Undercover Inspectors to Monitor Cryptocurrency Exchanges

The popularity of cryptocurrencies is increasing, and in monitoring the operations of cryptocurrency exchanges, the regulator has decided to employ tried-and-true methods of sending undercover inspectors. The Croatian Financial Services Supervisory Agency (Hanfa) issued a public consultation proposal for the Regulation on the Implementation of Secret Supervision over the Provision of Services Related to Crypto Assets at the beginning of September. The consultation ends in mid-September, after which all formal conditions for secret supervision of cryptocurrency exchanges will be met.

This form of supervision is not entirely new in the domestic financial world – Hanfa already applies it in a range of measures when supervising the operations of insurance companies based on a similar regulation from last year derived from the Insurance Act. The application of secret shopping in the cryptocurrency market was announced in the Act on the Implementation of Regulation 2023/1114 on Crypto Asset Markets, which came into force in mid-July last year, and which in Article 45 provides for the possibility of conducting supervision through secret shopping (mystery shopping).

Waiting for Alignment

However, according to this law, there are currently no licensed companies, Hanfa emphasizes. – Generally, the supervision of cryptocurrency exchanges is currently only provided for by the Anti-Money Laundering and Terrorism Financing Act – they add from the institution.

This regulation is a new subordinate legal act, they emphasize in Hanfa. – Its purpose is to more precisely regulate the implementation of Hanfa’s powers already provided for by law. The most significant novelty is the precise regulation of the procedures and circumstances under which secret supervision can be conducted. The goal is to ensure legal certainty and transparency, as well as alignment with European regulatory practices where this type of supervision has proven to be an effective tool, especially for verifying compliance with legal requirements regarding the transparent presentation of information when establishing a business relationship with clients. We believe that this Regulation will significantly contribute to consumer protection, as a supplement to regular supervision of overall business operations – emphasize the financial regulator.

As stated in the explanation, secret purchases will be conducted by employees of Hanfa or other persons authorized by the regulator. In response to Lider’s question about how many such external collaborators could be engaged, Hanfa states that their use will be decided on a case-by-case basis, guided by business justification and taking into account the goal to be achieved. Secret shoppers, whether they are employees of Hanfa or external collaborators, will present themselves as potential clients interested in entering into contracts for the purchase of cryptocurrencies at cryptocurrency exchanges.

Triggers for Supervision

In addition to physical locations, secret supervision can also be conducted during online purchases. A purchase contract may also be concluded, but it will not be legally valid as it is intended solely for the purpose of proving facts established in the supervision process. Hanfa will notify the cryptocurrency exchange within 15 days that it was the target of secret supervision, and at that time, it will also receive instructions from the regulator regarding the refund of the money spent by the secret shopper, while the regulator will return the purchased cryptocurrencies.

The proposal for the Regulation states that this type of supervision will be applied particularly when verifying the provision of services that may potentially be difficult for the average consumer to understand, as well as cross-selling and identifying risks associated with conducting business with crypto assets. These include, for example, aggressive distribution of certain crypto assets, unfair business practices, and actions contrary to regulations or the sale of cryptocurrencies that do not meet the requirements and needs of clients. A trigger for sending secret shoppers will also be a significant increase in the number of concluded contracts that may suggest actions contrary to the rules, as well as a high rate of termination of concluded service contracts. Hanfa will also direct its secret shoppers if it notices a significant number or increase in complaints and objections from interested parties, a significant number of lawsuits, and if it receives information from the media or other competent authorities about irregularities in a cryptocurrency exchange.

Unpredictable and Effective

From our largest and most well-known cryptocurrency exchange, Electrocoin, they state that they have not been subject to such supervision so far. However, they do not see any problem in the announced possibility of sending secret shoppers. – We believe that the introduction of a system such as secret shopping will significantly increase the level of compliance with regulatory requirements. Such a measure serves to encourage market participants to proactively comply with regulations, as it represents an unpredictable and effective supervision mechanism. This raises the standard of transparency and professionalism in the operations of all participants – they emphasize from Electrocoin.

However, the question remains how much work Hanfa’s secret shoppers will actually have. Last year, Hanfa received a total of 214 complaints from citizens who reported their experiences with the domestic financial industry. The majority of these complaints, 56 percent, relate to complaints against insurance companies, which is understandable given the prevalence of insurance policies, especially mandatory car insurance. Although some estimates suggest that around 200,000 Croatian citizens invest in cryptocurrencies, not a single complaint has been received directly regarding the operations of domestic cryptocurrency exchanges.