wigge & Partners’ website can be accessed at www.wiggepartners.se.
Endnotes
(1) SOU 1943:24, p. 41.
(2) Prop. 2006/07:115, p. 281.
