Citywealth Crypto Editorial Board: news round-up

Date: 21 Jun 2023

Karen Jones

With the USA legislating by enforcement, Citywealth caught up with the Citywealth Crypto Editorial Board to get their views and initiatives on legislation in multiple jurisdictions and sentiments surrounding crypto, or digital assets as they are now more commonly known (encompassing tokens and NFT’s).

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With Bermuda just onboarding Coinbase, they have certainly got the best news, although Ireland also shows a change to a positive tone. Our Board chews through recent news including the “crypto is gambling” comment which Lyle Wraxall, Chief Executive of Digital Isle of Man, has some interesting thoughts on.

The Ciywealth crypto editorial board

The Citywealth Crypto Editorial Board provides guidance and direction to our editorial team. Convening twice a year – virtually – the board discusses the latest trends and innovation in the wealth management and private client industries, with a focus on Crypto. The crypto editorial board includes: Charles Kerrigan, Partner, CMS Cameron McKenna Nabarro Olswang LLP (chair), UK; Sean Kiernan, Founder & CEO, Greengage Global Holdings, UK; Ash Costello, Partner, gunnercooke llp, UK (Dublin, Ireland); Lyle Wraxall, Chief Executive of Digital Isle of Man; Tony Moretta, CEO, Digital Jersey, Channel Islands; Sasha Kazantseva-MIller, Deputy of the States of Guernsey, Digital Guernsey, Channel Islands; Steven Rees Davies, Partner, Carey Olsen, Bermuda; Zoe Wyatt, Partner, Head of Crypto & Digital Assets, Andersen, London; Harumi Urata-Thompson, founder and CEO of HUT Consulting, New York; Andrew Pedvis, CFA, founder of Digital Securities Consulting LLC; James Ramsden KC, Partner, Astraea Group; Charlotte Hill, Partner, Penningtons Manches Cooper.

1^st July VASPS Guernsey regulation

Sasha Kazantseva-Miller, Deputy of the States of Guernsey, Digital Guernsey, Channel Islands says: “The main update from Guernsey on its approach to digital/virtual assets and crypto is that the Lending, Credit and Finance legislation was passed by the States of Guernsey and regulation will come into effect on July 1^st. One of the pillars of the legislation is regulating VASPs – Virtual Asset Service Providers as required under the FATF guidelines of July 2019. This provides the enabling regulatory framework for blockchain, crypto and other fintech businesses to become regulated via the Guernsey Financial Services Commission.”

In the view of Karen Jones, Editor, Citywealth, offshore is showing the most promise with digital/virtual asset and crypto regulation and governance in terms of clear, transparent and positive legislation although, as we find out below, some jurisdictions appear to be implementing regimes to stay up to date, remain relevant and to protect their current infrastructure.

Moneyval compliance: time intensive for offshore govts

Jonathan Van Neste, Oben Law and Oben Regulatory, who most recently worked as a Senior Policy Officer of the Financial Services and Digital Economy team within Jersey’s Economic Development Department, stood in for Tony Moretta, CEO, Digital Jersey, Channel Islands. He notes that in Jersey: “Efforts to ensure FATF compliance prior to Jersey’s Moneyval assessment is absorbing a lot of time locally. Moneyval is the common and official name of the Committee of Experts for the Council of Europe on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism.”

Market approach to crypto

Steven Rees Davies, Corporate Partner, Carey Olsen, Bermuda, who has worked with the Bermuda government and other key stakeholders in the introduction and development of Bermuda’s digital asset legal and regulatory regime, and represents a significant number of digital asset companies headquartered, or with operations, in Bermuda, noted that: “Jurisdictions are now taking one of three main approaches to dealing with digital/virtual asset and crypto businesses from a regulatory and legal perspective:

1. Proactively engaging with the sector to create appropriate and clear regulatory regimes to manage the risk evident within the sector
2. Leaving regulators to govern the sector using existing legal and regulatory regimes, whilst allowing for discussion around long term legal change; or
3. Ensuring that minimal international standards are being followed in relevant lines of governance.” (FATF standards applicable to VASPS).

