On 26 February, Julia Charlton presented the seventh of a 7 part webinar series on Crypto Regulation in which Julia continues with an exploration of the various approaches adopted by regulators in Gibraltar and the UK to crypto regulation and how they compare to Hong Kong. Julia concludes the webinar with a round-up of some of the most recent developments in cryptocurrencies since the start of this online forum.
DLT Framework applies to firms that carry on DLT activities i.e. activities that are not subject to regulation under any other regulatory framework that use DLT for the transmission or storage of value belonging to others
Firms carrying on a business in DLT activities, including crypto trading exchanges and custodians, need to be authorised and licensed as DLT Providers by the GFSC
THE REGULATORY PRINCIPLES
conduct the business with honesty and integrity;
pay due regard to customers’ interests and needs and customer communication;
maintain adequate financial and non-financial resources;
effective management and control of the business;
effective arrangements in place for the protection of client assets and money;
effective corporate governance arrangements in place;
systems and security access protocols maintained to appropriate high standards;
prevention of financial crime;
development of contingency plans for the orderly and solvent wind down of its business.
GLOBAL RANKINGS
number of crypto hedge fund managers
US
UK
Gibraltar
Hong Kong
AML/CFT REGULATIONS
Proceeds of Crime Act 2015 amended to extend AML/CFT obligations to undertakings that receive proceeds in any form from the sale of tokenised digital assets whether on their own account or on behalf of another person
DLT Providers are required to comply with the Proceeds of Crime Act and related guidance issued by the Gibraltar Financial Services Commission
5AMLD – brought service providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers into the AML/CTF regulatory regime
GIBRALTAR – REGULATION OF ICOs
March 2018 – proposals to regulate ICOs issued
Proposed regulations would cover the promotion, sale and distribution of crypto tokens, secondary market platforms and investment services relating to tokens conducted in or from Gibraltar
Virtual assets that fall outside the scope of the DLT Regulations and Gibraltar’s financial services and securities laws would be regulated
Introduction of a requirement for an “authorised sponsor” of all publicly offered ICOs and obligations on authorised sponsors, secondary token market operators and token investment and ancillary service providers
PROMOTION SALE AND DISTRIBUTION OF TOKENS
Regulation of the primary market promotion, sale and distribution of tokens that are not securities, outright gifts or donations, extending to activities:
which purport to be or imply that they are made from Gibraltar;
are intended to come to the attention of or be accessed by any person in Gibraltar;
are conducted by overseas subsidiaries of Gibraltar-registered legal persons (in such cases, the Gibraltar person will be liable); or
are conducted by overseas agents and proxies acting on behalf of Gibraltar-registered legal persons, or on behalf of natural persons ordinarily resident in Gibraltar (in such cases, the Gibraltar person will be liable).
DISCLOSURE RULES
require adequate, accurate and balanced disclosure of information to enable anyone considering purchasing tokens in the primary market to make an informed decision
FINANCIAL CRIME PROVISIONS
undertakings that receive, whether on their own account or that of another person, proceeds in any form from the sale of tokens are already within the scope of the Proceeds of Crimes Act 2015 (POCA)
AUTHORISED SPONSORS
An authorised sponsor will need to be appointed in respect of every public token offering promoted, sold or distributed in or from Gibraltar
Authorised sponsors must have knowledge and experience of ICOs and mind and management in Gibraltar
Delegation of some of the work will be permitted
CODES OF PRACTICE
Authorised Sponsors must have in place one or more codes of practice relating to offerings they sponsor
A code of practice will have to be incorporated in authorised sponsors’ agreements with their ICO clients
Submission of codes of practice will form part of the application process for an authorised sponsor licence
Prior reporting of amendments to codes of practice will be required and will be treated in the same way as other major business changes
It is proposed that regulations would specify principles governing the content of codes of practice, however authorised sponsors will be free, subject to approval, to set their own methodologies for implementing the principles
REGISTER OF AUTHORISED SPONSORS
GFSC will establish and maintain a public register of authorised sponsors and their codes of practice (past and present)
GFSC will add the following details to the public register:
the client(s) for whom they act;
the token(s) included in the offering;
the code of practice applicable to the offering; and
any interest they, and connected persons, have in the tokens offered.
NEW CONTROLLED ACTIVITY AND OFFENCE
It will be an offence to promote, sell or distribute tokens in or from Gibraltar without compliance with:
the requirement for an authorised sponsor;
the requirement for a current entry on the public register;
specified disclosure obligations; and
relevant provisions of POCA, where applicable.
