Regulatory Landscape: Key Developments Shaping the Crypto Industry in 2024

Transcript

at least glad to see all of you here this morning my name is Ian Simpson from rle match it's my pleasure to welcome you to the first day of the crypto Valley Conference here in the lovely city of Rod croz at haalu at this lovely location for those of you who don't know this is the sixth year of the Krypto Valley Conference quite a record uh when it comes to longevity and sustainability perhaps of a different sort um I also have had the pleasure of being involved in the crypto and blockchain scene in Switzerland over that time much has changed actually since 2017 as maybe some of you know but one thing that has not changed is that

legal and regulation is still very important and as we like to say at rule match playing by the rules still pays off very much that of course is going to be the topic of some of the first sessions today here in this room the first panel I have to warn you is very in-depth very involved um very detailed and there are quite a few people who will bring in their knowledge on the subject today you see their their names here but fortunately to guide everybody through the topic we have an expert moderator so I'd like to welcome Katrina lassot heler from lexence and her guest for the first panel

[Applause] so good morning everybody we have a proper order so if you forget um the names of my guests you can always have a look up um it's early I get it uh but for more than 6 years already Regulatory and legal specialist reg regulatory issues are more than important for the crypto industry some like to say that it's one of

the let's say almost deal breakers in some of the of the business models Let's uh don't be so pessimistic and let's um to have some holistic approach to this so my name is Kina lassota I'm lawyer I'm attorney at law with lexon Lo PUK but most importantly I'm co-chairing I'm Co of the regul regulatory working group with crypto valy Association together with RTO luer who cannot unfortunately cannot be with us today but um this is what what we do I don't have to tell you much about Crypt valy Association itself I guess because we have so many guests

here and I know um as the day will um uh will develop there will be more people but I want to tell you a few words about Dr regulatory working group what we doing we a group of um quiet skills experts um um really doing it pro bono we meet every month and discuss issues related to regulatory development um there is another group dealing with AML but we somehow working together anyway and um uh we share knowledge we invite very interesting people but most importantly we provide feedback to Regulators our two last initiatives was

paper on staking where we somehow um explained to finma that not every kind of staking needs a banking license it it was quite success finma understood so we good and the last one we um issue a statement uh to European Commission on reverse solicitation issues under Mika we will have a lot of discussions today um many discussions concerning mik um on this panel and on three sub subsequent panel if I panels if I so in the agenda correctly so stay with us important issues and this what we're sharing today it's Unique opportunity for you because I as I like to say is usually um quite expensive so you can

have the the the Insight today just um to when we here um on at the conference so with me on is Dominic Dimitrus Joshua and Crystal how it will look they will have one minute to introduce themselves then we will go into two rounds of questions and at the end we will have some key takeaways so Dominique perfect thank you very much Karina I'm Dominic I'm also a lawyer I'm working at supp P at mme and I'm in the crypto space since 2016 and the question that I'm currently most focusing on is the connection between Financial Market regulation and Technologies because most of the projects I'm dealing with they need

these both aspects to be understood in detail from both directions so on the one side regulated businesses like Bank Integrations Asset Management um exchanges stable coin issuances which all depend on understanding the technology properly to explain to the regulator how the existing regulation can be applied with using this technology and on the other side a lot of Dow defi projects which similar considerations are relevant but from the other side around so to actually explain why this is due to this centralization a totally different setup different risks different understanding which allow also a different regulatory

approach thank you very much you are in time the thank you very much for having me uh Karina here very happy to be here with you my name is Dimitri sarakis I'm Financial Economist by training and I was for seven years economic and monetary policy specialist at the European Parliament drafting the blockchain resolution of the parliament that created the framework that now gives heex and pains to Karina and the other fellow lawyers here uh crafts person of the title two and title three of ma and the DT pilot resim was my last regulation before leaving the parliament I'm board member of gbbc and uh co-founder of valuers a company specializing on building economic Financial economic business cases on

