Crypto View - September 2023 Part two

> Sign up to Cryptoview here

This 2nd edition we are again focussing on the changes to the UK financial promotion regime as it relates to crypto - the FCA have been active in publishing guidance and communicating with the industry and we take another look at what is coming in October. We also have an update to Italy where a tax amnesty in relation to crypto is about to end - if this impacts you, please do reach out to my colleagues to discuss. Finally, we have some technical advice from the EBA on how it will determine the significance of ARTs and EMTs. Oh, and Sam Bankman-Fried's trial has started...

Financial Promotions in the UK

You may have seen that on 07 September, the FCA published a Dear CEO letter as well as Feedback on Good and Bad Practice in cryptoasset firms' compliance with the financial promotion regime - which is due to come into force on 08 October 2023. The key takeaway is that the FCA have offered firms the chance to apply for a 3 month extension to 08 January 2024 to implement the so-called "four frictions" as firms are facing challenges in implementing these in good time:

• 24 Hour cooling off period
• Personalised Risk Warning
• Customer Categorisation
• Appropriateness Assessment.

The extension is by way of a "modification by consent" and only applies to those firms who are registered or authorised in the UK (including those authorised firms who are approving financial promotions on behalf of overseas firms). The effect will be that the COBS Rules in relation to direct offer financial promotions will not apply until 08 January 2024 for those firms who the FCA agrees to modify their consent for.  For firms outside the UK - their section 21 approver would need to apply for the extension for them to benefit. All other financial promotion rules will still apply from 8 October 2023. This includes the s.21 financial promotion restriction, as well as FCA Rules related to risk warnings, risk summaries, the ban on incentives to invest and the requirement that financial promotions must be fair, clear and not misleading.

The other publication focussed on what the FCA had seen when reviewing firms implementation on a number of areas, giving examples of good and bad practice. While not binding, it is a good guide as to what the FCA expects firms to be doing as they implement the rules. Further guidance was published in relation to Restricted Mass Market Investments (RMMIs) more generally, when the FCA published examples of good and poor practice for the wider sector, looking at the implementation of the frictions by firms offering P2P loans, which are already required to follow the rules that cryptoasset firms will be subject to from 08 October.

Besides the guidance, the FCA also published a Final Warning for firms marketing to UK consumers. It is concerned by the poor engagement from many unregistered, overseas cryptoasset firms who have UK customers on this important change, with few engaging with the FCA on the issue. It reiterated that carrying out financial promotions in relation to cryptoassets after 08 October 2023 will be in breach of s.21 of FSMA which is a criminal offence punishable by up to 2 years imprisonment, an unlimited fine, or both. The FCA also highlights that they may look to take action against intermediaries that enable the offshore firms to target UK consumers. For example:

• Social media platforms and search engines enable ads to be targeted at UK consumers
• App stores and domain name registrars host apps and websites, which are often the main form of communications with UK consumers.
• Payments firms enable consumers to invest money with these firms.

We are hosting a webinar this Friday (06 October) looking at the impact of this new legislation, including discussion on the extraterritorial nature of the regime, how it may be enforced by the FCA and what firms can expect to happen next. You can sign up for the webinar here.

If you would like to discuss the financial promotions regime and how it might impact your business specifically, please do get in touch.

Tax on Cryptoassets in Italy

An advantageous tax amnesty introduced by the Italian 2023 Budget Law (the Voluntary Compliance Procedure) is due to expire at the end of November 2023 (available in Italian only). This tax amnesty allows Italian tax resident individuals to regularise their tax affairs in relation to their crypto holdings and transactions by the payment of a lower rate of tax on disposals and a lower penalty. Any taxpayers concerned about their tax compliance for the periods covered by the Voluntary Compliance Procedure should consider taking advantage of it before it expires. The Voluntary Compliance Procedure is available to Italian tax resident individuals who failed to report crypto-assets and related income, if any, and, consequently, may have unpaid tax liabilities for the fiscal years from 2016 to 2021 (open fiscal years).

The Voluntary Compliance Procedure provides that individuals holding cryptoassets during the open fiscal years can pay:

1. a penalty of 0.5% instead of the normal rates of 3% to 6%; and
2. a substitute tax of 3.5% instead of the ordinary rate of 26% due on disposals of crypto

both to be applied to the fair market value of the cryptoassets at the end of each fiscal year subject to the compliance procedure.

To take advantage of the Voluntary Compliance Procedure, individuals must, by 30 November 2023, (i) file a tax amnesty return and an explanatory note with the Italian tax authority, providing information on the tax status of the applicant and the tax amnesty computation; and (ii) pay any corresponding tax and penalties.

Many taxpayers have already chosen to utilise the Voluntary Compliance Procedure as it provides for a substantial benefit compared to the ordinary taxes and penalties that would become due in the case of a tax assessment by the Italian tax authority and there remains a short time available for other affected taxpayers to apply under the Procedure. However, action is required now.

For more information, please contact Marco Palanca or Davide Pellegrini in our Milan office.

SBF on trial

Having filed for bankruptcy nearly a year ago, the trial of Sam Bankman-Fried began yesterday, the 03 October. This will be avidly watched by all in the cryptoasset sector, and beyond. Early indications suggest that the trial will likely last for 4-6 weeks, and we will be keeping a close eye on it - we'll be sure to give you our thoughts on next month's Crypto View.

This month in MiCA

This month, two of the Simmons MiCA team (Derek Lawlor and Koen van Leeuwen) delved into the Grandfathering provisions of MiCA - looking at the implementation, transitional provisions, and how they compare with the simplified procedure. It also covered how passporting fits into the grandfathering process and what happens to VASP registrations upon receiving a MiCA license. There is a review of different Member States treatment of their discretion around the transitional period. You can listen back to the webinar here.

We also saw a piece of Technical Advice from the European Banking Authority (EBA) on the classification of Asset Reference Tokens (ARTs) and Electronic Money Tokens (EMTs) as significant, and the fees that are to be charged by EBA to issuers of significant ARTs and EMTs. The EBA proposes that the outcome of the significance assessment should ultimately be subject to a holistic/collective assessment of both core and ancillary indicators for each criterion.  The proposed core indicators would inform the 'default' assessment of significance against the relevant criterion, with the ancillary indicators having a role when the core indicators do not lead to a conclusive determination of significance.

The core indicators of circumstances under which ARTs and EMTs and their issuers can be considered as interconnected with the financial system are:

• Share of non-deposit reserve assets that are financial instruments issued by financial institutions. This aims to highlight the direct interconnections via the issuer's reserve of assets.
• Share of ART/EMT issuer's asset holdings relative to total supply of specific financial instruments (e.g. units of a UCITS, sovereign bond. This indicator seeks to show the indirect interconnections between the issuer and the financial system via the issuer's asset holdings.
• Share of ART/EMTs issued that are held by financial institutions. This aims to show the direct interconnections of the ART or EMT and the financial system via financial institutions' holdings.

The core indicators of circumstances under which the activities of the issuer of ARTs and EMTs are considered to be significant on an international scale:

• Market share of value of cross-border transactions with ARTs/EMTs into and from the EU. This should highlight the general use of ARTs or EMTs on an international scale for cross-border transactions.
• Market share of cross-border transactions into and from the EU with an ART or EMT that are associated as means of exchange. This looks at the use of the ART or EMT at international scale specifically for for payments and remittances, and/or transfer of value, to capture currency substitution effects.