CryptoLaw Newsletter #29

Korea wants to tackle crypto market abuse; US hearing touches on DeFi; EU Council publishes MiCA position; UK Law Commission on smart contracts; CBDC e-book; China planning digital asset exchange?

Hello CryptoLawyers,

There is so much noise in crypto-news that it’s sometimes hard to see the forest for the trees. So far, we’ve mostly been covering weekly crypto & law updates. We also want to zoom out and are thinking about a couple of ways to do that.

We’ve started working on country overviews, with highlights of the legal framework relevant to cryptoassets. We’ve got one on the US and one on the UK so far (and working on more country overviews, including India and Singapore). It’s still in beta – happy to hear your comments and suggestions.

The weekly news on crypto & law includes a Finish warning on crypto ads, Korea’s plans to criminalize crypto market abuse, the EU Council’s position on the draft crypto Regulation, a report on smart contracts by the UK Law Commission, the US crypto Sprint group’s 2022 roadmap and more!

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Digital assets

  • Korea – The Financial Services Commission of South Korea wants to see greater action against price manipulation or insider trading on crypto markets. The FSC wants to see criminal liability for such behaviour included in a draft Act on the Protection of Cryptocurrency Users. Parliament had asked the FSC to prepare a draft law on crypto activities and the FSC has now reportedly finalized its proposals. This appears similar to the EU’s approach in the draft MiCA Regulation: a crypto-bespoke legal framework that tackles market abuse for digital assets not subject to financial market regulation (with its own existing market abuse provisions). In addition to the criminal liability recommendation for unfair behaviour, the FSC is also said to propose a tax on non-art NFTs and to propose that crypto service providers self-regulate under the umbrella of an industry association. (Korea Times, Coindesk, Cointelegraph)

  • India – The government is closely monitoring crypto ads, but does not plan to ban them, according to the Minister of Finance, Nirmala Sitharaman. (Coindesk)

  • US – The inter-agency crypto policy “sprint” group published its roadmap for 2022. The sprint group, formed by the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC), laid out its priorities. The sprint group in 2022 will “provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection and compliance with existing laws and regulations” related to custody, stablecoins, collateralized loans, holding crypto in treasury (on the balance sheet) and the very broad category of “facilitation of customer purchases and sales of crypto-assets”. These priorities don’t come as a surprise: stablecoins and crypto lending products, for example, have been under investigation by various regulators for a while. Ancillary custody services that the group wants to look into “could potentially include” staking and “DLT governance services” (does that target DAO service providers?). The Sprint group will also focus on capital requirements for banks with crypto exposure.

  • … and more from the US – The OCC published a letter confirming that national banks and federal savings associations must demonstrate that they have adequate controls in place before they can engage in certain cryptocurrency, distributed ledger, and stablecoin activities. — Cryptocurrency, like other tech, can be manipulated by state and non-state actors to destabilize countries or the US dollar as the reserve currency, said Hillary Clinton, calling on the Biden administration to toughen crypto regulation. (MSNBC on YouTube and Decrypt) — The SEC will hold a public meeting, part of which is dedicated to a panel discussion on crypto-assets, including consumer protection, stablecoins and crypto ETFs. Panelists include Timothy Massad and Aaron Wright. The meeting will take place online on 2 December, starting at 10am ET.

  • EU – The Council of the EU published its position on the draft Markets in Crypto Assets Regulation (MiCAR), over 400 pages long. NFTs are not covered by the draft MICA rules, the Council said. The Finance Minister of Slovenia, which is presiding the Council until the end of 2021, said MICA is a “a priority for the Presidency and we now hope for a quick agreement with the European Parliament”.  (Council press release Coindesk, Cointelegraph). A French central bank official nevertheless thinks there is still room for progress” on the draft MICA text “in order to reconcile pragmatism and flexibility with the necessary requirements in terms of risk control and the prevention of regulatory arbitrage.”

  • Germany – The incoming new government mentioned blockchain and cryptocurrencies in its coalition agreement – a first in the country. The coalition proposes “a new dynamic” for crypto-assets and also wants crypto service providers to identify beneficial owners. As an EU member state, Germany’s legal framework on crypto will become heavily influenced by the MICA Regulation once the latter is adopted.  (Cointelegraph)

  • Thailand – In a bid to boost tourism, the Tourism Authority of Thailand plans to launch its own TAT Coin. The plan, subject to approval by the Thai government, hopes to attract rich crypto nomads. TAT reportedly discussed its plans with the Stock Exchange of Thailand and is now pushing for government approval. (Cointelegraph)

  • Australia – Tax authorities cannot rely on Australian taxpayers to report their crypto tax obligations accurately. According to a tax official, users may mistakenly think their crypto gains are tax-free. (Cointelegraph)

  • UK – The Law Commission published its findings on smart contracts. It concluded the “current legal framework in England and Wales is clearly able to facilitate and support the use of smart legal contracts, without the need for statutory law reform… Current legal principles can apply to smart legal contracts in much the same way as they do to traditional contracts, albeit with an incremental and principled development of the common law in specific contexts. Although some types of smart legal contract may give rise to novel legal issues and factual scenarios, existing legal principles can accommodate them.” The laws on deeds and jurisdiction (private international law), however, require “further work” to support smart contracts.

