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Associate Paul Grant and Paralegal Ben Pharoah discuss why crypto firms are moving offshore amid increased regulatory scrutiny in the US following high-profile failings in the industry, in WealthBriefing.

Paul and Ben’s article was published in WealthBriefing on 20 June 2023, and can be found here.

The past year has served as a cautionary tale for crypto firms as to the risk associated with trading in the virtual asset markets, not least following the collapse of several major exchanges including Celsius, Voyager Digital and most recently, FTX.

Regulators in the US have responded by seeking to clampdown on cryptocurrency exchanges to avoid repeats of such incidents. The Securities and Exchange Commission (SEC) has recently taken aim at a host of companies including Kraken and Bittrex, pointing them out for regulatory scrutiny. Some of the major players have alluded to “confusing” regulations, and fears of reprisals, which they believe could push more crypto companies to leave the US in favour of pastures new.

Whilst some US firms are looking across the Atlantic to re-shop, others are looking to make their bed closer to home.

Europe

It’s no coincidence that Europe has emerged as a potential benefactor of the chaos in the US, especially after the EU passed clearer crypto rules via its Markets in Crypto Assets (MiCA) guidelines in April, setting the wheels in motion for it to enter into force in July. MiCA promises to regulate issuers of stablecoins, both asset-referenced tokens and electronic money tokens, as well as all other cryptoassets and service providers. It will also include market integrity provisions to ensure there is no market abuse and insider dealing.

France is just one jurisdiction looking to realise its potential and promote its regulatory framework to attract US companies. France currently hosts 72 registered crypto companies – a number that’s expected to rise. Circle, the firm behind the second-largest stablecoin by market capitalisation, is seeking dual registration in France to localise its flagship product, EUROC, for the European market. Other large players including eToro have also registered with the Autorite des Marches Financiers.

Crypto platforms can currently operate in France without a full license until 2026, allowing them to provide services with minimal checks. By January 2024, however, these companies will need to acquire a full license to operate, even before the EU’s regulations take effect. As part of the transitional measures implemented earlier this year in anticipation of MiCA, companies submitting applications from July 2023 onwards will be subjected to an enhanced registration process which will necessitate evidence of robust IT systems and a conflict of interest policy.

France will now hope to ride the wave of positivity following MiCA. Germany, Italy and Spain will also do likewise.

United Kingdom

The UK Government has announced its intention to make the UK a global hub for cryptoasset technology. As part of this, it said it would create “a dynamic regulatory landscape which works for everyone”. The Financial Services and Markets Bill, which would make wide-ranging changes to financial regulation, contains measures relating to cryptoassets.

In 2021 the Government ran a consultation on the UK’s regulatory approach to cryptoassets. It sought views on the UK’s regulatory framework and how to mitigate risks to consumers and stability. In the outcome document, published in April 2022, the Government said that measures in the bill would focus on stablecoins and the promotion of cryptoassets.

A further consultation paper was published in February 2023, this time on its regulatory approach to cryptoassets, to be implemented following the passage of the bill. It said cryptoassets and the activities underpinning their use “should follow the standards expected of other similar financial services activities, commensurate to the risks they pose”. These standards include prudential requirements, data reporting, consumer protection, location policy and rules on operational resilience. The Government believes that having the regulatory framework should stimulate growth and innovation in the sector by “giving responsible actors the regulatory certainty and confidence to participate in cryptoasset markets, and investors the confidence to invest in the UK for the long-term”.

Companies wanting to provide cryptoasset services falling within the scope of anti-money laundering and counter-terrorist financing must also register with the Financial Conduct Authority.

Bermuda

Coinbase is just one of numerous companies already looking to capitalise upon the opportunities available offshore. The San Francisco-based company has recently secured a license in Bermuda to launch its derivatives exchange.

Bermuda boasts its own regulatory regime and has adopted a business-friendly approach to the oversight of cryptocurrencies and related businesses. DLT providers are regulated under the Digital Asset Business Act 2018 which provides for a tiered licensing system allowing for start-ups to benefit from a supervised and regulated market. It also allows those companies to build up a track record in the market before obtaining a full licence. DABA also integrates the carrying-on of digital assets business into the provisions of the Bermuda’s anti-money laundering and terrorist financing regulations which is supported by its Sector-Specific Guidance Notes. Initiatives like these, together with Bermuda’s taxation benefits make it an attractive jurisdiction for service providers to set up shop.

Gibraltar

Gibraltar has long committed itself to effectively regulating cryptocurrency. The Rock has in recent years overhauled its policies on tax and information sharing (not least through the signing of numerous Tax Information Exchange Agreements) in a concerted attempt to snuff out corrupt players.

Gibraltar’s regulations on DLT are relatively historic – at least in crypto terms – having come into effect in 2018. Gibraltar has done its due diligence in this respect, and its focus is on facilitating fewer, well-regulated firms. The regime in Gibraltar establishes ten core principles which the Gibraltar Financial Services Commission has responsibility to ensure compliance with the emphasis being on a ‘right tough, not light touch’ approach.

Hong Kong

Hong Kong too has recently begun extending a warm welcome to firms looking to step away from tightening crypto regulations in the US. In February, it proposed a set of welcoming rules to regulate crypto-related activities. Under the new legal regime, retail investors are allowed to trade certain digital assets on licensed exchanges, replacing a 2018 framework that restricted trading to only accredited investors. The city is also paving the way to legalise stablecoins and is looking to facilitate communication between banks and crypto start-ups; in sharp contrast with Beijing’s heavy-handed crackdown on the crypto industry. The move shines a light on the degree to which Hong Kong enjoys policy exceptions in certain areas, such as finance.

Singapore

Singapore could also prove an attractive home for US firms. A recent YouGov study revealed 25% of Singaporeans consider crypto as the future of finance whilst 32% of Singaporeans surveyed either own, or used to own, crypto.

Whilst the Monetary Authority of Singapore, Singapore’s central bank and financial regulatory authority, has regulated virtual currency intermediaries specifically to address potential money laundering and terrorist financing risks, it stated in 2017 that it would not otherwise be regulating virtual currencies per se.

In November 2021, the MAS extolled Singapore’s ambitions to become a hub for sound and well-regulated digital assets. Efforts have since been made to achieve a delicate balance between encouraging blockchain innovation and protecting investors from the risks of participating in a promising but nascent market. Two consultation papers published in October 2022 went on to consolidate Singapore’s objective of being a buoyant but prudent crypto jurisdiction by setting out proposed measures to reduce the risk of consumer harm in cryptocurrency trading and to support the development of stablecoins in Singapore’s digital asset ecosystem.

Conclusion

Given recent developments in the US, alternative jurisdictions have certainly caught the eye of US crypto companies. Ultimately, however, the question of whether these tailored regimes are robust enough to adapt to changes in the crypto market remain largely untested. Given the global offering of crypto platform providers, market reactions to events like the FTX scandal are likely to determine the position of these jurisdictions insofar as their ability to continue to maintain an attractive regulatory framework for those operating within the crypto space.