Who is responsible? The English court comments on duties owed to cryptoasset owners


The judgment in Tulip Trading Ltd v Bitcoin Association for BSV and Others sheds light on the legal relationship between the software developers behind various bitcoin networks and their participants. Notably, the court found that there was no case to be made that the developers had a duty to take action to undo the effects of an alleged theft. At the same time, the possibility of other legal duties falling on developers in the future was left open. Players in the crypto markets should be cognisant of this position, amid ongoing market turmoil. 

The decision 

Earlier this year, the High Court denied a prominent bitcoin holder, whose private keys to substantial holdings were allegedly taken in a cyber-attack, the right to serve a legal claim on a group of developers for failing to take action to restore the lost value into the claimant’s hands.

The case was brought by Tulip Trading Ltd (“Tulip”), which claimed that the defendants were the core developers behind various bitcoin networks and/or otherwise controlled the relevant software, and that they owed the claimant fiduciary and/or tortious duties to rectify the “theft” of private keys by writing and implementing a software “patch” that would restore Tulip’s access to the bitcoin assets. In setting aside permission to serve the claim out of the jurisdiction, Mrs Justice Falk held that there was no serious issue to be tried on the merits of the claim. Last month, Falk J also declined Tulip leave to appeal.

No fiduciary and tortious duties – for now

Falk J rejected the argument that the software developers owed the claimant a fiduciary duty. In particular, she noted that the defining characteristic of a fiduciary relationship is the obligation of undivided loyalty, and if the claimant’s argument were accepted, the steps that the defendants would have to take would be for the claimant’s benefit alone, to the exclusion of other users, to whom the defendants would also owe the same duty and who would have a legitimate complaint against the defendants.

Falk J also refused to find a tortious duty of care in this situation. She concluded that it would not merely be an incremental extension of the law to impose a duty concerning “failures to make changes to how the networks work, and were intended to work, rather than to address a known defect”. This was particularly true given that the alleged loss was an economic loss arising out of an omission. 

Underlying both strands of Falk J’s reasoning is a recognition of the “core values of bitcoin as a concept” (in the defendants’ words): digital assets are transferred through the use of private keys and what the claimant was seeking was effectively to bypass that.

Bitcoin networks are not financial institutions 

Tulip argued that bitcoin networks “could be equated with financial institutions”, in the sense that “[f]unds were being entrusted to controllers of the Networks, who profited from their activities, and public policy required the imposition of a corresponding duty of care”, and therefore a duty of care similar to the duty of care on banks established in Barclays Bank v Quincecare [1992] 4 All ER 363 should be imposed on bitcoin networks. Falk J was not persuaded by the argument: in particular, she noted that the starting point for the Quincecare duty of care is the relationship of contract and agency between the bank and its customer. It is interesting that such arguments seen in the more traditional financial sphere were being deployed in the context of a decentralised network with no contractual framework, and the court’s rejection of the direct analogy should be welcomed. 

Room for future claims? 

Without deciding the point, Falk J in obiter commentary left open the prospect of the developers or controllers of digital asset networks owing some other form of duty to owners of digital assets in other situations. For instance, she suggested that it was conceivable that some form of duty could arise if the developers “introduc[ed] for their own advantage a bug or feature that compromised owners’ security but served their own purposes.” Falk J hinted that there may be other circumstances where the developers or controllers could owe a duty.

This is only a first instance decision following a summary procedure and therefore its precedent value will be limited. But, in practice, this decision is likely to be influential given the novel issues raised. The recent turmoil in the cryptoasset market may provide fertile ground for litigation on this topic as the significance of these potential duties takes centre stage.


EU finalises DLT Pilot Regime


The EU’s pilot regime for market infrastructures based on distributed ledger technology has now been finalised. The regime will provide significant flexibility for eligible firms to experiment with DLT-based trading facilities and settlement systems for financial instruments, including the option of operating a combined trading and settlement facility. There are, limitations to consider, however, including uncertainty as to whether infrastructure developed under the regime will be permitted to live on long-term. Meanwhile, the UK is working on developing its own financial market infrastructure sandbox.

What is the DLT Pilot Regime?

The EU’s pilot regime for market infrastructures based on distributed ledger technology has now been finalised through a Regulation published in the EU’s Official Journal. The regime is effectively a regulatory sandbox. It allows eligible firms to apply to operate a DLT-based trading facility and/or settlement system for financial instruments, within a flexible regulatory environment. Broadly, the idea is to facilitate the development of secondary market infrastructure for digital securities (including both “tokenised” securities and digitally native securities), and to help inform EU regulators as to what (if any) permanent changes to the regulatory framework would be beneficial.

Applications can be submitted from 23 March 2023. Permissions will be granted for a period of up to six years (and will only be valid during the life of the pilot regime). By March 2026, the European Securities and Markets Authority (ESMA) will report on the success of the regime and recommend next steps (including whether to make any elements of the pilot regime permanent, by amending the general regulatory framework).

Key features

The final Regulation has evolved from the Commission’s initial proposal. The key features of the final version are summarised below.


  • Authorised investment firms and market operators may apply to operate a DLT multilateral trading facility (DLT MTF)
  • Authorised central securities depositories may apply to operate a DLT securities settlement system (DLT SS)
  • Both groups may apply to operate a combined DLT trading and settlement system (DLT TSS)
  • New entrants may apply for temporary authorisations as investment firms / market operators or CSDs, alongside an application under the pilot regime


  • Applications are to be made to relevant national authorities
  • National authorities are required to consult with (and in some cases have regard to a non-binding opinion from) ESMA, as part of their decision-making process
  • Applications must indicate which regulatory exemptions the applicant is requesting

Exemptions from general regulation

  • Broadly, operators will be subject to regulations applicable to the equivalent traditional market infrastructures, subject to the requested exemptions
  • DLT TSSs (which have no traditional equivalent) are subject to rules applicable to both DLT MTFs and DLT SSs, with a few exceptions, primarily to avoid overlap
  • Exemptions may be requested from certain specified requirements under the general regulatory framework, where those requirements are incompatible with the proposed DLT use case
  • Each exemption granted will be subject to certain attached conditions, with which the operator must comply
  • Among other things, exemptions may allow for models which provide direct access to retail investors, settlement in commercial bank money (as opposed to central bank money) and CSD-operated settlement systems which are not designated under the Settlement Finality Directive

    Additional requirements

  • Firms operating under the pilot regime will also be subject to additional requirements aimed at the risks associated with the novel technology and structures
  • Among other things, operators will require a clear business plan, an appropriate legal rulebook, disclosures to stakeholders on how the offering differs from a traditional offering, robust arrangements around technology and the protection of client assets and a credible exit strategy, in case the pilot is discontinued

Eligible financial instruments

  • The regime limits the types of financial instrument that may be admitted to trading / recorded on a DLT market infrastructure (for example, in relation to shares, the issuer must have a market capitalisation of less than EUR500m and in relation to bonds, the issue size must be less than EUR1bn)
  • In addition, the total market value of financial instruments admitted to trading / recorded on a DLT market infrastructure must fall within an aggregate limit, set at EUR6bn
  • National competent authorities may lower any of these thresholds

Potential opportunities

Under the general regulatory framework, transferable securities which are traded on trading venues are required to be recorded in a CSD. This requirement has previously acted as a barrier to innovative non-CSD entities developing some of the more streamlined market infrastructure models which distributed ledger technologies would support. The pilot regime’s DLT TSS model will, for the first time, allow investment firms and market operators (as well as new entrants that apply for temporary authorisations) to provide settlement services in relation to securities which are traded on trading venues. This could potentially be a significant opportunity for new players to compete with CSDs on settlement services.

Equally, CSDs have not previously been authorised to offer trading facilities, and they too may look to explore the possibility of capturing new parts of the value chain through the DLT TSS model.

More broadly, firms now have the option of requesting exemptions to a number of requirements which have previously been identified in the market as potentially problematic for DLT-based systems. At least in theory, this should provide much more latitude for experimentation with innovative systems. The regime also gives firms the chance to help shape the future of EU financial services regulation.


Naturally, there are limitations to consider. For example:

  • The threshold restrictions on eligible financial instruments will restrict the potential scale of projects (although it is helpful that the threshold levels have been increased significantly from the Commission’s initial proposal).
  • Satisfying the conditions attached to exemptions as well as the additional requirements may not be straightforward in practice. In some cases, there may be considerable uncertainty as to how the requisite standards can be met.
  • The uncertainty as to whether projects developed under the pilot will be permitted to live on beyond the permission period might inhibit some firms from committing significant investment up front.
  • For these reasons, it may be preferable for certain authorised firms to experiment with DLT-based innovation outside the pilot regime. Depending on the precise model, it may be possible to get comfortable that the arrangement is in fact compatible with the general regulatory framework, notwithstanding the use of DLT.

    UK equivalent

    The UK is also aiming to have a “Financial Market Infrastructure Sandbox” in place by 2023. However, whereas draft legislation for the EU’s regime has been in circulation since 2020, most details of the UK’s sandbox remain unclear. The UK government is hoping to take advantage of its newfound law-making agility post-Brexit to streamline the process. It is expected to begin engaging with industry and regulators on the detail over the coming months.


EU debates how to apply travel rule to cryptoassets


Electronic payment transactions in the EU generally need to be accompanied by information about the payer and payee. EU lawmakers are now debating how to extend this requirement, known as the “travel rule”, to combat money laundering via cryptoassets. The proposals have raised concerns in the industry about how cryptoasset service providers could comply with the rule in practice.

What is the “travel rule”?

The Financial Action Task Force sets international anti-money laundering standards. In 2019, the FATF put forward several recommendations for regulating what it calls virtual assets. One recommendation was for virtual asset service providers to obtain, hold and transmit information about both the originator and beneficiary in any virtual asset transaction. The intention behind this “travel rule” is to increase the information available to anti-money laundering and counter terrorist financing authorities about suspicious transactions.

FATF recommendations need to be adopted by national authorities to have legal force. Only a small number of FATF member jurisdictions have applied its recommendations. However, at its most recent meeting of finance ministers, the G7 confirmed its commitment to holding cryptoassets to the same standard as the rest of the financial system, including rapidly implementing the travel rule.

EU approach to implementation

The European Commission has proposed implementing the FATF recommendation by amending (or “recasting”) the EU’s Funds Transfer Regulation.

The FTR currently details the requirements for information that must accompany transfers of funds involving an EEA payment service provider. Under the proposals, similar requirements would be extended to transfers of cryptoassets made by cryptoasset service providers (CASPs). The recast FTR would take the definition of CASP from the EU’s draft legislation for regulating crypto-assets, MiCAR which covers crypto exchanges, custodians and traders, among others.

CASPs would be required to ensure that all transfers of cryptoassets are accompanied by:

  • for the originator CASP: the originator’s name, account number (where relevant), address, official personal document number, customer identification number or date and place of birth; and
  • for the beneficiary’s CASP: the beneficiary’s name, account number (where relevant).

CASPs would also be required to verify the accuracy of this information.

The final details of the recast FTR are currently being negotiated. We highlight below some of the important points still under discussion.

Should there be a minimum threshold?

The Commission’s original proposal would have applied only transactions worth more than €1,000. This is in line with the FATF recommendation for a threshold of €1,000/$1,000 for occasional transactions. However, the European Parliament and Council have suggested applying the travel rule to all transactions involving CASPs, with no minimum transfer threshold.

How to deal with transfers involving unhosted wallets?

Not all transfers of cryptoassets involve intermediaries such as an exchange or custodian. Users may hold cryptoassets for themselves in “unhosted wallets”. This poses a problem for applying travel rule standards because it may not be possible to identify the person who owns the cryptoassets in an unhosted wallet.

