Bitcoin’s bull run last year caused its value to hit a new high of $ 60,000 per bitcoin in March 2021. In February 2021, the total value of the 18.6 million Bitcoin tokens currently in circulation exceeded $ 1 trillion, roughly half of the cryptocurrency’s total market value of $ 2 trillion. At the same time, in addition to the share prices of many cryptocurrency companies, other cryptocurrency prices have also risen on the world market.
In the US, financial giants have begun using cryptocurrencies in new ways: Mastercard is integrating Bitcoin into its payment systems, and BNY Mellon has announced that it will hold Bitcoin and other cryptocurrencies on behalf of its customers. These events reflect a surge in institutional interest in the emerging Bitcoin and cryptoasset class. On the corporate side, Tesla recently bought $ 1.5 billion worth of Bitcoin for its corporate coffers.
This growth has been analyzed in a number of ways and there is no consensus on the reason for Bitcoin’s continued rise in value. One thing is clear: digital currencies like Bitcoin are now firmly anchored in the financial landscape and are more widespread.
Light touch regulation
Just as we saw growth in value, we also saw a flurry of regulatory and political activity related to cryptocurrency in the first quarter of 2021.
On January 13, 2021, the President of the European Central Bank Christine Lagarde called for Bitcoin to be regulated worldwide. In an interview at the Reuters Next conference, she said that “[Bitcoin] is a highly speculative asset that has done some funny business and engaged in some interesting and completely reprehensible money laundering activity.
In general, crypto assets have so far been subject to slight regulation (if any), although we have seen interesting developments in related areas such as the fight against money laundering and terrorist financing.
regulatory developments in the US
In December 2020, the US Securities and Exchange Commission initiated enforcement proceedings against Ripple for raising $ 1.3 billion in capital by offering allegedly unregulated securities for digital assets, leading Ripple to participate in various Exchanges was delisted. In the same month, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced a bill introducing data collection and reporting requirements for transactions in convertible virtual currency (CVC) or legal tender status (LTDA) digital assets.
FinCEN’s notification of the proposed rule-making stipulates that banks and money service companies must submit reports, e.g. B. Submit a Currency Transaction Report (CTR), keep records and verify the identity of customers in relation to transactions above certain thresholds that include (i) CVC / LTDA wallets that are not hosted by a financial institution (i.e. non-hosted wallets) or (ii) CVC / LTDA wallets hosted by a financial institution in certain jurisdictions determined by FinCEN.
FinCEN proposes to adopt these requirements via the Banking Secrecy Act (BSA) and to stipulate by ordinance that CVC and LTDA are “money instruments” within the meaning of the BSA. In January and March 2021, FinCEN published notices resuming the consultation period on the proposed legislation and finally extending the deadline for replies on all aspects.
In its communication of January 2021, however, Fincen stated the following about the “proposed reporting requirements”:
“These proposed requirements are broadly in line with the existing CTR reporting requirements that apply to transactions in currencies. The proposed rule is an important measure to close loopholes to prevent illegal transactions using CVC and LTDA, including terrorist financing, as such transactions would otherwise be subject to well-known and long-standing reporting requirements if made in cash. ‘
The potential impact of this regulatory development is significant. If implemented in the manner and effect intended by FinCEN, this legislation hits the roots of some of the anonymity associated with cryptocurrency. Some commentators argue that the proposed regulations threaten legitimate expectations of individuals ‘financial privacy and impose a disproportionately higher compliance burden on virtual currency transactions (e.g., collection of addresses from customers’ counterparties) that is not imposed on cash transactions.
Regulatory developments in the UK
Regulators on this side of the pond have also taken steps regarding cryptocurrency. On January 11, 2021, the Financial Conduct Authority (FCA) warned consumers of the risk of investments that advertise high returns on crypto assets:
“Investing in crypto assets or related investments and lending generally involves taking very high risks with investors’ money. When consumers invest in such products, they should be ready to lose all of their money. ‘
Current UK policy is rooted in the UK Cryptoassets Taskforce’s final report (bit.ly/3rEE8Ln) published in October 2018. In it, cryptocurrencies were identified as a subset of the “crypto asset”. The report provided non-legislative definitions for three sub-categories of crypto assets:
- Exchange tokens (i.e. cryptocurrencies like Bitcoin, Litecoin, etc.). These tokens use a distributed ledger technology (DLT) platform and are not issued or supported by a central bank or any other entity, they are a medium of exchange or investment;
- Security tokens that represent a “specified investment” under the Financial Services and Markets Act (2000) (Regulated Activities) Order, SI 2001/544, and can also be transferable securities or financial instruments within the meaning of the EU Markets in Financial Instruments Directive II represent; and
- Utility tokens that can be redeemed to access a specific product or service provided through a DLT platform.
