In the recent case of AA v Persons Unknown and Ors, the English High Court considered in detail the question of whether Bitcoin and other forms of cryptocurrency constitute property, and therefore whether such assets can be the subject of certain injunctive relief.
The UK Lawtech delivery panel has produced a legal statement on crypoassets and smart contracts. Seeking to address legal uncertainty by recognising cryptoassets as tradable property and smart contracts as enforceable agreements under English law, the paper provides a clear approach to these areas while carefully considering some key questions.
Following a period of consultation with stakeholders and market participants, the FCA has issued guidance on cryptoassets, helpfully outlining the key factors to be considered when determining how a particular type of asset might be treated. The guidance clarifies the types of assets which the FCA considers to fall within their regulatory perimeter. In summary, pure exchange tokens (such as cryptocurrencies or payment tokens), which provide limited or no rights to the holder, and utility tokens, which only provide access to a current or prospective product or service, will fall outside the FCA perimeter. Conversely, security tokens, which provide rights and obligations akin to shares or debentures, are within the perimeter. Firms carrying on specified activities involving security tokens will therefore need to ensure compliance with applicable FCA rules and requirements.
On 30 July 2019, the United States Senate Banking, Housing and Urban Affairs Committee convened a hearing entitled, Examining Regulatory Frameworks for Digital Currencies and Blockchain.
After years of relatively low volumes of tech IPOs, the first half of 2019 suggests a record year of fundraising. Analysis shows that US tech IPOs alone have raised a combined $17bn (on track to exceed the previous full year record of $22.5bn in 2000). Flotations by household name tech behemoths such as Uber ($8.1bn) and Pinterest ($1.4bn) have contributed to this groundswell. Pitchbook reports that there are currently nearly 180 active tech unicorns (start-ups valued at over $1bn) in the US, and with many of those firmly in the wider public consciousness, it seems clear we can expect continued buoyancy in the tech IPO market in the near future.
The Bank of England has published a report titled, "Future of Finance: Review on the Outlook for the UK Financial System: What it means for the Bank of England." Further intense change to the financial system is predicted as services and firms are digitized. The report notes that the world's largest financial service firm is China's Ant Financial which has over one billion clients without having any physical branches, highlighting the direction of change. Interestingly, the report also states that reliance on flexible cloud services by financial institutions could cut technology infrastructure costs by around 40%.
With this digital shift must come a revision of rules to keep up pace with developments in data sciences, new analytical techniques and reliance on cloud technologies. A collaborative strategy is needed to improve payment infrastructure and regulation as well as having strong international standards to protect the flow of capital.
The Lord Chancellor announced that £2m will be allocated to fund technological developments in the legal sector. Speaking at the Artificial Intelligence in Legal Services Summit, the Chancellor stated that the funding would 'support emerging lawtech in the UK and wider economic growth,' to ensure the UK continues as a leading global legal centre. In 2018, the lawtech sector was valued at £12.5bn globally. This funding will help to develop technology to improve law firms' productivity and increase the legal sector's already substantial contribution of around £25bn to the economy.
The 'Financial Innovation Partnership' (FIP) is the latest initiative strengthening the relationship between the USA and the UK. Designed to develop both countries' fintech sectors, the FIP will share knowledge on emerging trends in financial services innovation, technical expertise, information about regulatory issues and business development in financial technology. The partnership will also encourage enhanced commercial opportunities on both sides of the Atlantic with the Department of International Trade entering a reciprocal relationship with the US Commerce Department to take UK companies to the US and vice versa. The FIP has developed from the Financial Regulatory Working Group which has met twice in the past year and stated that cooperation on regulatory issues and sharing technical expertise was even more critical as the UK prepares to leave the EU.
MEPs have recently voted to introduce the European Union’s Fifth Money Laundering Directive (the EU5MLD), which EU member states (including the UK) are required to implement by January 2020.
The EU5MLD has particular significance to the crypto sector as it extends AML & CTF requirements to 'virtual asset service providers' (which includes, amongst others, entities operating a crypto exchange, wallet or those facilitating the transfer of crypto assets).
Businesses which fall within the EU5MLD will be required to register for supervision with their jurisdiction's relevant AML & CTF supervisory body (likely the FCA in the UK). Such businesses will also need to introduce mechanisms for, amongst other things, conducting the mandatory level of KYC/CDD checks on customers, the ongoing monitoring of transactions (including the reporting of suspicious transactions), the appropriate level of training for staff and satisfactory record keeping.
In the UK, it remains to be seen as to whether the Government will seek to expand upon the EU5MLD when introducing its implementation legislation by extending the definition of 'virtual asset' to include all digital assets, and not just crypto.