Nevertheless, the European Parliament has proposed requiring CASPs not only to collect but also to verify information on the identity of the unhosted wallet holder. The beneficiary’s CASP would also need to systematically report to the relevant authorities all transfers exceeding €1,000 from unhosted wallets.

If it is included in the final text, these requirements would pose practical difficulties for CASPs as they would need to find a way to collect the relevant information from controllers of unhosted wallets. In practice, this may mean that some CASPs choose not to provide services to these wallets.

When would the travel rule start to apply?

The Commission’s draft changes to the FTR interact with other pieces of EU legislation which are still in draft, such as MiCAR and the EU’s latest AML package. It may be several months before these texts become law. To avoid delaying implementation of the travel rule, the European Parliament and Council have suggested de-coupling the recast FTR from the AML package so that the former can start to apply sooner.

The latest thinking is that the recast FTR will be able to align with MiCAR. At one point the Parliament had suggested de-coupling the two but recent progress on MiCAR negotiations should mean that the two texts can enter into force at the same time. It is still to be confirmed when the rules will start to apply.

Other proposals

There are several other measures that the European Parliament has proposed, including:

  • a ban on transactions with third country CASPs deemed not to comply with EU rules;
  • enhanced due diligence for crypto transfers relating to banking transactions;
  • a ban on high-risk transfers on AML/CTF grounds; and
  • establishing a CASP blacklist.

These would impose potentially burdensome requirements on CASPs to screen crypto-asset transfers. Even if these ideas are not picked up in the recast FTR, they may be revisited when the text of the EU AML package is negotiated.

What is the UK’s approach?

The UK is also committed to implementing the travel rule but has yet to set out a timeline for application. The government has proposed implementing the travel rule by amending the UK Money Laundering Regulations rather than by amending the UK version of the FTR. The government has mooted a transitional period to allow cryptoasset exchanges and custodian wallet providers more time to prepare for the new rules.

What happens next?

Negotiations between the European Parliament, Commission and Council are expected to conclude in the coming months. Once the text is agreed, the recast FTR will need to complete the legislative process. As noted above, it is not clear how much time CASPs will have to prepare before the rules start to apply.

With thanks to Imran Bhaluani for writing this post.


UK proposes measures to protect against the collapse of systemic “digital settlement assets”


In the aftermath of the recent collapse of TerraUSD, a prominent USD-pegged “stablecoin”, the UK government is consulting on new measures to bring systemic “digital settlement asset” firms within the special administration regime applicable to traditional systemic payment systems. The proposals raise a number of questions, particularly in relation to scope and objectives. Stakeholders have until 2 August 2022 to respond.

Regulatory response to collapse of TerraUSD

Last month, a highly prominent algorithmically maintained USD-pegged “stablecoin”, TerraUSD, went into freefall, along with its sister cryptocurrency Luna. The incident sent shockwaves across the crypto markets and reinforced the concerns of many regulators around potential contagion risks. In the UK, the Financial Conduct Authority promptly put out a reminder to consumers of the risks of investing in cryptoassets. There followed much speculation as to if and how the government might respond, in light of its recent efforts to present the UK as open for crypto business. The government has now published a consultation paper outlining proposals intended to mitigate financial stability risks by bringing systemic “digital settlement asset” firms within the Financial Market Infrastructure Special Administration Regime (FMI SAR).

What is the FMI SAR?

The UK has certain “special administration regimes” to deal with the insolvencies of entities like banks and financial market infrastructures, where the usual administration process does not best serve the public interest. Traditional payment systems which are recognised as systemic fall within the FMI SAR. If such a payment system fails, the FMI SAR requires the administrator to pursue an objective of service continuity (i.e. continuing to deliver the failed firm’s services), even if that is not in the best interests of the creditors. This is designed to mitigate the risk of severe disruption to the wider financial sector. The Bank of England has oversight and powers of direction over administrators of entities that fall within the FMI SAR.

Proposals to extend and amend the FMI SAR

The government is proposing to pass legislation (i) to establish that systemic (non-bank) digital settlement asset firms will generally fall within the scope of the FMI SAR and (ii) to make amendments to the FMI SAR regime in order to introduce an additional objective for administrators in these cases (as discussed further below). The proposal contemplates that the Bank of England will be the lead regulator but will have an obligation to consult with the FCA, given the potential for regulatory overlap.

What constitutes a “digital settlement asset” and a “systemic DSA firm”?

The consultation paper defines “digital settlement asset” in rather vague terms. What is clear is that this concept is intended to be broader than the category of “payment cryptoassets” which are to be regulated under the e-money and payment services regimes. The government has previously said that that category will not include algorithmic stablecoins. In contrast, the term “digital settlement assets” is said to include “wider forms of digital assets used for payments/settlement” alongside payment cryptoassets.

The term “systemic DSA firms” is stated to refer to “systemic DSA payment systems and/or an operator of such a system or a DSA service provider of systemic importance”. The paper notes that “[a] payment system may be designated as systemic where deficiencies in its design or disruption to its operation may threaten the stability of the UK financial system or have significant consequences for businesses or other interests.”

The additional objective for administrators of systemic DSA firms

While continuity of service is intended to remain an important objective in the administration of a systemic DSA firm, the government wants to introduce an additional objective “covering the return or transfer of funds and custody assets”. This is intended to reflect the fact that, unlike traditional payment firms, DSAs may allow users “to store value which is then used for the movement of funds between cryptoassets without transitioning into fiat money”. This raises a lot of questions. In particular, in the case of an algorithmic stablecoin which has no (or subpar) market value and which is backed by no legal rights or interests in respect of fiat money, what “funds” are intended to be “returned or transferred”, and by whom? The consultation paper provides little insight into these types of issues.

What’s next?

The consultation remains open for comment until 2 August 2022.


European Parliament pushes for sustainability disclosures in crypto market


It is a truth universally acknowledged that Bitcoin has the same carbon footprint as [insert small-to-medium sized European country here]. Now the European Parliament is trying to encourage cryptoassets like Bitcoin towards a more sustainable way of working as part of broader plans to regulate cryptoasset markets in the EU. The UK and US have also said they are looking closely at energy usage associated with crypto. 

ESG meets fintech

Bitcoin is the best-known example of the proof-of-work consensus mechanism. This involves computers competing to solve complex mathematical puzzles to add transactions to the blockchain. This consensus mechanism, referred to as mining, requires electricity – around 707 kWh per Bitcoin transaction, according to the European Parliament – which is often (but not inevitably) generated from fossil fuels.

In response, the European Parliament has suggested including sustainability requirements into the draft EU’s Markets in Crypto-Assets Regulation (MiCAR). The proposals include:

1. updating the EU’s ESG Taxonomy Regulation to cover cryptoasset mining activities

2. requiring white papers of cryptoassets using proof-of-work to include an independent assessment of the asset’s likely energy consumption

3. applying sustainability disclosures to cryptoassets, cryptoasset service providers and issuers.

Taxonomy Regulation

The Taxonomy Regulation establishes the criteria for determining whether an economic activity is “environmentally sustainable”. An activity is environmentally sustainable if it contributes substantially to certain environmental objectives set by the Taxonomy Regulation and meets several other conditions. Technical screening criteria determine whether a given activity contributes to the relevant environmental objective and “does no significant harm” to any of the other environmental objectives.

The European Parliament has suggested that the Commission should include cryptoasset mining in the economic activities that contribute to climate change mitigation in the Taxonomy by 1 January 2025. The likely result is that technical screening criteria would be drafted explaining what an eco-friendly consensus mechanism would look like. Other forms of consensus mechanism would be considered non-compliant from a Taxonomy perspective, which could influence investor demand for the cryptoasset.

White papers

MiCAR will require offers of cryptoassets in the EU to be accompanied by a white paper. The white paper must include certain information including a detailed description of the rights and obligations attached to the cryptoasset.

According to the European Parliament, this white paper should also share information on the sustainability of the cryptoasset including whether the underlying ledger has been maintained in compliance with the Taxonomy, plus an independent assessment of the likely energy consumption of the cryptoasset where the proof-of-work model is used.

Sustainability disclosures

MiCAR will also impose various conduct obligations on cryptoasset service providers. Relevant services relating to cryptoassets include custody, trading, exchange, brokerage, promotion and advice. These providers would be required to act honestly, fairly and professionally in the best interest of their customers and provide information to them which is fair, clear and not misleading.

The European Parliament plans to add sustainability disclosures to these requirements in MiCAR. Under its plans, cryptoasset service providers would have to publish information related to the environmental and climate-related impact of each cryptoasset for which they offer services. This should be placed prominently on their website. Again, the expectation is that this would explain whether the relevant cryptoassets are in compliance with the Taxonomy.

Collectively these proposals do not amount to a ban of proof-of-work mechanisms. However, the greater transparency on ESG factors would aim to drive investment decisions away from “brown” crypto and towards “green” crypto.

Beyond the EU

The EU is not alone in exploring this topic. For example, having committed to regulating some stablecoins, the UK is preparing to set out its plans for regulating other forms of cryptoasset in a consultation paper due later this year. The government has already said that it recognises the issue of rising energy consumption from certain cryptoassets and that its approach will be aligned to environmental objectives, including the UK’s net zero target. President Biden’s Executive Order on the responsible development of digital assets also requests reports from various US federal agencies which should address the effect of consensus mechanisms on energy usage.  

Next steps

The final content of MiCAR is due to be negotiated between the European Parliament, Commission and Council. These negotiations – known as trilogues – will likely take several months. Neither the Commission nor the Council included sustainability-related requirements in their draft versions of MiCAR so it is up in the air whether the European Parliament’s proposals will make it into the law. The expectation is that the text will be finalised in autumn 2022.

Read our survival guide for more on the Taxonomy Regulation and how it interacts with other aspects of the EU’s sustainable finance package.


UK “open for crypto businesses” as it points to flexible future regulation


The UK government has set its sights on being a global hub for cryptoasset technology. HM Treasury has announced a package of measures intended to achieve this vision. This includes the regulation of some stablecoins under e-money rules, an upcoming consultation on regulating broader crypto activities, and a sandbox for financial market infrastructure innovation. The positive messaging signals an attempt to counter suggestions that the UK is no longer an innovation-friendly jurisdiction. 

Stablecoins to be included in payments regime

Last year the UK announced its “staged and proportionate” approach to cryptoasset regulation. According to a January 2021 consultation paper, the first step would be to regulate stablecoins used as a means of payment. Now, in its response to that consultation, HM Treasury has confirmed its intention to do so via existing e-money and payment services regulations.

The Electronic Money Regulations 2011 (EMRs) will be adjusted to cater for “payment cryptoassets”. Broadly these will cover “any cryptographically secured digital representation of monetary value which is, among other things stabilised by reference to one or more fiat currencies and/or is issued and used as a means of making payment transactions”. The precise boundaries remain to be seen but cryptoassets linked to other types of assets (like commodities or cryptoassets) would be out of scope, as would those which are stabilised using algorithms. As a result, we would expect that most stablecoins that are used to facilitate activity in the crypto markets will, at least initially, not be caught by the regime.  

Issuers and other entities providing services for these payment cryptoassets, such as wallet providers, would be subject to the EMRs. This means that they would need to seek FCA authorisation. They would also need to apply prudential and conduct of business standards, including safeguarding rules which require funds to be held to cover the value of the stablecoins that have been issued. The FCA will need to spell out how the existing regime would be applied to stablecoin issuers and service providers at a future date.

Another key aspect relates to location. Existing e-money and payment services regulations require in-scope entities to be based in the UK. One concern is that applying this type of requirement to stablecoin arrangements could end up pushing issuers away from the UK, despite the government’s aims to create a global hub for crypto. HM Treasury’s paper suggests that the location requirements may be revisited in the context of a separate upcoming review on the regulatory perimeter for payments. 

