Cryptocurrency Policy on the Upswing

Regular blog readers and our PolicyScope Risk Monitor subscribers both know that FinTech and cryptocurrency policy activity have remained active throughout the pandemic period. But in the last few days, activity levels have started to spike from multiple jurisdictions, rendering aggregate activity for July already nearly on a par with pre-pandemic activity...and July is not yet over.

With action levels now exceeding rhetoric levels for the first time since February, we can see that policymakers are returning to work.

A deep dive into activity for July delivers more insight. A nearly symmetrical sine wave illustrates well the informational advantages and value of tracking public policy using our PolicyScope Platform. Rhetorical reactions follow concrete actions with a nearly 1:1 correlation:

Volume levels do not need to be high in order to deliver strategically significant signalling effects. In fact, low levels of activity make it highly likely that small technical moves manage to miss generating attention. This week in particular sees financial regulators vying for attention with growing geopolitical tensions between China and the rest of the world as well as yesterday's dramatic European summit conclusion and, of course, rapidly increasing COVID19 infection rates.

This week alone, policymakers in the European Union, the United Kingdom and the United States have all taken action regarding cryptocurrency and FinTech issues.


United Kingdom (July 21): The UK government released a proposal that would extend consumer protection regulation regarding "financial promotions" to eligible cryptoassets.  The definition of eligible assets is tightly defined to focus only on fungible representations of value that rely on distributed ledger technology "which is not issued by a central bank or other public authority."

Extending the equivalent of a prospectus requirement to crypto-assets constitutes another step towards sectoral regulation for these new instruments.  For the last three to five years, regulatory activity at the perimeter has focused on extending prospectus and other securities law requirements to "initial coin offerings" on the basis that they are tradeable instruments.  Today's UK proposal would directly regulate the coins themselves, but only initially with respect to the representations made to consumer purchasers.

United States (Commodity Futures Trading Commission (July 21): In remarks to Bloomberg Television on the occasion of his first year in office, Chairman Heath Ledger identified expanding the regulatory perimeter to cover crypto-assets as one of his top three forward-looking priorities.

United States (Securities and Exchange Commission (July 21): In remarks to the Blockchain Association Singapore, Commissioner Hester Pierce publicly sounded a note of caution concerning the SEC's expansive definition of a securities transaction in the context of digital tokens. Her perspective will resonate with cryptocurrency enthusiasts and advocates:

"I do not support the message that distributing tokens inherently involves a securities transaction...(because) the widespread distribution and use of (tokens) across the global is a necessary prerequisite for any successful blockchain network."

Before advocates celebrate too much, they should read the rest of the speech. Commissioner Pierce is not objecting to the assertion of regulatory jurisdiction in the cryptocurrency sector. She merely seeks a tighter application of the Howie test for whether (or not) an instrument is a security.


European Union (July 21): The European Council finally agreed a regulation (which is immediately applicable as law within Member States without requiring implementing legislation).  It is expected that the European Parliament will vote on the regulation in the autumn. Consider:

Immediately implementation holds the promise of releasing additional funding into the European economy from the private sector, months before the newly minted Recovery and Resilience Fund begins to disburse resources into national economies across Europe. In many crowdfunding platforms around the world, funding flows using various cryptocurrency tokens rather than sovereign-issued currency.

It will be interesting to see whether increased access to crowdfunding in Europe in the coming months also sparks an uptick in cryptocurrency usage or issuance (or both). Policymakers in Europe likely are aware of the possibility. Earlier this month, when previewing Germany's financial sector policy priorities for its tenure as President of the 6-month rotating seat at the European Council, Economy Minister Sholz indicated the importance

"Furthermore, we will have to plan beyond crisis management and identify where Europe needs to become more resilient and independent. We must think about ways to tie up some of the loose ends that have faded into the background somewhat while we have been focusing on the COVID-19 epidemic....This also includes creating a secure environment for using digital technology more widely in the financial sector, building a competitive financial market for cryptocurrency-based financial services and putting an effective supervisory structure in place to monitor money laundering..."

The remarks were published in eight different national newspapers around the European Union.


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