The Bank for International Settlements (BIS, owned by 60 central banks, including BoE) published a statement on crypto-assets setting out their expectations of banks that want to acquire crypto exposures or provide related services.
The BIS Committee on Payments and Market Infrastructures and the Markets Committee has reported on its work on central bank digital currencies, analysing their potential implications for payment systems, monetary policy implementation and transmission as well as for the structure and stability of the financial system.
The Financing and Money Services Act, 2009 has been amended to include a licensing regime applicable to the peer-to-peer (P2P) FinTech market, peer-to-business (P2B) and business-to-business (B2B) markets, assisting with the growth of the FinTech industry in the BVI. The recent changes are key for BVI companies carrying out financing and money services businesses anywhere in the world, including those dealing with virtual currencies and operating crypto exchanges.
Another string in the bow for Guernsey as a market leading jurisdiction for tech. Lodged this week was The Electronic Transactions (Electronic Agents) Guernsey, 2019, Ordinance which builds on The Electronic Transactions (Guernsey) Law, 2000 by providing certainty in the use of electronic agents in transactions and in the formation of contracts. Unlike steps taken in many other jurisdictions to codify 'smart contracts', the new legislation in Guernsey specifically addresses the use of 'electronic agents, acting on behalf of the parties, even where no natural person was aware of, or reviewed, the electronic agents' actions or the resulting terms' when forming a valid contract. The new legislation paves the way for further use of AI and blockchain technology in Guernsey, building on the jurisdiction's already impressive reputation in this field.
Minister of Financial Services of the Cayman Islands outlined the government’s favoured approach of an adaptable, technology-neutral, regulatory sand-box type framework for regulating digital assets, in a statement in the Legislative Assembly on 14 November. The minister said that while many countries have enacted legislation quickly to be the first to “jump of the bandwagon”, the Cayman government has opted for a steady, cautious and prudent approach. The Cayman government is currently engaged in the process of resolving the necessary legislative changes to implement the regulatory sandbox framework and are actively exploring how regulated digital identification systems could streamline anti-money laundering compliance. They are working closely with the Fintech Innovation Lab (which Mourant is part of) and have also sought input from companies operating in FinTech.
Caspian, a Hong Kong headquartered full-stack crypto asset management platform, has announced that it is planning a public sale of its coin offerings. Caspian is a recent joint venture between Hong Kong-based Tora, an asset management technology provider, and Kenetic, a Hong Kong-based cryptocurrency and investment firm, which plans to raise USD19.5m through token offerings. The full-stack crypto asset management platform is also offering compliance, algorithms, portfolio management, risk, and reporting. We have been working alongside King & Wood Mallesons on this potential ICO, providing Cayman Islands and BVI law advice, to ensure that Caspian meets legal and regulatory guidelines.
Recognised international standards on virtual assets and digital ID are finally here, or at least in motion, with two major Financial Action Task Force (FATF) developments this week. These will assist all jurisdictions, including the forerunners in which we operate, to further develop their stance in relation to these key areas.
The States of Guernsey has approved proposals for new legislation under the Electronic Transactions (Guernsey) Law, 2000 regarding the use of 'electronic agents' in relation to the formation, execution, performance and termination of a contract and the legal status of that contract.
While the laws of agency and contract formation were considered to be 'sufficiently robust to encompass electronic agents' at the time the Electronic Transaction Law was enacted, the Electronic Transactions Law was drafted to permit the States to legislate specifically for electronic agents and the legal effect of actions carried out by such means.
Following on from the establishment of the UK-Australia Fintech Bridge earlier this year, which aims to increase trade between both countries and reduce regulatory barriers, the UK will be sending a 15 strong delegation to Sibos 2018 and the Intersekt Fintech Festival in Australia. The UK is further represented by several independent British fintech companies, UK banks including Barclays, HSBC, Lloyds, Natwest and Standard Chartered and UK trade development bodies Invest Northern Ireland and London & Partners. The delegation highlights the UK's increasing commitment to trade ties with Australia, particularly in the fintech space.
The ESMA has set aside a budget of just over EUR 1 million with the aim of achieving a co-ordinated approach to the regulation and supervisory treatment of new or innovative financial activities. The ESMA's monitoring in this space will have a particular focus on financial innovation including fintech and crypto-assets helping the ESMA to play a proactive role in market intelligence gathering and deciding when to employ its own powers of intervention.
