Frequently asked questions on virtual currencies and their issuance (Initial Coin Offering)

What do the terms virtual currency, cryptocurrency, crypto-asset and ICO mean?

Virtual currency and cryptocurrency

Virtual currency is defined in the new Money Laundering Directive 1). What virtual currencies have in common is that:

  • they are not issued or guaranteed by a central bank or a public authority
  • they are not necessarily attached to a legally established currency
  • they do not possess the same legal status as currency or money
  • they are accepted by natural or legal persons as a means of exchange
  • they can be transferred, stored and traded electronically.

One of the best known virtual currencies is Bitcoin, which is a decentralised virtual currency that can be exchanged for a legal payment instrument, such as the euro. It was also the first cryptocurrency, i.e. a virtual currency based on an encryption algorithm and protected by encryption. A cryptocurrency is built on public and private keys by which value is transferred from one person to another and which are encrypted before every transfer.


Bitcoin and other virtual currencies can be considered as a form of wealth, but only as long as they have a functioning market. Instead of virtual currencies and cryptocurrencies, the term crypto-asset is often used. Bitcoin and other virtual currencies are, despite everything, a relatively small phenomenon and, at least for now, they have no impact on the financial markets or financial stability.

ICO i.e. Initial Coin Offering

Also associated with virtual currencies is the phenomenon ICO (Initial Coin Offering), i.e. the issuance of a new virtual currency. An ICO is a way of raising risk financing for a company or product development project. It means the advance sale of a new virtual currency or token.

New virtual currencies issued via an ICO may vary greatly in nature, depending on the way the ICO is implemented. Virtual currencies can be roughly divided into three categories. In addition, hybrid models combining a number of different features have also been observed in the market.

  1. Payment instrument-like virtual currencies, originally planned as alternatives to traditional currencies and also intended to be used as payment instruments elsewhere than in their issuer’s services. The best known payment instrument-like virtual currency is Bitcoin.
  2. Virtual currencies used as payment for a certain commodity (utility coin),which can be used to pay for their issuer’s products or services. Generally, the products or services are only at an early stage of their development when the virtual currency usable to pay for them is issued.
  3. Financial instrument-like virtual currencies, which have features in common with securities, such as voting and ownership rights and expected returns.

What are the risks associated with virtual currencies?

The security, integrity and balance of virtual currency systems are based on the mutual trust of their users. Value formation in virtual currency systems is not covered by the supervision of the Financial Supervisory Authority (FIN-FSA) nor any other authority.

Virtual currencies are primarily used as speculative investments, and their use for payment is secondary. No-one guarantees their value and as a result market prices fluctuate strongly. For these reasons, Bitcoin or other virtual currencies are not a real alternative to money, nor are they good payment instruments. There is also a money laundering risk associated with virtual currencies, and they are widely used in criminal activity. The FIN-FSA has warned about the risks of virtual currencies (in Finnish).

What regulations must be taken into consideration when virtual currencies are used for trading, when they are accepted as payment instruments or when they are issued?

Parties involved with virtual currencies must take into consideration the regulations governing them and also be aware of future regulatory projects.

Investors, miners or those accepting virtual currencies as payment instruments must take into consideration Tax Administration guidelines

Investors who buy and sell virtual currencies must take into consideration Tax Administration guidelines on the taxation of income from virtual currencies. Similarly, parties who accept virtual currencies as payment instruments or parties who earn money from mining them should be familiar with Tax Administration guidelines.

Regulation of virtual currency exchange services currently depends on what kind of virtual currencies are admitted to trading and how payment transactions are arranged

It is essential that parties establishing a virtual currency exchange service carefully review the virtual currencies admitted to trading. Virtual currency exchange services are responsible for determining the nature of each virtual currency admitted to trading and should assess, in particular, whether each virtual currency is a transferable security or other financial instrument referred to in the Investment Services Act. Regulation of trading with financial instruments is also applicable, technology neutrally, to exchange services in which virtual currencies classified as financial instruments are admitted to trading.