tokenized assets and my main pain point at this stage is to explain to the European commission why we need a deep economic understanding of why to tokenize financial instruments and real world assets and what kind further regulatory initiatives we need to do in Brussels in order to facilitate this Innovation thank you very much Joshua thank you welcome also from my side I'm Joshua toer uh legal coun at Signum bank and working in such a role I think we always see these topics of regulation but also of Technology development of both these topics and and working in a way that that you can always um ensure compliance but also be Innovative on on

not just on the technological side but also on the on the legal and Regulatory side so topics like staking and and also mikar I think are um topics that keep us busy but that are also really interesting as a lawyer to to get to know and and find solutions that work for us thank you hello hello so my name is Chrystal thank you for the intro Karina so I'm a Attorney at Law at Bonar laon international law firm uh we are a law firm based in v in the v state in Switzerland but we have offices as well in uh in Dubai Paris and in Hong Kong and Shanghai so I work in the technology and fit Tech Team and uh in this team we

we work with many different kinds of crypto projects we help them from the beginning of the project to set up the legal framework and then we we continue working with them uh when they they reach a certain uh stage so it's as my colleague mentioned it's all the legal issues linked with techn technology and regul Regulatory Financial uh uh regulations thank you so today we will be talking about not only regulatory not only IML we will be talking about current issues which affect crypto industry including Ai and cyber security so that's the new topics which we which we

also will be um uh touching on today important thing if I didn't mention this we all with exception of Dimitrus which we hope he will we all members of the regulatory working group so we all actually actively work on those issues every four weeks so um we happy to to be here and now let's start um as you know crypto industry is one of the most global ones and if there is a country like Switzerland when we started 2016 the whole Odyssey through through crypto um W everybody was coming here saying oh icoo Switzerland and so for on it's possible yes it is possible but what is even more important is is not the country where you issuing but where you

offering that's really what you have to keep in mind and having this in mind I want to come to Dominic and ask you to provide us little bit feedback and to explain to people what are the last two sack decisions on ATF spot trading that they will understand what is this about basically so thank you so the um sec's decision on allowing BTC ETFs and also principally allowing e ETFs were quite regulatory Milestones I guess most of you perhaps have read is in the newspapers so was widely covered um it was a particularly Milestone because the SEC is is known as a very crypto averse and critical um regulator and it has

been pushed by judicial decisions in the US political motions to actually I wouldn't say Embrace but accept um that there are these financial instruments that can be listed sold and traded in the US like BTC ETFs and now in the future also ETF on ethereum however the letter ones have not yet been like approved as an individual instrument but as a basic principle allowance that this should be possible however it needs also to be kept in mind that these are indirect exposures for um for the investors so you don't own Bitcoin or EA if you purchase these instruments you have an exposure indirectly and that means you

don't can canot like directly interact with this financial Innovations of of defi or other web 3 applications in Switzerland the approach is a bit different it is generally more crypto-friendly and it allows you to hold more directly your crypto also which regulated providers like Banks we Al Signum here today and others um to have a direct exposure to um crypto and also and perhaps also therefore the ETF road is not so much followed in Switzerland they're also different apart from that crypto is the underlying regulatory reasons why there are no such ETFs but there are etps which are um there since many years listed on the Swiss stock exchange and give you quite

a similar exposure here in Switzerland than an ETF main difference they are not bankruptcy remote but there is a lot of cleal requirements specifically designed to mitigate these risks and give you very similar um similar um economic structure the ETFs well have you ever thought about it where there is such business model like basically the fund is directly trading with ethers and and Bitcoins like in those SE decisions will this required a license in Switzerland or so yes of course the if you do like a fund structure which is a collective investment scheme you pull money to um to actually invest into something and it also can be Bitcoin or

