Global menu

Our global pages


Public Comment on Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms

  • United Kingdom
  • Crypto assets
  • Financial services and markets regulation
  • Financial services and markets regulation - Hedge funds
  • Financial services



The Eversheds Sutherland Cryptoassets team regularly contributes to consultations launched by governments and regulatory bodies, and has assisted regulators and blockchain companies understand the implications of their businesses.

In May 2019 the International Organization Of Securities Commissions (“IOSCO”), published a consultation paper to identify issues, risks and regulatory considerations relating to crypto-asset trading platforms. The consultation sought input from stakeholders on the perceived issues relating to crypto-asset trading platforms.

The consultation closed on 29 July 2019 and is available here. Below is our submission.

Our submission

1. Access to Crypto-Asset Trading Platforms

“A key consideration for regulatory authorities is how access is provided to CTPs. If CTPs provide non-intermediated access to investors, another key consideration is who is responsible for the on-boarding process and how it is being performed.”

The CTP on-boarding process performs a gatekeeping function, and it is through this process that mitigations can be put in place to help prevent criminal activity from taking place on a platform.

We agree with the Report in saying that there has been a prevalence of non-intermediated access to CTPs: there has been an increase in institutions and retail investors accessing CTPs directly instead of operating through regulated intermediaries. This approach has allowed smaller parties to participate in the crypto-asset market directly, facilitating small-scale investment.

We note that one of the toolkit approaches put forth in the Report is the suggestion that regulators consider only allowing intermediated access to CTPs. However, in our view, the key issue here is not whether an intermediary is used, but rather ensuring that the on-boarding process is clear, fair, ensures compliance with regulatory requirements, such as AML, and supports orderly markets. Use of an intermediary is not inherently required to achieve these outcomes, but rather the more important requirement is to ensure that CTPs have sensible on-boarding practices, acknowledging the nature of their clients as retail. Whilst, therefore, a CTP may use an intermediary to achieve these outcomes, to require an intermediary imposes a cost, which may not be justified.

In terms of the on-boarding process itself, a point to consider is the extent to which regulators can set out a clear and transparent framework regarding the outcomes these are expected to achieve. In particular, the Fifth Money Laundering Directive is to be welcomed as a step forwards in clarifying the standards expected. In terms of how the standards should be set, on the basis that the risk in relation to CTPs is generally analogous to forex, in our view, both should be subject to equivalent treatment. We would therefore use as a starting point the requirements applicable to the forex when determining which requirements should apply to CTPs.

Lastly, we would support explicit recognition that, where once client has passed the on-boarding, AML and KYC requirements for CTP, other market participants should be able to rely on this for the purposes of their own on-boarding, to the extent that they do not have notice of a potential defect in the process.

2. Safeguarding participant assets

“Where a CTP holds participant assets, a key consideration for regulatory authorities is how such assets are held and safeguarded. This includes consideration of what arrangements are in place in the event of a loss, including a loss due to theft from, or the bankruptcy of, the CTP. Where a CTP holds participant assets, a key consideration for regulatory authorities is whether prudential mechanisms are in place to support the operations of the CTP.”

We note that it is common for CTPs to offer both exchange and custody services for participant assets, given that they naturally interlink. In holding assets on behalf of investors, CTPs are acting as their agent, and consequently are subject to fiduciary duties and obligations to their clients. This is shown, for example, in the case B2C2 Ltd v Quoine Pte Ltd [2019] SGHC (I) 03, in which the Singapore International Commercial Court clarified that holding exchange tokens in a wallet creates a trust relationship in respect of the individuals for whom the wallets are held. This means that CTPs holding client assets are subject to obligations to ensure the safe storage of the relevant assets, and in this respect there is a role for a framework outlining the exact nature of these.

