Recent legal and regulatory developments re digital assets - Europe and Asia

In this update we round up a series of articles from our global fintech team which highlight some recent legal and regulatory developments relating to digital assets in Europe and Asia. 

01| UK opens door to some cryptoasset exchange-traded products

The Financial Conduct Authority has indicated that it would consider requests to create cryptoasset exchange-traded notes. 

The move presents an opportunity for UK professional investors to deepen their involvement in the crypto sector but the FCA’s ban on selling this kind of product to retail customers remains in place.

02| Law Commission continues to clarify English law treatment of digital assets, including as to legal status, forum and applicable law

The Law Commission of England and Wales has recently published two papers on digital assets. 

One proposes statutory drafting to clarify that something can be an object of property rights even if it does not fall within the two traditional categories of property. The proposed drafting is strikingly simple and should support further development of the common law. 

The other is a call for evidence focused on when the English courts can accept jurisdiction to hear a digital asset dispute, and which country’s laws they should apply to resolve it. This paper includes extensive analysis as to the application of existing private international law rules and invites feedback on potential areas for intervention. 

03| EU seeks to clarify boundaries of cryptoasset regulation

With just a few months before the EU’s Markets in Crypto-Assets Regulation starts to apply, firms are ramping up preparations. 

MiCA will cover a broad range of cryptoassets, including e-money tokens and asset-referenced tokens and is expected to have impact not only for EU based firms, but also crypto asset service providers based outside the EU. 

The European Securities and Markets Authority has opened two consultations on draft guidelines which shed light on key questions relating to MiCA’s scope. In the first, ESMA provides draft guidance on reverse solicitation under MiCA. In the second, ESMA suggests criteria for determining whether a cryptoasset can be classified as a financial instrument. 

ESMA’s consultations run for three months, closing on 29 April 2024. ESMA expects to finalise its guidelines in Q4 2024. 

ESMA has also started to build a bank of extra guidance on MiCA-related topics. On 2 February 2024 it released five Q&A on MiCA providing further guidance for CASPs.

04| Singapore Court rules on situs issues in cryptocurrency

In a recent case involving overseas service of court documents the Singapore High Court was asked to decide whether the claim concerning digital assets involved property situated in Singapore.

The location of assets is crucial to determining how any accompanying legal rights can be enforced, but this is a particularly challenging question for cryptoassets which are not tangible and do not have a physical location, are not represented by physical certificates, and may not have a register. 

Moving away from recent English case law that has determined the lex situs of a cryptoasset to be the place where the person or company who owns it is domiciled, the Singapore High Court ultimately concluded in favour of a residency test, premised on control – i.e. the residence of the person who controls the private keys to the cryptoasset.

This was on the basis that a cryptoasset has no physical presence and exists as a record, and thus best manifests itself through the exercise of control over it – and that control over a cryptoasset is with the person who controls the private key to the cryptoasset linked to that key.

05| HKMA on how banks should custody digital assets

HKMA Authorised Institutions have received new guidance, which they are expected to adhere to if providing custody for digital assets to their clients. 

The guidance comes amid a growth in interest in digital asset-related activities that have developed in a highly fragmented legal and regulatory landscape.

AIs are required to follow the guidance both in relation to any standalone custody services for digital assets, as well as custody carried out in connection with the provision of intermediary services for digital assets. 

It will apply only to client digital assets, and it is not applicable to custody of proprietary assets of an AI or its group companies which are not held on behalf of clients.