VISA um you need to have those respective licenses however always it needs to be looked at is it an foreign structure that is sold into Switzerland is it Swiss structure that is only offered to Swiss market as you said the crossboard issues are important and also this us ETFs it's also the question how and to which extent you can purchase them in Switzerland however currently I think with the etps on the stock exchange we have quite a good uh Market already there yes so it's getting better I specifically asked a question because many people are coming and asking hey do I need a license for this or other business model so I think it's quite clear yes you need always as usual the issue is in details but

generally yes so Josh let's stay a little bit in Switzerland and the staking issue which we had here and they're still having so you are in legal counceling in a bank imagine six years ago we would have had not have he anybody from a bank so you see the development actually so how you deal with the staking activities what is your take on this what's what's the approach um in Switzerland and give us some some uh feedback yeah I think uh the staking discussions got quite hot last summer when we received first indications from

finma that they want to that they want to require um entities offering staking services to have a banking license um why was that because the LT act introduced two new Provisions um stating that or to ensure that crypto isit held with a custodian can be segregated in the case of bankruptcy and one of the requirements to ensure that was that the assets held at the custodian are held available for the client at all times and so last summer we received kind of the indication from finma that this is not the case with staked assets because there's the risk of slashing but there's also the unstaking period and this then started quite a discussion in the

industry I think it was a good example to also see that there the industry needs to come together and and also educate each other but also start conversations with The Regulators um this then led to uh finma publishing the staking guidelines in December last year and that I think was a big part a big step towards more clarity on that topic so we received uh guidelines on how can you do it and we also received the clarity that you do not require a banking license to stake and if you have a banking license you do not need to take Stak assets um on your balance sheet so I think that was a a big step on on giving us Clarity in the market of course there's still open questions on

how you do it and how to implement it um taxwise also but there's still couple of open questions also on the private law side but uh I think we we can be quite happy with finma's um circular at the end yes um you may wonder some of you why somebody from a bank was actually not very satisfied with the state statement of finma that a banking license is needed because a bank has a banking license so if you just could give a short feedback on how much um assets you would have to have if it was running if it was run U was run under banking um uh activity yeah I think um maybe first taking a step back

I think it's also with this industry you shouldn't see yourself as just we as a bank and it might be an advantage for us if only Bank can provide this service because I think we're we're in this together and we benefit from each other if if we can establish an environment for the whole industry um and coming back to that question so if a bank if only banks could do staking but under the first indications of finma a bank would have to take Stak assets on the balance sheet and this would then require Capital requirements uh which were quite harsh so staking business would even as a bank not be really interesting um to perform anymore okay so if you want to see our

statements and the the statements on finma the one on finma is on the homepage of finma our as crypto valy Association is um on the um uh website of crypto valy Association read it it will be good guidelines for you how to structure the business perhaps your business will not require the B banking license now I will come now to dimitrios because we stay in the sphere of crypto assets dimitrios we have maika in Europe in European Union marketing crypto asset regulation and it was supposed to be all clear and fantastic and easy and uh I guess this is still not the case would you give us some feedback

what are the still open questions under maika not only from us for the third countries in relation to reverse solicitation but also in Europe esma had some consultation running so anything still open mhm two minutes two minutes wonderful okay uh first of all we are very happy having mik because m is a an excellent regulation to put legal certainty regulatory Clarity in a very difficult and uh very fastly evolving space obviously we have not all the answers in MAA MAA was uh a regulation for Central cized entities and uh much of what had

to be there is not there uh for example staking is uh a crypto asset service that is not included and if we had the opportunity to open the file again and add something over there staking would be in there is a high probability staking would be in a meik 2 possibly in the first quarter of 202 six this is going to have another dimension also about what we're doing with nfts that uh uh mainly because of me it was excluded uh it seems that uh it had to be in for uh reasons related to

single Market instead of being prey to 27 different uh consumer protection regulations it's better to have them in one place and uh the obvious challenge in MA because we don't practically have MAA yet implemented 30th of December on the 30th of December we have the stable coins part and we are going to have from what I'm hearing only one major stable coin authorized Circle uh other than that no stable coins whatsoever will be in MA on the 30th of uh June but we don't care because we don't have C asps to the list them before the December