Not all stablecoins will be treated alike. Under the proposals, the Bank of England will be empowered to deem some stablecoin-based payment systems as posing a systemic risk. These systemic stablecoin arrangements and their relevant service providers would then be subject to oversight by the Bank of England as well as the FCA.

More to come on other cryptoassets

In relation to other cryptoassets, HM Treasury is continuing to take an incremental approach. As well as bolstering AML regulation and extending the scope of the financial promotions regime to the crypto sector, it has now announced that it will consult later this year on regulating a wider set of cryptoasset activities. 

The commentary in the paper indicates that HM Treasury remains at an early stage of formulating a clear vision as to how crypto markets and decentralised structures should be regulated. In the run-up to the consultation, the FCA is holding a series of “Crypto-Sprints” with industry participants to help shape regulatory policy. Meanwhile, a Cryptoasset Engagement Group will bring together key figures from the government, regulatory authorities and industry. This suggests that the Treasury has heard feedback on the importance of engaging with industry to develop an appropriate regulatory framework.

FMI sandbox to start in 2023

The Chancellor announced last year that HM Treasury would partner with the FCA and Bank of England to create a Financial Market Infrastructure Sandbox to allow FMIs to experiment with distributed ledger and similar technologies within a flexible regulatory environment. The consultation response reveals that the government will propose legislation to allow for the regulatory flexibility the Sandbox entails, and that the intention is for the Sandbox to be up and running by 2023. It also suggests that the Sandbox will be used to support both existing FMIs in delivering their services more efficiently as well a new FMIs, which in some cases may seek to consolidate the value chain.  

Beyond that, much of the detail remains unclear, including precisely what regulatory flexibility the Sandbox will allow for; which types of entity may apply to participate; the standards participants will need to meet; the nature and scale of activities permissible within the Sandbox; and the role and responsibilities of the regulators overseeing the process. HM Treasury expects to work with industry and regulators to settle these details in advance of introducing legislation.

A careful balancing act

The government aims for its regulation in these areas to be flexible, allowing the FCA and other regulators to change rules in response to market developments. However, they acknowledge that they need to balance this against the benefit of providing clarity to the industry, especially on where the regulatory perimeter is drawn.

Similarly, the government is mindful of the need to balance the (sometimes) competing objectives of risk mitigation and supporting innovation. Amid some recent suggestions that UK authorities have recently focused more on the former, at the expense of the latter, this latest set of announcements seeks to make clear that the UK is committed to creating an innovation-friendly environment.  

Other developments

Other fintech-related announcements made by the UK authorities include the following:

  • The Law Commission will be tasked with considering the legal status of Decentralised Autonomous Organisations
  • Following his review into UK fintech, Ron Kalifa OBE has been appointed chair of a steering committee charged with developing a new Centre for Finance, Innovation and Technology
  • HMRC will continue to explore ways of enhancing the competitiveness of the UK tax system to encourage further development of the cryptoasset market
  • The Chancellor has commissioned the Royal Mint to create a Non-Fungible Token (NFT) this summer 
Next steps

The government says that it plans to introduce legislation to make the stablecoin-related changes when parliamentary time allows. A second legislative phase to bring other cryptoassets into the scope of regulation would follow the consultation which is due later in 2022. We are likely to see draft legislation to facilitate the FMI Sandbox around a similar time. Much like in the US, the next couple of years mark a pivotal stage in the development of cryptoasset regulation in the UK.


Checking regulatory entropy: The Biden Administration’s Executive Order on Digital Assets


On 9 March 2022, the Biden Administration issued its long-awaited Executive Order on Ensuring Responsible Development of Digital Assets seeking to establish a unified US federal government approach to the regulation of digital assets.1 Simply put, for those in the digital asset business – from investors to service providers, NFT holders to large financial institutions, and many more – the Executive Order is critical in understanding how US regulation of such assets will develop in the coming years.

Executive Order 

The Executive Order notes the Administration’s concerns with, among other things, addressing consumer and investor protection; financial stability; illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. These concerns animate and instruct the following stated goals:

Developing a digital dollar 

To lay the groundwork for issuing a US CBDC,2  the Executive Order calls on the Secretary of the Department of the Treasury (Treasury or Treasury Department), the Board of Governors of the Federal Reserve System, and the Attorney General to research and report on the economic, financial, monetary, national security, law enforcement, and legislative implications of a US CBDC. With these reports in hand, the Attorney General will then provide a legislative proposal for issuing a US CBDC.3

Because CBDCs have the potential to significantly impact cross-border payments and displace existing currencies, the Executive Order also calls on the Secretary of the Treasury to take the lead in establishing an interagency framework for international engagement related to digital assets and CBDCs. This framework will expand existing CBDC-related international cooperation, such as the G7 Digital Payments Experts Group. 

Addressing digital assets’ climate impact 

The high-energy consumption required for digital asset financial structures is a growing concern among environmentalists. In this light, the Executive Order requests a report from various US federal agencies exploring the short, medium, and long-term effects of new digital asset technologies, such as proof-of-stake cryptocurrency mining, on climate change and the energy sector.

The Executive Order also mandates that the report include research on potential uses of blockchain technology to mitigate climate impacts, such as liability exchanges for greenhouse gas emissions, water, and other natural or environmental assets. 

National security and illicit finance risk

The Executive Order details the illicit uses of digital assets and decentralized finance: the facilitation of money laundering, terrorism financing, ransomware, and sophisticated cybercrime.

Notably, the Executive Order comes just days after the Treasury Department issued its 2022 National Risk Assessment specifically addressing the exploitation of the digital economy by criminals, foreign terrorist groups, and rival nations. In response to these issues, the Executive Order calls on several US federal agencies to provide strategic advice on how to effectively mitigate these risks, which have taken on greater import given the conflict in Ukraine.4

Protecting consumers 

The Executive Order also aims to protect US consumers, investors, and businesses from the financial risks posed by a digital asset ecosystem lacking appropriate oversight. In particular, the Executive Order shows concern for the risks digital assets pose to less informed market participants and the potential for these risks to exacerbate social inequities. The Executive Order envisions a regulatory framework that promotes responsible innovation while protecting consumer privacy, data, and assets, providing adequate disclosures to investors, and supporting equitable economic growth. 

To that end, the Executive Order requests the Secretary of the Treasury, in consultation with the Secretary of the Department of Labor and key independent agencies,5such as the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal banking agencies, and the Consumer Financial Protection Bureau (CFPB), to produce reports addressing specific aspects of the transition to a digital asset economy, including effects on consumers, investors, and businesses. The reports should also include recommendations to protect consumers and support access to safe and affordable financial services. 

Mitigating systemic risk 

Citing the general principle of “same business, same risks, same rules,” the Executive Order emphasizes that large firms providing digital asset services should comply with the same standards that govern traditional financial firms and that the regulatory framework may need to evolve to cover the additional risks created by each digital asset’s unique characteristics.  

To accomplish this, the Executive Order urges the Secretary of the Treasury to convene the relevant US federal financial regulators (e.g., the SEC and the CFTC) and produce a report identifying the specific risks to financial stability posed by digital assets as well as existing regulatory gaps, and to make recommendations to address these risks, which may include proposing additional laws and regulations.  

Flurry of activity

The Executive Order comes amid a flurry of recent US federal government research, regulation, and enforcement actions regarding digital assets important to understanding the current state-of-play in the United States. For example, to safeguard retail investors, the Treasury Department’s Financial Literacy and Education Commission recently launched a new effort to educate consumers about digital assets. Meanwhile, concerns that a crisis among stablecoins could result in a “bank run” style panic has led the President’s Working Group on Financial Markets and US federal bank regulators to recommend that stablecoin issuers be required to obtain a bank charter.  

On the enforcement front, both the SEC and the Department of Justice recently announced high-profile civil and criminal actions against alleged wrongdoers in the digital asset space. The day before the Executive Order was issued, the SEC charged two siblings with defrauding retail investors out of more than $124 million through fraudulent digital token offerings. And in a headline-grabbing move in February 2022, the Department of Justice arrested a married couple for allegedly conspiring to launder more than $4 billion in stolen cryptocurrency. As part of the latter action, the DOJ seized over $3.6 billion in cryptocurrency in what it touted as the Department’s largest financial seizure ever.


This is not the beginning of the end, and likely is not even the end of the beginning of US digital asset regulation. While the industry has applauded the Executive Order, there is still a need for greater legislative guidance and regulatory clarity. The direct pressure on Cabinet-level officials, indirect pressure on independent agencies, and eventual pressure on the US Congress will only continue to build.6While the Administration can do a lot in regulating digital assets, Congressional action will play a key role in implementing the President’s vision.


UK authorities team up to remind regulated firms about crypto standards


Regulated firms are increasingly interested in entering the (largely) unregulated cryptoasset market. In a coordinated set of statements, UK authorities have reminded firms of their obligations under existing prudential and conduct regulation when they do so. These statements also pave the way for an expansion of the regulatory perimeter, including through the regulation of systemic stablecoins, ahead of HM Treasury’s anticipated response to its 2021 crypto consultation.

Impact of crypto on financial stability

In recent years we have begun to witness a blurring of lines between the traditional financial sector and the crypto sector. This includes the growth in institutional exposure to unbacked cryptoassets like bitcoin and ether (in some cases indirectly, through derivatives or exchange traded products), as well as the rise of non-banks developing stablecoins backed by traditional asset classes.

The Bank of England and its Financial Policy Committee have for some time expressed measured concern over the potential financial stability risks. In a new report, the FPC reiterates a position we have heard several times before: the FPC considers that the direct stability risks posed by crypto and decentralised finance to the UK financial system are currently limited, but that they have the potential to grow and need to be monitored closely. The report outlines how the FPC intends to continue monitoring risks to systemic financial institutions; risks to core financial markets; risks from use in payments; and the impact on real economy balance sheets. 

As the markets grow, the FPC expects that enhanced regulatory frameworks will be needed, both at a global and domestic level. For now, it has welcomed statements from the Financial Conduct Authority and Prudential Regulation Authority reiterating firms’ existing regulatory obligations (as discussed below) as well as the government’s proposals to regulate stablecoins, including by bringing systemic stablecoins within the remit of the Bank of England (see our blog post: UK reveals plans to regulate stablecoins).

Treating crypto exposure

Published on the same day as the FPC report, the PRA has written to CEOs at banks and PRA-regulated investment firms to set out its views on exposures to cryptoassets. This builds on its 2018 letter on the same topic (see our blogpost: Guidance on how UK firms should handle exposures to crypto-assets).

In its latest letter, the PRA reminds firms to consider the full prudential framework when assessing and mitigating risks arising from cryptoasset exposures (including indirect exposures) or other activities (such as custody). Among other things, it suggests that its rules on market risk mean that a capital requirement of 100% of the current value of the firm’s position is likely to be appropriate for “the vast majority of cryptoassets”. The PRA says this is “particularly” the case for unbacked cryptoassets, while remaining somewhat vague in relation to digital assets backed by legal rights or interests.

The PRA also flags the need to manage operational risks. For example, firms that outsource the custody of crypto keys should understand their liability if the third party custodian fails and in that situation their legal and operational options for regaining control of the relevant assets.

The letter provides firms with guidance but does not propose changes to the existing regime. The Basel Committee on Banking Supervision is working on an internationally-agreed position on the treatment of cryptoassets (see our blogpost: Global banking regulator outlines proposals for the prudential classification and treatment of cryptoassets). The PRA does not suggest that it plans to pre-empt the BCBS by proposing a tailored crypto prudential regime before those talks are concluded.

The FCA has also issued a notice directed to all regulated firms with exposure to cryptoassets. The FCA reiterates that firms should be clear with customers about the extent of their business which is regulated. Firms are also advised to check whether the businesses they interact with are on the FCA’s list of unregistered cryptoasset businesses.

