We hope you are keeping well and will enjoy another full edition of Crypto View, covering the recent announcements in the UK in relation to promotions of Cryptoassets, as well as news from Hong Kong and the Netherlands.
Cryptoasset Promotions
Hopefully you will have seen our interim Crypto View that we sent out covering the Response to the Regulatory Framework for Approval of Financial Promotions. We would recommend reading it: the UK authorities suggest quite dramatic changes to the regulation of cryptoasset promotions both from inside the UK as well as for firms based outside of the UK targeting the UK. HM Treasury’s consultation response confirmed that “Qualifying Cryptoassets” will be added to the Financial Promotion Order (FPO), which regulates financial promotions in the UK. Only a day later, the FCA published its consultation titled “Strengthening our financial promotion rules for high risk investments, including cryptoassets”. See our separate article on the consultation generally.
Chapter 6 of the consultation focusses specifically on cryptoassets. The FCA promotion rules will apply to FCA authorised firms when promoting or approving promotions of Qualifying Cryptoassets. The FCA says that it considers Qualifying Cryptoassets (as defined by HM Treasury) to be high risk. It proposes that they be treated as new category of “Restricted Mass Market Investments”. As such, they will need to be accompanied by prescribed risk warnings. Inducements in relation to crypto assets will be banned. The FCA proposes to restrict direct offer promotions – i.e. promotions which contains an offer to the investor to invest, or an invitation to make an offer to invest - further. These would need to incorporate “positive frictions” – cooling off periods and further risk warnings – and could only be directed at certified sophisticated investors and high net worth investors.
The consultation also includes draft updates to the FCA’s Handbook that reflect HM Treasury’s consultation on cryptoasset promotions. Responses to this consultation close on 23 March 2022 and the FCA propose to publish final rules in the summer.
Crypto and Digital Assets All Party Parliamentary Group Launched
A UK All Party Parliamentary Group (APPG) has recently been formed, providing a forum for Parliamentarians, Regulators, Government and industry to discuss the challenges and opportunities relating to the crypto sector. The APPG will work to make sure that new rules in the sector will support innovation. The secretariat to the APPG is CryptoUK, an independent trade body which represents the UK Crypto and Digital Assets sector and aims to work constructively with Government and Regulators to advance the UK’s approach to regulation of the crypto.
This comes at an important time in the UK as new regulation affecting the digital assets sector is introduced. The changes to the UK’s financial promotions regime, so as to bring cryptoassets within its scope, and HMT’s consultation regarding the regulation of stablecoins are two examples of areas where the crypto sector will need to make its voice heard and the APPG will provide a forum for doing so.
Security for costs can be ordered in a crypto case, but can’t be paid in crypto
In a recent case, (Tulip Trading Ltd v Bitcoin Association for BSV and others), the English courts confirmed that, while security for costs could be obtained in disputes about digital assets, the security could not be provided in the form of digital assets. This could be an issue for parties to litigation who hold their assets mainly in digital form.
The case concerned an action brought by Tulip, the holding company of Craig Wright, who publicly claims to be the inventor of bitcoin, against 16 software developers. Dr Wright is seeking to recover bitcoin worth around USD 1 billion which he claims was lost following a hack. Dr Wright’s claim is against bitcoin developers, however, rather than the alleged perpetrator of the hack.
The developers sought security for their costs and succeeded, on the basis that Tulip had not provided evidence of its ability to pay their costs, were it ordered to do so. Dr Wright proposed to post the security by transferring digital assets to his solicitors, who in turn would provide written confirmation to the defendants’ solicitors. However, the high volatility of bitcoin meant that, in the Court’s view, it would not provide the defendants adequate security, since a fall in the bitcoin price would lead to the security losing value.
Cryptoasset Tax
As cryptoassets gain popularity worldwide they also attract attention from HMRC and other tax authorities around the world who are keen to ensure that any related profits are subject to tax. In our Insights article we highlight some of the main tax issues in relation to this rapidly evolving and complex asset class for financial institutions and asset managers to be aware of when engaging in crypto-currency activities.
For further information about the tax treatment of cryptoassets, register here for our next webinar, Keeping Up with Crypto, on 10 February, 4pm GMT. This will be co-hosted with Holland & Knight and we’ll be discussing the latest direct and indirect tax, compliance and enforcement initiatives in the US, UK and EU.
HKMA Discussion Paper on Cryptoassets and Stablecoins
Earlier this month, the Hong Kong Monetary Authority (HKMA) published a Discussion Paper on Cryptoassets and stablecoins to seek market feedback on expanding the regulatory framework around digital assets. Notwithstanding the title, the paper primarily focused on stablecoins, especially payment-related stablecoins. Against the backdrop of growing use of stablecoins and cryptoassets in the market, the HKMA is looking to regulate payment-related stablecoins before they become a widely accepted means of payment in Hong Kong.
Having concluded that none of the existing and prospective regulatory regimes in Hong Kong readily captures payment-related stablecoins and the relevant activities, the HKMA proposes to develop a new regulatory framework to govern a non-exhaustive list of stablecoin-related activities, including minting and burning of stablecoins by the issuer, managing reserve assets to ensure stabilisation of the stablecoin value, validating transactions and records, safe-keeping of private keys to stablecoins, etc..
The proposals are to restrict anyone from carrying on these regulated activities in Hong Kong unless (i) an entity incorporated in Hong Kong and (ii) holding a relevant licence granted by HKMA. The HKMA also plans to impose requirements on capital and liquidity, fitness and propriety of controllers, management of reserves of backing assets, internal governance and control and financial reporting. The HKMA will seek to align the proposed framework with the approach adopted by regulators around the globe and draw reference from relevant international standards and recommendations, such as those put forth by the FSB and BIS for stablecoins.
The HKMA is inviting responses to its proposal before end of March 2022, and it aims to introduce the new regime no later than 2023/24. It seems clear that the HKMA sees the regulation of stablecoins and cryptoassets closely linked to its duty to maintain the monetary and financial stability in Hong Kong, but it remains to be seen how far the HKMA will go with its proposed restrictions after considering feedback from the market.
Crypto Reviewer – launches March 2022
Recognising the rapidly evolving nature of crypto regulation around the world our crypto team has developed Crypto Reviewer, a fully searchable online database of crypto regulations covering areas such as licensing, token categorisation, issuance, lending, AML, marketing and research. Available 24/7 Crypto Reviewer will provide reliable information which is frequently updated as the international crypto regulatory landscape evolves. Set to launch in March 2022 please register your interest here in a demo of the product or apply to be part of our beta testing community.
If you have any questions or would like to discuss anything in relation to this further, please do not hesitate to reach out to the cryptoasset and digital currency team at Simmons & Simmons.
