Danish FSA Orders Saxo Bank to Divest Crypto Holdings, Indicating Tightening Regulation

The Danish Financial Supervisory Authority (Finanstilsynet) on July 4, 2023, issued a directive to Saxo Bank, instructing the financial institution to divest its holdings in cryptoassets. This move is based on the current legal framework, which prohibits banks from trading cryptoassets for their own account.

Saxo Bank has been providing its customers with various crypto trading options via its platform. It offers a variety of crypto products, including ETFs (exchange traded funds) and ETNs (Exchange traded notes), which track the evolution of cryptoassets. Moreover, the bank extends an opportunity for customers to speculate in cryptoassets marketed as "cryptocurrency crosses."

In addition to offering these services, Saxo Bank has been maintaining a portfolio of cryptoassets. This portfolio serves as a hedge against the market risks associated with the bank's crypto product offerings.

However, according to Denmark's Financial Business Act, an exhaustive list of permitted activities for financial institutions is provided, and trading in cryptoassets does not feature on this list.

Currently, the area of crypto trading remains unregulated. The Regulation on Markets in Cryptoassets (MiCA), intended to regulate this area, will not take full effect until December 30, 2024.

The Danish FSA has voiced concerns that unregulated trading in cryptoassets could potentially destabilize trust in the financial system. The FSA argues that legitimizing trading in cryptoassets without proper regulations is unwarranted, thereby classifying this activity as an unacceptable ancillary banking operation.

Saxo Bank had been trading in cryptoassets for its own account as a means of hedging risks associated with the provision of other financial products. This action, however, is deemed unallowable for Danish financial institutions under the current Financial Business Act.

Consequently, the Danish FSA has decided that Saxo Bank's trading in cryptoassets for its own account falls outside the permitted business area for financial institutions. This has led to the directive for the bank to divest its cryptoasset holdings.

Historically, Denmark has been viewed as one of the most crypto-friendly nations globally, being one of the first jurisdictions to declare its stance on Bitcoin treatment. The Danish Central Bank does not regulate Bitcoin and doesn't recognize cryptocurrency as conventional currency. Moreover, the Financial Supervisory Authority of Denmark does not regulate or prohibit the operation of cryptocurrency businesses, including Bitcoin operations, in the country.

However, this action against Saxo Bank may signal a potential pivot in Denmark's approach, indicating a move towards stricter crypto regulation.