He says: “There has to be regulation to minimise the risk in certain lines of business.”

‘Slow mo’ in Hong Kong

Hong Kong was mentioned by Jones as “putting themselves out there to encourage crypto, as an economic bounce, after the impact of covid lockdowns,” but Charlotte Hill, Partner, Penningtons Manches Cooper in the commercial dispute resolution team in London pushes back and says, “They are very slow when compared with other jurisdictions, only recently confirming that crypto is property and is capable of being held on trust.”

Global standard for definitions would be helpful

Rees Davies says: “It would help if we had more definitions agreed upon at a global level – digital assets does not mean crypto. Digital assets include NFTs, tokens and crypto.” Lyle Wraxall, Chief Executive of Digital Isle of Man adds: “Data cannot be defined as property but there is talk of putting data into an NFT.” A Google search shows this relates to gaming, of which the Isle of Man has substantial expertise.

Regulation isn’t necessarily to attract crypto

With reference to VASPS and FATF’s 2019 guidelines, Rees Davies pointed out that: “Most offshore jurisdictions want to be compliant to avoid being black or grey listed by FATF, and so the introduction of VASP regimes are not in all instances seeking to attract this sector but to protect against it. For example, in some jurisdictions they have clearly stated that a VASP licence is permissible but only for the servicing of institutional clients, not retail.”

Bermuda-based Rees Davies added: “Some places like Jersey have benefited from a regulator that has proactively engaged with industry to facilitate the acceptance of certain activities involving digital/virtual assets using their existing laws and regulations, with digital/virtual asset management being the obvious example.” He also mentions Luxembourg and the Netherlands.

Second half of the year may see MLR licence applications

Charles Kerrigan, Partner, CMS Cameron McKenna Nabarro Olswang LLP (Chair), UK spoke of the HM Treasury consultation: “This will result in unregulated tokens being brought inside the regulatory perimeter. Rules on financial promotions will require marketing to UK consumers to follow procedures and be approved by an authorised person. We haven’t seen more of the MLR licence applications granted this year but there are expected to be a handful in the second half of the year. (This is for businesses that need to register with HM Revenue & Customs (HMRC) under the Money Laundering Regulations.) There is a political question looming. If we have a new (Labour) government then we could see different rules. The UK is still perceived a somewhat open to crypto.” He adds: “Brian Armstrong’s comments about Coinbase in the UK follow enforcement actions in the US.”

Ireland warms up to crypto

Ash Costello, Partner, gunnercooke LLP, UK, says: “In Ireland things are warming up for non-retail funds, and the public opinion is warming to the industry.” She says that Ireland’s Minister for Finance, Michael McGrath TD, delivered a keynote speech to open this year’s Blockchain Ireland week, whereas previous years’ events were less well represented.   

Crime prevention approach

Van Neste says Jersey is taking a conservative approach: “Mainly crime prevention and Moneyval in September.” He mentions an amendment to the transfer of funds. “The law that is being amended in Jersey to bring VASPs within scope of the travel rule is the EU Legislation (Information Accompanying Transfers of Funds) (Jersey) Regulations 2017.”

Van Neste noted Deputy Curtis, Assistant Minister for the Jersey Digital Economy, is pursuing a new Digital Economy strategy, of which future proofing regulation is a part, whether to attract digital businesses to the Island or to promote digital adoption. Van Neste has previously put forward the suggestion to Deputy Curtis that Jersey should consider providing for a certain regulatory space for digital assets. He is hoping to continue with this suggestion during the working group.

Abu Dhabi’s recent consultation

Zoe Wyatt, Partner, Head of Crypto & Digital Assets, Andersen, London, who advises start-ups to large multinational Web3 companies on their UK and cross-border tax, highlighted Abu Dhabi’s recent consultation on the creation of a Foundation entity specifically designed for the DLT sector, to act as a DLT / DAO legal wrapper, which “could be very interesting.”

