The week’s developments in the crypto currency world including FMLC paper on issues of legal uncertainty relating to ICOs

FMLC paper on issues of legal uncertainty relating to ICOs

On 31 July 2019, the Financial Markets Law Committee (FMLC) published a paper discussing issues of legal uncertainty arising from initial coin offerings (ICOs). The FMLC comments on how existing laws apply to ICOs and looks at some of the challenges for regulators, providers and market participants. These challenges include a lack of international and regional harmonisation relating to the categorisation of tokens issued in ICOs, as well as in their regulatory treatment.

The FMLC believes that where ICOs do fall within the UK or EU regulatory perimeter, further uncertainties arise about how existing registration and authorisation regimes would apply to them. On the other hand, where ICOs fall outside the regulatory perimeter, there are questions about whether and, if so, how the relevant regime might be extended to prevent any regulatory underlap. Since this area of law is made more challenging by the non-physical, non-geographical nature of token issuance, the paper also discusses the conflict of laws issues that may arise because of the cross-border nature of ICOs and distributed ledger technology (DLT).

Finally, the FMLC refers to existing attempts to regulate ICOs and makes some recommendations that might inform further work in this area. It looks at some models that might be adopted to adapt legal and regulatory frameworks to accommodate ICOs, and recommends that particular attention is given to the aspects of ICOs that are innovative and non-aligned with traditional financial services and that are therefore unfamiliar to, or unrecognised by, existing law and regulation.

(Source: Financial Markets Law Committee, Initial Coin Offerings: Issues of Legal Uncertainty, available at
http://fmlc.org/report-initial-coin-offerings-30-july-2019/

The U.S. Senate Committee on Banking, Housing and Urban Affairs holds its hearing on regulatory frameworks for cryptocurrencies and blockchain

The U.S. Senate Committee on Banking, Housing and Urban Affairs is holding its hearing on regulatory frameworks for cryptocurrencies and blockchain today. The open session is titled “Examining Regulatory Frameworks for Digital Currencies and Blockchain”. Testifying as expert witnesses will be Circle CEO Jeremy Allaire, representing the Blockchain Association; Rebecca Nelson, a member of the Congressional Research Service specializing in international trade and finance; and Mehrsa Baradaran, a law professor at the University of California Irvine School of Law.

The hearing is set to examine the regulatory questions around the industry and should be fairly broad, unlike the hearings on Facebook’s Libra project earlier this month. “It’s going to be a discussion about the broader industry and what are the regulatory challenges and what can the U.S. be doing better, so I’m pretty optimistic,” said Kristin Smith, head of the Blockchain Association. In his prepared remarks, Allaire calls for Congress to treat digital assets as its own asset class, as current regulatory burdens may make it difficult for U.S. companies to conduct business.

Source: “Circle CEO Allaire to Congress: Treat Crypto as a New Asset Class”, available at https://www.coindesk.com/circle-ceo-allaire-to-congress-treat-crypto-as-a-new-asset-class

Crypto friendly regulation can help UK Brexit, says $10 billion advisory giant

The CEO of financial advisory giant deVere Group said positive cryptocurrency regulation should form a central part of the post-Brexit United Kingdom. DeVere, which has around $10 billion of assets under advice, is concerned the U.K. will end up in recession in the event of a no-deal Brexit, which politicians have promised could happen as soon as October. deVere CEO statated that “the growing cryptocurrency market has already provided tangible economic benefits to other major economies” and ““post-Brexit Britain will be uniquely placed to go even further and by embracing it, it could reboot the UK’s financial services sector.” Brexit would allow London to preserve its financial hub status, freeing it from bureaucracy and leaving lawmakers free to adopt a pro-crypto approach similar to Switzerland and Japan.

