FCA talk on digital assets at NYU
On 5 March 2020, Therese Chambers, Director of Retail and Regulatory Investigations at the FCA gave a speech at the Advancement of Digital Assets and Addressing Financial Crime Risk at the New York University School of Law. The speech was entitled “Unstable coins: cryptoassets, financial regulation and preventing financial crime in the emerging market for digital assets” and covered amongst other matters, the origins of cryptoassets, technology regulation in the UK and the difference on approaches between the UK and the United States.
Below we have set out some of the highlighted topics of the talk, in summary form:
- cryptoassets such as Bitcoin, present different financial crime risks from traditional FinTech apps, as they enable digital value transfer without a financial intermediary;
- money laundering using cryptoassets is a real danger, but the application of robust AML controls combined with international cooperation can help reduce the risk;
- robust regulation to prevent financial crime supports financial innovation in new markets such as cryptoassets; and
- the FCA’s AML regime for cryptoassets presents the FCA with unique supervisory and enforcement powers that are tailored to meet international standards.
COMMENT: both the fact of this talk, the UK regulator speaking in a US venue, and the highlighted issues which look at international efforts, show the understanding of regulators in both countries that cryptoassets are here to stay and need to be regulated, as are other asset classes, suggesting that the regulators do want to move forward proactively and provide the public with protected access to a new range of assets
European Banking Authority announces digital finance priorities for 2020
On 3 March 2020, the EBA published a speech by José Manuel Campa, EBA Chair, setting out the EBA’s priorities for 2020 in relation to digital finance. Mr Campa’s speech focused on three areas: the impact of regulation on the development of new technologies; the impact of supervision; and the EBA’s plans for 2020 with regards to FinTech.
Mr Campa commented on the varying supervisory approaches in different jurisdictions. He suggested that these different approaches might be due to a “lack of familiarity with newer technologies,” and highlighted both the EBA’s FinTech Knowledge Hub and other initiatives to promote knowledge sharing and education. Mr Campa set out three areas in digital finance on which the EBA will focus:
- regTech – the use of technologies to address regulatory and compliance requirements more effectively and efficiently and SupTech – the harmonisation of technologies used for suspicious transaction monitoring;
- platformization – the EBA will be carrying out a thematic work on platformization, ie the trend towards the reaggregation of products and services on platforms; and
- operational resilience – supporting the implementation of the EBA’s guidelines on information and communication technology risk and security management addressed to financial institutions by organising training events in 2020.
COMMENT: It is not just the UK and USA which are taking what we view as constructive and proactive steps to improve regulation. Here, in a further step forward, the EBA has considered the key issues to be addressed and is exploring how technology can be used to enhance the possibilities which technology itself can create.
FMLC responds to European Commission consultation on regulatory framework for cryptoassets
On 17 March 2020, the Financial Markets Law Committee (FMLC) published a press release announcing the publication of its response to the European Commission’s consultation on the suitability of the existing regulatory framework for cryptoassets.
The FMLC’s response takes the form of two reports:
Taxonomical approaches to cryptoassets – this report calls on the FC to reconsider its proposed criteria for the classification of cryptoassets. It argues that the characterisation of cryptoassets simply by reference to their functions yields an incomplete picture and that regulation of cryptoassets on the basis of such characterisation may fail to take into account the many other factors that influence the roles of various actors creating, holding or transferring cryptoassets.
The regulation of cryptoassets – this report considers issues raised by the EC on the application of existing regulation to cryptoassets suggesting that legislation that regulates the financial markets in general, such as MiFID II and the Market Abuse Regulation (596/2014) can be considered to be technology neutral and could encompass cryptoassets to the extent that they are functionally equivalent to financial instruments.
COMMENT: The engagement by another body in the discussion of not just whether cryptocurrencies need regulation but, more importantly, how, is hopefully another step towards the formation of a correct regulatory framework. The request for re-thinking shows how the intricate and precise nature of these assets is understood by many in the industry.
JMLSG consults on new chapter of AML and CTF guidance relating to cryptoasset exchanges and custodian wallet providers
On 17 March 2020, the Joint Money Laundering Steering Group published for consultation the proposed text of a new chapter to be added to Part II of its anti-money laundering (AML) and counter-terrorist financing (CTF) guidance for the financial services sector.
The proposed new chapter (referred to as sector 22) contains sectoral guidance relating to cryptoasset exchanges and custodian wallet providers. It takes account of the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511), which came into force on 10 January 2020.
