Canadian Fund Manager to List Bitcoin Fund on Major Stock Exchange
Canadian investment fund manager 3iQ received initial approval on its long road to launch a closed-end bitcoin fund on either the Toronto Stock Exchange or the TSX Venture Exchange later this quarter. The firm said on Wednesday that it received a favorable ruling before a panel of the Ontario Securities Commission (OSC) for the Bitcoin Fund, noting the commission moved to direct the OSC Director to issue a receipt for a final prospectus.
“We have addressed the questions of pricing, custody, audit, and public interest issues in a regulated investment fund. We intend to refile the prospectus as soon as possible,” CEO Fred Pye said in a statement. 3iQ claims its entrant is “the first regulated, major exchange-listed” bitcoin fund in the world – the caveat being that other firms have launched similar products that are unregulated or on smaller exchanges. In June, Swiss-based Amun AG launched its exchange-traded product (ETP) using the Bitwise 10 Select Large Cap Crypto Index as a benchmark on the Swiss SIX Exchange.
3iQ had been working closely with the OSC’s Investment Funds and Structured Products Branch to create an investment fund allowing retail investors to participate in a regulated and listed fund, according to Pye. New York-based cryptocurrency exchange Gemini Trust Company LLC will provide custody services to manage the bitcoin in the fund. 3iQ partnered with asset manager VanEck to develop an innovative bitcoin benchmark from VanEck’s MV Index Solutions, a regulated index provider in developing cryptocurrency indices and data series.
VanEck withdrew its own exchange-traded fund application to the U.S. Securities and Exchange Commission in late January 2019. In April, 3iQ acquired the rights to manage First Block Capital’s funds, including the FBC Bitcoin Trust and FBC Distributed Ledger Technology Adopters ETF, while First Block has a strategic investment in 3iQ.
Source: “Canadian Fund Manager to List Bitcoin Fund on Major Stock Exchange”, available at https://www.coindesk.com/canadian-fund-manager-to-list-bitcoin-fund-on-major-stock-exchange
FATF Releases Guidance on Global Digital IDs as Use Cases Grow
The Financial Action Task Force (FATF) wants financial institutions to prepare for the global expansion of digital identification systems. FATF published its draft guidance on digital identity Thursday, for governments, regulated entities and other stakeholders to enforce anti-money laundering (AML) and counter financing terrorism (CFT) regulations. The intergovernmental organization aims to address emerging security and transparency issues as the process of financial transactions become more digital, according to the guidance.
On its website, FATF listed a number of questions acting as “areas of focus,” requesting private stakeholders to provide feedback via email by Nov. 29, 2019. The areas include the specific risks digital ID might pose to AML/CFT enforcement; how it might support financial inclusion; how a system might aid in transaction monitoring; and the potential impact on implementing FATF’s record-keeping requirements. Notably, the guidance specifically lists distributed ledger technology (DLT) as a tool that can aid in the growth of digital ID networks. A number of blockchain companies have already set their eyes on this particular area, such as Civic.
In its guidance, FATF called on authorities to “develop clear guidelines or regulations allowing the appropriate, risk-based use of reliable, independent digital ID systems by entities regulated for AML/CFT purposes. Meanwhile, FATF suggests regulated institutions, such as cryptocurrency exchanges (referred to as virtual asset service providers, or VASPs), “take an informed risk-based approach to relying on digital ID systems for Customer Due Diligence.” The 77-page draft guidance details many issues related to digital ID systems, including their reliability and independence, and how they might be used in performing customer due diligence. The draft guidance is also part of FATF’s effort to the money laundering and terrorist financing risks due to the rise of stablecoins across international financial systems.
The organization stressed the importance of digital identity in payment systems, which could be used to identify stakeholders in stablecoin-related transactions. FATF has been increasingly active in the blockchain space this year. In June, the organization published its guidance for crypto exchanges and other VASPs, urging countries to implement strict KYC protocols around the transfer of digital assets.
Source: “FATF Releases Guidance on Global Digital IDs as Use Cases Grow”, available at https://www.coindesk.com/fatf-releases-guidance-on-global-digital-ids-as-use-cases-grow
British Tax Authority Updates Cryptocurrency Guidelines, Says It Is Not Money
The United Kingdom’s tax, payments and customs authority, Her Majesty’s Revenue and Customs (HMRC), has updated its cryptocurrency taxation guidelines for businesses and individuals.
On Nov. 1, the U.K. government tax agency, which manages taxes alongside other financial policies, released tax guidance updates that further clarify its stance on how businesses and individuals involved with cryptocurrency will be taxed.
The guidelines set out HMRC’s view on cryptocurrency transactions, which taxes apply, how to file tax returns and accounting practices, among others. It also considers the taxation of exchange tokens, while stating that rules for utility or security tokens will be added in the future.
Companies that buy or sell tokens, mine, exchange tokens for other assets or provide goods or services in return for tokens are liable to pay for one or more different types of tax. Those taxes include income tax, corporation tax, capital gains tax, stamp taxes and National Insurance contributions.
The tax authority explicitly stated that it does not consider any of the current types of cryptocurrencies to be money or currency.
HMRC further recognized that the cryptocurrency sector is a fast-moving one and it will therefore look at the facts of each case separately and apply the relevant tax provisions according to what has actually taken place, rather than by relying on theory alone.
HMRC had previously considered cryptocurrency trading to be the same as gambling. However, the latest tax guidance update states that the agency does not consider the buying and selling of cryptocurrencies as such.