30th so this is something we need to take into consideration the obvious question is how this MAA world will actually be implemented in practice and people's focus on MAA it's not MAA if you are a crypto asset service provider you have to abide depending on what kind of services you offer with 24 regulations if you are an e-money token issuer you need to abide with 11 regulations so the constellation of regulations working together is a big big question mark because it generates systemic effects and questions yes I still need to ask you one question and I

keep asking this every time and I hope I will get an answer why on Earth you change the definition of asset reference token between the wording 2020 and the 2023 what what you mean you mean the recital of the European yeah what's the asset reference to was supposed to be in token which is referenc to another crypto asset or Fiat money and now what we have is crypto asset Fiat money or another right and this is where we starting having problems especially in relation to reverse solicitation is it Financial instrument or not is it covered by Ma or under methid and if this is Mika the reverse solicitation issue is much more stricter okay so why you

change the why was the change of the of the of the your question is not about the definition of asset reference tokens but about reverse solicitation no but first one is about the definition of the of the art uh I suspect that I like the new definition of the asset reference tokens simply because it gives more room to have a basket of whatever asset you want to have and tokenize whatever you like as long as you have an asset ref a make a license to do so who is entitled to go to the National competent authority of the member State and issue an asset reference token somebody who wants to issue a token of the space where to issue and this is the reverse

solicitation question obviously reverse solicitation is a major problem that we had in Europe in the last 65 years it's not new and we don't have a threshold clear as in the United States that says you cannot offer the service to an American citizen clear full stop we don't have a threshold though we cannot say more than 25 people than 25,000 people you cannot do that so what is the message of the regulator if your main uh group of clients resides in Germany then you have to incorporate your entity in Germany end of story that's that's clear um and we know it's much more stricter my question rever solicitation cannot be

a business model for a company that's clear I know now my question was because due to the change of the definition we started having problems through in defining what is financial instrument under miit and what is fin what is not Financial instrument and under maika you have the problem in title too because if you are another token and your token is qualified as Security in Slovenia but not in Poland and you have the passport from Slovenia then you have the problem of explanation what the hell a security is so it's not asset reference token it's everything the question is about a miit 3 with a definition of what is a security or

not yeah but anyway it's still we see there is still a lot of work to to be done and now because we started talking about assets so um and somebody needs to hold the assets and not every of us is it Engineers cannot mind their assets so we need to have somebody who is storing them securely so now I will go to to Crystal and uh we know all Dora is coming in European Union if you don't know digital operational res resilience act something that is really directing Financial intermediaries we have ai act coming up defining that financial services are highrisk um activities so what is the take of Switzerland

comparing to European Union so we can say that Switzerland has been less prolific in terms of regulations than uh the EU uh if we just come back to the uh AA act so it can apply to uh to to Swiss developers and deployers of AI systems and generative general purpose AI models so Swiss based entities individuals and bodies that could also apply to uh decentralized uh technology protocols for instance it's not it's not clear but it we will see how it is implemented but this is something to to think about we'll have

to apply uh will be in the scope of the uh uh EU AA act the eua ACT broadly in in one minute so it classifies AI systems into different risks level and depending on the risk level the the developers or deployers have a different set of uh oblig ations there is the unacceptable risk that is prohibited the highrisk AI systems that need to fulfill a list of uh obligations so I will not go into um details today because the list is long and there is also the limited uh AI uh risk uh AI systems uh

risks and uh these are just subject to uh transparency uh obligation so this is for instance uh chat but and uh deep uh fake uh systems so uh the final text has been not yet published but it will be published in the upcoming days so uh then once it's uh published the application the regulation will be applicable six 6 months from now and until 36 months so it's a very uh it's a very hot topic I would say and we will see how it applies to um to decentralized technology

protocols in terms of Dora now so Dora is a is a cyber security uh act it it is aimed at financial institutions and it is aimed to uh regulate the cyber security and ICT systems within financial institutions so it's more like a compliance act where ICT systems needs to fulfill a certain list of criteria there needs to be risk assessments put in place uh the the third party ICT providers need to fulfill also some obligations and this could be applicable in Switzerland for ICT providers and ICT providers also entail blockchain

