Clifford Chance

Welcome to this month's global crypto round-up, summarising crypto regulatory developments that have happened around the world in October 2022 along with our Clifford Chance crypto publications and upcoming events.

Details of these and previous developments can also be found on our Fintech Topic Guide on the Clifford Chance Financial Markets Toolkit.

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CLIFFORD CHANCE PUBLICATIONS AND MATERIALS

Hong Kong to allow retail access to virtual asset ETFs and considering legalizing retail virtual asset exchanges

Hong Kong announced several fundamental virtual asset-friendly changes to the city's regulatory stance towards virtual assets, including the relaxation of rules surrounding retail access. The Hong Kong Government issued a policy statement on 31 October 2022 in conjunction with the city's flagship Hong Kong Fintech Week conference, which unveiled several key changes to the city's regulatory stance towards virtual assets (VA), in particular allowing retail access to VA futures ETFs, and launching consultation on the degree of retail access to VA, among other updates.

English law in the 21st century: does it need an update to accommodate crypto?

The recent Law Commission Digital Assets Consultation Paper proposes the creation of a third category of personal property under English law. This briefing focuses on identifying some of the practical consequences of this proposal from a financial services perspective. This is achieved by summarising some of the main points made in the consultation and considering the potential impact for the use of English law.

Metaverse and privacy: The views of the Spanish Data Protection Agency

The Spanish Data Protection Agency (AEPD) has published an interesting article on its blog under the title 'Metaverse and privacy'. The AEPD points out that technologies that are enabling creation of the metaverse or virtual worlds such as cryptocurrency and NFTs can bring their own risks to privacy that have to be managed.

Digital settlement assets - the next stage in UK cryptoasset regulation

The Financial Services and Markets Bill introduces powers for HM Treasury (HMT) to bring stablecoins used as means of payment and similar 'digital settlement assets' within scope of regulation. Most details of the new regime are left to be fleshed out by HMT, who confirmed their intention to regulate stablecoins used as a means of payment earlier in 2022 and plans to consult on its approach to regulating other types of cryptoassets later in 2022.

The Advertising Brief | Issue Two: October 2022

The second issue of our new UK advertising regulatory update includes an outline of how Arsenal FC were recently caught offside advertising crypto fan tokens.

Arbitration agreements in the T&Cs of crypto-exchanges and NFT marketplaces: Do not assume one size fits all

Many crypto businesses use online T&Cs which use arbitration as the required method of dispute resolution, which are commonplace in the US but has given rise to the question of whether those agreements are valid under non-US consumer protection legislation.  We consider the issue and outline what crypto-exchanges, NFT marketplaces and other online businesses should be doing now as a result.

The Fintech Files II: Crypto regulation with neo bank, Vivid Money

In this video, Tom Smeele, Head of Legal and Clifford Chance alumni, shares what they are experiencing at Vivid Money - a mobile banking app and digital investment platform. Exploring the new, and still largely unregulated, crypto investing industry to consider some of the challenges are the team from Clifford Chance, including Marina Sarkisjan (Legal Counsel) Christian Hissnauer (Senior Counsel) and Sam Akkersdijk (Associate). Together tThey discuss the fragmentation of any existing crypto regulation in crypto that does exist across different jurisdictions.

The EU Pilot Regime: unlocking the Digital Capital Markets

In this podcast, experts from AFME, AXA Investment Managers, Société Générale – FORGE  and Clifford Chance discuss the impact of innovation and particularly distributed ledger technology (DLT), on the capital markets. They discuss the EU Pilot Regime which, from March 2023, will allow operators of DLT market infrastructures the opportunity to experiment with the use of DLT in issuance and post-trade processes, free from certain regulatory constraints.

The metaverse: When is real estate no longer real?

It is often difficult to navigate the conceptual and legal challenges that may arise when investing in, and developing, virtual land in the metaverse, as well as to make sense of the broader question: can something that's not 'real' have anything in common with real estate? Land transactions in virtual worlds are skyrocketing and this trend is expected to continue, with a recent study forecasting that the virtual land market will grow by over US$5 billion by 2026. 

Digital Asset Services: How do English Courts' new powers to order disclosure of information by foreign non-parties impact on providers outside of England & Wales?

