Trading Cryptocurrencies on Behalf of Third Parties: A Belgian Case
As described, trading activities are similar to portfolio management within the meaning of MiFID regulations, i.e. the discretionary and individualised management of portfolios including one or more financial instruments within the framework of a mandate given by the client.
Both activities seem similar though not the same. The main difference is the notion of financial instrument. In that regard, cryptocurrencies are not, at least for the time being, considered as financial instruments within the meaning of the Belgian law.
Article 2, 1° of the law of 2 August 2002 on the supervision of the financial sector and financial services exhaustively defines financial instruments. It appears that cryptocurrencies do not fall within the definition of financial instruments given by the Belgian law.
However, the Royal Decree of 24 April 2004 approving the regulation of the Financial Services and Markets Authority prohibiting the marketing of certain financial products to retail clients must be analysed, as it did not include cryptocurrencies as financial instruments, and in so doing, did not make it subject to the MiFID regulation.
In the context of the issue at hand, the regulation essentially states that it is prohibited to promote, on a professional basis, a financial product whose return depends directly or indirectly on a virtual currency. It is therefore necessary to examine more precisely what it prohibits concerning cryptocurrencies.
The concepts to be defined for this purpose are: (I) the marketing, (II) the clients (III) the financial income.
I. The marketing
Marketing is defined as “the presentation of the product, in any manner whatsoever, with a view to inducing the customer or potential customer to purchase, subscribe, adhere to, accept, sign or open the product concerned”[1].
The regulation covers marketing carried out on a professional basis, whether by the supplier or the issuer of the product itself, or by an intermediary.
The notion of marketing is therefore extremely broad. Thus, the simple fact of proposing, or recommending the purchase of cryptocurrencies can be seen as marketing.
On the other hand, the regulation specifies that, “portfolio management does not involve marketing, as long as investment decisions are made by the portfolio manager”.
This clarification is worrying as the definition of marketing ends up covering investment advice specifically, but not portfolio management, whereas the portfolio manager must, just like the adviser, provide the (potential) client with appropriate information on financial instruments, including comments and warnings on the risks inherent in investing in these instruments (art. 27, § 3 of the laws of 2 August 2002).
The portfolio manager must also agree with the client on the types of financial instruments that may be included in the portfolio and, where applicable, an authorisation to invest in certain types of financial instruments (art. 20, § 2, 8° and 9° of the Royal Decree of 3 June 2007), which clearly implies a “presentation” of these instruments with a view to their acceptance.
In practice, licensed portfolio managers could therefore invest in cryptocurrencies for a retail client, within the limits of their mandate, without having marketed (and therefore presented) it. The manager should therefore have very broad discretionary power.
II. The retail client
The regulations and the attached explanatory note do not give further specifications about the definition of retail clients. However, this definition exists in one specific law, the law of 2 August 2002 (MiFID regulation). Although the MiFID regulation is not applicable to cryptocurrencies at this stage, this definition should be used as a guide.
A retail client is a client who is not treated as a professional client, as defined in Annex A of the Royal Decree of 3 June 2007 laying down the rules and procedures for transposing the Markets in Financial Instruments Directive as “a client who has the necessary experience, knowledge and competence to make his own investment decisions and properly assess the risks involved”. Some people are professional clients per se (credit institutions, investment funds, insurance companies, the State, Communities and Regions, public authorities, etc[2]).
In fact, almost all clients and most companies, within the meaning of the Code of Economic Law, are considered retail clients.
However, retail clients can become professional clients at their request (opt-down) provided they meet certain criteria.
a) Possibility for the retail client to request to be treated as a professional client (“opt-down”)
Retail clients may request to be treated as professional clients, either generally, for a particular investment service or transaction, or for a particular type of transaction or product, and thereby waive part of the protection afforded by the conduct of business rules. This is called an “opt-down”.
b) Conditions and procedures for an opt-down
This option is conditional to the regulated financial institution’s approval. To opt for this status, the retail client must meet certain conditions and follow specific procedures.