In principle, no authorisation is required for a virtual currency exchange service where trading takes place in the exchange service with payment instrument-like virtual currencies and with virtual currencies intended for payment for a certain commodity. If an exchange service accepts from buyers fiat currency (such as euros) or transmits to sellers fiat currency, it must give due consideration to payment institution regulations that may apply, depending on the way activities are organised. Further information on payment institution authorisations is available in the authorisations section of the FIN-FSA website.

New money laundering regulations are on the way, and providers of exchange services and wallet services should familiarise themselves with the regulations in advance

A high risk of money laundering and terrorist financing is associated with virtual currencies. In addition, they have been widely used in other criminal activities. The reform of the EU’s Money Laundering Directive, the fifth Money Laundering Directive (in Finnish), brings virtual currency exchange services and wallet service providers within the scope of regulation.

It is estimated that the new regulations will enter into force nationally in 2019. The exact timetable for entry into force will be determined as preparation of the legislative proposal advances. The proposal aims to promote the authorities’ opportunities to prevent and investigate crimes connected with virtual currencies (in Finnish).

When arranging ICOs, it is essential to determine the features of the new virtual currency

The regulations to be applied to ICOs should always be assessed on a case-by-case basis, because the virtual currencies issued in ICOs vary in terms of their features, and there are also large differences in the ways that ICOs are implemented. The most important issue in organising an ICO is the nature of the virtual currency to be issued and to what it entitles.

Securities market legislation is technology neutral. The virtual currency to be issued via an ICO may also fall within the scope of the definition of a security or financial instrument. A security is defined in Chapter 2 Section 1 of the Securities Market Act. A security is negotiable and issued or meant to be issued to the public together with several other securities with similar rights. A financial instrument is defined in Chapter 1 Section 14 of the Investment Services Act (747/2012) (in Finnish).

The FIN-FSA uses a list of questions in assessing whether virtual currencies are considered to be securities. If a virtual currency is considered to be security, regulations applicable to issuing a security must be adhered to. Exchange services offering trading in such currencies must also take into consideration provisions relating to securities trading.

If a virtual currency is not considered to be a security or financial instrument, the general provisions of the Consumer Protection Act, such as the provisions relating to distance selling, should nevertheless be taken into consideration.

What should I do if a virtual currency to be issued in an ICO is classified as a security?

There are no special regulations or exceptions for the issuance of virtual currencies. If a virtual currency classified as a transferable security is issued via an ICO, securities legislation should be adhered to. In this case, the issuer of the virtual currency may have, for example, an obligation to prepare and publish a prospectus. Further information on prospectus regulations can be found in the prospectuses section of the FIN-FSA website.

Even if a prospectus obligation does not arise, the general principles of the Securities Market Act, particularly Chapter 1, must nevertheless be adhered to.

The prospectus regulations must be reviewed with care and enough time reserved for preparing a prospectus. The FIN-FSA reserves 20 banking days for approving a prospectus, from the date when the FIN-FSA has received a prospectus containing all the necessary information.

How does the FIN-FSA provide guidance to organisers of ICOs and other parties planning services related to virtual currencies?

The FIN-FSA provides guidance centrally via the FIN-FSA Innovation Help Desk. Questions should be sent by email to the Innovation Helpdesk, and as detailed a description as possible of the planned activity appended. Parties planning to organise ICOs must also append answers to the questions that enable the assessment of whether the new virtual currency is considered to be a security. It is recommended that a draft of the white paper also be appended.

Final observation

In all business activity related to virtual currencies, it is recommended that due consideration be given to regulatory development. In Europe, there is currently much discussion about the regulation of virtual currencies, and it is recommended that parties involved in virtual currency activities follow regulatory development as closely as possible. Regulatory development may also affect how the FIN-FSA views the need for the authorisation of services in the future. The FIN-FSA may update its above-mentioned positions if regulatory development gives cause to do so.

1) According to the definition, a virtual currency means a digital representation that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.