The European Securities and Markets Authority (ESMA) has renewed restrictions on the marketing, distribution or sale of contracts for differences (CFDs) to retail clients, in effect since 1 August, from 1 November 2018 for a further three-month period. ESMA has acted in response to a significant investor protection concern related to the offer of CFDs to retail clients, in particular in relation to cryptocurrencies where leverage is limited to 2:1, significantly lower than traditional assets such as gold which is limited to 20:1. Other restrictions include a requirement on CFD providers to provide a standardised risk warning including the percentage of losses on a CFD provider’s retail investor accounts. The protection of retail investors remains a key focus for regulators in the jurisdictions in which we operate and we continue to work with stakeholders in government and industry to ensure that innovations such as ICOs and cryptocurrencies are balanced with appropriate protection for retail investors.
Notes issued on a private blockchain have been listed on The International Stock Exchange (TISE) in what is understood to be the first such listing on a regulated exchange. Dom Re IC Limited, a Guernsey cell company, has issued notes on a private blockchain that replaces the settlement system traditionally used for note issues. The notes were subsequently listed on TISE. TISE has a well-deserved reputation for innovation and we look forward to continuing our work alongside TISE to deliver cutting edge solutions to our clients.
Intercontinental Exchange (ICE), the owner of the New York Stock Exchange, has announced "Bakkt" a new venture offering a regulated market for Bitcoin. ICE states that Bakkt is designed to serve as a scalable on-ramp for institutional, merchant, and consumer participation in digital assets by promoting greater efficiency, security, and utility. Our view is that this is part of an accelerating trend to provide retail and institutional investors with access to what has been perceived to be an inaccessible asset class.
The report notes "It is important to ensure that English courts and law remain a competitive choice for business. Therefore, there is a compelling case for a Law Commission scoping study to review the current English legal framework as it applies to smart contracts". We share this view in relation to the jurisdictions in which we operate and continue to actively engage with local stakeholders to ensure that the relevant laws are sufficiently certain and flexible to enable the use of smart contracts.
According to data compiled by Kraken-owned Cryptowatch (a cryptocurrency market data provider) from 15 of the largest cryptocurrency exchanges, BVI is the second biggest cryptocurrency market in the world. It places behind the USA, which is the largest market for cryptocurrency, with Japan ranking in third.
The U.S. Securities and Exchange Commission (SEC) has delayed its final decision on a physical bitcoin exchange-traded fund (ETF) until late September. There are a total of nine proposed bitcoin ETFs currently under review and the SEC is expected to provide final decisions within the next two months. A SEC-regulated Bitcoin or cryptocurrency ETF is seen by many as essential to providing institutional investors with access to the market and so enabling liquidity and driving mainstream adoption.
Forbes reports that Northern Trust has added a number of new blockchain features to its fund management offering. Amongst the new features added are those relating to capital calls and automated processes for change in ownership of assets between GPs and LPs. It is also reported that Northern Trust, whilst not themselves a custodian of crypto assets, has opened its administration services to a select group of hedge funds with cryptocurrency investments.
Northern Trust Corp., a leading global asset management firm with $954 billion of assets under management, is reported to be developing a custody service for digital assets to supplement the services it already provides to funds investing in digital assets. It is noteworthy that a traditional market participant of Northern Trust's stature is working to address one of the key challenges for institutional investment in digital assets – a move that will no doubt be welcomed by the market and regulators alike.
The institutional environment around cryptocurrencies has continued its relentless development, with Coinbase recently launching their custody service. Bloomberg reports that the cryptocurrency service provider has already accepted deposits from ten hedge funds and family offices, all within its first week of operation and that Coinbase’s aspirations don’t end there, with the firm hoping to take on 100 institutional clients, managing a collective value of $5 billion in crypto assets come January.
The London Stock Exchange and the Financial Conduct Authority have worked together with an innovative technology start up whose aim is to demonstrate that UK equities can be tokenised and issued within a fully compliant custody, clearing and settlement system. The first company to test the technology will be the start up itself, with a launch slated for September 2018. If successful this could set the template for dozens of other companies to tokenise their corporate equity issuances in the regulated environment.
The Cayman Islands Monetary Authority has released an advisory regarding the potential risks of investments in ICOs and virtual currencies, including financial loss and fraud. The advisory, which appears to be pitched to members of the general public, emphasises that virtual currencies are not legal tender in the Cayman Islands and highlights certain red flags to help identify potentially fraudulent ICOs, but does not otherwise shed light on any ICO-related legal and regulatory changes that are in the pipeline.
The Financial Conduct Authority has announced that it intends to publish its cryptocurrency review later this year. The watchdog noted that cryptocurrencies themselves do not fall within its regulatory remit, but some models of use or packaging cryptocurrencies bring them within its perimeter, making the landscape complex.