Requirements for crypto-asset issuers and service providers
In Latvia, there is no specific national framework for obtaining authorisation for crypto-asset transactions. Depending on the business model, the possibilities for using crypto-assets and classification, issuers and/or service providers are subject to the legislation existing in Latvia, which determines that the issuers and service providers are subject to certain financial sector regulation and requirements for the licensing process.
Where, within the framework of the initial coin offering (ICO), investment-type virtual assets are issued conferring the right to participate in the profit-sharing, financial benefit or management of the company.
Investment-type virtual assets (issued tokens) may be qualified and classified as financial instruments within the meaning of the Financial Instrument Market Law (FIML) (transferable securities — capital, debt, other securities or financial derivatives).
The initial offer of such assets, equivalent to transferable securities, by an ICO organiser is entitled to be carried out only through an investment firm or a credit institution in accordance with the requirements of FIML, except in cases where all of the following provisions are all satisfied at the same time:
- the issuer meets the characteristics of a small or medium-sized business;
- the total estimated payment for transferable securities within 36 months shall not exceed EUR 3 000 000;
- the issuer shall make no more than two offers to the public within 36 months;
an offer expressed in relation to the equity or debt securities.
If the issuer intends to raise funds where the total consideration in the European Union calculated over 12 months is:
- up to EUR 1 000 000, then the issuer shall not inform Latvijas Banka;
- from EUR 1 000 000 to EUR 8 000 000 000, then the issuer must prepare and publish an offer document in accordance with the provisions of the Financial and Capital Market Commission's Regulations No 49 of 21.04.2020;
- above EUR 8 000 000, then the issuer must prepare an issuance prospectus referred to in Regulation (EU) No 2017/1129 of the European Parliament and of the Council of 14.06.2017 and submit it to Latvijas Banka for authorisation.
The following services offered by the ICO organiser in relation to the type of investment crypto-assets shall be considered as investment services that the investment service provider is entitled to provide:
- reception and transmission of orders in relation to financial instruments,
- execution of orders on behalf of clients,
- dealing on own account,
- portfolio management,
- investment advice,
- initial placing of crypto-assets, as well as secondary trading through organising the multilateral trading facility and/or the organised trading facility (Section 1 (49) and (76) of FIML).
Accordingly, the ICO organiser needs to assess whether or not the investment firm shall obtain authorisation for the provision of investment services and ancillary investment services in Latvia.
Where, within the framework of the ICO, the e-money tokens are issued, the function of which is very similar to that of electronic money.
Like electronic money, these types of crypto-assets are electronic alternates for coins and banknotes and can be used for making payments or as a means of saving.
These activities are planned to be regulated by the MiCA Regulation (Regulation on Markets in Crypto Assets).
At present, in order to issue such e-money tokens, electronic money institution operating licence should be obtained in accordance with the Law on Payment Services and Electronic Money.
Where, within the framework of ICO, settlement, exchange, consumption functions and charitable virtual assets are issued which do not confer the right to profit distribution, financial benefit or management in the issuer company.
These are types of assets that should not be authorised by Latvijas Banka, but we recommend that Latvijas Banka be consulted before using them in order to verify the qualification and requirements for using these assets. The use of such assets in Latvia should also be consulted by the State Revenue Service (SRS).
Settlement function. A virtual asset shall be used as a contractual means of payment (settlement) to settle goods or services with people who accept it. Virtual currencies are most commonly considered as these types of assets.
The execution of the referred settlement activities shall be governed by a contractual relationship between persons based on private law transactions (Civil Law, Regulations Regarding Distance Contracts, Consumer Rights Protection Law, Advertising Law, etc.).
The Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing shall also apply. The performance of these activities shall be monitored by the SRS.
Exchange function. A virtual asset shall be acquired as a result of exchange or used as a means of exchange against another payment means (exchange of virtual currency). The Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing shall also apply to the execution of such transactions. Please contact the SRS for more detailed information.
Consumption function. Virtual assets that grant access rights to a virtual asset issuer platform or the right to use a product or service produced by an issuer may be considered as a consumption function for virtual assets. The use of such assets shall be primarily governed by the Civil Law, Regulations Regarding Distance Contracts, the Consumer Rights Protection Law, the Advertising Law, etc.
Charity. A virtual asset is used as a transfer of a certain digital value (donated, voluntarily given (usually for charitable purposes) without expectations waiting of financial return) to a person who accepts it for charity purposes. Virtual money is usually used to perform such activities. The use of such assets is primarily governed by the Law on Taxes and Fees, Law on Public Benefit Organisations, the Advertising.
The contact point for consultation established by Latvijas Banka – Innovation Hub – is open to consultations and discussions with companies planning their activities or already operating in the field of crypto-assets on the territory of Latvia. Latvijas Banka's experts will evaluate the planned/existing business model and provide advice on the applicable regulation.
Consultations with experts of Latvijas Banka
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For retail holders of crypto-assets
Crypto-asset operations, using blockchain and distributed ledger technology (DLT) have many benefits, but they also have different types of risks and disadvantages that each crypto-asset user should clearly understand and evaluate before participating in crypto-asset projects.
- The possibility of raising funding (money resources) and to carry out a secure and faster transfer using Internet resources
- Access to the global financial market
- The possibility of reducing the costs of certain financial transactions (transfers, offers of securities to the public, etc.) and accelerating their execution
- The possibility of improving the security of financial transactions (reduced cyber security risks)
- Risk of project failure
- Risk of loss for the ICO organiser or fraud
- Risk of incomplete or unclear project information
- Risk of regulatory change
- Settlement risk for tokens
- Cyber-attack risk
- Technical problems with smart contracts, home pages, etc.
- The risk of investor protection (absence of a guarantee fund and investment protection)
- The risk of a lack of regulation (currently, there is no comprehensive framework to adequately address/minimise risks inherent in crypto-assets)
- Risk of capital losses
- Market risk
- The risk of money laundering and financing of terrorism and proliferation
- The sector is in the development phase, which makes it difficult to predict
- DLT and similar technologies used for crypto-assets are still in the development phase (many of them have recently been established) and have not undergone sufficient tests which could result in significant failures in their functioning and safety
- Due to the high risks inherent in the field of crypto-assets, other financial institutions are not widely open to cooperation (e.g., the banking sector)
- Limited scope for widespread use of virtual assets for settlement and investment