In terms of delineating this framework, given the divergence internationally of the treatment of tokens, it is useful to consider as a starting point a system of classification which differentiates between the functional roles that crypto-assets can play, rather than one tied to a particular legal framework. In particular, we suggest that crypto-assets can be split into three core functions1:

1. Crypto-assets which operate as vouchers: these are tokens which refer to something outside the network (so-called “off-chain” assets), which may be a reference to a security (security tokens), service or goods (utility tokens) or fiat money (e-money) (“crypto-voucher tokens”). These tokens act simply as a registration mechanism for the reference asset, and as such it makes sense to focus on the safeguarding of the underlying asset.

2. Crypto-assets which act as a means of investment / exchange: these are different to crypto-vouchers, in that they do not act as a reference to an external asset or service, but rather it is the existence of the token in itself which is valued, and include, for example, bitcoin (“crypto-exchange tokens”). Here, value is derived from the token itself, and as such it makes more sense to see the safekeeping role as being in relation to the token: in this respect, it is worth noting that B2C2 Ltd v Quoine Pte Ltd involved crypto-exchange tokens.

3. Crypto-assets which are the coding base for tokens: these effectively constitute coding platforms, on which the other token types can be built, and include, for example ERC-20 (“crypto-fuels”). As such, there is no inherent value in holding particular tokens, as they would not be traded on a CTP.

“Where a CTP holds participant assets, a key consideration for regulatory authorities is whether prudential mechanisms are in place to support the operations of the CTP.”

We understand the need to ensure that CTPs have sufficient capital to give comfort that they have sufficient operational resources. However, given the wide range of different CTPs, any capital requirements should have gradations to take account of the CTP’s size and customer base, in order to avoid imposing unreasonably high barriers to market entry for smaller CTPs.

3. Description of CTP Operations

“Due to the prevalence of non-intermediated access to CTPs, a key consideration for regulatory authorities is the extent to which information about how CTPs operate is available to their participants.”

We agree that where investors directly access a CTP and there is insufficient information available about the CTP’s operations, this can cause issues of market integrity and fairness and so negatively impact consumer confidence. To ensure, therefore, that CTPs publish details of their operations in a way which is accessible it is worth considering whether a framework can be established, setting out the exact disclosures which need to be made.

4. Market integrity

“A key consideration for regulatory authorities is the applicability of existing rules relating to market abuse and the capacity of CTPs to prevent and/or detect market abuse.”

Given the ability for trading of crypto-assets to be manipulated, market abuse and insider trading frameworks should be applied to them, to help protect consumers and ensure market integrity.

5. Price discovery

“A key consideration for regulatory authorities is how efficient price discovery is supported on CTPs.”

Price discovery is important for crypto-assets, and currently different CTPs can quote different prices for the same tokens, which can obfuscate true value. If there were a database of CTPs trading crypto-assets, this would facilitate arbitration trading between different CTPs, which in turn would narrow these differentials to a more accurate valuation of the relevant token.

6. Technology

“A key consideration for regulatory authorities is the mechanisms used by CTPs to facilitate resiliency, integrity and reliability of critical systems. A second key consideration for regulatory authorities is how a CTP addresses cyber security and resilience.”

Whilst we recognise the need to ensure proper business continuity planning and cyber resilience processes that are in place, given the evolving and nascent nature of the technologies and industry, we would suggest that any action by regulators in this regard should involve promoting the correct culture towards dealing with such risks, rather than setting out prescriptive requirements, which may become outdated.

How Eversheds Sutherland can help

We have an award winning crypto assets practice, with our work being “Highly Commended” at the Financial Times Innovative Lawyers Europe awards 2018, and were runners up for the Banking and finance Team of the Year with the British Legal Awards (Legal Week) 2018. We have also been shortlisted for the Financial Times Innovative Lawyers Europe awards 2019.

We are advising participants across blockchain ecosystems, and our clients include token developers, blockchain platforms, crypto-exchanges, exchanges run using distributed leger technology, crypto-custodians, firms in the FCA sandbox, crypto-brokers and crypto-funds. We take a flexible approach to providing advice, taking a cross-sectoral and practical approach tailored to the diverse needs of our clients. For further information, please do contact us.

1. See Andrew Burnie, James Burnie, Andrew Henderson ‘Developing a Cryptocurrency Assessment Framework’ 10.5915/LEDGER.2018.121.