In an appearance on CNBC last week, Heath Tarbert, chairman of the Commodity Futures Trading Commission indicated that he wanted the United States to “lead” in the blockchain technology underlying cryptoassets. Currently, said Dr. Tarbert, “I don’t think we’re at the top of the list [and] we may not be at the bottom.” He noted, however, that, when the Libra Association chose a location to set up, they “could have chosen anywhere in the world.” They picked Switzerland, with Singapore being their second choice. “I don’t know where the United States was,” said Dr. Tarbert, “but it clearly wasn’t first on the list.” According to Dr. Tarbert, whoever leads in blockchain technology will get to establish “the rules of the road for the rest of the world” and he is committed to seeing the United States as “a leader.”
Separately, in an opinion article in Fortune, Dr. Tarbert indicated that a “principles-based approach” is the best way to regulate cryptoassets and other fintech products. He noted that such an approach has been applied by the CFTC in evaluating clearinghouses that settle transactions that might result in the delivery of bitcoin. Although cryptoassets “face the unique operational risk of a systems hack that could result in a loss or theft,” Dr. Tarbert said the CFTC’s core principles solely require clearinghouses to identify and minimize operational risk without prescribing precisely how. As a result, each of the three clearinghouses currently processing cryptoassets were “able to adopt a different method of facilitating Bitcoin transfers and addressing the risk of loss.”
Dr. Tarbert argued that principles-based regulation “can provide a more effective regulatory approach for overseeing financial services in this global technological age than a highly prescriptive rules-based approach can.”
In other legal and regulatory developments involving cryptoassets:
- Singapore Regulator Seeks Input to Authorize Derivatives Based on Payment Tokens to Be Traded on Authorized Exchanges: The Monetary Authority of Singapore issued a Consultation Paper providing a framework for derivatives based on virtual currencies (i.e., “payment tokens”) to be traded on licensed (i.e., “approved”) exchanges in Singapore under MAS’s oversight. MAS argued that, because of their higher standards and oversight, approved exchanges would be better able “to cope with the new risks posed by these products.”
As proposed by MAS, listing derivatives on approved exchanges would be voluntary and not mandatory.
MAS also proposed to implement a number of measures specifically directed at retail investors who trade derivatives based on virtual currencies through regulated financial institutions. These would include requiring 1.5 standard margin for all derivatives offered by approved exchanges, as well as “tailored” risk disclosures and advertising restrictions.
Currently, MAS takes the view that derivatives based on virtual currencies are not subject to regulation under applicable Singapore law. It proposes to amend applicable rules to effectuate its proposals. Comments on MAS’s Consultation Paper will be accepted through December 20, 2019.
- Fed Says Stablecoins Could Make Fiat Currencies Unstable: The Board of Governors of the Federal Reserve System issued its semi-annual report on financial stability on November 15, in which it warned that “[a] global stablecoin network, if poorly designed and unregulated, could pose risks to financial stability.” Although the Fed appeared to acknowledge that stablecoins could “complement existing payment systems and improve consumer welfare if appropriately designed and regulated,” the banking regulator said that stablecoins introduce “important challenges and risks related to financial stability, monetary policy, safeguards against money laundering and terrorist financing and investor protection.” The Fed argued that, as a result, any proposed global stablecoin “must address a core set of legal and regulatory challenges before it can operate.”
Recently, the International Organization of Securities Commissions issued a similar statement that stablecoins are “rightly subject to significant international and public scrutiny” and urged all persons seeking to launch stablecoins – particularly those with potential global reach – to engage with all regulatory bodies in jurisdictions where they seek to operate. (Click here for background in the article “IOSCO Encourages Stablecoin Issuers to Engage With Relevant Regulatory Bodies Prior to Issuance” in the November 17, 2019 edition of Bridging the Week.)
- Another NY Trust Charter Granted for Virtual Currency Custodian and Execution Platform: The New York Department of Financial Services approved Fidelity Digital Asset Services LLC as a NY Trust Company authorized to provide virtual currency custody and execution platform services. FDAS is the 23rd entity that has received designation as a trust company or a Bitlicense and authorized to engage in virtual currency activities from NY or to NY residents. (Click here for background on New York’s BitLicense in the July 8, 2015 article “New York BitLicense Regulations Virtually Certain to Significantly Impact Transactions in Virtual Currencies.”)