The regulated entity must conduct an assessment of the competence, experience and knowledge of the client, providing reasonable assurance, in light of the nature of the transactions or the services at stake, that the client is in a position to take investment and correctly understands the risks.
The suitability criteria applied to directors and certified directors on the basis of the financial guidelines can be considered as one of the means of assessing the client’s competence and knowledge[3].
As part of this assessment, at least two of the following criteria must be met:
- The client has carried out an average of ten transactions of a significant size per quarter during the previous year;
- The value of the client’s portfolio of financial instruments, defined as including bank deposits and financial instruments, exceeds 500,000 EUR;
- The client has been employed for at least one year in the financial sector, or in a professional position requiring knowledge of the transactions or services at stake.
To waive the protection afforded by the MiFID rules of conduct, the client must follow the following procedure:
- The client notifies the investment firm in writing of his or her wish to be treated as a professional client, whether at any time, for an investment service or a determined transaction, or for a type of product or transaction;
- The investment firm specifies, clearly and in writing, the protections and rights to compensation that the customer may not receive;
- The client declares in writing, in a separate document from the contract, that he or she is aware of the consequences of waiving the above-mentioned protections.
Before deciding to accept such a waiver, the investment firm is required to take all reasonable measures to ensure that the retail client who wishes to be treated as a professional client meets the criteria set out above [4].
III. Financial income
Financial products are defined in the law of 2 August 2002 as savings, investment or insurance products (arts. 2, 39°). Within the meaning of this law, financial products distinguish themselves from financial services, which relate to one or more financial products (arts. 2, 40°).
However, this distinction is no longer relevant since the adoption of Book VI of the Code of Economic Law. This includes savings, insurance and investment products but also financial instruments within the meaning of MiFID, and all investment instruments within the meaning of the Prospectus Act.
Consequently, cryptocurrencies must be considered as covered by the notion of financial products, and therefore by the regulation prohibiting marketing to retail clients.
Conclusion
The simple act of presenting cryptocurrency portfolio management services to the public could already be considered as marketing, which is prohibited.
In practice, portfolio management involving cryptocurrencies is not prohibited, but for that purpose, the retail client must have access to the right information regarding the cryptocurrencies — which implies the marketing. When it comes to professional clients, the marketing of financial products whose performance is, directly or indirectly linked to cryptocurrencies, is not prohibited.
Retail clients wishing to use such services would have to request to be treated, as part of this discretionary cryptocurrency management, as professional clients. This should come from their own initiative. Finally, a whole series of conditions and procedures would have to be respected.
However, this solution involves the risk that the FSMA and the courts consider that the marketing has taken place before the conclusion of the discretionary cryptocurrency management contract. In this case, it is only at the time the contract is concluded — not at the time the service is marketed -that the retail client could choose to be treated as a professional client. The contracting parties may insert contractual clauses to avoid such interpretation.
In the end though we come back to the problem initially raised. Investment services such as discretionary asset management clearly imply marketing on the part of the manager within the meaning of the Belgian law.
Perhaps we should not consider asset management from the point of view of the investment service, because trading cryptocurrencies on behalf of third parties does not currently concern the management of financial instruments within the meaning of the Belgian financial law. Therefore, the manager would not have to comply with the above-mentioned legal obligations.
In any case, the Belgian regulator should clarify the provisions of its regulations in order to prevent the current legal ambiguity.
[1] The explanatory note attached to the Financial Services and Markets Authority concerning the prohibition of the marketing of certain financial products to retail customers refers to Article 30bis of the law of 2 August 2002 to define the concept of marketing.
[2] For an exhaustive list, see Annex A of the Royal Decree of 3 June 2007 laying down the rules and procedures for to transpose the Markets in Financial Instruments Directive.
[3] Annex II of the MIFID II Directive and Annex A of the Royal Decree of 3 June 2007 mentioned above. Annex A of the above-mentioned Royal Decree of 3 June 2007 transposes the content of Annex II of the MIFID Directive into Belgian law.
[4] Annex A of the Royal Decree of 3 June 2007 mentioned above.
Author: Matias Gross.
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