Hungary Cracks Down on Unauthorized Encryption Activities, Investors Face Legal Risks

Hungary has recently implemented one of the most aggressive encryption regulatory measures within the EU, classifying unauthorized encryption trading activities as a criminal offense. According to the latest amended law, engaging in encryption trading on unlicensed platforms may result in a maximum of 8 years in prison. This move has turned everyday encryption trading into a potential legal minefield, causing a stir in the fintech industry.

The new regulations will take effect from July 1, forcing several large fintech companies to suspend their services in Hungary, affecting millions of users. Industry insiders warn that this could lead to a massive outflow of funds, leaving investors in a legal quagmire.

New Regulations: Severe Penalties for Unauthorized encryption Activities

Hungary's revised Penal Code has added two new offenses: "encryption asset abuse" and "providing unauthorized encryption asset exchange services." According to the new law, conducting cryptocurrency transactions on unauthorized platforms can result in a maximum sentence of 2 years in prison. If the transaction amount exceeds approximately $140,000, the sentence can reach up to 3 years; if it exceeds approximately $1.4 million, a 5-year prison term may be imposed.

For service providers operating without government approval, the law imposes the severest penalties, with a maximum sentence of 8 years in prison. This comprehensive reform has caught businesses and investors off guard.

According to reports, around 500,000 Hungarians invest in encryption assets using legally declared income. However, under the new vague framework, many users may face criminal charges due to past or ongoing encryption activities. An industry insider stated that ordinary users might face the risk of being prosecuted simply for managing their investments as usual.

It is worth noting that the Hungarian Financial Supervisory Authority has 60 days to establish enforcement and compliance mechanisms, but the current legal environment remains unclear. The new law also requires that all encryption transactions—whether exchanging tokens for fiat currency or exchanging for other tokens—must be reviewed and certified for compliance by authorized "verifiers". Transactions not certified will be considered invalid, and participants may face criminal penalties.

Fintech companies suspend services, compliance path unclear

The uncertainty of the law has led major market participants to withdraw from Hungary. On July 9, a well-known neobank announced the suspension of all encryption services "until further notice." The company has over 2 million users in Hungary.

Users can still transfer their existing encryption assets to external wallets, but the purchase, recharge, and staking services have been completely frozen. The company stated that the suspension of services is to ensure full compliance with Hungarian domestic laws and the newly introduced EU cryptocurrency regulatory framework, MiCA.

Currently, the company is applying for MiCA authorization through its EU entity, but the additional local license required by the Hungarian central bank complicates the process. The company emphasizes that this measure is temporary and states that "it is working to resume services as soon as the regulatory path becomes clearer."

Hungary's cryptocurrency regulation trends are contrary to the EU

Hungary's timing for cracking down on encryption trading is quite special, as the EU's MiCA regulatory framework also came into effect on July 1. MiCA aims to establish a unified legal framework for the encryption market across the EU, with several member states choosing to delay implementation to ensure a smooth transition. However, Hungary is going against this coordinated path.

An analyst pointed out that it is difficult to understand Hungary's implementation of such strict regulations at the moment when the EU has just established unified standards. This will create huge legal uncertainty and stifle financial technology innovation.

However, the crackdown on encryption trading seems to be just a part of Hungary's broader policy trend. The government has also implemented regulations limiting foreign ownership in companies and introduced laws that allocate a portion of citizens' donated funds to the state. Critics argue that these policies primarily affect urban voters with higher education levels, who typically do not support the ruling party.

Although law enforcement actions against globally recognized trading platforms are considered unlikely, enterprises registered in Hungary and local users are now facing legal risks. This has led to a paradox—foreign platforms may continue to provide services to Hungarian clients with almost no consequences, while local companies could be sued.

The Hungarian central bank announced on July 3 that it would exclude encryption from official reserves, further intensifying the restrictive atmosphere. The central bank stated that the stability and reliability of reserve assets must be prioritized and reiterated its preference for traditional assets such as gold and fiat currency.