Global Regulation, Local Solutions Emerging Themes 2020 - Page 77



DIGITAL
Across the world the regulatory treatment of
blockchain technology remains diverse. Within
the EU, member states often take different
approaches but the EU is slowly developing
EU-wide frameworks such as the European
Securities and Markets Authority’s (“ESMA”)
recent advisory on initial coin offerings and
cryptoassets. Regulatory oversight within the
US is likewise divided across multiple federal
and state regulators. We briefly consider the
regulatory approaches in three key jurisdictions.
UNITED STATES
Much of the recent regulatory activity in the US
has come from the Securities and Exchange
Commission (“SEC”), Commodities Futures
Trading Commission (“CFTC”), Financial Crimes
Enforcement Network (“FinCEN”) and Internal
Revenue Service (“IRS”). In April 2019, the SEC
released a statement on “Framework for
‘Investment Contract’ Analysis of Digital Assets”
to help market participants determine whether
a digital asset is a security, both at issuance
and later.
In July 2019, as part of market discussions to
develop ways to establish possession or control
by broker dealers over their customers’ digital
asset securities, the SEC and the Financial
Industry Regulatory Authority (“FINRA”)
issued a joint statement identifying scenarios
that avoid custody concerns altogether. For
example, where broker dealers do not act as
intermediaries or take possession of the digital
asset securities.
In October 2019, CFTC Chairman Tarbert
clarified in public remarks that he considers both
Bitcoin and Ether to be commodities (and not
securities). In the same month, the IRS released
guidance addressing taxation of digital assets
and virtual currencies, including appropriate
calculation of gains and losses. And the SEC
continues to police fraud and unregistered
offerings in the digital asset context.
EMERGING THEMES 2020
Regarding money transmission and anti-money
laundering concerns, in May 2019, FinCEN issued
guidance on convertible virtual currencies
detailing how:
(1) Money transmission regulations apply
to common business models involving
convertible virtual currencies
(2) Financial institutions can identify and report
suspicious activity relating to convertible
virtual currencies.
On 11 October 2019, FinCEN, the SEC, and
CFTC issued a joint statement highlighting
anti-money laundering and counter-terrorism
obligations in the digital asset space.
Importantly, blockchain when used
as a medium of exchange, for
example Bitcoin, is not currently
regulated in the UK. This may,
however, change in the coming
months following various public
enquiries on the subject
UNITED KINGDOM
The regulatory approach to blockchain in
the UK is essentially based on a functional
characterisation of how blockchain is being
used in a particular situation. On this basis,
many applications of blockchain fall within the
existing regulatory framework. For example,
tokens that are properly characterised as
securities (as opposed to pure utility tokens)
are regulated investment products. Therefore
issuing them could potentially be subject to the
prospectus requirements and providing certain
services in connection with their issuance and
secondary market trading are very likely to
require the service provider to be licensed.
Importantly, blockchain when used as a medium
of exchange, for example Bitcoin, is not currently
regulated in the UK. This may, however, change
in the coming months following various
public enquiries on the subject. In contrast,
derivatives over cryptocurrencies are regulated
financial products.
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Notably in November 2019, the LawTech
Delivery Panel published a Legal Statement
on Cryptoassets and Smart Contracts. This
document concludes that, under existing
English law, most cryptoassets are capable of
being legal property and smart contracts are
capable of satisfying the basic requirements
for a legal contract. This may well help to
reduce much of the legal uncertainty relating to
cryptoassets and smart contracts and thereby
make the UK a more attractive place to do
blockchain-based financial services business.
GERMANY
Like the UK, Germany aims to be the EU front
runner for setting a comprehensive regulatory
framework for blockchain technology, proposing
not only an overall blockchain strategy but also
the enactment of new regulatory authorisation
requirements.
CONCLUSION
Although 2019 saw a
number of tangible
developments in legal and
regulatory approaches to
blockchain technology, the
sphere remains in its infancy.
2020 will see additional
legal and regulatory
initiatives; the emergence of
recognisable trends in the
application of existing rules;
and further sophistication in
interactions between
market participants
and regulators.
Draft legislation has been prepared which
will implement new licensing requirements
for operators of electronic wallets storing the
client’s key(s) and bring certain tokenised
services to customers within the scope of
regulation in Germany. When the new law
comes into force, the provision of brokerage and
exchange services in currency tokens, securities
tokens, and certain other tokens (most likely
excluding utility tokens) will trigger the need
for a banking license. As these activities will
be regulated services, anti-money laundering
requirements will also apply.
DANIEL CSEFALVAY
Partner,
London
BERND GEIER
Partner,
Frankfurt
BEN SAUL
Partner,
Washington DC
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