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Five Points to Consider Regarding the Regulation of Cryptocurrency

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Five Points to Consider Regarding the Regulation of Cryptocurrency

By Elliott Phillips, Partner, Signature Litigation and Steven De Lara, Senior Associate, Signature Litigation

Despite the rapid ascent of the world’s leading cryptocurrency—such that $4,000 will buy 1 Bitcoin, and there are $66 billion worth of Bitcoins in circulation—there remains no regulatory legislation in place in Britain. Herein, we investigate the complexities of constructing an adequate regulatory framework for cryptocurrency, in five stages. 

One: The UK’s Lack of Cryptocurrency Regulation

Elliott Phillips

Elliott Phillips

The first, is simply to acknowledge the increasing void left by the UK’s lack of cryptocurrency regulation.

Last year, HMRC issued guidance in the form of a letter concerning VAT, stating that Bitcoin—the revolutionary cryptocurrency set to re-sculpt the global financial landscape—was to be treated as a single-purpose face-value voucher. This meant that anyone selling Bitcoin, or operating an exchange, would have to charge VAT on the value of the Bitcoin being sold.

HMRC quickly and quietly withdrew this guidance, and is currently re-examining how and when VAT should be applied.

Further, the Financial Conduct Authority (FCA) has confirmed not only that it does not regulate digital currencies, but that it has no intention of doing so in the future. This means that Bitcoin businesses do not have to register with or be authorised by the FCA. When it comes to Anti-Money Laundering (AML) legislation, there is currently no formal obligation to prevent money laundering through Bitcoin dealings despite the imminent EU legislation.

Two: The Nature of Bitcoin

The second point, regards the strange and speculative nature of crypotocurrency, present from its founding, which makes regulation so problematic. Bitcoin’s emergence, involves an anonymous inventor, calling themselves Satoshi Nakamoto, complex mathematics, and billions of pounds of ‘electric cash’ circulating in a subterranean international financial system.

Nakamoto summarised the original vision for cryptocurrency in a 2009 abstract “Bitcoin: A Peer-to-Peer Electronic Cash System”, which states ‘a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.’

Inherently removed from the regulatory jurisdiction of financial institutions, cryptocurrency is distributed via blockchains, which use distributed ledger technology (DLT) to scatter information across multiple participants that is unamendable without universal consent. The method requires sophisticated technology and engineers a potentially transparent and virtually unhackable environment.

Three: The Problem of Compliance

Steven De Lara

Steven De Lara

The third point, issuing from the concept of ‘electric cash’ and DLT underlying cryptocurrency, regards the problem of enforcing compliance.

The immense digital security of cryptocurrency—provided through hashes: an algorithm-created sequence of letters and numbers, which are stored along with the block and date-stamped at the end of the blockchain—is counteracted from a regulators perspective by the immensely problematic cloak of anonymity.

Although all Bitcoin transactions are recorded on a universally-visible shared ledger, they are difficult to track because of when Bitcoins are placed in customers’ digital wallets. With no way of identifying an individual Bitcoin unit (or sub unit), trailing bitcoins and successfully pursuing the owner of a particular wallet can be near impossible.

Consequently, cryptocurrency is the money of choice for international crime rings; ranging from money laundering and drug trafficking, to tax evasion and terrorism. Most recently, the Russian national Alexander Vinnik, 38, was arrested in Greece and charged (27 July 2017) by a US grand jury over the alleged money laundering of $4billion over several years.

Such high-profile criminal activity has in turn spurred several countries to declare Bitcoin exchanges to be subject to AML laws.

Four: International Regulatory Responses

The fourth point regards the necessity for regulatory frameworks to include Bitcoin and other cryptocurrencies becoming increasingly apparent in foreign countries.  For example, China and Japan have announced their intention to regulate local bitcoin exchanges, followed more recently by Australia.

In the US, various government agencies have been tasked to ensure that Bitcoin transactions are undertaken within the law. However, last year, a Florida court ruled that Bitcoin should not be classified as money.

