Insight: We investigate bungling regulator CySec's cryptocurrency minefield - FinanceFeeds

Insight: We investigate bungling regulator CySec’s cryptocurrency minefield

CySec issued permission to some retail firms to add cryptocurrencies to their list of instruments, then stopped issuing it, and now its licensing department does not know who those firms are, and has an island full of firms offering unlicensed cryptocurrency via offshore jurisdictions. Want CySec to tell you who is who? It’ll take them 15 days

Two years is not long at all in the general timeline of anything measurable by normative quantification, yet is a lifetime in the obscure mind of the trendy proponents of the next non-entity that will ‘lead the world’, usually disappearing into oblivion very shortly after superlatives have been lavished upon it by interns who have difficulty operating an electric razor.

To those propagating their anarchistic and outside-the-system soundbytes, the word ‘social’ will ring in their ears as retrospective as the words ‘British Empire’ to those in the real world, in that it would seem a light year ago.

Today, the buzzword of choice for the uninitiated is ‘crypto’, which is often accompanied by the acronym ICO, standing for Initial Coin Offering.

FinanceFeeds continues to maintain that cryptocurrency has no place in the genuine, established institutional electronic financial world, nor does it among the technological developments that continue to advance any operational prowess, apart from the distributed ledger functionality provided by blockchain database technology, and once the R&D departments of the large banks and professional services consultancies, including Goldman Sachs and PriceWaterhouse Coopers find a way to detach blockchain from its intrinsic component Bitcoin, that will be the end of that.

Immeasurable with regard to price, no issuer, no standardized method of carriage, no liquidity provision and genuine market access, and with no genuine provenance, Bitcoin, along with its also-ran peers, has been the brainchild of anarchists and mavericks, has a historic litany of e-wallet hacks – sometimes by exchange owners themselves, commercial demises, and seizures by the authorities, in every case leaving its ‘investors’ with no recourse whatsoever.

The regulatory authorities in most regions are ambivalent, and do not view cryptocurrency or ICOs as any part of the financial ecosystem, and ICOs are now stacking up rather like the modern version of ponzi schemes in 1920s Wall Street in the post bucket shop era.

Any entity can launch an ICO, and ask people to invest in something that does not exist. Those launching ICOs are not subject to any due diligence or auditing. The raising of capital for startups in established business sectors, conversely, is preceded by massive due diligence procedure, and IPOs, in which companies prepare to be listed on a public stock exchange, are subject to vast scrutiny by official auditors, as well as existing shareholders, and in the financial sector, the national regulator.

Any hint of obscurity, and the deal is blocked, whereas individuals such as George Popescu, who is banned from being a director of any company in the UK for 12 years, sits on the board of several cryptocurrency related firms.

Regulatory authorities in some regions, however, are perhaps not au fait enough with the consequences of allowing permission for retail electronic financial services firms to offer cryptocurrency trading.

FinanceFeeds has discovered an anomaly with regard to CySec’s recent granting of permission to only a handful of retail FX brokerages in Cyprus to offer cryptocurrency trading.

The regulator, according to sources, granted permission to a very small number of retail firms, and then stopped granting permission thereafter. “There are only 5 brokerages that are CySec regulated that are allowed to offer cryptocurrencies as a tradable option. They suspended the permission of everyone else to do this. This begs the question, why are so many who are regulated offering this?” said one source, a compliance officer at a major brokerage.

“The reason there are 5 firms with permission is that the regulator provided the permission by mistake”

Very likely, considering that CySec in March looked at two cryptocurrencies, deeming them not to be financial instruments, those being XECoin and cryptocoin, issuing a warning to investors to avoid trading them.

Thus there is an anomaly. The permission granted to certain firms does not constitute a separate license, but, whilst CySec has made no official publication on cryptocurrency provision, we have deduced that this is simply a required permission to add cryptocurrencies as additional instruments under existing CIF licenses.

One compliance director we spoke to today stated “Cryptos are not in the list of financial instruments offered by CIFs. There are a number of financial instruments that we have a license for, and crypto currency is not one of them because digital currencies were not in the picture in 2007 when MiFID 1 was rolled out, so now you have to apply for cryptos as anew instrument to be added under your existing license.”

