This week’s legal roundup
Charles Kerrigan, Partner at CMS Law writes today’s legal briefing which is a sports roundup up of progress towards institutional acceptance of digital assets. These stories are unrelated except that they show the range of important constituents working on these questions at the same time.
Andrew Bailey, the Governor of the Bank of England, gave a speech titled “Reinventing the Wheel (with more automation)” that discussed stablecoins alongside central-bank digital currency (CBDC). He is the second Bank of England Governor to speak on the subject. When Mark Carney referenced CBDC in a speech in August last year that was momentous, indicating that market infrastructure would be influenced by technical developments in crypto. Bank of England Governors traditionally have not speculated openly about digitalisation in this way. Governor Bailey’s speech referenced the Bank’s March Discussion Paper on CBDC and noted that innovation in payments “picks up pace”. The tone of the speech was sober and focused on standards and international cooperation among regulators but we have crossed a line in the last 12 or so months.
People use crypto – the University of Cambridge released its latest international industry survey of crypto businesses, again using the perspectives of exchanges, payments, custody and mining. Two highlights show accelerating acceptance by both retail and institutional parties. In 2018, the report estimated the number of cryptoasset users at 35 million. That estimate is now 101 million. In 2018, 11% of service providers supported stablecoins. That figure is now 55%. We don’t know what percentage of lawyers hodl crypto but they need to follow what’s going on if not from the inside then at least from the outside.
European harmonisation – the European Commission has proposed a bill to clarify cryptoasset definitions and establish rules on custody of digital assets and the legal relationship between token issuers and holders. The Commission has issued press releases setting out its views over a number of years and will now build on these through legislation. Positively, the aim appears to be to assist market participants and to embrace digital assets and blockchain technology. This will involve amendment to EU financial services regulation to implement a strategic goal of supporting digital finance. There are no surprises in the approach that will be taken.
Topics highlighted include legal certainty, innovation, investor protection, and financial stability. Lawyers are often asked by crypto and digital assets businesses where they should locate. It has been a tricky question to advise on because it involves trade-offs between regulation, licencing, tax, corporate rules, brand association, ecosystem support and where founders want to live. A lack of harmonisation has made it hard to give a short answer. If the EU can deliver harmonisation in the digital asset markets this could help these markets overtake traditional capital markets where a European capital markets union has been a long time in coming.
CBDC II, Sand dollars, and Digital Euro – Barbados’ CBDC, the “Sand Dollar,” will launch in the next few weeks and will be a world first. Chaozhen Chen, the central bank’s assistant manager of eSolutions, has said the CBDC has been designed to provide better access to financial services for retail and business customers across the country. Digital money has a long history of assisting social inclusion and many commercial and not-for-profit projects using blockchain maintain that goal. In Europe, the ECB will trade mark the phrase “digital euro” and an executive member of the European Central Bank (ECB) last week talked about a digital euro initiative in the context of avoiding the eurozone having to rely on digital currencies issued by foreign entities.
Laws – The UK Law Commission has announced a consultation named “Adapting English law for the digital revolution”. This involves two new projects to “ensure that English law can accommodate two emerging technologies that could revolutionise commerce”. The projects will run alongside each other to review the law on smart contracts and digital assets. For smart contracts, the aim is to fill gaps in the law that might restrict growth in the use of the technology. For digital assets, the aim is to set up the law to deal with electronic documents, cryptoassets and other digital assets. These are big changes and precisely the topics most directly relevant to the crypto community. The work will build on the statement issued in November 2019 by the “LawTech Delivery Panel UK Jurisdiction Taskforce” that some readers may remember from reporting at that time.
And standards – the British Standards Institution is processing responses to its PAS 333, Smart Legal Contracts consultation. PAS (Publicly Available Specifications) are fast-track standards used to meet an immediate market need. The PAS on Smart Legal Contracts will set out requirements for functional elements in a smart legal contract. This is a project involving programmers and lawyers. The consultation closed in May and work is continuing to publish the PAS for use in projects.
Lawyers and programmers used to work in silos and simply hand work back and forth to each other, if they cooperated at all. Blockchain and other smart contract projects can’t be completed without the teams being integrated, however. The standards will provide a common starting point to help with this and with developing an institutional benchmark for the quality of projects, something that has been missing until now. They are also an example of what Government in the UK means when it says that the UK can lead the world in frontier technologies without competing on spending with the US and China.
And finally
Claude Brown, Partner at Reed Smith LLP comments on the FCA ruling on crypto derivative trading.
The FCA first laid out plans to ban the sale of crypto-derivatives for retail investors in its consultation paper last year, so this move does not come as much of a surprise. The volatile nature of cryptocurrencies and yet-to-mature market makes this a dangerous arena for retail investors.
Indeed, considering that only a few months ago the regulator launched a consultation proposing that cryptoasset promotion should be regulated, the watchdog’s weathervane is clearly set and the wind is blowing firmly in one direction.
While the £53m saved by retail consumers is sure to draw headlines, the true potential of cryptocurrencies never lay with consumers in the first place. Beyond the eye-watering price of Bitcoin or the amusing trading of DogeCoin, central banks are reviewing the potential of stablecoins to upend the regulatory system.
From the threat that Libra may attract and hold so much capital as to equal the central banks, to the potential that internal stablecoins could make central reserves obsolete – expect the big cryptocurrency waves to come from the large financial institutions, rather than legions of retail investors.