- UK Law Panel Says Cryptoassets Should Be Regarded as Property Under UK Law: A panel of UK judges and lawyers – the UK Jurisdiction Taskforce – said that cryptoassets should be regarded as property under UK law. This is because, said Sir Geoffrey Vos, Chancellor of the High Court and chairman of the UKJT, cryptoassets have the indicia of property and are not “disqualified” because of their novel characteristics such as intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralization, and rule by consensus. Moreover, cryptoassets should be regarded as property despite not being "things in possession or things in action." According to Sir Vos, in general, under UK law, the term “property” does not “describe a thing itself but a legal relationship with a thing” and “[t]he fundamental proprietary relationship is ownership.” Generally, noted Sir Vos, a person who has exclusive control over a private key is the owner of the associated cryptoasset.
Additionally, the Task Force concluded that a smart contract may satisfy the “basic requirements” of an English legal contract. According to Sir Vos, “[t]hose requirements are that two or more parties have reached an agreement, intend to create a legal relationship by doing so, and have each given something of benefit.”
- Bitwise Bitcoin ETF to Be Reconsidered by SEC; Grayscale Seeks Registration of Bitcoin Trust: The Securities and Exchange Commission determined to review its denial of a January 28, 2019 application by NYSE Arca, Inc. to list and trade shares of the Bitwise Bitcoin ETF Trust. On October 9, the SEC previously declined a rule change proposed by the exchange to list and trade shares by delegated authority of the Division of Trading and Markets. The Commission indicated it would review this action and, as part of the process, will accept comments on the Division’s determination through December 18, 2019. (Click here for background on the SEC’s staff’s initial rejection of the Bitwise ETF in the article “New CFTC Chairman Says Ether Derivatives Likely Soon While SEC Says No to Another Bitcoin ETF” in the October 13, 2019 edition of Bridging the Week.)
Separately, Grayscale Investments voluntarily filed a registration statement with the SEC on behalf of Grayscale Bitcoin Trust. According to the company, if deemed effective, registration would permit accredited investors who purchased shares in the trust in a private placement to sell their shares earlier – after six months of holding, rather than twelve as now, subject to conditions.
My View: For the United States to be a leader in blockchain technology as Dr. Tarbert advocates, it should start by more rationally regulating virtual currency exchanges.
Along those lines, as I have written previously, the case for a single federal regulator of cryptocurrency exchanges is overwhelming. Today, jurisdiction over such entities is divided among FinCEN (which generally requires exchangers of virtual currency to be registered as money service businesses), the states (many of which require such entities to register as money transmitters or in an equivalent manner, or in the case of New York, also mandates such entities to obtain a so‑called “BitLicense”) and the Commodity Futures Trading Commission (which exercises anti-fraud and anti-manipulation authority over transactions involving spot virtual currencies but does not functionally regulate such transactions day to day). (Click here for a general discussion of federal and state jurisdictional issues involving cryptoassets in the article “Digital and Digitized Assets: Federal and State Jurisdictional Issues” by the American Bar Association Derivatives and Futures Law Committee (March 2019).)
Although most states view cryptocurrency exchanges’ activities as meeting their requirements for money transmitters, many states do not. (Click here, e.g., for background in the article “Cryptocurrency Exchange Not a Money Transmitter Says Pennsylvania” in the January 27, 2019 edition of Bridging the Week.) Moreover, except for New York, none of the states or FinCEN regulate cryptocurrency exchange activities similarly as do the CFTC and Securities and Exchange Commission in connection with their oversight of traditional exchanges. At the state level, requirements for such entities tend to emphasize anti-money laundering and US government sanctions compliance, and cyber security protections, and capital and bonding, as opposed to monitoring and protecting against manipulative trading.
To me, this hodgepodge approach is a big problem waiting to happen and creates a too-high barrier to entry for legitimate firms that wish to provide innovative cryptoasset trading solutions.