Legal development

Digital Assets Digest January edition

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    IOSCO: Consultation report on Retail Distribution and Digitalisation

    This consultation report, published on 17 January 2022, analyses the developments in online marketing and distribution of financial products to retail investors in IOSCO member jurisdictions, both domestically and on a cross-border basis. The report notes a significant growth in digitalisation and the use of social media for the marketing and distribution of financial products. The report states that crypto-assets are an area of increasing focus for IOSCO and refers to the IOSCO's February 2020 report "Report on Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms".

    The report sets out a range of policy toolkits and enforcement toolkits. The report states that some IOSCO members consider that investigations and enforcement of illegal online activities may be more challenging where new complex products such as crypto-assets are used, citing difficulties that can be encountered in tracing the flow of funds and obtaining information from another jurisdiction due to regulatory differences. The report also repeats concerns about firms exploiting cross-border gaps and engaging in regulatory arbitrage and registering in jurisdictions that do not have robust regulations.

    House of Lords Economic Affairs Committee: Report on central bank digital currencies

    On 13 January 2022, the Economic Affairs Committee of the House of Lords published a report on CBDCs. The report notes that over 90 jurisdictions are looking into CBDCs. The report refers to the joint taskforce created by the Bank of England and HM Treasury to explore the potential of a "retail" CBDC.

    Areas covered by the report include: how a CBDC would benefit households and businesses and the problems it could solve; how crypto asset technology is affecting the monetary and payments systems; and wider international effects of a CBDC.

    The report finds that while a CBDC may provide some advantages, it could present significant challenges for financial stability and the protection of privacy. The report sets out area for further enquiry by the joint taskforce and these include: how the CBDC can be a competitive payments option without causing a level of banking sector disintermediation that would have negative consequences for credit allocation and financial stability; additional monetary policy options a CBDC would provide to the Bank of England; how a CBDC can ensure strong privacy safeguards while also meeting financial compliance rules; and main international and national security risks that arise from a CBDC. The report calls on the taskforce to work with international partners to see if lessons on technical design and usage can be learnt. It also calls for the taskforce to look into whether a wholesale CBDC would have any significant advantages over the real-time gross settlement (RTGS) system.

    ECB: Speech by Andrea Enria - Exchange of views with the European Affairs Committee and Finance Committee of the French Senate

    On 12 January 2022, the ECB published a speech delivered by Andrea Enria. The speech considers the outlook for the European Banking sector, setting out how digital transformation is affecting the banking sector. Mr Enria welcomes progress made by EU co-legislators in relation to aspects of the EU Digital Finance Package, notably the Regulation on Markets in Crypto-assets (MiCA), and calls for continued progress in this area.

    The Law Society Report: Blockchain - legal and regulatory guidance

    On 11 January 2022, the Law Society published the second edition of its report on legal and regulatory guidance concerning blockchain. The report is in collaboration with the Tech London Advocates (TLA) Blockchain Legal and Regulatory Group. The report notes that the COVID-19 pandemic has accelerated the use and evolution of DLT. The report focuses on two areas: the growing types and uses of DLTs and specifically cryptoassets; and the ways DLT is changing the way services (including law) are practised. Likely trends identified by the report include: the growth in NFTs and digital collectibles (such as MeeBits); and further development, testing and gradual deployment of CBDC (the report states that although DLT is not inherent to CBDCs, DLT has several benefits for CBDCs including smart contract programmability, interoperability, transparent audit trails and confidentiality).

    Bank of England: Minutes of the CBDC Technology Forum - November 2021

    On 6 January 2022, the Bank of England published the minutes of the CBDC Technology Forum held in November 2021. The CBDC Technology Forum consists of senior stakeholders from industry, civil society and academia offering input on policy considerations and functional requirements relating to the UK CBDC. Items discussed in the forum include: main models of CBDC and the public and private sector roles in its provision (i.e. a platform model, a pooled account model, an intermediated token model, and a bearer instrument model); and privacy in a CBDC system.

    Digital Currencies—More than a Passing Fad?

    This paper by Barry Eichengreen, Professor of economics and political science at the University of California, looks at whether the financial sector is undergoing a period of exceptionally rapid change and what this means for the evolution of money (as well as the role that digital currencies can play). The paper looks at categories of digital money and considers their viability and desirability from a social standpoint. The paper argues that "plain-vanilla" cryptocurrencies lack the essential attributes of money and so may remain niche investment products, while stablecoins are expensive to operate. The paper concludes that the only viable alternatives to existing central bank-issued money are central bank digital currencies.

    ESMA: Call for evidence - DLT Pilot Regime and review of MiFIR regulatory technical standards on transparency and reporting

    On 4 January 2022, ESMA issued a call for evidence on the use of DLT for trading and settlement and whether regulatory technical standards on regulatory reporting and transparency requirements under MiFIR need to be amended. ESMA is required to look into this area pursuant to the Regulation on a pilot regime for market infrastructures based on distributed ledger technology (which is currently proceeding through the EU legislative process and for which a political agreement was reached in November 2021). ESMA considers it important to begin consultations at this stage, since the EU DLT Pilot Regime is likely to start applying in 2023. The call of evidence is aimed at trading venues, securities settlement systems and entities considering operating under the DLT Pilot Regime, as well as market participants that plan to use DLT market infrastructures. The call for evidence also looks into the possibility of regulators directly accessing the DLT.