Regulating systemic stablecoins

Last year, the Bank of England published a discussion paper on new forms of digital money, including systemic stablecoins (see our blogpost: Bank of England papers on new forms of digital money). It has now published a summary of the responses along with planned next steps.

Among other things, respondents broadly agreed on the need to preserve cash; achieve interoperability between all forms of money; and have an appropriate risk-based regulatory framework for systemic stablecoin arrangements, including for private sector intermediaries.

The Bank had originally outlined four potential models for regulating systemic stablecoins in order to achieve the equivalent protections enjoyed by holders of commercial bank money. These models generated a mixed response among respondents. The FPC has advised that model 4, which contemplates stablecoins backed by commercial bank deposits, would introduce undesirable financial stability risks. The FPC also considered that any regulatory framework would need to mitigate the absence of a “backstop” (akin to the Financial Services Compensation Scheme and bank resolution arrangements) to compensate depositors in the event of a failure, as this type of state-backed arrangement would be difficult to replicate for non-banks. 

Next steps

In its letter the PRA says it will continue to monitor any expansion of firms’ crypto-related activities and expects firms to discuss proposed prudential treatment of crypto exposures with their supervisors. A PRA survey asks firms about their current and planned crypto exposures, including indirect exposure to crypto via derivatives. Responses to the survey are invited by 3 June 2022.

Before then, HM Treasury is expected to release more detail on the direction of travel for the regulation of cryptoassets in the UK, which is expected to include draft legislation introducing a regulatory framework for stablecoins (see our blogpost: UK reveals plans to regulated stablecoins). Building on this, the Bank of England intends to consult on its proposed regulatory model for systemic stablecoin issuers and wallets in 2023. 

The Bank of England and HM Treasury are also expected to launch a joint consultation on the case for introducing a UK CBDC in 2022.


China’s crypto ban extends to a wider range of crypto-based activities


In September 2021, the People’s Bank of China and nine other Chinese government authorities jointly released the Circular on Further Preventing and Handling the Risks Concerning Speculation in Virtual Currency Trading. Together with another official notice to stamp out cryptocurrency mining, cryptocurrency-based mining and other crypto-related activities in China are set to be tightly regulated. 

See this alert from our China fintech team which summarises some of the recent related regulatory developments and discusses several hot topics such as NFTs and China’s Digital Yuan Plan.


The Kalifa Review of UK Fintech: One Year On


The Kalifa Review of UK Fintech was published in February 2021, with great fanfare. The report set out a myriad of bold recommendations to empower the UK to retain and strengthen its position as a global leader in fintech. One year later, as the effects of the pandemic continue to drag on, we follow up with 10 observations on the progress made.

1. A strong start to a marathon project

The Kalifa Review set out an ambitious multifaceted agenda for the UK. Its implementation was always going to be more of a marathon than a sprint. Still, (at the risk of mixing sporting analogies) we saw a strong start right out the gate.

Within the first few weeks of its release, the Chancellor had endorsed the Kalifa Review and committed to implement many of its recommendations. This was a highly promising start and one that was cemented a few months later when the Autumn Budget allocated £5m to seed fund the Centre for Finance, Innovation and Technology (CFIT). This was the vehicle Kalifa envisaged would coordinate the delivery of his strategy. Kalifa reportedly viewed its funding as the “main outstanding piece of the jigsaw” and was delighted with the result.

2. Slow but steady progress on support for scale-ups

Many of the recommendations were aimed at retaining fintech businesses in the UK beyond the start-up stage, with the hope of creating more homegrown global champions. Support was recommended on multiple fronts, including in relation to capital, talent and regulation. Progress on most aspects has been slow but steady.

Concerning capital, the government launched a long-awaited consultation on enabling investment into productive finance in November. Among other things, it looked at revising the charge cap for defined contribution pension schemes to facilitate the use of performance fees. These revisions are expected to unlock greater investment into high growth sectors such as fintech. The consultation closed in January and we are now awaiting the government’s response. 

The government has also announced reforms to R&D tax credits, which again were designed in part to attract growing fintech businesses with financial incentives. Among other things, the reforms expand qualifying expenditure to include data and cloud computing costs and refocus the reliefs on innovation that actually takes place in the UK. 

In relation to talent, the government has committed to launching a “Scale Up Visa” in spring 2022; fast-tracking visa applications for recruits to recognised UK scale-ups; and launching a Global Talent Network to help fill skills gaps from talent pools in the US and India. 

On the regulatory side, Kalifa suggested that the Financial Conduct Authority (FCA) could implement a “scalebox” i.e. a package of measures to assist firms which are growing significantly. In response, the FCA has piloted additional support for newly authorised firms and fast-growing firms via what it initially labelled a “regulatory nursery”. These initiatives are expected to be rebranded as “early and high growth oversight” when they are fully rolled out later this year.

3. Job done on reforming Listing Rules

Amid concerns over the UK’s declining status as a venue of choice for global IPOs, the Kalifa Review recommended a number of changes to the UK Listing Rules. This included removing restrictions on certain dual-class share structures and reducing the proportion of shares required to be in public hands. Both measures were intended to favour founder-led companies, by allowing founders to retain a greater degree of control after a floatation. The recommendations were echoed in Lord Hill’s UK Listings Review, which was published around the same time. 

The FCA has wasted no time putting these recommendations into practice. By July 2021, it had already launched a consultation outlining its proposals and the changes were finalised and in effect by the beginning of 2022.

Meanwhile, the government has been seeking to amend the prospectus regime, to ensure that it is not overly burdensome for issuers. For example, it is proposing to allow companies to provide forward-looking financial information in certain circumstances, which is expected to be particularly helpful in sectors such as fintech.

Of course, the proof will be in the pudding and it remains to be seen whether these reforms will indeed have the desired effect.

4. No signs of relaxations on merger control

One remark in the Kalifa Review that raised some eyebrows was the suggestion that the Competition and Markets Authority should take a more flexible approach in its merger control assessments. The rationale was that a degree of consolidation would be critical in facilitating the growth that UK fintechs need in order to become global champions.

As we expected, the CMA has not shown any signs of relaxing its controls since then. On the contrary. The CMA has made a number of high-profile investigations in the fintech space, including an inquiry which led it to block the merger of two homegrown crowdfunding platforms, Crowdcube and Seedrs, and resulted in Seedrs being acquired by the US platform, Republic. It is also proceeding with revisions to its rules to make it easier to block tech mergers. Similar trends continue in the EU and US and show no signs of abating. 

5. An encouraging start on foreign trade alliances, though no regulatory recognition

The Review highlighted the importance of facilitating access to international funding and markets, not least given the relatively small size of the UK’s domestic market as well as the recent loss of EU passporting rights for firms regulated in the UK. 

Since then, the government’s Department for International Trade has been busy negotiating a Digital Economy Agreement with Singapore, and it reached an agreement in principle in December. Among other things, the agreement seeks to ensure that UK businesses can continue to sell electronic content to Singapore without facing tariffs, promote interoperability (e.g. through mutual recognition of electronic authentication and digital signatures), reduce restrictions on cross-border data flows and facilitate knowledge sharing. It does not appear to include anything on mutual recognition of regulatory standards, something that would be particularly useful in establishing the UK as an international launchpad post-Brexit. 

The UK Office for Investment has also secured a commitment of £10bn of investment from the UAE into a number of sectors including tech, though the recently established UAE-UK Sovereign Investment Partnership.

6. No single cohesive regulatory strategy

The Review’s very first recommendation was the delivery of a “digital finance package” that would outline a new regulatory framework for emerging technologies. The idea was that this would bring together the regulatory agendas of all the various government departments and regulators under one coordinated strategy, with clear objectives, actions and timescales.

Disappointingly, while we have seen developments across various areas of regulation, we are still awaiting an overarching UK strategy. In many areas (such as the regulation of digital assets), there remains a considerable degree of uncertainty as to the UK’s long-term direction of travel, and a clear strategy would be extremely welcome in the industry. Moreover, a bold statement of direction could play an important role in attracting innovation to the UK.

7. Support for financial market innovation

One of the areas of policy recommended for inclusion in the digital finance package was support for financial market innovation. There have been a couple of promising developments in this area following the report. 

In relation to securities, the government announced that it will work with the FCA and Bank of England to deliver a financial market infrastructure “sandbox”. This is intended to enable firms exploring the use of innovative technologies in the settlement of financial instruments to do so within a more flexible regulatory environment (subject to appropriate protections). The government is currently working with the Bank of England and the FCA to deliver this.

With regard to payments, the Bank of England launched a new model for settlement in central bank money in April. Under this model, a payment system operator can hold its participants’ funds in an omnibus account with the Bank of England and settle transactions between participants in real-time simply by updating the participant balances in the omnibus account. The model is expected to support the development of a range of novel payment systems, including those that may be based on distributed ledger technologies. 

8. Establishing the case for a UK CBDC

In line with Kalifa’s recommendations, the Bank of England has continued to devote significant resource to research and development on issuing a retail Central Bank Digital Currency. In the past few months, it has published the findings of responses to its initial discussion paper, announced that it will launch a formal consultation on the use case for a CBDC in 2022 and begun engaging with various lawmakers and stakeholders. 

Perhaps unsurprisingly, reactions have been mixed. Notably, the House of Lords’ Economic Affairs Committee has been somewhat lukewarm, concluding in a recent report that they “have yet to hear a convincing case for why the UK needs a retail CBDC”.

9. Broad focus on data, but no clear direction on Open Finance

Harnessing the power of data was a prominent theme in the Kalifa Review and we have seen a number of initiatives in this vein. For example, the government has launched an ambitious policy framework on data, run a consultation on digital identities and committed significant funding to data-related initiatives. There has also been a consultation on reforms to the UK’s data protection regime, with a view to making certain departures from GDPR in order to provide more tailored support and supervision of data-driven businesses. The Information Commissioner has indicated that these reforms are intended to create a world-leading regime, which at the same time will not endanger the UK-EU data relationship.

However, it remains unclear exactly where the UK is headed with regard to Open Finance i.e. the initiative to broaden user-driven data sharing within the financial sector. The FCA finally published the findings to its Open Finance Call for Input last March. Among other things, it concluded that there was a need for a legislative and regulatory framework to facilitate Open Finance, but we are yet to hear any specific proposals. 

10. Investors embrace regional development

And finally, a brief comment on dynamics within the UK. The Review recommended breaking up London’s near monopoly on UK fintech by developing a number of regional hubs. Investors have clearly got the memo. Regional investment outside London has increased 237% since 2020, according to new figures from Innovate Finance. The data suggests that investment into fintech in the UK as a whole is also up, but that regional growth rates surpass the national average. This may come as little surprise to some, given broader relocation trends fuelled by the pandemic.

Get in touch

Overall, things broadly seem to be moving in the right direction, though some with more speed and precision than others. We will be keeping a close eye on how all these matters develop over the coming years. Should you have queries, please do not hesitate to get in touch.


Russian Central Bank proposes a ban on cryptocurrencies


As Spain, Singapore and the UK have been taking steps to regulate the rules around advertising cryptoassets (read more), last week the Russian Central Bank took a step further, publishing a consultation paper which proposes a ban on the issuance, use and mining of cryptocurrencies in Russia.

According to the consultation paper, the value of Russian citizens’ transactions with cryptocurrencies has reached $5 billion per year, and Russian individuals have become active users of international online cryptocurrency trading platforms. Following the ban on crypto mining in China, Russia has become one of the global leaders by mining capacity so the proposal has serious implications for the fintech sector.

However, even if the Central Bank manages to push through its position and finally comes up with a draft law addressing all the suggested bans, the Russian legislative process is a rather long and complex one and the results may be quite unpredictable.

The story so far

Russian law officially recognised cryptocurrencies as a legitimate asset on 1 January 2021. It legalised the use of cryptocurrency as an investment tool or a payment method, but at the same time expressly banned Russian legal entities and individuals from advertising and using cryptocurrency as a means of payment inside Russia.

