Navigating Slovakia’s Cryptoscape: A VASP Density Anomaly

Slovakia’s cryptocurrency puzzle: A nation that hosts almost 10 times more Virtual Asset Service Providers (VASPs) than France, while having less than a tenth of the population.

The use of cryptocurrency has rapidly expanded across the EU, including jurisdictions that have taken a traditionally more conservative approach to their financial markets. Slovakia is one of those jurisdictions that continues to consider crypto-assets to fall outside the boundaries of financial markets. As a result, the National Bank of Slovakia (NBS) currently does not supervise the virtual asset service providers (VASPs) within its jurisdiction. We review the regulatory structures and possible risks, including fraud, financial sanctions and anti-money laundering.

NBS has a mandate to supervise the entire financial market, including banking, capital markets, insurance and pension savings. Across the EU, most member states have divided supervisory responsibilities between two supervisory agencies – one overseeing the banks and one overseeing the rest of the financial market, as different regulatory approaches are required. In the case of Slovakia, the burden of monitoring the entire financial market rests on the NBS’s shoulders. The entire financial market, with one exception, completely ignores the oversight of crypto by the Financial Markets Authority.

“Robust monitoring 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 Europol’s Cybercrime Centre

This lack of oversight has led to an intriguing density anomaly of crypto companies, Slovakia hosts over 550 virtual asset service providers (VASPs). These VASPs include both cryptocurrency exchanges and virtual wallet providers. The large number of VASPs suggests that Slovakia is the leading crypto jurisdiction in Europe with a thriving crypto industry. Still, it is possibly very far from reality as to why there are so many VASPs. The figure is astronomical, as by comparison, in France, according to the French market authority, there are currently 71 registered VASPs. In Denmark, which is a country similar in size to Slovakia, and with an extremely active fintech and crypto environment, there are only 26 VASPs.

“Slovakia’s regulatory oversight of the crypto landscape feels like a version of the EU’s Wild West,” says Dr. Alexandra Andhov, an associate professor of law at the University of Copenhagen, who previously practiced law in Slovakia. “The lack of apparent regulatory oversight and the large number of exchanges and wallet providers operating under a registration issued by a trade licensing office could create a breeding ground for criminal activity, including circumvention of the sanctions against Russia.”

When reviewing the regulations for Slovakia, various elements can be seen as potentially worrying. Firstly, no extensive licensing is required for these businesses to operate, just meeting the age requirement of 18, having a clear criminal record and completing general upper secondary education or vocational upper secondary education. Then, on payment of a small fee, a VASP is registered with the Trade Licensing Office and can start operating.

This has raised concerns among industry experts and stakeholders, who argue that this lax approach to regulation opens the door to criminal activity. The Trade Licensing Office only registers the VASPs (automatically). There is no actual assessment mechanism for the individuals involved in VASPs, their experience or understanding of operating VASPs, which is currently common practice in EU Member States. Once these devices are registered, they are free to operate. There is no subsequent supervision of the general business activity of VASPs. According to the NBS, the VASPs are not considered part of the financial market and thus fall outside their competence and supervision. The fact that there is no competent body to supervise the activities of VASPs poses a significant problem, both in relation to consumer protection and financial market stability.

An additional challenge is the disjointed nature of AML mechanisms. According to the Anti-Money Laundering Act No. 297/2008, it is the Financial Intelligence Unit (FIU). The FIU in Slovakia acts as a central agency dedicated to detecting and combating money laundering and terrorist financing activities.

By collecting, analyzing and sharing financial intelligence with relevant authorities, the Financial Intelligence Unit (FIU) maintains the integrity of Slovakia’s financial system, protecting it from illegal activities and criminal exploitation. Positioned within the police force, the FIU operates under the remit of the Ministry of the Interior and acts as the sole unit overseeing VASPs in terms of anti-money laundering (AML) compliance. However, it is important to note that FIUs are primarily designed to process and interpret incoming data, rather than act as regulators or enforcement agencies. As a more reactive institution, the FIU concentrates on investigating and enforcing Slovak AML laws, but cannot provide significant resources to support obliged entities.

“When considering 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 rectified if Slovakia wants to improve the general understanding of business entities’ AML obligations. This in itself should be rectified if Slovakia wants to improve the general understanding of business entities’ AML obligations.

Another element that contributes to the fragmentation of AML supervision is the NBS’s control over other providers of financial services.

When it comes to AML supervision of other financial institutions, NBS has the supervisory authority. This ultimately divides the AML supervision and opens the door for various criminal activities that will happen on the doorstep of the competence of these two agencies.

This arrangement means that Slovakia, in particular its Ministry of Finance and the National Bank of Slovakia (NBS), cannot see Virtual Asset Service Providers (VASPs) as financial intermediaries. Consequently, there may be a significant underestimation of the potential risk and exposure to the financial market. Across the EU, regulators have warned to observe virtual assets, with financial regulators typically overseeing VASPs. In Slovakia’s case, however, the NBS maintains that it has no obligations towards crypto service providers, even though according to Act No. 747/2004 the institution is responsible for financial market supervision, including macro supervision – which aims to ensure the stability of the entire financial system – and financial consumer protection.

In a cordial exchange on social media, the National Bank of Slovakia clarified that while it does not currently supervise crypto asset service providers, there are existing regulations governing their operations. Businesses engaged in virtual currency exchanges and custodial wallet services are required to register with the Trade Licensing Office and comply with the country’s anti-money laundering (AML) laws.

The bank highlighted the variation in the number of exchanges, noting that some providers exclusively offer wallet services, others are foreign entities with limited Slovak activity, and some do not offer crypto-related services to the public.

Despite these explanations, critics argue that neither the NBS nor the Trade Licensing Office possess the necessary expertise to navigate the intricacies of the crypto market, leaving the rationale behind this division of responsibilities an open question for diplomatic inquiry.

Slovakian lawyer and AML and compliance specialist Lucie Schweizer states, “It is worrying to see how easy it is to set up a crypto-related business in Slovakia without proper oversight. This not only poses a risk to investors, but also damages the reputation of the Slovak AML system.”

The application documents to register a VASP in Slovakia available here can be seen as easy as applying to register an imported car or a foundation in certain countries.

“Although platforms must comply with AML/CTF regulations, a confidential review and dialogue with VASP representatives revealed that out of 550 active companies in Slovakia, only a handful have been audited annually for the past three years. The limited supervision of these high-risk groups of companies suggests inadequate oversight and room for improvement.” – Nicoll Coralius, AML and cryptocurrency expert

In the fast-paced world of digital assets, it is important for stakeholders to exercise foresight and vigilance to mitigate unexpected challenges, such as money laundering or sanctions evasion. As the regulation of Markets in Crypto-Assets (MiCA) has been approved, expectations are high that the National Bank of Slovakia (NBS) and other relevant authorities will take a more proactive stance in understanding and regulating the burgeoning crypto market.

By allowing high-risk VASPs to register through a trade licensing office that has experience in unrelated fields with this application. In addition, scarce resources supply, auditing only a small number of companies annually, even though they handle a VASP volume 10 times that of France with a population of less than a tenth. This approach undeniably helps maintain the pinnacle of regulatory standards and excellence, don’t you agree?

Editing: Grace Marshall

Performed legal review: Dr. Alexandra Andhov

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