technology providers so that's why it's uh it's applicable uh in Switzerland too so thank you why we talking about this because and I know Demitrius will have a word with later it's just what you see what is happening in European union now they saying you know the guys whatever if you're offering crypto assets if you're offering Financial Services if you're offering ICT Services doing for like providing services for Financial in intermediaries or service providers you have to have representation in European Union full stop at European Union just decided they don't care we have how many millions of citizens it's you always your great story 450 comparatively Rich if you want to come there if you want to

offer you need to adhere to the to the to the principles this is why we discussing them today because it will be important not only for Swiss companies but from any other Third Country company let's say Singapore Hong Kong I know there's delegation from Hong Kong today it's all will be important for those companies as well if they want to enter European market so now they're going to a second round quickly and we start with Dominique Defi and D what to expect I just see the time so I keep I think we have another six minutes because it started later yeah um briefly there are a lot of interesting projects on our table and a lot of is going on so there's Innovation there is development

in the defi Dow space and I want to briefly focus on let's say the underly principle of something being defi or da it's the D it's the decentralization and we see currently globally uh more tightening regulatory initiative to really Define this and to question whether most of the projects they actually are sufficiently decentralized to be outside of financial Market regulations and the good thing here in Switzerland is fin as a regulator clearly accepts that there is full decentralization that exists and it also has set u some indicators which they have publicly referenced to what

they would see as an indication for not being fully decentralized so control over smart contracts clear indirect control via Dow governance um dependency on exclusivity of access Etc so there are a lot of things which finally boil down to trust into single operator so if there is a project which has a project team that needs to run things into which the community needs to trust to actually use the application then it is likely not seen as fully decentralized whereas decentralization from a regulatory perspective goes hand inand with the philosophical um concept of trustless in web 3 and blockchain so if there is

really no one you need to trust it's independent from everyone it's pre-programmed it's autonomous then it also does not fall under Swiss Financial Market regulations now this principle of course is sometimes in the day-to-day work difficult to uphold clearly and therefore the question always is for a project do they on the long run intend to really build something that should be Community run or do they actually want to do something that's more centralized but uh they just want to use it defi as a as a mental and it's clearly recommendable to use your energy your efforts to Innovation to build this decentralized aspect and to live up to the promise of of DT and blockchain and

on the same time also then build something new that is a totally different risk structure and allows a regulator also to exempt it from regulation not by just being decentralized by name but being from a conceptional perspective something different and something new and there a lot of use cases that can be seen there in the future it can also give more security to Banks limit Credit Crush risks Etc so there's a lot um of chances and opportunities there if this principle is fully followed let's see um I cannot say who but it's very famous scholar um I said in conference two years ago at the conference was under shatam rule saying I cannot say who but

I can say what was said he said the only real defi was Unis swap version one Whatever After came it's probably not really defi but we can discuss and I know there will be discussions but I just want to you know so Joshua how should Swiss and maybe Third Country um casps and the crypto asset service providers also like a bank applied the reverse solicitation rule under Mika I think we we probably heard the answer before there uh it was clear I solve the problem just disc right it's uh you shouldn't put the business on

pure reverse solicitation and try just to do that I think that that will not work we saw esma publishing gu draft guidelines on reverse solicitation under mikar in the beginning of the year and I think they were quite clear what the intention is so the intention is to be um even I think you can say even more restrictive than under Mii 2 and so going forward they even recommend the local competent authorities to to do active searches on social media to to check whether the websites of a of an entity kind of implies a presence in in a European country and also to to implement monitoring tools for social media so I think we can see where it

goes so I think the the recommendation would be be really careful on on what you do and and don't try to to use reverse solicitation as a business model yeah will this be a problem for the bank you will be rather um approaching the European market or rather will stay away and be very very passive that people will come over to you I I think you can see it both ways that it I mean there's some restrictions but there's also some solutions to it and to find ways um compliant ways to to address European markets to to establish maybe a presence in the European Union or EWR so I think there's there's way to to deal with it um yeah I think it it goes both ways

let's see I think the no final word was said because SMI is still working on the consultations so let's see what will be the interpretation at the end what really reverse solicitation is so now um dimitros um yeah we have less and less time but any plans to digitalize Assets in European Union there is something coming up to my know well first we have the TT pilot regime my favorite regulation uh it didn't go very well because exactly the Amendments I filed were not carried through however this is the real elephant in the room because uh all these crypto assets you see under MAA are just dwarfed in front of the

