Bulgaria’s New Crypto Law: A Step Towards Market Regulation
The proposed changes to Bulgaria’s cryptocurrency legislation are set to enhance transparency in the crypto-asset sector through stricter regulations and increased oversight.
This law, drafted by the Ministry of Finance, is Bulgaria’s response to MiCA (Markets in Crypto-Assets Regulation), the European regulation that comes into force this year. As a co-founder of INDUSTRIA and a talking head in the field, I will outline how this legislation could shape the future of crypto regulation in Bulgaria.
Transposing MiCA: A Legal Imperative
The primary objective of this new law is to transpose the MiCA regulation into Bulgarian national law. Although MiCA is directly applicable across the European Union, Bulgaria, like other member states, must take specific steps to ensure its effective implementation. As I emphasised in the interview, the law aims to identify the competent authorities responsible for overseeing the crypto market in Bulgaria, specifically the Bulgarian National Bank (BNB) and the Financial Supervision Commission (FSC). Additionally, the law mandates the expansion of the FSC with two new directorates focused on enforcing these regulations.
From my perspective, the legislation is well-constructed. It not only designates the relevant authorities but also ensures they have the power to enforce the rules set out in MiCA. It further addresses crucial areas such as compliance, consumer protection, and market transparency. For those in the crypto industry, this is legislation you simply cannot afford to overlook.
Expanding the Regulatory Framework
Technologically, it’s promising to see that the law delves into decentralized ledger technology (DLT) for the second time in Bulgarian legislation. This is an encouraging sign for the future of blockchain and other decentralized technologies in the country.
The law is comprehensive, encompassing both crypto-assets and tokenized assets, such as art and real estate. By including a wide range of assets and their trade, the legislation aims to bring clarity and order to what has been a relatively unregulated space. The primary goal, as I see it, is to bring crypto-assets out of the grey market and elevate them to the level of standard financial assets.
Protecting Consumers and Market Integrity
One of the law’s most critical aspects is its focus on consumer protection. Companies offering crypto-assets are required to fully disclose information about their teams, addresses, and other relevant details. This is a significant step towards ensuring that consumers are not left in the dark when dealing with crypto firms. As someone deeply embedded in the industry, I can affirm that transparency is crucial in building trust within the crypto market.
However, increased regulation does come at a cost. While the law does not directly impact crypto mining, it will raise operational costs for many market participants. Companies will face higher fees for licensing and submitting white papers, with some fees expected to reach tens of millions of levs under the new measures.
Stringent Measures and Their Implications
The law introduces a robust framework, including significant penalties for non-compliance. Companies could face fines of up to BGN 10 million (around 5 million euros) or 5% of their annual turnover, whichever is greater. These penalties are a clear indication of the law’s strictness, designed to prevent violations and maintain high regulatory standards.
For small and medium-sized enterprises (SMEs), this complex administrative structure could represent a significant burden. The law introduces a range of licensing and reporting requirements that, while necessary for market integrity, could be challenging for smaller players to meet. This strict approach may limit innovation and flexibility, particularly in emerging technologies such as decentralized finance (DeFi) and non-fungible tokens (NFTs).
Balancing Innovation and Regulation
While the law aims to encourage innovation, its stringent regulations might stifle the experimentation vital for new technologies to flourish. There’s a risk that companies might seek more flexible jurisdictions, potentially impacting Bulgaria’s competitiveness in the global crypto market.
From my expert perspective, it’s crucial that the implementation of these regulations is balanced with the need to foster innovation. The law introduces a multi-tiered oversight mechanism involving both the FSC and the BNB, ensuring that various aspects of the market are continuously monitored.
The Path Forward for Bulgaria
Looking ahead, the benefits of this law for market participants, citizens, and Bulgaria as a whole are significant. For businesses, the law provides a clear legal framework, reducing uncertainty and facilitating smoother operations within the EU market. It also promises to reduce costs by integrating new regulatory requirements with existing systems.
