Crypto View - August 2021

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A forum for digital disputes

The UK Jurisdiction Taskforce (UKJT) has recently published its Digital Dispute Resolution Rules, a new set of arbitration rules for dispute resolution in on-chain digital relationships and smart contracts. Novel technologies, such as digital assets, smart contracts, blockchain and fintech have grown significantly in recent years. The UKJT's introduction of a bespoke set of arbitration rules for digital disputes should therefore be welcomed.

The Rules were published following an extensive consultation and the UKJT's November 2019 Legal Statement on the Status of Cryptoassets and Smart Contracts, which expressed the view that cryptoassets were property and smart contracts were contracts under English law. That view was endorsed as "an accurate statement as to the position under English law" in AA v Persons Unknown & Ors, Re Bitcoin (December 2019), and has since been accepted in both Ion Sciences Ltd v Persons Unknown and others (unreported) (December 2020) and Fetch.ai Ltd and another v Persons Unknown Category A and others (July 2021).

The purpose of the Rules is to facilitate the rapid, cost effective and specialised resolution of commercial disputes involving digital technology, including cryptoassets, cryptocurrency, smart contracts, distributed ledger technology, and fintech applications. For more details on the Digital Dispute Resolution Rules, our litigation team have a helpful article that you can access here.

An update from the USA

We have been in touch with colleagues from our partner firm, Seward & Kissel, to get an update on what is happening with regulation of the cryptoasset industry in the US, and it would seem that it is just as fluid as it is over here. Numerous regulators are raising concerns, emphasized by recent enforcement actions and jurisdictional tussles.

The SEC, CFTC, FinCEN, and others have publicly commented on gaps that may exist in the U.S. regulatory framework involving securities, derivatives and commodities, and anti-money laundering and sanctions laws. Notably, SEC Chairman Gensler, in a widely-reported speech (which was followed up by correspondence between U.S. Senator Elizabeth Warren and the Chairman), gave fairly critical comments on the cryptoasset industry, noting that investor protection was a key issue, as well as unregistered securities listings. Chairman Gensler also addressed cryptocurrency trading, lending, and other decentralized finance platforms, suggesting that many tokens found on these DeFi platforms may implicate the U.S. securities laws, even where the underlying tokens involved in such transactions may not be securities. Gensler also took aim at stablecoins, suggesting that some stablecoins may be securities and investment companies. You can see S&K's blog post regarding Gensler's comments here.

Gensler's comments about stablecoins are representative of a shift in policy between the Trump and Biden administrations. Under Brian Brooks, the Trump-appointed Acting Comptroller of the Currency, the Office of Comptroller of the Currency (OCC), which regulates federally chartered banks, issued interpretative guidance to national banks much more favourable to stablecoins, and approved charters for banks focusing on crypto. Compare that to statements made by Michael Hsu, the Acting Comptroller of the Currency, who immediately upon taking office paused approvals of novel charters pending an internal review of the OCC's licensing framework and of recent interpretive letters.

We are also seeing a bit of a "turf war" between the various regulators. Gensler's speech prompted a tweet from one of the CFTC commissioners reminding everyone that commodities are regulated by the CFTC, not the SEC (the CFTC has taken the position that virtual currencies are commodities, though some may be securities), and the SEC and the Wyoming state banking regulator broke a few lances over who had the authority to determine what constitutes a "bank" for purposes of SEC regulations.

With respect to recent U.S. enforcement actions, there have been several that have put the industry on notice. For example, the CFTC and FinCEN recently fined BitMEX $100 million for anti-money laundering and derivatives law violations, finding that BitMEX wilfully failed to comply with its U.S. AML obligations, failed to register as a futures commission merchant, and operated a facility to trade or process swaps without being approved as a designated contract market or swap execution facility. You can read more about this on S&K's blog post on the BitMEX matter here. The SEC also recently announced enforcement actions against Poloniex for operating an unregistered digital asset exchange that facilitated purchases and sales of digital assets that qualified as securities and Blockchain Credit Partners for selling securities in an unregistered offering by using smart contracts and decentralized technology to sell digital tokens, among other violations. While the Blockchain Credit Partners case was not a pure DeFi matter, it certainly demonstrates that DeFi is on the SEC's radar and will be a focus going forward. Other U.S. regulators that have brought enforcement actions include OFAC, which settled enforcement actions against BitPay and BitGo for sanctions violations -- see S&K's commentary here.

It would seem that U.S. regulators are scrutinizing almost every aspect of the digital asset industry, particularly those entities that operate offshore and access U.S. customers without appropriate registration. We expect that scrutiny to continue as the industry rapidly evolves.

If you would like more information on the US market, as well as reading the commentary linked above, you can also reach out directly to our Seward & Kissel colleagues: Bruce Paulsen, Anthony Tu-Sekine and Andrew Jacobson.

An update from Germany

You may have seen that the EU recently published its proposal on including cryptoassets in the scope of the Funds Transfer Regulation (FTR) (see here), but the German government has also addressed this issue in its proposal for a Cryptoasset Transfer Regulation (Kryptowertetransferverordnung, or the KryptoTransferV) which was published in May (see here in German).

The new KryptoTransferV, similar to the FTR and other legislation that we have seen coming into force, is intended to counter risks associated with cryptoassets, money laundering, and terrorist financing by verifying payment flows. Like the European proposal, the German rules are based on the Financial Action Task Force (FATF) Travel Rule. Further, the KryptoTransferV references the current version of FTR and applies its rules to Cryptoasset Service Providers (CASPs). German CASPs now have to meet the requirements in the FTR when transferring cryptoassets.

In practice, the KryptoTransferV requires CASPs transferring cryptoassets on behalf of a sender to provide certain information, such as the user's name and address, to the other CASP, who acts on behalf of the recipient. If the Regulation is applied as currently drafted, the disclosure of the account number of the payer, the communication of the blockchain address, or the public key of the payer for crypto transactions will also be needed. The KryptoTransferV also requires those in scope to ensure that information on the beneficiary or originator of a transfer is collected even where the transfer is made from, or to, a cryptoasset wallet that is not managed by a CASP.

Any entity that is involved in the transfer of cryptoassets will be in scope, including credit institutions and investment firms caught by the German Anti Money Laundering Act (Geldwäschegesetz, or GwG).

If you would like more information on the German market, you can also reach out directly to: Jochen Kindermann and Lena Menger.

Binance

Binance's relationship with the FCA has been in the news again last week, with the FCA saying that "it is not capable" of effectively supervising Binance's UK operations. In a similar vein to the reporting of the consumer warning issued by the FCA earlier this summer, this does not impact the provision of the crypto services that Binance currently provide to UK customers from overseas. What this statement suggests is that the FCA does not see Binance's UK entity as meeting the threshold condition to be authorised, namely that the firm must be "capable of being effectively supervised by the FCA". This requirement looks at the nature and complexity of the regulated activities to be carried out, the complexity of any products that the firm provides, the way in which the business is organised, and considerations regarding any group structure or close links.

This does not impact the unregulated provision of cross-border products and services from any other Binance entity, and we also note that the FCA has confirmed that the exchange has complied with all requirements of its consumer notice from June.

It would seem that the FCA is increasingly seeking to use the authorisation or registration process for cryptoasset businesses to look into the group structures of the businesses more generally. While the FCA has limited powers with regard to extraterritorial enforcement, it does have the lever of denying authorisation or registration for any UK entity that is part of a global group structure.

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.