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From its inception more than a decade ago, blockchain has been reinventing the way financial services are delivered. Blockchain technology is famously disruptive, creating vast profits for the most successful, but inevitably also creating new risks and financial losses to others and is naturally attracting regulatory scrutiny. By Daniel Csefalvay, Bernd Geier and Ben Saul, partners at BCLP

Clear and sensible regulation of blockchain around the world would optimise the technology’s benefits to society. Yet national regulators have been slow to respond to the new challenges, and the international regulatory framework for blockchain-based financial services varies significantly between jurisdictions. 

How is a financial services blockchain business to select the optimum regulatory regime? It is illustrative to compare blockchain regulation in three key jurisdictions: the UK, Germany and the US – before even looking at other emerging regimes. 

United Kingdom

The UK regulators have generally not created separate regimes for blockchain, but over time have been incrementally fitting new blockchain applications into the existing regulatory framework. For instance, crypto derivatives are treated as regulated financial products. Securities tokens are characterised as regulated investment products, and so any issuance would need to consider prospectus requirements, and licensing for connected services. And at the beginning of the year, crypto asset exchange providers and custodian wallet providers were brought within registration requirements under money laundering regulations. 

UK regulators have also indicated that they will bring per se cryptocurrencies – such as Bitcoin and Ether – into the financial services licensing regime in some way, but the precise means by which this is to be accomplished remains to be seen. For example, it has been suggested they might require crypto exchanges to become licensed, even those only allowing the trading of per se cryptocurrencies.

The clearest statement to date of the UK legal standing of blockchain was published in late 2019 by the LawTech Delivery Panel. The statement asserts with some authority that most crypto assets are capable of amounting to legal property, under conventional rules of English law, seeking to dispel any residual uncertainty.

Germany

The German government, in contrast to the UK, has proposed both a national blockchain strategy, as well as fairly wide-ranging new requirements for authorisation. Since the beginning of 2020, new rules are in place for example, introducing special licensing requirements for the provision of electronic wallet services. The provision of services in securities tokens and crypto currencies requires authorisation. Anti-money laundering (AML) obligations have been significantly expanded in scope. 

By setting down clear rules and strategy in this way, the German regulators are seeking a clear competitive advantage. The EU is also beginning to develop a wider framework. For example, the European Securities and Markets Authority has published advice on initial coin offerings and crypto assets. 

United States

Just as European crypto businesses should consider both national and EU rules, so in the US, local state as well as federal rules apply. Even at federal level, multiple authorities have jurisdiction over blockchain in financial services. 

The Securities and Exchange Commission (SEC) moved comparatively early against certain unregistered issuances of digital assets. It has published a number of relevant statements, including on whether digital assets are subject to securities regulations. In early 2020, the SEC urged investor caution when investing in initial exchange offerings through online trading platforms. The SEC has also issued a joint statement with the Financial Industry Regulatory Authority, clarifying that broker dealers, among others, do not come within custody rules if they are not taking possession of digital assets nor acting as an intermediary. 

The chairman of the Commodities Futures Trading Commission has stated that Bitcoin and Ether are not securities, but commodities. The Financial Crimes Enforcement Network has published guidance on the application of money transmission regulations to convertible virtual currencies, and on reporting related suspicious activity. Internal Revenue Service guidance on taxation of digital assets and virtual currencies should also be consulted. And, finally, legislation has been proposed in the US House of Representatives to “clarify which Federal agencies regulate digital assets, to require those agencies to notify the public of any Federal licenses, certification, or registrations required to trade such assets, and for other purposes”. 

The optimum regime

In reality, there is no one regulatory regime that is optimum for all blockchain applications in financial services; this depends much on what the business actually does with the technology. Some rough trends can be discerned. 

The US is more receptive than many other jurisdictions to blockchain solutions for capital raising. This may result from the early SEC interventions on blockchain securities, paradoxically establishing clearer guidance on developing compliant solutions. The UK is more receptive to blockchain applications in secondary market trading, building on the deep, conventional secondary markets, and the Bank of England’s open approach to central clearing. And Germany’s new rules are seeking first mover advantage.

Other jurisdictions may offer different specialisms. Switzerland is building a lead in crypto currency trading, developing its historical exchange businesses. Singapore is vying for crypto derivative trading, recently proposing a derivative exchange approval regime. 

National regulatory regimes will continue to mature, playing catch-up with developments in blockchain technologies. It must be hoped that national specialisms will continue to develop, and that international rules will converge further.

A Speakers’ Corner is an area where open-air public speaking, debate and discussion are allowed. The original and most noted is in the north-east of Hyde Park in London

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