Navigating the Cryptocurrency Landscape in Latvia Before 2024

As of the period leading up to 2024, Latvia’s regulatory landscape for cryptocurrencies was shaped by a blend of defined and undeveloped regulations. The Latvian authorities, particularly the Bank of Latvia and the State Revenue Service, considered cryptocurrency as a contractual means of payment, but not as legal tender or official currency. This stance stemmed from the fact that cryptocurrencies were unregulated and not linked to any national currency​​.

In terms of anti-money laundering (AML) regulations, Latvia adhered to the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing. This law was aligned with the European Union’s 4th and 5th Money Laundering Directives (4MLD and 5MLD), reflecting a proactive stance towards mitigating financial crimes associated with cryptocurrencies. The financial services sector, inclusive of services related to cryptocurrencies, was regulated under the Financial Instrument Market Law and the Law on Payment Services and Electronic Money, with oversight provided by the Bank of Latvia​​.

The AML Law specifically included definitions and regulations concerning virtual currencies, defining them as digital representations of value that could be transferred, stored, or traded digitally. Virtual currency service providers were required to register with the State Revenue Service, conduct risk assessments, establish internal control systems, and report unusual and suspicious transactions. This placed virtual currency service providers under the same regulatory umbrella as other financial entities subject to AML regulations​​.

In terms of specific cryptoasset activities like borrowing, lending, exchange, custody, and yield/staking, Latvia did not have explicit regulations. The Consumer Rights Protection Centre (CRPC), responsible for overseeing consumer lending, had not issued sanctions or announcements regarding the lending of cryptoassets. However, operations such as exchange and custody were regulated and required licenses if they fell within the scope of traditional financial services. Virtual assets, particularly those categorized as investment-type tokens, might be classified as financial instruments under the Financial Instrument Market Law​​.

Despite this regulatory framework, Latvia lacked a specific national framework for establishing cryptoasset businesses or obtaining licenses for cryptoasset transactions. The classification of virtual assets as investment-type tokens implied that authorizations might be required for certain business models. This uncertainty underscored the importance of consultation with the Bank of Latvia, particularly for initial coin offerings and other investment-related crypto activities​​.

The Bank of Latvia expressed its intention to support FinTech and innovation in the financial system, including cryptoassets, depending on the business model. The Regulatory Sandbox, open to all financial service companies, including those dealing with cryptoassets, represented an avenue for introducing innovative financial services or business models in Latvia​​.

Overall, there were no specific limitations to setting up a cryptoasset business in Latvia, but the nature of the business model might present unique challenges or requirements. Therefore, it was advisable for entities interested in cryptoasset ventures to consult with the Bank of Latvia to navigate the regulatory landscape effectively​​.

In summary, prior to 2024, Latvia’s approach to cryptocurrency regulation was characterized by its alignment with EU AML directives, the need for registration and compliance by virtual currency service providers, and a general lack of specific regulations for certain cryptoasset activities. The evolving nature of this regulatory landscape highlighted the importance of ongoing dialogue with regulatory authorities, particularly for new and innovative business models in the crypto space.