Czech regulators tread softly on crypto oversight – POLITICO

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

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

There are “risks associated with offers to raise capital through alternative investment products, sometimes backed up by a strong media offering,” as one Czech National Bank (CNB) alert in December meekly described it.

The alert continued that virtual tokens “are not investment tools in the sense of financial regulation.” Therefore, the investment in it is not subject to the supervision of the Czech National Bank.

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

Blockchain is a decentralized ledger that records cryptocurrency transactions using “blocks” of information, which are almost impossible to tamper – making them extremely secure against external manipulation.

Maria Staszkiewicz, CEO of the Czech Financial Technology Association, is among those calling for more robust oversight. “These assets are now entering the mainstream, so they can’t just sit back and close their eyes,” she warned. It also asserts that other EU countries, such as France or Germany, would have likely had more difficulty with a project like Xixoio.

At the same time, there is fresh momentum from Brussels to bring the cryptocurrency market under the control of national regulators and the European Union. These efforts could give the Czech authorities better tools to deal with Xixoio as well as other potential crypto players on the wings.

Too good to be true?

For Richard Watsk, the former tech and real estate investor who runs Xixoio, the company is a “bridge between cryptocurrency and traditional finance.” At the moment, the tokens he is selling are nothing more than shares in his startup, but he promises that the capital raised will eventually be used to provide financing to SMEs. Under the terms agreed upon by the investors, Xixoio is under no obligation to either use the capital raised in any particular way or pay any share of the profits.

Xixoio started to be a hit last fall, running ads across TV stations and billboards that promised triplex returns. That campaign delivered a warning in November from the Treasury, but to little effect. Then Watzke claimed in a choppy interview in December that Xixoio had already attracted more than 2,000 clients. He also blasted the media for questioning his project and boasted of his willingness to sue critics such as Peter Borkowitz, a lawyer who publicly called Xixoio a Ponzi scheme.

More eyebrows were raised this month, when media agency DenikN reported that the management of Xixoio is linked to Russian-owned MoneyPolo – which US authorities suspect of funneling dirty money via the now-defunct BTC-e cryptocurrency platform.

The authorities have not taken any step to shut down Xixoio. But as Jan Ovar, a Prague-based fintech lawyer, sees it, “we have to assume” that the NCB is paying more attention to the company due to media scrutiny.

The broader concern among critics is that Watzke is exploiting a blockchain vulnerability, which means the authorities lack oversight powers to prevent him from making wild claims to potential investors.

“At the moment, the Czech Republic has not been created for a blockchain man,” a source close to the government said sarcastically.

But Prague may see stricter rules soon.

Lawmakers in the European Union are working to develop new investor protection and transparency rules for the crypto-asset market, many of which are escaping existing standards for trading financial instruments. One means is the Markets in the Crypto Asset Action Framework, or MiCA. Once that takes effect by the end of the year, Czech lawmakers can then pass legislation that would give CNB oversight authority over a much broader range of digital assets by amending the Civil Code.

“Once the new regulations are implemented, something that looks like a safety asset and behaves like a security asset should be treated as such, no matter how it is created,” Staszkiewicz says.

According to CNB spokesperson Petra Vodstrčilová, these regulations have been updated “It appears sufficient to fulfill our mandate as a financial supervisor” provided that national legislators follow suit. For now, however, she cautioned, “it is not realistic to expect the financial supervisor to supervise all possible investments.”

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

Searching for certainty

Small and medium businesses are also turning to this debate, with many keen to see if Xixoio can provide a new source of financing while lowering borrowing costs. Some worry that increased regulation will hinder innovation and crowd out entrepreneurs. “New and innovative Czech fintech projects are already struggling to win licenses, as regulators are pushing them hard to justify their presence,” Ovar said.

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

Staszkiewicz emphasized that “serious companies seeking to use this technology to conduct real business look to have clear regulations and rules.”

But not everyone seems too keen on the promise of increased scrutiny. That could even include Watzke – who has now begun reducing his stake in Xixoio, according to new data released in the UK, where the parent company is registered.

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