For citizens, the law enhances consumer protection by ensuring that services related to crypto-assets are safer and more transparent. This should lead to fewer scams and financial losses, a crucial consideration for anyone entering the crypto space.
At a national level, the law is poised to drive economic development by attracting investment in the crypto sector. By improving financial stability and aligning with European regulations, Bulgaria can strengthen its position as a reliable partner in the global market.
Establishing the Foundation: Licensing, Regulation, and Compliance in the Crypto Market
This law is pivotal as it defines the licences and regulations related to the crypto market. It should be read alongside MiCA. Until now, there has been no comprehensive regulation of crypto in Bulgaria, and this is the first law to govern this space. It addresses the rights and obligations within it, marking a significant milestone.
As a technologist, I am pleased to see that decentralized ledger technology is being discussed once again in legislation. This law responds to MiCA and effectively transposes European regulation into local legislation. The directive’s application is mandatory, with objectives grouped into three main areas:
- Identifying the competent authorities (the FSC and BNB)
- Ensuring that these authorities have the necessary powers
- Introducing various measures, including coercive ones, to ensure compliance with the regulations
Strict Measures in CAML
The Crypto Assets Market Law (CAML) introduces a complex regulatory framework covering all aspects of the crypto-assets market — from issuance and trading to providing related services. Here are some key elements that underscore the law’s strictness:
- High Sanctions and Fines: The law stipulates significant fines for both individuals and companies. Sanctions can reach up to BGN 10 million or 5% of a company’s annual turnover, whichever is greater. This clearly indicates the law’s strictness, aimed at preventing violations and maintaining high regulatory standards.
- Complexity and Administrative Burden: CAML introduces a complex administrative structure, requiring market participants to comply with numerous licensing and reporting requirements. For SMEs, these demands could represent a substantial burden.
- Coercive Administrative Measures: The law grants regulators the authority to apply various coercive measures, such as blocking access to online platforms and deleting domains. These measures aim to prevent serious violations and protect consumers and investors.
- Mandatory Compliance Measures: Market participants must adhere to strict compliance requirements, including anti-money laundering measures and reporting suspicious transactions. This necessitates significant investments in technology and processes, contributing to the law’s stringent reputation.
While these measures are designed to ensure stability, transparency, and participant protection in the crypto-assets market, they may also pose challenges for SMEs and innovative companies.
Typical Violations Leading to Large Fines
Common violations that could result in substantial fines include:
- Lack of Transparency: Failure to provide complete and accurate information to consumers and regulators.
- Violations of Accountability Rules: Non-compliance with reporting and accountability requirements.
- Failure to Comply with Anti-Money Laundering Measures: Non-compliance with anti-money laundering and counter-terrorism financing rules.
The fines under CAML are designed to ensure strict regulation and control over the crypto-assets market, applying not only to licensing and reporting violations but also to more severe offences such as market manipulation and insider trading.
Costs of Regulation for Obligated Entities and Regulators
For Obligated Entities (Crypto Asset Service Providers and Issuers)
- One-Time Costs: Entities will incur one-time costs associated with obtaining a licence, including building information systems and other necessary infrastructures.
- Ongoing Costs: After obtaining a licence, entities will continue to face ongoing costs related to maintaining compliance with regulatory requirements.
For Regulators (FSC and BNB)
- One-Time Costs: National authorities will incur one-time costs for building the necessary structures and systems for supervision.
- Ongoing Costs: Regulators will also have ongoing costs, dependent on the number of entities supervised and the volume of their activities.
These costs are significant, and while fees charged to supervised entities will partially cover them, the financial burden on regulators will be substantial.
Significant Benefits for Market Participants, Citizens, and Bulgaria
For Market Participants
- Security and Legal Framework: CAML provides a well-defined legal framework, reducing risks and uncertainties.
- Access to the European Market: Compliant companies will gain easier access to the EU market.
- Reduced Costs: Integration of regulatory requirements with existing systems should lead to cost reductions.