Following a cybercrime, it will not always be possible to identify those responsible for a fraud or ransom demand. In cases involving digital assets, the underlying distributed ledger or blockchain technology, by design, often allows anonymous or pseudonymous transactions, and near-instantaneous transfers mean those digital assets can change hands very quickly. However, the English courts possess well known tools (Norwich Pharmacal and Bankers Trust orders) allowing fraud victims to obtain information from third parties that have been used (unwittingly) to advance a fraudulent scheme.

GLOBAL LEGAL AND REGULATORY UPDATES, INDUSTRY GUIDANCE AND PUBLICATIONS

International

• (28 Oct 2022) International Monetary Fund working paper on digital money and central banks' balance sheets, which discusses several cases where substitution of currency in circulation and bank deposits may take place via digital money such as central bank digital currencies (CBDCs) or other e-money, and how this would impact the central bank balance sheet.
• (26 Oct 2022) The Bank for International Settlements (BIS) and four central banks have completed a successful pilot of the use of CBDCs by commercial banks for real-value transactions across borders, as part of Project mBridge. Project mBridge is a collaboration between the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People's Bank of China and the Central Bank of the United Arab Emirates. After experimenting with different technology architectures in earlier phases of the project, the project team developed a new blockchain, the mBridge Ledger, custom-built by central banks for central banks to serve as a specialised and flexible platform for implementation of multi-currency cross-border payments in CBDCs. | Report | Press release
• (21 Oct 2022) The BIS Innovation Hub has completed its first retail CBDC system. Project Aurum was carried out by the Innovation Hub's Hong Kong Centre in partnership with the Hong Kong Monetary Authority and the Hong Kong Applied Science and Technology Research Institute. Aurum is a full-stack (front-end and back-end) CBDC system comprising a wholesale interbank system and a retail e-wallet system. The aim was to bring to life two very different types of tokens: intermediated CBDC and stablecoins backed by CBDC in the interbank system. | Project webpage
• (12 Oct 2022) International Organization of Securities Commissions (IOSCO) report on retail distribution and digitalisation, which sets out measures for IOSCO members to consider when determining their policy and enforcement approaches to retail online offerings and marketing. The measures outlined in the report are intended to assist IOSCO members in adapting their regulatory and enforcement approaches, consistent with their legal and regulatory frameworks, to meet the challenges posed by rapidly evolving digitalisation and online activities. | Press release
• (11 Oct 2022) Financial Stability Board (FSB) consultation on a proposed framework for the international regulation of cryptoasset activities, based on the principle of 'same activity, same risk, same regulation'. The proposed framework includes recommendations on regulatory, supervisory and oversight approaches to cryptoasset activities and markets as well as revised high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements to address associated financial stability risks more effectively. Comments are due by 15 December 2022. | Press release
• (10 Oct 2022) FSB report on the progress made during the second year of the G20 Roadmap for Enhancing Cross-Border Payments and priorities for the next phase of work. Amongst other things, the report states that the Bank for International Settlements' Committee on Payments and Market Infrastructures is considering whether and how the use of well-designed and risk-managed stablecoin arrangements could enhance cross-border payments by addressing existing frictions, what opportunities and challenges this would bring, and how this could impact central banks' core functions. The outcome of this work will be finalised by the end of 2022.
• (10 Oct 2022) Organisation for Economic Co-operation and Development Crypto-Asset Reporting Framework (CARF), a new global tax transparency framework to provide for the reporting and exchange of information with respect to cryptoassets. The CARF contains model rules that can be transposed into domestic legislation and targets any digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions. | Press release
• (4 Oct 2022) The Global Financial Markets Association, the Futures Industry Association, the Institute of International Finance, the International Swaps and Derivatives Association, the International Securities Lending Association, the Bank Policy Institute, the International Capital Markets Association, and the Financial Services Forum have submitted a joint response to the Basel Committee on Banking Supervision's (BCBS's) second consultation on the prudential treatment of cryptoasset exposures. The joint letter warns that some features of the BCBS' proposed framework, including the proposal to limit banks' exposures to Group 2 cryptoassets to 1% of a bank's Tier 1 capital, would reduce banks' ability to, and in some cases effectively preclude banks from, utilising the benefits of distributed ledger technology.

