Clear crypto regulation is essential for the development of the crypto industry. Funds from major investment funds will flow into the crypto industry once a clear crypto regulatory framework is set in major crypto jurisdictions. In this blog we will review the crypto industry regulation in Lithuania and highlight the main advantages of this jurisdiction. Over the last half of the decade, cryptocurrency investments have continued to maximize exponentially. As of 2023, reports show that there are 420 million people across the globe engaged in some form of cryptocurrency exchange. Amid such ongoing traction, Lithuania has remained under the spotlight as a hub, not just for individual cryptocurrency investors but also full-fledged businesses. The country’s regulations combined with a dearth of financial crypto-friendly policies, make Lithuania a great choice for licensing and authorizing exchanges in the region. And as a ripple effect, it also makes it incredibly easy for people to view crypto as a viable form of generating profit and/or savings. But before we dive further into the cryptocurrency landscape of Lithuania, here’s what you need to know.
What are the implications of cryptocurrencies in 2023?
By definition, cryptocurrencies are intangible digital tokens that are traded as a form of virtual currency. These are trail-free, and easily transferable between two or multiple parties over the general internet infrastructure. Contrary to traditional money, crypto is decentralized and thus, not owned by any single person or entity. Since the entire cryptocurrency system thrives on blockchain technology, transactions are limitless given a valid network of computers and without the need for any intermediaries such as banks.
In 2023, the global economy has already witnessed various splutters. In spite of negative speculation, the United States economy is experiencing growth, albeit at a slow pace. So to say, the world isn’t yet in an official recession but countries worldwide are reporting record high inflation rates. Given the uncertainty, especially following the fall of FTX, cryptocurrencies, similar to stocks, are more susceptible to volatility in the market. That said, the outlook is still positive with analysts pointing out that 2024-2025 might see many prominent cryptocurrencies boom.
Cryptocurrency regulation in Lithuania
To understand how cryptocurrencies are legislated in Lithuania, it’s important to look at the situation from a global perspective. Regulation of such digital assets is not easy, to say the least. Governments must possess a deep understanding of decentralized financial systems to even begin to implement regulation. It is precisely due to this ambiguity that many nations have yet to legalize cryptocurrency. While countries like Malta, Estonia, Canada and the United States readily enable the use of crypto, others like China have a lot of burdens.
On the larger front, there are no set international laws to oversee the trade of cryptocurrency and similar assets.
However, among the countries cognizant of cryptocurrency’s massive potential and increasing popularity, is Lithuania. Ever since 2020, the latter has been recognized as one of the top nations for crypto-related operations. This is because there is an extensive legal framework present to monitor the use, exchange, and overall trade of cryptocurrency within Lithuania. Not to mention, the jurisdiction has established a proper ecosystem whereby activities conducted by individuals and businesses are properly regulated.
Regulation of cryptocurrencies doesn’t just serve to alert the government of any illegal activities but also supports the interests of investors. By providing a framework of stability, enthusiasts as well as seasoned crypto traders are encouraged to take the legal route. All the while, regulated cryptocurrency activities foster various growth and innovation opportunities in the form of greater monetary accessibility, transparency and a lot more.
How Lithuania regulates cryptocurrency and related operations
The Anti-Money Laundering (AML) and counter terror financing (CTF) measures adopted by the Lithuanian government play a major role in how cryptocurrency exchange operates. The regulatory framework ensures that virtual currencies are controlled in compliance with the guidelines laid down by the European Union.
Cryptocurrency Exchange License
For companies eager to establish a virtual currency trading system in the country, Cryptocurrency exchange licenses must be obtained to legally initiate operations. This enables businesses to legally engage in a wide variety of activities, including brokerage trading to earn commissions among others. However, qualifying for any type of cryptocurrency license requires that the applicant meets all VASP related requirements.
Electronic Money License
If businesses wish to offer e-money to their clients, they must apply for an Electronic Money license (EMI). Once granted, this lets companies provide wallet services to customers. That said, EMI licenses are only suitable for companies with sufficient financial backing as the sharing capital requirement is a minimum of €350,000. This is in addition to the presence of verifiable and viable risk management frameworks within the business.
Overall, the EMI license offers ample versatility to all those who hold it since businesses are allowed to provide their services within the entirety of the European Economic Area rather than just Lithuania.