Similarly, the EU has promised to tighten digital currency law, including Bitcoin, by the end of this year, but specifics are yet to emerge. Meanwhile,Gibraltar is quickly establishing itself as one of the first jurisdictions to propose the introduction of a regulatory framework (currently expected in January 2018) that would encompass firms operating with distributed ledger technology (DLT). Its main aims are to:

  • Provide regulatory confidence for DLT firms based in Gibraltar;
  • Provide sufficient flexibility to enable the effective regulation of novel business activities, products, processes, and business models;
  • Enhance consumer confidence in dealing with properly regulated firms using novel technology; and
  • Encourage DLT firms to be established in Gibraltar because there is an appropriate regime for regulating their activities

As a jurisdiction open to new technology, but with a solid reputation as a progressive and safe financial center, Gibraltar is uniquely placed to secure the benefits of DLT firms operating Bitcoin and other cryptocurrencies while providing essential protections to those seeking to invest in this fast-developing sector of financial technology.

 Five: A Call for New Legislation 

Following this international response,the UK’s distinct absence of regulation or judgments defining the status of DLT is brought into sharper focus. As cryptocurrencies like Bitcoin continue to increase in value and legitimacy, Britain’s head-in-the-sand approach surely cannot be maintained. Perhaps it will take a string of high-profile litigation cases, like that following the $450m collapse of Mt.Gox in 2014, a leading bitcoin exchange. It is, however, unwise to wait for catastrophe.

Preparations should be being made, regardless of the still rapidly changing face of cryptocurrency.

Finance

Global dividend payouts forecast to revive in 2021

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Global dividend payouts forecast to revive in 2021 1

By Joice Alves

LONDON (Reuters) – Global dividend payments could rebound by as much as 5% this year, a new report estimated on Monday, after the coronavirus caused the biggest slump in payouts since the financial crisis more than a decade ago.

Companies’ payouts to shareholders plunged more than 10% on an underlying basis in 2020 as one in five cut their dividends and one in eight cancelled them altogether.

A total of $220 billion worth of cuts were made between April and December, based on investment manager Janus Henderson’s Global Dividend Index. But there are signs companies are beginning to reinstate at least some of them.

Janus Henderson’s report warned that dividends could still fall 2% this year, in a worst-case scenario. But its best-case scenario sees 2021 dividends up 5% on a headline basis.

“It is quite likely we will see companies pay special dividends in 2021, utilising strong cash positions to make up some of the decline in distributions in 2020”.

Banking dividends will be likely to drive the rebound in payouts in 2021, the report said, after the European Central Bank and Bank of England eased blanket bans for lenders on dividends and buybacks. These were imposed during the first wave of the crisis to prepare for a potential increase in bad loans.

UK lenders Barclays and NatWest resumed payouts this month.

Last year, dividend bans meant banks cut or cancelled $70 billion of payments globally, according to the report.

But the overall global dividend cuts proved less dramatic than expected. In August, Janus Henderson had expected the virus to drive corporates to cut $400 billion worth of dividends, nearly double the eventual outcome.

A resilient fourth quarter of 2020 helped, said Janus Henderson. The likes of German car maker Volkswagen and Russia’s largest lender Sberbank restored payments.

Mining and oil companies cut dividends after a slump in commodity prices, while consumer discretionary companies also took a hit following lockdowns.

European dividends, not including Britain, fell by 28.4% on an underlying basis in 2020 to $171.6 billion. “This was the lowest total from Europe since at least 2009,” Janus Henderson said.

(GRAPHIC: Dividend cuts by region –

Global dividend payouts forecast to revive in 2021 2

In contrast, North American payouts rose 2.6% for the full year, setting a new record of $549 billion, the report said. Canada had the fewest dividend cuts anywhere in the world, the index showed.

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Former Bank of England Governor Carney joins board of digital payments company Stripe

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Former Bank of England Governor Carney joins board of digital payments company Stripe 3

By Kanishka Singh

(Reuters) – Mark Carney, former head of the UK and Canadian central banks, has joined the board of U.S. digital payments company Stripe Inc, days after the company was reported to be planning a primary funding round valuing it at over $100 billion.

