Legal development

Digital Assets Digest March 2022 edition

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    ECON: Report on proposed Regulation on markets in cryptoassets adopted

    On 14 March 2022, the European Parliament's Economic and Monetary Affairs Committee (ECON) published a press release confirming that it has adopted its report on the European Commission's legislative proposal for a Regulation on markets in cryptoassets. The press release notes that amendments proposed by ECON include a provision that ESMA would be responsible for supervising the issuance of asset-referenced tokens and the EBA would be responsible for supervising electronic money tokens.

    A draft version of the report was published in March 2021.

    FMLC: Letter to HM Treasury: Financial Promotions Rules for Cryptoassets

    On 15 March 2022, Financial Markets Law Committee (FMLC) published a letter to HM Treasury, following the publication of HM Treasury's response to its 2020 consultation on cryptoasset promotions and the FCA's consultation on strengthening financial promotion rules for high-risk investments, including cryptoassets (CP22/2).

    The letter outlines areas of legal uncertainty in relation to the regulation of cryptoassets and calls for a coordinated approach from regulators and authorities so as to encourage a single, coherent regime fit for cryptoassets.

    BoE: Minutes: CBDC Engagement Forum - February 2022

    On 11 March 2022, the CBDC Engagement Forum issued the minutes for its meeting held on 9 February 2022, together with slides. Topics covered at the session were: CBDC use cases; mitigating exclusion (digital, financial, socioeconomic etc.); co-existence between CBDC and other forms of money. In the session on CBDC use cases, the Bank of England carried out a presentation, and members also discussed the arguments for and against determining specific use cases and corresponding functionalities prior to developing CBDC. Members emphasised that the private sector needed clarity around the policy and technical parameters that will be put in place for CBDC in order to start identifying potential use cases and commercial opportunities. There was also a discussion on organising workshops, hackathons or sprints involving the private sector innovators in the future to explore CBDC more practically. The Bank of England also mentioned the recent announcement of a joint project with the BIS Innovation Hub London on CBDC and API applications.

    FCA press release: illegal crypto ATMs operating in the UK

    On 11 March 2022, the FCA issued a warning in relation to illegal crypto ATMs operating in the UK.

    Key issues
    • Crypto ATMs offering cryptoasset exchange services in the UK must be registered with the FCA and comply with UK Money Laundering Regulations. None of the cryptoasset firms registered with the FCA have been approved to offer crypto ATM services. Therefore, those that are operating in the UK are doing so illegally and consumers should not be using them.
    • Since the FCA published the list of unregistered crypto firms that may have been continuing to conduct business, a recent assessment found that 110 are no longer operational.

    FCA: Data: Consumer investments data review April - September 2021

    On 3 March 2022, the FCA issued webpage summarising its work to tackle consumer harm in the investment market between 1 April 2021 and 30 September 2021. The FCA refers to its Consumer Investments Strategy published towards the end of this period. The webpage provides updates and figures in relation to cryptoassets sector including: there was an increase in reports about possible cryptocurrency scams, both to the FCA Supervision Hub (up 14 per cent on the previous 6 months) and its ScamSmart website (up 49 per cent); the FCA's Cryptoasset team in Supervision opened over 300 cases relating to potential unregistered cryptoasset businesses in the period identified; and the FCA added 172 firms to its unregistered cryptoasset businesses list and made 10 referrals to the Advertising Standards Authority.

    The FCA states that it has limited powers over many issuers of high-risk investments such as cryptoassets where they are not carrying out a regulated activity. It states that its recent consultation paper aims to strengthen the consumer journey into high-risk investments and clarify the roles and responsibilities of authorised firms approving the financial promotions of unauthorised firm.

    ECB: Interview: Contributions by Elizabeth McCaul, Member of the Supervisory Board of the ECB: Strengthening the resilience of the European banking sector

    The ECB has published this excerpt from an interview given by Elizabeth McCaul, Member of the Supervisory Board of the ECB. In the piece, Ms McCaul provides an overview of the challenges facing the European banking sector as it emerges from the COVID-19 crisis.

    Key points made include:
    • Bankers need to adapt their strategies to major structural shifts, such as digital transformation. Banks should reduce costs, gain efficiencies and identify new sources of revenue; and
    • Policymakers should ensure a level playing field on risk management between banks and bigtech. The Digital Operational Resilience Act and the Regulation on Markets in Crypto-assets are therefore welcomed.