It is common knowledge that there is no blanket ban or restriction on cryptocurrencies in the UK and that there is still no specific regulatory system for crypto assets in the UK. Accordingly, with regard to financial regulation, the question of whether a cryptocurrency is subject to regulation or not depends on whether the respective crypto asset (i) falls within the scope of the Financial Services and Markets Act 2000 (FSMA 2000), (ii) the Anti-money laundering regulation, or (iii) the payment services and e-money regulation according to the Payment Services Regulations 2017, SI 2017/752, and the Electronic Money Regulations 2011, SI 2011/99.
This multitude of regulatory regimes is reflected in the cryptoasset taxonomy contained in the FCA Guidance on Cryptoassets of July 2019 (bit.ly/2QYSgCH). In practice, analyzing whether a cryptocurrency is subject to UK financial regulation requires taxonomy on a case-by-case basis. However, the FCA guidelines state that cryptocurrencies that are not centrally issued and do not confer rights or entitlements are referred to as “exchange tokens” in the task force report and as “unregulated tokens” in the FCA guidelines.
Accordingly, from the FCA’s point of view:
‘Exchange tokens are currently outside the regulatory framework. This means that the transfer, purchase and sale of these tokens, including the commercial operation of crypto asset exchanges for exchange tokens, are not currently regulated by the FCA. For example, if you are an exchange and only allow transactions of Bitcoins, Ether, Litecoin or other exchange tokens between participants, you are not engaging in any regulated activity. ”
In summary, this means that exchange tokens are unlikely to be regulated unless they are comparable to other regulated investments (e.g. stocks). In this case, they are more likely to be classified as security tokens.
That is not to say that the UK’s regulatory approach has been static. The UK Money Laundering and Terrorist Financing (Amendment) Regulations 2019, SI 2019/1511, came into force on January 10, 2020. This updated the regulations on money laundering, terrorist financing and money transfers (information on the payer) 2017, SI 2017/692 (MLR) and implemented the EU’s Fifth Money Laundering Directive into national law. This development required all UK crypto asset companies to register with the FCA. Existing crypto-asset transactions (i.e. those that already operated crypto-asset activities immediately before January 10, 2020) could continue this business in compliance with the MLR, provided they registered with the FCA by January 10, 2021 have means that the company in question must cease all crypto asset activities.
There was also another regulatory milestone in the UK in January 2021. On January 6, 2021, the FCA’s ban on the sale and distribution of crypto-related investment products (derivatives and exchange-traded bonds relating to certain types of crypto assets) for private customers came into force. The FCA had previously announced that it considered these products unsuitable for retail consumers “because of the harm they cause” and that “these products cannot be reliably assessed by retail consumers”. Taken together, these developments reflect a gradual advance of legal controls – particularly with regard to (unregulated) exchange tokens – in a currently unregulated environment.
It is clear that the UK Government is now fully aware of these issues. On January 7, 2021, the UK Treasury announced the first phase of a consultation process with industry and stakeholders on a broader regulatory approach to crypto assets, and in particular stablecoins (a type of cryptocurrency whose value is tied to other “stable” assets such as US dollars or gold ). The consultation, which closed on March 21, 2021, sought views on how the UK can ensure that its regulatory framework is “equipped to take advantage of new technologies while mitigating risks to consumers and stability”.
These developments reflect a growing awareness among governments at home and abroad of the potential of DLT and crypto assets as they begin to occupy a central position in financial markets. With this increased focus by governments, a need for regulation is perceived to protect consumers and prevent illegal activities. It is clear that 2021 will be a big year for cryptocurrency regulation as we await the results of the UK consultation.