Abstract
This article displays that the regulation of the specific type of electronic property – be it (defined as) crypto/ digital/ virtual assets, cryptocurrency, etc. (or e.g. electronic money – which is out of the scope of this article) is subject to different regulatory patterns and dispersed across many sources of law in Germany, Russia, and the UAE.
Prima facie, the reason for this is the misconceived perception of history of regulation of securities and the lack of systematics in regulation. For example, it is tempting to say that it would help to first clarify whether a particular item of electronic property may or may not be handled as a bearer, order, or non-negotiable security, be defined as a thing, or as a security in general (or any other term or comparable typology existing in a national legal system).
However, after some deliberation, this theoretical difference between bearer securities and registered securities will appear idle or useless for a lawmaker because, in any event, the owner of an electronic property item will be using electronic medium (e-wallet, website, etc.) to make a transaction and prove their title. Much more efficient would be a wise regulation of dispute resolution clause in any contract governing a digital transaction and a higher level of layman/ consumer protection.
Thus, the resolution of the regulatory challenges starts with understanding the electronic property–specific features and assessing the current economic environment in a state, rather than applying usual regulatory approaches. Practice shows that a de-centralized (not to say chaotic) regulation with sufficient powers granted to local authorities may in some societies be more fruitful than prohibitions.
Overview of Regulatory Challenges
Crypto-News
The major topics in the crypto field are that cryptocurrencies can be stolen, fraud is perpetrated on a custodian of digital assets, nature of the client – custodian relation (fiduciary, services, agency, etc.) is not transparent, and there are many insolvencies of all types of parties involved in the digital assets market (ThoughtLeaders4. Crypto Exchanges and Custodial Services: Contract, Trust, Fraud and Insolvency; URL: https://youtu.be/x8OrXqtfF4E?si=W92WoZGvM8HNYrab ). One of the remarkable tendencies in Russia is that a hostile takeover of a data center is a real risk that should be taken into consideration when drafting a colocation services agreement.
Theoretical Achievements
The digital assets were analyzed by many practitioners and academics, including S Abdulkasimov, J Brockhurst, MA Gitlitz, M Gutbrod, F Müller, D Kozlov, S Richter, A Schmidt, E Sukhanov.
In a plethora of his articles and books devoted to digitalization Dr Gutbrod (among many other works, M. Gutbrod. Autonomy of Will in Times of Artificial Intelligence, Blockchain and ICO's; URL: https://www.academia.edu/38149653/Autonomy_of_Will_in_Times_of_Artificial_Intelligence_Blockchain_and_ICOs_German ), points out that one needs to very clearly identify the subject matter and, in essence, break down vague concepts like "crypoassets" or "tokenization" into practically useful and comprehensible topics (for example, would a payment in crypto be tax deductible, what are the rules applicable to flexible/ automatic determination of price by a smart contract, what are the depositary's rights and obligations, the rules to discern different ways to attract third party funds or exchange fiat/ cryptocurrency, duty of disclosure and due diligence depending on the status of the counterparty, tort liability in case of computer emergency). So, according to a recent discussion with Dr Gutbrod, sensible regulation of digital assets would (a) examine the source, flow, and use of funds provided, (b) check compliance of the actual rules on adherence to a digital assets project with what has been declared to the outside world (digital assets prospectus or resolution, etc.), (c) check the "smart contracts" to see whether the persons who concluded them could have expected them to work as they did in the specific case, (d) define precisely the completely abstract possibilities for action which necessarily underlie every declaration of intent.
With this approach in mind, and as it will be shown in the below discussion of German, Russian, and UAE regulations, the approach best workable to decrease the regulatory challenges can be called "functional".
On the contrary, the classic method of analogy of law (in our case, of securities law) or systematic method are not the best methods to primarily regulate the digital assets, because digital assets and cryptocurrencies are new era creatures and thus have totally new features — such as smart-contracts, forks, or mining — not known to the "old" law.
German approach
Definition of digital assets
From 1 January 2020, digital assets (Kryptowerte) have been regulated as a new category of "financial instruments" under the German Banking Act (Kreditwesengesetzes; URL: https://www.gesetze-im-internet.de/kredwg/ ).
Digital assets are defined by Art. 1(11)(10) of the German Banking Act as "digital representations of a value that has not been issued or guaranteed by a central bank or public body and does not have the legal status of a currency or money, but is accepted by natural or legal persons as a means of exchange or payment or serves investment purposes based on an agreement or actual practice and that can be transferred, stored and traded electronically".
According to the German regulator, BaFin, there are two main questions to be resolved as to the issuance and trading of any digital asset: (a) does it require a prospectus, and (b) does it require a regulatory permit. These questions are answered by analyzing which rights a specific token provides — a final regulatory assessment is generally only possible if BaFin is aware of the contractual agreements that are to form the basis of the respective transactions
( URL: https://www.bafin.de/DE/Aufsicht/FinTech/Geschaeftsmodelle/DLT_Blockchain_Krypto/DLT_Blockchain_Krypto_node.html; also see BaFin Guidance Notice Crypto Tokens; URL: https://www.bafin.de/SharedDocs/Downloads/DE/Merkblatt/WA/dl_wa_merkblatt_ICOs.pdf?__blob=publicationFile&v=3 ).
