An extract from The Virtual Currency Regulation Review, 3rd Edition
Introduction to the legal and regulatory framework
The Danish financial sector is regulated under numerous acts. Banks, investment firms, management companies, insurance companies, pension funds and mortgage credit institutions are mainly regulated by the Danish Financial Business Act (FBA). Furthermore, the following, inter alia, all have their own separate regulations: alternative investment fund managers, investment advisers, payment service providers, issuers of electronic money and consumer credit businesses.
Danish financial regulation is influenced by both national and international regulatory trends, and Denmark implements most of the directives and guidelines of the European Union into its financial regulations. Certain regulations drafted and adopted by the European Union are also directly applicable in Denmark.
The Danish Financial Supervisory Authority (FSA) is the main supervisory authority in Denmark, although Nationalbanken, the national bank, also has an oversight role.
The European Banking Authority (EBA) published a warning on virtual currencies on 12 December 2013 (the Warning) that defines virtual currencies as 'a form of unregulated digital money that is not issued or guaranteed by a central bank and that can act as means of payment'.2 The FSA did not materially change the EBA's definition of virtual currencies when it published the Warning on 17 December 2013 or when it revised it on 27 August 2015. On this basis, it is reasonable to assume that this is the definition that has been applied by the FSA until now. However, on 10 January 2020, an amendment to the Danish Act on Measures to Prevent Money Laundering and Financing of Terrorism (the AML Act) came into effect, which defines a virtual currency as 'a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically'. The definition of virtual currency was inserted into the AML Act as part of the Danish implementation of the Fifth Anti-Money Laundering Directive (AMLD V; see Section IV).3 Consequently, the definition of virtual currencies provided by the AMLD V is used in this chapter. The definition must be read in conjunction with the other financial regulations currently in force in Denmark, as it is supplementary to any assets or activities defined in these regulations.
Securities and investment laws
As mentioned in Section I, Danish financial regulation is, to a large extent, influenced by EU law. The Danish securities and investment laws are regulated both by the rules for securities and offerings thereof, and by rules for providing investment services related to securities, which in Denmark are defined overall as financial instruments.
Prospectus requirements are relevant when offering securities to the public or having securities admitted to trading on a trading venue. Compliance with the rules on prospectus requirements must be ensured before offering securities to the public.
The Danish rules on offering securities to the public or having securities admitted to trading are mainly regulated in the Prospectus Regulation,4 which applies directly in Denmark, and certain aspects of the Markets in Financial Instruments Directive II (MiFID II),5 the Market Abuse Regulation (MAR)6 and the Danish Capital Markets Act (CMA).
Overall, the rules in the Prospectus Regulation apply to participants and their conduct on the capital markets.
Although market abuse is regulated in the MAR, we have not reviewed virtual currencies in terms of the MAR, as it is beyond the scope of this chapter. However, this seems to be becoming increasingly relevant, as significant financial institutions have listed instruments that derive their value from virtual currencies.
The FBA is the main regulation regarding investment services in Denmark, and it implements, inter alia, parts of MiFID II and the Capital Requirements Directive IV.7 Furthermore, the area of investment services is also dependent on EU legislation under the Markets in Financial Instruments Regulation (MiFIR).8 The FBA applies to financial companies such as credit institutions, investment firms, management companies, pensions funds and insurance companies. It thereby regulates a significant amount of services provided; however, in terms of investment law, the defined services in question are investment services as defined in Annex 4 of the FBA, which is similar to Annex I, Sections A and B, MiFID II. This includes, inter alia, the following investment services:
- the reception and transmission of orders in relation to one or more financial instruments;
- the execution of orders on behalf of clients;
- dealing on own account;
- portfolio management; and
- investment advice.
