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Fintech: cryptoassets – navigating a fragmented legal framework

Cryptoasset rules – an overview

There is no single, globally accepted definition of ‘cryptoasset’. A very high-level definition of the term might be ‘a type of digital asset (ie a digital representation of value) that relies on cryptography and distributed ledger or similar technology’.

But regulators and legislators approach this concept in different ways. Depending on the definition used, all of the tokens mentioned in Beyond bitcoin could constitute ‘cryptoassets’.

Analogue rules for a digital phenomenon

In many jurisdictions, financial regulation has not yet fully caught up with the cryptoasset phenomenon. As a result, without a specific regulatory framework, cryptoasset activities must be assessed against the existing ‘analogue’ regime in the relevant jurisdiction, which may result in some cryptoassets falling through the cracks.

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Bitcoin, for example, is not considered to be ‘money’ or a financial instrument in many jurisdictions and, as a result, many businesses providing services related to bitcoin do not need to be regulated at all. Other jurisdictions have regulated such services.

Determining the relevant jurisdiction is also not always a simple matter, given the decentralised, cross-border nature of many cryptoasset activities. The bitcoin blockchain doesn’t have a governing law clause or a single operator with a centre of main interest. But providing services with regard to cryptoassets, also on a cross-border basis to customers in another jurisdiction, could trigger licensing requirements.

When existing regulations might apply

Some cryptoassets fall within the existing regulatory perimeter. Depending on their characteristics, certain cryptoassets may: 

  • satisfy the relevant definition of ‘e-money’, which are within the regulatory perimeter in the EU, the UK and many other jurisdictions. Should this be the case, issuers of e-money tokens would be subject to the applicable regulatory regime; and
  • constitute financial instruments, such as shares, bonds or derivatives. Generally, activities in relation to cryptoassets that share the characteristics of financial instruments are covered by existing financial market regulation.

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Depending on the services provided, payment services regulations and prospectus requirements may be relevant. Anti-money laundering and counter-terrorist financing legislation could also apply.

Guidance available but new rules needed

Despite their potentially global and cross-border nature, the regulation of cryptoassets is often still a question of national regulation (see, for example, the pages on cryptoasset regulation in the USthe UK and Asian jurisdictions, along with the EU).

This leads to a fragmentary approach, which can be difficult for businesses and investors to understand and implement, especially if they want to scale their businesses cross-border.

Over the last few years, legislators and financial regulators across the world have undertaken fundamental work and published a multitude of guidance in respect of cryptoassets and related services, and their legal and regulatory treatment.

The handling of cryptoassets triggers further questions beyond financial regulation. Without an accepted global standard, local requirements on taxation, intellectual property, import/export of foreign exchanges and their treatment under civil law may differ significantly between jurisdictions.