Publication

During the end of 2024, the Latvian government introduced amendments to the Commercial Law, specifically permitting the use of crypto assets as contributions in kind to the share capital of a limited liability company (SIA). These latest amendments are part of a broader strategy aimed at promoting innovation and attracting crypto asset service providers to Latvia.

The legal framework is based upon the European Parliament and Council Regulation (EU) 2023/1114 on Markets in Crypto-Assets (MiCA), which came into effect on 30 December 2024. MiCA aims to establish a unified regulation for crypto assets across the European Union, thereby increasing legal certainty and promoting a wider use of distributed ledger technology (DLT).

Although crypto enthusiasts generally frown upon hearing about new regulations being introduced, MiCA’s task is to regulate the ‘shadow market’ of crypto, thereby ensuring consumer protection, market integrity, and financial stability.

Particularities of the Process

The standard process of incorporating a SIA in Latvia includes several stages – preparing incorporation documents, appointing the management board, and paying the share capital.

Traditionally, when establishing a SIA, participants transfer Euro 2,800 to the temporary account of the newly established SIA, but it is possible to pay the share capital with a contribution in kind. For making a contribution in kind, an independent expert’s opinion on the value of the in-kind contribution is usually required. However, when making a contribution by way of a crypto asset, the founder can prepare the valuation of the crypto asset themselves. This valuation must be based upon the average price of the specific crypto asset on a crypto asset trading platform operating in accordance with the MiCA regulation (over the six-month period prior to the valuation).

Article 153 of the Commercial Law, which sets out the basic principles of in-kind contributions, was supplemented with a seventh part, which prescribes the procedure for investing crypto assets in the company’s share capital. Meanwhile, Article 154 of the Commercial Law, which determines the procedure for evaluating in-kind contributions, was supplemented with part 2², which sets out the procedure for evaluating electronic money tokens or asset-referenced tokens.

According to the seventh part of Article 153 of the Commercial Law:

“When making an in-kind contribution with a crypto asset, it shall be transferred to the company’s distributed ledger address or to an account opened with a crypto asset service provider specified in the MiCA regulation.”

Currently, only two types of crypto assets are allowed for paying share capital: 1) Electronic Money Tokens (EMT); or 2) Asset-Referenced Tokens (ART), as defined in MiCA:

1. Electronic Money Tokens (EMT) – Regulation Section IV (Articles 31–44)

• These are crypto assets most commonly called stablecoins intended to maintain stable value by referencing a single official fiat currency (e.g., Euro or USD). They function similarly to electronic money.
• Examples include fiat currency-backed stable cryptocurrencies such as USD Coin (USDC) and Tether (USDT).
• Issuers must be authorised (licensed) as an electronic money institutions (EMI) or credit institutions, observing strict requirements, including:
  • Maintaining liquid reserves in a 1:1 ratio with the reference currency.
  • Reserve assets must be separated from the issuer’s own assets.
  • Token holders must be ensured the right to redeem tokens at face value at any time.
  • A whitepaper must be submitted and approved by the national competent authority.

2. Asset-Referenced Tokens (ART) – Regulation Section III (Articles 16–30)

• These cryptocurrencies stabilise their value by referencing multiple assets, such as a basket of currencies, commodities or other crypto assets.
• Examples include DAI and PAX Gold (PAXG).
• Issuers must obtain MiCA authorisation and meet requirements, such as:
  • Secure and transparent reserve asset management.
  • Reserves must not be used as collateral.
  • Detailed reports on reserve coverage.
  • Compliance with risk management and governance standards.

Practical Experience: USDC as Share Capital

USDC (USD Coin) is one of the most popular stablecoins or EMTs that complies with MiCA. USDC is issued through a partnership between Circle and Coinbase, aimed at ensuring a constant 1:1 peg to the USD. USDC’s total market capitalisation exceeds USD 60 billion. The closest stablecoin pegged to the Euro is EURC from the same issuer Circle, but its market capitalisation and popularity are significantly lower.

