When Satoshi Nakamoto created Bitcoin with the idea of bypassing what he believed to be a failed traditional financial system and wanted to build a world without central banks and regulators, he certainly did not imagine that 15 years later, the latter would be the "inevitable" factor, which will drive the crypto sector. After years of speculation, fraud, money laundering, bankruptcies, mixing traditional with decentralized finance and its increasing mass adoption (40% of Americans own crypto), it became clear that without regulations the sector has no future. What's more - it's the regulators' word that gives it a boost, making it legit - for example, the approval of exchange-traded funds with beneficial ownership of Bitcoin by the US financial regulator last year produced strong market momentum for the largest cryptocurrency and other leading altcoins.
Although what is happening in the US is driving the market, the European Union is one step ahead in crypto-regulations, which aim to ensure investor protection and market stability. Something that is transferred to Bulgaria as well - at the end of August, the Ministry of Finance published a draft for public discussion of the Law on Crypto Asset Markets, with the deadline for opinions and recommendations from the affected parties being September 20. Its aim is to transpose the requirements of the European Regulation on the markets of crypto assets (MiCa) into national legislation.
Currently, the country does not have specific regulations in this area, which creates uncertainty for both investors and service providers. Only since 2020 has a registration regime been in place in Bulgaria for individuals and companies dealing with cryptocurrencies, as a measure under the law against money laundering.
In accordance with MiCa, the draft law provides for the creation of a competent authority that will be responsible for compliance with the new rules and will regulate the activities of market participants that are registered in Bulgaria, regulate the licensing regime, provide accountability and issue fines for violations. After the licensing, there will be a clearer picture of who provides what services in the country.
For Bulgaria, there are no accurate statistics on how many companies and users of crypto services there are - according to various sources, in recent years there are between 150 and 300 companies. According to data from the EU blockchain observatory report for 2022, over 183 000 people owned crypto in Bulgaria. and there are also 30 ICOs (initial token offerings) from Bulgarian companies. According to the digital currency payment platform Triple A for 2024, already about 300 000 Bulgarians (6.1%) of the population own virtual currencies. In addition, internationally, Bulgaria is considered a crypto-friendly destination.
Representatives of the Bulgarian crypto sector that Capital weekly spoke to welcomed the legislation, although they believe that it will have different effects on the market and individual companies. According to them, the high capital requirements and accountability requirement may deny smaller companies from the market, but would encourage innovation and competition among others.
"A key effect of the bill is that the end investor will get more security. On the other hand, companies providing services in the sector - from management to custody and others will have to meet the same clear conditions under the supervision of FSC as part of their license. This will inevitably lead to a more competitive market with a wider choice of better products", crypto asset management company Belayer said.
The new-old regulators
The regulatory role will be assumed by the Financial Supervision Commission (FSC) and the National Bank (BNB). Asset-backed tokens (ART according to MiCA) are with the FSC, and electronic money tokens (EMT), which can only be issued by electronic money companies and credit institutions, are with the BNB. The FSC will be responsible for issuing licenses to carry out activities related to crypto-assets. It will also monitor and control the activities of token issuers and service providers, as well as impose sanctions for violations of regulatory requirements. The financial regulator will accept complaints and alerts from consumers and stakeholders about breaches of the new legislation. In the legislation, special attention will also be paid to the public offering of tokens (ICOs), since the biggest frauds happen with them.
BNB and the European Central Bank (ECB) will be responsible for banking supervision and will be able to extend licenses to credit institutions that want to carry out activities related to the issuance of asset-backed tokens and electronic money. In addition, they will have the right to revoke licenses of institutions in case of violations or at the proposal of the FSC.
Instead of creating a separate state authority to regulate crypto assets, the Bulgarian government decided to assign this task to the FSC. This decision is motivated by the need to optimize costs and use the already existing infrastructure and experience of the FSC in the regulation of financial markets. The authors of the draft law indicate that there is a certain analogy between the proceedings under MiCa and the existing ones under the Law on Public Offering of Securities and the Law on Financial Instruments Markets, which will facilitate the process of implementing the new rules.
