Martin Saps

Crypto Regulation: A crossroads?

October 26, 2020


Earlier in October, here in the UK the FCA published final rules banning the sale of derivatives and ETNs that reference certain types of cryptoassets to retail investors (coming into effect on 6 January 2021); despite the fact that 97% of respondents to the original consultation opposed the ban. When you review the FCA’s final rules, one point that particularly stands out is the FCA’s claim that underlying cryptoassets have ‘no inherent value’.

Over in the US, the Department of Justice recently announced its Cryptocurrency Enforcement Framework, outlining the DOJ’s enforcement strategy and its views about the legitimate (a short, sceptical section) and illegitimate (the bulk of the report) uses of cryptocurrency, that some worry is an attack on digital privacy following hot on the heels of a statement from the Five Eyes intelligence alliance (plus Japan and India) calling for back-door access to encrypted messaging services and other systems.

Last week the US District Court for the Southern District of New York, having previously ruled that Kik Interactive’s Kin token sale violated US securities law, approved Kik’s USD$5m settlement with the Securities and Exchange Commission (although the settlement does not require the registration of Kin tokens as securities).

But it hasn’t all been bad news.

In Europe, the European Commission in late September published its proposal for the Markets in Crypto Assets Regulation (MiCA), a sweeping (168 page!) piece of legislation overhauling the treatment of cryptoassets throughout the EU (which, subject to any further changes, is expected to come into force towards the end of 2022). 

MiCA is sensible and represents a relatively even-handed regulatory approach, providing much needed harmonisation across EU Member States in the treatment of currently out-of-scope cryptoassets (and which will enable businesses to passport authorisation obtained in one Member State throughout the EEA). It does however take clear aim at stablecoins with a series of new, onerous compliance obligations imposed on stablecoin issuers which seems to be a reaction to the perceived threat of Libra.

In the US, two promising crypto-related bills have been recently introduced in the House of Representatives. The first, dubbed the ‘Securities Clarity Act’, would establish a distinction between securities and tokens by confirming that tokens underlying investment contracts (such as SAFTs) are not themselves securities (and instead should be treated as commodities). This is particularly significant following recent US Court decisions against Telegram and Kik (amongst others) earlier this year which have fundamentally called into question the validity of the SAFT token sale model.

The second bill, called the ‘Digital Commodity Exchange Act’, aims to introduce an opt-in national regulatory framework in the US for digital commodity trading platforms (i.e. crypto exchanges) that would bring exchanges under the jurisdiction of the Commodity Futures Trading Commission (CFTC) (rather than the SEC), and which would harmonise regulatory treatment of cryptoassets as commodities at the federal level (rather than on a state-by-state basis, as it is currently).

There is a long way to go but these bills – if enacted – could bring fundamental and much needed changes to the regulatory landscape in the US.

We are now at a significant crossroads. 

Regulation can provide welcome certainty, stability and protection for retail consumers but where it is inconsistently and disproportionately applied it can stifle innovation and cause confusion; particularly when it’s driven by policy decisions that are at odds with the views of the crypto community and the ever-increasing rates of adoption of the underlying technology (PayPal recently announced that it would allow its customers in the US to buy, hold and sell cryptocurrency). As is often the case, a balance needs to be struck.

Regulators and legislators globally are facing a choice: do they implement much-needed updates to legislation and regulation that is, in some cases, more than 70 years old; or continue to rely on out-of-date regulatory and enforcement regimes that produce inconsistent and unfair results.

Those who make the right choice stand to benefit hugely.

In the UK, an HM Treasury consultation has just concluded on the question of whether unregulated cryptoassets (termed ‘unregulated tokens’ in the UK) should be brought within the scope of the UK’s financial promotions rules. I recently participated in an excellent CryptoUK working group with many leading contributors to the industry encouraging HMT to adopt a balanced, appropriate approach. We hope HMT will listen.

With Brexit on the horizon, the UK has the opportunity and the freedom to become a world-leading crypto jurisdiction by imposing proportionate, clear regulation and embracing these exciting new technologies.

Will it make the most of this opportunity?

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