The “Digital Asset Policy Proposal”: a Coinbase’s legal advocacy

“Ensure America remains a financial leader”.

Brian Armstrong, CEO of Coinbase, shared yesterday on his Twitter (1) account his “Digital Asset Policy Proposal” (DAPP) (2), a short plea for a new regulatory foundation for crypto assets in the US.

The paper reveals some positions, which, regarding the regulation of the traditional financial system, will be interesting for some and surprising for others. In particular, he proposes the establishment of a generic definition of “digital assets”, the designation of a regulator dedicated to “digital assets” activities, working hand in hand with a “self-regulatory organization” and ensuring special supervision of exchanges and other activities related to digital assets, and the adaptation of the existing requirements for market transparency and AML.

Among the many proposals made, some particularly caught our attention:

The “Digital Asset” definition:

Coinbase would define “digital asset as: A financial asset issued and transferred using distributed ledger or blockchain technology. “Financial asset” would include an asset whose primary use is as a payment instrument, medium of exchange, means of storing value, or otherwise as a financial interest”.

This broad and all-encompassing definition of crypto assets would then imply the establishment of a “new [and separate] regulatory framework”. This may seem surprising, as the regulation of traditional finance has been built in different silos according to the types of markets (securities, FOREX, etc.), which have then been digitized. Conversely, the crypto assets economy is unique in that the underlying and historical technology that we owe to protocols such as Bitcoin and Ethereum offer the possibility ab initio of transferring values to which we have subsequently given different representations.

A transversal technology-centric regulation is therefore not incoherent in theory. In practice, however, it would mean ignoring the legal and economic fundamentals behind certain types of tokenized assets, which sometimes require a more specific and adapted regulatory approach in the light of these same fundamentals.

An ad hoc regulatory regime for blockchain-digitized financial instruments:

In line with this definition, “[…] digitally native versions of traditional financial assets, should be subject to a new regulatory regime for digital assets”. Here again, the form of the asset would take precedence over its substantive properties and would justify the establishment of an ad hoc legal regime, even if this would not prevent the implementation of current securities disclosure requirements.

Moreover, the approach chosen by the EU legislator is different, since the “MiCA” project (“Markets in Crypto Assets”) published on Sept. 24, 2020 (3), by the European Commission does not seem to include financial instruments (under the EU “MiFID II” regulation’s definition) transferred using blockchains and DLTs in this scheme.

(What do you think is the most logical approach, in your opinion?)

A fully integrated financial market system (risky or not risky?):

Last but not least: “MDAs [(Marketplaces for Digital Assets -or crypto exchanges-)] should be authorized to perform the full lifecycle of digital asset services, including digital asset trading, transfer (e.g. wallet services), custody, clearing, money payment, staking, borrowing and lending, and related incidental services”. In traditional finance, the meeting of supply and demand for financial instruments is reserved for regulated markets such as Euronext or the LSE, and custody is the historical monopoly of banks and credit institutions. At the contrary, Brian Armstrong wishes to endorse the current operation of crypto exchanges, which today for the most part ensure the entire vertical of the crypto financial transaction process. This will not fail to question the procedures and prudential rules put in place to mitigate the risks that such a “crypto exchange model” can generate — we will come back to this point in a future analysis.

This position is not surprising, however, and follows the regulatory logic operated in some countries, notably France: indeed, the Digital Asset Service Provider regime (largely taken up in the European “MiCA” project, by the way — the French can congratulate themselves on this — ) gives the possibility to these same providers to submit a registration file for several services at once, including “custody and administration of crypto-assets” and “operation of a trading platform for crypto-assets” (4).

In any case, Coinbase has understood that regulation is a major stake in the attractiveness and generalization of the crypto assets market.

And it must be everyone’s business.

(1) Link to the tweet: https://twitter.com/brian_armstrong/status/1448714553764712451?t=ID71KSfP3ClDqgb6k3sgDw&s=09

(2) Link to the DAPP: https://github.com/coinbase/digital-asset-policy-proposal

(3) Link to the “MiCA”: https://eur-lex.europa.eu/legal-content/FR/TXT/?uri=CELEX:52020PC0593

(4) You can find the list of the registered DASPs here: https://www.amf-france.org/fr/espace-professionnels/fintech/mes-relations-avec-lamf/obtenir-un-enregistrement-un-agrement-psan#Liste_des_PSAN_enregistrs_auprs_de_lAMF