Crypto Industry Report #11
Balzers (LI), 3 December 2019
This week, our blockchain experts assessed the following headlines:
Our weekly Crypto Industry Report news ticker provides you with the latest information on the global crypto industry – picked and analysed by our blockchain experts.
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Swiss Government presents DLT law proposal – incentivised by Liechtenstein blockchain act
The Federal Council, composed of seven members that are the head of government of Switzerland, announced during a meeting last week that expected in early 2020, the Swiss Parliament will examine a federal legislation proposal of specific amendments to nine federal acts covering civil and financial market law in order to improve the regulatory framework conditions for distributed ledger technologies (DLT) including blockchain.
Previously, in December 2018, the Federal Council already published a report on the legal framework for blockchain and DLT in the financial sector, mentioning the need for action in specific areas.
In addition, the Federal Council submitted a series of amendments to existing legislation for consultation in March 2019. The response to the consultation, which ended on June 28, 2019, was positive and welcomed with the approval from cantons and other relevant parties.
The proposal that the Swiss Parliament will examine in early 2020 is a revised report following the consultation on the initially released report in December 2018.
Assessment
The Swiss federal government aims to improve the regulatory clarity, facilitate innovation and protect users through a DLT legal framework.
The Liechtenstein’s Blockchain act will come into force from January 1, 2020, providing a comprehensive, technology-neutral and innovation-friendly regulatory framework.
The Blockchain act will be the first legal framework covering the whole token economy with a token container model, in which any kind of rights can be represented, and also defining the different service provider roles and their supervision.
In fact, the Blockchain act was mentioned as an example in the documents regarding the proposed framework in Switzerland, in particular Art. 25 about the safeguarding requirements and segregation of clients’ assets for protection in the event of bankruptcy of the defined roles of TT Key Depositary, TT Token Depositary and TT Protector. It is likely that the Blockchain act influenced the Federal Council decision to take actions to also establish a clear DLT legal framework in Switzerland in order to remain competitive and facilitate innovation.
Among the amended federal acts, the main ones that received the most comments in the consultation were about the changes in securities laws, in the law on debt collection and bankruptcy and in financial market infrastructure law.
The key proposed amendments include the Swiss Code of Obligations that will be amended in order to increase regulatory clarity about the transfer of DLT-based assets. Regarding cryptocurrencies, it is not required to adapt the civil law, however in the case of tokens that represent a legal position they would be similar to securities, and therefore there would be a need to adapt the civil law in this case.
In addition, in order to clarify the legal uncertainty about the segregation of assets, amendments will be done to the federal Law on Debt Collection and Bankruptcy.
The Financial Market Infrastructure Act amendments would include that DLT trading facilities would be subject to the Anti-Money Laundering Act.
In September, FINMA published stable coin guidelines and it was mentioned that the Libra Association had requested an initial assessment of its regulatory obligations in Switzerland related to the Libra stable coin project, since the Libra Foundation was established in Geneva.
Therefore, it seems that projects like Libra as well as pioneer regulations like the Blockchain act in Liechtenstein which is coming into force in 2020, are incentivising the Swiss government to accelerate the development of a clear regulatory legal framework in the country.
It is expected that the Swiss Parliament will examine in early 2020 the federal legislation proposal about the amendments to federal acts to improve the DLT and blockchain legal framework in Switzerland.
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Co-founder of Telegram ordered to testify – significant impact on TON launch possible
Last week, according to an official document from a judge of the New York Southern District Court, Telegram’s co-founder and CEO, Pavel Durov, will give a disposition on January 7 or 8, 2020, at a location that will be decided and confirmed by the relevant parties.
In addition, two other Telegram employees will testify as well regarding the ongoing case of the Telegram Open Network (TON) launch. Shyam Parekh will testify on December 10 and a Telegram vice president, Ilya Perekopsky, will testify on December 16. Both testifications will be held in London, and they are related to the sale of TON’s gram tokens to certain US based investors, and the SEC considers that it was a sale of unregistered securities.
Although Telegram registered the token sale under the exception Rule 506 (c) and sold tokens to accredited investors, the SEC considers that since these investors would be able to resell their tokens once TON launches to unaccredited investors on the open markets, then this would be a violation of the 506 (c) exception.
In particular, the Form D filing under exemption 506 (c) was used by Telegram in February 2018 to sell securities without registering them with the SEC. However, the SEC claimed that the $1.7 billion token sale was illegal under US securities laws while Telegram insisted that the token sale was properly registered under Regulation D and that the gram tokens will be a currency or a commodity once issued, not a security.
Assessment
Telegram’s TON network was previously expected to launch before the end of October, however following an emergency action from the SEC, the launch was cancelled and delayed. The SEC claimed that the gram tokens sold to US accredited investors would be then distributed to unaccredited investors following TON’s launch.
Since around a third of the total gram tokens were sold to US investors, the actions of the SEC may have a significant impact on TON’s launch. While the majority of TON investors accepted to delay the launch to April 30, 2020, there is a court hearing scheduled for 18-19 February, 2020, in which representatives from Telegram will need to justify that the gram tokens are not securities among other topics in order to be able to launch as expected on April 30, 2020.
