Crypto View - July 2021

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Binance

Since our last email, FCA's announcement regarding Binance Markets Limited drew a lot of attention. On 26 June, FCA issued a press release, covered by large parts of the media, that Binance Markets Limited (BML) is not permitted to undertake any regulated activity in the UK. The FCA register shows that BML has permissions to act as an investment firm, including dealing as matched principal broker and investment advisor in relation to certain securities and that FCA issued a restriction on its activities under FSMA.

While much of the reporting suggested that the FCA had "banned" Binance from operating in the UK, this is not exactly correct. The restriction specifically relates to BML, which (despite its permissions) is not carrying out any business at this time, and not to other Binance Group entities. Further, the FCA's notice relates to regulated activities only and therefore does not cover the main part of Binance's business - operating a spot cryptoasset exchange. As such, the restriction should have less impact on the business activities of Binance as a whole than the media reports suggested.

One key risk consideration illustrated by these events is that that promoting crypto derivatives into the UK and entering into such instruments with UK customers are regulated. Restrictions apply, even where the firm is outside of the UK.

Query what these developments say about the FCA's attitude towards cryptoassets generally. We have already seen an extension of the timeframe under which it can assess applications under the Money Laundering Regulations (MLRs), and we are not seeing any speeding up of this process. Under the MLRs a large number of firms, formerly not subject to any oversight by a UK regulator, are applying for registration for the first time.

Based on what has been reported in the press, a large number of those applicants are being rejected by the FCA on the basis that it does not like what it sees. That is unsurprising, since for most firms it will be their first interaction with the FCA and they won't be familiar with what is required of them - but it also looks like the FCA is treating registration as a form of authorisation by another name.

Anti-Money Laundering Updates

You may also have seen developments with regard to the Sixth Anti-Money Laundering Directive (6AMLD). There are two key updates here. First the EU is proposing to extend the existing AML regulations that apply to financial services to the entire crypto sector. This will mean that all cryptoasset service providers will have to verify the identity of those sending and receiving transactions, with Maireád McGuinness, the EU's Financial Services commissioner, going so far as saying that "anonymity is gone" in the crypto space. The direction of travel seems clear with regard to regulation in the EU for cryptoassets, with moves to bring more and more activities within scope of regulation.

While the UK is not implementing 6AMLD, following Brexit, it is nevertheless looking at making some changes to its money laundering legislation itself. On 21 July HM Treasury published a consultation with the snappy title "Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 Statutory Instrument 2022". The consultation covers several areas, but of particular interest to us is chapter 6, which looks at the implementation of FATF's "Travel Rule" for cryptoassets.

Like the EU, HMT is proposing that information on the originator and beneficiary of a cryptoasset transfer remains with the transfer throughout the chain of payment. This would mean that cryptoasset firms would need to put in place systems to enable the transfer of this information to take place. A transitional period is proposed to allow firms to put the necessary solutions in place.

Also HMT proposes a de minimis threshold, under which transactions would only need to include more limited beneficiary and originator information. The suggested threshold is GBP 1,000 (or the cryptoasset equivalent), though this would still include the name, and account number/unique transaction identifier for the originator and beneficiary.

HMT do note that this requirement wouldn't apply to private individuals using unhosted wallets.

Is Craig Steven Wright Satoshi Nakamoto?

28 June 2021 saw an interesting UK High Court, judgment ruling in favour of Dr. Craig Steven Wright, an Australian computer scientist (resident in the UK), in a copyright infringement suit against Bitcoin.org (which founder(s) and operator(s) is/are known anonymously as "Cobra").

This is the first English case where the courts had been compelled to determine (and the UK High Court has now recognised) that an individual claimant was the creator of Bitcoin and owner to the Bitcoin Whitepaper copyrights (and therefore, "Satoshi Nakamoto"). This was a default judgment by the High Court in favour of Dr Wright, as the defendant Cobra failed to submit a formal defence. Nevertheless, the High Court had to be satisfied of Dr Wright's standing to bring claims as the author of the Bitcoin Whitepaper. This judgment follows an unrelated Australian case also brought by Dr Wright (Kleiman v Wright) - where it was understood that Dr Wright managed to carry out a transaction involving certain bitcoin (circa 1.04 BTC) from the earliest Genesis block, in the presence of the Australian court judge in March.

Following the court order, Cobra will now have to remove all references to the Bitcoin Whitepaper from Bitcoin.org and disallow any further downloads/access to the Bitcoin Whitepaper via its website. It is also ordered to pay Dr Wright's summary legal costs and display a copy of the court order on Bitcoin.org website for 6 months.

As we're sure you will be aware, a significant part of the crypto community continues to actively dispute that Dr Wright is Satoshi Nakamoto. Anonymity around the creator of Bitcoin remains an essential element for the integrity of the Bitcoin network (chief of all, its promise of decentralisation) and Bitcoin's growth trajectory as a major asset class. Dr Wright's case prompted a number of other websites/platforms to openly host the Bitcoin Whitepaper in a sign of solidarity with Bitcoin.org.

Soon after Dr Wright's filing against Bitcoin.org back in February 2021, a California-based organisation called Crypto Open Patent Alliance (COPA) also filed a separate lawsuit against Dr Wright, requesting the UK courts to declare that Dr Wright is not the owner, hence does not have copyrights, over the Bitcoin Whitepaper. This was filed on 9 April 2021 and the case remains to be heard. The Judge in the English case criticised Cobra during the hearing for not formally defending itself, despite Cobra's multiple emails to the court pleading for an adjournment until the separate lawsuit filed by COPA is heard. The Judge also pointed out that "Cobra" had attended the virtual hearing on MS Teams, despite choosing not to submit a formal defence.

The English case is part of a series of other legal actions brought by Dr Wright across numerous jurisdictions including the US, Australia, New Zealand and Japan. Among the various different claims, Dr Wright is seeking orders against a collective of early Bitcoin developers to allow him to retrieve more than 100,000 BTC held at wallets for which he had allegedly lost his private keys following a cyber hack. It will be of great interest to observe how (and if) the UK High Court judgment will be subsequently appealed, its interaction with the claim brought by COPA and their implications on Dr Wright's other claims outside of the UK.

If there's anything from this email that you would like more information on, or would like to discuss things more generally, please don't hesitate to get in touch.