Written by Alex Fong

Are “cryptocurrency”, “block-chain” and “initial coin offerings” words which have lost their buzz? As early as August this year, technical analyst Jeff deGraaf was reported as saying it might be “game over” for Bitcoin.1 It is true that markets have been relatively quiet, with Bitcoin in particular trading between USD$6,000 and $7,000 since September, after massive price fluctuations around the start of this year leading to a peak of over USD$20,000.2

But a quiet market does not lead to the conclusion that block-chain is “over”. Firms continue to engage with block-chain, if not directly with cryptocurrencies3. Cryptocurrency exchanges and online ICO venues continue to operate and trade, unsure of or wilfully blind as to the licencing requirements that may apply to them in different jurisdictions. Some of them might even be in the business of listing digital tokens which may fall under the ambit of securities regulation.

Regulation and certainty – what about the law?

In light of this, the role of the regulator and lawyer in the sphere of financial technology should be apparent.

For a start, regulators like the Financial Conduct Authority (“FCA”) have been working to control financial technology. Indeed, the FCA has been dancing on its toes for a while – and it doesn’t look like the music is stopping any time soon. In April 2018, the Chancellor of the Exchequer announced the formation of the Cryptoassets Taskforce, a joint effort by HM Treasury, the FCA and Bank of England (“BoE”) to define and set out the UK’s regulatory approach to distributed ledger technology (“DLT”).4

In July, the Taskforce published a 58-page final report (the “FR”) on DLT (really just legalese for block-chain), introducing cryptographically secured assets (“cryptoassets”) and DLT in general, before dealing with the risks and benefits associated with cryptoassets, and the direction of regulation in future. Most notably, it begins with a statement of policy – the Taskforce, and the three institutions which comprise it, is keen to support the development of DLT.

In addition, the FR should provide some welcome guidance to legal professionals who advise generally two types of clients. Clients may be originating actors in the cryptocurrency market, who develop, issue or “mine” cryptoassets, wallet providers and custodians, trading platforms and exchanges, and payment providers. But they may also be investors – private equity firms or venture capitalists looking to fund promising projects seek to be informed of the legal risks associated with their investments, such as the risk of money-laundering or terrorism financing (“ML-TF”).

The approach in the Final Report

But in the face of these risks, and in recognition of the broader policy to promote the health of markets built on DLT, the Taskforce’s approach has not been conclusive. For the time being, the approach will be 1) to “warn consumers of the risks” 2) consider all-out bans on certain cryptoassets (such as contracts-for-difference (“CFDs”) and options); 3) expanding the scope of “specified investments” under existing regulatory rules in order to catch certain cryptoassets5. The Taskforce anticipates future consultation to be carried out in 2019 as part of a gradual process to straighten things out.

Rather unsatisfactorily, this pushes our wait for legal certainty and regulatory clarity further into the ether. Sure, 2019 is better late than never – but every day substantial risks remain uncharted for firms seeking to enter the “FinTech” space, and this alone is arguably inhibitive of the innovation and progress at the heart of block-chain adoption.

A taxonomy of tokens

But there’s a diamond in the rough. Towards the end of the FR, the Taskforce makes the observation that “exchange tokens present new challenges to traditional forms of financial regulation”, intimating that perhaps some substantive reform should take place.

In the author’s view, this reform should focus on the taxonomy of things – definitions are invaluable at this elementary stage, especially regarding which types of tokens fit within which types of regulation6. It is clear what a security token is – but that clarity is not present across different classes of cryptoassets. What does it mean when we say a “native” asset token derives its value from the DLT platform, and a “non-native” asset token does not?7 Does a “non-native” asset token possess value independent of the asset upon which it is based, according to its increased liquidity? Are there “non-native” asset tokens which may be construed as security tokens? If so, what are the proprietary claims attaching to them, and should they be regulated differently?

I concede that these questions are not easy to answer. But the lack of rigour in dealing with these definitional problems is arguably the source of the lack of clarity which currently subsists. In a paper presented at the Miegunyah Lecture, the late Peter Birks observed that “… it is not in the nature of competing taxonomies to coexist. If they compete, they fight to the death.” I think it is time for the contenders to step into the ring.

1. Tae Kim, “Top technical analyst says it could be ‘game over’ for bitcoin”, CNBC Websitehttps://www.cnbc.com/2018/08/09/top-technical-analyst-says-it-could-be-game-over-for-bitcoin.html, accessed 13 Nov 2018.

2. Anthony Cuthbertson, “Bitcoin Price Stability is ‘Calm Before the Storm’; Cryptocurrency Analysts Predict”, 9 Aug 2018, Independent Website, https://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin-price-stability-cryptocurrency-analysis-prediction-2018-market-latest-a8630426.html, accessed 13 Nov 2018

3. Cryptoassets Taskforce, Cryptoassets Taskforce Final Report, last updated 29 October 2018, accessible at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_final_report_final_web.pdf, accessed 13 Nov 2018.

4. HM Treasury, “Cryptoassets Taskforce meets for the first time”, 21 May 2018, Gov.UKhttps://www.gov.uk/government/news/cryptoassets-taskforce-meets-for-the-first-time, accessed 13 Nov 2018.

5. Final Report, 40–41.

6. This argument has been made fairly recently: Fong, “Blocking the Chain: Regulating the Initial Coin Offering” (2018) 1 De Lege Feranda 62.

7. Final Report, 13.