    Final compromise text of proposed Regulation on pilot regime for market infrastructures based on DLT

    On 21 December 2021, the Council of the EU published an "I" item note attaching the final compromise text (14993/21) of the proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology. A political agreement was reached between the Council and the European Parliament on the proposed Regulation in November 2021. The Council of the EU has also published a press release stating that the Council's Permanent Representatives Committee has endorsed the political agreement. The proposed Regulation is expected to formally adopted by the Council of the EU and the European Parliament. It is expected to be published in the Official Journal in 2022. The Commission introduced the Regulation in September 2020 as part of its Digital Finance Strategy.

    European Commission: EU Supervisory Data Strategy

    On 15 December 2021, the European Commission published its supervisory data strategy. The strategy aims to improve and modernise financial supervisory reporting in the EU and put in place a system that delivers accurate, consistent, and timely data to supervisors. The strategy focuses on four building blocks: consistent and standardised data; data sharing and reuse; improved design of reporting requirements; and joint governance.

    One of the actions set out in the strategy is undertaking a study on supervision embedded in DLT in 2022 and asking ESMA to investigate and prepare a report on new data collection approaches under the DLT pilot regime for market infrastructures. The strategy states that the European Commission will support ESMA’s investigation by leveraging its expertise gained in building the European Blockchain Services Infrastructure (EBSI).

    The strategy provides for ESMA to investigate the use of DLT for supervisory reporting, and the assessment will also cover derivatives markets in order to prepare for a possible expansion of the pilot regime and formalisation of DLT-based transaction systems and post-trade infrastructure.

    All-Party Parliamentary Group on Blockchain: Programme 2022/2023

    This publication by the All-Party Parliamentary Group on Blockchain, a group set up by UK Parliamentarians to respond to developments in blockchain and other DLTs, sets out the future work programme for the group for the years 2022 and 2023. This includes events bringing together policymakers, business leaders & entrepreneurs, academia, and civil society. Events planned include evidence meetings and planned topics for evidence meetings include the following: Blockchain, Artificial Intelligence & Internet of Thing; Cryptocurrency as Payments: The current state of affairs; and Decentralised Finance.

    ASA: Four negative rulings concerning cryptoasset advertising

    In December 2021, ASA published rulings concerning cryptoasset advertising by, Skrill and Arsenal Football Club, and Coinbase which breached the CAP code. ASA stated that this is a "red alert" priority issue. This follows an earlier statement issued about advertising promoting cryptocurrencies and non-fungible tokens.

    ASA's decision concerned the use of two in-app ads for the first advert included the text "Buy Bitcoin with credit card instantly"; and the second ad included text which stated "Earn up to 3.5% p.a.", with the number in the text increasing to "8.5%".


    ASA ruling against Arsenal Football Club plc relating to both a Facebook post and content on Arsenal's website advertising $AFC Fan Tokens which were published in August 2021.

    Skrill Ltd

    ASA ruling against Skrill Ltd related to a paid-for Reddit advert advertising the opportunity to "give crypto a go, for free".


    ASA ruling against Coinbase Europe Ltd related to a paid-for Facebook ad which warned customers not to "miss out on the next decade," making reference to Bitcoin's increase in value since 2010.

    ESMA: Q&As on application of AIFMD to managers of undertakings investing in cryptoassets

    On 17 December 2021, ESMA published an updated version of its Q&As on AIFMD to include a new Q&A about whether managers of undertakings investing in cryptoassets are subject to the AIFMD. ESMA states that collective investment undertakings raising capital from a number of investors to invest in cryptoassets in accordance with a defined investment policy for the benefit of those investors will qualify as an alternative investment fund. The AIFMD does not provide for a list of eligible or non-eligible assets and AIFs can invest in traditional and alternative assets.

    ESMA advises market participants and investors to consider; whether an undertaking meets the definition of an "AIF" under article 4(1)(a) on a case-by-case basis; whether there are any specific requirements and/or limitations on a national level; and the high risks of investing in crypto-assets. ESMA reminds market participants and investors of the high risks involved in investments in crypto-assets.

    ECB President: Response to Mr Chris MacManus, MEP on queries raised in relation to cross border access to the digital euro

    In this letter, dated 17 December 2021, ECB President, Christine Lagarde responds to queries raised in relation to the digital euro by MEP Chris MacManus. The letter confirms that the Eurosystem will carefully consider the implications of allowing or restricting the use of a digital euro by non-euro area residents. The letter confirms that the two-year investigation phase of the digital euro project (running from October 2021 to September 2023) will involve an examination of circumstances in which a digital euro could be used in cross-border contexts. It states that a decision on the geographical scope of a digital euro (i.e. the possibility of allowing some usages beyond the euro area) will be taken at a later stage. The letter notes that the guiding principle will be that access to a digital euro should be consistent with the Eurosystem’s objectives.