“Regulated in multiple jurisdictions and partnering with several dozen financial institutions around the world, Stripe will benefit from Mark Carney’s extensive experience of global financial systems and governance”, the company said on Sunday, confirming a report by the Sunday Times newspaper.

Forbes magazine had reported on Wednesday that investors were valuing Stripe at a $115 billion valuation in secondary-market transactions.

A senior Stripe executive told Reuters in December that the company plans to expand across Asia, including in Southeast Asia, Japan, China and India.

The company offers products that allow merchants to accept digital payments from customers and a range of business banking services.

Stripe raised $600 million in April in an extension of a Series G round and was valued back then at $36 billion.

Consumer-facing fintechs have seen a boost to their businesses during the COVID-19 pandemic, as people have been staying at home to avoid catching the virus and have increasingly been managing their finances online.

Carney, who headed the Bank of England and the Bank of Canada, had a 13-year career at Wall Street bank Goldman Sachs Group Inc in its London, Tokyo, New York and Toronto offices.

He is the United Nations special envoy on climate action and finance.

(Reporting by Kanishka Singh in Bengaluru; Editing by William Mallard)

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The potential of Open Finance and the digitisation of tax records

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The potential of Open Finance and the digitisation of tax records 4

By Sudesh Sud, Founder of APARI 

The world is undergoing huge changes at the moment. Between coronavirus pushing the economy to the limit and a group of Redditors challenging the financial market hegemony, people are questioning the role of established institutions. If finance doesn’t work to enable the economy, businesses or individuals, then who is it for?

Before the digital revolution, financial experts were seen as a necessity. They knew how things worked, what everything meant, could provide good advice and were employed to sit at the heart of the action. Now, trading can be done by anyone online through established platforms, with a wealth of information available to hand.

Yet, as the 2008 financial crisis proved, established financial institutions have made themselves too big to fail. Simply tearing down the existing financial system would leave many ordinary people, along with businesses and government treasuries, in ruin.

However, as legendary futurologist, Buckminster Fuller, once said: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

Traditional banking models are already being upended by technology. Through Open Banking, challenger banks are able to connect services digitally, cutting inefficiencies and costs while speeding up transactions. Now, Open Finance is seeking to build on this model to connect financial services via technology, potentially making the existing financial model obsolete.

Just as Open Banking led to greater democratisation of money, Open Finance has the potential to transfer power back to individuals. Not only would this benefit society as a whole, but it would help minimise the boom-bust cycles that cripple entire economies. No individual would be too big to fail, and bailing people out would cost far less, having minimal impact on the economy overall.

With more information available to them, Open Finance businesses will be able to use technology to make better decisions instantly. Many people struggle to get onto the housing ladder due to a poor credit score, for example, yet they have been paying rent every month of their adult lives. Why, then, can they not access mortgages? A company called Credit Ladder is addressing this through Open Banking, reporting rent payments via challenger banks like Starling to credit agencies, helping good renters to access mortgages.

While it is still very early days for Open Finance, there seems to be an endless raft of possibilities to benefit individuals, businesses and national economies. Faster, more secure, and less risky access to credit can help grow the economy, transforming finance from something that benefits a few wealthy capitalists to something that enables growth in the real economy.

So how else could Open Finance benefit society?

Using Tax Information

Every working adult pays income tax. Some of us via self-assessment while others are enrolled in PAYE. Regardless, we all have tax records with a wealth of financial information that has been verified, at least in part, by HMRC.

This centralised repository of financial information could be put to better use, such as allowing credit reference agencies to better understand an individual’s risk profile or helping to prove income as part of a mortgage application. Unfortunately, HMRC is a black hole of information ‒ its sheer size and power sucks information in, but nothing comes back out again.

However, by Making Tax Digital (MTD), HMRC are effectively allowing individuals to keep validated tax records on the software of their choice. Software providers may then be able to use this information to enable certain aspects of Open Finance. The information doesn’t need to be protected by HMRC, it is the individual’s choice and responsibility over how to use their own information.