Africa

South Africa:

• (19 Oct 2022) Financial Sector Conduct ​Authority notice declaring cryptoassets as a financial product under the Financial Advisory and Intermediary Services Act.

Americas

US:

• (26 Oct 2022) Speech by Commodity Futures Trading Commission (CFTC) Commissioner Christy Goldsmith Romero, in which she discussed how crypto presents many similar financial stability risks as the traditional financial system, with parallel themes to 2008, and the potential for that risk to become systemic.
• (13 Oct 2022) US Senator John Hickenlooper has written a letter to Securities and Exchange Commission (SEC) Chair, Gary Gensler, urging the SEC to issue regulations for digital asset securities through a transparent notice-and-comment regulatory process.
• (12 Oct 2022) Speech by US Federal Reserve Board Vice Chair for Supervision, Michael S. Barr, on managing the promise and risk of financial innovation with appropriate regulation, striking the right balance for cryptoasset activity, regulating stablecoins, recognising the risks of tokenising bank liabilities, advancing customer autonomy, and providing public sector support for payment innovation.
• (11 Oct 2022) Speech by Office of the Comptroller of the Currency (OCC) Acting Comptroller, Michael J. Hsu, in which he urged financial regulators not to lower their standards when dealing with crypto, but to learn and smartly adapt so that they can ensure safety, soundness, and fairness and encourage responsible innovation. While broadly reiterating his position as a crypto skeptic, Hsu identified programmability, composability, and tokenisation as holding promise and acknowledged that blockchain development can be credited with bringing these ideas to the fore.
• (5 Oct 2022) Republican members of the US House Financial Services Committee have asked the US Attorney General to provide them with the Department of Justice's assessment (as required by President Biden's March 2022 Executive Order on Ensuring Responsible Development of Digital Assets) of whether legislative changes would be necessary to issue a central bank digital currency. The lawmakers have asked to be provided with the assessment and any corresponding legislative proposal by 15 October 2022. | Letter
• (3 Oct 2022) Financial Stability Oversight Council report on digital asset financial stability risks and regulation, which concludes that cryptoasset activities could pose risks to the stability of the US financial system and recommends the passage of legislation providing for rulemaking authority for federal financial regulators over the spot market for cryptoassets that are not securities, as well as steps to address regulatory arbitrage. | Fact sheet | Press release

APAC

China:

• (31 Oct 2022) Speech by the Governor of the People's Bank of China, Yi Gang, in which he indicated that privacy protection is one of the top issues among the many still remaining when it comes to the application of China's central bank digital currency.

Hong Kong:

• (31 Oct 2022) Speech by the Securities and Futures Commission (SFC) Deputy Chief Executive Officer, Julia Leung, in which she outlined the steps the SFC is taking to review the 'professional investor only' requirement for cryptoasset customers. Amongst other things, Leung indicated that the SFC has been actively looking to set up a regime to authorise exchange traded funds (ETFs) which provide exposure to mainstream VAs, with appropriate investor protection.
• (31 Oct 2022) Financial Services and the Treasury Bureau policy statement on the development of virtual assets (VAs) in Hong Kong, which sets out the Government's policy stance and approach towards developing a vibrant sector and ecosystem for VAs in Hong Kong. Amongst other things, the policy statement indicates that the SFC will be conducting a public consultation on how retail investors may be given a suitable degree of access to VAs.| Press release
• (31 Oct 2022) SFC circular setting out the requirements under which the SFC would consider authorising ETFs that obtain exposure to VAs primarily through futures contracts for public offering in Hong Kong.

India:             

• (16 Oct 2022) Prime Minister Narendra Modi has launched 75 Digital Banking Units, which will provide savings, credit, investment and insurance services. | Press release | Speech by Governor of the Reserve Bank of India, Shaktikanta Das.
• (7 Oct 2022) Reserve Bank of India (RBI) concept note on CBDC, which is intended to create awareness about CBDCs in general and the planned features of the Digital Rupee in particular. It explains the objectives, choices, benefits, and risks of issuing a CBDC in India and sets out the RBI's approach towards the introduction of the CBDC.| Press release

Malaysia:

• (31 Oct 2022) The Securities Commission Malaysia has announced new digital-related initiatives to spur the growth of the capital market and help support the country’s economic recovery, including scaling-up micro, small and medium enterprises' access to financing and encouraging innovation and building capabilities through digitalisation. | Press release

Republic of Korea:    

• (28 Oct 2022) Speech by the Governor of the Bank of Korea, Chang Yong Rhee, about the lessons learned from the recent CBDC experiment at the Bank of Korea.