Financial instruments are defined directly in the FBA and cited again in the CMA. Both Acts use the same terminology for financial instruments, which include:
- negotiable securities (except for payment instruments) that can be traded on the capital market, including:
- shares in companies and other securities equivalent to shares in companies, partnerships and other businesses, and share certificates;
- bonds and other debt instruments, including certificates for such securities; and
- any other securities of which securities as mentioned above can be acquired or sold, or give rise to a cash settlement the amount of which is fixed with securities, currencies, interest rates or returns, commodities indexes or other indexes, or targets as reference;
- units in collective investment schemes;
- credit derivatives; and
- financial contracts for difference.
Similar to the definition of investment services, the definition of financial instruments under Danish law is similar to that provided by Annex I, Section C in MiFID II.
A virtual currency, in comparison to the above definition, is not a financial instrument, but rather a negotiable security, and will therefore not per se be subject to the above-described securities regulation, since virtual currencies are not included in the list of financial instruments.
Under Danish law, there is no strict requirement regarding structure or legal identity before an asset may be defined as a financial instrument. It is therefore possible that a virtual currency can be defined as a financial instrument whereby the issuer or the virtual currency itself, or both (depending on the set-up), will be subject to regulatory requirements.
The FSA has not yet published any guidance as to when a virtual currency should fall within the definition of financial instruments. However, other financial supervisory authorities have done so. For example, the Swiss Financial Market Supervisory Authority (FINMA) published guidelines on 16 February 2018 regarding how it intends to apply financial market legislation when handling enquiries from initial coin offering (ICO) organisers. FINMA mainly focuses on the economic function and purpose of virtual currencies. The most essential point in FINMA's analysis is the underlying purpose of tokens, and whether they are tradable or transferable.9
In addition, the UK Financial Conduct Authority (FCA) has stated that:
Cryptocurrency derivatives are, however, capable of being financial instruments under the Markets in Financial Instruments Directive II (MIFID II), although we do not consider cryptocurrencies to be currencies or commodities for regulatory purposes under MiFID II. Firms conducting regulated activities in cryptocurrency derivatives must, therefore, comply with all applicable rules.10
Accordingly, it seems that, like FINMA, the FCA also focuses on the underlying purpose.
We believe that the financial instrument test to be performed under Danish law must be similar to that of FINMA and the FCA.ii Prospectus requirements
The CMA applies to capital market participants and their conduct on the markets. As such, it regulates different aspects of the Danish capital markets.
The CMA and the Prospectus Regulation is drafted so that all requests for the admission of securities for trading on a regulated market and all public offerings of negotiable securities in the European Union or European Economic Area are subject to the prospectus requirement.
A prospectus is basically a document describing the major features and attractions of a particular asset or issuer. A prospectus must be prepared in accordance with the regulations applicable to a particular area.
If a virtual currency falls under the definition of a financial instrument, an offering to the public would be subject to the prospectus requirement. If so, it would have to be assessed, on a case-by-case basis, whether an exemption from the prospectus requirement may be relied upon.Prospectus requirement exemptions for offerings to the public
To our knowledge, there are no virtual currencies listed on regulated markets, therefore only offerings to the public are discussed here.
The most relevant exemptions from the prospectus requirement when offering negotiable securities to the public are as follows:
- offerings with a value of less than €8 million measured over 12 months, unless a certificate is needed to provide the offering in other EU or EEA Member States; and
- securities for trading issued by a collective investment scheme, however not closed-ended.
An offer to the public of negotiable securities can also be exempted based on the type of addressees of the offer, the amount of addressees, the denomination of units offered and the minimum considerations per investors.
Provided that a particular ICO is not subject to the prospectus requirements, the relationship between the issuer and the sponsor in the ICO will, under Danish law (if applicable), be regulated by (1) the subscription agreement between the issuer and the sponsor as governed by the Danish laws on obligations and contracts and (2) by the overarching principle of the seller's (the issuer's) duty to disclose material facts to the purchaser (the sponsor) (see Section VII).Investment services
If a virtual currency falls within the definition of a financial instrument, conducting any of the investment services listed in the FBA will be subject to Danish regulations, the FBA and other EU regulations. While a discussion on the consequences of this is outside the scope of this chapter, it must be noted that this may influence the distribution of the virtual currencies, the pricing model with regards to both the issuance and the administration (if any) of the virtual currency, and the disclosure requirements.
