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After the jarring experiences of crypto firms in 2022, regulators are tightening controls – certainly in the case of the US SEC. Some exchanges are considering hanging their hats elsewhere. This article looks at rival destinations such as Singapore, Bermuda, the UK, and Gibraltar.
Regulators in the US, most notably the Securities
and Exchange Commission, are tightening the screws on
cryptocurrency exchanges, anxious to avoid a repeat of collapses
such as that of FTX. This
has created a need for legally and reputationally robust
alternative centres from which to operate. As a result, US
cryptocurrency exchanges are considering offshore
jurisdictions. The exchange Coinbase recently said that securing
a licence in Bermuda would increase “economic freedom and
opportunity” for their customers.
To consider the situation, we carry this guest article from
Paul Grant, associate at European firm Signature
Litigation, and his colleague, Ben Pharoah, a paralegal.
Signature has offices in Gibraltar, London and Paris. The
editors are pleased to share these views; as ever, the usual
disclaimers apply to views of outside contributors. To get
involved in the conversation, please email [email protected]
The past year has served as a cautionary tale for crypto firms
regarding the risk associated with trading in the virtual asset
markets, not least following the collapse of several major
exchanges including Celsius, Voyager Digital, and most recently,
FTX.
Regulators in the US have responded by seeking to clamp down on
cryptocurrency exchanges to avoid repeats of such incidents. The
Securities and Exchange Commission has recently taken aim at a
host of companies including Kraken and Bittrex, pointing them out
for regulatory scrutiny. Some of the major players have alluded
to “confusing” regulations, and fears of reprisals, which they
believe could push more crypto companies to leave the US in
favour of pastures new.
Whilst some US firms are looking across the Atlantic to re-shop,
others are looking at making their bed closer to home.
Europe
It is no coincidence that Europe has emerged as a potential
benefactor of the chaos in the US, especially after the EU passed
clearer crypto rules via its Markets in Crypto Assets (MiCA)
guidelines in April, setting the wheels in motion for it to enter
into force in July. MiCA promises to regulate issuers of
stablecoins, both asset-referenced tokens and electronic money
tokens, as well as all other cryptoassets and service providers.
It will also include market integrity provisions to ensure that
there is no market abuse and insider dealing.
France is just one jurisdiction considering realising its
potential and promoting its regulatory framework to attract
US companies. France hosts 72 registered crypto companies – a
number that’s expected to rise. Circle, the firm behind the
second largest stablecoin by market capitalisation, is seeking
dual registration in France to localise its flagship product,
EUROC, for the European market. Other large players, including
eToro, have also registered with the Autorité des Marches
Financiers.
Crypto platforms can operate in France without a full licence
until 2026, allowing them to provide services with minimal
checks. By January 2024, however, these companies will need to
acquire a full licence to operate, even before the EU’s
regulations take effect. As part of the transitional measures
implemented earlier this year in anticipation of MiCA, companies
submitting applications from July 2023 onwards will be subjected
to an enhanced registration process which will necessitate
evidence of robust IT systems and a conflict-of-interest
policy.
France will now hope to ride the wave of positivity following
MiCA. Germany, Italy, and Spain will also do likewise.
United Kingdom
The UK government has announced its intention to make the UK a
global hub for crypto asset technology. As part of this, it said
it would create “a dynamic regulatory landscape which works for
everyone.” The Financial Services and Markets Bill, which
would make wide-ranging changes to financial regulation, contains
measures relating to crypto assets.
In 2021 the government ran a consultation on the UK’s regulatory
approach to crypto assets. It sought views on the UK’s regulatory
framework and how to mitigate risks to consumers and stability.
In the outcome document, published in April 2022, the government
said that measures in the bill would focus on stablecoins and the
promotion of crypto assets.
A further consultation paper was published in February 2023, this
time on its regulatory approach to crypto assets, to be
implemented following the passage of the bill. It said that
crypto assets and the activities underpinning their use “should
follow the standards expected of other similar financial services
activities, commensurate to the risks they pose.” These
standards include prudential requirements, data reporting,
consumer protection, location policy and rules on operational
resilience.
