The European regulatory sphere is accelerating its activities to clarify its approach to DLT, blockchain and cryptocurrencies. Both, on a national and European level, there are now announcements, research and other developments, on an almost daily basis. This article aims to roughly indicate the direction in which regulation in the EU and European countries regarding blockchain technology is headed, by highlighting some of the latest significant developments.
Distributed ledger technology (DLT), often referred to as blockchain, is a decentralized database, shared by participants of a network. The participants at each node of the network can access the records shared across that network and can own an identical copy of it. It involves a unique combination of seven characteristics: decentralized data storage, immutability, cryptography, a single point of truth, programmability, transparency and identifiability or pseudonymity. The most prominent use of DLT is the cryptocurrency Bitcoin, but cryptocurrencies (a special form of token that can be utilized to initiate payments) were only the first implementation of DLT. It has the potential to increase efficiency and improve quality in several industries.
The European Parliament adopted a non-legislative resolution on DLT and blockchain that gives a promising signal for the general utilization of DLT in the EU on 3 October 2018. It suggests a regulatory approach and examines possible advantages from the application of DLT in several economic industries, including financial services. The Parliament targets innovation-friendly regulation and does not want to regulate DLT itself but rather remove existing barriers to implementing blockchain.
Another example of a united and supportive EU approach is the signing by Italy on 27 September 2018 of the declaration creating a European Blockchain Partnership. The signing countries commit to support the delivery of blockchain-based public services across the EU by helping to reduce hurdles that innovators may face in expanding the usage of digital solutions.
A report published by the Swiss Federal Council might help other European states in assessing their regulation of DLT. The report attempts to clarify the legal and regulatory approach of Switzerland with respect to DLT as well as DLT-related assets and to secure beneficial preconditions for an innovation-friendly financial market in Switzerland. Besides examining use cases in the financial space, it states that Switzerland will continue to follow a technology-neutral approach but also assesses whether it might be necessary to partially adapt the legal framework. Civil and insolvency law, financial law as well as the Money Laundering Act are investigated.
The Deutsche Bundesbank (BBk) and the Deutsche Boerse (GDB) successfully completed their blockchain-based settlement technology research (BLOCKBASTER) project, aimed at creating a conceptual prototype (not an operational system) for blockchain-based securities and cash transfer and settlement. The sandbox testing tool included performance features like the full lifecycle of a bond from issuance to settlement, redemptions as well as corporate actions. Moreover, the prototype tested cash transfers with the sourcing of digital coins and their transfer, as well as the settlement of cash payments.
One of the fields that receives much media attention is the regulation of cryptocurrencies and initial coin offerings (ICOs), in which a company or individual issues tokens based on one of the blockchain technologies and token holders receive a virtual counter-value for a payment of real value. The European Securities and Markets Authority (ESMA) and national regulators are keen to clarify the legal treatment of those instruments that are used for corporate financing and trading.
Steven Maijoor, ESMA’s chair spoke in front of the committee on economic and monetary affairs of the European Parliament (ECON) about the necessity of evaluating the steps that should be taken concerning crypto assets and ICOs: “Some of these ICOs are like a financial instrument. Once it is a financial instrument it comes under a whole regulatory framework. The subsequent question is what do we do with those ICOs that are outside the regulatory world. We will assess that as a board. We expect to report by the end of the year.” For this reason, European ICOs are going to be examined on a case-by-case basis to identify those that are covered by existing regulations.
On UK national level, the report published by the Cryptoassets Taskforce (consisting of HM Treasury, the Financial Conduct Authority (FCA) and the Bank of England) lays out an analysis of DLT and crypto assets, which evaluates the corresponding risks and benefits as well as the existing UK regulation and policy regarding financial services. The report commits the authorities to take actions that will sustain the country’s high international standing in the financial community as a safe financial center by enforcing high regulatory principles and might indicate the regulatory treatment to be adopted by other European countries as well. The government will issue a consultation in early 2019 to explore how the market can be regulated effectively.
Additionally, in Germany, there was a first verdict on the legal status of Bitcoin on 25 September 2018, in which the Berlin’s Court of Appeal determined a transgression of power by a regulatory body. The trial concerned the legal classification of Bitcoin, where Germany’s Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) was judged to have exceeded its constitutional jurisdiction. An initial local court verdict convicted the owner of an online Bitcoin-trading platform of operating in the banking business and providing financial services without the necessary licence. The regional court, with the later confirmation of the Court of Appeal, then withdrew the sentence by arguing that the German Banking Act does not apply to this case as Bitcoins are not in fact a financial instrument according to Section 1(11). The Berlin Court of Appeal did not agree with the BaFin’s argument that Bitcoins act as a complementary currency. It should be noted however that the verdict applies only for criminal law. Thus, it is not binding for the BaFin, which is subject to the administrative jurisdiction.