    House of Commons: Answers to written questions: Treasury: Blockchain

    On 4 March 2022, the House of Commons published a response by John Glen, Economic Secretary to the Treasury, in relation to a question concerning take steps HM Treasury was taking with the FCA to ensure that securities issued on blockchain can be clearly distinguished from crypto asset service providers. Mr Glen provided a summary of the requirements of the Money Laundering and Terrorist Financing (information on the Payer) Regulations 2017 and confirmed that, although a cryptoasset business can issue securities on the blockchain that confer an ownership interest in the business, these securities would be legally distinct from the business itself.

    House of Commons: Answers to written questions: Treasury - Cryptocurrencies

    On 4 March 2022, the House of Commons published a response by John Glen, Economic Secretary to the Treasury, in relation to a question concerning whether HM Treasury had made an estimate of the revenue that the digital assets sector could potentially bring. Mr Glen states that the Cryptoassets Taskforce, consisting of HM Treasury, the Bank of England and the FCA is exploring the impact of cryptoassets, the potential benefits and challenges of DLT in financial services, as well as assessing what, if any, regulation is required in response.

    EBA: Speech by Jose Manuel Campa, Chair: Digital finance: An enabler for economic transformation

    On 10 March 2022, the EBA published a speech by Manuel Campa. The speech provides an overview of the digital finance developments in the EU and policy initiatives that are designed to address emerging challenges. The speech also makes reference to the recently published report by the ESAs on European Commission call for evidence on digital finance.

    Key issues
    • New business models and new entrants require close monitoring as they drive changes in the structure of the EU financial system
    • The value chain of many financial products is being disrupted, broken.
    • Closer cooperation between financial and relevant non-financial authorities is needed to address new challenges.
    • In relation to cryptoassets and DeFi, the EBA will develop templates in 2022 that competent authorities can use to help increase convergence in the monitoring of cryptoasset activities.
    •  The EBA will continue to contribute to ongoing EU and international work streams on cryptoassets, including global stablecoins, and the prudential treatment of banks’ exposures to cryptoassets (a further BCBS consultation can be expected in 2022).

    ASA: Guidance on advertising cryptoassets

    On 10 March 2022, CAP Executive issued guidance on how the CAP Code applies to adverts for cryptoassets. CAP states that although FCA regulation of most cryptoassets may not take effect before 2023, advertising for unregulated cryptoassets must comply with the CAP Code.

    The guidance sets out how the CAP Code applies to cryptoasset adverts. It refers to a number of key rulings and key points for advertisers.

    Key points
    • Make clear that cryptoassets are not regulated by the FCA or protected by financial compensation schemes.
    • Do not take advantage of consumers' inexperience or credulity.
    • Include all material information.
    • Make clear that value can go down as well as up, state the basis used to calculate any projections or forecasts and make clear that past performance is not a guide for future performance.

    ECON: Draft report on proposed Regulation on information accompanying transfers of funds and certain cryptoassets

    On 15 February 2022, the European Parliament's Economic and Monetary Affairs Committee (ECON) published its draft report on the proposed Regulation on information accompanying transfers of funds and certain cryptoassets.

    The draft report sets out suggested amendments to the proposed Regulation.

    Key proposed amendments
    • There should be no exemptions based on the value of the transfer.
    • It should be clarified that the proposal also applies to transfers from or to cryptoasset wallets based on a software or hardware not hosted by a third party, known as "unhosted wallets" (provided that a cryptoasset service provider or another obliged entity is involved).
    • In addition to obtaining accurate information on the originator and the beneficiary, cryptoasset service providers should also be expected to obtain information on the source and destination of cryptoassets involved in a transfer.
    • To assist in the identification of illicit actors posing the greatest risk from an anti-money laundering (AML) and counter-terrorist financing perspective, the EBA should maintain a public register of non-compliant cryptoasset service providers.

    HM Treasury: Minutes: Financial Stability Report meeting - January 2022

    On 15 February 2022, the Government published the minutes for the meeting held in January 2022. The minutes state that the Governor and Chancellor of the Exchequer discussed the December 2021 Financial Stability Report and the FPC’s judgements relating to cryptoassets. It was agreed that innovation in this area could bring a number of benefits, if undertaken safely.

    ESMA: Risk Monitor: ESMA Report on Trends, Risks and Vulnerabilities (No. 1 2022)

    On 15 February 2022, ESMA published the latest edition of its periodic report on trends, risks and vulnerabilities. The report contains a section on financial innovation, setting out key risks and trends.

