INTRODUCTION Contributed by: James Burnie, gunnercooke llp
The buying jurisdictions (onshore) This brings us to the buying jurisdictions – these tend to be those with large populations that might buy crypto-assets, and typically include jurisdictions with large populations such as the EU, UK and the USA, as well as jurisdictions which are traditional financial hubs, such as the UAE, Hong Kong and Singapore. Regulators in these jurisdictions tend to place greater emphasis on consumer protection – as if there is an issue with a crypto-asset, their populations tend to be the ones that absorb the loss. It is also noteworthy that the regulators deployed to govern such activity tend to be securities regulators, and as such approaches are often heavily influenced by securities regulation. Whilst this may make sense in certain contexts, where the reasons for buying a crypto-asset is as an invest- ment, it can cause difficulty in other contexts – and so for example virtual currencies created alongside video games can have an awkward relationship with local requirements. A notable trend here is that NFTs tend to be less regulated, or not regulated at all, in a large range of jurisdictions, because they are generally considered to be intrinsically less “like a security” than fungible crypto-assets. When selling into buying jurisdictions, firms can see the situation in terms of effectively being “pay to play” – in that there is a cost attached to complying with local laws, and so firms need to weigh that against the potential revenues received in accessing these juris- dictions. A consequential factor is the extent to which firms have taken a risk-based approach to matters such as reverse solicitation. In this respect, it is worth noting that generally reverse solicitation is not accept- ed by most jurisdictions – however the USA and UK have traditionally been the most aggressive jurisdic- tions in terms of seeking to enforce local requirements on companies outside of the jurisdiction. An evolving world It is worth noting that the above is only a current snap- shot of the regulation of crypto-assets. We are seeing various jurisdictions increasingly take an aggressive approach towards regulating crypto-assets, both in terms of jurisdictions bringing in regulation to regulate crypto-assets, for example in Africa where there is a general shift towards regulation, led by jurisdictions
such as Mauritius and Botswana, as well as in terms of jurisdictions becoming more stringent towards regula- tion, such as is the case in Singapore, UAE and Hong Kong. A common theme we are seeing as the regulatory grip tightens is a requirement to have a local subsidiary in order to service local populations. The effect of this has been twofold: firstly, it undermines the attractiveness of the selling jurisdictions if in any event firms will need to set up onshore. Secondly, it increases operational costs as obligations such as capital requirements and having sufficient local substance (for example in terms of senior compliance) increases costs, meaning that firms may not have sufficient resources to operate in a large range of markets. The overall effect of this yet to be determined, as if the cost of operating in a jurisdiction outweighs the benefit, then firms may cease servicing that market – which will have the detrimental effect of reducing cus- tomer choice. As such, being too aggressive in terms of regulation can actually harm a jurisdiction’s position as it could be left behind more progressive jurisdic- tions. An interesting development here has been that of sandboxes – originally pioneered by the FCA in the UK – as a means for regulators to better understand the products being sold in their jurisdiction to try to find the right balance of regulatory approach. This approach has now been adopted by a range of regu- lators internationally. The need for cohesion Whilst regulators have taken different approaches to dealing with crypto-assets, the cost of this for the industry has been a lack of cohesion. This can be seen for example in the context of stablecoins, where different jurisdictions have taken very differ- ent approaches as to what constitutes a stablecoin in their jurisdiction, and how they should be regulated, for example in terms of backing reserve assets. For example, backing reserve assets for UK-based sta- blecoins must be held in low risk secure and liquid assets such as short-term bank deposits, and cannot include electronic money. By contrast, in the EU an electronic money institution licence is a requirement to issue a stablecoin.
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