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.
The activities are similar to it but are not the same. Indeed, the main difference of the MiFID regulation is the notion of financial instruments. In that regard, cryptocurrencies are not, at least for the time being, financial instruments within the meaning of Belgian law.
Article 2, 1° of the law of 2 August 2002 on the supervision of the financial sector and financial services exhaustively defines what financial instruments are.
It appears that cryptocurrencies do not fall within the definition of financial instruments given by 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 customers changed the situation, as it did not include cryptocurrencies as financial instruments, and in so doing, did not make them 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 customers (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. Indeed, the definition of marketing ends up covering investment advice specifically, but not portfolio management, whereas the manager must, 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).
He 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 for a retail client, within the limits of their mandate, in cryptocurrencies, without having marketed (and therefore presented) it… The manager should therefore have very broad discretionary power.
II. The retail customer
The regulations and the attached explanatory note do not specify anything about the definition of retail customers. However, this definition exists only in one specific law, the law of 2 August 2002 (MiFID regulation). Although the MiFID regulation is not, at this stage, applicable to cryptocurrencies, it is therefore this definition that 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 in themselves (e.g. credit institutions, investment funds, insurance companies, the State, Communities and Regions, public authorities, etc[2].).
In fact, almost all consumers and most companies, within the meaning of the Code of Economic Law, are therefore retail customers.
However, retail customers may be professional clients at their request (opt-down) provided they meet certain criteria.
a) Possibility for the retail customer to request to be treated as a professional customer (“opt-down”)
However, 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 to them by the conduct of business rules. This is called an “opt-down”.
b) Conditions and Procedures for an Opt-Down
However, this option is subject to the condition that the regulated company of which they are customers accepts it. To opt for this status, these retail customers 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 he or she 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 year of the previous four quarters on the relevant market;
The value of the client’s portfolio of financial instruments, defined as including bank deposits and financial instruments, exceeds 500,000.00 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.
In addition, these customers may only waive the protection afforded by the MiFID rules of conduct in accordance with 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, or 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 document separate 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 must be required to take all reasonable measures to ensure that the retailer 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 are distinguished 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, it must be considered that cryptocurrencies are covered by the notion of financial products, and therefore by the regulation prohibiting marketing to retail customers.
Conclusion
The simple act of presenting cryptocurrency portfolio management services to the public could already be considered to be marketing, which is prohibited.
In practice, what is prohibited is not portfolio management in cryptocurrencies, but the fact that the retail client may be offered such portfolio management, and therefore the client’s access to such information. The marketing to professional clients of financial products whose performance is, directly or indirectly linked to crypto-currencies, is not prohibited.
Retail customers wishing to use such services would be obliged to request to be treated, as part of this discretionary cryptocurrency management, as professional clients. This should come from their initiative. Finally, a whole series of conditions and procedures would have to be respected.
However, this solution involves a risk. Indeed, the FSMA and the courts could consider that the marketing takes place before the conclusion of the discretionary cryptocurrency management contract. In this case, it is only at the time the contract is concluded, and not at the time the service is marketed, that the customer could choose to be treated as a professional. The contracting parties may insert 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 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 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.