    Key points
    • Cryptoasset markets reached new records, with a peak at EUR 2.6 trillion in November 2021, fuelled by investor appetite for riskier assets and growing institutional adoption.
    • Stablecoins and decentralised finance continued to expand rapidly, along with concerns over the resilience of their business models. The implementation of the markets in cryptoassets proposal is therefore a priority matter, as this will bring unregulated cryptoassets into the EU regulatory perimeter.
    • Although the cryptoasset market remains dominated by Bitcoin, a shift in investor preference towards Ethereum is underway. In 2021, Ethereum market capitalisation increased at three times the rate of Bitcoin. This may be due to environmental factors or could also be due to availability of "passive" income through "staking", which is unavailable with Bitcoin

    ESMA: Speech by Verena Ross: The major challenges facing securities regulators

    In this speech given by Verena Ross, ESMA Chair, reference is made to trends observed by regulators during the pandemic, including the increase in uptake by young people of investments such as cryptoassets. Ms Ross notes that celebrities and online influencers are increasingly promoting complex and risky products, like cryptoassets. Ms Ross argues that Fear-Of-Missing-Out can pressure individuals to invest in products they may have little knowledge about.

    BIS: Speech by T Rabi Sankar, Deputy Governor of the Reserve Bank of India: Cryptocurrencies – an assessment of cryptocurrencies and what they mean for the financial system

    This speech by Deputy Governor of the Reserve Bank of India, Rabi Sankar, focuses on the following areas: what precisely is a cryptocurrency; what useful economic role does a cryptocurrency play; and what, if any, are the risks it poses to society and economy.

    Key points
    • Cryptocurrencies have the potential to play a critical role in how finance develops in the future and many are questioning whether finance/ banking as we know it can survive the rise of cryptocurrencies.
    • There are already indications that private cross-border flows are taking place in cryptocurrencies and so potentially personal remittances or cross border investments would be made in these cryptocurrencies. As they are non-reserve currencies, this could have adverse implications for India’s foreign exchange reserves.
    • The concern with private currencies is not limited to bitcoin or just cryptocurrencies but extends to any private currency. There should be more concern in relation to stablecoins and there could be considerable damage to the currency system, and the financial sovereignty of a country can be threatened as a result of cryptocurrencies.

    FSB: Letter from Klaas Knot, Chair to G20 Finance Ministers and Central Bank Governors

    On 17 February 2022, the FSB issued a letter from its Chair, Klaas Knot, to G20 Finance Ministers and Central Bank Governors ahead of their meeting. The letter notes that the transition to a post-pandemic world poses its own challenges, including managing the impact of digitalisation.

    Main points
    • In October 2022, the FSB, in coordination with the Committee on Payments and Market Infrastructures and other SSBs, will deliver a progress report on the G20 Cross-Border Payments Roadmap, and will also report on the implementation approach for monitoring progress towards the Roadmap’s targets. The FSB is also focused on addressing potential financial stability risks associated with digitalisation. An area that will receive considerable attention in 2022 is cryptoassets.
    • Cryptoasset markets are fast evolving and could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system. Financial stability risks could rapidly escalate.
    • In light of the FSB’s updated assessment of the risks to financial stability posed by the major component parts of cryptoassets, regulatory approach should be holistic and avoid fragmentation that could give rise to regulatory gaps and arbitrage.
    • The FSB will continue to work with SSBs to address any gaps or overlaps in regulatory standards for “global stablecoins”. The FSB is beginning work with SSBs to examine regulatory and supervisory issues and approaches in relation to “unbacked” crypto-assets. This additional work has become more urgent as cryptoasset markets have grown rapidly over the past year.
    • In October, the FSB will deliver a consultative report on its review of the high-level recommendations in the FSB’s 2020 stablecoin report, and how any gaps identified could be addressed by existing frameworks.

    FSB: Speech by Klaas Knot: Navigating change in the global financial system - the role of the FSB

    In this speech by Klaas Knot, Chair of the FSB, the FSB's approach to managing changes to the global financial system is discussed, as is the role of the FSB.

    Key points
    • Important innovation is happening outside the traditional financial system, often supplied by non-financial entities such as BigTechs, traded on unregulated platforms and transferred on ordinary computer networks globally.
    • The FSB has been monitoring cryptoasset developments since 2018.
    • Most stablecoins are neither stable nor coins. Decentralized finance is often quite centralized. This leads to misconceptions about cryptoassets, which contribute to their fast growth.
    • The FSB aims to be proactive and effective in its approach and will analyse the financial stability implications of decentralized finance, in order to understand the need for policy action.