Web3 insolvency and M&A

Wyatt updated the Board on the patterns and changes in crypto workflow and client profile: “In early 2022 I would get circa ten new NFT project enquiries each week. Between May, when Celsius filed for Ch.11 and November, when FTX filed for Ch. 11, there was a slowdown of new enquiries and a significant drop after the FTX collapse.” She attributes this to the “bankruptcy directly affecting the retail sector and impacting investor market and risk sentiment.” She says: “Our pipeline became focused around helping clients that had lost significant funds to FTX, to secure new investment, restructure, sell or merge with other projects.”

Quality of clients improves

Wyatt explained that, following Andersen’s appointment as UK tax advisors to the Celsius Ch.11 restructure, along with the change in pipeline, they have effectively been forced to pivot into Web3 insolvency and M&A specialisms. She says: “Thankfully the team had relevant experience.” She adds: “The token and NFT projects are still coming in, but they are more high profile or sophisticated (more verticals across multiple jurisdictions bringing cross-border tax issues to manage). The general quality of clients is better.”

Gaming

In addition, Wyatt noted that NFT PFP projects (PFP is a profile picture like Cryptopunks) are seeking to secure longevity with new verticals like gaming. She says: “Foundations are buying up NFT projects and other Web3 IP, where the projects have little community or financial runway remaining despite a good product, community or brand awareness.” (Jones mentions the SkyBridge Unicorn Recovery Fund. See note below).

NFT consultation – third type of ‘property category’ proposal

Dion Seymour, Crypto & Digital Assets Technical Director at Andersen, says: “For tax purposes the UK recognises NFTs as intangible property. From a wider legal standpoint, it’s not clear whether NFTs fit within the existing types of property; chose in action or chose possession. The Law Commission consulted on this and posed a third type of category, and we are expecting the conclusions of this consultation soon. This will have a wide-reaching impact and could be very attractive for non-UK persons to locate here.”

Jones references a conversation from New York where the lack of regulation is attributed to a turf war as different govt organisations want big slices of the crypto pie under their control.

Crypto is just gambling (isn’t it?)

“Crypto is just gambling”, the now infamous gambling reference recently made by Charles Randell, former chairman of the FCA and fellow MP’s in the UK, that sent the whole crypto industry into a tailspin, is mentioned. Wraxall says: “There is a halo of respectability (in the gambling sector) but that crypto should not be legislated as gambling but by financial services.”

Jones asks Wraxall to comment further on the gambling comment, as the Isle of Man has a specialty in gaming and gambling licences.

He doesn’t agree crypto should be considered gambling, similarly to financial trading not being considered, or regulated, as gambling. “Crypto has to be in the financial services ecosystem,” he says, “It is so different. Gambling has far simpler regulation.” He adds: “The Isle of Man do regulate crypto gambling, but it is seen as financial services.”

Seymour (ever the tax man) adds: “If crypto is gambling is it tax free?

DAC8 to complement MiCA

Seymour mentions the APPG making a presentation which may help. (The Crypto and Digital Assets All Party Parliamentary Group (APPG) provides a forum for parliamentarians, regulators, Government). He says legislation is lumbering ahead. He mentions DAC8: “DAC8 is designed to complement the recently implemented Markets in Crypto-assets (MiCA) Regulation and anti-money laundering rules. These rules will provide the conditions for access to the EU market for crypto assets, replacing existing national rules governing issuance, trading, and custody of such assets.”

Seymour says the market has more viable businesses now less froth. References the banking crisis and says European players have held steady.

Sean Kiernan, CEO, Greengage commented. Greengage is a digital merchant bank, that provides relationship-based e-money account services to SMEs, high net worth individuals, and digital asset firms. Kiernan mentions that: “Greengage has a glossary of crypto terms being updated to create understanding for policy makers about the sector.” He mentions Innovate Finance, which is the independent industry body that represents and advances the global FinTech community in the UK. Hill adds that the Greengage glossary was much in demand at a recent event, and many were seen being given to policy makers and the judiciary.

Banking and audit issues seen in sector

Harumi Urata-Thompson, Founder and CEO of HUT Consulting, says: “A lot of crypto entities have no banking, and it is a fight to get the infrastructure back.” She says: “a lot of auditors have left the sector,” which is undoubtedly because of reputational risk. She makes a further good point: “How does the industry get ready for compliance if no one will do an audit?”