FinanceFeeds approached a further compliance specialist on this matter, who said “Initially, CySec began issuing licenses to trade cryptocurrency, then they realized it was getting out of control and they are monitoring it. They have now stopped offering permission at all.”

Exactly as has been demonstrated in the past when brokers initially looked to offer cryptocurrency trading in the early part of this decade, the risk has once again been highlighted that because there is no way of pricing, clearing or giving a stable valuation on any cryptocurrency, liquidity management is almost impossible and the risk to brokers and clients is quite simply not worth it.

This particular compliance officer considers that CySec may well have followed that line of thinking once realizing the risks. “It could blow up and if everyone is on the wrong side of a trade, the brokers may collectively not have enough capital.”

Brokers wishing to offer cryptocurrency had to submit a letter to CySec for permission to do so, and the initial five were granted permission, before CySec realized that this was not the direction it wanted to take.

Actually gaining any perspective on who the five brokerages with permission are is nigh on impossible, as no regulatory official appears to know to whom they granted the permission.

In many cases, however, retail brokerages are offering cryptocurrency trading, despite their lack of permission from CySec, and are simply onboarding the clients via offshore entities which are outside CySec’s jurisdiction, yet promoting their company as a MiFID II compliant, CySec regulated entity.

This practice has been investigated previously by FinanceFeeds, however a recent addition to this dynamic centers around cryptocurency.

For example, RoboForex lists cryptocurrency on its official site, however if attempting to access the RoboForex website from within Cyprus, it redirects to the Cyprus site with no listing of cryptocurrency.

FinanceFeeds spoke to RoboForex today with regard to this matter, the company’s compliance department having confirmed that RoboForex (CY) Ltd is the entity which is regulated by the CySEC under license No. is 191/13 and provides services to European clients only.

THe company categorically stated in its correspondance to FinanceFeeds that the onboarding of client from any other countries is not allowed.

With regard to cryptocurrency, the firm explained “RoboForex (CY) Ltd doesn’t offer trading in Crypto-currencies due to the fact that there is no clear legal framework in relation to provision of instruments of such kind”.

This further reinforces the understanding within companies providing services, which is in some respects lacking within the regulator’s own structure.

“RoboForex (CY) Ltd company will consider opening these instruments for trading if they are explicitly legalized by the CySEC” stated RoboForex’s compliance officials.

The official website of the RoboForex (CY) Ltd company is roboforex.eu, and it is clear as to where this relates within the list of websites of RoboForex (CY) Ltd under CySec’s official register.

Excluding this list, there are no websites belonging to RoboForex (CY) Ltd through which onboarding and provision of information can be performed.

RoboForex LTD (Belize) company is a dedicated company, which is regulated by the IFSC, license No. IFSC/60/271/TS/17, and the RoboForex LTD (Belize) company uses a dedicated website – roboforex.com to provide information about its’ products and services.

The RoboForex LTD (Belize) company does not provide services for European clients.

European clients that come to the website roboforex.com are being warned about the opportunity of registration of account with the European company RoboForex (CY) Ltd.

In this case, the link to the website of Cypriot company RoboForex (CY) Ltd (roboforex.eu) is provided. This website contains all the information related to RoboForex (CY) Ltd company.

With regard to our finding that there was a redirection from within Cyprus, RoboForex explained “Please note that there is no compulsory redirection of customers to the website of the EU company RoboForex (CY) Ltd.”

FinanceFeeds approached CySec on this matter via email, to which the response was that they would notify us within fifteen days (!!!) as to who the five companies are.

That is astonishing, so a call was then made to CySec’s licensing officials, who at first did not know which companies were authorized with permission to provide cryptocurrency trading, even though the very same department issued the permission. When asked why the official regulator did not know the answer to this, there was very little comprehensible response.

FinanceFeeds then pointed out who the firms are according to our own research, and the official explained “send us an email and we will reply within 15 days to confirm.”

Yes. And the ice cap will have melted.

The regulator also did not provide clarity as to why it issued certain firms with permission to trade cryptocurrency, and then stopped doing so, appearing perplexed as to why such a question would be asked.

Bearing this in mind, it is perhaps prudent to consider when the word ‘binary’ will be replaced by ‘crypto’.

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