DIGITAL ASSETS: US AND UK REGULATORY AND TAX TREATMENT - Nick Moore, Christine Lombardo, Sarah Riddell, Steven Lightstone, Sarah-Jane Morin and ...
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DIGITAL ASSETS: US AND UK REGULATORY AND TAX TREATMENT Nick Moore, Christine Lombardo, Sarah Riddell, Steven Lightstone, Sarah-Jane Morin and Kate Habershon May 21, 2021 © 2021 Morgan, Lewis & Bockius LLP
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Before we begin: Morgan Lewis and Global Technology
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Topics
• Nick Moore: Introduction: Digital assets
• Christine Lombardo & Sarah Riddell: US regulatory treatment of digital assets
• Steven Lightstone: UK regulatory treatment of digital assets
• Sarah-Jane Morin: US tax treatment of digital assets
• Kate Habershon: UK tax treatment of digital assets
4Section 01 Introduction
Introduction: Digital Assets
Cryptocurrencies vs digital assets – an introduction
The shortcomings of existing payment systems
Risks and challenges of digital assets
In particular, how do digital assets fit in to existing regulatory frameworks?
Public policy issues
6Section 02 US & UK Regulatory treatment of digital assets
US Legislative Efforts
8US Regulatory Treatment of Digital Assets
AML Money Services Business SEC & CFTC Implications
• New FinCEN Proposal • FinCEN • Regulatory status of XRP in
• SEC, CFTC, FinCEN issued a joint • State considerations question
statement in 2019 reminding • The SEC has continued to issue
persons engaged in digital asset digital asset guidance
activities that they are still • The CFTC has continued pursuing
obligated to comply with AML and enforcement actions
countering the financing of
terrorism obligations
Trust Company State Attorney Generals
• NY Department of Financial • Investigation and enforcement
Services authority
9US Regulatory Treatment of Digital Assets
10US Regulatory Treatment of Digital Assets:
SEC Developments
• Commissioner Peirce’s Token Safe Harbor 2.0 Proposal
– Provides a three-year grace period from registration under the federal securities laws.
• Division of Examinations Risk Alert
– Issued to assist firms in their development and enhancement of compliance practices
related to digital assets.
• May 11th Division of Investment Management Staff Statement
• SEC v. Ripple Labs, Inc. Inc., Bradley Garlinghouse, and Christian A. Larsen
– The SEC alleges that the defendants engaged in the unlawful offer and sale of
securities.
11US Regulatory Treatment of Digital Assets:
FinCEN, CFTC, and OCC Developments
• In December, FinCEN proposed rules that would require banks and FinTechs to
to submit reports, keep records, and verify the identity of customers in relation
to transactions above certain thresholds involving wallets for convertible virtual
currency (CVC) or digital assets with legal tender status.
– CVC: a medium of exchange (such as cryptocurrency) that either has an equivalent
value as currency, or acts as a substitute for currency, but lacks legal tender status.
– Digital assets with legal tender status: any type of digital asset issued by the U.S. or any
other country that is designated as legal tender by the issuing country and accepted as
a medium of exchange in the country of issuance.
12US Regulatory Treatment of Digital Assets:
FinCEN, CFTC, and OCC Developments
• In 2021, the CFTC has pursued enforcement actions against Coinbase ($6.5M
civil monetary penatly) and Jsquared (nearly $400,000 civil monetary penalty
and restitution).
• Since January, the OCC has conditionally approved national trust bank charters
for Anchorage Trust Company and Paxos National Trust. The OCC has also issued
digital asset-related guidance under former Acting Comptroller of the Currency
Brian Brooks.
• New Acting Comptroller of the Currency, Michael Hsu, has ordered a review of
these recent actions.
“I believe these trends cannot be stopped. They bring great
promise, but also risks.”
13UK Regulatory Treatment of Digital Assets
FCA encourages consistency in FCA taxonomy:
regulation via Global Financial
• Security tokens (regulated)
Innovation Network
• E-money (regulated)
• Unregulated tokens
However, UK government has
just consulted on regulatory
approach to cryptoassets Dealing in unregulated
(including proposals to tokens (except cryptoasset
regulate stablecoins) and derivatives) does not require
bringing cryptoassets into FCA authorisation
financial promotion regime
FCA does not currently treat AML legislation applies
stablecoins as separate category of to cryptoasset business
cryptoasset
14Section 03 US & UK tax Treatment of Digital Assets
US Tax Treatment of Digital Assets
US Tax Treatment of Digital Assets
IRS Notice 2014-21: convertible No specific guidance on
virtual currency is treated as stablecoins from the IRS or U.S.
Open questions:
property Treasury.
Distinguish between stablecoin
IRS FAQs on Virtual Currency
and other cryptocurrencies?
Transactions
Rev. Rul. 2019-24: Airdrops and Gains/losses generated by
forks underlying basket of assets:
Taxable? Reportable? By whom?
CCA 202114020 (March 21)
16UK Tax Treatment of Digital Assets
HM Revenue & Customs has
Cryptocurrencies are not
published guidance on the UK The sterling value of each
treated as cash, but rather are
tax treatment of transaction in cryptocurrencies
treated as assets more akin to
cryptocurrencies that has must be determined to
securities. Gains will typically
recently been updated to calculate UK tax liabilities.
be subject to tax, eg as the
include stablecoin.
profits of a trade.
