Cryptocurrency and Investment Funds registered with the CNMV

Cryptocurrency and Funds Registered with the CNMV

On May 9, 2018, the CNMV, as part of the “Questions and answers for companies in the FinTech sector” series, raised the possibility of establishing a fund that invests directly in cryptocurrencies.

All in direct relation to the joint Communication from the CNMV and the Bank of Spain, dated February 8, 2018, which warned the following regarding Cryptocurrency and Funds:

“The CNMV and the Bank of Spain warn that, to date, no ‘cryptocurrency’ issue or ICO has been registered, authorized, or verified by any supervisory body in Spain. This implies that there are no ‘cryptocurrencies’ or ‘tokens’
issued in ICOs whose acquisition or holding in Spain can benefit from any of the guarantees or protections provided for in the regulations relating to banking or investment products.”

In this regard, while emphasizing the CNMV’s concern over this phenomenon of investment in virtual currencies, it is noted that these types of funds are viable through a Closed-ended Collective Investment Entity (EICC). This implies, on the one hand, compliance with a series of requirements and, on the other, practical problems regarding regulatory compliance in relation to asset valuation (due to volatility), as well as liquidity management and custody guarantees.

The CNMV: Constitution of Registered Funds with investment in Cryptocurrency.

We provide the response published by the CNMV due to its great interest:

“These types of funds would have a legal place under Law 22/2014, which regulates, in addition to venture capital entities, other closed-ended collective investment entities and their management companies.

Investment could be carried out through a Closed-ended Collective Investment Entity (EICC) in which, according to Article 2.1 of Law 22/2014, the divestment policy for its participants or partners must meet the following requirements:

• that divestments occur simultaneously for all investors or participants, and
• that the amount received by each investor or participant is based on the rights corresponding to each of them, in accordance with the terms established in their bylaws or regulations for each class of shares or units.

The launch of these types of entities, which may take the form of funds (FICC) or companies (SICC), requires numerous requirements and conditions, including the limitation of the marketing of shares or units of these types of entities solely to professional investors (as defined in Articles 205 and 206 of the Recast Text of the Securities Market Law).

FICCs, in addition to being registered with the CNMV (Article 8 of Law 22/2014), must be managed either by a Management Company for Closed-ended Collective Investment Entities (SGEIC), by a Management Company for Collective Investment Institutions (SGIIC) authorized to manage these types of funds, or by an international SGIIC with a European passport to operate in Spain that can manage a closed-ended investment fund. FICCs do not have a minimum equity requirement for their constitution (Article 38.2 of Law 22/2014).

SGEICs must have a minimum initial share capital, fully paid up, of €125,000. Likewise, the possibility of using the figure of self-managed SICCs as defined in Articles 45 et seq. of Law 22/2014 could be considered, which require, according to Article 48.1, a minimum initial share capital, fully paid up, of €300,000.

It should be noted that, according to the provisions of Article 85 of Law 22/2014, FICCs and SICCs are not subject to CNMV supervision (except for self-managed SICCs).

However, despite the theoretical fit within this framework, the investment of FICCs and SICCs in cryptocurrencies poses a series of practical problems on how to comply with regulations regarding asset valuation, liquidity management, and custody guarantees. Regarding asset valuation, the procedure to be used for valuing cryptocurrencies would need to be determined, taking into account their volatility, fragmentation, and the lack of regulation of the underlying cryptocurrency market. Regarding liquidity, the method of liquidity management and how to control liquidity risk must be established to ensure that obligations regarding any incurred leverage can be met. It is also necessary to analyze how the custody of this class of assets will be guaranteed—for example, how software validation, key custody, or cyber-attack risk management will be handled.

Specifically, regarding the practical difficulty of proper asset custody, and given that virtual currency movements can, in some cases, be carried out anonymously and without proper client identification, reporting obligations for the prevention of money laundering should be taken into account. It would be advisable to contact SEPLAC to determine if the EICC must comply with any of the reporting obligations provided for in Law 10/2010 on the Prevention of Money Laundering and Terrorist Financing.

The CNMV is observing the phenomenon of increased investment in virtual currencies with concern due to the potential risks this investment may pose to investor protection, especially for retail investors, and the stability and integrity of the markets.”

The aforementioned text can be consulted in full under CNMV Legislation.

IN DIEM Cryptocurrency Specialist Lawyers.

The IN DIEM Abogados department specializing in Cryptocurrencies and Bitcoin has extensive experience and a high level of knowledge in New Technologies and Cryptocurrencies. We operate and advise not only in relation to the virtual currency Bitcoin but also with all existing cryptocurrencies, including: Ethereum, Ripple, Litecoin, Dash… as well as Cryptocurrency and Funds, and ICO (Initial Coin Offering) investments, offering our clients the appropriate operational strategy and necessary advice for their operations and investments.

The highly specialized IN DIEM Law and Cryptocurrency Department, made up of a multidisciplinary team including IT specialists, financial experts, and expert lawyers, will contribute securely to the development of your operations and investments, providing technical and operational resources to analyze potential investments and operations, intervene in mining operations, or implement regulatory or legal compliance frameworks.

If you require more information, you can click HERE.