Payment Institution License
For businesses planning to offer transaction services involving cryptocurrencies, the Payment Services license remains a crucial prerequisite. Companies with the latter can conduct full-fledged payment solutions including setting up a platform for currency exchange, direct debits, crypto to fiat and more.
Just like the EMI, if you have the PI, you can legally operate anywhere across the European Economic Area. However, the differentiating factor resides in the minimum capital required. At the very least, applicant businesses must have a capital of €125,000.
Aims of Cryptocurrency Regulation in Lithuania
Investor and consumer protection
While cryptocurrency regulation in Lithuania generously lends itself to the protection of businesses and institutes, the primary aim remains consumer protection. Since the average investor is more likely to become subject to the dangers of illicit virtual currency activities, the framework is such that even small violations don’t go under the government’s radar. This largely insulates customers against crypto fraud.
Therefore, all investors are required to conduct a KYC, otherwise known as ‘Know Your Customer’, a process that serves as identification of the user for accurate record keeping. This, alongside other measures, help build due diligence to keep investors and customers safe.
Curbing the threat of money laundering
One of the major reasons cited by governments across the globe for not legalizing Virtual currency is the threat of money laundering. Since crypto is much harder to track compared to traditional money, it is often used by criminals to launder large sums without setting off sirens for concerned authorities.
In Lithuanian jurisdiction, regulatory bodies impose stringent policies to monitor all the cryptocurrency transactions occurring within national borders. This form of tracking not only limits the chances of illegal activity but also makes it near impossible for large sums to be digitally transported without triggering the finance ministry’s attention.
Enhancing financial stability
The use of cryptocurrency by individuals and businesses collectively has a major impact on the country’s financial system. If unregulated, the use of virtual currency creates an undocumented hole of influence that might be misinterpreted by economic decision makers at the state level. Needless to say, by adding cryptocurrencies to the mix of regular financial transactions, Lithuania ensures that it can measure, predict and mitigate potential financial risks appropriately. Moreover, it allows the government to adopt a bird’s eye view of the overall economic infrastructure, whereby earnings in virtual currency are also considered a part of the global domestic product.
Improvement on the innovation front
Regulating crypto doesn’t just come with risk-preventative benefits. It opens doors to a plethora of opportunities that can be leveraged extensively. And that’s exactly what Lithuania does so perfectly. At the moment, the country is busy creating a tech-driven platform by the name ‘LBChain’ to test digital ledger projects. But this is just one of many ways the Lithuanian government is taking advantage of its regulatory excellence.
In fact, Lithuania is so popular as one of the most crypto-friendly countries that it invites forward thinkers and entrepreneurs from different corners of the globe. Since the country boasts legal clarity in terms of digital currency investments and ventures, people are encouraged to set up platforms and startups without fear of being restricted.
In 2022 alone, between the months of January and October, almost 800 fintech businesses were registered. Naturally, the financial sector is booming and actively contributing to job creation within Lithuania.
Efficient taxation mechanisms
Underdeveloped countries with no regulation for cryptocurrencies bear the brunt of uncollected taxes. Because it is virtually impossible for these governments to track and monitor transactions, taxation is driven out of the picture. Given that cryptocurrency trades, when viewed collectively, add up to considerable profits, missed transactions and thus, missed tax earnings mean less government spend.
In Lithuania, however, individuals and businesses generating income from blockchain-based assets must comply with appropriate tax laws. This ensures that the government collects as much revenue as possible. In turn, Lithuania uses the tax collected not just for mainstream projects but also to further enhance its participation in the virtual currency realm.
Robust technological endeavors
Lithuania flaunts rapid growth in its startup landscape. Just over the last ten years, the area has been flooded with thousands of new businesses, a large chunk of which are fintechs.
By regulating cryptocurrency, Lithuanians benefit not only from financial robustness but also in other areas such as healthcare and supply chain. Over the past few years especially, the government has taken bigger steps to harness the power of blockchain across different operational aspects to boost itself on the technological frontier.
Compliance with European Union policies
Lithuania is a part of the European Union and thus, it must comply with the policies and guidelines laid out by the governing body. Given that the EU is more actively participating in the cryptocurrency world by the day, Lithuania is required to keep up with and adhere to the dynamic regulatory rules underlying the large European financial system.
