CryptoLaw #45
UK crypto hub plans; criticism on EU KYC plans; Binance not subject to US fed. securities laws, says court; and UK court finds no fiduciary duties for core developers.
Hello everyone,
TLDR:
EU parliamentarians ruffled feathers (again) with a proposal to expand know-your-customer rules to a broad set of crypto transactions.
Meanwhile, the UK stole the limelight with a plan to turn itself into a crypto hub. Stablecoins will become a valid payment tool and will be brought into existing regulation. Details TBD.
If you lose your tokens because your private keys got hacked – too bad, don’t try to claim core developers of the token’s network have a fiduciary duty to help you get your assets back through a software patch. That’s the plain language summary of a recent UK court case.
The US SEC wants companies to disclose risks regarding crypto holdings to their investors.
Since Binance isn’t a US exchange, it didn’t commit US securities violations, according to a US court, rejecting yet another class action suit from disgruntled crypto holders.
Top-5 developments this week:
Do bitcoin developers have fiduciary duties towards bitcoin owners? A company managed by the infamous Craig Wright claimed so. The main claim boiled down to this: if you lose your bitcoin (or other crypto assets) because the private keys stored on your computer get hacked, then the bitcoin core developers have a legal obligation to develop a patch to fork the network to give you your coins back. That’s an incredibly bold assertion to make, even for a Wright-linked company. The court wasn’t convinced. The judge made a couple of interesting points on fiduciary and other duties that developers may face, as a fluctuating group of individuals, as well as on a legal disclaimer in the Bitcoin core code, and on jurisdiction. See our blog post here.
Customers of crypto exchange Binance lost a lawsuit alleging the exchange violated securities laws. The plaintiffs had started buying tokens on Binance in 2017, which soon lost much of their value. A Manhattan District Judge rejected their claims, which he said were brought too late. More importantly, however, was the jurisdictional conclusion that US federal securities law did not apply as Binance isn’t a domestic US exchange: “Plaintiffs must allege more than stating that plaintiffs bought tokens while located in the U.S. and that title passed in whole or in part over servers located in California that host Binance's website.”
U.S. listed companies that hold cryptoassets on behalf of customers should account for those assets as a liability on their balance sheet and disclose the related risks to investors, according to the Securities and Exchange Commission. The staff guidance document also clarifies how companies should apply accounting rules to digital assets. Crypto trading platforms should assume the liability of holding their customers’ assets and report both the obligation and corresponding asset, Bloomberg reported.
While we were busy analysing the potential impact of the EU’s proposed crypto rules (see below), the UK was refining the next steps in its own crypto policy. On Monday, the UK Treasury announced plans to recognize stablecoins as a valid payment tool. The move is part of a broader ambition to make the UK a crypto hub. Other parts of the plan include a financial market infrastructure sandbox, an FCA-led 2-day multi-stakeholder workshop in May, a Cryptoasset Engagement Group to work more closely with industry and even plans for a Royal Mint NFT drop this summer. The UK government will also review its crypto tax rules, including the tax treatment of DeFi loans, and consult on “wider regulation” of the cryptoasset sector later this year. Lots of announcements, but not many details yet. The announcement comes in the wake of criticism over the FCA’s handling of the anti-money laundering registration procedure. “This registration process has frankly been a disaster, and as a result, some very large and successful crypto businesses are leaving the U.K. and won’t come back. So that’s a lot of tax revenue and something of a blow to London as a fintech hub,” one crypto source told Coindesk. However, the FCA blamed poor compliance practices at some of the crypto applicant companies as the main problem in the AML registration process.
And then, finally, back to the EU, which appears to have received more attention from crypto twitter in the past few weeks than in the past few years combined. A draft rule imposing KYC (user identification) rules on a broad array of crypto transactions narrowly passed an EU parliamentary vote last week. The 2 key questions were: (1) should all crypto transfers be subject to KYC/AML rules, regardless of size and regardless of whether they involve financial intermediaries; and (2) should we subject transfers from personal wallets (self-hosted by users) to stricter rules than those from crypto wallets hosted by financial intermediaries? Yes on both counts, according to the EU committee vote. Critics argue that this subjects crypto transfers to stricter rules than conventional transfers and that the EU is going beyond theAML guidance issued by the Financial Action Task Force (FATF). EU parliamentarian Stefan Berger (rapporteur of the EU’s crypto regulation MiCA) tweeted he strongly regretted the vote, which he thinks will weaken the EU as a place of incorporation for innovation. It’s not clear if the rule will survive the next negotiation stage.
6/ The EU went beyond what's required. It dropped the $1k threshold & requires storing/collecting/verifying data for every single satoshi transfer. It also went so far as to require verification for “unhosted” wallets, something not explicitly mentioned in the FATF guidance.
16/ The EU already has some structural disadvantages in startups - smaller fragmented national markets without a common language, less flexible labor markets. If you add on "here are a bunch of rules that your competitors across the Atlantic don't have", well, good luck to youLeaked updates on the EU’s draft MiCA Regulation show provisions on decentralized finance (DeFi) and decentralized organisations (DAOs) are being discussed. Based on the leaked documents, there’s still some work to do on technical descriptions. For example, a draft DAO definition shared on Twitter incorrectly states a DAO’s “rules are entirely routed in its algorithm”.
Shout out to @jacobrobinsonjd who’s turning this newsletter into a podcast. Check out his Law of Code, which also features recent episodes with Dapper Labs’ Chief Compliance Officer and with a co-author of a16z’s DAO framework.
And also…
Tough restrictions for Australian ‘finfluencers’? Australian markets regulator ASIC published guidance for financial influencers, warning them the financial advise they offer to followers may make them financial service providers subject to registration obligations. Crypto influencers need to pay heed to ASIC’s guidance if the crypto products and services they discuss online are financial in nature.
Bank of Japan calls on G7 to adopt common crypto legal rulebook.
The National Bank of Georgia said it plans to adopt crypto rules, following FATF guidance.
Another bill targeting El Salvador’s adoption of bitcoin as legal tender was submitted in US Congress – this time in the House of Representatives.
Federal authorities in the US seized $34 million from a man who reportedly used mixers to hide his crypto transactions.
US SEC Chair Gary Gensler wants his team to cooperate with the CFTC to “register and regulate platforms where the trading of securities and non-securities is intertwined.”
The US SEC denied another spot Bitcoin ETF, this time from Cathie Wood’s ARK Invest.
1 out of 5 Americans have used, bought or traded crypto assets, according to a poll.
Singapore is tightening the rules for crypto companies registered in the jurisdiction but operating exclusively abroad. Those companies will now need to be licensed for KYC/AML purposes.
Sweden wants to test its CBDC for programmable smart payments.
The European Commission published a targeted consultation on a digital euro.
India’s 1% tax on crypto transactions deducted at source could be challenged in courts with a “fair chance” of success, lawyers think.
Indonesia plans a 0.1% tax on crypto transactions and investments.
Not legal but still relevant: FTX invested in Flash Boys US exchange IEX. IEX’s CEO Brad Katsuyama once generously spent an hour to allow me to interview him for my PhD research. Still grateful.
Thanks for reading!