CryptoLaw Newsletter #42

EU Parliamentary committee votes on MiCA draft; UK FCA warns Bitcoin ATMs; Ukraine adopts Virtual Assets Bill; Israeli banks cannot flatly refuse crypto clients; Guernsey trust for DAOs?

Hello everyone,

This week, we’ve had the EU Parliament’s ECON committee vote on the draft MiCA Regulation and the FCA warning that all crypto ATMs currently operating in the jurisdiction are unlawful. dydx Foundation analysed the Guernsey Purpose Trust as a safeguard against unlimited liability for DAO participants and a tool to ensure DAOs can interact with the off-chain world. Israel’s central bank published draft guidelines telling banks they cannot flat-out refuse fiat deposits linked to crypto activities, but can only do so after a case-specific analysis. And fresh of the press: Ukraine adopts its Virtual Assets law, which has been months in the making.

Digital assets

  • EU – The Committee on Economic and Monetary Affairs (ECON) of the European Parliament voted on the draft MiCA Regulation. MiCA covers cryptoassets that are not financial instruments (which are already covered by the EU’s existing financial regulation), but is heavily focused on stablecoins. Its provisions range from disclosure obligations to market abuse rules, but most of the recent discussions had been about a single proposal that critics argued could turn into a „bitcoin ban“. That provision did not survive the ECON vote. And although crypto-twitter rejoiced, not everyone was happy with that outcome. The S&D fraction said on its website that „[t]he S&D and Green proposal to give the Commission the mandate to adopt a delegated act defining minimum environmental sustainability standards for the consensus mechanisms used for validating crypto-asset transactions was voted down by the conservatives and liberals with the support of the far-right ID group.“ One S&D MEP took a sneer at rapporteur Berger: „[W]e managed to convince the conservative rapporteur of the need for minimum environmental standards and he supported a broad and ambitious agreement in February. Unfortunately, the conservative rapporteur then seems to have caved in to pressure from lobbyists and industry,“ said one S&D MEP. The committee did approve an alternative amendment proposed by Berger, „ask[ing] the Commission to present MEPs with a legislative proposal to include in the EU taxonomy (a classification system) for sustainable activities any crypto-asset mining activities that contribute substantially to climate change, by 1 January 2025“.

  • The EU Commission published a call for tenders for a regulatory DLT sandbox and for legal advice for the operation of the core services of the European Blockchain Services Infrastructure (EBSI).

  • US – The crypto industry continues to add former public officials to its ranks. The WSJ concludes the industry now includes three former SEC chairs, three former CFTC chairs and three former senators, among others. Recently, US Fincen’s Chief Digital Currency Advisor Michele Korver announced her departure to join investment firm a16z as Head of Regulatory.

  • Ukraine – President Zelenksy signed into law the Virtual Assets bill, The law has been months in the making and will clarify the legal status of cryptoassets.

  • Sanctions against Russian individuals and entities

    • The US Treasury issued FAQs on cryptoassets and their use by sanctions Russian individuals and entities. “All U.S. persons are required to comply with OFAC regulations, regardless of whether a transaction is denominated in traditional fiat currency or virtual currency,” it warned.

    • The UK financial regulatory authorities issued a joint statement “reiterat[ing] that all UK financial services firms, including the cryptoasset sector, are expected to play their part in ensuring that sanctions are complied with.” “Financial sanctions regulations do not differentiate between cryptoassets and other forms of assets.”

    • Japan‘s Ministry of Finance and the Financial Services Agency warned crypto-exchanges that they face a fine if they transact with sanctioned persons, while executives risk a 3-year prison term.

    • An overview of how Singapore, Thailand and South Korea are dealing with the sanctions by Cointelegraph.

    • Blockchain analytics companies are seizing their moment to shine. Chainalysis released a free tool for decentralized web3 builders to make sure they don’t interact with crypto addresses linked to US-sanctioned individuals and entities. DEX, DeFi, DAO and DApp developers can use the on-chain oracle on most EVM chains, including Ethereum, Polygon, Arbitrum, Avalance and Binance Smart Chain. The tool (only) checks for wallets linked to persons on the US sanctions (OFAC’s Specially Designated Nationals) list. Competitor Elliptic said it identified a crypto-wallet with “significant” holdings worth millions of dollars that might be linked to sanctioned Russian individuals.

  • US – Motions filed by both the SEC and Ripple in their ongoing legal battle were dismissed by a Southern New York District Court judge. The SEC had asked to dismiss Ripple’s claims that it had been denied due process, as it had not been given fair notice that the SEC would consider its XRP token a security. it defense that it was not given fair notice that the agency would consider Ripple‘s XRP token a security, thus denying the company due process. Judge Analisa Torres rejected the SEC’s motion. Ripple’s CEO and chairman had filed a motion to dismiss the SEC’s claims that they aided and abetted an unregistered securities sales. The judge also dismissed that motion.

