|  | LEGAL SHORTS | Welcome to Legal Shorts, a short briefing on some of the week's developments in the financial services industry for the week ending 19 May 2023.
| | ECONOMIC CRIME AND CORPORATE TRANSPARENCY | The Economic Crime and Corporate Transparency Bill has completed its committee stage in the House of Lords and an amended version has been published.
Some of the key amendments made to the version of the Bill are:
failure to prevent fraud offence - introduction of an offence in relation to a "fraud offence". This includes false accounting and false statements by company directors, fraudulent trading and obtaining services dishonestly;
director disqualification - the addition of director disqualification sanctions to the regime; and
register of members – amendment to introduce a duty on members to notify, and notify changes to, the required information. Companies can also require that information be provided. Failure to comply and the making false statements are offences.
| | UK TREASURY COMMITTEE WANT TO REGULATE RETAIL CRYPTO TRADING AS GAMBLING | The UK’s Treasury Committee has released a report asking the government to regulate cryptocurrencies as gambling instruments, not financial assets. In the report, the UK House of Common's Treasury Committee makes the argument that retail crypto trading is more akin to betting on sport than investing and should be regulated as such. The report argues that even cryptoassets like bitcoin and ether "have no intrinsic value and serve no useful social purpose" and therefore should be regulated by the government as gambling instruments. The release of the report Wednesday follows a February update from His Majesty's Treasury in which the government outlined its plans to "robustly regulate cryptoasset activities." We at Cummings Pepperdine believe that this report belies a series of basic misunderstandings about cryptoassets. An informative reply has been provided by the UK Crypto Business Council which we have reproduced below: “The Treasury Select Committee (TSC) has today published its report on ‘Crypto Regulation’. There is a great deal of outrage from industry today at their findings, chiefly around the recommendation that Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service.
It is important to highlight a few key points: The Treasury Select Committee is in no way affiliated with HMG/HMT. They are part of the legislature and not the Government. They hold the Treasury to account but do not create legislation. Other than being able to “send for persons, papers and records” relevant to their terms of reference, they have no specific powers. HMG/HMT is obligated to officially respond to their report and we can expect that in the next (circa) two months.
The Government and the Minister responsible, Andrew Griffith, continues to be supportive of the sector and has re-iterated this at every opportunity - even recently stating that the timeline for implementation would be brought forward to within 12 months.
An HMT spokesperson has already come out to say that HMG would reject the TSC recommendation. Stating that: "Risks posed by crypto are typical of those that exist in traditional financial services and its financial services regulation – rather than gambling regulation – that has the track record in mitigating them (...) Crypto offers opportunities but we are taking an agile approach to robustly regulating the market, addressing the most pressing risks first in a way that promotes innovation.”
Industry gave evidence just days after the FTX debacle first hit the headlines. It is hardly surprising that this was the context in which much of this report was written.
What this goes to show is that the work of the UKCBC in educating parliamentarians is vital. Now is the time for industry to come together.
The UK remains on track to become the epicentre of the global crypto-economy.This is in no way a step backwards in fulfilling this ambition.”
| | TRAVELLING TO THE US TO LOOK AT THE SEC | The chairman of the Securities and Exchange Commission (SEC), Gary Gensler, continues to express concerns on areas of the digital asset world. This week Mr Gensler has said “It’s a false narrative to say that these things are that decentralised. They tend toward centralisation.” He was commenting on projects which may give an air of distributed control but, in reality, governance is retained in the hands of the few. Some commentators see this as part of a campaign against alleged noncompliance across the U.S. crypto sector. Meanwhile, the Global Blockchain Business Council (GBBC) and GBBC Digital Finance (GDF) have made a submission commenting on the SEC’s Proposed Rule, "Safeguarding Advisory Client Assets," released on February 15th, 2023. Both the GBBC and GDF have thanked the SEC for its attention and welcome an open dialogue, noting that the Proposed Rule is significant and will affect numerous industry participants, including Registered Investment Advisors (RIA), investors, custodians of assets, and others. With this in mind, they have urged the SEC to pause any rule implementations until clear guidance is issued on recommendations. GBBC and GDT also encourage the SEC to:
issue specific guidance with respect to the manner in which crypto assets may be held by a qualified custodian in compliance with the Proposed Rule;
propose custody arrangements that would meet the stated goal of the Proposed Rule which include leveraging technological solutions to safeguard crypto assets, such as multi-party computation (MPC) wallets integrated with exchange platforms;
extend the effective date for RIA compliance;
ensure that there are crypto-focused qualified custodians that have regulatory approval to allow RIAs to utilize their services; consider market-based solutions such as insurance that could help to enhance protection and security for the public; and
release guidance as to how FFIs can meet the requirements introduced in the Proposed Rule.
