Introduction/Welcome Welcome to our first edition of Dark Matters, Penningtons Manches Cooper’s quarterly newsletter which deals with all things cyber and crypto-related. In this newsletter, we visit all four corners of the globe, exploring recent crypto developments from the UK, to the US, down to Cuba and El Salvador and across to China. We even feature a trading hamster, Mr. Goxx, so read on! The next Dark Matters newsletter will focus on cyber scams, heists and hacks, so keep your eyes peeled! 

The UK Crypto market The Exchange-traded funds "ETF" market, and more generally the crypto market, is buoyant as companies seek funding rounds to assist them with their growth. To name just one recent example, Penningtons Manches Cooper advised Cardiff-based Coincover on its Series A fundraising round of $9.2 million, led by Element Ventures, with participation from DRW Venture Capital, CMT Digital, Avon Ventures, Valor Equity Partners, FinTech Collective, Susquehanna Private Equity Investments and Volt Capital. Founding investors Insurtech Gateway Fund and Development Bank of Wales also took part.   Recognising the significant threat posed by hackers and the potential for user error or business failure, Coincover was founded in 2018 with the aim of bringing safety and confidence to those looking to use and hold cryptocurrency. Coincover has sought to establish an industry standard for crypto safety and through a unique combination of military-grade technology and insurance-backed theft cover underwritten by Lloyd’s of London, provides protection from loss of access to and theft of cryptocurrency funds. The funding will enable Coincover to accelerate development to quickly deliver to market more cryptocurrency safety products; support its partners to activate and maximise the adoption of crypto safety products amongst their customers through new tools and resources; and raise consumer awareness of the options now available to safely hold and trade cryptocurrency. FCA 5MLD (the FCA’s AML and counter-terrorist financing regime) Congratulations to Penningtons Manches Cooper client Coinpass for receiving FCA approval and becoming one of the few registered cryptoasset firms on its register. While many firms have not been able to meet the FCA’s requirements, or have withdrawn from the temporary registration process, Coinpass is just one of 11 companies to have received FCA approval by complying with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Coinpass’s chief executive, Jeff Hancock, said in a statement: “We're exceptionally pleased to be among one of the first UK based cryptocurrency Trading Exchanges for retail investors and businesses to be fully registered with the Financial Conduct Authority as a crypto-asset firm”. FCA releases its supervisory notice to Binance Markets Limited In a supervisory notice published on 25 August 2021, the FCA informed Binance’s UK arm not to carry out any regulated activity. The FCA also demanded an end to advertising and financial promotions by the website. In response, a Binance spokesperson said: “The FCA UK notice has no direct impact on the services provided on Binance.com … Our relationship with our users has not changed.” Binance later halted withdrawals and deposits in GBP. It has recently been reported that the US has expanded its investigations into Binance Holdings Limited and is now examining possible insider trading and market manipulation. Seizures On 13 July 2021, detectives made the UK’s largest cryptocurrency seizure worth nearly £180 million, according to a statement released by the Met Police. This was only a matter of weeks after the specialist detectives investigating money laundering offences made a seizure worth £114 million. This is a landmark achievement by the Met Police and demonstrates the fact that cryptocurrencies may not be as anonymous or untraceable as many are led to believe. Mr Goxx With a nod to the Mt Goxx scandal, Mr Goxx is a hamster that has, so far, out-traded humans and funds with his lifetime career performance up 20%. Mr Goxx – who is live streamed on Twitch and has an active Twitter account – enters his trading office (in his cage) and runs on his “intention wheel” to select which cryptocurrency to trade, and goes through his tunnels to indicate whether to buy or sell. BBC news reported that, as of 27 September, his career performance was up 19.41%, beating the return not only on major stock markets such as the FTSE 100 or the Dow Jones, but also the performance of investing supremo Berkshire Hathaway.