USDC is based upon the following technical and financial principles:

• Reserve in USD currency or equivalent assets: For every USDC in circulation, an equivalent amount in USD (or highly liquid US government securities) is held in third-party maintained accounts, which are periodically audited. Upon returning USDC, the token is destroyed, and the user receives the equivalent amount in USD.
• Regular audits and transparency: Circle publishes reports on reserve funds so that users and institutions can verify the maintenance of the 1:1 ratio.
• Smart contracts and blockchain: USDC exists on multiple blockchains (Ethereum, Solana, Polygon, etc.), and issuance and destruction (minting/burning) occur through smart contracts, ensuring transparency and precise accounting.

Data from the European Central Bank (ECB) highlights that since 2022, the Euro/USD exchange rate has experienced significant fluctuations, affecting the competitiveness of Latvian companies across global markets. Stablecoins can offer an alternative, enabling companies to manage currency risk more effectively, maintain liquidity, and reduce conversion costs.

It should be noted, however, that currently no Latvian bank offers crypto asset custody services for businesses; therefore, it is necessary to seek a foreign Fintech provider for such services. Additionally, when transferring funds to a crypto exchange, there is an inherent risk the credit institution may identify the payment as risky and accordingly block the account.

When the tokens are in the company’s possession, crypto assets must be accounted for in the bookkeeping. According to the amendments to the Cabinet Regulation No. 775 “Regulations on the Application of the Annual Accounts and Consolidated Annual Accounts Law,” crypto assets must be shown as inventories, while EMTs – fall under “cash”. The value of crypto assets at year-end must be adjusted, choosing between acquisition costs or the lower market price. Detailed information on the types of crypto assets and accounting policy must also be included in the financial statements. It is entirely possible that in the near or distant future taxes may also be payable with crypto assets.

Reduction of the bank’s role as a transaction intermediary and building trust in crypto

Europe in general, and Latvia in particular, are currently at interesting crossroads regarding the trust in cryptocurrencies. The Eurobarometer 2024 survey shows that 68% of Europeans have heard about cryptocurrencies, but only 17% have used them. In the Latvian context, these figures are similar according to recent surveys– 63% of residents are aware of cryptocurrencies, but only 14% have used them.

The decentralised financial system (DeFi) is currently changing the dynamics of financial transactions, gradually reducing the role of banks as intermediaries. The decentralisation enabled by blockchain technology transforms the essence of financial intermediation, on the one hand, threatening traditional bank revenue sources, but on the other hand, stimulating new models of cooperation and forms of services.

High-street banks will continue to offer traditional services, including deposits and loans, but their ‘monopoly’ over transactions is gradually diminishing. For entrepreneurs in Latvia, this means more opportunities to conduct cross-border transactions without the need to pay relatively high commission fees or wait for long transaction confirmations. Moreover, transactions on the blockchain are fully traceable and virtually unbreakable.

With the increasing trust of global asset managers in crypto assets, regulatory efforts by global jurisdictions, and the inclusion of crypto assets within investors’ portfolios and the topic is no longer discussed within a narrow circle of enthusiasts.

One of the main obstacles for general acceptance is the lack of knowledge and concerns about security. As the Associate Professor Dr. oec. Jānis Priede from the University of Latvia’s Faculty of Business, Management and Economics notes:

”Fraud cases and chaotic regulation in the past have left an impact on public trust in cryptocurrencies. However, the implementation of the MiCA regulation and other regulatory efforts are gradually changing this perception”.

Personal experience reflects this paradox of trust – on the one hand, the legislator increasingly supports the integration of cryptocurrencies into businesses, but on the other hand, traditional institutions, such as banks, still treat them with caution or rejection. As regulatory clarity increases and positive usage examples emerge, a gradual rise in public trust in cryptocurrencies can be likely expected, particularly in stablecoins, which combine innovation with stability.

As is often stated in the financial world – money is conservative, but innovations are revolutionary. My experience shows these two forces are gradually starting to find a place in Latvia, and in the future, we may see more and more companies successfully integrating traditional business structures with the advantages provided by crypto assets.