The government believes that having the regulatory framework
should stimulate growth and innovation in the sector by “giving
responsible actors the regulatory certainty and confidence to
participate in crypto asset markets, and investors the confidence
to invest in the UK for the long term.”
Companies wanting to provide crypto asset services falling within
the scope of anti-money laundering and counter-terrorist
financing must also register with the Financial Conduct
Authority.
Bermuda
Coinbase is just one
of numerous companies already planning to capitalise on the
opportunities available offshore. The San Francisco-based company
has recently secured a licence in Bermuda to launch its
derivatives exchange.
Bermuda boasts its own regulatory regime and has adopted a
business-friendly approach to the oversight of cryptocurrencies
and related businesses. DLT providers are regulated under the
Digital Asset Business Act 2018 which provides for a tiered
licensing system which allows startups to benefit from a
supervised and regulated market. It also allows those companies
to build up a track record in the market before obtaining a full
licence. DABA also integrates the management of digital assets”
business into the provisions of the Bermuda’s anti-money
laundering and anti-terrorist financing regulations which is
supported by its Sector-Specific Guidance Notes. Initiatives like
these, together with Bermuda’s taxation benefits, make it an
attractive jurisdiction for service providers to set up shop.
Gibraltar
Gibraltar has long committed itself to effectively regulating
cryptocurrency. The Rock has in recent years overhauled its
policies on tax and information sharing (not least through the
signing of numerous Tax Information Exchange Agreements) in a
concerted attempt to snuff out corrupt players.
Gibraltar’s regulations on DLT are relatively historic – at least
in crypto terms – having come into effect in 2018. Gibraltar has
done its due diligence in this respect, and its focus is on
facilitating fewer, well-regulated firms. The regime in Gibraltar
establishes 10 core principles which the Gibraltar Financial
Services Commission has responsibility for
ensuring compliance with the emphasis being on a “right
tough, not light touch” approach.
Hong Kong
Hong Kong too has recently begun extending a warm welcome to
firms which want to step away from tightening crypto regulations
in the US. In February, it proposed a set of welcoming rules to
regulate crypto-related activities. Under the new legal regime,
retail investors are allowed to trade certain digital assets on
licensed exchanges, replacing a 2018 framework that restricted
trading to only accredited investors. The city is also paving the
way to legalising stablecoins and wants to facilitate
communication between banks and crypto startups; in sharp
contrast with Beijing’s heavy-handed crackdown on the crypto
industry. The move shines a light on the degree to which Hong
Kong enjoys policy exceptions in certain areas, such as finance.
Singapore
Singapore could also prove an attractive home for US
firms. A recent YouGov study revealed that 25 per cent of
Singaporeans consider crypto as the future of finance whilst 32
per cent of Singaporeans surveyed either own, or used to own,
crypto.
Whilst the Monetary
Authority of Singapore, Singapore’s central bank and
financial regulatory authority, has regulated virtual currency
intermediaries specifically to address potential money laundering
and terrorist financing risks, it stated in 2017 that it would
not otherwise be regulating virtual currencies per se.
In November 2021, the MAS extolled Singapore’s ambitions to
become a hub for sound and well-regulated digital assets. Efforts
have since been made to achieve a delicate balance between
encouraging blockchain innovation and protecting investors from
the risks of participating in a promising but nascent market. Two
consultation papers published in October 2022 went on to
consolidate Singapore’s objective of being a buoyant but prudent
crypto jurisdiction by setting out proposed measures to reduce
the risk of consumer harm in cryptocurrency trading and to
support the development of stablecoins in Singapore’s digital
asset ecosystem.
Conclusion
Given recent developments in the US, alternative jurisdictions
have certainly caught the eye of US crypto companies. Ultimately,
however, the question of whether these tailored regimes are
robust enough to adapt to changes in the crypto market remain
largely untested. Given the global offering of crypto platform
providers, market reactions to events such as the FTX scandal are
likely to determine the position of these jurisdictions insofar
as their ability to continue to maintain an attractive regulatory
framework for those operating within the crypto space.
