In the Czech Republic, a suspected scam is prompting calls for regulators to take a hot new crypto product more seriously.

When a high-profile ad campaign run by a company named Xixoio began promising huge returns to small investors last autumn, some in the media and fintech world questioned whether the claims were too good to be true. But authorities were powerless to do more than issue warnings.

There are "risks associated with offers of capital appreciation through alternative investment products, which are sometimes supported by a strong media presentation," is how one Czech National Bank (CNB) alert in December meekly put it.

Virtual tokens "are not investment instruments in the sense of financial regulation," the alert continued. "Investments in them are thus not subject to the supervision of the Czech National Bank."

Some critics say regulators are partly to blame because they’ve been unwilling to take on the extra work of supervising digital assets. But with respect to blockchain technology, such as Xixoio's XIX Tokens, the bigger issue is that the watchdogs have no effective authority at all because those assets aren't defined as "securities."

Blockchain is a decentralized ledger that records cryptocurrency transactions with "blocks" of information, which are almost impossible to tamper with — making them very secure against outside manipulation.

Maria Staszkiewicz, CEO of the Czech Fintech Association, is among those calling for more robust supervision. "These assets have now entered the mainstream, so they can’t just sit back and close their eyes," she warned. She also maintains that other EU countries, such as France or Germany, would likely have come down harder on a project like Xixoio.

At the same time, there's fresh momentum from Brussels to bring the crypto market more closely under the control of national and EU regulators. These efforts could give Czech authorities better tools to handle Xixoio as well as other potential crypto players in the wings.

Too good to be true?

To Richard Watzke, the former art and real estate investor operating Xixoio, the company is a "bridge between crypto and traditional finance." For now, the tokens he’s selling represent no more than shares in his startup, but he promises that the capital raised will eventually be used to provide financing to SMEs. Under the terms agreed on by investors, however, Xixoio has no obligation to either use the capital raised in any particular way or to pay out any share of profits.

Xixoio started making a big splash last fall, plastering ads across television stations and billboards that promised triple-figure returns. That campaign drew a warning in November from the finance ministry, to little effect. Watzke then claimed in a volatile interview in December that Xixoio had already attracted over 2,000 clients. He also railed against the media for questioning his project and boasted about his willingness to sue critics like Petr Borkovec, a lawyer who publicly labeled Xixoio a Ponzi scheme.

More eyebrows were raised this month, when the DenikN media outlet reported that Xixoio’s management is linked to the Russian-owned MoneyPolo — which is suspected by U.S. authorities of moving dirty money via the now defunct BTC-e cryptocurrency exchange.

Authorities have still made no move to shut Xixoio down. But as Jan Šovar, a Prague lawyer specializing in fintech, sees it, "we have to assume" the CNB is paying closer attention to the company given the media scrutiny.

The broader concern among critics is that Watzke is exploiting the blockchain loophole, which means the authorities lack the oversight powers to prevent him making wild claims to potential investors.

"Right now, the Czech Republic is not built for blockchain man," quipped one source close to the government.

But Prague may see tighter rules soon.

EU legislators are developing new investor safeguards and transparency rules for the market of crypto assets, many of which escape existing standards for trading financial instruments. One vehicle is the Markets in Crypto-Assets framework, or MiCA. Once that's in place by year end, Czech lawmakers could then pass legislation that would give the CNB supervision authority over a far broader range of digital assets through amending the civil code.

"Once the new regulations are implemented, something that looks like a security asset and behaves like a security asset should be treated as such, no matter how it is created," says Staszkiewicz.

According to CNB spokesperson Petra Vodstrčilová, these updated regulations "seem sufficient for fulfilment of our mandate as a financial supervisor" provided that national lawmakers follow suit. At present, though, she cautioned that "it’s not realistic to expect that the financial supervisor will supervise all possible investments."

The source close to the government agreed that the new regulations "will give us a framework on which local authorities can build."

Searching for certainty

SMEs are also tuning in to this debate, with many keen to see if Xixoio can provide a new source of financing while cutting borrowing costs. Some worry that increased regulation will hamper innovation and crowd out entrepreneurs. "New and innovative projects in Czech fintech already struggle to win licences, with regulators pushing them hard to justify themselves," said Šovar.

But others hope that increased legal certainty by year end, if it materializes, will help mend trust in governance over such assets and, more broadly, support the development of the crypto market and attract institutional investors.

"Serious companies who seek to use this technology to conduct real business are looking forward to having clear regulations and rules," Staszkiewicz asserted.

But not everyone appears so keen on the promise of increased scrutiny. That might even include Watzke — who has now begun reducing his stake in Xixoio, according to fresh data issued in the U.K., where the parent company is registered.