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International developments in cryptocurrencies and DLT - June 2018
There have been many developments around the globe in relation to cryptocurrencies. Regulators in the United States (US) and Lithuania have provided further clarification on the application of securities laws to tokens and token offerings, while the Reserve Bank of Australia (RBA), International Monetary Fund (IMF) and the Hong Kong Monetary Authority (HKMA) have spoken on cryptocurrencies in relation to central banks.
- Australia: The head of the Payments Policy Department at the RBA, Tony Richards, has spoken on cryptocurrencies and DLT. Examining the potential for cryptocurrencies to act as money, Richards indicated that where there is a trusted central entity in a well-functioning payment system, there may not be a need for cryptocurrencies. As such, there is little reason for the RBA to issue an e-AUD though Richards maintained that the RBA was keeping an “open mind”. Richards also spoke on the potential of DLT, but suggested that permissioned shared ledgers were more likely to be used than trustless blockchain solutions.
- US: The Director of the Division of Corporation Finance at the US Securities and Exchanges Commission (SEC) spoke on the application of US securities laws to digital asset transactions. Re-emphasising that the Howey test should be applied taking into account the economic realities of the digital assets – that is, the circumstances surrounding the digital asset and the manner in which it is sold – the Director notably commented that in his opinion, if the network on which the token functions is sufficiently decentralised, the assets may not represent an investment contract. For example, Bitcoin and Ether, as they are today, no longer constitute securities.
- United Kingdom: The Financial Conduct Authority (FCA) has released another warning on the possible risks associated with cryptoassets. Addressing financial firms in a ‘Dear CEO’ letter, the FCA suggests appropriate actions for firms to consider in implementing a risk-based approach in relation to cryptoassets.
- Belgium: Just as the US SEC did last month, regulators in Belgium have jointly created a website highlighting the risks of investing in cryptocurrencies and initial coin offerings (ICOs). Significantly, the website allows users to plug in the URLs of companies to cross-check against websites detected by Belgian regulators to be operating without a valid licence.
- Lithuania: The Ministry of Finance in Lithuania (Ministry) has released ICO guidelines for issuers, intending to improve transparency around the application of Lithuania’s regulatory regimes to ICOs. Like other regulators around the world, the Ministry has indicated that the features of and rights associated with tokens will determine whether, among other things, securities laws or the Civil Code will apply. The guidelines also cover tax and accounting in relation to tokens, and note that Lithuania’s anti-money laundering and counter-terrorism financing regime is being amended to bring digital currencies within its scope of operation.
- Hong Kong: The HKMA, Hong Kong’s de facto central bank, has stated that it has no plans to issue a central bank digital currency. The HKMA indicated that proposed efficiency gains of central bank digital currencies are dependent on the circumstances of a jurisdiction and that the capabilities of Hong Kong’s existing infrastructure and systems mean central bank digital currencies are less useful. The HKMA noted that it would require further study and more proof-of-concept work to assess the feasibility of using a central bank digital currency for payment applications.
- IMF: The deputy director of the IMF’s Monetary and Capital Markets Department has released an article entitled ‘Monetary Policy in the Digital Age’. While he acknowledges that crypto assets are currently too volatile and risky, and suffer from a lack of general trust, he asserts that central banks “must continue to carry out effective monetary policies” in order to remain competitive. Notably, central banks must strive to make fiat currencies more stable and attractive for use as a settlement vehicle, whilst regulators must ensure that crypto assets do not receive an unfair advantage from a lighter regulatory touch.
There have also been considerable developments in the blockchain and DLT space.
In the US, a bill introduced in Michigan has proposed that individuals falsely making, altering, forging or counterfeiting blockchain records may face imprisonment up to 14 years for doing so. Such a bill supports the notion of using blockchain records as ‘legal proof’. In Vermont, the governor has signed a bill legalising “blockchain-based limited liability companies” (BBLL companies), which are companies operating a business utilising blockchain technology for a “material portion” of its business activities. Under the bill, BBLL companies must specify whether the decentralised consensus ledger or database used is fully or partially decentralised, and whether it is public or private. BBLL companies may provide for its governance through blockchain technology and may adopt voting procedures using smart contracts carried out on blockchain. The creation of BBLL is notable in that it provides regulators and legislators with a means of regulating blockchain-based entities specifically through laws or regulations in future.
In Switzerland, the city of Zug has launched an e-voting pilot in conjunction with its digital identity trial. The pilot allows residents to use their digital ID to cast votes in a blockchain poll, though the government of Zug has indicated that the results of the poll will not be binding. The government intends to review the security of the polling system, primarily whether privacy can be ensured. The findings of the pilot are likely to be significant as blockchain has been proposed as a solution to removing election fraud while providing immutable records.