Czech regulators tread softly on crypto oversight – POLITICO

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

When a high-profile ad campaign 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 believed. true. But the authorities were powerless to do more than issue warnings.

There are “risks associated with capital appreciation offerings through alternative investment products, which are sometimes backed by strong media presentation,” an alert from the Czech National Bank (CNB) said mildly in December.

Virtual tokens “are not investment instruments within the meaning of financial regulation”, continues the alert. “Investments in these are therefore not subject to supervision by the Czech National Bank.”

Some critics say regulators are partly to blame because they haven’t been willing to take on the extra work of overseeing digital assets. But when it comes to blockchain technology, like Xixoio’s XIX Tokens, the biggest problem is that watchdogs have no effective authority because those assets aren’t 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 secure against outside manipulation.

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

At the same time, Brussels is giving further impetus to bring the crypto market more closely under the control of national and European regulators. These efforts could give Czech authorities better tools to manage Xixoio as well as other potential crypto players behind the scenes.

Too good to be true?

For Richard Watzke, the former art and real estate investor who operates Xixoio, the company is a “bridge between crypto and traditional finance.” For the moment, the tokens he is selling only represent shares in his startup, but he promises that the capital raised will eventually be used to finance SMEs. According to the terms agreed by the investors, however, Xixoio has no obligation to use the capital raised in any particular way or to pay a share of the profits.

Xixoio started causing a stir last fall, running ads on TV stations and billboards that promised triple-digit returns. This campaign prompted a warning in November from the Ministry of Finance, without much effect. Watzke then claimed in a volatile interview in December that Xixoio had already attracted more than 2,000 customers. He also hit out at the media for questioning his project and bragged about his willingness to sue critics like Petr Borkovec, a lawyer who publicly called Xixoio a Ponzi scheme.

More eyebrows were raised this month, when news outlet DenikN reported that Xixoio’s management was linked to Russian company MoneyPolo – which is suspected by US authorities of moving dirty money through the former exchange of BTC-e cryptocurrency.

Authorities have yet to do anything to shut down Xixoio. But as Jan Šovar, a fintech lawyer from Prague, sees, “we have to assume” that the CNB is paying more attention to the company given the intense media scrutiny.

The broader concern of critics is that Watzke is exploiting the blockchain loophole, which means authorities lack the oversight powers to stop him from making wild claims to would-be investors.

“At the moment, the Czech Republic is not made for the blockchain man,” joked a source close to the government.

But Prague could soon see stricter rules.

EU lawmakers are crafting new safeguards for investors and transparency rules for the crypto asset market, many of which fall outside existing standards for trading financial instruments. One vehicle is the Crypto-Asset Markets Framework, or MiCA. Once this 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 the new regulations are implemented, anything that looks like a security asset and behaves like a security asset should be treated as such, regardless of how it’s created,” Staszkiewicz says.

According to CNB spokeswoman Petra Vodstrčilová, these updated regulations “seem sufficient to fulfill our mandate as financial supervisor” provided national lawmakers follow suit. At present, however, she 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 give us a framework that local authorities can rely on”.

Search for certainty

SMBs are also tuned into this debate, with many keen to see if Xixoio can provide a new source of financing while lowering borrowing costs. Some fear that increased regulation will stifle innovation and crowd out entrepreneurs. “New and innovative projects in Czech fintech are already struggling to get licenses, with regulators pushing them to justify themselves,” Šovar said.

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

“Serious companies looking to use this technology to do real business are eagerly waiting for clear regulations and rules,” Staszkiewicz said.

But not everyone seems so committed to the promise of increased control. This could even include Watzke – who has now started to reduce his stake in Xixoio, according to new data published in the United Kingdom, where the parent company is registered.

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