Category: Cryptocurrencies & ICOs

1
Cryptoassets: Taxation of Individuals in the UK
2
Regulating Stablecoins: Certain Stablecoins are Now Subject to the Texas Money Services Act
3
UK FCA Probes Crypto Businesses
4
FCA Fighting Cryptoasset Risks
5
Stakeholder Report on ICOs and Crypto Assets
6
Fintech Trends – Shift From ICOs to STOs
7
Commissioner Brian Quintenz Comments On The Liability Of Smart Contract Developers For Uses In Violation of CFTC Regulations
8
Financial Stability Board’s View on Crypto-Assets
9
New FCA “Dear ICO” Letter warns of financial crime associated with cryptocurrencies
10
An old-fashioned bank heist – in cyberspace

Cryptoassets: Taxation of Individuals in the UK

By Jonathan Lawrence

On 19 December 2018, the UK tax authority, HM Revenue and Customs (“HMRC”), published a policy paper on the taxation of cryptoassets. The guidance is limited to HMRC’s view in relation to individuals holding cryptoassets and does not extend to tokens or assets held by businesses. The guidance confirms that HMRC does not consider cryptoassets to be currency or money for tax purposes and separates crypto assets into three categories of “tokens”: exchange tokens, utility tokens and security tokens. The guidance focuses on the taxation of “exchange tokens,” a term encompassing assets such as Bitcoin.

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Regulating Stablecoins: Certain Stablecoins are Now Subject to the Texas Money Services Act

By Daniel S. Cohen

On January 2, the Texas Department of Banking (“DoB”) updated Supervisory Memorandum – 1037 (“Guidance”) which provides guidance regarding the application of the Texas Money Services Act (the “Act”) to virtual currencies.  First issued on April 3, 2014, the Guidance divides virtual currency into two categories: centralized and decentralized.

Centralized virtual currencies are virtual currencies “created and issued by a specified source” that “rely on an entity with some form of authority or control over the currency”. Decentralized virtual currencies, on the other hand, are virtual currencies that do not have an administrator or a central repository. 

Stablecoins are considered decentralized virtual currencies, provided they do not have an administrator or central repository.  According to the Guidance, whether the Act applies to centralized virtual currencies requires a case-by-case determination.  As for decentralized virtual currencies, the Guidance states that the Act only applies when sovereign currency is involved, and only in certain cases, because decentralized virtual currencies do not constitute money or monetary value. 

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UK FCA Probes Crypto Businesses

By Jonathan Lawrence

The Financial Conduct Authority (FCA), the UK financial regulator, confirmed to the Financial Times on 30 December 2018 that it was investigating 18 businesses involved in the sale of cryptocurrencies. The regulator has also issued alerts and warnings about dozens of companies suspected of cryptocurrency investment fraud. Currently, the transfer, purchase and sale of cryptocurrencies are not regulated in the UK. However, companies that sell regulated investments with an underlying cryptocurrency element may need FCA authorisation to do so depending on their activities.

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FCA Fighting Cryptoasset Risks

By Jonathan Lawrence

The UK Financial Conduct Authority (FCA) Executive Director of Strategy and Competition recently delivered a speech at The Regulation of Cryptocurrencies event in London. In his remarks, Chris Woolard outlined several steps the FCA is planning to take to combat risks in the cryptoasset market:

  • to help firms better understand the boundaries of current regulation in relation to cryptoassets, the FCA will consult on perimeter guidance by the end of 2018, helping to clarify which cryptoassets fall within the FCA’s existing regulatory perimeter, and those that fall outside;
  • HM Treasury (HMT) is to then consult on whether the regulatory perimeter requires an extension to capture cryptoassets that have comparable features to specified investments, but currently fall outside the perimeter;
  • the FCA will also consult on a prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts-for-difference, options, futures and transferable securities;
  • to combat financial crime risks, HMT will undertake one of the most comprehensive responses globally to the use of cryptoassets for illicit activities by applying and going further than the existing directive, the fifth EU Anti-Money Laundering Directive (5AMLD);
  • HMT will first consult and then legislate on how to transpose 5AMLD and broaden the scope of anti-money laundering and counter-terrorism financing regulation; and
  • HMT plans to complete further analysis on whether regulation could meaningfully and effectively address the risks posed by exchange tokens and what, if any, regulatory tools would be most appropriate and then consult in early 2019 on whether and how exchange tokens, as well as related actors such as exchanges and wallet providers, could be regulated effectively.

