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12 April 2019
The Croatian Electronic Money Act (Official Gazette 64/2018), which transposed the Second EU Electronic Money Directive,(1) regulates:
The Croatian National Bank issued a warning on 9 February 2018 stating that:
virtual currencies are not electronic money as they essentially cannot be considered money, i.e. they are not stored monetary value or a monetary claim on the issuer. In particular, under the Electronic Money Act, the electronic money issuer is obliged, at the request of the electronic money holder, to redeem the monetary value of the electronic money (electronic money redemption) at par value. By contrast, because of rapid and dramatic changes in their prices, the value of virtual currencies at which they may be exchanged by their holders most often is not equal to the monetary value the holders have previously invested.(3)
Pursuant to Article 3 Item 7 of the Croatian Electronic Money Act, 'electronic money' means electronically (including magnetically) stored monetary value which is issued on receipt of monetary means for the purpose of making payment transactions pursuant to the act regulating payment transactions, and which is accepted by a natural or legal person other than the electronic money issuer, and which constitutes a monetary claim against the issuer. Therefore, for virtual currencies to be considered electronic money under the Croatian Electronic Money Act, they must:
Most entities use distributed ledger technology rather than a virtual currency issuer. Thus, in most cases, virtual currencies cannot be considered as electronic money since they are not issued on receipt of funds and there is often no virtual currency issuer to redeem the virtual currency.
The Croatian Payment System Act (Official Gazette 66/2018), which transposed the Second EU Payment Services Directive, regulates payment services and payment service providers alongside with their obligations, payment institutions and payment systems. The Croatian National Bank issued a warning on 9 February 2018(4) stating that "[v]irtual currencies are not used to make payment transactions in accordance with the Payment System Act, so that trading and paying in virtual currencies cannot be considered as payment services". Further, the European Court of Justice established that "'bitcoin' virtual currency, being a contractual means of payment, cannot be regarded as a current account or a deposit account, a payment or a transfer".(5) Thus, it seems that the Croatian National Bank has explicitly interpreted that, under the Croatian Payment System Act, only payment services enumerated pursuant to Article 4 may be considered a payment service.
In conclusion, it seems that the principal act regulating payment services in Croatia (ie, the Payment System Act) cannot apply to virtual currencies, given that the Croatian National Bank has addressed that trading and paying in virtual currencies cannot be considered as payment services.
On 9 February 2018 and 20 February 2018, respectively, the Croatian National Bank and the the Croatian Financial Services Supervisory Agency (CFSSA) issued warnings regarding virtual currencies. Although they have not explicitly stated the difference between virtual currencies and crypto-assets, it can be inferred that a broader field including crypto-assets is considered under the term 'virtual currencies'. These warnings noted that "virtual currencies are not legal tender in the Republic of Croatia, they are neither a foreign currency (foreign exchange) nor foreign means of payment",(6) and addressed that investors cannot rely on their trust in virtual currencies since "organisations or individuals issuing or trading in virtual currencies are not authorised or supervised either by the Croatian National Bank or any other institution in the Republic of Croatia".(7) Further, the Croatian National Bank stated that as virtual currencies are not regulated, authorised or supervised by the Croatian National Bank or other Croatian institutions, they represent a high-risk investment.
Further, on 18 December 2017 the Croatian Financial Stability Council(8) expressed its concern regarding risks relating to virtual currencies investment, such as risk of "theft of virtual wallets, misuse of transactions, absence of protection regarding refunds when executing such payment transactions"(9) and "operative risk and risk arising from fraud or computer defaults".(10) The council stated that provisions on deposit insurance and investor protection schemes when investing in virtual currencies (or crypto-assets) do not apply.
In addition, on 28 December 2017 the CFFSA issued a note on the risks of investing in virtual currencies and initial coin offerings (ICOs),(11) thereby warning investors that ICOs are a means of funding by offering issuance of cryptocurrencies (virtual currencies) and tokens to the public. The note addressed that the legal nature of ICOs and tokens varies depending on their structure and the rights which they transfer to their owners. However, since they are currently unregulated and not standardised, the CFFSA warned investors to act diligently and inform themselves of the risks of investing in virtual currencies and ICOs.
The recent ESMA report(12) notes that it conducted a survey in 2018 among national competent authorities regarding the status of virtual currencies and other crypto-assets under their respective financial securities law which assessed whether some of the virtual currencies and crypto-assets may qualify under the EU Markets in Financial Instruments Directive (2004/39/EC) (MiFID II)(13) as financial instruments. The survey highlighted that a particular number of crypto-assets may be qualified as transferable securities or other types of financial instrument and that those crypto-assets should therefore comply with the existing EU financial regulation (whose application depends on the qualification as financial instrument under MiFID II). This further raises the issue of the potential gaps and issues that may exist in the current rules when it comes to supervising those instruments.(14)
The Croatian Capital Markets Act (Official Gazette 65/2018), which transposed MiFID II, regulates, among other things, the issuance of financial instruments and establishment and business activities of investment firms. Article 3 Items 24 and 96 of the act define the terms 'financial instruments' and 'transferable securities' in the same way as in MiFID II. Therefore, the ESMA's interpretation regarding crypto-assets and subsequently platform operators may potentially change the regulators' interpretation primarily regarding the issuance, trading and supervision of crypto-assets.
For further information on this topic please contact Željka Rostaš Blažeković at Porobija & Porobija by telephone (+385 1 4693 999) or email (email@example.com). The Porobija & Porobija website can be accessed at www.porobija.hr.
(2) This article is part of a series that examines digital currencies and the relevant legislation. For other articles in the series, please see "Virtual currencies – EU legal overview" and "Virtual currencies under Anti-money Laundering Act".
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Željka Rostaš Blažeković