An implementing law which would set out procedures for the issuance and circulation of cryptocurrency in Russia was also expected last year, but its adoption was delayed, largely due to the ongoing debate between various state authorities as to the optimal approach to the regulation (read more in the Russia section of our Fintech Global Year to Come 2022, Year in Review 2021).

What bans are proposed?

In its consultation paper, the Central Bank proposes:

  • to prohibit the issue and/or circulation of cryptocurrency inside Russia (including through cryptocurrency exchanges and the like);
  • to prohibit Russian financial institutions, financial intermediaries and the country’s financial infrastructure from trading cryptocurrencies and creating related financial instruments;
  • to prohibit cryptocurrency mining in Russia; and
  • to establish liability for the violation of the existing restriction on paying with cryptocurrency between Russian nationals inside Russia and of the new proposed bans.

There is currently no plan to ban Russian citizens from holding cryptocurrencies or from trading cryptocurrencies abroad through their offshore accounts, as Elizaveta Danilova, the head of the Central Bank’s Financial Stability Department, said in a briefing. However, the system of regular monitoring of cryptocurrency transactions is likely to be enhanced, including via cooperation with foreign regulators, in order to obtain information about Russian citizens’ operations in foreign cryptocurrency markets.

Key reasoning

The key reasons cited by the Central Bank for introducing these bans are perceived threats to citizens’ wellbeing, financial stability, monetary policy sovereignty and risks of widening of the illegal activities (money laundering, drug trafficking, terrorist financing, etc.) as a result of the growing use of cryptocurrencies. In the regulator’s  opinion, cryptocurrencies show signs of a financial pyramid and their use may eventually lead to the formation of a bubble in the market.

As for cryptocurrency mining, the Central Bank’s view is that it creates unproductive consumption of electric power which threatens the social infrastructure and the implementation of Russian environmental agenda.

The Central Bank also believes that the global trend for growing popularity of cryptocurrencies will soon be reversed against the backdrop of swiftly developing faster payments systems and emergence of central bank digital currencies – from the regulator’s perspective these may represent a better  alternative to the cryptocurrencies as they have many similar advantages such as high speed, convenience, blockchain protection and relatively low cost.

What’s next?

The  proposal represents a view of just one, albeit the key, regulator in the area. The Central Bank position could still face some resistance among other state authorities and lawmakers. For instance, during the last few months there have been quite a few statements by a number of high-ranking Russian officials in the press in support of legalising crypto mining activities which would allow to introduce the respective taxation regime and thereby boost the Russian economy.

Currently the Central Bank proposal is at a very early stage, we have only seen a consultation paper which is aimed at fueling a discussion in the market. We will be following developments closely.

The report says cryptocurrencies are volatile and widely used in illegal activities such as fraud. By offering an outlet for people to take their money out of the national economy, they risk undermining it and making the regulator’s job of maintaining optimal monetary policies harder the report said. The bank, therefore, said Russia needs new laws and regulations to effectively ban crypto-related activities. (CoinDesk)


Global Fintech Trends in 2022


The digitalisation of finance and the opportunities for fintech

The digitalisation of financial products and markets continues apace. As the world struggles to emerge from the Covid-19 pandemic, the financial industry is having to adapt to once-in-a-generation societal changes, and technology is at the heart of its response. As financial services are unbundled and repackaged around a digital architecture, the market has become more competitive. The line between tradfi and fintech has blurred now that insurgents have become mainstream, “traditional” firms operate like tech companies, and tech companies are embedding themselves in the financial ecosystem.

The face of financial services is no longer the high street bank, but the digital marketplace. Representing the platformisation of financial services, these marketplaces are the new hubs for consumers to access products. Increasingly, these products include cryptoassets. New alternative investing platforms give users access to non-traditional asset classes that will not always be clearly within the scope of existing consumer protections, prompting regulators to consider whether existing regulatory frameworks are adequate.

Tackling friction in cross-border payments continues to be a major area of focus, with attention on both improvements to existing infrastructure and the development of alternative rails such as stablecoins and CBDCs. Alternative forms of digital money could present potential solutions to cross-border payments but also raise questions about the future of traditional forms of money and their role in society. The use of data and data protection regulation is also an increasingly pressing issue as the role of AI and machine learning in financial services continues to gain traction.
Another factor underpinning innovation in finance is the growing focus on climate change and the role of sustainable finance and fintech solutions in achieving the immense challenge of transitioning to net zero and carbon neutral solutions. Fintechs need to be mindful of ESG compliance, especially those in the digital asset space given the energy-intensive nature of certain crypto activities.

The fintech sector has proved extremely resilient and is emerging successfully from the pandemic, with a huge amount of activity and interest. All in all, however, there is plenty of work to be done in policy, law and regulation to help both those providing and those utilising financial services navigate the seismic changes ahead.

Record levels of fintech investment and funding

The digital shift has precipitated record levels of funding into digital assets, payments and fintech generally. Global funding to start-ups is at an all-time high with a tsunami of capital flowing into private tech companies. Fintech has also been the big winner in venture capital with one in every five venture dollars going into fintech investments in Q2 2021 . Overall, 2021 saw a flood of fintech innovation capital and, by the end of Q3 20211, global fintech funding reached US$94.7 billion (with 3,549 deals), almost double 2020’s full-year total.

Asia has become a hot spot for fintech deals which reached a record high of 307 deals totalling US$5.9 billion in Q3 2021. The region has seen consecutive quarterly deal growth since Q2 2020, and funding growth since Q3 2020. We are seeing South East Asia tech companies, especially in Indonesia, as a destination for investment money looking to hedge China risk. The US is leading in funding, with levels exceeding the total funding for Asia, Europe, LatAm and Canada combined. In the third quarter of 2021, over 43 new fintech unicorns emerged globally, with the US being home to nearly half of all the total 206 existing fintech unicorns2.

There has been some concern amongst commentators that this fintech boom is a bubble, created by sky high valuations and a fear among investors of missing out on the next big success story. It is certainly true to say that, as in any new and rapidly expanding sector, innovations in fintech face a material risk of failure. However, Fintechs are almost by definition agile and – just as Big Techs are diversifying into finance – are showing the ability not only to disrupt traditional financial services, but also to diversify into broader tech offerings (such as Paypal’s move to combine fintech with social media and e-commerce through the acquisition of Pinterest).

We therefore expect these upwards investment trends to continue into 2022, and for the healthy financing climate to lead to more fintech exits. Yet investors and fintechs will need to take account of geo-politics and the headwinds brought about by the prospect of a regulatory reset for the digital economy. It remains to be seen how long the heat in the market can be sustained as the impact of new policies and regulations, such as antitrust attention on control of data, and new/enhanced foreign investment regimes focused on the tech sector, start to bite.

1 Source: State Of Venture Q2’21 Report – CB Insights Research

2 Source: State Of Fintech Q3’21 Report – CB Insights Research

The global regulatory reset impacting fintech – financial services, antitrust and data

One of the most striking interventions in the digital economy in 2021 has been in China, which has turned the tide on Big Tech with a regulatory squeeze using various of the regulatory levers at its disposal. What started as regulatory scrutiny in consumer finance has quickly moved into the antitrust space and cryptoassets. More recently, the focus has been on the interoperability of apps (within SuperApps), data flows and whether platforms should be broken up.

While the China clampdown is impacting domestic investment, it is also creating opportunities in India and South East Asia which is accommodating those leaving China’s markets or looking to diversify. Singapore, in particular, is experiencing growth as a “hub”. With support from the regulators, South East Asia is also seeing growth on digital banking.

The US is also experiencing a reset. Witness the changing tides of sentiment against US tech giants and new Biden appointees shaping the digital asset market, which has become too large to ignore. US regulators across the board have been resorting to regulation by enforcement and are also starting to think about specific regulatory frameworks for tech. Centralised finance is moving towards banking regulation but the explosion in DeFi, crypto, NFTs and stablecoins is presenting a regulatory challenge.

Consumer protection is also going up the regulatory agenda in both the EU and the UK but with more of an evolutionary than revolutionary approach as they look to foster safe and trustworthy innovation, building on existing strong regulatory frameworks and guidance. The EU has put out various specific proposals which we expect to see progressed in 2022, whilst post-Brexit the UK is still taking its time to find the right balance between addressing emerging risks and supporting innovation.

Blurring lines between crypto and mainstream financial markets

Markets in “first generation” cryptoassets like Bitcoin and Ether are continuing to expand rapidly. At the same time the range and complexity of digital assets is also growing, with the rise of Decentralised Finance (DeFi), Non Fungible Tokens (NFTs) and projects to digitise or tokenise traditional asset classes, from financial instruments to cash to real estate.

A notable trend is that institutional exposure to digital assets as a distinct asset class has been increasing significantly and is expected to continue to do so. Exposures may come in a variety of forms, such as direct trading, trading in derivative and related products, portfolio investment, integration of digital assets within service offerings and investment in digital asset market players.

Alongside this, the use of novel technologies, such as blockchain and distributed ledger technologies, to digitise assets and automate processes in traditional financial markets, continues to gain momentum. While many of these projects still involve a high degree of centralisation, increasingly greater degrees of decentralisation are being considered, including deployments on public blockchains.

The crossover between decentralised and traditional markets and related contagion risks will be of particular concern for policymakers. For example, the financial stability consequences of a crash in the price of Bitcoin are all the more significant if the crypto market is highly integrated with the traditional financial sector. Likewise, as DeFi arrangements continue to grow and gain institutional backing, the need to close regulatory gaps in this area becomes more pertinent.

Across the globe, regulators are considering how best to regulate the expanding spectrum of digital assets in order to tackle financial crime, protect investors and mitigate systemic risks while at the same time supporting innovation. The answers are not straightforward. Regulatory approaches continue to be bolstered, refined and clarified and we expect this trend to continue into 2022.

Payments and the future of money

With the pandemic having turbocharged the payments revolution, innovation in payments will continue to drive greater convenience, lower costs and increasingly frictionless instant payments. This innovation will be led by digital marketplaces which are benefitting from society’s move to online shopping and which, in response, are investing more in their payments infrastructure. Meanwhile new payments products, such as buy-now, pay-later, will aim to embed the BNPL model in anticipation of future regulatory scrutiny.

Innovation has resulted in more choice for consumers in the way they make and manage payments, from APIs and Open Banking, to QR codes, e-money, digital wallets and BNPL. Competition between payment service providers, and the technology firms and digital marketplaces, will drive further innovation but also put pressure on business models. Many of these providers are reliant on each other as payments chains become more complex, increasing the potential for legal disputes between contracting parties.

Innovation is not limited to the private sector. An increasing number of central banks have now launched or begun piloting a CBDC. Ironically, many of the more economically developed jurisdictions have reached less advanced stages, as they take their time to consider the use case, potential implications and design. There has been a significant amount of cross-border collaboration between many of these jurisdictions to develop common frameworks and to try to ensure that different domestic CBDCs can interoperate with one another.

Potential issuers of systemic stablecoins await clarity from regulators as to the proposed regulatory framework. It remains to be seen whether regulatory proposals will be compatible with a commercial stablecoin proposition. Meanwhile Asian countries are forging ahead with other innovations and we expect to see more projects such as the Singapore and India linkage of real-time payment services through mobile phone numbers and UPI virtual payment addresses.

Data governance, cyber and innovation – an increasingly complex matrix

Regulators in major markets are adopting divergent approaches as they seek to strike the right balance between incentivising effective risk management and not stifling innovation.

The EU’s first-mover proposals for an AI-specific regulation have provided a benchmark for a comprehensive, risk-based approach. As things stand, there are some concerns that the calibration to risk approach and the broad categories of high-risk activity could stifle innovation and even create barriers to the adoption of AI in the EU. However, the proposed regulation has a long way to go and will need to pass through the EU’s legislative machine – where material changes could still be made – and will then apply two years after it is adopted. This means any new obligations are unlikely to start to apply before 2024.

