Crypto View - November 2021

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We hope you are keeping well. As ever, we have had another busy month in the world of cryptoassets. This month we are focussing on updates from various regulators. We have had confirmation from the European Parliament that it has reached agreement with the Council of the EU on the DLT Pilot Regime, and statements from the Bank of England on Central Bank Digital Currencies, the SEC on DeFi, and the CSSF on funds investing in cryptoassets. A lot to get your teeth into.

DLT Pilot Regime and MiCA

You may remember the European Commission publishing its Digital Finance Package last year. This included proposals for the Regulation on Markets in Crypto-Assets (MiCA), as well as the Regulation on DLT-based market infrastructure (the DLT Pilot Regime). On 24 November, the Council of the EU published an update on MiCA, while the European Parliament published an update on the DLT Pilot Regime.

For MiCA, the Council has adopted a mandate for trilogue negotiations with the European Parliament. That proposal can be found here. We will keep you updated with further developments.

On the DLT Pilot Regime, the European Parliament’s press release announced that it had reached agreement with the Council of the EU. No agreed text was released, and likely won’t be for a few more months. However, the statement did confirm that “financial instruments services provided using the DLT market should be limited and subject to value thresholds, as follows:

• Shares (500 million euro)
• Bonds (1 billion euro)
• Corporate bonds (200 million euro)
• Units of collective investment undertakings (UCITS) (500 million euro).

Further, operators of DLT can admit new financial instruments only until their total market value reaches 6 billion euro.”

The statement also says that currently, the are no authorised financial market infrastructures that use DLT to provide trading or settlement services for cryptoassets that qualify as financial instruments. Any new DLT trading and/or settlement system will be exempt from certain financial services rules, and should be allowed to test innovative solutions in cooperation with other market participants. This contrasts with the UK position where the MLR registration requirements pose a significant hurdle to innovative settlement solutions using DLT. It will be interesting to see whether the UK regulators adapt their position to respond to these announcements.

Our colleagues Jochen, Derek and Rezah are also tracking these European developments closely.

Statement on CBDC

On 09 November, the Bank of England released a statement with an update on a UK Central Bank Digital Currency (CBDC) colloquially referred to as Britcoin. They confirmed that in 2022, HM Treasury and the BoE will launch a consultation on the case for a UK CBDC, including whether there are merits to further work to develop an operational and technology model for a UK CBDC. The aim is that for this consultation to help inform policy development over the next few years. We had a great discussion at the Simmons annual Global Legal and Business Update, hosted by Rosali Pretorius, and with representatives from the Bank of England, Bank of International Settlements and the Bank of New York Mellon. You can listen to the recording of that here, along with a number of other sessions we held in relation to cryptoassets. This development was also picked up in our first Payments View and something we’ll be monitoring closely from both a crypto and payments perspective.

Statement on DeFi Risks, Regulations, and Opportunities

The Securities and Exchange Commission published a detailed statement on DeFi this month, also on 09 November.

In it, Commissioner Caroline Crenshaw provided a good background to DeFi for those not familiar with it. She also raised two hurdles which she sees the DeFi community as needing to address, namely a lack of transparency and pseudonymity.

The former might seem at odds with the stated aims of DeFi, with all transactions recorded on a public blockchain and the code being publicly available. However, Crenshaw raises the interesting point that only a relatively small group of people can actually read and understand that code, and there is a disconnect between those professional investors that can afford to analyse this code, or hire technical expertise and the general public who are investing in DeFi assets.

Crenshaw also raises the question of who regulates DeFi, and suggests that various US regulators have jurisdiction over certain aspects (of US DeFi enterprises) however, she notes that no DeFi participants within the SEC’s jurisdiction have registered with the SEC. This seems to be the fundamental issue, the whole basis of DeFi is that there should be no entity to regulate, though clearly regulators would beg to differ. This tension will only become more apparent over the next 12-18 months as the popularity of DeFi increases.

CSSF Guidance on Cryptoassets for Funds

On 29 November, the Commission de surveillance financier (the CSSF) published long awaited guidance on investments in virtual assets in Luxembourg.

The CSSF reaffirmed its position that for UCITS marketed to non-professional customers and pension funds, investors are not allowed to invest either directly or indirectly in virtual assets.

However, alternative investment funds (AIFs) managed by an authorised alternative investment fund manager (AIFM) can invest directly (and indirectly) in virtual assets, under the following cumulative conditions:

• the AIF markets its units, shares, interests only to professional investors; and
• the authorised AIFM obtains an extension authorisation from the CSSF for this new strategy.

You can read more about this guidance here, or contact one of our colleagues in Luxembourg: Augustin de Longeaux, Pieter Leguit, Céline Reymond, Matthieu Chambon, and Ugo Gargiulo.

Podcasts

A bit of a plug now, but you may have seen that we have also started a Digital Assets Podcast Series. These are being curated by Douglas Robinson in our Disputes team. The latest one has just been published, which you can find here, along with the three others that we have previously released.

Smart Contracts

You may also have seen that the Law Commission has published its advice to the Government on Smart Contracts on 25 November. The summary of that advice can be found here. This is quite detailed, so we’re going to take a bit of time reviewing it and include our thoughts on this in next month’s edition of Crypto View.

We hope you’ve found the above useful and interesting, and, as always, welcome any feedback or questions you may have.