The Importance of Clear Guidelines for Businesses and Investors
Clear and transferable guidelines in the cryptocurrency spectacle are not only essential for business growth in Lithuania but also pivotal for garnering investment capital. These policies ensure that the relevant parties are able to access the necessary mechanisms and know the expectations of setting up a business and technology platform, or even investing in cryptocurrency as an individual. Naturally, established guidelines for businesses and investors not only boost economic health but also mitigate uncertainty that can prove financially dangerous otherwise.
Robust legal compliance
The most important aspect of virtual currency regulation is to build legal compliance. In the absence of the current framework, investors and entrepreneurs would largely be deterred from operating their ventures in the country. Or worse, take the wrong steps to jeopardize their businesses.
By clearly laying out what is required of crypto license holders and investors in the region, the Lithuanian jurisdiction makes compliance a more achievable goal. It reduces the risk of recurring penalties, and promotes an ecosystem built on transparency.
Encouraging local and international investments
To reiterate, Lithuania is experiencing rapid growth due to the many startups setting roots on national soil. This, in large proportions, is due to clear guidelines underlying cryptocurrency exchange.
Since investors know what they’re in for and what to look forward to, there’s less speculation and risk associated with committing capital. Verily, over the last few years, Lithuania has welcomed large sums of international investments.
Greater market confidence
Those who trade cryptocurrency know that market speculation and investor fear is everything. Alongside other external factors, these two are proven to determine the trajectory of coin prices and plunge the overall market index. When we talk on a country-level, clear guidelines and regulatory frameworks boost market confidence. Such that, when businesses, individuals, and investors trust the financial systems in place to work as intended, fear of liquidity is automatically low.
This confidence, sustained over long periods of times, helps Lithuania maintain its position as a stable market within the largest global economy. And in a domino effect, market stability sends positive signals to governing bodies, potential investors, and cross-the-country partners.
Economic equity
Economic discrimination is rampant throughout the globe, particularly within developing countries with lacking regulatory frameworks. This puts the average citizen at a disadvantage. With cryptocurrencies added to the equation, economic disparity can worsen since people earning through blockchain can potentially evade taxation and possibly even engage in questionable activities.
As a resident of Lithuania, or someone staying in the country for business, there are several repercussions for non compliance with the law. Ever since 2022, the EU and Lithuanian Government have been working together to crack down on financial irregularities arising from illegal activities involving virtual currencies. The Financial Crimes Investigation Service are actively playing complex technological solutions to identify and charge perpetrators jeopardizing fairness standards in the region.
Role of government institutions in formulating and enforcing regulations
Officially, the Financial Crimes Investigation Service supervises the operations of cryptocurrency businesses in the country. Additionally, the ministry of finance closely monitors all crypto operations in the Fintech bubble. In cases of violation, the financial crimes investigation service comes into play and is ordained to deliver notices and take corrective action.
In order to greenlight businesses for the use of cryptocurrency and fintech under Lithuanian and EU policies, three types of licenses, as mentioned earlier, are granted.
If you’re looking to get licensed for crypto exchange in Lithuania, the first and the foremost requirement is to have a limited liability company. This is a non-negotiable essential if you want to offer any form of virtual currency services, be it through an exchange system or storage wallet. Bear in mind, this is not the same as being an investor in cryptocurrency or digital assets.
As of the November 2022 amendment, stricter policies for crypto operation and trading in Lithuania have been introduced.
For one, people can only open accounts with their real name matching their state-issued identification card. Moreover, each company is assigned an individual AML officer who is barred from performing similar functions for any other crypto business. Most prominently, however, a virtual currency exchange as well as a crypto wallet operator is required to show a minimum capital amounting to EUR 125 000.
Besides these changes, a Company Register went into effect at the start of 2023 whereby all currency exchange and wallet operators were publicly listed to enable greater transparency. Today, these companies are also ordained to follow rules of presence within Lithuania.
The Verdict
Lithuania’s cryptocurrency framework, although constantly evolving as a result of external forces remain an epitome for other governments to follow. Ever since COVID-19, the country has reserved its position as a top cryptocurrency-friendly destination. Safe to say, the regulatory infrastructure is driven by diverse objectives such as enhancing innovation, boosting legal compliance, and protecting individuals.