Banking and money transmission
The business of banking and money transmission is regulated in the FBA regarding credit institutions, and in the Danish Act on Payments (PA) regarding payment service providers and issuers of electronic money.i Banking
According to the FBA, an entity carrying out activities comprising receiving from the public deposits or other funds to be repaid, as well as activities comprising granting loans on their own account but not on the basis of issuing mortgage-credit bonds, must be licensed as a credit institution.
The FSA issued guidelines on 4 July 2012 according to which the following four requirements discussed must be satisfied for an activity to trigger the licence requirement under Section 7 of the FBA:
- the entity must receive deposits or other funds to be repaid;
- the entity must receive such funds from the public;
- the entity must grant loans for its own account; and
- if the entity only receives other funds to be repaid, this must be a significant part of that entity's business operation.11
We have not yet seen any issuers of virtual currencies that would qualify as a credit institution in accordance with the above conditions, which is an assessment that must be made at the level of the issuer. For the issuer to fulfil the above conditions, its financing must be based partly on deposits or other funds to be repaid.
An issuer of virtual currencies will likely be using virtual currencies for financing. We have not seen virtual currencies being used in a way whereby there was an immediate request for repayment. It is therefore our assessment that the purchase of virtual currencies is unlikely to be deemed as deposits or other funds to be repaid, owing to the way virtual currencies are traded. A purchaser's possibility of redeeming the purchase amount relies in most cases on the liquidity of the virtual currency (i.e., supply and demand). In contrast, the blockchain technology seems highly relevant for the market of credit institutions. However, as the technology continues developing, we may see advances in the market of virtual currencies that change aspects or the use of virtual currencies whereby they may be seen as deposits.
If provided to non-consumers, lending not based on deposits is considered a non-regulated service under Danish law, although the issuer will have to be registered in accordance with the AML Act. Lending not based on deposits will, in some cases, require a licence, if loans are provided to consumers. Again, the focus must be on the issuer.ii Payment services
Under the PA, the definition of money remittance is as a 'payment service where funds are received from a payer for the sole purpose of transferring a corresponding amount to a payee or to another payment service provider acting on behalf of the payee, without any payment accounts being created in the name of the payer or the payee'.
As virtual currencies are not defined as currencies as such, transferring them cannot be defined as a money remittance service. It may be possible to create a money remittance service based on blockchain technology and virtual currencies, which means a person using virtual currencies or blockchain technology, or both, to transfer money on behalf of other persons must be aware of whether the service will fulfil the definition of at least money remittance. The focus must therefore be on the issuer and which services it provides.
Furthermore, under the PA electronic money is defined as an electronically or magnetically stored monetary value representing a claim on the issuer that is issued on receipt of funds for the purpose of making payment transactions, and that is accepted by people other than the issuer of the electronic money.
Before virtual currencies can become electronic money, it is required that the value was electronically or magnetically stored, and represented a claim against the issuer. It is rare for both of these requirements to be fulfilled by virtual currencies. Blockchain technology, however, seems rather purposeful for the issuance and use of electronic money.
Furthermore, Denmark has chosen to specifically regulate instruments that were formerly known as payments surrogates. These instruments are paid-for electronic services that can be used to (1) acquire goods and services or (2) make payment transactions with the payer's consent to carry out the transaction by telecommunication where the payment goes to the operator who manages the communication network, and who only operates as an intermediary between the user of the payment service and the supplier of goods and services, unless the service constitutes a payment service.
We believe virtual currencies will not fall under the definition of the instruments formerly known as payment surrogates. However, as the technology progresses there may be certain virtual currencies or uses thereof that would fall under this part of the regulations.