Czech Regulators Step Smoothly on Oversight of Cryptocurrencies – POLITICAL

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PRAGUE – In the Czech Republic, a suspected scam is prompting regulators to take a hot new crypto product more seriously.

When a high-profile advertising campaign run by a company named Xixoio began promising huge returns to small investors last fall, some in the media and fintech world wondered if the claims were too good to be true. But the authorities were unable to do more than issue warnings.

There are “risks associated with capital appreciation offers through alternative investment products, which are sometimes supported by strong media presentation,” is the mild manner of a December Czech National Bank (NBC) advisory.

Virtual tokens “are not investment tools in the sense of financial regulation,” the alert continued. “Investments in them are therefore not subject to supervision by the Czech National Bank.”

Some critics say regulators are partly to blame because they have not been willing to take on the extra work of supervising digital assets. But compared to blockchain technology, such as Xixoio’s XIX Tokens, the biggest problem is that watchdogs have no effective authority because those assets are not defined as “securities”.

Blockchain is a decentralized ledger that records cryptocurrency transactions with “blocks” of information, which are nearly impossible to tamper with, making them very safe against external manipulation.

Maria Staszkiewicz, CEO of the Czech Fintech Association, is among those calling for stronger oversight. “These assets have now entered the mainstream, so they can’t just sit back and close their eyes,” he warned. He also claims that other EU countries, such as France or Germany, would probably have been tougher on a project like Xixoio.

At the same time, there is new momentum from Brussels to bring the cryptocurrency market more closely under the scrutiny of national and EU regulators. These efforts could provide Czech authorities with better tools to manage Xixoio and other potential cryptocurrency players behind the scenes.

Too good to be true?

For Richard Watzke, the former art and real estate investor who manages Xixoio, the company is a “bridge between cryptocurrency and traditional finance.” For now, the tokens he is selling represent nothing more than shares of his startup, but he promises that the capital raised will eventually be used to provide financing to SMEs. In the terms agreed by the investors, however, Xixoio has no obligation either to use the capital raised in any particular way or to pay any share of profits.

Xixoio began making a big splash last fall, plastering ads on TV stations and billboards that promised triple-digit returns. That campaign attracted a warning in November from the finance ministry, with little effect. Watzke then said in a volatile interview in December that Xixoio had already attracted over 2,000 customers. He also lashed out at the media for questioning his plan and boasted of his willingness to sue critics like Petr Borkovec, a lawyer who publicly labeled Xixoio a Ponzi scheme.

More eyebrows were raised this month when media DenikN reported that the management of Xixoio is linked to Russian-owned MoneyPolo, which is suspected by US authorities of moving dirty money via the now defunct cryptocurrency exchange BTC-e.

The authorities have not yet moved to shut down Xixoio. But as Jan Šovar, a Prague lawyer specializing in fintech sees, “we have to assume” that the CNB is paying more attention to the company given its control of the media.

The broader concern among critics is that Watzke is taking advantage of the blockchain loophole, which means that authorities don’t have the supervisory powers to stop him from making wild claims to potential investors.

“Right now, the Czech Republic is not built for the blockchain man,” joked a source close to the government.

But Prague may soon see stricter rules.

EU lawmakers are developing new investor safeguards and transparency rules for the cryptocurrency market, many of which escape existing standards for trading financial instruments. One vehicle is the Markets in Crypto-Assets, or MiCA, framework. Once it is in place by the end of the year, Czech lawmakers could then pass legislation that would give the CNB supervisory authority over a much wider range of digital assets by amending the Civil Code.

“Once new regulations are implemented, something that looks like a security asset and behaves like a security asset should be treated as such, regardless of how it was created,” says Staszkiewicz.

According to CNB spokesperson Petra Vodstrčilová, these regulations updated “they seem sufficient for the fulfillment of our mandate as financial supervisor” provided that national legislators follow suit. At the moment, however, he warned that “it is unrealistic to expect the financial supervisor to oversee all possible investments.”

The source close to the government agreed that the new regulations “will provide us with a framework on which local authorities can build.”

In search of certainty

SMEs are also tuning in to this debate, with many eager to see if Xixoio can provide a new source of finance while reducing financing costs. Some fear that more regulation will hinder innovation and crowd out entrepreneurs. “New and innovative projects in Czech fintech are already struggling to get licenses, with regulators pushing hard to justify themselves,” Šovar said.

But others hope that greater legal certainty by the end of the year, if it materializes, will help repair confidence in the governance of these assets and, more generally, support the development of the cryptocurrency market and attract institutional investors.

“Serious companies looking to use this technology to conduct real business are looking forward to clear rules and regulations,” said Staszkiewicz.

But not everyone seems so enthusiastic about the promise of more control. This could also include Watzke, who has now started reducing its stake in Xixoio, according to new data released in the UK, where the parent company is registered.

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