Source: “British Tax Authority Updates Cryptocurrency Guidelines, Says It Is Not Money”, available at https://cointelegraph.com/news/british-tax-authority-updates-cryptocurrency-guidelines-says-it-is-not-money
European Union Drafts Law Suggesting Consideration of Eurocoin
A draft document issued by the European Union suggests that the union should consider issuing its own digital currency. Reuters reported on Nov. 5 that the draft in question — which is still subject to amendments — urges member states to develop a common approach to cryptocurrencies, possibly banning high-risk projects.
If the draft in its current form is approved, which could happen as early as next month, it could have far-reaching consequences. More precisely, Reuters suggests that such a law could escalate into an EU regulatory campaign against cryptocurrencies. The draft prepared by the Finnish EU presidency also suggests that the European Central Bank should consider issuing its own digital currency:
“The ECB and other EU central banks could usefully explore the opportunities as well as challenges of issuing central bank digital currencies including by considering concrete steps to this effect. The draft will be discussed this Friday, and perspective on its adoption will be presented on Dec. 5.
Source: “European Union Drafts Law Suggesting Consideration of Eurocoin”, available at https://cointelegraph.com/news/european-union-drafts-law-suggesting-consideration-of-eurocoin
US Congress Weighs Bill Spelling out CFTC’s Crypto-Derivatives Oversight
The U.S. Congress will soon vote on a bill providing new information about the Commodity Futures Trading Commission’s (CFTC) authority over the cryptocurrency derivatives markets.
A provision in the 2019 CFTC Reauthorization Act clarifies how the regulator would collect information on digital commodities contracts and commodity swaps. The bill is heading to the House of Representatives for a floor vote after being passed unanimously by the House Agriculture Committee, which oversees the CFTC.
If passed, the bill would be the first to place Congressionally-mandated, digital commodity-specific requirements on the CFTC. What’s more, according to the provision’s writer, Rep. Sean Patrick Maloney (D.-NY), it has already become the first crypto derivatives legislation in history to make it past committee.
“It’s time for Congress to get smart about crypto and create an integrated approach to regulating digital currencies,” Maloney said in a statement. “This provision is an essential first step in our efforts to close the gap in regulation of crypto-assets in the derivatives market, fight manipulation and detect fraud.”
The provision itself is short, saying the CFTC will “adopt rules detailing the content and availability of trade and trader data and other information the board of trade must be able to access” from contract markets underpinned by digital commodities.
Source: “US Congress Weighs Bill Spelling Out CFTC’s Crypto-Derivatives Oversight”, available at https://www.coindesk.com/us-congress-weighs-bill-spelling-out-cftcs-crypto-derivatives-oversight)
UK Banking Pilot Aims to Streamline Compliance Using Factom Blockchain
Crypto startup Knabu is piloting bank regulatory reporting with Factom, one of the earliest enterprise blockchain companies. Revealed exclusively to CoinDesk, the London-based firm is launching the 30-day pilot today.
Knabu is best known as a payments company with a smart-deposit product meant to help companies mitigate the risks of self-custodying assets on a blockchain. It is simultaneously applying for a UK banking license, aiming to establish itself as a bank that can serve crypto and blockchain firms normally excluded from traditional banking services.
“The purpose of the pilot is to start proving some of the efficiencies that blockchain brings – specifically as core infrastructure for a bank,” Gabrielle Patrick, founder and CEO of Knabu, told CoinDesk, adding, “The average cost of regulatory compliance for a bank is about 30 percent of its budget. … We’re a blockchain-first company and felt that it was necessary to demonstrate the features that can remodel that.”
Compliance costs for banks are high because of how many manual processes have to be repeated. Knabu will run know-your-customer (KYC), know-your-business (KYB) and anti-money laundering (AML) checks on customers, encrypt the data, and send it to Factom to be recorded on the ethereum and bitcoin blockchains.
“We wanted to avoid repeating the same KYC, KYB and AML checks,” Hakim Mamoni, chief technology officer and co-founder of Knabu, told CoinDesk. “[Traditional banks] don’t have the same flexibility in terms of having access to the data.”
As a part of wanting to bank other underserved companies, Patrick is interested in also serving small-to-medium enterprises as well as fintech startups. The only customer pilot participant that Knabu would name is crypto trading platform EthBits. IdentityMind will perform Knabu’s KYC and KYB checks while DMG Blockchain will use blockchain forensic tools like Blockseer and Walletscore to perform AML due diligence on customer bitcoin and ethereum wallets.
The Factom blockchain builds data chains and then preserves them on the ethereum and bitcoin blockchains using a Merkle root. Factom’s service, which in the past was operated by customers using factoid tokens, is being run entirely by Factom with Knabu pushing data to the firm using an application programming interface (API).
“This allows us to be able to borrow the security that you get from the power of the bitcoin and ethereum blockchains to verify that your data is what you claim it to be,” Carl DiClementi, vice president of product at Factom, told CoinDesk.
Knabu CEO Patrick says the pilot is in line with work from the UK’s Financial Conduct Authority exploring ways in which financial institutions can digitize regulatory reporting. In the future, Knabu aims to also test reporting capital reserves on Factom’s blockchain. “The goal is to rip out any inefficiency and to serve underserved businesses,” Patrick said, adding, “Many sectors are underserved because the cost is too high.”
Source: “UK Banking Pilot Aims to Streamline Compliance Using Factom Blockchain”, available at https://www.coindesk.com/uk-banking-pilot-aims-to-streamline-compliance-using-factom-blockchain/)
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