Tuesday 30 March 2021 11:55 am

Harmonisation needed in the global regulatory maze for digital assets

There is a long list of legal considerations that creators of digital assets and digital asset exchange operators must consider when planning to establish their business and offer their products across multiple jurisdictions, writes Abradat Kamalpour.

As crypto and digital assets are relatively new for regulators across the globe, the legal approach by the authorities varies from one country to another, therefore the regulations governing such assets differs in various jurisdictions. 

One can envisage that if a digital asset provider decides to offer its products and services globally, which makes the most sense,  there is a complex matrix of regulations and laws which will have to be considered in order to line up a roadmap for global reach.

There are some key questions that digital assets issuers and exchange operators must consider when seeking to grow their footprints in a new jurisdiction.

Let’s discuss the regulatory and marketing approach in a number of selected jurisdictions, namely, the UK, China, Australia, Hong Kong, Japan and the EU.  

We will limit the scope of our discussion on digital assets that are designed to operate as digital currencies/cryptocurrencies that can actually be used as such practically.

The first question to ask is what is the regulatory scope in the various countries?

The regulatory scope of cryptoassets differs significantly across jurisdictions, with some, such as Hong Kong, largely applying existing laws and regulations governing the use of securities to cryptoassets. Whereas other jurisdictions, such as Japan, have updated their existing regulations such that they now encompass certain cryptoasset activities.

For example, the Japanese Financial Services Agency, holds the view that a foreign cryptoasset exchange operator is not allowed to trade with customers residing in Japan without being registered in the country.

Some jurisdictions have gone even further and implemented specific laws and regulations which govern crypto assets and related services such as Malta and Gibraltar.

Various jurisdictions also have different sets of criteria which they apply when determining whether or not a cryptoasset would be considered a “security”.

For example, in the UK regulators look at the nature and purpose of the cryptoasset when determining its regulatory scope: is the cryptoasset to be used as a means of payment? Does it grant holders of the asset any rights against the issuer? Does it have an investment purpose?

The UK position has been discussed in more detail in a Crypto AM Talking Legal article dated 26 May 2020.  If a digital asset that is designed to be used as digital currency is considered a “security” it can have a significant impact on its regulatory treatment and utility. For example, if it is determined to be a security, a full prospectus may need to be prepared and approved in the relevant jurisdiction. This can have a significant time and cost impact.

In certain jurisdictions, the location where the “issuer” of the digital currency is established is important, and whether they offer “payment services”, or if the relevant digital asset is going to have a utility similar to fiat currencies.

To have true utility as a digital currency, a cryptocurrency needs to be widely usable for trading, not just itself, but also for other goods and services. This is when other than securities laws, payment service and system laws become very relevant.

E-money laws and regulations are also very relevant as part of the analysis. For example, in Singapore if the issuer is established onshore or is considered to be providing “payment services” it will very likely fall in the regulatory framework which will lead to certain regulatory consequences.

In Australia, if the digital currency is to be used for payment of goods and services, the relevant facility could be regulated as a “non-cash payment facility” through which a person makes payments, or causes payments to be made, otherwise than by physical delivery of Australian or foreign currency.

In China the position is much stricter, in which there is a clear prohibition against providing cryptoassets and related trading services. The Chinese authorities are thus very conscious of any cryptoasset activities, and anyone who attempts to offer cryptoasset products or services may even face criminal consequences.

It is crucial that cryptoasset product and service providers comply with strict marketing protocols to avoid such enforcement action in China.

The differing approaches to regulation of such digital products and services makes offering digital currencies and related services at an international level very complex. In some instances, meeting the regulatory requirements in one jurisdiction can lead to complexities in meeting the requirements in another. It goes without saying that harmonisation and consistency is required at an international level in order for the sector to flourish and reach full potential.

What about law reform?

It is no news that the cryptoasset regulatory landscape is constantly evolving in response to advancing developments.  There are legal changes happening across jurisdictions and regulators are running various consultation processes.

For example in Hong Kong, the cryptoasset regime is poised to change substantially in the near future. On 4November 4 2020, the Hong Kong Financial Services and Treasury proposed bringing virtual asset service providers within the formal regulatory perimeter of the Hong Kong Securities and Futures Commission (SFC) which, if implemented, would require issuers and cryptoasset operators to obtain an SFC license. 

There are also various reforms in process at an international level. On September 24 2020, the European Commission published its proposed Regulation on markets in crypto assets (MiCA), which forms part of a wider set of publications on Europe’s Digital Finance Strategy.

The MiCA proposals are intended to create an innovation-friendly framework that does not pose obstacles to the application of new technology, while ensuring a common approach across the European Single Market and addressing the new risks cryptoassets pose.

As discussed in some detail in a Crypto AM Talking Legal article dated January 18 2021, the HM Treasury published a consultation paper titled: “UK regulatory approach to cryptoassets and stablecoins: consultation and call for evidence”. The Consultation represents the first stage in the government’s consultative process with industry and stakeholders on the broader regulatory approach to cryptoassets and stablecoins.

It seeks views on how the UK can ensure that its regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, while mitigating risks to consumers and stability.

It is indeed a positive development that governments and regulators are looking at law reform to develop the industry.

However, it is critical that such regulatory reforms and changes are implemented with international harmonisation in mind. The differing approaches across various jurisdictions are  a barrier to the development of international digital assets and cryptocurrencies that can be widely used to take advantage of the true benefits of DLT technologies.

By Abradat Kamalpour, Partner Ashurst LLP and Architect of FinTech Legal Labs (www.fintechlegallabs.com), Ida Mokhtassi, Associate Ashurst LLP and Emily Jones, Trainee Ashurst LLP.