Areas covered within the guidance includes the following:
• risk management;
• customer due diligence; and
• dealing with suspicious transactions.
COMMENT: The importance of anti-money laundering regulation to apply to all assets – not just money – is crucial. By stringent application of these rules it is hoped that the bad name given to crypto assets by some quarters will decrease along with bad actors in the sector.
Bitcoin steadies as Bank of England cuts rates to 0.25%
On 11 March 2020, the Bank of England lowered interest rates 0.5% to just 0.25%, a reduction of 0.5%. The pound immediately reacted, falling 0.5% against the US dollar, to subsequently recoup some of the losses.
Bitcoin however has failed to react, with supporters of the cryptocurrency maintain that stimulating spending and borrowing by lowering rates is just one practice laying the foundation for the long-term ruin of the fiat economy.
To avoid recessions, a key fear of Keynesian economists, governments aim to increase spending while applying incentives such as tax cuts for businesses. Additional spending against a backdrop of less income can only happen via the use of measures such as increasing the money supply, further debasing fiat currencies.
COMMENT: Many in the crpytosphere are predicting how the impact of the coronavirus and actions taken by central banks and governments will impact the future uptake of non-fiat currencies which have no central bank
Libra competitor Celo launches ‘Alliance for Prosperity’
The Celo Foundation has signed up 50 members to its ‘Alliance for Prosperity’, an effort to use blockchain technology and digital assets to “enable prosperity for everyone”.
Celo is a decentralised and open source platform designed to help make financial tools accessible to anyone with a mobile phone. The project’s Celo Dollar stablecoin can be sent to mobile numbers rather than crytpo wallet addresses.
Libra Association members Andreessen Horowitz and Coinbase Ventures, along with the Grameen Foundation, are among the firms backing the non-profit Celo Foundation’s mission. The Foundation says its platform will help bring the transparency, utility and low cost of blockchain technology to people around the world, enabling developers to build tools that work across devices, carriers and countries. ”
According the article, Celo differs from the Facebook-led Libra because it is decentralised. Its reserve is also backed by other cryptocurrencies, not fiat money, which could help avoid the regulatory concerns Libra is facing.
COMMENT: It will be interesting to see not just how Celo performs, but also Libra and other alternative, or competitor, coins.
US Cryptocurrency Act of 2020
On March 9, Representative Paul Gosar introduced the “Crypto-Currency Act of 2020,” a bill that looks to choreograph a wide range of digital assets to answer to the appropriate regulator.
Cointelegraph quotes Mr Gosar’s legislative assistant saying, “the bill looks to provide not only clarity, but legitimacy to crypto assets in the United States.” Mr Gosar’s proposal divides digital assets into three categories: crypto-commodity, crypto-currency and crypto-security. Respectively, the three categories would be governed by the Commodity Futures Trading Commission (CFTC), the Secretary of the Treasury via the Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC).
Cointelegraph commented that the language of the bill appears to cement the status of digital assets like Bitcoin as crypto-commodities rather than crypto-currencies. The classification of “crypto-currency” states “representations of United States currency or synthetic derivatives” — more reminiscent of stablecoins like Tether (USDT). The language behind crypto-securities, remains familiar: “all debt, equity, and derivative instruments that rest on a blockchain or decentralized cryptographic ledger.”
The bill is an updated version of one leaked in December; it features expanded definitions for terms like “Decentralized cryptographic ledger” and “Smart contract” — concepts that U.S. legislators are struggling to cope with. The updated bill is more explicit about determining “primary” rather than “sole” regulatory responsibility. The exact implications remain to be seen, but the change could weaken the legal standing of crypto businesses arguing that, say, the SEC has no right to regulate them.
The past year has seen a number of new draft bills, especially in response to Facebook’s white paper for Libra. Fears of facing regulation by the SEC probably contributed to changes to Libra’s initial vision of a managed stablecoin based on a “basket of currencies.”
The nearest peer to Gosar’s new bill is, however, Warren Davidson’s (R-OH) Token Taxonomy Act, initially introduced in 2018 and later updated and re-introduced in April 2019.
Finman, for one, felt that the Token Taxonomy Act had stalled out. He also said of the new Crypto-currency Act that “I think this is slightly bigger in scope.”
Claire practises financial services law with a focus on regulatory issues, cryptocurrencies and tokens, trading and brokerage documentation and advising both existing and start-up funds and fund managers.
If you would like to discuss any of the points we raise, please contact me or one of our other lawyers.
Phone: 0207 585 1406