In June 2021 in the US state of Texas, Governor Greg Abbott signed a new law known as the Virtual Currency Bill which came into force as of 1st September 2021. The impact of this is that Texas will now recognise virtual currencies, including digital currencies, into law. It makes Texas the second state after Wyoming to recognise cryptos. The fact that Texas now legally recognises cryptos is more evidence of how Digital Assets are being embraced and possibly helps to partially explain, along with Texas’s cheap power supplies, why so many of the Bitcoin mining firms which have fled China are now moving to Texas. However, companies engaged with crypto activities very much remain in the ‘cross hairs’ of US regulators. According to the Wall Street Journal ,the Securities and Exchange Commission (SEC) is alleged to be investigating Uniswap Labs, the organisation behind one of the world's largest DeFi platforms. Some publications, such as Coinidol, have indeed posed the question: “Is the US SEC in a War Against Cryptocurrency Business?” No doubt this is off the back of the SEC investigations into some of the key crypto businesses such as Binance, Coinbase and Ripple.
Meanwhile, DeFi platforms are potentially challenging many of the traditional financial services - for instance lending, borrowing and insurance as well as investing, and have proved to be very popular for retail investors. In order to gain institutional appeal, DeFi platforms ideally need to be authorised and this is the route taken by Swarm Markets, itself having been regulated by the German regulator BaFin since 1st July 2021. Here in the UK, much frustration has existed regarding the time it is taking for the FCA to review firms’ applications to be listed on the FCA crypto register. As of 10th January 2020, companies engaged with crypto activities in the UK were required to register with the FCA and prove they had systems and procedures to comply with Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs). Whilst the FCA did grant temporary registration and allow existing firms which had been executing MLR crypto activities before the 10th January 2020, the FCA’s initial deadline to review these 100+ firms was extended to 31st March 2022. Those firms which have been granted the temporary registration include Revolut, Fidelity Digital Assets, Copper, eToro and a subsidiary of the huge Chinese Digital Asset platform, Huobi. Because of the FCA delay in the granting of permission to be able to offer crypto activities to UK citizens, it is believed that over 60 firms have relocated out of the UK. Furthermore, there are lawyers in the UK arguing that it could be illegal to promote Non-Fungible Tokens (NFTs) to UK citizens since some NFTs are backed by physical property and therefore may be considered to be security.
However, the FCA is slowly granting registration for firms and adding them to the FCA crypto register - on the 26th of August, Coinpass, a UK-based firm which buys and sells crypto currencies was successfully added to the FCA crypto register. It has also recently agreed for another company, Ramp, to be allowed onto the FCA crypto register. Meanwhile, according to the FCA, also in the UK: "On 25 June 2021, the FCA imposed requirements on Binance Markets Limited. The firm complied with all aspects of the requirements. See our Supervisory Notice. See the FCA Register for any requirements that apply to the firm. These requirements remain in place and BML are still unable to conduct regulated business in the UK". One wonders whether this announcement from the FCA will give some comfort to those other regulators expressing concerns as to Binance, especially with regards to AML/KYC procedures. Interestingly, from a recent post we put on LinkedIn regarding the FCA adding firms to its crypto register, we had considerable interest not just from the UK but also internationally, from various jurisdictions such as: Greater New York City Area (USA), Zürich Area (Switzerland), San Francisco Bay Area (USA), Berlin Area (Germany), Paris Area (France), Amsterdam Area (Netherlands), Edinburgh (UK), Toronto Area (Canada).
This interest from various jurisdictions serves to highlight the global nature and interest in cryptos and how they are regulated. Whilst professional advice ought to be always taken before conducting any activity in a country, Global Insights has a comprehensive summary for different countries when it comes to legislation in the various jurisdictions across the world. Jeffrey Wang, at Amber Group, a Canadian-based crypto finance firm, recently said: “Regulation is probably one of the biggest overhangs in the crypto industry globally”. The Asia Securities Industry & Financial Markets Association (ASIFMA), a regional trade association, has written a report titled, ‘Tokenised Securities in APAC’. This report has interviews from the Hong Kong Securities and Futures Commission, the Bank for International Settlements, Blockchain technology firm R3, Switzerland’s SIX Digital Exchange and the Singapore Exchange (SGX). The report found that the market is beginning to appreciate the advantages of Digital Assets. Furthermore, there have been a number of projects such as Deutsche Bank and Singapore fintech company, Hashstacs, announcing they are to issue to digital bonds. HSBC Singapore and Marketnode, the joint venture between the SGX and Singapore sovereign wealth fund, Temasek, have revealed the completion of a digital bond using Marketnode’s platform.
The lack of regulatory clarity not only dissuades some private clients but is a huge barrier for institutions to engage in cryptocurrencies. However, despite this, we continue to see a rise in interest and, indeed, in trading volumes for Digital Assets in various forms such as DeFi tokens, NTFs and cryptocurrencies. The regulators must somehow try and keep pace with this fast-changing sector; especially difficult when many of the new platforms are decentralised whereby making it very hard to track down who is actually responsible when something goes wrong.
There is also the added complication of firms such as Sky Mavis, (based in Vietnam), which developed Axie Infinity, itself now one of the highest-grossing blockchain games in the world according to the decentralised app ranking provider, DappRadar.com. Axie Infinity has players worldwide buying and sell in effect NFTs/crypto assets and turning over hundreds of millions of $s a day. It will be interesting to see if regulators turn a blind eye to such activities or will we see some, such as the SEC, eventually crack down on such firms in the same way that it appears the SEC is doing with Uniswap? Charles Randell, Chair of the FCA in the UK, recently said in a speech worth reading: “Good financial regulation supports innovation, productivity and economic growth. In regulating the online world, we need to strike the right balance between fostering innovation, providing an appropriate level of protection and allowing individuals freedom to take decisions for which they are responsible”.
The challenge is striking the balance between not stifling innovation but maintaining confidence in the financial system, all the while protecting investors. On the face of it, it seems an impossible task for a regulator to be able to authorise a truly decentralised organisation. In essence, the monitoring and conduct is being carried out by the members for the members, so one would hope they would have the best interests at heart for those using their platforms. Furthermore, it is encouraging that regulators are engaging and discussing the challenges around regulating Digital Assets. The jurisdictions that are truly able to embrace Digital Assets could well find many firms beating a path to their door, generating jobs and taxes for the economy as a whole.