The UK’s own approach to regulating AI is evolving, as it considers a “light-touch” regulatory framework to foster innovation, At the same time it is also considering deviations from EU standards for data protection again to support innovative tech. China has responded to GDPR with a similar, but sometimes more stringent, data protection regime, as well as making its own proposals on global standards for AI. Data protection and cyber rules are proliferating in the US, as well as increasing enforcement against digital platforms.

Several markets are also following the lead of the UK and EU in issuing wide-ranging operational resilience requirements. This broad range of unharmonised international requirements will place increasing pressure on financial institutions to focus resources on the increasingly complex interaction between the technology, risk, compliance and procurement functions.

Innovation leading to increasing enforcement and litigation risk – particularly with respect to crypto

Greater consumer adoption of new financial technologies means that regulators are even more focused on taking steps to ensure both they and firms mitigate the risk of consumer harm. But many novel financial product and service offerings don’t neatly fit into the existing regulatory and legal frameworks. These products and services seem to pose greater inherent risks than traditional financial service products: for instance, with some products (e.g. crypto) being far more volatile and vulnerable to market manipulation/scams/being used for financial crime. When combined with the fact that many of the companies offering these products are young and have relatively immature compliance frameworks, there is a recipe for future regulatory investigations, potential enforcement and litigation.

This is especially the case as regulators’ expectations of what companies will do is rising across many subject areas: from preventing financial crime to transparently and fairly processing personal data, from acting more in consumers’ interests to acting responsibly when it comes to topics like ESG and D&I. And, where the risk of civil claims, either class actions or individual, is increased by the availability of litigation funding in many jurisdictions, this has in turn fuelled creativity in how civil claims are formulated and pursued.

In the US, the popularity of cryptocurrencies and the volatile market have attracted the attention of federal and state agencies in recent years. The Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), Internal Revenue Service (IRS), Financial Crimes Enforcement Network (FinCEN), and the New York State Department of Financial Services are among the agencies that regulate the use of cryptocurrencies. Governmental investigations and enforcement actions are typically based on allegations of fraud, misconduct, money laundering, and compliance with securities laws.

While regulators struggle with how to best bring about enforcement, cryptocurrency users are not waiting around. They are suing. Cryptocurrency users are exercising their rights under existing federal, state and contract laws to recover damages. They can do this because much of the malfeasance in cryptocurrency markets is not novel, just repackaged. Private litigation, i.e. enforcement by people rather than regulators, has thus far addressed three general issues in blockchain breakdowns: (i) “traditional” securities fraud; (ii) initial coin offering (ICO) failures; and (iii) platform disruptions.

On the civil side, investors are also bringing lawsuits claiming fraud, market manipulation and violation of securities laws. Complaints alleging breach of contract, intellectual property infringement, trade secret misappropriation, and others have also been increasing.


OFAC publishes guidance on its expectations for sanctions compliance for the U.S. virtual currency industry


As an increasing number of investors, both within the United States and internationally, begin to buy and sell digital assets, a U.S. regulator has again reminded the virtual currency industry that it is subject to the same compliance obligations as more traditional industries. Last week, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued specific guidance regarding the application of U.S. sanctions requirements to the virtual currency industry. While this guidance does not break new ground or offer any surprises to experienced sanctions practitioners, it helpfully summarizes how sanctions apply in the virtual currency space and sets out OFAC’s expectations in a user-friendly manner that should be well-received by business teams and others who are less familiar with U.S. economic sanctions requirements.

Mounting regulatory focus on virtual currency

The guidance is only the latest example of the mounting regulatory focus on virtual currency. It follows the U.S. Department of Justice’s (DOJ) recent announcement of the creation of the National Cryptocurrency Enforcement Team. U.S. Regulators beyond the DOJ also have announced enforcement actions and reviews with respect to digital assets more generally:

  • the Securities and Exchange Commission announced charges against cryptocurrency lending platform BitConnect in connection with an alleged $2 billion fraud;
  • the Treasury’s Financial Crimes Enforcement Network (FinCEN) published its analysis of ransomware trends that found that virtual currencies were often used for ransomware-related payments; and
  • the Commodity Futures Trading Commission and FinCEN announced a $100 million consent decree against the BitMEX cryptocurrency derivatives trading platform for, among other things, willfully failing to implement and maintain a Bank Secrecy Act compliant anti-money laundering program and customer identification program, and failing to report certain suspicious activity.

Press reports even suggest that a White House task force is considering an Executive Order to establish oversight of so-called stablecoins. The fast-moving pace and expanding reach of virtual currency regulation is a trend that is unlikely to change.

Guidance specific to virtual currencies

OFAC views participants in the virtual currency industry as playing “an increasingly critical role in preventing sanctioned persons from exploiting virtual currencies to evade sanctions and undermine U.S. foreign policy and national security interests.” The guidance, much like the guidance OFAC has published with respect to other industries (e.g., shipping and transportation) is designed to assist industry participants in understanding and mitigating the risks that are unique to their sector.

The guidance begins with a high-level primer on U.S. sanctions, but with practical takeaways for the virtual currency industry, such as explanations on how U.S. persons can “block” virtual currencies and examples of recent enforcement actions highlighting sanctions risks in the virtual currency space.

While the categories of sanctions and compliance obligations described by OFAC are not new, they are described in the guidance in a way that is designed to speak to a less familiar audience: individuals with a tech background that may not be accustomed to compliance in the financial services sector, or with compliance best practices that are otherwise relevant to the facilitation of cross-border transactions.

Along with the guidance, OFAC also published updates to FAQs 559 and 646 that, respectively, address:

  • the definition of “digital currency,” “digital currency wallet,” “digital currency address,” and “virtual currency” for purposes of OFAC sanctions programs; and
  • how to block a virtual currency from being transferred or released once a person holding the virtual currency determines that it is subject to blocking, because a sanctioned person has an interest in the virtual currency, or the virtual currency is itself blocked.
OFAC recommendations for virtual currency industry participants

As with any sector of the economy, virtual currency industry participants are expected to evaluate a variety of factors in assessing their unique sanctions risks and formulating a risk-based compliance strategy.

Factors to be considered can include: the business type, size and sophistication, products and services offered, customers and counterparties, and geographic location, to determine a business’s unique sanctions risks, which should then inform the risk mitigation measures that a company implements.

In the guidance, OFAC identifies the following key measures that virtual currency industry participants should carefully consider in implementing their risk-based compliance programs:

  • Geolocation Tools – these tools allow companies to determine the locations of IP addresses, in particular to identify any that are in comprehensively sanctioned jurisdictions; OFAC makes clear that a failure to use such tools could lead to enforcement actions if transactions occur in relation to comprehensively sanctioned jurisdictions.
  • KYC Procedures for the Virtual Currency Industry – OFAC recommends that companies perform information gathering throughout a customer relationship’s lifecycle: in connection with onboarding, during periodic reviews, and when processing transactions.
  • Transaction Monitoring and Investigation Software – through this technology, companies can determine whether transactions involve certain identifying information that is associated with persons who are either on a sanctions list or are located in a comprehensively sanctioned jurisdiction.
  • Sanctions Screening – as in virtually any industry, particularly the financial services sector, OFAC expects the virtual currency industry to implement controls reasonably designed to screen customers and counterparties against sanctions lists; this includes:

(i) screening transactions themselves to determine if they involve sanctioned persons or comprehensively sanctioned jurisdictions;

(ii) applying screening tools’ fuzzy logic technology to avoid search results falling through the cracks because of name variations and misspellings; and

(iii) ongoing screening in case of updates to customer information, OFAC sanctions lists, and regulatory requirements. 

Screening is not enough

In short, simply screening customers against OFAC’s Specially Designated Nationals and Blocked Persons List (the SDN List) is not enough:

  • Companies should design sanctions programs which actively identify red flags, and seek to block transactions with individuals and entities that are a target of sanctions, such as those located in a comprehensively sanctioned jurisdiction, even if those individuals and entities do not appear on a sanctions list. Indeed, addressing risk relating to comprehensively sanctioned jurisdictions is a key aspect of compliance for the virtual currency industry.
  • Companies should also be prepared to dive deeper when required, under their risk-based approach, by requesting information like names of beneficial owners, and requesting additional information in connection with specific transactions to clear sanctions red flags.
Looking ahead – the industry is on notice

OFAC’s guidance makes clear that it means to hold all actors in the virtual currency industry accountable, from technology companies to exchangers, administrators, miners, wallet providers, and even traditional financial institutions exploring new virtual currency assets and services.

Designing effective, risk-based sanctions programs is complex, especially for many of the newer, leaner participants in the virtual currency industry, but in light of the guidance it will be difficult to argue in the future that OFAC has not put the industry on notice of its expectations. It is never too soon to begin implementing sanctions compliance steps in accordance with OFAC’s guidance. 


Italy launches a sandbox platform allowing the tokenisation of investment alternatives for institutional and retail investors


Linklaters Milan is tax advisor to the first Italian end-to-end platform for the issue and placement of security tokens of investment alternatives for institutional and retail investors (the Security Token & Alternative Investment Sandbox or STAI) promoted by CeTIF, Reply and Fondazione Cariverona. The project is designed and developed in the context of a sandbox process, a collaborative and controlled test environment, open to insurance companies, banks and corporates with the participation, as institutional observers, of Banca d’Italia, IVASS and Consob. 

The potential of tokenisation

Tokenisation is the process of issuing a security token via blockchain that digitally and legally represents a real asset. By creating digital assets to represent physical assets, tokenisation has the potential to transform the financial market by enabling physical assets to be owned by wider global pool of investors. Because of their digital nature, security tokens may not only represent ownership of traditional assets like publicly traded equity or bonds, but also traditionally illiquid assets like private placements, real estate, or fine art. 

Tokenisation in fact increases the liquidity of traditionally illiquid, non-fractionable assets like real estate; security tokens can be more easily traded than the underlying assets themselves, potentially reducing risk for investors. For investors, this means increased democratisation and the ability to diversify one’s portfolio with access to previously unavailable assets (for example tokenisation of real estate allows a single property to be owned by thousands of investors). The investment process becomes more streamlined and digital reducing costs.  

The global perspective

The global tokenisation market is growing rapidly and size is expected to reach $5.8 billion by 2026, rising at a market growth of 20.4% CAGR during the forecast period (Source here). Similarly, Alternative Investment is a market with a strong growth worldwide (ACGR forecast +9.8% at 2025) and in Italy it exceeded 45 billion Euros in 2019 (Source here). 

At global level, we are seeing the launch of various projects aimed at using DLT and security tokens, including the integration of security tokens into the security value chain, such as Polymath, Swarm and the Italian companies Blockinvest and WizKey. 

The Italian STAI project

The first type of asset class to be tested in the STAI will be Real Estate, which in Italy has reached a market cap of over 7.89 Trillion Euro (2020).

The platform will allow originators (real estate asset owners) to completely or partially divest their assets (by enabling fractional ownership) and the advisors/placers (retail and investment banks) to expand the offer  – since fractionalization dramatically reduced the investment threshold – structuring and placing security tokens with institutional and retail investors who, in turn, can diversify their portfolio by accessing a new, more transparent market.

Thanks to Blockchain/DLT technology, the solution also facilitates the onboarding phase (Know Your Customer) compliance by design, simplifying and speeding up all processes (reconciliation, compensation and transfer of security tokens between the parties) and reducing time and costs (dematerialization, shared repository, verifiable and transparent among ecosystem subjects).

What’s next?

