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When analyzing the developing centers of the FinTech industry, it is worth paying attention to Ireland. There are many companies involved in blockchain technologies in this jurisdiction. According to the research published by “The Irish Times” in 2018, about 120.000 people in Ireland own a cryptocurrency.[1] Despite the above, it should be stated that the Irish regulatory landscape regarding crypto assets remains in development compared to older and more experienced siblings from Europe. This is evidenced by the fact that in Ireland cryptocurrency-based businesses are not prohibited or banned, but there is still no specific legal regulation for FinTech businesses, including crypto assets or attention-grabbing proposals for regulatory amenities that attract a wide range of investors. The Irish government also do not view cryptocurrency as legal tender. This authority declares its readiness to undertake actions aimed at adapting and supporting modern solutions based on crypto-assets, however, as today, we’re  still waiting for real progress in this aspect. Moreover, there is no news of the government's willingness to regulate crypto-trading at the local level.

Taking the above into account, is it a good idea to think of Ireland as a jurisdiction in which to start and develop a crypto-based business? In the absence of a legal regulation dedicated to such assets, are other legal acts binding in this state applicable to them? What is the positioning of the Irish crypto sector for the future? We will answer all of the above questions and much more in the following article.

LEGAL FRAMEWORK

Cryptocurrencies are unregulated and decentralised. This means that The Central Bank of Ireland (CBI), which is the authority responsible for the regulation of financial services in Ireland, does not guarantee or control their supply. It also means no regulatory protections for investors when holding, buying or selling virtual currencies or there is no harmonized definition of crypto assets. However, despite the lack of a regulatory framework, cryptographic operations do not take place in a regulatory vacuum - it should be borne in mind that some existing regulatory systems may be important for crypto assets depending on the specific characteristics crypto-assets and business model. In other words the given issue could be subject for example to securities regulation, MiFID II or it may also be structured such that it falls outside the regulated space.[2] For example, if the token qualifies as a “financial instrument” the requirements set out in the MiFID II, MAR and Irish AML requirements would need to be considered.

In early 2021 the Fifth Anti-money Laundering Directive (EU) 2018/843) has been implemented into Irish law. AMLD V was implemented under the Criminal Justice (Money Laundering and Terrorist Financing) Act of 2021, which made changes to the Criminal Justice Act 2010 (Act). The changes applicable to Virtual Asset Service Providers (VASP) entered into force on 23 April 2021. From that moment, all crypto and blockchain companies established in Ireland classified as VACs will had to obtain a license from the Central Bank of Ireland. The registration obligation has been imposed on entities providing the certain services. Under the Act only includes those crypto-assets that can be both: digitally traded or transferred and used for payment or investment purposes. Currently there are no application or supervision fees. The length of the application process varies based on the number of pending applications and the applicant’s ability to submit a quality application along with all the mandatory documentation. In this way, the CBI has approved the cryptocurrency platform „Gemini” to accept cryptocurrency transactions in euros and sterling. Gemini  followed its authorisation as an Electronic Money Institution  by the Central Bank in March 2022. The platform allows retail customers and institutions to open a Gemini account to deposit, trade, and custody around 100 cryptocurrencies, including DeFi tokens.

As of 23 April 2021, the providers of certain services in relations to virtual assets will also have to meet anti-money laundering and countering of financing of terrorism obligations. The new legislation means VASPs are subject to a number of new requirements namely  must register with the CBI and comply with AML/CFT obligations. In connection with this, the aforementioned supervisory authority emphasizes that new regulation does not change the fact that virtual currencies are not currently regulated.

Returning to the topic of the domestic crypto-regulatory level, in March 2018, the Irish Department of Finance published a discussion “Paper on Virtual Currencies and Blockchain Technology”[3], which provides an overview of the potential of blockchain technology, and raises considerations on how virtual currencies impact investors and entities on several fronts, including data protection or EU regulations. As declared in the document, the Department of Finance has set up an inter-departmental working group on cryptocurrencies and blockchain that is closely monitoring innovations in the crypto sector.

Subsequent declarations without much coverage in actions that are real for investors were made in April 2019. Then the Government of Ireland unveiled “Ireland for Finance”- the new strategy for the further development of the international financial services sector in Ireland to 2025.[4] In the published document, the authority declared its intention to develop the country in the financial services sector, including DLT technology, showing readiness to support it. What is more, in a published document, the authority declared its intention to make this state a real global lead for blockchain technology. And as unfortunately often happens, lofty and ambitious theoretical plans do not adequately translate into business practice. Neither in the published document nor at a later date specifies the form and method of supporting the FinTech sector or specific plans for its development. Moreover, until now the Irish authorities in a somewhat cautious way of approaching certain risks aspects of blockchain technology. The best example of this are the messages issued by the CBI aimed at drawing investors’ attention to the potential risks associated with cryptocurrency investments.