SECONDARY MARKET ACTIVITIES
The proposed regulations will set out requirements for:
disclosure to the public of data on trading activity;
disclosure of transaction data to GFSC; and
specific supervisory actions concerning tokens and positions on token derivatives.
AUTHORISED SECONDARY TOKEN MARKETS
New controlled activity of operating a secondary market platform used for trading tokens and their derivatives
GFSC will authorise and supervise secondary token market operators and maintain a public register of such operators
INVESTMENT AND ANCILLARY TOKEN SERVICES
generic advice (setting out fairly and in a neutral manner the facts relating to token investments and services);
product-related advice (setting out in a selective and judgemental manner the advantages and disadvantages of a particular token investment and service); and
personal recommendation (based on the particular needs and circumstances of the individual investor)
EU PROPOSALS
Which crypto assets will be caught by the regime? – any cryptoassets that are not already subject to EU regulation i.e. utility tokens, stable coins and e-money tokens
“Asset-referenced tokens” – a type of crypto asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one of several commodities or one or several crypto assets, or a combination of these assets
“E-money tokens” – crypto assets whose main purpose is use as a means of exchange and that purports to maintain a stable value by referring to the value of a single fiat currency
“Other crypto assets” – intended to cover all other crypto assets which are not covered by other regulatory regimes
EU PROPOSALS (CONT.)
Which crypto asset services will be caught by the regime?
Trading platform operators, custodial services, and exchange service providers
The placement of crypto assets, executing payment transactions in asset-referenced tokens and providing advice on crypto assets
Crypto asset services may only be provided by a legal person with a registered office in an EU Member State and that legal person would have to be authorised and licensed in an EU/EEA Member State as a crypto asset service provider
EU PROPOSALS (CONT.)
Issuers of crypto assets – “any legal person who offers to the public any type of crypto assets or seeks the admission of crypto assets to a trading platform for crypto assets”
Requirements imposed on issuers:
must be a legal entity;
subject to minimum disclosure requirements and comply with requirement that diclosures are fair, clear and misleading;
issuers of asset-referenced tokens must obtain authorisation;
must comply with the requirements set out in Article 13 of the MiCA
EU PROPOSALS (CONT.)
Requirements imposed on issuers of asset-referenced tokens or e-money tokens:
must be established in the EU
issuers of e-money tokens must be authorised as an e-money issuer under the E-money Directive
issuers of stablecoins must be authorised under the MiCA
Exemptions are available from the authorisation requirements for both e-money token issuers and assetreferenced token issuers for small-scale offerings of up to EUR 5 million within 12 months and offerings solely to qualified investors
EU PROPOSALS (CONT.)
“Significant” asset-referenced tokens and “significant” e-money tokens
Subject to a higher capital requirement of up to 3% of reserve assets and will have to put in place a liquidity management policy
Assessment of whether a particular token is significant will be made by the European Banking Authority having regard to factors such as a market capitalisation or value of at least EUR 1 billion, having at least 2 million customers and use in at least seven EU member states.
TERRITORIAL APPLICATION
MiCA would apply across the EU to all member states and would be directly applicable
Firms outside the EU would be impacted, to the extent that they do business within the EU
Issuers seeking to issue stablecoins or e-money tokens in the EU would therefore be required to be established in the EU and be duly authorised
COMPARISON AND IMPACT OF EU PROPOSALS
EU
No overarching regulatory regime
Handful of EU nations have developed innovative frameworks
Key benefit of proposals is access to a new EU single market for crypto assets
Concerns that EU proposals favour incumbent financial institutions
APAC
Patchwork of regulatory approaches
Main challenges faced by crypto businesses is understanding and complying with the various requirements and obligations
Concerns that FSTB proposals will stifle innovation and negatively impact financial inclusion
PAYPAL
20%
increase in overall revenue forecast
US$2 bn
in earnings from PayPal’s bitcoin business alone by 2023
3x as many
bitcoin traders using the app compared to non-bitcoin users
DBS DIGITAL EXCHANGE
10 DEC 2020 – DBS announced it would be setting up the DBS Digital Exchange
Follows DBS’ receipt of in-principle approval by Singapore’s MAS recognising the DBS Digital Exchange as a Recognised Market Operator
Will provide a regulated platform for the issuance and trading of digital tokens back by financial assets; cryptocurrency trading and exchange services between four fiat currencies (including HKD) and four of the “most established” cryptocurrencies and digital custody services
Will only offer services to institutional investors and accredited investors
BITCOIN FUNDS AND INSTITUTIONAL INVESTMENT.
20 Jan 2021 – BlackRock reportedly looking at giving two funds the”go-ahead” to invest in bitcoin futures
21 Jan 2021 – eToro report found more asset managers are looking at crypto as an asset class