A further step in regulation is the German Law On Digital Securities effective as of 10 June 2021 (Gesetz über elektronische Wertpapiere; https://www.gesetze-im-internet.de/ewpg/ ), the essence of which may be the definition of issuance of bearer bonds and some funds units (no shares can be issued in Germany on the basis of this law) through the inclusion of certain information in the licensed digital securities register (see Art. 13 and 17 of the German Law On Digital Securities).
The effectiveness of regulation might be assessed on the example of the development of German regulation of bearer (Inhaberschuldverschreibung) versus registered (Namenschuldverschreibung) digital bonds. Under the German Law On Digital Securities, it became possible to issue bearer bonds in a digital asset form. BaFin mentions that "registered and non-negotiable securities (that is, requiring a specific assignment, not only agreement and transfer, to be transferred) as well as order bonds, are not covered by the eWpG"
(URL: https://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2021/fa_bj_2107_eWpG.html). As of 26 April 2023, nearly 2 years after the German Law On Digital Securities had been passed, colleagues from White & Case Germany witnessed 25 issuances of bearer bonds under this German Law On Digital Securities. Before 10 June 2021, as said, it was not possible to issue bearer bonds in a digital form. At the same time, issuances of registered bonds in digital assets form remained more popular due to legal uncertainty of the new law and the absence of a requirement to employ a licensed digital securities registrar for registered bonds' issuance (Frankfurt School Blockchain Center. Industry Insights (CAC23A) – The Legal Frameworks of Tokenized Debt in Europe; URL: https://youtu.be/3l0ZemDI1qs?si=UeX6sWGmD-gIRC5u).
Among many law firm alerts reviewed, colleagues from Dentons Germany prepared the most practical comparison of German Law On Digital Securities' features as compared to the earlier existing regulatory landscape (URL: https://www.dentons.com/de/insights/alerts/2021/may/10/bundestag-clears-the-way-for-electronic-securities). One of their conclusions is generally aligning with that of White & Case lawyers: "Not every token that has the characteristics of a bond (interest, repayment, etc.) is a digital bond within the meaning of the eWpG".
So, the question remains open if the increased popularity of registered digital bonds – with registered securities by definition being designed to be more restricted in circulation than the bearer ones ( URL: https://de.wikipedia.org/wiki/Namenspapier ) – over bearer digital bonds, and the resulting excuse of a lower protection standard was intended (or is just an occasional effect of an a very labor-intensive and systematic approach to regulation).
According to M Gutbrod, BaFin is slow in publishing the implementing regulations, and, more importantly, German regulators seem to be making it clear, in tried-and-true German fashion, that license applications should not be filed. Generally, it is disappointing to many lawyers that such in-depth work is no longer sufficient to create a roadmap to issue a liveable modern finance instrument.
Definition and practical use of cryptocurrency
The German Banking Act regulates digital assets (that embrace cryptocurrency), but there is no specific statutory definition of cryptocurrency in Germany. There are rather theoretic discussions regarding the nature of the cryptocurrency under German law: it is less likely to be a "res corporales" and more likely to be a security (URL: https://www.fachanwalt-gesellschaftsrecht-hamburg.de/aktuelles-im-bankrecht-versicherungsrecht-und-anlegerschutzrecht/bitcoin-und-kryptow%C3%A4hrungen/;URL:https://opendata.uni-halle.de/bitstream/1981185920/80367/1/BeitraegeTWR_162.pdf ).
Generally, it seems that German courts (showing a quite relaxed approach) and BaFin (concentrating on warnings, URL: https://www.bafin.de/DE/Verbraucher/GeldanlageWertpapiere/verbraucher_kryptowerte.html ) take different approaches to cryptocurrencies, allowing for a dialogue and development of regulations (and, importantly, the existence of the alternative crypto-payment system in the absence of a strict ban).
For instance, in the decision of Berlin Court of Appeal (Kammergericht) dated 25 September 2018 ( URL: https://gesetze.berlin.de/bsbe/document/KORE223872018 ) it was stated that (a) "Bitcoins are an encrypted electronic payment system generated by a computer (see Beck NJW 2015, 580, 581; Richter/Augel FR 2017, 937, 938 f.), which is managed and stored in a network accessible to everyone and which can be transferred to anyone who also has an Internet-capable computer system", (b) "There is no superior and identifiable (legal) person who can regulate the distribution of Bitcoins (see Beck aaO, p. 584), rather all participants monitor the correctness of the transfer of Bitcoins within the network", (c) "Bitcoins lack general recognition and stability of value so that they do not qualify as unit of account, and operation of a trading platform for Bitcoins does not constitute a financial service for which a license is necessary because bitcoins do not constitute financial instruments under the WpHG". It was for the German court also unclear, what is the civil law ground (e.g., is it an agency or commission contract) for the transactions with Bitcoin.
