We are currently representing an EU based client of AAX whose crypto assets were blocked after the collapse of AAX which went under a bankruptcy and liquidation process operated by Quantuma international.
AAX functioned as a cryptocurrency asset provider who offered an online platform for trading in crypto assets and derivatives linked to such assets(1).
On the website, AAX referred to several jurisdictions: Atom Holdings (in Official Liquidation), registered in the Cayman Islands and its subsidiaries:
- AAX Limited, registered in Seychelles
- AAX Asia Private Limited (in Liquidation), a company registered in Singapore
- AAX Singapore Private Limited (in Liquidation), a company registered in Singapore
- Atom Holding Limited, a company registered in Malta
- AAX Exchange (Malta), a company registered in Malta
- Atom International Technology Limited, registered in Hong Kong with Quantuma Advisory Ltd. a company registered in England and Wales
The broker provided three distinct services. Firstly, there was spot trading, enabling the exchange of one cryptocurrency for another. Secondly, there was futures trading, which relied on the spot price index of cryptocurrency assets. The third service offered was OTC trading, a facilitation of direct transactions for the sale and purchase of cryptocurrency assets(1).
Currently AAX is undergoing a procedure of liquidation, the broker reportedly decided to declare bankruptcy and and liquidate the entirety of its assets. AAX shuttered its services on November 13th, 2022, following what it said was a malicious attack in which it was left unable to verify customer balances and allow people to withdraw their crypto assets holdings (2). The entity is currently undergoing an internal investigation.
In the light of the new European Markets in Crypto-Assets Regulation “MiCA”(3) coming into force soon, it prompts the question of how investors would be affected in this scenario if AAX was subject to regulation under MiCA.
What protections does MiCA provide for investors in case of liquidation of a crypto service provider?
According to MiCA, AAX would be categorised as an issuer of crypto-assets (the AAB Token) and a crypto-asset service provider, thereby subjecting it to a specific set of rules designed to afford greater protection to investors.
1. Major Advantages
The major advantages that AAX’s clients would have if MiCA was applicable could be summarized as follows:
- AAX would be subject to an EU jurisdiction.
In the case at hand, after a meticulous check we can confirm that AAX operates under two entities in Malta. However, based on the information that our client shared with us, we can’t confirm that AAX in Europe operates under them.
- AAX would be obliged to hold in custody client’s assets separated from its own estate with no recourse from creditors of AAX in the case of its own insolvency(4).
This is the best security for the traders as far as their crypto assets should be kept in separate wallets and their assets should be immediately accessible in case of bankruptcy.
- For the AAX Token (AAB), AAX would be obliged to publish an information document (called white paper) with mandatory disclosure requirements such as the characteristics, functions and risks of crypto-assets, also general information on the issuer, on the rights and obligations attached to the crypto-assets, on the underlying technology used for such assets and on the related risks, etc.(3)
- AAX would be subject to civil liability rules should apply to crypto-asset issuers and their management body for the information provided to the public through the crypto-asset white paper.
- AAX would be liable for the losses incurred as a result of incidents attributable to it, capped at the market value of the assets at the time of loss(4).
- AAX would need to have a comprehensive set of rules of conduct specifically to protect clients’ assets:
- Mandatory provisions in custody agreements with clients (for example obligatory clauses contain the nature of the service provided and a description of that service, the means of communication between the crypto-asset service provider and the client, including the client’s authentication system, a description of the security systems used by the crypto-assets service provider, fees applied by the crypto-asset service provider, the law applicable to the agreement)
- Keeping a register of positions in the name of each client, including rules and procedures to ensure safekeeping and minimise risks of loss due to fraud, cyber-threats and negligence.
- Facilitating exercise of client rights (for example granting clients the ability to file complaints with crypto-asset service providers free of charge)
- Adopting a procedure for returning crypto assets as soon as possible(.4)
AAX’s clients would be in a better position if AAX was regulated under the MiCA. However, as pointed out by Verena Ross, the chair of ESMA, even though the implementation of MiCA is a step forward, it has to be noted that there is no such thing as a safe crypto-asset and that consumers need to be aware that MiCA does not provide the same protection as what exists for traditional financial products(5). EU takes a step forward to solving this status quo by introducing MiCA and providing investors with ways to protect their assets against unscrupulous firms and unreliable practices. Undoubtedly, if AAX was regulated by MiCA, users would have experienced significantly lower losses in their crypto investments thanks to the enhanced protection afforded by MiCA.
If you feel that your broker is liable for your losses, please contact us and we will provide you with a free preliminary analysis of the case.
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