Stablecoin pegged to sterling The tax profits of trading in
may remove some of the issues cryptoassets will generally follow
caused by value fluctuations. the accounting treatment.
17Section 04 Presentation takeaways
Presentation Takeaways
Overview Global regulation US regulation
The growth of digital assets The cross-border nature of The SEC, CFTC, and FinCEN are on
presents a challenge for global stablecoin gives rise to the need the forefront of crypto asset and
regulators, but also an opportunity for consistent regulation in relevant stablecoin regulatory issues. Based
to facilitate development of jurisdictions. IOSCO’s report on legislative efforts, we will see
revolutionary access to the modern demonstrates the patchwork of FinCEN take the lead on stablecoin
financial system. A successful way regulation needed to issues with the SEC and CFTC
forward will require international comprehensively regulate responsible for more traditional
collaboration and especially the stablecoin. oversight (such as clearing agency
alignment of the different registration).
regulatory spheres into which
components of a stablecoin
ecosystem will fall.
19Presentation Takeaways continued
UK regulation US tax UK tax
Digital assets fall within existing Convertible virtual currency is Cryptoassets are for UK tax
regime, but Treasury has consulted generally addressed under U.S. tax purposes treated more like assets
on whether further regulation is guidance but digital assets such as shares rather than cash.
needed. specifically are not.
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21Biography
Nick Moore’s practice focuses on complex cross-border M&A,
investments, joint ventures, strategic advice and corporate
restructurings, with a particular focus on the fintech and TMT
sectors.
His clients in the fintech sector include banks, investment banks
and insurers, notably advising TSB on its separation from Lloyds,
Williams & Glyn on its proposed separation from RBS and some of
the largest ever transactions in the UK insurance market including
Nicholas Moore
the merger of Allied Zurich and Zurich Allies to create Zurich
London
Financial Services and the acquisition by Swiss Re of GE's UK
T +44.20.3201.5626
business.
F +44.20.3201.5001
22Biography
Christine Lombardo advises investment managers and broker-
dealers on financial regulatory matters.
She concentrates her practice on securities regulation for a broad
range of financial firms including retail asset managers, private
fund managers, family offices, broker-dealers, other professional
traders, and high-net-worth individuals.
Christine M. Lombardo Christine also counsels legal, compliance, and business personnel
Philadelphia on the structure, operation, and distribution of advisory programs,
T +1.215.963.5012 including digital advisory offerings, and investment products,
F +1.215.963.5001
including hedge funds, private equity funds, venture capital funds,
real estate funds, and other alternative investment products.
23Biography
Leveraging her experience as a lawyer at the US Commodity
Futures Trading Commission (CFTC), Sarah V. Riddell advises
domestic and foreign exchanges, derivatives clearing
organizations, swap execution facilities, and other financial
institutions on a broad range of regulatory matters, including
CFTC registration and compliance.
Sarah also assists hedge fund clients with CFTC and National
Sarah V. Riddell
Futures Association (NFA) registration, compliance, and
Chicago
examination questions.
T +1.312.324.1154
F +1.312.324.1001
24Biography
Steven Lightstone advises on financial services, securities, and
derivatives regulatory issues.
His clients include asset managers across a wide range of asset
classes and their funds, fintech firms, banks, broker-dealers,
payment institutions, institutional investors, insurers, lenders, and
market associations.
Steven Lightstone
London Steven is a founding member of the firm’s fintech group and
T +44.20.3201.5663 regularly contributes to the firm’s fintech blog.
F +44.20.3201.5001
25Biography
Sarah-Jane Morin represents public and private companies, private
equity funds, venture capital funds, real estate funds, portfolio
companies, and alternative investment vehicles in the tax aspects
of complex business transactions and fund formations, including
domestic and cross-border investment strategies, sponsor
investment strategies, limited partner investment strategies,
mergers, acquisitions, integrations, buyouts, recapitalizations,
debt and equity restructurings, and ongoing operations and tax
Sarah-Jane Morin compliance issues.
San Francisco
T +1.415.442.1231
She also advises on international tax issues, including the tax
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aspects of offshore vehicles (CFC/PFIC/GILTI regimes), anti-
deferral rules (Subpart F), withholding, cost sharing, and transfer
pricing.
26Biography
Kate Habershon advises corporations and funds on corporate
taxation. Her focuses include tax and structuring issues related to
international tax planning, mergers and acquisitions, corporate
finance, private equity, executive compensation, internal group
restructurings, and financial products. Before joining Morgan
Lewis, Kate was tax counsel in the London office of another
international law firm, a solicitor on the international and energy
tax teams of a Magic Circle firm, and a lawyer in the tax
Kate Habershon department of the Sydney, Australia, office of another
London international law firm.
T +44.20.3201.5560
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Morgan, Lewis & Bockius LLP.© 2021 Morgan, Lewis & Bockius LLP
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Our Beijing and Shanghai offices operate as representative offices of Morgan, Lewis & Bockius LLP. In Hong Kong, Morgan, Lewis & Bockius is a separate Hong Kong general partnership registered
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