On that point Wyatt confirms that Andersen do not do audit. She says though she is concerned that with so few players in the market that high profile UK regulated projects are driven to using the same firm for accounting and audit, which in her view is a conflict. She explains why: “If and when things go wrong, like FTX, the optics become particularly questionable.”

Seymour mentioned that it would be prudent for some projects to voluntarily undertake a proof of reserve audit in addition to the statutory accounting audit.

Ripple CBDC outsource platform

Jones mentions things that are top of mind: Allen & Overy Fuse and the announcement of a Ripple CBDC platform which is a white label platform for governments to use. There is a mention that NFTs also need to be regulated, not just crypto.

Kerrigan knew about Allen & Overy’s Fuse program: “A&O select a few firms at a time and give them support including office space. A big theme in the market is interest in the tokenisation of debt and equity instruments,” he says, “like Blackrock”.

Seymour comments that Ripple is “outsourced CBDC”. A news item says: “The Ripple CBDC Platform enables central banks and governments to bring the next level of digitization to their financial services while promoting access to millions of people around the world who are unbanked.”

Ripple has a testimonial: “Partnering with Ripple to help create our national digital currency is part of our commitment to lead in financial innovation and technologies, which will provide the citizens of Palau with greater financial access,” said Surangel Whipps Jr, President of the Republic of Palau (near the Philippines).

Final comments

Rees Davies says: “Regulation will get stronger but it’s also about the user experience. There remains a general lack of certainty and consistency in how businesses in the sector are treated in different jurisdictions, but the law and related regulations will gradually continue to change and adapt.”

Van Neste agrees: “We want certainty.”

Urata-Thompson: “The US has many different regulators looking at this, making things complex. It is an uphill battle. I hope the storm passes”

Hill and Kerrigan agree that: “We need more user-friendly information to share with people and firms that are just now learning about crypto and tokenised assets.”

Kiernan says: “CBDC is the flavour of the month, with Central Banks driving innovation. There is a digital identity debate with Web3. He says CBDC and stablecoins alongside digital identity are a piece of the puzzle to unlock the promise of Web3.” Jones says there is a book which says at some point all coins will just have an interface like Instagram and users won’t know what they are using, it will just auto-calculate.

Costello says “working together is key” and agrees with Urata-Thompson, saying: “A shake up and litigation will drive clarity. Once we are through the crypto winter the dust will settle and there will be a lot more progress.”

Seymour adds: “Kiernan is right – education is needed still” and says he thought: “We had got through that but clearly it is not the case.” He adds: “It’s not just about normalisation; there are very random views everywhere.”

Wraxall says: “We in the Isle of Man are moving forward with our customer journey for blockchain businesses.” He mentions an ‘innovation challenge’ around digital identities saying it is looking at things like eKYC and dynamic compliance. 29^th June is the final. Winners get an opportunity to work with the government.

Notes

1. At the Digital Isle Conference on 10th November 2022, Lyle Wraxall, Chief Executive of Digital Isle of Man, announced the launch of the FinTech Innovation Challenge, a collaboration between Digital Isle of Man, Finance Isle of Man, and supported by the Isle of Man Financial Services Authority and Deloitte assisting. The Innovation Challenge is part of the Isle of Man’s ambitions to build a secure, vibrant, and sustainable future. It has been developed to give innovative businesses around the world the chance to experience the island’s collaborative financial services sector and showcase their solutions to core challenges that have been identified across the Isle of Man business community.”
2. SkyBridge Unicorn Recovery Fund: “The 2022 downturn in asset prices has created significant dislocation for public and private market investors, resulting in private equity valuations that have come down dramatically in secondary market transactions. These price declines have accelerated because of the Silicon Valley Bank and broader regional bank crisis. We believe there is an opportunity to purchase equity in quality private companies – disruptive and seasoned industry leaders – at discounted prices from distressed sellers that are looking to exit illiquid positions. Historically, venture and private equity funds launched during similar market dislocations have been strong performing vintages, although past performance does not guarantee future results and actual results may vary.”