| | STABLECOINS AROUND THE WORLD | First up, it’s the EU. José Manuel Campa, Chairperson of the European Banking Authority has said that “central banks should have the power to veto the widespread introduction of so-called stablecoins” if they impact public policy goals. Campa will oversee major issuers under the recently-passed Markets in Crypto Assets (MiCA) regulation and will be setting detailed rules for MiCA’s implementation over the coming months, including requiring stablecoin issuers to obtain a license and hold minimum reserves. Campa noted that there is a future where stablecoins are a more relevant means of payment, but that those stablecoins must comply with “sensible guardrails” including anti money-laundering protections. Mr Campa also noted that stablecoins on decentralized, permissionless blockchains could be unsafe for financial stability and soundness and said “all issuers will be subject to a robust authorization and also supervisory framework going forward”. Moving to the US, the Chairman of the House Financial Services Committee, Rep. Patrick McHenry has announced the hearing, “Digital Assets, Financial Technology and Inclusion Subcommittee Hearing Entitled: ‘Putting the ‘Stable’ in ‘Stablecoins:’ How Legislation Will Help Stablecoins Achieve Their Promise’”. The hearing will be held at 9:00AM ET on Thursday, May 18, at 2128 Rayburn House Office Building in Washington D.C. and will be livestreamed. One to watch on catch up, as we publish Legal Shorts on a Friday.
| | REMUNERATION REQUIREMENTS FOR SMALL DUAL-REGULATED FIRMS | The FCA has published consultation paper CP23/11 in which it sets out proposals that aim to ensure that its remuneration rules for small dual-regulated firms are proportionate to the risks these firms pose to consumers and markets in the UK. The main proposals are:
to amend the FCA proportionality thresholds that allow smaller, less complex dual-regulated firms to be excluded from some of the remuneration rules by increasing the total assets threshold and changing the additional criteria that firms with over £4 billion of total assets are required to meet;
to remove the requirement for smaller, less complex dual-regulated firms to apply the rules on malus and clawback;
to align some minor differences between its rules and the PRA Rulebook, including those relating to the identification of Dual-regulated firms Remuneration Code staff; and
to make corresponding changes to its non-Handbook guidance.
The intention is for firms to be able to apply the amended remuneration rules and guidance to remuneration awarded in respect of their next performance year that begins on or after publication of the relevant policy statement. The draft Handbook text, which makes changes to the Dual-regulated firms Remuneration Code in chapter 19D of the Senior Management Arrangements, Systems and Controls sourcebook (SYSC 19D), is set out in the Senior Management Arrangements, Systems and Controls Instrument 2023 (Appendix 1). Comments can be made on CP23/11 until 9 June 2023 and the FCA plans to publish its policy statement and final rules and guidance in Q4 2023.
| | AND FINALLY, ON A PERSONAL NOTE | Those who follow me on LinkedIn will know about the three refugees from Ukraine who have lived with us, two of whom we hope will remain our guests until they can return to their home. For this and other reasons, we follow activity in Ukraine closely and have noted a to a recent announcement from the IRS Criminal Investigation (IRS-CI) division of the IRS. It has said that it is working alongside Ukrainian investigators and crypto investigations company Chainalysis to combat Russian oligarchs using crypto to evade sanctions. Apparently Fifty Ukrainian law enforcement officers have taken part in virtual training sessions using Chainalysis licenses donated to Ukraine by the IRS. IRS-CI Chief Jim Lee stated that “these trainings help participants hone their digital investigative skills to trace the source of blockchain funds and unmask cryptocurrency transactions with cryptocurrency forensic tools… [s]haring tools not only safeguards the U.S. financial system, but the global economy.”
| | CRYPTIONARY TERM OF THE WEEK | We’ve given an upate on a few stablecoin matters above, so what is a stablecoin? To help, here is our Cummings Pepperdine Cryptionary Term of the Week:
STABLECOIN:
A hybrid breed of cryptocurrency that is often pegged to real assets (including Fiat currency). Algorithmic stablecoins do not back assets, but instead rely on mathematical rules to adjust their supply to match the demand for them. The algorithms will create or destroy stablecoins, with the aim of automatically stabilising their price against some other, typically fiat, currency. In the UK, stablecoins will only be regulated under FSMA if they meet the definition of e-money under the EMRs or a Security tokens.
| | PEP PIC OF THE WEEK | | | Who are we? | Cummings Pepperdine is a unique leading legal advisor on crypto and alternative assets, advising a large and diverse global client base and the only firm to provide a complete solution building on the three key areas of law, tax and FCA with legal underpinning at every point.
For more information, visit www.cummingspepperdine.com | | | | |
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