With effect from October 2021, the STAI will be available to test issue and placement of security tokens in respect of real estate underlying assets. The platform was designed with a view to scaling up, so subsequently it will also become operational for other types of asset classes such as: credits, private equity/debt, venture capital, ESG rating, works of art and collectables.


ECB launches digital euro project


The European Central Bank has officially launched its digital euro project. But there is still a long way to go before digital euros start to appear in our digital wallets. In this post we look at the rationale, timeline and implications for the project.

What is a CBDC?

Central Bank Digital Currencies are an electronic form of central bank money, potentially accessible to all citizens and companies as an alternative to, and introduced alongside, cash.

Several countries are picking up speed on developing CBDCs, notably the US and China. But CBDCs raise fundamental questions about financial stability and monetary policy, as well as societal questions such as the ongoing role of cash and private banks.

The ECB’s digital euro project sets out its stall for how the EU will answer those questions.

Rationale for the digital euro: Potential benefits

The ECB has identified the below scenarios in which a digital euro could benefit the EU and its citizens. One of the key themes is the desire to improve the autonomy of the Eurosystem.

  1. The digitalisation and independence of the European economy could benefit from a digital form of central bank money available to citizens.
  2. It could provide a more sustainable option for central bank digital currency in the face of declining use of cash as a means of payment. An increasing dependence on private forms of money and private payment solutions could endanger the sustainability of the cash infrastructure and hamper the provision of adequate cash services.
  3. A form of money other than euro-denominated (i) central bank money, (ii) commercial bank deposits, or (iii) electronic money could become a credible alternative as a medium of exchange and, potentially, as a store of value in the euro area. Here, solutions with a global reach developed by private actors such as big technology providers, possibly outside EU supervision, could threaten European financial, economic and political sovereignty. A digital euro offering the same functionality as such a private form of money would seek to counter this threat.
  4. If the Eurosystem were to conclude in the future that the issuance of a digital euro is necessary or beneficial from a monetary policy perspective. The central bank could use a digital euro as a direct transmission channel and, for example, set the renumeration rate on the digital euro as they deem necessary for the overall economy.
  5. The need to mitigate the probability that a cyber incident, natural disaster, pandemic or other extreme events could hinder the provision of other forms of payment services. In this scenario, a digital euro, together with cash, could constitute a possible contingency mechanism to make sure that payment services are still available.
  6. The international role of the euro could become a Eurosystem objective which would be enhanced if issued as a digital euro, especially if it were designed as an interoperable way to offer cross-currency payments.
  7. If the Eurosystem decides to proactively support improvements in the overall costs and ecological footprint of the monetary and payment systems. A digital euro would not need to be physically produced, nor would the infrastructure need cash distribution centres, branches and ATMs. The power consumption of a digital euro core settlement system would be low; in its tests, only a few kilowatts were needed to run thousands of transactions per second.
What has happened so far and what happens next?

The ECB emphasises that no final decision has yet been made on whether a digital euro will actually be adopted. The issues surrounding CBDCs and the many options available in their development are complex and require careful thinking, so it is no big surprise that the EU plans to take five years to work it through.

The Digital Euro Report October 2020

The launch of the digital euro project was preceded by a report on a digital euro published in October 2020 (read our blogpost: Lofty Ways to Leave your Fiver). This examined the issuance of a digital euro from the perspective of the Eurosystem: defining scenarios and implied consequences which could induce the Eurosystem to issue a digital euro. It also identified a number of principles for such a digital euro, explored its potential effects and design possibilities, and considered technical and organisational approaches. 

Further experimental work

Following the October 2020 report, the Eurosystem’s High-Level Task Force on CBDC conducted further experimental work to address key design options left open by the report.

Digital euro project phases 

  • Investigation phase: As no major technical obstacles were identified during the preliminary experimentation phase, the Eurosystem has proceeded to launching the digital euro project with an investigation phase projected to last 24 months.
  • Experimentation phase: This investigation phase will be accompanied by an intensified experimentation phase which focuses on the technical aspects of a digital euro.
  • Determination: At the end of the digital investigation phase, the ECB will decide whether or not to start work on the actual development of a digital euro. 


Assuming a positive decision, overall, we expect the timeframe to be at least 4-5 years from now.

What will happen during the investigation phase?

The goal of the project is to develop a riskless, accessible and efficient form of digital central bank money. In the investigation phase the ECB will further develop the functional design of a digital euro based on the user’s needs which are key to this goal.

While further diving into the technical side of things, the legal framework will also be assessed to identify any changes that might be required to issue the digital euro.

Lastly, the ECB will focus on the possible impact of a digital euro on the market, privacy concerns and, maybe most difficult of all, assess the meaning for supervised intermediaries with the goal to define business models with the digital euro ecosystem.

Here, the ECB has already identified a broad array of design options and significant implications in its October 2020 report. While the ECB aims for a balanced outcome, the stakes are high. For example:

  • Role of banks: The future roles of banks could be significantly affected if the Eurosystem were to grant its end users the ability to directly access and operate accounts on its infrastructure, potentially ending the need for private banks.
  • Role of intermediaries: The Eurosystem could continue to interact directly only with supervised intermediaries which would, for example, act as settlement agents instructing transactions on behalf of their customers as of today. Alternatively, a decentralised infrastructure could allow end users to transfer holdings of bearer digital euro among them with no need third party involvement (such as the Eurosystem or supervised intermediaries).
Will a digital euro be DLT-based?

No decisions made yet on design features

Up until now, the ECB has only identified general principles and goals, shaping a general outline of key characteristics. No decisions have yet been made on final design features, such as the underlying technology.

While the ECB recognises the possibility of using DLT protocols, it also emphasises that there is no need to use DLT. In its experiments so far, ECB has focused on how to combine a centralised ledger and a decentralised ledger as well as focusing on the issue of scalability and how to determine digital identity.

TIPS system

Even though there were no major technical restrictions identified for all technologies tested to date, experiments conducted on the TARGET Instant Payment Settlement (TIPS) System showed a slightly higher scalability as compared to blockchain based models. According to some press coverage, the ECB currently seems to lean towards the use of TIPS as a potential technological basis for a digital euro.

What to look out for

While other countries’ CBDC projects pick up steam, and while the euro area becomes increasingly dependent on non-European payment networks, the pressure to enhance European based payment solutions is likely to build. As a result, there is the possibility that other initiatives with similar objectives might gather political support over the digital euro.

This is already the case for the European Payments Initiative (EPI), which aims to provide a system for real-time payments between consumers based on the SEPA instant credit transfer scheme (read our blogpost: EPI promises new cashless payment solution). Given the increasing pressure from consumers for this kind of solution, we expect growing support for this initiative.

In any case, central banks are aware of the many difficult and open questions around CBDCs, especially in connection with the significant impacts a CBDC could have on the financial system. They will tread carefully and are most likely to move forward incrementally considering carefully the design options and functionality

Note that players in the payments industry will have the chance to input their thoughts on the digital euro in market advisory group (MAG) which will be established. We will keep you updated on developments. 

Learn more about global trends in payments, including CBDCs, by catching up on the payments session in our Regulating the Digital Economy Series.


UK’s operational resilience plans and how they impact fintech


No one in fintech can ignore the risk of technology outages, or the threat of increasingly sophisticated cyber-attacks. New rules from the UK regulators will push some financial services firms to prepare for disruption to their operations in a more exacting way. Even fintech firms outside the scope of the rules can expect more interest in how operationally resilient they are.

What has happened?

The Financial Conduct Authority and Bank of England have put the finishing touches to their operational resilience regimes. The final rules are largely unchanged from an earlier draft which we covered in our 2019 blogpost: Operational resilience: a new approach to managing cyber, tech and sourcing risk.

Who’s in scope?

Some, but not all, UK fintechs will need to apply the rules. In-scope firms include challenger banks, payment institutions and electronic money institutions and certain payment system operators. Other fintechs may be impacted indirectly (see more on this below).

What applies when?

The rules will start to apply from 31 March 2022. By this date, in-scope firms will need to have:

  • identified their important business services,
  • begun mapping what is needed to deliver those services,
  • set impact tolerances for the maximum tolerable disruption to each of those services,
  • developed a plan for testing whether they can remain within those impact tolerance levels, and
  • made several documents recording compliance with the operational resilience requirements.

Our Linklaters podcast on operational resilience takes a closer look at the different aspects of the regime. For example, Episode 5 focuses on “important business services” and how to identify them.

Another requirement to remain within impact tolerances for each importance business service will only apply in full from 31 March 2025. This three-year transition period also gives in-scope firms extra time to refine their scenario testing and mapping exercises.

What are the main challenges for fintechs?

The rules which prescribe new documentation and processes are likely to be the most burdensome aspects of the operational resilience regime for fintechs. For example:

  • Audit trails: Firms will need to record how they comply with the rules and make these records available to regulators on request. In several areas this includes explaining decisions that have been made when implementing the regime. For example, the firm must keep a record of not only the firm’s testing plan but also a justification for the plan it has adopted.
  • Scenario testing: Firms are required to regularly test their ability to remain within impact tolerances in a range of “severe but plausible” scenarios. The rules require this testing to be followed by a “lessons learned exercise” to address weaknesses.
What’s happening elsewhere?

Looking ahead, another challenge could be managing different international resilience regimes. For example, the EU has drafted legislation on “digital operational resilience”, known as DORA, which is similar in some ways to the UK regime. Read our briefing on DORA for more on the EU’s plans.

Other jurisdictions are set to follow in their footsteps and build on international principles for operational resilience that have been set by the Basel Committee on Banking Supervision. Even though these emerging regimes share a common aim, the nuances between them may cause problems for fintechs that operate cross-border.

What about firms not in the scope of the UK rules?

Fintechs outside the scope of the UK rules could still be indirectly impacted. For example, many fintechs provide services to regulated firms. Mapping exercises mean firms in the scope of the operational resilience regime will scrutinise not only the vulnerabilities in their systems but also the resilience of third party providers. The fallout from the Wirecard insolvency shows how important business services can be disrupted when a third party fails.

The regulators are also paying close attention to outsourcing and third party risk management more generally. The FCA has confirmed that – notwithstanding Brexit – it will continue to apply the European Banking Authority’s guidelines on outsourcing, although with adjusted timeframes to align with the operational resilience regime. The Prudential Regulatory Authority has finalised new guidance in this area as well.

What happens next?

Beyond the rules themselves, operational resilience is now part of the regulators’ mindset. Supervisors are likely to question firms’ readiness for disruption in a variety of scenarios. For example, when unregulated fintechs seek authorisation, regulated fintechs request new permissions, or when innovative products are trialled in the regulatory sandbox.

Visit our operational resilience webpage to see a timeline of regulatory milestones and explore our operational resilience resources, including our podcast series.


Bank of England papers on new forms of digital money: our key takeaways


The Bank of England has published its latest thinking on new forms of digital money, a.k.a. Central Bank Digital Currencies and stablecoins. Notably, the BoE’s latest modelling on the potential impact on credit conditions has not deterred the Bank from continuing to support digital money innovation. In the case of systemic stablecoins, it expects such arrangements to be subject to standards “equivalent to commercial bank money” and outlines four potential models for achieving that. The paper is open for feedback until 7 September 2021.

A busy month for the BoE’s innovation department

The Bank of England has had a busy month in matters of innovation. It recently published a discussion paper on new forms of digital money and a summary of responses to its March 2020 CBDC discussion paper (along with a number of related speeches). It has also, together with the Bank for International Settlements, launched the BIS Innovation Hub London.

So, what have we learnt from its latest messaging? A few key takeaways below.

The Bank’s modelling on the potential impact on credit conditions has not deterred the Bank from continuing to support digital money innovation

The potential risks that stablecoins and, in some cases, CBDCs pose to monetary and financial stability have been widely discussed. They include, among other things, the potential impact on commercial banks and the knock-on effect on funding the real economy. Whilst heavily caveated, the digital money paper reveals some BoE modelling which suggests that the long-term impact of new forms of digital money on lending rates and credit provision may be modest (though the impact on banks themselves, particularly in the short term, may be more significant).