(Source: “Crypto Friendly Regulation Can Help UK Brexit, Says $10 Billion Advisory Giant”, available at https://cointelegraph.com/news/crypto-friendly-regulation-can-help-uk-brexit-says-10-billion-advisory-giant/

The New York Times Research & Development team launches The News Provenance Project to fight “fake news”

The New York Times is looking to blockchain technology in order to develop a workable solution to combat “fake news”. It will begin by by exploring Hyperledger Fabric, a permissioned and private blockchain framework. They are developing this proof of concept in collaboration with the IBM Garage, which has executed similar projects in other industries. The underlying structure of blockchain as a “distributed ledger” (a database that is not housed on one set of servers owned and operated by one entity, but by many entities and servers that are kept updated simultaneously) is useful for this project because it makes the records of each change traceable: files are not so much changed as built upon. Any updates to what is published are recorded in a sequential string (or “blocks” in a “chain”) with the string of those changes adding up to create a provenance. The project will begin by experimenting with publishing photos on a blockchain, with the hope that in theory will provide its audiences with a way to determine the source of a photo, or whether it had been edited after it was published. In exploring the applications of blockchain for photojournalism, the development team hopes to learn more about where and how it may be sensibly used for journalism as a whole.

(Source: “Introducing the News Provenance Project”, available at https://open.nytimes.com/introducing-the-news-provenance-project-723dbaf07c44

Voting goes on the blockchain in Naples

The voting system of the blockchain project for the city of Naples, which since April 2018 has been studying a broad and articulated plan to innovate the municipal system with the help of decentralised distributed systems, is nearing completion. The project is aimed at “creating an electronic voting system in symbiosis with blockchain technology”, which excluded from the outset the option of online voting in order to overcome the problem of rigged voting. The blockchain voting system in Naples is developed on two levels: the regulatory level respecting the privacy of users, also in light of the recent GDPR; the technological level that makes use of various existing information technologies, including the Ethereum blockchain for the immutable recording of voting data. The “functional specifications of the project” will be published by the end of September 2019, to give everyone the opportunity to study the eVoting system developed by the working group on decentralised electronic voting of the Napoli blockchain project.

(Source: “Naples: voting goes on the blockchain”, available at https://en.cryptonomist.ch/2019/07/22/naples-voting-blockchain//)

Navigating blockchain and climate action

The Climate Ledger Initiative (CLI) has published a report to help policymakers navigate the opportunities and challenges of using blockchain technology for climate action and implementation of the Paris Agreement. The main benefits of blockchain technology are rooted in three main characteristics:

  1. Data records on a blockchain are immutable through a permanent ledger for increased transparency.
  2. Blockchain technology brings trust to peer-to-peer transactions – particularly important in the context of weak regulatory settings or under decentralised governance.
  3. Smart contracts – applications that can automatically execute the terms specified in a contract on a blockchain – increase efficiency and reduce transaction costs.

Building on a comprehensive analysis of the needs of the Paris Agreement, the authors identify three main areas where blockchain has the most potential to accelerate climate action:

  1. Next-Generation Registries and Tracking Systems: The decentralised nature of the Paris Agreement and its governance structure requires new approaches to registries and tracking systems to handle heterogeneous rulesets for accounting and reporting and to allow for trusted, networked carbon markets.
  2. Digitising Measuring, Reporting and Verificaiton (MRV): Digital technologies can unlock new, more accurate ways to measure, report and verify climate outcomes at lower transaction costs but with increased transparency. Smart contracts to enable automated issuance, transfer and payment of climate outcomes.
  3. Decentralised Access to Clean Energy and Finance: Individuals are empowered to produce and store their own renewable energy and trade with their neighbours. Blockchain technology combined with new fingerprint, iris or face recognition technology allow individuals who lack identity documents or bank account to access climate finance.

(Source: “REPORT: Navigating Blockchain and Climate Action” available at https://www.goldstandard.org/blog-item/report-navigating-blockchain-and-climate-action/)

Claire Cummings

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
Email: claire.cummings@cummingsfisher.com

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