CryptoLaw Newsletter #4 - 1 June 2021
After crypto volatility, regulators turn up the heat
Hello CryptoLawyers,
After another week of volatility and sliding crypto prices, we’ve also seen another round of crypto warnings by public authorities and further hints that increased legislative and regulatory action is looming.
Digital Assets
Lots of reiterated crypto warnings, mainly from central bankers:
The Central Bank of Ireland’s Derville Rowland warned that the growing popularity of cryptocurrencies like Bitcoin is ‘of great concern’ and that investors should be ‘really aware they could lose the whole of that investment’ (Bloomberg). Rowland’s comments take on an extra level of importance: she is set to become the new chair of the Investment Management Standing Committee at ESMA, the EU’s Securities & Markets authority on 1 July.
Bank of Japan’s governor Haruhiko Kuroda said Bitcoin is barely used for settlement and is backed by nothing. (Bloomberg)
Denmark’s Central Bank governor Lars Rohde thinks cryptocurrencies are a fad. However, he hinted at what keeps central bankers up at night: not crypto ‘currencies’ but BigTech moving into payments. (Bloomberg)
Crypto warnings from central banks and regulatory bodies are nothing new, although the recent turbulence in crypto markets can explain the latest salvo of public warnings. Just last week, the Central Bank of Kuwait issued a statement on crypto-risks and the Bank of Canada called crypto highly risky despite institutional involvement (Cointelegraph). The Bank of England’s Andrew Bailey had previously stated crypto assets have no intrinsic value and warned investors only to buy them ‘if you’re prepared to lose all your money’. (CNBC)
The US SEC’s Gensler once again called for greater regulatory oversight of crypto in testimony before the Subcommittee on Financial Services and General Government. Gensler repeated concerns over volatility and speculation in crypto assets. He also flagged the lack of audited figures for trading volumes due to tokens trading on unregistered crypto exchanges, calling it ‘just one of many regulatory gaps in these crypto asset markets.’ Gensler noted the SEC has brought 75 cases so far relating to tokens and securities laws. He also addressed DeFi, stating that DeFi ‘platforms raise a number of challenges for investors and the SEC staff trying to protect them.’ In a clear hint of what’s on the horizon, Gensler said he looks forward ‘to working with fellow regulators and with Congress to fill in the gaps of investor protection in these crypto markets.’
Securities authorities
Canada - The Ontario Securities Commissionsays crypto trading platform Poloniex violated securities law by not registering as exchange. (Coindesk)
US – The SEC started its official review of bitcoin ETF applications by SkyBridge, Fidelity. (Coindesk)
Does crypto force securities regulators to modernize rules?
‘[W]e have work to do in modernizing our custody rules all across the board. I think, as with many other areas, crypto may force us to do that modernization faster than we otherwise would do,’ said SEC Commissioner Pierce at Consensus 2021. (Coindesk)
Banks & payments
US - Nebraska can issue state charters for crypto banks after Governor Ricketts signs Nebraska Financial Innovation Act (Decrypt)
Should Central Banks Worry About Facebook's Diem and Alibaba's Alipay, ask the authors of a new working paper published by the Richmond Fed.
Mining
Iran bans cryptocurrency mining for four months to stave off blackouts. (Verge)
China may apply social credit blacklisting of miners in Inner Mongolia in mining crackdown. (South China Morning Post)
AML/Money laundering
UK - Crypto business have been struggling to comply with AML rules set by Financial Conduct Authority, according to the Economic Secretary to HM Treasury. (Cointelegraph)
UK - The National Crime Agency finds that crypto money laundering is increasing. Its 2021 National Strategic Assessment discusses ransomware and dark markets.
Art and NFTs: Will NFTs aggravate money laundering concerns in the art world? (Decrypt)
Tax
Litigation - A couple in Tennessee, US filed a complaint in court arguing the IRS has no right to tax newly mined coins. It said coins earned by staking have been ‘created’ and are not taxable until sold. (Cointelegraph)
Australia’s Tax Office reminded taxpayers to declare crypto gains & losses. (Decrypt)
Korea – South Korea reiterated its plans to impose 20% income tax on crypto capital gains as ‘miscellaneous income’ as from 2022. (Blockchain.News)
Clarifying the regulatory perimeter: who’s in charge?
South Korea sought to clarify roles of different crypto regulators. (Cointelegraph)
The news comes shortly after the US Federal Reserve, OCC and FDIC had a first inter-agency crypto team meeting. Acting head of the OCC, Michael Hsu, said in an FT interview ‘he hoped US officials would work together to set a ‘regulatory perimeter’ for cryptocurrencies’. Hsu said that there was interest among his peers in ‘co-ordinating a lot more of these things’ . (FT)
Is Nigeria softening its stance on crypto? Central Bank of Nigeria Governor Godwin Emefiele assured Nigerians that ‘digital currencies will still have a place in the country’ and that ‘digital currency will come to life even in Nigeria’.