Requirements to market participants
Crypto service providers must apply for this license within 18 months after the entry into force of the new rules from January 1 next year, and within 7 days after receiving it, they will have to register with the Commercial Register. The financial regulator must issue a license within 6 months or refuse silently - an action that stirs discontent within the sector.
"While the MiCA provides for a maximum period of 60 working days for issuing a license, the Bulgarian draft law speaks of a period of up to 6 months. Also, the idea of a silent refusal provided for in the draft law is contrary to the requirements of the MiCA, which require a written decision and active communication with the applicant. Such differences must be cleared up before the adoption of the final text of the law, in order to avoid limiting the rights of crypto service providers and their customers," Vyara Savova, senior policy expert at the European Crypto Initiative (EUCI) told Capital weekly.
Licenses and capital requirements are similar to those for investment firms and electronic money companies. The latter, if they want to perform crypto services, will only have to request an extension of the license. Licenses are practically divided into three groups:
- Issuers of asset-backed tokens (these are stablecoins) will have to maintain a separate reserve of assets for each token, and at all times must have equity of a minimum of 350,000 euro, 2% of the average reserve of assets or a quarter of the previous year's fixed overheads. These requirements are aimed at ensuring financial stability and reducing risks for consumers.
- Issuers of tokens for electronic money - here, according to the regulation, the Law on Payment Services and Payment Systems should be applied, with the minimum capital being BGN 700,000.
- Crypto-asset service providers - realistically, the largest group of licensing companies should also fall here. The capital requirements are 150,000 euro for companies operating a crypto-asset trading platform, 125,000 euro for crypto-asset custody and exchange services; 50,000 euro for all other crypto asset services.
"The new licensing requirements will pose a serious challenge to a large part of the current crypto companies in Bulgaria. Many of them are not fully prepared for the changes and will likely encounter difficulties in establishing internal procedures to comply with regulatory requirements and reporting to meet the new standards," crypto trading platform Bonex told Capital weekly. And they added that "to meet these requirements, companies will have to devote significant resources to preparing and maintaining license documentation, as well as to compliance with the regulatory standards established by the FSC".
In any case, each new regulation burdens businesses with more administrative burden, costs and uncertainty. However, if it cleans up shady schemes, gives more transparency and investor protection, especially for a sector like crypto, then the pros for everyone will far outweigh the cons.
The draft law also foresees substantial fines for abuses, the most serious of which are those for unregulated public offering of tokens - then they can reach BGN 10-20 million in case of repeated violations, and sanctions are also foreseen as a percentage of the turnover. There are also sanctions for not providing public information. The penalties for the unregulated transfer of crypto-assets are lighter.
When Satoshi Nakamoto created Bitcoin with the idea of bypassing what he believed to be a failed traditional financial system and wanted to build a world without central banks and regulators, he certainly did not imagine that 15 years later, the latter would be the "inevitable" factor, which will drive the crypto sector. After years of speculation, fraud, money laundering, bankruptcies, mixing traditional with decentralized finance and its increasing mass adoption (40% of Americans own crypto), it became clear that without regulations the sector has no future. What's more - it's the regulators' word that gives it a boost, making it legit - for example, the approval of exchange-traded funds with beneficial ownership of Bitcoin by the US financial regulator last year produced strong market momentum for the largest cryptocurrency and other leading altcoins.
Although what is happening in the US is driving the market, the European Union is one step ahead in crypto-regulations, which aim to ensure investor protection and market stability. Something that is transferred to Bulgaria as well - at the end of August, the Ministry of Finance published a draft for public discussion of the Law on Crypto Asset Markets, with the deadline for opinions and recommendations from the affected parties being September 20. Its aim is to transpose the requirements of the European Regulation on the markets of crypto assets (MiCa) into national legislation.
