Lithuania: Central Bank Policy Update Opens Crypto Investment Funds to Professional Investors

The Central Bank of Lithuania has recently updated its policies on cryptocurrencies and initial coin offerings (ICOs), effectively allowing cryptocurrency-based investment funds to operate in the country.

According to Finance Magnates, the central bank has reportedly attempted to give financial market participants (FMPs) a “level playing field” when looking into the nascent industry. The Bank of Lithuania has now established that FMPs can launch investment funds for “virtual assets,” and has created parameters for how and when these assets can be used as a payment method.

The documents read:

Taking into account current market developments and evolving regulatory regimes as well as seeking to ensure a level playing field for all financial market participants, the Board of the Bank of Lithuania has updated its position on virtual assets and initial coin offering[s].

The central bank’s new policy means professional investors can create funds for digital assets, and that private companies can receive cryptocurrency payments processed by third-party exchanges, that turn them into local fiat currency.

It notes, however, that FMPs can’t accept digital assets if they’re then required to repay them, with or without interest. They’re also prohibited from issuing cryptocurrency-based loans, or from accepting virtual assets as collateral, unless they’re legally seen as securities.

Per the central bank, FMP should still attempt to separate their traditional financial activities from those related to virtual assets. They should, in fact, not provide services related to the cryptocurrency industry.

Crypto Growing in Lithuania

In Lithuania, the cryptocurrency scene has notably been growing. Recently, cryptocurrency wallet provider Blockchain.com opened offices in the country, and the amount raised by ICOs based in the country has kept on growing.

According to the report, it may have been behind Lithuania’s recent move, as the country saw a need for tougher anti-fraud measures with the growing popularity of the fundraising practice. As CryptoGlobe covered, in April of last year the central bank initiated a dialogue between crypto investors, banks, and regulators.

QuadrigaCX Co-Founder Traded Away Users’ Funds as Sole Operational Director: Report

  • More than $220 million worth of users' funds absconded-with by QuadrigaCX co-founder
  • Stollen funds used for trading on "competitor exchanges" - for a loss

Reportedly deceased QuadrigaCX co-founder Gerald Cotton withdrew customers' funds to trade on both spot and leveraged margin exchanges, incurring significant losses in the process, alleges the latest public report on court proceedings surrounding the incident.

The report, the fifth commissioned to the global accountancy firm Ernst and Young (EY) by the Supreme Court of Nova Scotia, found that a vast sum of cryptoassets were transferred from QuadrigaCX exchange wallets to wallets operated by “competitor” exchanges and controlled Cotton, between the period 2016-19. The vast majority of the transfers occurred under Cotton’s alias “Chris Markay.”

Specifically, 9,450 bitcoin, 387,738 ether and 239,020 Litecoin were said to be transferred from QuadrigaCX in this way, and the questionable transfers resulted in “overall trading losses” trading on both spot and margin exchanges.

An additional sum of 21,501 bitcoin was also transferred to an exchange wallet controlled by Cotton, although it is unknown precisely how much of this sum originated from QuadrigaCX wallets. The proportion is unknown because the wallet is held in an offshore location not obliged to comply with EY’s requests for full accounting details. EY added however, that this information has been given to law enforcement of the unspecified jurisdiction.

 

 

EY also claim that Cotton traded on QuadrigaCX itself, using what were likely false deposits of fiat currency to buy cryptocurrency on the platform and counter-trade customers. About 300,000 trades were made from these “unsupported deposits,” which helped beef up QuadrigaCX’s trading volume and trading revenues.

The EY report outlines some generally poor practices that seem to have enabled the scandal, includin poor Know-Your-Customer (KYC) standards enforced on the exchange, which enable the easy exploitation of the platform; no separation between users’ wallets and the exchange’s wallets; and a “significantly flawed” financial reporting and operational control operating infrastructure, which EY claim were largely directed by Cotton alone and in which “typical segregation of duties and basic internal controls did not appear to exist.”

An Unpaid Bill

The QuadrigaCX story has been so big as to make it to non-crypto media in Canada. It has recently been reported by the CBC that Cotton’s alleged exploits have left former customers in the lurch, to as much as $250 million (Canadian) of unreturned funds.

EY claim that roughly 76,000 users’ funds are stuck in limbo as, in effect, unpaid IOUs, and confirm a figure of $214.6 million CAD remains unpaid.