Libra may have added impetus for regulators to get on top of the regulatory status of stablecoins and other forms of cryptoassets but are we any closer to getting legal certainty? December saw the publication of two further papers seeking to bring greater clarity and January has seen the FCA take responsibility for AML compliance. Will 2020 be the year when firms and investors will at last have greater certainty of the regulatory status of their products?
The past decade saw an explosion in digital currencies, digital tokens and distributed ledger technology but like much innovation, the legal and regulatory status of these new assets is often murky. Our FinTech practice is now regularly asked to advise on the regulatory status of business models involving the use of cryptoassets. As the decade drew to a close, two papers were published which may help to clarify the legal and regulatory framework of cryptoassets.
Legal status of cryptoassets
The first, a Legal Statement on cryptoassets and smart contracts, was published by the UK Jurisdiction Taskforce in November. Its aim was to create greater legal certainty on the legal status of cryptoassets but, importantly, it was not seeking to consider their regulatory status.
Its key findings were:
- Cryptoassets should be treated in principle as a form of property. They cannot be subject to bailment but can be subject to other forms of security which do not require possession.
- Smart contracts are capable of satisfying the requirements of an English law contract. While clearly helpful in providing greater legal certainty on the legal nature of these assets, particularly for investors and market participants, this doesn’t add any further clarity on their regulatory status.
The current UK regulatory regime
The FCA has previously broken down the regulatory status of cryptoassets into three broad categories:
- Regulated security tokens
- Regulated e-money tokens
- Unregulated tokens, including utility tokens and cryptocurrencies.
Investment products (e.g. derivatives) that reference unregulated tokens could themselves be regulated. In addition, since 10 January, businesses carrying on certain cryptoasset activities, including exchange providers, wallet providers and ICO issuers, are now in scope of the Money Laundering Regulations and subject to the FCA’s oversight in relation to AML/CTF risks.
While this provides some legal certainty, it allows a number of cryptoassets to remain outside the perimeter. As this potentially includes stablecoins which could be targeted at consumers and given the concern that a significant player such as Libra could create financial stability risk, the current regulatory framework was always going to come under further review.
The European Commission consultation
To consider some of these issues, on 19 December, the European Commission published a consultation on the suitability of the existing regulatory framework for cryptoassets.
The consultation makes clear that it wants to consider the variety of different actors, including wallet providers, exchanges and trading platforms that play a particular role in the ecosystem. It is also concerned that, while “the cryptoasset market remains modest in size and does not currently pose a threat to financial stability, this may change with the advent of 'stablecoins', as they seek a wide adoption by consumers” and references the recent G7 report that if stablecoins reach global scale “they would raise additional challenges in terms of financial stability, monetary policy transmission and monetary sovereignty”.
Both the Commission and the European Council have declared that they “are committed to put in place the framework that will harness the potential opportunities that some cryptoassets may offer” and this consultation is intended to help them achieve that.
It asks a series of questions to understand:
- The general public’s views: including, have they used them and if so how, who was involved in the process, did they feel informed and did they make a profit or a loss?
- The classification of cryptoassets: should there be an EU level classification, should it distinguish between payment tokens, investment tokens, utility tokens and hybrid tokens, should any be treated as bank deposits for deposit guarantee scheme purposes?
- Unregulated cryptoassets: what are the opportunities and challenges for cryptoassets that currently fall outside the regulatory perimeter, what risks do they present and should there be a regime to deal with them, is regulation needed in relation to service providers that provide trading or intermediation services, what issues are there for market integrity, AML/CTF, consumer/investor protection and supervision and oversight of service providers?
- Regulated cryptoassets: general questions on the use and benefits of security tokens, how existing legislation applies or should apply to security tokens, how existing legislation applies or should apply to e-money tokens?
The deadline for comments is 18 March 2020. Following comments, the Commission will consider whether legislative action is required. Any legislation is likely to take time to make its way through the legislative process and into law in the relevant member states but given the increasing focus on this area of innovation and the need for national regulators to issue guidance, there is likely to be political will to get things moving swiftly.
Although 2020 is unlikely to bring us the final guidance we need from regulators, it should start providing greater certainty on the future shape of cryptoasset regulation. In the meantime, our teams advising clients on the deployment of services involving the use of cryptoassets are continuing to develop our interpretation of the existing law in the context of the business models proposed for cryptoassets, and we are more than happy to look at anything new that clients may propose.
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