Singapore:   

• (31 Oct 2022) The Monetary Authority of Singapore (MAS) report detailing potential uses of a purpose-bound digital Singapore dollar and the supporting infrastructure required, marking the successful completion of Phase 1 of Project Orchid. While the MAS has assessed that the case for a retail CBDC in Singapore is not compelling for now, it is continuing to explore good use cases for digital currencies, and Project Orchid is intended to build the technical capabilities and competencies necessary for the MAS to issue a retail CBDC, should the need arise.  | Press release
• (26 Oct 2022) MAS has published two consultation papers proposing regulatory measures to reduce the risk of consumer harm from cryptocurrency trading and to support the development of stablecoins as a credible medium of exchange in the digital asset ecosystem. These measures will be part of the Payment Services Act. Consultation deadline: 21 December 2022 | Consultation Paper on Proposed Regulatory Measures for Digital Payment Token Services | Consultation Paper on Proposed Regulatory Approach for Stablecoin-Related Activities | Press release
• (10 Oct 2022) Speech by Managing Director of MAS, Ravi Menon, on how fintech can potentially play a positive transformative role in relation to cross-border payments and ESG data.

Europe

EU:

• (31 Oct 2022) European Central Bank Research Bulletin, 'Cold hard (digital) cash: the economics of central bank digital currency', which considers the economic forces that are shaping the rise of digital money and looks at the implications for monetary policy and financial stability before discussing policy issues and challenges.
• (27 Oct 2022) EU Commission supranational risk assessment for 2022, comprising a report on the assessment of the risk of money laundering and terrorist financing (ML/TF) affecting the EU's internal market, as well as an accompanying staff working document. The report warns that cryptoassets carry a significant ML/TF risk, due to the ease of transferring cryptoassets to different countries as well as the absence of homogeneous controls and prevention measures implemented at the global level. Amongst other things, the Commission is calling on national competent authorities to ensure that non-fungible token sales platforms are covered under the categories of obliged entities subject to their customer due diligence and other anti-money laundering/countering the financing of terrorism obligations.
• (18 Oct 2022) Report on approaching the regulation and supervision of decentralised finance, commissioned by the EU Commission and written by Professor Tarik Roukny.
• (18 Oct 2022) EU Commission work programme for 2023. Amongst other things, the Commission intends in Q2 2023 to table a legislative proposal setting out the principles of a digital euro before its potential issuance by the European Central Bank (ECB). The Commission and the ECB are also organising a high level conference to discuss key regulatory and policy aspects of a digital euro, which will be held in Brussels and online on 7 November 2022. Registration for in person attendance ends on 1 November 2022.| Annexes to work programme | Press release
• (18 Oct 2022) EU Commission action plan on digitalising the energy system, which includes a section on the energy consumption of cryptocurrencies. By 2025, the Commission intends to draw up a report on the environmental and climate impact of new technologies in the cryptoasset market, including an assessment of policy options to mitigate adverse impacts. In the meantime, the Commission has called on Member States to implement measures to lower the electricity consumption of cryptoasset miners and, in case there is a need for load shedding in the electricity systems, to be ready to stop cryptoasset mining.
• (5 Oct 2022) The EU Council's Committee of Permanent Representatives has endorsed and published the final compromise texts of the Markets in Cryptoassets Regulation (MiCA) and the recast Regulation on information accompanying transfers of funds and certain cryptoassets. This follows the provisional agreements reached by EU Council and Parliament negotiators at the end of June. The texts still need to be formally approved, first by the EU Parliament plenary and then by the Council, before they can be published in the Official Journal.
• (4 Oct 2022) The EU Parliament has adopted a non-binding resolution on the impact of crypto and blockchain on taxation, which calls for a better use of blockchain to fight tax evasion and for EU Member States to coordinate more on the taxing of cryptoassets. | Press release
• (4 Oct 2022) European Securities and Markets Authority Trends, Risks and Vulnerabilities Risk Analysis on cryptoassets and their risks for financial stability, which calls for continuous monitoring of the cryptoasset market and its interconnectedness with the wider financial system to assess newly emerging threats in a timely manner.