    Lawtech UK: Report: Smarter Contracts

    This report, published on 25 February 2022, aims to explain how "smarter contracts" and blockchain technology are currently being used.

    Notable points
    • Smart legal contracts and non-fungible tokens are being securely linked to the ownership of physical assets, changing the way assets are traded and bringing economic and environmental advantages.
    • Rapid growth of digital and smarter ways of contracting is expected and use of smarter contracts will become the norm. The legal contract is a key asset that is ready to evolve, and it is inevitable that its form and function will become digital.

    Speech by Sir Geoffrey Vos: Contracts, just smarter. Seizing the opportunity of smarter contracts

    This speech by Sir Geoffrey, Master of the Rolls, Vos covers the launch of the Lawtech UK smarter contracts report.

    Key points
    • The use of new technologies is not something that may happen, it is happening now.
    • The blockchain is now at a stage in its development equivalent to where the internet was in or around 1995. The internet was unstoppable in 1995 and blockchain technology is unstoppable now.
    • Hopefully, English law will prove to be the law of choice for borderless blockchain technology as its take up grows

    FMLC: Minutes: Financial Markets Law Committee Meeting 27 January 2022

    In this meeting, a number of topics were discussed by members, including distributed ledger technology in financial market infrastructures.

    Key points
    • The Secretariat has been in discussions with various stakeholders regarding the legal issues on the adoption of DLT by financial market infrastructures and it had a meeting with HM Treasury and the Bank of England on these issues.
    • A seminar was held in December 2021 for members of the FinTech and Infrastructure Scoping Forums with speakers from the Australian Securities Exchange and Euroclear to provide remarks on why and how their organisations are adopting the use of DLT and dealing with the legal and regulatory challenges.

    FSB: Speech by Klaas Knot: The road ahead - lifting barriers for cross-border payments

    In this speech, Mr Knot sets out FSB's views in relation to cross-border payments and provides an overview of the five focus areas set out in the FSB's Roadmap for enhancing cross-border payments.

    Key issues
    • FSB wants to improve confidence between financial institutions and between jurisdictions by: promoting more consistent application of AML/CFT standards; facilitating cross-border data flows and information sharing; fostering improved digital identity frameworks as well as customer due diligence infrastructures; and, in specific cases, by identifying low-risk “safe payment corridors”.
    • FSB stance is that the payments barriers should be reduced for both individuals and companies
    • Demand for cryptoassets could be a reflection of dissatisfaction with current payment services. Enabling easier remittance payments, while maintaining their safety and security, will be a key part of reducing dissatisfaction.
    • FSB's target is to lower the global average cost of cross-border retail payments to one percent of the amount transferred, with no cross-country corridor above three percent
    • FSB's fifth focus area in the Roadmap involves looking at new types of payment infrastructures and arrangements, like central bank digital currencies and “global stablecoins”. The Roadmap is looking at how innovations could contribute to improved cross-border payments, but not with the result that monetary and financial stability is undermined.

    ECB: Speech by Fabio Panetta: Central bank digital currencies: defining the problems, designing the solutions

    This speech by Fabio Panetta at the ECB looks at the following areas: why we need CBDCs; main benefits of CBDCs; and designing a successful digital euro.

    BIS: Speech: Pablo Hernández de Cos: Financial stability and crypto-assets

    In this speech, Pablo Hernández de Cos, Governor of the Bank of Spain and Chair of the Basel Committee on Banking Supervision, considers: the characteristics of cryptoassets and recent developments; specific risks to financial stability; and main elements shaping the current response of regulators and supervisors.

    Key points
    • The range of sophisticated products linked to cryptoassets has increased considerably, including exchange traded funds and futures contracts referencing cryptoassets.
    • Decentralised finance has quadrupled in size in the last year. It has encouraged a demand for certain types of digital assets that can be used as collateral.
    • Use of cryptoassets for payments could create parallel value systems.
    • There is a limited understanding of cryptoassets by some investors.
    • The buoyancy of the cryptoassets market makes it difficult to respond adequately, as does coordinating an appropriate regulatory response to cryptoassets..

    FSB : updated assessment of risks to financial stability from crypto-assets

    The FSB has published an updated assessment of risks to financial stability from cryptoassets. It looks at uses of these assets and sets out areas of vigilance for industry and regulators and states that it could reach a point where they are a threat to stability due to scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system.

    Key points
    • A growing number of financial service providers are offering or plan to offer crypto-asset custodial and trading services.
    • If financial institutions continue to become more involved in crypto-asset markets, this could affect their balance sheets and liquidity in unexpected ways.