Regulatory guidance on cryptoassets and digital currency companies may lead to a legitimisation of crypto-businesses as an investable asset class.

By Stuart Davis, Sam Maxson, David Walker, Tom Evans, and Catherine Campbell

Recent and upcoming regulatory guidance on cryptoassets and the regulation of companies engaged in digital currency, such as issuers, crypto-exchanges, crypto-custodians, crypto-brokers, and other service providers, could help facilitate private equity investment in this space. While there has been some institutional investment in crypto-businesses — such as Goldman Sachs’ investment in Circle (owners of the Poloniex crypto-currency exchange) and Tiger Global’s investment in Coinbase — this has been a relatively nascent market with most money coming in the form of early-stage and venture investing.

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Drivers of Volatility in Cryptoassets Values

Regulatory uncertainty has been a key driver in dampening the market value of cryptoassets. Regulators around the globe have issued warnings that cryptoassets may be regulated financial instruments, and issuers and intermediaries may require licences. Further, the application of AML/KYC rules to cryptoassets has been unclear.

Both the FCA and the PRA have written to firms to warn about certain risks associated with exposures to crypto-assets, and to advise firms of the measures they should consider implementing to mitigate such risks.

By Stuart Davis and Charlotte Collins

The FCA and the PRA have each written a “Dear CEO” letter to firms, to warn about the risks associated with exposure to crypto-assets. The letters reflect each regulator’s concerns, according to their regulatory remit, and provide examples of practical measures that firms should be putting in place.

These letters come at a time when both the use and regulatory scrutiny of crypto-assets is increasing, with the FCA recently revealing in a response to a Freedom of Information Act request that it is currently investigating 24 crypto firms.

New EU anti-money laundering measures have been approved by European legislators.

By Stuart Davis and Charlotte Collins

The European Parliament and Council have finally signed off on the text of the fifth Anti-Money Laundering Directive (known as MLD5).

Overview

The new directive is of particular interest to the FinTech sector as, amongst other things, MLD5 includes measures to increase transparency around more recently developed instruments of payment — namely cryptocurrencies and prepaid cards. Both these instruments lend themselves to anonymity and raise concerns that they could be used to help fund terrorist activities.

MLD5 will lower the threshold for identifying the holders of anonymous prepaid cards from €250 to €150. It will also require know-your-customer (KYC) checks to be performed for remote payment transactions exceeding €50, or if a withdrawal of more than €50 is made. The new provisions will also mandate that prepaid cards issued outside the EU can only be used in the EU if they comply with equivalent anti-money laundering (AML) standards (although it seems that this is left for the EU acquirer to judge). This is largely driven by European lawmakers’ concerns that individuals can fund terrorism “on a shoestring”, as evidenced by the fact that rental cars used in terror attacks have been paid for using prepaid cards.

FCA warns providers of cryptocurrency derivatives of their regulatory obligations.

By Andrew Moyle, Stuart Davis and Charlotte Collins

The UK Financial Conduct Authority (FCA) has issued a statement reminding businesses offering cryptocurrency derivatives of the requirement to be authorised.

The FCA explains that, although cryptocurrencies are not themselves regulated in the UK, derivatives that reference cryptocurrencies (such as cryptocurrency futures, cryptocurrency contracts for differences, and cryptocurrency options) are capable of being financial instruments under the Markets in Financial Instruments Directive II (MiFID II) and therefore within scope of regulation. The FCA clarifies that it does not consider cryptocurrencies to be currencies or commodities under MiFID II.

ESMA to introduce measures to restrict the provision of CFDs, and prohibit the provision of binary options, to retail investors in the EU.

By Nicola Higgs and Charlotte Collins

The European Securities and Markets Authority (ESMA) has announced the first use of its new product intervention powers under MiFID II. ESMA had announced before MiFID II came into force that it would introduce such measures, and had launched a brief call for evidence on its specific proposals on 18 January 2018. Despite receiving almost 18,500 responses to the proposals (many of which were presumably objections from the industry), ESMA has pressed ahead regardless, suggesting that the consultation was a mere formality.

The measures will introduce:

  • A prohibition on the marketing, distribution, or sale of binary options to retail investors in the EU
  • A restriction on the marketing, distribution, or sale of contracts for differences (CFDs) to retail investors in the EU

The Strategy emphasises the UK government’s continued push to create a world-leading FinTech sector.

By Stuart Davis, Charlotte Collins and Sam Wong

At the second International Fintech Conference held on 22 March 2018, Philip Hammond, Chancellor of the Exchequer, announced the launch of the UK’s first Fintech Sector Strategy. The Strategy includes the following key measures:

  • A new Cryptoassets Task Force — consisting of HM Treasury, the Bank of England, and the Financial Conduct Authority (FCA) — will be set up to help the UK manage risks relating to cryptoassets and to harness potential benefits of the underlying technology.
  • “Robo-regulation” pilot schemes will be developed to assist regulated firms in complying with regulation, by creating software that would automatically ensure regulated firms follow the relevant rules. It is hoped this will help reduce compliance costs for newer and smaller firms, who are often disproportionately burdened, as well as potentially improving the accuracy of data submissions.

Swiss regulator offers assistance in navigating the regulatory framework.

By Andrew Moyle, Stuart Davis and Charlotte Collins

The Swiss Financial Market Supervisory Authority (FINMA) has published a set of guidelines, setting out how it intends to apply its financial markets legislation in the context of initial coin offerings (ICOs).

Despite the growing trend for ICOs globally, FINMA is the first national regulator to provide such helpful clarity for ICO participants, who are typically left to work out for themselves whether and how their structure fits into existing regulatory frameworks. ICOs, in which investors receive blockchain-based coins or tokens in exchange for funds, were not envisaged when many existing frameworks were developed. Further, the increasing deployment of ICOs has not given rise to ICO-specific rules and regulations in most jurisdictions, although a minority of regulators such as the Gibraltar Financial Services Commission have announced that they are creating regulatory regimes specifically targeting ICOs. Consequently, the application of current regulation and legislation to ICOs is in many cases unclear, with the legal analysis depending very much upon the way in which a particular ICO is structured.