As MTD software develops, we will see it connected to Open Banking, allowing self-assessed taxpayers to connect their business account directly to the software, effectively getting their tax return completed for them by an AI program. They would simply check the details, add any adjustments, and click submit. HMRC would then validate the records, providing assurance for any financial institutions using that financial information.

More Growth, Lower Risk

With access to complete and validated financial information, lenders would be able to more quickly and accurately assess individual risk when considering a loan or mortgage application. This would greatly speed up the process of applying for a loan, whether for a business venture or property purchase, for example.

Take residential landlords, for example. They may own a few properties already, with equity coming out of their ears. If that landlord wants to obtain another property, they would need to get their accountant to assemble their financial information, complete a SA302, and send everything off to their mortgage advisors who would then validate the information before submitting the mortgage application.

The application can then take months to approve, slowing down the process and potentially leading to missed opportunities. Since property sales usually occur in a chain (the owner of the property you are purchasing is usually purchasing another property, and so on), these inefficiencies slow the process down for everyone and can have major impacts.

If, however, mortgage applicants could simply share validated financial/tax records, mortgage providers could use that information to make quick decisions with reduced risk. What’s more, applicants could share only relevant, high-level information, rather than expose their entire financial history.

Individual Risk Management

Currently, individuals can manage their credit score/risk profile via third party providers like Experian, Equifax and TransUnion. These credit reporting agencies use limited information, such as credit cards, store cards and loans to assess risk. Individuals need to understand what factors each agency uses in order to ‘game’ the system.

For example, someone who has always been careful with their money, kept to a strict budget and never taken out a loan or credit card will have a far worse credit rating than someone who regularly uses debt to finance their lifestyle. So, even though they may have amassed a good deal of savings, they cannot get a good deal on a loan or mortgage.

With Open Finance, these individuals would be able to quickly prove their earnings, spending, and savings, decreasing their risk profile in line with reality. Rather than crude measures of creditworthiness, financial institutions would be able to use accurate and validated information to make quick decisions based on realistic risk. This both transfers more power to individuals and contributes to faster growth while reducing overall risk.

As a centralised repository for validated financial information, MTD providers will be in a unique position to develop a two-sided marketplace for finance, allowing credit providers to match products to individuals’ risk profiles. When a customer needs a loan, credit card or mortgage, they can simply browse products for which they have already been approved, applying and receiving finance instantly.

Empowering PAYE Taxpayers

Currently, PAYE taxpayers have little, if any, visibility or control over their tax contributions. They will see the amount paid in tax and national insurance, but to claim any allowances requires them to submit a self-assessment tax return. For most PAYE taxpayers, this simply doesn’t seem worthwhile.

Yet, self-employed taxpayers can claim for things like travel to their place of work, a proportion of living expenses when working from home, even their lunch. These things are necessary for productive work yet, for PAYE taxpayers, come out of their already taxed income. Meanwhile, businesses tend to make use of every tax allowance available to them.

This imbalance could be rectified with Open Finance connected to tax software. As MTD becomes a validated system for self-assessed taxpayers, a new version could be developed for PAYE taxpayers, putting them in control of their tax and finances. Not only would they be able to benefit from Open Finance in the same way as self-assessed taxpayers, but they will also be able to claim for reasonable allowances. What’s more, HMRC/the Treasury/the government would be able to hold employers accountable for pay disparities and unreasonable tax avoidance.

Open Finance, then, has the power to speed up and reduce the cost of obtaining and providing finance. It would make the finance system fairer and most transparent while distributing financial power, and help to avoid the creation of too big to fail financial institutions and the boom-bust cycle that has become unfortunate features of modern capitalism.

Ultimately, Open Finance has the potential to help the UK and other nations recover from the seemingly unending series of crises that have plagued the early 21st century by allowing people to access finance quicker in order to grow their business and personal finances while reducing risk, inefficiencies, and costs.

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