The new Blockchain 2021 guide features 18 jurisdictions. The guide provides the latest legal information on decentralised finance (DeFi); updates to tax systems to consider blockchain and cryptocurrencies; non-fungible tokens (NFTs); initial coin offerings (ICOs); smart contracts; data privacy and protection; and mining and staking.
Last Updated: June 17, 2021
Blockchain 2021 – An Overview
DLx Law is again pleased to introduce the Chambers guide to blockchain and cryptocurrency law and regulation. Last year’s initial guide was a milestone in the maturation of this nascent area of the law, highlighting the work of numerous jurisdictions in creating a “blockchain-friendly” regulatory environment. Developments in France, Japan, Malaysia, Portugal and the United Kingdom were all carefully considered, along with the increasingly settled environment in jurisdictions like Gibraltar, Mexico, Singapore and Switzerland.
This year’s guide is an important step forward. The year 2020 wound up defying all expectations – both positive and negative. The year will forever be recalled for the global COVID-19 outbreak and its ensuing human tragedy, but the full impact of the pandemic could not have been anticipated as last year’s guide was being prepared. Despite the initial adverse reaction of nearly all markets to news of the rapid spread of COVID-19, the prices of bitcoin and many other digital assets rebounded in remarkable form and the latter half of the year was characterised by one of the greatest bull runs the sector has ever seen, with both retail and institutional interest in the digital asset sector blossoming beyond nearly all expectations.
Moreover, after being stress-tested in perhaps the most dramatic way possible on so-called Black Thursday (12 March 2020) when the price of ether (the native digital currency of the Ethereum blockchain network) dropped by more than 30% in less than 24 hours, the newly emerging area of “decentralised finance” – almost an afterthought in last year’s guide – rose to prominence, with the warm-weather months in the northern hemisphere becoming known as “DeFi Summer”. Commentators from around the globe consider the development of DeFi in their jurisdictions in this year’s guide. It is still too early to assess the extent to which blockchain protocol-based DeFi platforms will supplement or even supplant traditional providers of financial services, but it is unquestionable that wilful ignorance of the subject is simply no longer acceptable for mainstream finance lawyers.
As 2020 rolled into the new year, another key trend in the blockchain space emerged, seemingly almost out of nowhere. Non-fungible tokens, or NFTs, which combine provable digital scarcity with art, music, collectibles and nearly everything else under the sun, captured the public’s imagination in a way nothing other than bitcoin had previously. Dismissed by some as a gimmick, NFTs have shown real staying power, with businesses around the globe finding creative ways to integrate these digital assets into their more traditional product offerings. From the lawyer’s perspective, this also created a burgeoning practice area, requiring skills in the areas of intellectual property, media and communications and, of course, blockchain and digital assets. The guide reliably surveys the landscape, and this subsector could provide an ideal on-ramp to deeper engagement for practitioners reluctant to make the jump into digital assets.
Finally, with the rapid expansion in digital assets came the inevitable regulatory push-back, perhaps most clearly seen by the publication in March 2021 of draft Guidelines by the Financial Action Task Force (FATF). Concerned primarily with co-ordinating the global response to money laundering, financial crime and weapons proliferation, FATF’s draft Guidelines were a stark reminder to practitioners that the area of blockchain is not a practice area for legal “tourists”. Real liability can arise for market participants who are not au fait with all the latest regulatory developments in the space. Once again, this year’s guide makes an ideal starting point for all those seeking to become experts in the field, able to steer clients around the Scylla and Charybdis of rapidly mutating technological developments that impact all commercial activity in blockchain and the many regulatory roadblocks arising to slow the rate of change and allow policymakers and legacy market participants to keep pace.
Perhaps few developments better illustrate this combined approach of technology development and regulatory response than the publication by Commissioner Hester Peirce of the US Securities and Exchange Commission of a proposal to provide a “safe harbour” for issuers of new digital assets using Github, a platform better associated with the development of open-source software code. Using this year’s guide, experienced practitioners will undoubtedly gain valuable and actionable insights, while those new to the sector will benefit from the broad lateral survey provided as they begin their journey into this dynamic and evolving practice area. Below we look briefly at some of the representative developments you will find inside.
A review of the 2021 Chambers guide reminds us of the continuing diversity of business models in the blockchain space. In Switzerland, activity in the capital markets area has been especially pronounced, with SIX Digital Exchange (SDX) creating a fully integrated issuance, trading, settlement and custody infrastructure for digital assets. SDX will focus on a business-to-business model and will operate as regulated financial market infrastructure (including functioning as an exchange and a centralised securities depository).
Australia has seen blockchain become a driving force of innovation in a number of industries, with use cases in areas such as supply chain, healthcare, government, insurance, banking and finance and real estate.
In the UK, in addition to the trading and management of digital assets, other sectors have found ways to deploy blockchain technology as well, including:
We now see a vibrant market in Mexico, which had been slow to engage in the early stages of the growth of blockchain, with use cases spanning digital diplomas and certificates; decentralised application (dApp) development; self-sovereign identity solutions; the automation of onboarding processes, both on-chain and off-chain; supplier procurement platforms; the development of digital asset wallets; asset tokenisation; crowdfunding; DeFi; NFTs; remittances utilising stablecoins; supply chain automation; energy distribution; and security token offerings.
In 2020, France built upon 2019’s Action Plan for the Growth and Transformation of Companies (PACTE Act), which was the first comprehensive regulatory framework for initial coin offerings (ICOs) and intermediaries dealing with cryptocurrencies (digital assets service providers – DASPs). Among other things, order 2020-1544 of 9 December 2020 extended the scope of services on crypto-assets requiring registration with the Autorité des marchés financiers (the AMF). As a result, four services now require registration to the extent that they are supplied in France:
The AMF also approved the registration of 14 digital asset service providers, including COINHOUSE, BITPANDA and LGO, and three ICOs.