France:

• (21 Oct 2022) Speech by First Deputy Governor of the Banque de France, Denis Beau, on the mounting risks to the fintech innovation ecosystem and how the Banque de France and the Autorité de contrôle prudentiel et de resolution (ACPR) can help to tackle them.
• (19 Oct 2022) Speech by Governor of the Banque de France and Chairman of the ACPR, François Villeroy de Galhau, on helping fintechs to become a lasting and integral part of the financial landscape while continuing to keep pace with the digital transformations under way, especially in cryptoassets.
• (11 Oct 2022) The Banque de France is participating in a new wholesale central bank digital currency experiment with SWIFT. The objective of the experiment is to issue cross-border payments in a test environment to study the interoperability between different distributed ledger technologies and existing payment systems. | Press release

Netherlands:

• (6 Oct 2022) The Dutch Central Bank (DNB) has issued a press release welcoming MiCA as an important step in the regulation of European crypto markets and arguing that the rapid developments in crypto markets make it essential to continue evaluating, tightening and expanding regulations.

UK:

• (21 Oct 2022) Financial Secretary to the Treasury and City Minister, Andrew Griffith MP, has tabled an amendment to Financial Services and Markets Bill, which would amend the Financial Services and Markets Act 2000 to clarify that the powers relating to financial promotion and regulated activities can be relied on to regulate cryptoassets and activities relating to cryptoassets. Cryptoasset is also defined, with a power to amend the definition.
• (19 Oct 2022) Speech by Carolyn Wilkins, an external member of the Bank of England's Financial Policy Committee, on the governance of decentralised finance, calling on the crypto industry to build best practices in governance, codes of conduct, and set high expectations for transparency.
• (18 Oct 2022) The Law Commission of England and Wales has launched a Government-commissioned review that aims to provide clarity on how private international law rules can apply to emerging technology, such as digital assets and electronic trade documents. The Law Commission will publish a consultation paper in the second half of 2023. | Project webpage | Press release
• (12 Oct 2022) The Electronic Trade Documents Bill has been introduced in Parliament. The Bill gives effect to the recommendations of the Law Commission for England and Wales to allow for the legal recognition of certain types of documents used in trade and trade finance (whose functionality depends on their being capable of being possessed) in electronic form. It does so by providing that a trade document in electronic form that satisfies the criteria set out in the Bill is capable of possession. | Press release | Explanatory notes | Bill webpage
• (3 Oct 2022) Innovate Finance paper for the Treasury Committee inquiry into cryptoassets, setting out an action plan with short, medium and long term measures for government and regulators to ensure that the UK remains a leading destination for investment in distributed ledger technology and cryptoasset based businesses. | Press release
• (3 Oct 2022) The Law Commission has published the responses it received to its April 2021 call for evidence on digital assets. The responses informed the Law Commission's current consultation, launched in July 2022, on law reform proposals to ensure that the law recognises and protects digital assets. That consultation ends on 4 November 2022. | Law Commission digital assets project page

EVENTS

Global Financial Markets Perspectives Series: The future of banking – can CBDCs and custody of digital assets change the financial markets? (online, 15 November 2022): In this session we will consider some use cases for Central Bank Digital Currencies and how they may impact the financial markets particularly when combined with digital assets. This session will provide practical insights for in-house lawyers on novel legal issues that arise from CBDCs and how the role of custodian of digital assets may be evolving. | To register, please see the event series registration form.

Global Financial Markets Perspectives Series: Managing AI in an evolving legal landscape (online, 29 November 2022): Our experts will examine recent legal developments in a number of jurisdictions, consider key issues affecting the successful deployment and management of AI and machine learning, look ahead to expected changes to relevant regulatory regimes and discuss what businesses can do to prepare. | To register, please see the event series registration form.