Stakeholder Report on ICOs and Crypto Assets

By Jonathan Lawrence

The Securities and Markets Stakeholder Group (SMSG) of the European Securities and Markets Authority (ESMA) has published a report on initial coin offerings (ICOs) and crypto assets. The goal of the report is to give advice to ESMA on steps it can take to contain the risks of ICOs and crypto assets (on top of existing regulation). The report mainly focuses on risks for investors as the SMSG states that there are no obvious market stability risks yet in this respect.

The first part of the report defines relevant concepts including crypto asset, virtual currency, cryptocurrency, token and ICO. There is taxonomy of crypto assets including payment tokens, utility tokens, asset tokens and hyrbids. The report also includes an overview of recent ICOs and of existing regulations of crypto assets, ICOs and sandboxes in 36 jurisdictions, including the European Union member states and Switzerland. The SMSG gives specific recommendations to ESMA on potential regulatory changes.

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Fintech Trends – Shift From ICOs to STOs

By Nicholas Hanna and Mark Tan

In recent months, there has been a noticeable shift by token issuers away from initial coin offerings (ICOs) towards security token offerings (STOs) largely driven in part to a recent bottoming out of the retail market (including Bitcoin and Ethereum) and softening demand from retail investors for ICOs.

This trend appears to have resulted from retail investors having come to realize the inherent limitations that ICOs possess, namely the fact that tokens issued in connection with an ICO generally only have “utility” and not much inherent value. Additionally, we are now also starting to see more interest from sophisticated and/or accredited investors and funds, who also tend to prefer “security” tokens instead of “utility tokens” when looking to make an investment, due to the inherent value that the former possess.

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Commissioner Brian Quintenz Comments On The Liability Of Smart Contract Developers For Uses In Violation of CFTC Regulations

By Anthony R.G. Nolan and Russell E. Deutsch

Recently, Commissioner Brian Quintenz of the US Commodity Futures Trading Commission (CFTC) commented that smart contracts that have the defining features of a swap, future or option are subject to CFTC regulation. The Commissioner posited the hypothetical that, after appropriate analysis, the CFTC has concluded that a particular smart contract, e.g., a binary option executed on a blockchain, is within its jurisdiction. He queried: If that contract is executed in violation of CFTC regulations, then against whom should the CFTC bring enforcement action?

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Financial Stability Board’s View on Crypto-Assets

By Jim Bulling and Edwin Tan

On 10 October 2018, the Financial Stability Board (FSB) released a report assessing the risks and implications of crypto-assets on financial stability.  The FSB considered that the growth of crypto-asset trading platforms, the introduction of new financial products (crypto-asset funds and exchange-traded products) and growing interest by retail investors together could lead to implications on global financial stability.

In its report, the FSB assessed the primary risks in crypto-asset markets which could expose and undermine confidence in the financial system and in financial regulators.

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New FCA “Dear ICO” Letter warns of financial crime associated with cryptocurrencies

By Judith E. Rinearson and Rizwan Qayyum

On June 11 2018, the Financial Conduct Authority (the “FCA”) issued a “Dear CEO” letter, which provided guidance for banks on how to handle the growing risks associated with “cryptoassets”.

The FCA defines “cryptoassets,” using Bitcoin and Ether as an example, as “any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value.”  While acknowledging that there are “many non-criminal motives” for using cryptoassets, the letter asserts that these products can be abused because they offer “potential anonymity and the ability to move money between countries.”

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An old-fashioned bank heist – in cyberspace

By Cameron Abbott and Sarah Goegan

In the old days the bank robbers would rob the local town and ride off into the sunset. The new version is a little less easy to see. Coinrail, a South Korean cryptocurrency exchange, has announced that it was hacked on 10 June.  That’s a polite phrase for “our customers lost a lot of coins”.

The cyberattack resulted in more than $40 million USD worth of altcoins (coins that aren’t bitcoin or Ethereum) being stolen. This represented around 30% of coins traded on the exchange. Quite a substantial amount, considering Coinrail is a smaller cryptocurrency exchange!

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