The EU Changes to the law governing crypto? In July 2021, the EU Commission proposed changes to EU law that would potentially force companies that transfer Bitcoin or other crypto-assets to collect details on the recipient and sender. The proposals would make crypto-assets more traceable and, in principle, help stop money-laundering and the financing of terrorism, but would potentially undermine a key pillar of crypto-assets. Euronews has reported, however, that a majority of Europeans want their own governments to regulate cryptocurrency, rather than the EU Commission, while a growing number would also support the creation of national digital currencies to assert some monetary independence from the EU.

The US America’s financial watchdog warns cryptocurrency trading platforms On 2 September 2021, Gary Gensler, head of the US Securities and Exchange Commission (SEC), warned that cryptocurrency trading platforms are putting their businesses at risk unless they work within the country’s regulatory framework. Mr Gensler had previously stated that: “Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.” This raises the question as to whether we can expect the US to introduce more regulatory control over cryptocurrencies in the coming months and what impact this might have on UK regulators to follow suit. Two examples of the SEC flexing its muscles:

1 Coinbase abandons lending product after SEC pushback Coinbase dropped its plans to launch a new digital asset lending product after pressure from US securities regulators who had warned that it constituted an unregistered security that would have led the SEC to take legal action.   2 The SEC is reportedly investigating Uniswap Labs A report from the Wall Street Journal, dated 3 September 2021, states that the SEC is reportedly investigating Uniswap Labs, the developer behind Uniswap, a leading decentralized exchange based on Ethereum. The investigation is apparently in early stages and we will be monitoring for any updates as and when they are released.

Wider adoption of cryptocurrencies China bans cryptocurrency China announced late last month that all transactions of cryptocurrencies are illegal, warning that this “seriously endangers the safety of people’s assets.” The price of BTC fell by more than £1,460 in the wake of the announcement. Cryptocurrency exchanges have since begun cutting ties with customers in China, with Huobi announcing that it would remove Chinese users by the end of the year and Binance no longer accepting user sign-ups with Chinese phone numbers. Cuba regulates the use of virtual assets for commercial transactions The Central Bank of Cuba issued a resolution establishing rules to regulate the use of virtual assets in commercial transactions and to licence service providers in that sector. This is yet another step towards the wider adoption of cryptocurrencies, the outcome of which is being watched by the industry as a whole. El Salvador approves cryptocurrency as legal tender El Salvador has approved cryptocurrency as legal tender but the adoption did not start as it had intended. Within hours of the launch the Government had to take its app for storing the digital asset temporarily offline as the global price of cryptocurrencies crashed on the same day. Questions remain as to whether this was an orchestrated attack or merely coincidence.

Articles from Penningtons Manches Cooper Directors beware! The civil penalties for ransomware The National Cyber Security Centre has taken down more than 700,000 online scams in the UK in the last year alone. It may come as a surprise to learn that cyber-security is a board level responsibility – directors could fall foul of the individual duties that they personally owe to the company if they do not consider and adopt reasonable measures to mitigate against potential losses and damage arising from cyber-attacks. Senior associate, Charlotte Hill outlines the steps that companies, directors and all key stakeholders should take to provide sufficient protection and escape liability. Non-fungible tokens - legal issues Since the first non-fungible token (NFT) was created (or “minted”) in 2014, interest in NFTs has been steadily rising, starting with the crypto community and exploding into mainstream in 2021. Quantum, an octagon-shaped animation by artist Kevin McCoy, was the first work to be associated with an NFT-type certificate of ownership and was sold this year by Sotheby’s for $1.4 million. This not only indicates the increase in public demand for NFTs but also that traditional institutions such as Sotheby’s are taking note. To read more, click here. 

Upcoming conferences! Just last week, Charlotte Hill was the guest of Erica Stanford of the Crypto Curry Club at City AM’s crypto conference and awards. Charlotte spoke on a panel with Zumo, Ziglu, Coinbase and the LSEG about crypto regulation in the UK. Congratulations to all of those who received awards at the event, deservedly so! Charlotte Hill and Oliver Kidd are attending the Crypto Gibraltar conference – the first major crypto networking event since the beginning of the pandemic – on 8-9 October. Do get in touch if you plan to attend, so that they can be sure to say hello!