If the court hearing is not successful, Telegram may decide to refund US based investors and launch TON with the remaining investors in other jurisdictions. Telegram tried unsuccessfully to dismiss the SEC case, therefore it seems possible that the TON launch may either be delayed further or launched without the US investors.
Telegram is the most popular app within the crypto community and the number of users has grown to over 350 million. Therefore, although the user base would be smaller compared to Facebook’s Libra project, if TON launches before Libra the gram tokens could become one of the most popular cryptocurrencies.
In addition, Coinbase Custody had previously announced that they would be supporting the gram tokens following the launch, including cold storage and insurance. This support from Coinbase Custody may have also contributed to the SEC emergency action in October.
Since TON is designed as a decentralized network, it would be challenging for the SEC to supervise transfers of gram tokens after the launch, which could be traded through decentralized exchanges for example. Therefore, the US accredited investors who obtained gram tokens could sell them to unaccredited investors since there are no transfer restrictions or whitelisted addresses, and that is likely the reason why the SEC considers that in this case the exemption 506 (c) does not apply.
For security tokens, some platforms have included a compliance layer in which certain conditions have to be met like regulations or restriction of transfers to certain whitelisted addresses.
However, if these restrictions are not implemented for gram tokens, then it would be challenging to prevent the US based accredited investors from selling their tokens to unaccredited investors.
Therefore, unless Telegram is successful explaining and justifying that the gram tokens are not securities then, given the apparent lack of transfer restrictions or a compliance layer, it may be difficult for Telegram to include US investors in the planned launch on April 30, 2020.
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South Korea’s new cryptocurrency bill will improve investor protection
According to reports from media in South Korea, last week the national policy committee of the National Assembly passed a cryptocurrency bill that will provide a legal framework for crypto currencies.
It would classify them as digital assets, require crypto related business to prevent money laundering and it will also establish the rules for financial transactions. The legislation and judiciary committee needs to also review and approve the bill, which would then be signed by the President and come into force in 2020.
The bill would introduce the legal framework for cryptocurrencies in South Korea providing regulatory clarity and transparency. Once the bill comes into force, all crypto related businesses will be required to register with the Financial Services Commission’s (FSC) Financial Intelligence Unit (FIU), and report to the relevant authority.
Assessment
The new bill will bring increased trust and legitimacy to the blockchain industry in South Korea. In addition, the new regulations will help to prevent money laundering and improve investor protection.
The guidance from the G7 Financial Action Task Force (FAFT) seems to have incentivised South Korea to also introduce a clearer legal framework for the crypto industry.
In fact, financial authorities in South Korea had already adhered to guidelines of the FATF for virtual asset service providers, mainly regarding the delisting of anonymous cryptocurrencies and stricter know your customer (KYC) for money laundering prevention.
The new bill will include requirements for crypto businesses like reporting and registration as digital asset businesses with the FCS’s Financial Intelligence Unit (FIU) and also obtaining an Information Security Management System certificate provided by the Internet and Security Agency, which is run by the state.
In addition, crypto businesses will need to develop their own monitoring systems for financial transactions in compliance with the standard from the FATF.
In 2018, regulators in South Korea following anti-money laundering (AML) requirements banned anonymous trading on crypto exchanges. Then, in June 2018, the Financial Services Commission (FSC) published AML guidelines for crypto currencies.
South Korea’s won is one of the main global currencies traded for bitcoin with a significant trading volume. Some major Korean exchanges already started to comply with the FATF guidelines by delisting privacy focused cryptocurrencies for example.
Since the Korean government is aiming to establish a legal framework for cryptocurrencies, it is likely that South Korea could remain one of the global leading countries in the blockchain industry, given also the relevance of the won in crypto markets.
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Bakkt achieves an all-time high trading volume of its physically-settled bitcoin futures – a positive sign for the currency
As reported last week, Bakkt’s trading volume reached an all-time high significantly higher than the previous one.
Following a launch with an amount below 100 contracts, Bakkt reached an all-time high above four thousand contracts last week traded in a single day.
While the amount of contracts traded at launch for Bakkt was considerable smaller than for the Chicago Mercantile Exchange (CME), the market conditions as well as the type of future contracts were different.
In addition, Bakkt’s volume has been increasing and it is gradually approaching the volume of CME.
Moreover, Bakkt will launch its regulated bitcoin options contracts on December 9 on top of the physically-settled bitcoin futures contracts, as well as other products soon including cash-settled bitcoin futures or a consumer app to spend bitcoin.
Also, Bakkt obtained recently an authorization to allow any institution to use the Bakkt Warehouse for custody of bitcoin.
Assessment
While the volume at CME is still significantly higher than for Bakkt, with the recent all-time high the Bakkt trading volume represents now a considerable percentage of CME’s volume, in only two months after the launch.
Given that Bakkt contracts are physically-settled, in December it will be observed whether institutional investors with positive market sentiment about bitcoin would hold their contracts after expiration to get exposure to physical bitcoin, or whether they will focus instead in obtaining trading profits from short-term price movements.
