The headline-grabbing explosions in the price of certain crypto-assets, chiefly Bitcoin, have given them a level of recognition that is disproportionate to their current cumulative market capitalisation. Much more exciting than these sporadic bursts, however, is the long-term opportunity that crypto-assets present once they move from the fringes of the financial sector to a mainstream regulated financial asset.
No country is better placed than Ireland to capitalise on this growing acceptance of crypto-assets.
Recent discussion at EU level, bolstered by legislative proposals, signifies increasing awareness that crypto-assets have the potential to become widespread in the economy, both as purely financial instruments and as a means of payment and a store of value. The European Commission’s proposed regulatory regime for crypto-assets seeks to combat the risks to consumer protection and financial stability that such widespread acceptance presents.
In addition, it and other proposals seek to ensure that the EU is equipped with the regulatory infrastructure to support a market for crypto-assets. The EU is acutely aware that if it fails to do so, it risks losing this business to other global financial centres.
If the European Commission’s proposed regulation on markets in crypto-assets is passed into law, it will mean that crypto-asset service providers will require regulatory authorisation in an EU member state and will be permitted to passport that authorisation throughout the EU. The providers will also be subject to prudential requirements, organisational requirements, rules on safekeeping of clients’ funds, complaint-handling procedures and conflicts of interests.
Ireland has the opportunity to take advantage of its well-earned reputation in both finance and technology to position itself as the leading jurisdiction in which to establish an EU-regulated crypto-services business. This will ultimately bring real commercial benefits in terms of jobs, business revenues and taxes.
While some jurisdictions in Europe have already introduced domestic regimes to regulate crypto-assets, Ireland has not yet done so. This is a wise approach – rather than seeking to create a bespoke regulatory regime for a relatively small market, we can instead excel at being a “fast follower” in the application of this new area of EU financial services regulation to service the much larger EU market.
In the meantime, the Central Bank of Ireland will exercise a level of domestic Irish regulatory oversight for “virtual asset service providers” under new anti-money-laundering legislation when the Criminal Justice Bill 2020 is enacted.
The EU passport will be critical to our success – it will mean that a crypto-asset service provider authorised by the Central Bank of Ireland will be permitted to service the entire EU market without requiring additional local authorisations in other member states. The EU passport for financial services is a key factor that makes Ireland an attractive and competitive location for foreign direct investment in the financial services sector. Brexit has arguably enhanced Ireland’s attractiveness for fintech providers and we have seen strong growth in the number of payment institutions and electronic money institutions licensed here in recent years.
Ireland’s offering in the fintech sector fuses our long-standing experience as a financial services hub with the more recent proliferation of tech companies. This combination has resulted in a rich pool of talented employees and ambitious entrepreneurs, as well as professional advisors capable of navigating the considerable legal and regulatory issues at play.
The Central Bank of Ireland has also enhanced this offering through its Innovation Hub, launched in April 2018, enabling fintech companies to engage directly with the regulator at an early stage of their development. The government too has actively supported Ireland’s international financial services sector, with the Department of Finance identifying technology and innovation as one of its four pillars to develop this sector in its 2020 strategy document International Financial Services Strategy 2025 – Ireland for Finance.
Ireland’s legal environment is well suited to resolving legal uncertainty around the novel technology that provides the foundation for crypto-assets. While most EU member states have a civil law system, Ireland has a common law system and this enables the application of existing legal concepts to new developments as they arise.
In 2019 the UK Jurisdiction Taskforce released an important report that extensively assessed crypto-assets within existing legal principles, with the aim of increasing legal certainty and establishing the UK as the jurisdiction of choice for activities relating to crypto-assets. Many of these benefits are also present in the Irish legal system, but we must undertake a similar exercise in interrogating the legal issues to demonstrate our commitment to this sector.
The unique combination of a favourable legal system, our status as a fintech hub and our continued membership of the EU makes Irish law a serious contender to be chosen as the governing law for the issuance of crypto-assets in the EU.
In other areas, the Irish legal sector has utilised this unique position to stimulate increased acceptance by the international finance community of Irish law as a governing law for cross-border transactions. In 2018 the International Swaps and Derivatives Association (ISDA) published an Irish law version of its master agreement, a standard document used worldwide in over-the-counter derivatives transactions. Last year McCann FitzGerald was delighted to partner with ISDA and R3, the software firm, to publish an analysis of the legal issues associated with using smart derivatives contracts on distributed ledger technology from an Irish law perspective.
Crypto-assets present an opportunity that goes far beyond trading Bitcoin. Ireland has the ability to capture this opportunity, especially when crypto-asset services are regulated at an EU level. This will require Ireland to bring together all relevant actors – government, regulators, industry players and professional advisors, to establish a common understanding of the legal, regulatory and technological issues and to develop a coherent strategy to attract investment across the crypto-asset sector. The bubbles may burst but the innovations will remain.
Josh Hogan, a partner at McCann FitzGerald, specialises in financial services regulation and fintech law. He is co-chair of the FinTech & Payments Association of Ireland regulatory insights group and a participant in the FinTech Foresights Group. McCann FitzGerald is a market-leader in fintech law and is one of only two Irish law firms to achieve a Band 1 ranking in the Chambers FinTech 2021 legal directory.