  • UK – All crypto ATMs in the UK are currently operating unlawfully, the Financial Conduct Authority warned. “Crypto ATMs offering cryptoasset exchange services in the UK must be registered with us and comply with UK Money Laundering Regulations (MLR). None of the cryptoasset firms registered with us have been approved to offer crypto ATM services, meaning that any of them operating in the UK are doing so illegally,” the FCA wrote. /// The UK’s National Crime Agency wants regulation on crypto-mixing tools, forcing mixers to comply with money laundering laws, with an obligation to carry out customer checks and audit trails of currencies passing through the platforms. Such tools obfuscate the origins of cryptoasset transfers. Some see it as a privacy-enhancing tool, others as an instrument to launder crypto funds. Wasabi, one of the crypto-mixing tools that became the subject of a Europol report, announced it would block illicit activities. /// The FCA is recruiting a Head of Department “to build and lead a new crypto department that will lead and coordinate the FCA’s regulatory activity in this emerging market,” according to a LinkedIn post.

  • Estonia is trying to shed a reputation tarnished by past ‘dirty money’ scandals, as a an audit by the Council of Europe’s AML committee is underway. Changes to the country’s Money Laundering and Terrorist Financing Prevention Act entered into force very recently and Talinn is not hiding that it wants a more transparent crypto industry. “Companies providing digital wallets and online exchange will soon have to cough up at least €100,000 in capital requirements to hold an Estonian license. Firms that hold and move cryptocurrencies for people will need to put down a minimum of €250,000. The amendments also come with steep registration fees, strict due diligence duties and heavier regulatory scrutiny. A chunk of companies’ business infrastructure will have to be located in the Baltic country, too,” writes Politico. Estonia was known for its (very) loose rules for crypto companies setting up shop in the country.

  • More AML rules for crypto, this time in Argentina: the country’s AML supervisor, Unidad de Información Financiera, plans to extend AML reporting obligations to crypto companies. The rules reportedly would enter into force this year.

  • Bahrain – Crypto exchange Binance obtained a crypto-asset service provider license from the Central Bank of Bahrain.

  • DubaiFTX‘s European entity obtained approval to operate Virtual Asset Exchange and Clearing House services. Soon afterwards, Binance also obtained the license.

  • China – Shanghai police arrested 10 people in relation to a crypto pyramid scheme worth US$16m.

  • Israel – The Bank of Israel published draft guidelines on crypto deposits. Banks are not allowed to impose a catch-all prohibition on fiat deposits originating from crypto activities. Instead, banks are required to make a case-by-case analysis. The guidelines come years after the Bits of Gold vs. Leumi case found its way to the Supreme Court: in 2018, the Court issued a temporary injunction against Bank Leumi, which refused services to a crypto exchange, citing general compliance risks for crypto-asset transactions.

  • The Verge published a long article on Tron’s Justin Sun. It’s not a flattering story, to say the least. The author spoke with 15 former and current employees of various Sun ventures and “hundreds of [leaked] pages of internal Tron documents”. There are claims of insider trading-like behaviour (unlawful insider trading is typically restricted to financial instruments – although, in the EU, the draft MiCA Regulation aims to expand market abuse rules to cryptoassets that are not financial instruments) and unlawful activities along the road. US authorities reportedly are investigating Sun. Potential charges in a subpoena viewed by the article’s author include: wire fraud, conspiracy or intent to commit wire fraud, swindling, money laundering, spending the spoils of a criminal enterprise, failure to register a security and lying about it, aiding and abetting a crime, and conspiracy to defraud the United States.

  • Academic corner –Probabilistic settlement finality in Proof-of-Work blockchains: Legal considerations”, by prof. Hossein Nabilou at the University of Amsterdam (Oxford Business Law Blog). The paper “highlights the key distinctions between legal finality and operational finality. It argues that, since operational finality cannot be realistically ensured in any payment and settlement system, ultimately it is the law that should fill the gap by devising the concept of legal finality”. However, “the concept of legal finality is at best non-deterministic” and the law relies on “alternative legal and institutional arrangements (eg, settlement discipline regimes) that could mitigate the risks emanating from the potential unraveling of transactions.” PoW blockchains are “incompatible” with such institutional arrangements, prof. Nabilou writes. “Along with other reasons, this may be a legitimate reason for pessimism about the potential use-cases of decentralized PoW blockchains in conventional post-trade processes.”


DAOs

  • What legal shape should DAOs take? As the number of DAOs rises, there’s more discussion about legal risks for DAO participants. There’s a risk that DAOs are considered partnerships by default – an ill-suited solution, according to Carla Reyes’ analysis. She pointed out that, at least in the US, the business trust could be a more suitable legal vehicle. The dydx Foundation sees the Guernsey Purpose Trust as an appealing legal option for DAOs. “This trust structure presents a potential solution for several issues [DAOs] face by (1) limiting liability for DAO and DAO committee participants; (2) enabling DAOs to engage in off-chain activities; and (3) clarifying the existence, or lack thereof, of any [US] tax payment and reporting obligations.” This construction can serve “as a vehicle for a committee of a DAO or a subDAO focused on a particular task, such as making grants, and does not [necessarily] wrap the DAO”. Trustees and enforcers have fiduciary duties but their tax filing and reporting obligations are limited. Assets in the trust cannot be returned to either the DAO or DAO token-holders.

  • Are DAO contributors employees? Which rights do they have? Employment lawyers undoubtedly are better placed to comment on this tweet, which show how DAOs are struggling with some very familiar questions:


CBDCs

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