Apart from the above, it is worth adding that there is an industry innovative network focused on the promotion of blockchain, crypto and Web3 in Ireland. Blockchain Ireland connects with other emerging technology clusters to facilitate formation of new jobs, to promote notable examples of blockchain, crypto and Web3 entrepreneurship, and to establish Ireland as a knowledge-hub for crypto-asset custody and creation, and a centre for decentralised financial services. In order to achieve its objectives, Blockchain Ireland co-creates a wide range of networking and information-sharing events including the popular annual/national Blockchain Ireland Week, and collaborates in and commissions research to scope and advance emerging opportunities in the field.

CRYPTO FUNDS

The way in which Ireland's regulatory approach to legalizing crypto funds is changed can be described as an application of the small steps method. The pace of changing the attitude towards the issue is not the fastest compared to other jurisdictions open to crypto, but Ireland does not completely close the door to investing in this type of assets. At the very beginning it is worth realizing that investment funds that are authorized in Ireland are generally set up as either Undertakings for Collective Investment in Transferable Securities (UCITS) or non UCITS funds, Alternative Investment Funds (AIFs). There are two main types of AIF in Ireland, the Qualifying Investor AIF (QIAIF) and the Retail Investor AIF.

In February 2020, the Central Bank  of Ireland (the Central Bank) released disappointing news for the one investor group to the public: cryptocurrencies will remain off limits for Irish-regulated funds targeting non-professional investors. The situation is slightly different with regard to professional investors. On 29 July 2021, the Central published updates to its Q&As on UCITS and Q&As on AIFMD. The guidance provided that the CBI was open to case-by-case applications for Qualifying Investor AIFs to gain exposure to crypto-assets (in light of the professional investor base and minimum €100,000 initial investment for such products). This is an extremely positive step forward for the Irish alternative funds industry.

On 8 February, 2022 the Central Bank of Ireland published its second Securities Markets Risk Outlook Report (Report)[5] in which it identifies the key conduct risks it sees facing securities markets in 2022 and sets down its expectations of what financial service providers and market participants should do to effectively identify, mitigate and manage these risk. In the Report, the Central Bank also referred to the trading in crypto assets, described them as a new product offering in securities markets that is complex and a potential threat to investor protection.

The Report emphasizes that the Central Bank has been an increase in queries in relations to whether UCITS or authorized AIF-s may be invested, either directly or indirectly in crypto assets – in the opinion of the authority, while such assets may be suitable for wholesale or professional investors, is highly unlikely to approve a UCITS or a Retail Investors AIF proposing any exposure (either direct or indirect) to crypto assets, taking into account the specific risks attached to crypto assets and the possibility that appropriate risk assessment could be difficult for a retail investor without a high degree of expertise. The Central Bank thus took away the retail investors hope for the possibility of investing funds in crypto funds. At present, participants in the cryptocurrency industry still have no illusions about changing the authority's approach to approve the crypto fund for retail crypto investors. However, non-optimistic news for retail investors does not entail negative consequences for another category of investors.

On the contrary, CBI has taken a first step towards approving crypto funds. In April 2022, the CBI has approved in principle a Qualifying Investor Alternative Investment Fund (which is dedicated to for professionals, well-informed, flexible investors, geared to a wide range of investment goals) with a low level of exposure to cash settled bitcoin futures traded on the Chicago Mercantile Exchange - it is the first time that the regulator has approved any kind of fund with indirect exposure to a cryptocurrency. The time when fund investing directly in bitcoin will be available to a retail investor would appear to still be some way off.

CRYPTO PERSPECTIVE FOR THE FUTURE

The regulatory situation in the Irish FinTech market is heading in a fairly good, albeit clearly prudential direction. The lack of cryptocurrency legal regulations or innovative solutions dedicated to investors investing a capital in crypto-assets means that Ireland for many is not a dream jurisdiction, which they will think about in the first place in the context of starting or developing their business. Interestingly, there are some exceptions to this objective observation - in the 2022 Global State of Crypto report[6], Ireland was deemed to be the most crypto curious country surveyed, with 58pc of respondents indicating some interest in cryptocurrency. How can we interpret this rather surprising distinction in this report? This is a kind of signal that Ireland is becoming noticeable and intriguing for investors, it arouses their curiosity. And this is certainly a good path that is worth following further.

Certainly not without significance is the fact that recently CBI approves qualified exposure to crypto assets.  With the increased focus of the Central Bank on this area, Irish funds are well placed to be at the forefront of future developments in this area, provided that managers are able to comply with the requirements of the Central Bank and any future regulatory developments in this area.  Taken together, all of the above issues make it impossible not to see Ireland as a country that undoubtedly already has some advantages to offer and which can attract much more if it continues to introduce further liberal and FinTech-friendly initiatives. At the moment, we only have to wait for the development of events and further constructive engagement by the Irish Government and CBI in these area.