Crypto View - December 2022

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Welcome to the final Crypto View of the Year. What a year it has been! January began with HM Treasury confirming that “Qualifying Cryptoassets” would be added to the Financial Promotion Order (FPO), the piece of legislation that governs the financial promotions in the UK – while this hasn’t actually happened yet, the recent changes to the FSM Bill do allow for other changes to be put through to the FPO that may bring this about. January also saw the launch of the UK’s Crypto and Digital Assets All Party Parliamentary Group, with the APPG’s inquiry into the UK’s crypto sector expected to be published early next year. We then saw developments in relation to the taxation of cryptoassets, something which we revisit this month in light of the Edinburgh Reforms.

Stablecoins and CBDCs have been in the news regularly this year, with the UK’s response to the consultation finally being published in early April after a year. April also saw the issuance of Dubai Law No. 4 2022, which establishes a new Crypto Regulator, the Dubai Virtual Asset Regulatory Authority (VARA). There has been a significant increase in activity in the region since, and you can contact Muneer Khan, Adam Wolstenholme and Nina Fischer for more information on the Dubai regime.

May was a big month in Simmons as we launched Crypto Reviewer, our cross-border regulatory tool that helps navigate compliance in the world of crypto. This has been going from strength to strength, and now covers 44 jurisdictions with plans to increase this even further in the new year. You can find out more, as well as book a demo, here.

June saw a long-awaited provisional agreement on MiCA, with the text eventually being formally published in October. We ran a really good series of seven webinars that covered MiCA from all angles. You can listen back to the series here.

Other significant developments included the Law Commission’s Consultation on the classification of digital assets and its proposals for certain digital assets to be treated as data objects (which could have far reaching implications in the UK and beyond) and developments in Germany which allow market participants to issue fund units in tokenised form via a decentralised crypto securities register (for details of this new German regime, please contact Jochen Kindermann for more information). The biggest news of the year, however, is the most recent – the fallout from the collapse of FTX will be impacting the industry well into next year, and likely beyond, with regulators, the industry, and customers around the world looking at the market in a different light.

We look at further developments around FTX below, as well as some other things that may have slipped under the radar over the last month.

More on FTX

This month saw Sam Bankman-Fried starting to experience the effects of FTX’s earlier collapse personally. He was arrested in the Bahamas on 12 December, after criminal charges were filed in the US. The indictment was later unsealed, and showed that Bankman-Fried was being charged with conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the Federal Election Commission and commit campaign finance violations (the latter in relation to donations made to both political parties). The indictment notes that the wire fraud conspiracy, wire fraud, and conspiracy to commit money laundering, each carry a maximum sentence of 20 years in prison, while conspiracy to commit commodities fraud, conspiracy to commit securities fraud, and conspiracy to defraud the United States and commit campaign finance violations, each carry a maximum sentence of five years in prison. Whether Bankman-Fried’s frequent interviews and public appearances since FTX’s collapse endeared him to US law enforcement are doubtful – though the testimony that he intended to give to congress is certainly worth a read.

Prudential Treatment of Cryptoassets

On 16 December, the Bank of International Settlements (BIS) published its report into the Prudential Treatment of Cryptoasset Exposures. This follows two earlier consultations on the area. The Committee has now finalised its prudential standard, with this document setting out the final standard which should be implemented by 1 January 2025. The structure of the standard is unchanged from the proposal set out in the second consultation. Essentially, under the standard, banks are required to classify cryptoassets on an ongoing basis into two groups:

• Group 1 cryptoassets are those that meet in full a set of classification conditions. Group 1 cryptoassets include tokenised traditional assets (Group 1a) and cryptoassets with effective stabilisation mechanisms (Group 1b). Group 1 cryptoassets are subject to capital requirements based on the risk weights of underlying exposures as set out in the existing Basel Framework.
• Group 2 cryptoassets are those that fail to meet any of the classification conditions. As a result, they pose additional and higher risks compared with Group 1 cryptoassets and consequently are subject to a newly prescribed conservative capital treatment. In addition to any tokenised traditional assets and stablecoins that fail the classification conditions, Group 2 includes all unbacked cryptoassets. A set of hedging recognition criteria is used to identify those Group 2 cryptoassets where a limited degree of hedging is permitted to be recognised (Group 2a) and those where hedging is not recognised (Group 2b).
  If you wish to discuss capital requirements in relation further, please do get in touch with Rosali Pretorius.

Edinburgh Reforms

This month also saw the UK’s Chancellor of the Exchequer announce sweeping reforms to financial services regulation. Most in the financial services industry did not agree with the Chancellor that these reforms marked a Big Bang 2.0, and a number of the proposals did seem to be rehashing and reheating previously announced measures. With regards to crypto, there was an announcement to hold a consultation on a retail CBDC in the coming weeks, as well as deciding to push ahead with the expansion of the investment transactions list under the Investment Managers Exemption, to include cryptoassets. This seems a very positive outcome, especially as the government has recognised the need to introduce the changes without further delay. For further details, see our article IME to expand to include cryptoassets.

As part of the former, the Government announced an RFP for a supplier to build a CBDC sample wallet proof of concept. It looks as though there are currently 23 firms underway with their applications, but to apply you need to have a Digital Supplier account, with new applicants not currently being accepted. This means that the number of firms who will be able to apply are likely to be limited…

You can read more about the Edinburgh reforms here, which also includes a link to a webinar that we did covering all the key parts.

This month in MiCA

There is not a lot to report this month in the world of MiCA. There were murmurings about the legislation being reopened in light of the FTX fallout, but that seems to have quietened down. More likely, and indeed mentioned by Christine Lagarde, the President of the European Central Bank, for a second time, is the implementation of MiCA followed by a swift development of MiCA II to plug any gaps that regulators believe still exist. We cannot wait.