  • Russia – Crypto transactions in Russia amount to US$5 billion a year, the Bank of Russia said. (Cointelegraph)

  • Finland – The Financial Supervisory Authority launched a warning shot on crypto marketing: only regulated virtual currency providers are allowed to market virtual currencies and related services, the FSA warned. (Cointelegraph)   

  • China – The crypto crackdown not only affected crypto miners in China, many of which relocated abroad. It is also have ripple effects on crypto news outlets. Chainnews, one of the main crypto news providers, is shutting down. Earlier this month, the websites and apps of crypto news agencies were blocked. Some sought refuge in new website domains or Telegram channels. (The Block)


DeFi

  • France – A central bank official called for regulatory changes to boost supervision of DeFi. Dennis Beau, First Deputy Governor of the Banque de France, said in DeFi the “usual regulatory frameworks are constrained by the fact that issuers and service providers are not easily identifiable in an environment where protocols are automatically executed without intermediaries, and there is no fixed jurisdiction for the services offered.”

  • BIS – DeFi and DLT can “bring benefits in terms of governance, with checks and balances that maintain the integrity of the system as a whole; but the price to be paid has been lack of scalability,” said Hyun Song Shin, Economic Adviser and Head of Research at the Bank for International Settlements.

  • US – On 17 November, US Congress held (yet another) hearing dedicated to crypto-assets. Several witnesses took the stand, including Peter Van Valkenburgh and Timothy Massad. Alexis Goldstein from the Open Markets Institute laid out concerns over crypto-asset markets in general and DeFi in particular, discussing rug-pulls, concentration of voting power, insider trading, too-good-to-be-true yield promises and more. Wharton’s Kevin Werbach discussed DeFi and regulatory options. Some excerpts leaned on the WEF’s DeFi Policy-Maker Toolkit (for full disclosure, I was a contributor). Werbach gave Congress 3 suggestions on how to regulate and enforced rules in the DeFi industry: focus on (centralized) stablecoin issuers, (centralized) app platforms and token issuers. Some highlights:

o   “In some cases, DeFi mitigates risks that are a serious problem calling for regulatory involvement in traditional finance. For example, with fully collateralized or over-collateralized DeFi transactions, there is not the counterparty risk that parties will not actually have the capital they claim to have. Positions are visible on the blockchain, and cryptographically secured. In other cases, DeFi generates risks that have no analogue in the established environment”.

o   “DeFi squarely poses the challenge of how it may be possible regulate decentralized systems… Furthermore, if a regulator wished to take enforcement action, there would appear to be no person or firm to take action against.”

o   “While this may sound like an insoluble problem, it is likely to be manageable in practice, if regulators adapt their approaches and focus on the objectives of legal requirements. There are three points of contact that deserve consideration as means of addressing potential regulatory concerns about DeFi: stablecoins, app platforms, and token issuance.”

You can read his full written statement here. If you want to watch the recording of the entire hearing, click here.

  • Korea – The FSC published a report on a proposed crypto-bespoke law (see above). According to Cointelegraph,  the draft law also targets digital assets issued by decentralized autonomous organisations (DAOs). DAOs and other token issuers would be required to submit a white paper and publish regular reports to users, as well as obtain a rating from a recognized token evaluation service and a legal review of the project, Cointelegraph reports. It is unclear how these requirements could be enforced by the authorities.


Stablecoins

  • WEF – The World Economic Forum published a series of 8 papers on governance risks related to stablecoins and CBDCs. Topics covered: public-private cooperation, regulatory gaps, consumer protection, financial inclusion, cross-border aid, privacy/confidentiality, interoperability and CBDC tech considerations.

  • US – Senator Brown, chair of the Senate’s banking committee, asked stablecoin operators for details. Brown sent letters to a number of stablecoin issuers, such as Circle and Coinbase (the companies behind stablecoin USDC), Tether and Paxos (the Pax Dollar is being tried by Facebook’s digital wallet Novi) and crypto exchanges such as Binance.US. He wants the stablecoin issuers to tell him how users can buy the stablecoin and redeem it against fiat again, expressing “significant concerns with the non-standardized terms applicable to redemption”. He also asked the companies to reveal the largest investor redemptions they’ve faced so far.


CBDC

  • China – In tandem with the crackdown on privately issued digital assets, China is thinking long-term about its own CBDC. Reports emerged that China may be launching its own digital asset exchange. The move aims to boost adoption of the digital yuan (e-CNY) and financial services in general. The State Council communiqué also urged large banks to set up digital yuan operations and pushed for  “faster trials” with the central bank digital currency. (Bloomberg)

  • Japan  – A consortium of over 70 banks plans to issue a digital yen that works like bank deposits. The Digital Currency Forum, as the consortium is called, wants to trial the digital yen for large business transactions as early as the start of 2022. A roadmap also hints at applications for the exchange of NFTs. (Coindesk)

  • Palau is partnering with Ripple to explore a digital currency strategy for the island republic. The strategy will focus on a US dollar-backed stablecoin. (Coindesk)

  • WEF  – Central Bank Digital Currencies should address 4 key cybersecurity threats, according to the World Economic Forum: (i) credential theft and loss, (ii) abuse of privileged user roles, (iii) system integrity and ‘double spending’ risks and (iv) quantum computers and the risk they pose to current encryption tools. The first three points do not come as a surprise, although the fourth one has received much less attention. The (commercial) availability of quantum computers sufficiently sophisticated to threaten existing cryptographic tools is estimated to be at least several years away. Once those post-quantum computers become sufficiently powerful, however, they have the ability to crack existing encryption tools such as RSA or elliptic curve cryptography. Other cryptographic tools, such as hashing functions used in several blockchains, will require larger outputs to remain secure in a post-quantum world.

  • Tanzania – The country has started “preparations” to have its own central bank digital currency, according to reports quoting Governor Florens Luoga of the Bank of Tanzania. (The Block)

  • US – The New York Federal Reserve launched a strategic partnership with the Bank for International Settlements. The new hub, the New York Innovation Center, will develop fintech products and services for the central bank community, according to a press release. CBDCs will be one focus area.

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That’s all for this week! Thanks for sharing and stay tuned!

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