NFTs
Law firm Slaughter & May discussed how NFTs can facilitate resale royalties:
‘NFTs can be created so that a commission is automatically paid to the original artist on future re‑sales of their work. This can avoid the need to rely on statutory resale royalty schemes. These differ by jurisdiction, usually provide relatively low royalty rates … and often have strict requirements (including, for example, in the UK that the re-sale is for €1,000 or more, that the work is by an EEA artist and that it is re-sold through an auction house or other art market professional).’
DeFi
How should DeFi be regulated? How can we apply laws made for centralised intermediaries in a DeFi world? Consensus held a panel with leading DeFi legal counsel. (Coindesk)
Is DeFi replicating high frequency trading and frontrunning? Connor Payne from Blocksize Capital spoke about the ‘new age of high frequency trading’ at this week’s Crypto Assets Conference. He concluded:
‘The innovative part of Decentralized Finance is not the finance part’.
Frontrunning is also discussed in the academic paper DeFi-ning DeFi: Challenges and Pathway by Amler et al. The paper looks at the defining features of DeFi, opportunities, governance and challenges, such as flashloans, security and oracles.
DLT
UK - The National Cyber Security Council published a white paper on DLT that aims to help decision-makers decide whether DLT is appropriate. For applications such as bitcoin, digital art trade, certification and supply chain management, DLT may be an appropriate data storage solution, it says. In other instances, a traditional technology such as a database may be more suitable.
US - FinCEN is turning its attention to zero-knowledge proofs and other privacy enhancing technologies, planning a workshop on the topic with industry participants in September.
CBDC
Sweden will test its CBDC with Handelsbanken. (Reuters)
Bank of Mauritius will pilot a CBDC this year. (Coindesk)
Conferences
Consensus 2021: ‘What regulators said’. (Coindesk)
Crypto Asset Conference: Regulation was on many panelists’ minds on the first day of CAC 2021, organized by the Frankfurt School Blockchain Centre. It is clear laws & regulation are no longer an afterthought for many in the industry.
Spotlight – UK and crypto regulation
With lots of noise in the crypto markets the past few weeks, it’s important not to lose track of the bigger picture. Why is crypto attractive to so many? What can (and can’t) it offer? These are questions not only industry is trying to answer, but so are governments around the world.
Regulatory authorities have been looking at one another to see how to regulate crypto, whether it was on ICOs, ETFs or, more recently, DeFi.
The UK is one example. The Kalifa Review, published in February, suggests how the UK can reinforce its position as a fintech hub post-Brexit. The Review encourages the UK to develop a CBDC, facilitate trading of tokenized securities and consider amending existing rules such as insolvency law to facilitate post-trade processes using digital technology (such as DLT).
The Kalifa Review also proposed to draft a new regulatory regime for cryptoassets and explicitly sets a comparative benchmark with the EU’s draft Markets in Crypto-Assets (MiCA) Regulation. The ‘UK needs to act quickly to preserve its position. The UK should aim to be at least as broad in ambition as MiCA – but should also consider whether it can develop a bespoke regime that is more innovation-driven.’ The Review recommends a bespoke crypto regulation that is ‘flexible enough to deal with future challenges – such as how Decentralised Finance (DeFi) should be regulated.’
The Review was published a month after the UK’s Treasury released a consultation paper and call for feedback on cryptoassets. The paper focused mostly on stablecoins, which the government thought presented the ‘most urgent’ risks and opportunities. It also asked for feedback on the use of DLT for financial market infrastructure. The government clearly also has DeFi on its radar and said it would ‘keep this space under review and monitor developments closely’. Although the UK government recognises the ‘the increasingly important role played by DeFi’, the government ‘does not currently propose to bring specific DeFi activities into the scope of regulation’.
The Treasury’s consultation closed on 21 March and it currently is reviewing submissions.
The UK will probably keep a close eye on how the EU’s draft MiCA rules evolve (and vice versa). Unsurprisingly, the Kalifa review recommended to ‘keep the initiatives of other jurisdictions under review, so that it can adapt to other developments in what will be a very fast-moving market.’ And a very fast-moving market it certainly is.
Previous initiatives in the UK:
Legal Statement on Cryptoassets and Smart Contracts, November 2019, UK Jurisdictional Taskforce
Smart contracts – Call for evidence, December 2020, Law Commission
Kalifa Review of UK Fintech, February 2021, independent report by Ron Kalifa OBE
Digital Dispute Resolution Rules, April 2021, UK Jurisdiction Taskforce
Digital assets – Call for evidence, April 2021, Law Commission (closes on 30 July)
Next week, we’ll spotlight the allegations of crypto frontrunning and market manipulation and what the industry is doing to counter it. Stay tuned!
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