Crypto View - October 2021

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Welcome to the slightly late October edition of Crypto View -- we hope you are keeping well. As ever, there have been some big developments in the crypto world this month, in particular the launch of the first U.S. bitcoin futures ETF.   We also have an update on the latest EU jurisdiction to introduce an AML registration regime for Crypto just as the FATF standards are being finalised. We also look at the FCA's Perimeter Report for an indication on its direction of travel in relation to cryptoassets regulation.

Bitcoin Futures ETF

You will no doubt have seen the news that on 19th October, the ProShares ETF became the first US bitcoin futures exchange-traded fund, in what is a milestone for the industry. Demand for the product was high, and the news probably contributed to a spike in the price of Bitcoin as well, with 20th October seeing the highest ever Bitcoin price. Unlike European crypto ETFs, the ProShares ETF does not invest in Bitcoin directly, but rather in Bitcoin futures, with the SEC yet to approve any application for a spot-price based crypto ETF.

It may be argued that paying a management fee to get exposure to a single asset which you can easily get more direct exposure to by holding Bitcoin in a wallet is unnecessary. But through the ETF cryptoassets is brought into the more traditional financial sphere: you can add crypto exposure to cryptoassets to your  normal brokerage accounts.  The SEC may also prefer this product - where it has greater oversight - to cryptoderivatives offered by offshore exchanges.  The SEC also signalled that it wants to limit new crypto-related products to those that provide unleveraged exposure, with the Wall Street Journal reporting that at least one asset manager has been asked not to proceed with plans for a leveraged ETF.

CBDC  

Back in the UK, a number of banks were giving evidence to the Treasury Committee on the Future of Financial Services. This covered a wide range of topics, from Brexit and economic crime, to central bank digital currencies. You may recall the Bank of England releasing a discussion paper last year looking at CBDC, and this hearing covered much if the same ground. Some witnesses Expressed a concern that making CBDC available to  retail customers could result in all the balances disappearing from the current accounts of high street banks. This would fundamentally alter the revenue streams of the traditional retail banking sector. The CEO of Starling Bank suggested that banks such as hers would hope to be providing the technology and CBDC wallets in such a scenario. 

The question of civil liberties was also raised, with concern about the information that would be available to the Bank of England, and how the UK might implement an e-ID system to work alongside it. 

FCA's Perimeter Report

FCA published its third annual Perimeter Report last week. It is interesting to see the increasing degree of prominence that cryptoassets has through the reports -- from two paragraphs in 2019, to a page in 2020, to a four page chapter in the most recent edition. The FCA continues to state that there are cryptoassets that offer benefits to financial services,  though the sense one gets from reading the report is slightly less positive.   In particular, the FCA states that their current powers over many cryptoasset-based activities are limited and that they will work with the Treasury and other regulators to see if further regulatory or legislative change is needed. 

One key point highlighted in the report is the financial promotions regime and how this could apply to cryptoassets. It refers to the Treasury consultation of 2020 and the FCA Discussion Paper from April 2021, noting that HMT are still considering responses to the consultation. However, the FCA state that they are already working on the suite of rules that may apply, which suggests that there has been some movement behind the scenes already. There were a number of issues with the proposed approach in the consultation and Discussion Paper, notably the separation of the financial promotion regime from licensing, in contrast to how the regime applies to investments.  If implemented as proposed, this would require approval for financial promotions in relation to unregulated cryptoasset products and services. When combined with the proposal for the approval of financial promotions to only be granted by authorised firms which have expertise in that area, this would mean that very few authorised firms, if any, would be available to approve a financial promotion related to cryptoassets. We hope that the rules that the FCA are working on balance the risks of any harm from advertising with the practicalities of how this might work, and avoid unnecessary damage to the industry.

FATF

FATF updated its 2019 "Guidance for a Risk-Based Approach for Virtual Assets and Virtual Asset Service Providers". The FATF Recommendations are the internationally endorsed global standards against money laundering and terrorist financing, and are used as a basis for individual regulators' approaches domestically. The updated Guidance focuses on the following key areas: 

• guidance on how the FATF Standards apply to stablecoins;
• additional guidance on the risks and the tools available to countries to address the money laundering and terrorist financing risks for peer-to-peer transactions;
• updated guidance on the licensing and registration of VASPs;
• additional guidance for the public and private sectors on the implementation of the "travel rule"; and
• Principles of information-sharing and co-operation amongst VASP Supervisors.

How jurisdictions across the world implement these recommendations will be hugely important to the crypto industry.

A new Spanish Registration Regime

As with other EU jurisdictions, Spain has now introduced a registration regime for VASPs and custody wallet providers.  Under the new rules, (i) service providers (regardless of nationality) that provide services in Spain, (ii) natural persons with their address in Spain who provide these services (regardless of the location of  their users) and (iii) legal persons who have an address in Spain who provide these services (again, regardless of the location of their users) will have to register with the Bank of Spain (BoS) no later than *29 January 2022. * This regime seems to be a lot broader than other jurisdictions, with the scope of "providing services in Spain" covering both those services provided from a permanent establishment in Spain or with no permanent establishment in Spain. This means that registration would be required for those entities providing cross-border services to Spanish customers.To register, several standard documents will have to be submitted, along with the application form and a suitability assessment, including an Spanish AML manual, criminal records checks for the managers of the entity, and an analysis of the risk that the services involve. 

Once the application for registration has been submitted, the BoS has a period of three months from the receipt of the application to make a decision. Providing these services without being registered with the Bank of Spain is qualified as a "serious" or "very serious" infringement in accordance with Spanish legislation. If you would like more information on the Spanish registration regime, please get in touch with Berta Satrustegui or Maria Tomillo. 

Crypto Case Tracker

As the crypto market grows the law is evolving to keep pace with it. Cases are now starting to reach the Courts which test the application of existing legal concepts to cryptoassets. These cases will be important in shaping how cryptoassets are treated in future. We will shortly be launching a case tracker to enable readers to keep abreast of developments. Look out for it in future editions of Crypto View.