Slovakia’s Cryptocurrency Puzzle: A nation hosting almost 10 times more Virtual Asset Service Providers than France, while having less then one-tenth of its population.
The adoption of cryptocurrency has rapidly expanded across the entire EU, including jurisdictions that have applied a traditionally more conservative approach towards their financial markets. Slovakia is one of those jurisdictions that continue to consider crypto assets as falling outside the borders of the financial market. As a result, the National Bank of Slovakia currently does not carry out any oversight over VASPs within its jurisdiction. We review the regulatory structures and possible risks including fraud, economic sanctions, and anti-money laundering.
The NBS is mandated to supervise the entire financial market, including banking, capital market, insurance and pension savings sectors. Across the EU, most Member States have divided the supervision obligations between two supervisory agencies – one that supervises the banks and one that supervises the rest of the financial market, as different regulatory approaches are necessary. In the case of Slovakia, the burden to oversee the entire financial market lies on the shoulders of the NBS. The entire financial market, with one exception, completely disregards the oversight over crypto from its financial market supervision.
“Robust digital asset oversight is vital for the growth of the market, 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 supervision has led to an intriguing density anomaly of Crypto Companies, Slovakia hosts over 550 VASPs. These VASPs include both cryptocurrency exchanges and virtual wallet providers. The sheer number of VASPs would suggest that Slovakia is the leading crypto jurisdiction in Europe with a booming crypto industry. Yet, it is possibly very far from the reality of why there are so many VASPs. The number is astronomic, as for comparison, in France, according to the French Market Authority, there are currently 69 registered VASPs. In Denmark, which is size-wise a similar country to Slovakia, and with an extremely active fintech and crypto environment, there are only 26 VASPs.
“Slovakia’s crypto landscape regulatory oversight 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 practised law in Slovakia. “The lack of apparent regulatory oversight and the sheer number of exchanges and wallet providers operating under a registration issued by a Trade Licensing Office might lead to a breeding ground for criminal activity, including circumventing the sanctions against Russia.”
When reviewing the regulatory framework of Slovakia, various elements might be seen as potentially concerning. First, no comprehensive licensing is required for these businesses to operate, merely meeting the age requirement of 18 years, having a clear criminal record, and finishing general secondary education or vocational secondary education. Subsequently, upon 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 leaves the door open for criminal activity. The Trade Licensing Office only (automatically) registers the VASPs. There is no actual review mechanism of the individuals nvolved in VASPs, their experience or understanding of operating VASPs, which is currently a common practice across the EU Member States. Once these entities are registered, they are free to operate. There is no subsequent oversight over the general business activities of VASPs. According to the NBS, the VASPs are not considered a part of the financial market and thus fall outside of their competence and supervision. The fact that there is no competent agency that would supervise the activities of VASPs constitutes a significant issue, both in connection with 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 serves as a pivotal agency dedicated to detecting and combating money laundering and terrorist financing activities.
By collecting, analysing, and sharing financial intelligence with pertinent authorities, the Financial Intelligence Unit maintains the integrity of Slovakia’s financial system, shielding it from illicit activities and criminal exploitation. Positioned within the police force, the FIU operates under the Ministry of Interior’s purview and serves as the sole entity overseeing VASPs in terms of Anti-Money Laundering compliance. However, it is essential to note that FIUs are primarily designed to process and interpret incoming data, rather than function as regulators or enforcement agencies. As a more reactive institution, the FIU concentrates on investigating and enforcing Slovak AML laws but may not offer significant resources to support obligated entities.
“When considering the crypto asset ecosystem, fragmented regulation, poor coordination and lack of data sharing can hinder timely action by the authorities to address risks like 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 remedied if Slovakia wishes to improve the general understanding of AML obligations of business entities. 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 oversight of other financial institutions, it is the NBS that has the supervisory authority. This ultimately divides the AML oversight and opens the door for various criminal activities that will occur on the doorstep of the competence of these two agencies.
This arrangement implies that Slovakia, particularly its Ministry of Finance and the National Bank of Slovakia, may not view VASPs as financial intermediaries. Consequently, there could be a significant underestimation of the potential risk and exposure to the financial market. Across the European Union, regulators have been cautioning to observe virtual assets, with financial supervisory authorities typically overseeing VASPs. However, in Slovakia’s case, the NBS maintains that it holds no obligations towards crypto service providers, even though, as per Act no. 747/2004, the institution is responsible for financial market supervision, including macro-prudential 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, although it does not currently supervise crypto-asset service providers, there are existing regulations that govern their operations. Businesses engaged in virtual currency exchanges and custodian wallet services are required to register with the Trade Licensing Office and comply with the nation’s AML laws.
The bank highlighted the variability in the number of exchanges, noting that some providers solely offer wallet services, others are foreign entities with limited Slovakian activity, and some do not provide any crypto-related services to the public.
Despite these explanations, critics contend that neither the NBS nor the Trade Licensing Office possesses the necessary expertise to navigate the intricacies of the crypto market, leaving the rationale behind this allocation of responsibility an open question for diplomatic inquiry.
Slovakian attorney and AML and compliance specialist Lucie Schweizer states, “It’s concerning to see how easy it is to establish a crypto-related business in Slovakia without proper oversight. This not only poses a risk to investors but also potentially damages the reputation of the Slovakian AML system”
The application docs to register a VASP in Slovakia which are available here could be viewed as simple as applying to register an imported car or a foundation in certain countries.
“Although platforms must adhere to 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 over the past three years. The limited supervision of these high-risk companies suggests inadequate oversight and room for improvement.” – Nicoll Corallius, AML & Cryptocurrency expert
In the fast-paced realm of digital assets, it is imperative for stakeholders to exercise foresight and vigilance to mitigate unexpected challenges, such as money laundering or sanctions evasion. As the Markets in Crypto-Assets (MiCA) regulation has been approved, expectations are high for the National Bank of Slovakia (NBS) and other pertinent authorities to adopt a more proactive stance in comprehending and regulating the burgeoning crypto market.
By allowing high-risk VASPs to enroll through a Trade Licensing Office experienced in unrelated fields with this application. Additionally providing scarce resources, and auditing only a small numbers of companies annually, even though handling a VASP volume 10 times larger than France with a population less than one-tenth. This approach undeniably helps maintain the pinnacle of regulatory standards and excellence, wouldn’t you concur?
Editing: Grace Marshall
Performed legal review: Dr. Alexandra Andhov
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