Since traders are able to sell before the contracts expire, the amount of investors that decide to receive physical bitcoin would provide a better overview of their strategy and willingness to keep physical bitcoin for the long term.
The increasing amount of futures contracts in Bakkt, but also in CME, is a positive sign for bitcoin. In addition, the current amount of hash rate of the network, which is close to the all-time high, and the approaching halving event in a few months provide a positive sentiment regarding bitcoin fundamental variables.
The framework for institutional investors like custody, insurance, trading products to hedge risk or regulations are being developed globally and therefore more institutions may enter the crypto markets in 2020.
Furthermore, Bakkt is currently preparing to launch a number of other important products. Regarding the Bakkt Warehouse, which is covered with a $125 million insurance, the New York Department of Financial Services (NYDFS) recently authorized Bakkt to offer its custody solution to any institution, and not only to those trading the bitcoin futures contracts.
In addition, on December, options on top of the physically-settled contracts will be introduced, being the first in the industry before CME’s planned options on January, 2020.
Also in December, bitcoin cash-settled futures contracts regulated by the Monetary Authority of Singapore (MAS) will begin trading on ICE Futures Singapore. The data to settle the new contracts will come from the physically-settled futures, therefore the current all-time high volume achieved is positive for the upcoming launch to provide a better price discovery.
Moreover, in partnership with Starbucks, in the first half of 2020 Bakkt will launch a consumer app to spend bitcoin.
Since Bakkt’s parent company, the Intercontinental Exchange (ICE), is an established financial institution owning over twenty global exchanges including the New York Stock Exchange (NYSE), it provides creditability for institutions that are deciding to enter the crypto asset class.
In 2017, CME introduced the first bitcoin futures, but currently the whole infrastructure is being developed including regulations, custody or insurance, which is a significant improvement compared to the framework for institutional investors when CME launched its bitcoin futures.
Bakkt’s CEO, Kelly Loeffler, is expected to be appointed for a US Senate seat, which could also provide further trust and credibility for Bakkt and the whole blockchain industry.
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ECB Executive Board member: Central bank digital currency could be alternative to cash
A member of the European Central Bank (ECB) who will soon lead the new Innovation hub in Switzerland of the Bank for International Settlements (BIS), Benoît Cœuré, said last week that the ECB will analyse the potential impact of crypto currencies within the financial system.
Cœuré claimed that if cash becomes no longer used or the demand is significantly reduced, then a central bank digital currency (CBDC) could still facilitate access for citizens to central bank money.
However, he mentioned that a CBDC could have advantages but also some risks and costs, which are being examined by the ECB as well as other central banks.
Starting from January 1, 2020, Cœuré will officially start as head of the BIS Innovation Hub in Switzerland, with the aim to support central banks analysing the benefits of certain new technologies including digital currencies.
Assessment
While previously some European countries claimed that they would not allow global stable coins such as Libra to operate in Europe, it seems that a European CBDC is being analysed both by the BIS and national central banks with several advantages identified.
The G7 published recently a report examining the impact of global stable coins and the need for enough regulatory clarify and risk identification before allowing the launch of any such stable coins.
The G7 report showed that global stable coins and CBDCs have become an important topic for governments and international organisations, which brings more legitimacy and trust to the blockchain technology.
The new BIS Innovation Hub may accelerate the research and development of a European CBDC, ensuring consumer protection, legal certainty, financial stability and anti-money laundering prevention among other topics. Given that CBDCs or global stable coins are untested, the regulations and requirements would be high for these solutions before a full launch is allowed.
Benoît Cœuré mentioned the increased risk that cash could eventually no longer be used and that there is not still a European card scheme, which is negative since this has led to the increased use of non-European cards for non-cash payments.
In addition, there is a raising consumer demand, in particular among young people, for payment services that are more efficient, easier to use and that work across several countries.
Moreover, Cœuré also mentioned that although central banks are exploring CBDCs, private initiatives for fast and efficient retail payments in Europe are also welcomed. Therefore, the attitude towards blockchain-based digital currencies seems to be positive.
Furthermore, the first deputy governor of the French central bank, Denis Beau, also said recently that the Eurozone would consider a settlement system and probably a digital currency based on blockchain.
He claimed that the tokenisation of financial assets and other solutions enabled by blockchain and distributed ledger technologies (DLT) could improve payment processes, settlements and help addressing certain market demands.
Moreover, he stated that the French central bank, in collaboration with the ECB and other European central banks, is willing to research and develop a CBDC.
Therefore, while previously countries like Germany or France showed their opposition to projects such as Libra in Europe, the sentiment seems to be more positive regarding a European CBDC. The collaboration of the BIS with European central banks could lead soon to some proof of concepts (PoC) or trials of a CBDC, and this could bring increased credibility and trust for the blockchain technology, in particular among institutions.
Central banks in other countries, including the US and China, have also claimed that they are analysing the potential advantages of CBDCs, therefore the first trials of a CBDC may begin in some countries in 2020.
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