Jan 28

Crypto-regulatory and legal update 21- 27 January

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This report is for informational purposes only. It is not intended as an offer of legal services.

 

Cboe Exchange withdraws proposed VanEck-SolidX Bitcoin ETF.[1] Bcoe BZX Exchange has withdrawn a proposed rule change to list and trade share of SolidX Bitcoin shares – a physically-backed bitcoin ETF. No reason for withdrawal has been provided. The decision may have been linked to the recent SEC shut-down with only a limited number of staffers reviewing applications.

 

Chile to tax cryptocurrency earnings.[2] Chile is reported to start taxing cryptocurrencies by imposing income tax. Cryptocurrencies are categorized as intangible assets and investors/traders will be required to declare their earnings on trading cryptocurrencies.

 

Guernsey to introduce smart contract legislation.[3] The Electronic Transactions (Electronic Agents) (Guernsey) 2019 will allow the formation of a legally binding contract by allowing a contract formation through the interaction of electronic agents. In other words, smart contracts – computer code carrying out a task in response to information received without further human input will be legally recognized.

 

FCA’s publishes guidance on cryptoassets.[4] The consultation paper published by the United Kingdom’s Financial Conduct Authority (FCA) seeks comments on their latest guidance on cryptoassets. FCA’s role is to ensure stability of U.K.’s financial markets, while achieving consumer protection. While the paper is instructive, it is not law and offers only guidance. The aim of the consultation paper is to provide regulatory clarity for the cryptoasset market. Despite the identified benefits, FCA has identified a number of risks, in particular – investment risk for consumers purchasing cryptoassets, lack of transparency and regulatory oversight enabling heightened risks from financial crime and market integrity threatened by a lack of transparency and oversight. The FCA adopted a wider-term ‘cryptoassets’ as a neutral term, akin to the crypto-taxonomy proposed by Christ Burniske. The regulator proposes three categories of cryptoassets: (i) exchange tokens (tokens used as a means of exchange – these are outside the jurisdiction of FCA), (ii) security tokens (tokens that meet the definition of a Specified Investment under the Regulated Activities Order and fall under the jurisdiction of the FCA) and (iii) utility tokens (tokens that grant holders access to a current and prospective product/service and may meet the definition of e-money). At the same time, FCA recognizes that these three categories are not mutually exclusive nor exhaustive – the assessment should be carried out on case-by-case basis. The regulatory treatment of cryptoassets needs to be balanced in a way that it encourages the development of DLTs, while securing an appropriate degree of protection for consumers, protecting and enhancing the integrity of the UK’s financial system and promoting effective competition in the interest of consumers. FCA refers to a ‘regulatory perimeter’ which separates the cryptoassets that fall within FCA’s jurisdiction over regulated cryptoassets form others. Cryptoassets within FCA’s perimeter can be characterized as specified investments under RAO, financial instruments under MiFID II, e-money under the EMRs or captured under PSRs. Per FCA, security tokens are those tokens that constitute Specified Investments under RAO or Financial Instrument under MiFID II. Such characterization can be determined based on a list of non-exhaustive factors. The factors target functionality, transferability, tradability or language used during cryptoasset issuance. FCA took the position of approximation, whereby it considered what is a traditional security and applied the reasoning to security tokens. In other words, ‘security tokens are securities because they grant certain rights associated with traditional securities’.

[1] https://www.sec.gov/rules/sro/cboebzx/2019/34-84988.pdf

[2] https://www.diariobitcoin.com/index.php/2019/01/17/contribuyentes-chilenos-deben-declarar-ganancias-con-criptomonedas-ante-el-sii/

[3] https://www.gov.gg/article/169886/Electronic-Transactions-Electronic-Agents-Guernsey-Ordinance-2019

[4] https://www.fca.org.uk/publication/consultation/cp19-03.pdf