An extract from The Virtual Currency Regulation Review, 5th Edition
Introduction to the legal and regulatory framework
Cryptoassets have benefited from a context that led to a global phenomenon, as the main core functionalities of a blockchain – immutability and decentralisation – enhanced transactions without borders and institutional approvals. The legal regime of cryptocurrencies is not yet clarified. In Romania, as in many EU jurisdictions, cryptocurrencies are not considered legal tender, nor electronic money, but rather digital assets bearing a limited role as currency or having a utility role in a determined cooperative system. They are often referred to as alternative payment instruments agreed between parties when concluding a pecuniary transaction.
This chapter aims to (1) describe the legal framework in Romania in anticipation of the accelerated crypto development in Romania and the European Union; and (2) provide clarity on potential operational and legal risks in the absence of guidance from relevant national authorities. Nevertheless, the long-term absence of a dedicated regulatory framework in Romania has not necessarily been a drawback for the entrepreneurs running companies that deal with cryptocurrencies, including crypto-exchanges, crypto ATMs and crypto-wallets. Initial coin offerings (ICOs) and initial exchange offers (IEO) led by Romanian teams have been coordinated in various friendly jurisdictions, other than Romania, where there has been more clarity on the legal liability. As a general view, Romania boasts many strong attributes in relation to crypto-adoption namely:
- among consumers, Romanians have the highest positive attitude towards the use of cryptocurrencies (44 per cent), followed by Poland and Spain;2
- Romania ranks 33th worldwide in a crypto-readiness index with two notable mentions: it ranks first globally for the annual increase in Google searches of ‘crypto’ and also ranks as one of the top 10 countries for the number of reported crypto ATMs;3
- Romania’s major cities are growing as top IT hubs in Europe, Romanian coders being well respected in the fintech and blockchain or crypto space. As more coders join projects in the blockchain or crypto space, the crypto community grows;
- in this context, various projects are being developed:
- there are a couple of local crypto-exchanges, national leading payment processors who are bridging the gap between electronic traditional payments and cryptocurrency payments;
- a layer 1 original blockchain – Elrond (among the fastest transfer speed that exists) and their mobile application Maiar; and
- various decentralised applications (Dapps) who are creating new ecosystems (such as for freelancing decentralised marketplaces, crypto trading bots), NFT online marketplaces, cryptoasset managers, as well as blockchain applications in the supply-chain sector; and
- the Romanian government uses blockchain in national elections as an underlying infrastructure.4
Securities and investment laws
i Financial market regulators
The growing popularity of cryptocurrencies has prompted increased regulatory scrutiny. In the European Union, cryptocurrencies are currently mostly unregulated and Romania is no exception when it comes to specific cryptocurrency regulations. In Romania, there are no specific securities regulations with respect to virtual currencies or their offering. The global financial market is regulated by the Financial Supervisory Authority (ASF)5 and the National Bank of Romania (BNR).6 ASF and BNR are in charge of supervising and monitoring banks and financial services companies operating in Romania. ASF protects the interests of actors in the financial markets, and is responsible for supervising financial products, the information published by companies and the financial service providers; whereas BNR is responsible for overseeing individual financial institutions (e.g., credit institutions, investment firms, payment institutions, non-banking financial institutions and electronic money institutions) and the proper functioning of the financial system as a whole. ASF relies entirely on the guidelines issued by the European Securities and Markets Authority (ESMA) with respect to the risk of initial coin offerings.
ASF does not offer any particular rules pertaining to the prospectus, transparency, market abuse and markets in financial instruments law but rather tacitly adopts EU law, including the Prospectus Directive, the European Union Markets in Financial Instruments Directive (MiFID II) and the Alternative Investment Fund Managers Directive. ASF seems to apply the EU principles of transferable security and financial instruments as defined in MiFID II. As a consequence, depending on their qualities, virtual currencies could be classified as transferable securities necessitating the publication of a prospectus prior to being offered to the public. According to MiFID II, a decentralised cryptocurrency will not be a transferable security unlike a security token that is similar to a share or bond. ESMA recognises that the virtual currencies regulatory framework is not yet finalised and there is significant disagreement among various regulators in the European Union and EU Member States (which all apply substantially the same EU financial law) regarding the qualification of certain token types: for example, depending on country and regulator, stablecoins may be classified as financial instruments, transferable securities, derivatives, collective investment schemes, units of account, e-money or a combination of the above.7
ii Prospectus Regulation
The Prospectus Directive (PD)8 requires that adequate information is provided when seeking to raise funds from investors in the European Union. Before an ICO, the issuer must publish a prospectus in which it clearly outlines all information necessary for an investor to be able to evaluate the potential investment. The information must be presented in a clear, concise and intelligent manner. The PD does not specify who has the responsibility to prepare the prospectus, but requests that the party responsible for information (being at least the issuer, the offeror, the party requesting admission to trading or guarantor) is mentioned in the prospectus. Depending on the structure of the ICO, coins or tokens may fall within the definition of a transferable guarantee and could therefore require the publication of a prospectus, which will be submitted for approval by ASF.
iii Alternative Investment Funds Managers Directive
ASF has integrated the European Alternative Investment Fund Managers Directive (AIFMD), which lays down the rules for the authorisation, operation and permanent transparency of alternative investment managers (AIFM) that manage or market alternative investment funds (AIF), or both, in the European Union. Depending on its structure, an ICO scheme could be qualified as an AIF, insofar as it is used to raise capital from a number of investors in order to invest in accordance with a defined investment policy. The companies involved in the ICO must therefore comply with the AIFMD rules, in particular the rules relating to capital, operations and organisation and transparency requirements.
iv The Regulation on pilot DLT market infrastructure
On 2 June 2022, the Pilot DLT Market Infrastructure Regulation (PDMIR) was adopted. It is the first part of the Digital Finance Strategy Package, which also includes MICA and other pieces of legislation completing the puzzle for the finance of tomorrow. It is expected to enter into force in March 2023.
The PDMIR is relevant for new crypto platforms that may wish to change their business model (registering to become a multilateral trading facility (MTF)). It is the first EU-wide sandbox of its type. The sandbox is aimed at allowing capital markets supervisors to gain further knowledge on the use of DLTs into capital markets infrastructure while allowing the sandbox beneficiaries to develop their products or services directly in the markets they cover. However, it is expected that traditional players in this space may seize the opportunities that DLT provides to improve efficiencies of listing securities with the help of blockchain.
The PDMIR will be applicable within the MIFIDII framework for financial instruments, as it will mainly apply to shares and public bonds (sovereign bonds are not allowed), with specific thresholds:
- issuer of DLT-based shares market capitalisation of less than €200 million; and
- bonds of up to €500 million per issuer.
This might bring the following policy considerations for Romanian rule-makers and opportunities for the Romanian capital markets and traditional or new Romanian or European financial instruments issuers and new crypto players, especially in the STO space:
- the virtualisation and dematerialisation of shares and bonds – whereby the proof of shareholding and bondholding could be demonstrated by the ownership of such financial instruments; and
- the Central Depositary and other multilateral trading facilities would need to adapt, as it is expected that EU-wide market infrastructure providers will be coming to Romania to claim a good share of the market based on a EU-wide financial passport.
STOs could become the norm in the not-so-distant future, should the enabling infrastructure, market abuse regulations, AML/KYC and consumer protection norms be put in place and no additional red tape brought forward by the EC’s new Digital Finance Strategy Package.