For Citizens
- Consumer Protection: The law introduces strict rules to safeguard consumer rights, reducing the risk of fraud and market abuse.
- More Accessible and Secure Services: Regulation will make crypto services more secure and reliable.
For Bulgaria
- Economic Development: The law is expected to stimulate innovation and attract investment in the crypto industry.
- Financial Stability: By reducing risks associated with crypto-assets, Bulgaria can improve its financial stability.
- International Image: Compliance with European regulations will enhance Bulgaria’s reputation as a reliable partner on the global stage.
Arguments for and Against the Proposed Changes
In Favour:
- Harmonisation with European Legislation: Aligning with EU regulations ensures legal certainty and facilitates access to the EU market.
- Consumer and Investor Protection: Stricter requirements provide greater protection against fraud and abuse.
- Transparency and Security: Enhanced transparency will strengthen market confidence.
- Regulatory Clarity: Clear rules simplify compliance and reduce legal uncertainty.
Against:
- Administrative Burden: Increased demands may stifle innovation and create challenges for SMEs.
- Risk of Stifling Innovation: Strict regulations could limit opportunities for new technologies and business models.
- Legislative Complexity: Numerous new requirements could lead to confusion and implementation difficulties.
- Lack of Public Consultation: Insufficient input from stakeholders may affect the legislation’s effectiveness.
Overall, the proposed changes in CAML are a double-edged sword. While they bring essential compliance with European legislation, consumer protection, and market transparency, they also introduce challenges for businesses, particularly SMEs. With sufficient time for adaptation and active dialogue with businesses, these changes could yield positive outcomes for both the market and the economy as a whole.
Potential Impact of the Proposed Changes in the Crypto-Asset Markets Act
The proposed amendments to the Crypto-Asset Markets Act (CAML) are likely to bring greater transparency to the crypto-asset sector and improve the relationship between banks and the sector. Here’s how these changes could unfold:
Transparency in the Sector
- Regulations and Licensing Regimes: The introduction of clear regulations and licensing requirements for participants in the crypto-asset market will lead to greater transparency. Firms offering crypto-asset services will need to adhere to strict rules, reducing the likelihood of abuse, fraud, and illegal activities.
- Reporting and Supervision: New reporting requirements and ongoing supervision by regulators (the Financial Supervision Commission and the Bulgarian National Bank) will make it easier to track transactions and activities in the sector. This will create a clearer picture of participants’ operations and increase trust among both regulators and consumers.
- Anti-Money Laundering Measures: The law envisages stringent anti-money laundering measures, which will help eliminate illegitimate activities in the sector. This will result in a more transparent market, reducing risks associated with illegal operations involving crypto-assets.
Improving Banks’ Attitudes Towards Crypto
- Legal Certainty: The introduction of a regulatory framework will provide legal certainty for banks, which have so far been cautious about crypto-assets due to the lack of clear rules. With well-defined regulations, banks will have more confidence in the legitimacy of crypto-asset businesses and will be able to interact with such companies more comfortably.
- Risk Reduction: Banking for crypto companies is often associated with high risks, particularly due to money laundering concerns and the absence of regulations. With the new requirements under CAML, banks will be able to assess and manage these risks more effectively, which could improve their attitude towards crypto clients.
- Partnerships and Services: In a regulated environment, banks might start viewing crypto companies as potential partners, leading to the development of new services and products related to crypto-assets. For example, crypto fund banking, crypto-asset custody services, and other financial products based on cryptocurrencies could become more popular.
The proposed changes in CAML are likely to contribute to greater transparency in the crypto-asset sector by introducing stricter regulations and increased oversight. In turn, this could improve banks’ trust in crypto companies and lead to better treatment from traditional financial institutions. By creating a more transparent and regulated market, banks will have greater confidence in working with crypto companies, encouraging better collaboration between the two sectors.
As always, your feedback is more than welcome. Feel free to share your opinion about the article, do you think that CAML and MiCa are a good regulation for the Bulgarian market for crypto assets?