    ECB: Action plan to address recommendations following incidents affecting TARGET Services in 2020

    This Action Plan and letter, published on 17 December 2021, set out key actions in response to a number of incidents in 2020 affecting TARGET Services. An independent review was launched in November 2020 owing to the frequency of the incidents as well as their relevance. The action plan consists of the following workstreams: change and release management; business continuity management; fail-over and recovery tests; communication protocols; governance, and data centre and IT operations.

    The Action Plan states that measures addressing several recommendations have already been agreed or implemented. The Action Plan states that market participants have also been involved in the process and that dedicated sessions were organised with the Advisory Group on Market Infrastructures for Payments (AMI-Pay), the Advisory Group on Market Infrastructures for Securities and Collateral (AMI-SeCo) and the CSD Steering Group (CSG). The ECB will update these groups regularly on the progress of implementation of the Action Plan until its completion.

    ISDA: Contractual standards for digital asset derivatives

    On 14 December 2021, ISDA published a paper on contractual standards for digital asset derivatives. The paper sets out how ISDA will develop digital product templates and definitions and how they can be integrated within the operational and technological infrastructure that is being designed and implemented across the digital asset ecosystem. Key areas covered in the paper include the following: the distinguishing features of different types of digital assets, as well as the key characteristics and features of these assets and their relevance to contractual standards; potential technology and market-driven disruption events that could occur with respect to digital asset derivatives; how digital assets and the derivatives that reference them can be valued, including in circumstances where a valuation source or methodology is disrupted; and how contractual standards for digital asset derivatives will interact with the existing ISDA documentation architecture.

    Bank of England: Financial Stability Report - December 2021

    On 13 December 2021, the Bank of England published the Financial Stability Report for December 2021. In the report, the FPC sets out its view of the outlook for UK financial stability and issues relating to the resilience of the financial system, including risks from cryptoassets.

    The report notes the rapid increase in cryptoassets and their associated markets and activities, including decentralised finance. It notes that the vast majority of the market consists of "unbacked" cryptoassets with no intrinsic value, vulnerable to major price corrections. The report confirms earlier assessment by the FPC that direct risks to the stability of the UK financial system from cryptoassets are currently limited, but notes that the current rate of growth, and increasing interconnection with the wider financial system mean that cryptoassets will present some financial stability risks. It argues that a large fall in cryptoasset valuations could cause institutional investors to sell other financial assets and potentially transmit shocks through the financial system. The report calls for enhanced regulatory and law enforcement frameworks at the domestic and global level. The FPC supports the work of the Taskforce of the HM Treasury, FCA and Bank of England on assessing the regulatory approach to unbacked cryptoassets. It also welcomes HM Treasury’s proposal for a regulatory regime for "stablecoins". The FPC confirms that it will continue to pay close attention to the developments in this area, and will, in particular, be looking for any material growth in banks’ exposures to unbacked cryptoassets. The report notes that some UK and global banks are starting to offer a variety of services, such as cryptoasset derivatives trading, and custody services (even though no major UK banks have reported direct exposures to cryptoassets as yet).

    ECB: Speech by Fabio Panetta: The present and future of money in the digital age

    On 10 December 2021, the ECB published this speech by ECB economist, Fabio Panetta, containing commentary on the digital euro, CBDCs and stablecoins. Key points made in the speech include the following: money and payments are undergoing rapid transformation; without appropriate, rigorous regulation, stablecoins are unfit to perform the functions of money, owing to the fact that they are low-risk but not risk-free and are vulnerable to possible runs; and further action at the global level is needed to respond to decentralised finance; and the growth of stablecoins and Big Tech’s expansion in the finance sector could drastically change traditional intermediation and payment services.

    BIS: Bulletin on interoperability between payment systems across borders

    This bulletin looks at the interoperability between payment systems across borders, which the bulletin argues is necessary to ensure that cross-border payments are faster, cheaper, more transparent and more accessible. The bulletin argues that payment systems interoperability involves attributes falling into three broad dimensions: technical, semantic and business. The bulletin argues that central banks can play a critical role in encouraging competition by supporting interoperability and can help to define the standards needed for interoperability. The bulletin includes illustrations setting out four stylised models for pursuing cross-border payments system interoperability (a single access point, bilateral link, hub and spoke or a common platform). The paper confirms that BIS Innovation Hub is working on several projects to foster interoperability across the four stylised models.

    FSB: Survey on work under Building Block 6 of the Roadmap for enhancing Cross-border Payments

    The FSB launched a survey as part of its work under Building Block 6 of the Roadmap for enhancing Cross-border Payments,. This involves the FSB reviewing existing national and regional data frameworks relevant to the functioning, regulation and supervision of cross-border payment arrangements. The FSB is seeking stakeholders’ feedback so as to better understand how requirements applicable to data – e.g., where and what data must be stored/retained, where it may be transferred, the rules governing the security or access to data, could affect (either enabling or impeding) cross-border payments,. Responses to the survey will support FSB member authorities in the analysis of the constraints on cross-border data flows imposed by existing national and regional data frameworks.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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