New Hungarian Encryption Regulations: Maximum 8-Year Prison Sentence Raises Industry Concerns

Hungary's recent cryptocurrency regulations have sparked widespread attention and controversy. The new rules classify unauthorized encryption activities as criminal offenses, making the country one of the most stringent in the EU regarding cryptocurrency. This move transforms everyday encryption transactions into potential legal risk zones, provoking a strong reaction from the fintech industry.

According to the latest revised laws, conducting encryption transactions on unlicensed trading platforms may face up to 8 years of imprisonment. This new regulation, which came into effect on July 1, has forced several large fintech companies to suspend their services in Hungary, affecting millions of users.

The new law introduces two new offenses: "abuse of encryption assets" and "provision of unauthorized encryption asset exchange services." Anyone engaging in cryptocurrency transactions on an unauthorized platform may face up to 2 years in prison. If the transaction amount exceeds approximately $140,000, the prison term may extend to 3 years; if the amount exceeds 10 times this figure, the term will be extended to 5 years. Service providers operating without government-approved licenses may face up to 8 years in prison.

According to local media reports, about 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 are at 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 must be reviewed by authorized "verifiers" and issued compliance certificates; otherwise, they will be deemed legally invalid, and participants may face criminal penalties.

The legal uncertainty has led major market participants to withdraw from Hungary. A well-known new bank has 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 purchasing, recharging, and staking services have been completely frozen.

Hungary's timing for cracking down on encryption trading is particularly 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 opting to delay implementation to ensure a smooth transition. However, Hungary is going against this coordinated path.

An analyst pointed out that it is hard to understand why Hungary is implementing such strict regulations just as the EU has established a unified standard, which will create significant legal uncertainty and hinder financial technology innovation.

Although law enforcement actions against globally recognized trading platforms are considered unlikely, companies 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 customers without facing consequences, while local companies could be sued.

The Hungarian Central Bank announced on July 3 that it will exclude cryptocurrencies from its official reserves, citing the high volatility of crypto assets and unclear regulations. The central bank stated that the stability and reliability of reserve assets must be prioritized while reaffirming its preference for traditional assets such as gold and fiat currency.

This series of measures has raised concerns within the industry about the future development of cryptocurrency in Hungary and has brought new challenges to the coordination and unification of cryptocurrency regulation within the EU.