In October 2020, the Cayman Islands implemented the Virtual Asset (Service Providers) Act (VASP Act), which provides a flexible foundation to promote the use of new technology and innovative enterprise in the Cayman Islands while complying with FATF guidelines. The new legislation provides for the supervision of persons and entities facilitating virtual asset activities as a business. Under the VASP Act, a “virtual asset” is defined as a digital representation of value that can be digitally traded or transferred and used for payment or investment purposes, but does not include digital representations of fiat currencies.
After various tentative steps, a new law known as “the law on digital financial assets” came into effect in January 2021 in Russia. Although this law did not immediately result in a dramatic change in the level of adoption of blockchain technology in Russia, it was still viewed as an important step forward. The muted response to this legislative initiative may have been due to the fact that the law allows the tokenisation of financial rights only and is silent about the tokenisation of rights to other assets (eg, rights to real estate, rights to art objects, etc). Perhaps most importantly, developments in Russian law in 2020 have taken steps toward providing definitions of different types of digital assets. There are now two categories of digital rights and cryptocurrencies formally defined and recognised as a separate type of property: utility digital rights and digital financial assets.
In Mexico, rather than adopting completely new legislation, market participants rely on the so-called Fintech Law (Law to Regulate Financial Technology Institutions), which was adopted in 2018. In addition to regulating the fintech sector, this law also includes a number of other legal provisions that effectively govern different actors in the blockchain ecosystem.
Taking a different tack, Australia has “retrofitted" existing regulatory regimes to apply to participants using blockchain technology and cryptocurrencies. The starting point for businesses is to determine whether a crypto-asset is a financial product under the Corporations Act 2001 (Cth) and whether issuing crypto-assets will require the business to hold a financial services licence (AFSL). "Financial products" are defined under the Corporations Act and form the basis of evaluating which regulations apply to various aspects of digital asset-based businesses.
DeFi and Other Developments
The DeFi market presents a conundrum for practitioners. On the one hand, DeFi is inherently a financial product and, as such, a highly regulated activity. At the same time, the “decentralised” nature of the space means that there is an inevitable resistance to any sort of regulatory constraint. DeFi also embraces anonymous projects, posing further challenges for regulators. Nevertheless, we continue to see growth in the area. After peaking at over USD80 billion in mid-May 2021, the “total value locked” (the market value of digital assets committed to DeFi protocols) fell back in line with overall declines in the digital asset sector but remains robust at around USD60 billion in mid-June at the time of writing. Only a year prior, this amount stood at barely USD1 billion.
In Singapore, DeFi continues to exhibit an upward trend. DeFi projects are growing, motivated by funding flowing into numerous start-ups and businesses. Such tools as automated market making pools, decentralised synthetic investment platforms, diversified lending services and lending-based derivatives and decentralised prediction markets characterise the space, as do new digital assets created by asset trading and other DeFi platforms. Investments in these projects continue to grow, as global businesses explore using Singapore as a potential base of operations in the region.
This has not been without challenge. The Monetary Authority of Singapore (MAS) has observed that decentralised exchanges present higher risks of money laundering as they are often unregulated (due to the lack of a central administrator) and may not apply adequate measures for anti-money laundering and counter-financing of terrorism (AML/CFT). However, Singapore has not yet taken any specific regulatory positions regarding DeFi.
In Mexico, alternatively, the adoption of DeFi platforms has been slow and there is little understanding of DeFi among the general public or regulators. There are no specific regulatory positions in Mexico on DeFi. However, the majority of DeFi activity in Mexico is lending, which is not an activity reserved for financial institutions, although transparency and AML/CFT regulations may apply. There are also no specific rules or models for decentralised prediction markets or decentralised stablecoins.
In the UK, there is no overarching regulatory framework that applies to DeFi. Instead, persons involved will be subject to authorisation requirements and regulatory supervision if their particular DeFi application fits within the existing regulatory definitions. In practice, the nature of DeFi has meant that some of its use cases are beyond the scope of the existing UK perimeter.
In January 2021, Her Majesty’s Treasury (HMT) launched a consultation and call for evidence on the UK regulatory approach to crypto-assets and stablecoins. Stablecoins refer to tokens that stabilise their value by referencing one or more backing assets, such as a fiat currency or a commodity, and could for that reason more reliably be used as a means of exchange or store of value. For these tokens, the consultation proposed that those involved in issuing stablecoins and providing services in relation to them should be subject to a regulatory regime. The UK’s Financial Conduct Authority would authorise and supervise relevant entities.
Mindful of the broader application of DeFi beyond stablecoins, HMT in that same consultation asked respondents what risks and opportunities they see in relation to DeFi generally and whether there is any evidence of risks to consumers that would be of interest to the government and UK authorities. The outcome of this consultation and how the regulatory framework will be applied as a result remain to be seen.
On the other hand, we see from the guide that NFTs remain a very new area and, generally speaking, outside of any regulatory taxonomies. NFTs demonstrate the evolving and multidisciplinary nature of the blockchain space and the need for well-informed lawyers who can help clients develop compliant responses in this fast-moving sector.
In conclusion, 2021 has been a signal year in blockchain – the year it will be recognised that blockchain and digital asset technology went “mainstream”. As the guide ably demonstrates, for practitioners in almost every practice area, blockchain is no longer a technology that can be ignored or left for others to understand. As we see more high-quality and well-trained lawyers come into this space, it cannot be doubted that the whole of the blockchain and digital asset sector will continue to mature and develop. Now let’s see what the coming year has in store!