In practice, it is possible to buy and use cryptocurrencies in Germany as a means of payment (Jens der Finanztester. Tether (USDT) kaufen & verkaufen mit Euro. Einzahlen, Umtauschen, Versenden (bei Binance, Kucoin); URL: https://www.youtube.com/watch?v=k7XhMkKpe_U)
Russian approach
Definition of digital assets
Russian law concentrates on regulation of so-called "digital rights". The content and conditions for the exercise of digital rights are determined in accordance with the rules of the information system; one can dispose of them only through the information system/ investment platform and without involvement of third parties.
According to the leading Russian scholar E Sukhanov, digital rights just embody in the digital world the rights that have been known to the civil law for a long time ( URL: https://www.estatut.ru/download.php?trid=5087 ). So, his view is that digital rights are just a new form and new method of disposal of the right (that is, through an informational system/ investment platform) — rather than a new right in itself.
Under Art. 141.1 of the Russian Civil Code, the Russian Law on Digital Financial Assets, and Russian Law on Attraction of Investments on Investment Platforms, there are three main types of digital rights in Russia: (a) digital financial assets including (1) monetary claims, (2) the possibility of exercising rights un-der issue-grade securities, the right to participate in the capital of a non-public joint-stock company, (3) the right to demand the transfer of issue-grade securities, which are provided for by the decision on the issue of digital financial assets; (b) utility digital rights that provide their owner with (1) the right to demand the transfer of a thing (things); (2) the right to demand the transfer of exclusive rights to the results of intellectual activity and (or) the rights to use the results of intellectual activity; (3) the right to demand the performance of work and (or) provision of services, utility digital rights cannot be the right to claim property, the rights to which are subject to state registration, and (or) the right to claim property, transactions with which are subject to state registration or notarization; (c) hybrid digital rights – digital rights that include both utility digital rights and digital financial assets.
The main actors in the relevant transactions are (a) the operator of exchange/ information system/ investment platform, (b) the issuer, and (c) the investors. The operator should have a Russian Central Bank license and register there its internal regulations governing custody and digital rights turnover.
Definition and practical use of cryptocurrency
Despite recent attention of the President to the use of cryptocurrencies and digital assets ( URL: https://www.rbc.ru/crypto/news/6697b1f79a794796605a1a81) and the opportunity to use digital rights in international trade (URL: http://publication.pravo.gov.ru/document/0001202403110010), the Western sanctions pressure proves to be effective in the digital assets area. Notably, both currently licensed Russian operators of digital rights exchange (that is, platforms supporting digital rights' transfer from the first to subsequent investor) are sanctioned by the US and the UK.
Art. 14(5) of the Russian Law on Digital Financial Assets prohibits the use of cryptocurrencies as the means of payment for individuals residing in Russia and Russian companies.
UAE approach
Definition of virtual (digital) assets
The major difference of the UAE regulatory approach is that, firstly, it is very much practice-oriented and, secondly, granular in terms of levels and intertwined regulations in the federal and local jurisdictions. For example, the UAE Cabinet Resolution No. 111/2022 identifies the UAE Securities and Commodities Authority (SCA) as the authority responsible for regulating virtual activities and virtual assets service providers across the UAE. The UAE Cabinet Decision No. 112/2022 On Delegating Certain Competencies relating to the Regulation of Virtual Assets pertains to the responsibilities and powers delegated to the Virtual Assets Regulatory Authority (VARA) exclusively for the Emirate of Dubai.
Under the SCA Decision No. 23/RM/2020 Concerning Crypto Assets Activities Regulation, a crypto (digital) asset is a record within an electronic network or distribution database functioning as a medium for exchange, storage of value, unit of account, representation of ownership, economic rights, or right of access or utility of any kind, when capable of being transferred electronically from one holder to another through the operation of computer.
Digital assets in the UAE embrace, among others, stable tokens (those pegged to currency rates) and security tokens. For instance, security tokens (i.e. conferring rights and obligations that are the same as those conferred by a share or a debenture (SCA Decision No. 23/RM/2020 Concerning Crypto Assets Activities Regulation; DFSA Consultation Paper No. 138 on the Regulation of Security Tokens) are recognized as securities.
Both federal (from SCA and/or the Central Bank) and local jurisdictions (for example, from VARA (Dubai), DFSA (DIFC free zone), or FSRA (ADGM free zone)) licenses are likely to be required to undertake issuance of the security tokens or virtual assets exchange services.
Remarkably, so-called utility tokens are not considered digital assets. Consequently, utility tokens are less regulated (and their issuers are still considered designated non-financial businesses & professions (DNFBPs) that are subject to the UAE Anti-Money Laundering Law).
Definition and practical use of cryptocurrency
Cryptocurrency has several statutory definitions in the UAE, for instance, digital representations of value or contractual rights (Stored Value Facilities Regulation by the UAE Central Bank), or a record functioning as a medium (SCA Decision No. 23/RM/2020 Concerning Crypto Assets Activities Regulation).
Like in Germany, license(s) are required to exchange fiat/ cryptocurrency.
In practice, there are many companies offering to the public at large fiat/ crypto exchange and settlement in the UAE.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.