tokenized assets you can have in the real world in the financial sector uh I believe that the next round uh coming after the European elections is going to address the fundamental issue of how the existing regulatory framework can apply to a massive tokenized financial instruments in DT based Financial infrastructures from placement all the way to trading clearing and settlement and this also has the final leg of the funds we don't need cbdcs to settle a transaction in a fund because EMTs are funds per payment service directive two and also amends the money

directive uh in Ma so you don't need cbdcs in the European Union to perform this action online now is the regulator framework appropriate I think no we need to change the market abuse directive the listing directive miit 3 itself uh and uh fundamentally to understand what is the economic problem we solve because in the end of the day it's not the regulation the problem it's why the hell we want to tokenize an asset what kind of problem we solve and what is the expectation and as we are moving from proof of concept to proof of value this is a fundamental issue to answer so

there is still something coming a lot of coming up and new election let's see what will be the MS they will know about it but um Crystal now coming to you so we're talking about those um crypto asset service providers and and people who may mine and like but we still have also trustees services in blockchain so anything about this here so yes so when we think about a blockchain project generally so they could be dios but Doos are also so have often an association that is associated with the D Dows to represent the Dow in in in the traditional Market there also you also have foundations that are uh overseeing

the protocol project sometimes another way is to think of trust Vehicles so this is something we have been doing for the last few months on a few specific projects and I want just to highlight the benefits and maybe the challenges with trust uh structures as a future uh development so the benefit of a trust vehicle is that it ensures security and prosperity of the assets that are put in trust so in terms of a of a protocol for instance the assets that could be put put in trust could be the pro proprietary intellectual property if it's not fully open source it could be uh private keys to a specific smart

contract or to a wallet and then why it ensures Prosperity is because the trustee is um is is has strict rules to follow based on the on the on the wishes of of the settler and so you you ensure that your project follows a certain guidelines on the long term based on the assets that you put in trust the truste is also a regulated entity so sometimes it can bring more um liability to a project it can bring more expertise or more trust into a project as well and finally it can represent the trust and act as a as an intermediary in the traditional Market the challenges

are that trusties are not all well versed in digital assets so it's sometimes difficult to find a trustee that has the infra infrastructure in place to uh be responsible for the responsibilities that he has so this is the first challenge the Second Challenge is that a trust is not a structure that could be used for fundraising for instance so it has a limited scope of um of of activities I would say so it should be used in a framework where it really is to safeguard and to ensure the prosperity of of a project and the third challenge is also the the the timing of when you should think about setting up a

trust usually it's at the initial uh stages of a project because uh then after the truste is subject to specific regulation AML regulation it becomes complicated once the project is isab established to set up a trust on the on the long run but we see developments and I think that trustees are also working on integrating uh digital Assets in their business lines so um I think it could be an interesting uh legal entity to to think about in a framework interesting now we have really really one or two minutes left it's just um another topic which I would like to really touch is the cbdcs right so you

know Switzerland decided to introduce cbdc like helveta Tre project just for wholesale trading so not for consumers not for retail and now guys to you just a question because European Union is going to issue digital Euro up to 3,000 euro per person basically and to you now we know uh Dimitri you totally against it it just doesn't make sense to have a cbdc what you just said uh we don't actually need a cbdc okay you don't need we don't need cbdc now from you yes or not and then we will finish here and if you guys want to know why yes or not talk to us in the Break um we we will be there to answer your questions Crystal

yes but with the right uh technology in place like yeah privacy I guess Joshua from a bankk perspective if it's a yes or no I would go with probably a it's either yes but or a no um also but so I think it's a depends on how we structure it okay same here if it's like cash it's that's the same rules it's not traceable as a privacy enhancement Etc then yes otherwise it's not a benefit okay thank you very much um if you have questions we probably don't have time for questions not really unfortunately um we here um we have three fantastic

panels now to come but later you can basically ask whatever you need thank you very much yeah