More broadly, the papers suggest that the Bank’s current thinking is that it should be possible to manage risks to monetary and financial stability through well-designed measures. In the case of stablecoins, this includes (i) an appropriate regulatory framework that aligns with the Bank’s expectations; (ii) the use of transitional periods to assess the impact of any launch after the event; and (iii) initiatives to encourage more institutions to access the Bank’s liquidity facilities (as discussed further below).

CBDCs – no firm decisions yet, but commitment to deeper exploration driven by five key principles

The responses to the BoE’s March 2020 CBDC discussion paper revealed a broad range of views on most substantive issues concerning CBDC, including whether or not to issue one. Many felt that the BoE needed to set out the use case more clearly, and that this would ultimately drive answers to other questions. This is something that the Bank has clearly taken on board.

The Bank now plans to “deepen its exploration” into CBDC through a number of fora, including a Joint Taskforce with the government; a CBDC Engagement Forum; a CBDC Technology Forum; and its work with the Bank for International Settlements.

In doing so, it plans to follow five principles, which it has formulated based on areas of consensus in the responses.

1. Principle 1: Financial inclusion should be a prominent consideration in the design of any CBDC. For example, it should be broadly accessible and not replace cash.

2. Principle 2: A competitive CBDC ecosystem with a diverse set of participants will support innovation and offer the best chance to deliver the benefits of CBDC. Consistent with the “platform-model” proposed in the BoE’s original discussion paper, the BoE should provide only a minimum level of infrastructure, with the private sector taking a leading role in responding to the needs of end users. Interoperability between CBDC and other forms of money will likely be a key concern.

3. Principle 3: Due recognition should be given to the value of other payments innovations and their ability to deliver the benefits the BoE seeks. Notably, the BoE has to consider whether improvements to existing architecture as well as privately issued stablecoins (which may in some cases be implemented much faster than a CBDC) could negate the need for a CBDC.

4. Principle 4: CBDC should seek to protect users’ privacy. The BoE has confirmed that, subject to meeting objectives in relation to financial crime, CBDC should ensure a strong level of privacy.

5. Principle 5: While CBDC should “do no harm” to the BoE’s ability to deliver monetary and financial stability, opportunities to better meet the Bank’s objectives should also be considered. In other words, the BoE should consider what opportunities CBDC offers to support monetary and financial stability (for example, in implementing negative interest rates or quantitative easing) as well as for payments.

Systemic stablecoin arrangements – broadly welcomed but need to meet standards equivalent to commercial bank money and traditional payment chains

Focus on systemic stablecoins

The digital money paper is primarily focused on stablecoins which are issued by private companies, denominated in sterling and have the potential to become widely used by households and non-financial businesses (i.e. gain systemic status). This is reflective of the government proposal to bring systemic stablecoins into the BoE’s regulatory remit.

The paper does acknowledge some of the potential challenges with developing different regimes for systemic and non-systemic stablecoins, including in relation to how firms might smoothly transition from one regime to the other as they grow (which is likely to be a key concern).

Stablecoins as a source of opportunity

Rather than discussing stablecoins purely in terms of risk-management, the BoE is quick to acknowledge the potential benefits that stablecoins could offer (eg in relation to efficiencies, competition, financial inclusion, data protection, resilience and enhanced functionality). Although it discusses the additional benefits that CBDCs could offer which privately-issued stablecoins could not (for example, in terms of public interest objectives), it does not seem to have reached any firm view as to whether a CBDC would necessarily be the preferable alternative.

Stablecoins as a store of wealth

The digital money paper highlights that stablecoins have the potential to offer both a new means of payment and a new way of storing wealth, and that the regulatory framework needs to support both functions. This is notable because the government’s recent consultation on stablecoins focused solely on payments. Likewise, the existing e-money regime (which the government has been considering for application to stablecoins) seeks to deter users from using e-money as a store of wealth by prohibiting interest payments.

Standards equivalent to those applied in traditional payment chains

The paper reiterates two expectations previously set out by the Bank’s Financial Policy Committee (FPC). The first expectation requires that payment chains that use stablecoins are regulated to standards equivalent to those applied to traditional payment chains and that firms in stablecoin-based systemic payment chains that are critical to their functioning are regulated accordingly.

Adding more colour to this, the BoE highlights that stablecoin arrangements can involve a fragmentation of functions (such as governance, issuance, redemption, reserve management, stabilisation, transfer of coins and interaction with users) across different entities, some of which may currently fall outside the regulatory perimeter. Given that any firm in the payment process could ultimately become a critical link in a systemically important payment chain, the Bank considers that it may be necessary to bring other entities within the scope of its regulation.

Standards equivalent to commercial bank money

The second FPC expectation requires that where stablecoins are used in systemic payment chains as money-like instruments they meet standards equivalent to those expected of commercial bank money. The BoE highlights four key features of the commercial bank regime for which equivalent protections would be needed:

1. A robust legal claim that allows for prompt redemption of the amount deposited

2. Capital requirements to lower the risk of insolvency

3. Liquidity requirements and support to ensure liquidity problems do not result in failure

4. A backstop to compensate depositors akin to the Financial Services Compensation Scheme and bank resolution arrangements

It also stresses that, unless a stablecoin is operating as a bank, the backing assets for stablecoins will need to cover the outstanding coin issuance at all times and robust reserve management will be a key requirement.

E-money not equivalent to commercial bank money

The paper echoes statements previously made by the Governor of the BoE in highlighting that the requirements applicable to e-money do not currently meet the FPC’s expectations. Whilst the use of e-money currently remains low, the BoE suggests that enhancements to the regime may be needed to address the potential for systemic risks arising in the future. Likewise, it indicates that this regime would not, as it currently stands, be suitable for regulating the types of systemic stablecoins it is concerned with.

Four potential regulatory models

The paper outlines four potential regulatory models which could be used to reflect the key features of the commercial bank regime. The differences centre around the assets that would be used to back the stablecoin issuer’s liabilities. In short, these are:

1. Bank model – i.e. the stablecoin issuer is subject to the current banking regime. Banks can choose to back their liabilities with (i) non-liquid assets like loans; (ii) liquid assets such as government bonds and certain corporate securities; and/or (iii) reserves held with a central bank.

2. HQLA model – the bank model is adapted so that the issuer is restricted to backing its liabilities with assets described in limbs (ii) and (iii) of the bank model. Capital, liquidity and backstop requirements could be calibrated to reflect the lower risks associated with these categories of backing assets.

3. Central bank liability reserve backing model – the bank model is adapted so that the issuer is restricted to backing its liabilities with assets described in limb (iii) of the bank model. This would be economically similar to a CBDC (but, importantly, not a direct central bank liability). Capital, liquidity and backstop requirements could be adjusted accordingly.

4. Deposit-backed model – liabilities are backed with deposits placed with commercial banks (acting as custodians). The custodian holds the deposits on trust for stablecoin customers in its reserve account or other highly liquid assets. The stablecoin issuer has no direct relationship with the central bank. This would share features with the current e-money regime, but with enhanced protections including a public backstop and appropriate capital and liquidity requirements.

Access to the Bank’s balance sheet

The model used would have implications for the use of the BoE’s balance sheet – for example, it may be appropriate for stablecoin issuers under the HQLA model to draw on central bank lending in order to access contingency liquidity in the event of severe market disruption, whereas this should not be necessary if the stablecoin issuer’s only assets are central bank liabilities.

Transitional periods and limits

As noted above, the BoE considers that transitional arrangements may be a useful tool in managing the potential impact of new stablecoins on monetary and financial stability risks. This includes, for example, the risk that the banking sector proves unprepared to withstand large outflows of deposits or that markets and non-banks are unable to fill any funding gaps that arise. Transitional arrangements could, for example, include limits on the use of, or access to, stablecoins during the transitional period. Such arrangements could also be maintained on a more long-term basis if necessary.

Next steps

The Bank’s discussion paper invites feedback on most of the issued raised, including the appropriate regulatory framework for stablecoins. Responses must be submitted by 7 September 2021.

As ever, please get in touch if you would like to discuss.


Global banking regulator outlines proposals for the prudential classification and treatment of cryptoassets



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Hong Kong unveils its bold Fintech 2025 Strategy


The HKMA’s Chief Executive Eddie Yue has said that banks should be going ‘all-in’ with comprehensive fintech adoption in the next 4 years.

The comments were made in a speech unveiling the HKMA’s ‘Fintech 2025’ strategy, which touched on five main areas:

  1. All banks to go fintech, but the HKMA will digitalise too 
  2. Central Bank Digital Currencies for wholesale and retail too
  3. Next-generation data infrastructure
  4. Expanding the fintech-savvy workforce
  5. Funding and policies

For more details read our Hong Kong Financial Regulation alert.


Hong Kong SAR: HKMA’s Fintech 2025 Strategy


The HKMA’s Chief Executive Eddie Yue has said that banks should be going ‘all-in’ with comprehensive fintech adoption in the next 4 years.

The comments were made in a speech unveiling the HKMA’s ‘Fintech 2025’ strategy, which touched on five main areas:

1. All banks to go fintech, but the HKMA will digitalise too

Banks are encouraged to fully digitalise their operations, from front-end to back-end for 2025. The HKMA will perform Tech Baseline Assessments to review where banks are and what their plans are. The target is for banks to submit a Three Year Plan for technology adoption in Q4 2021, which the HKMA will then assess and benchmark against overseas peers.

This will allow the HKMA to identify fintech business areas or technology types which may be underdeveloped, and would benefit from HKMA support. The HKMA continues to “walk the talk” by digitalising its supervision of banks through the use of advanced technologies.

2. Central Bank Digital Currencies for wholesale and retail too

CBDCs are an area in which the HKMA has been busy carrying out research. A new study will begin on e-HKD to understand its use cases, benefits, and related risks, and the HKMA will also continue to collaborate with the People’s Bank of China in supporting the technical testing of e-CNY in Hong Kong for cross-boundary payments for both domestic and mainland residents.

3. Next-generation data infrastructure

New data infrastructure that the HKMA will be working on includes the Commercial Data Interchange, digital corporate identity, and DLT-based credit data sharing platform.

4. Expanding the fintech-savvy workforce

The HKMA is working with the private sector and with universities to increase internship programs in fintech areas, as well as launching a new fintech module for the Enhanced Competency Framework to raise the professional competencies of existing banking practitioners.

5. Funding and policies

Recognising that encouraging banks will stimulate innovation, the HKMA will also be looking at funding and policies. For example, the HKMA is exploring the possibility of providing funding support to qualified fintech projects in the Fintech Supervisory Sandbox, as well as working with the private sector to offer further types of support.

HKMA support for banks

The HKMA is providing support to banks as part of this strategy to ensure a wide and consistent fintech implementation. This support comes in the form of initiatives that are more traditionally supervisory focused, such as future supervisory guidance to facilitate the uptake of novel technologies and the publication of a “Regtech Adoption Practice Guides” series to address how regtech solutions can be applied to cloud computing, blockchain and anti-money laundering surveillance.

However, the promise of steps such as analysing where there are lacunas in banks’ technological implementation, upskilling the workforce and working on projects with the assistance of the private sector along with additional funding, has the potential to make the changes at a deeper level which allow for more sustainable change, rather than simply placing additional requirements on banks and expecting them to catch-up.

Impact for the region

While some of the details are yet to be published, the unveiling of this strategy demonstrates that the HKMA believes in the importance of fintech as a key growth engine in the financial services in Hong Kong, and as a way to deliver fair and efficient financial services in Hong Kong. This should therefore mean that there is an increased drive to  implement fintech solutions in the banking industry in Hong Kong in the coming years.