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Monday, 28 March 2022

FCA Circles The Wagons Over Cryptoassets

Hot on the heels of the crackdown on advertising cryptoassets in the UK, the Financial Conduct Authority has also sent a notice to all the firms it supervises who 'interact' with cryptoassets or related services. There's nothing new here but a sense that the FCA has suddenly realised that the UK authorities are way behind the crypto-curve (particularly in light of recent sanctions), and there's a mad scramble to avoid another LC&F scandal - or worse.

The FCA expects firms to ensure that consumers understand what aspects of their services are regulated and clearly distinguish those elements which are not regulated. The firm is responsible for identifying and managing potential risks related to cryptoassets. 

There is a reminder that it is a criminal offence to provide cryptoasset exchange services or custodian wallet services by way of business in or from the UK without being registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (or have temporary permission to do so while your application is pending). 

All authorised and registered firms must have appropriate systems and controls to counter the risk of being misused for financial crime, so firms should be reviewing whether cryptoasset businesses they interact with are listed on the FCA’s Unregistered Cryptoasset Businesses page, for example. 

The FCA's Dear CEO letter also remains relevant in terms of how to achieve best practice where clients and customers may be using cryptoassets, or where firms are providing services to customers offering cryptoassets. 

Firms should assess the risks posed by a customer whose wealth or funds derive from the sale of cryptoassets, or other cryptoasset related activities, using the same criteria that would be applied to other sources of wealth or funds (even if the evidence trail may be weaker). 

While there are no specific prudential (capital) treatments that explicitly mention cryptoassets, firms subject to the investment firm prudential regime (IFPR), have obligations (under MIFIDPRU 7) to assess and mitigate the potential for harm to clients, to the markets in which the firm operates and to itself, that could arise from all of their business - even if the activity is unregulated or carried out on a principal, agency some other basis. Assessing adequate financial resources should involve assessing and managing risks and exposures from cryptoassets and deducting from regulatory capital any cryptoasset that is accounted for as an intangible asset.  

All FCA regulated firms must observe the Principles for Business in the Handbook, and Principle 10 requires a firm to arrange adequate protection for clients’ assets. The FCA’s Client Assets Sourcebook (CASS) provides detailed rules for firms to follow when holding regulated assets in custody, as part of their investment business. Where cryptoassets are security tokens (and so count as specified investments), firms carrying out regulated activities involving custody of those cryptoassets are likely subject to CASS. 

The FCA will continue to monitor the use of cryptoassets in custody arrangements and act where appropriate.


Wednesday, 23 March 2022

ASA Goes Postal On Crypto

Just in case you thought the Advertising Standards Authority was on a frolic of its own when issuing its recent guidance on cryptoasset advertising, yesterday it went postal, literally, by issuing an Enforcement Notice to 50 advertisers whose advertisements it considers do not comply with specific rules in its Non-broadcast Code. Advertisers have until 2 May 2022 to rectify the problems, after which the ASA will commence targeted monitoring and potentially sanctions (including adverse publicity and referrals to Trading Standards for enforcement).

Unlimited fines, jail time and confiscation of assets as the proceeds of crime are all possible results of Trading Standards enforcement activity. 

It is also clear that the ASA is working closely with the Financial Conduct Authority in determining whether any financial regulations are being infringed, with similar potential consequences.

The ASA's Enforcement Notice includes more detailed guidance and illustrations of what is - and is not - acceptable by way of cryptoasset advertising. No need to recite that here.

Regardless of concerns from a policy or philosophical perspective, and any efforts to sway the approach to cryptoasset regulation being taken by the ASA, Treasury and/or FCA, anyone advertising cryptoassets in or from the UK should take care to heed the ASA guidance for now.

Monday, 14 March 2022

Are NFTs Really Non-Fungible?

This question has been bugging me for ages. It has nothing to do with whether the owner of an NFT has any right in a pre-existing/underlying image or asset to which the NFT is linked (the owner of the NFT does not (necessarily) have any rights in the underlying image/asset). My question relates to the token itself. There could be significant regulatory consequences if NFTs are not actually "non-fungible" since the UK Treasury, for example, has said that NFTs will not be subject to financial marketing restrictions.

TechnoLlama has pointed out that certain NFTs, such as profile picture (PFP) collectibles might not be protected by copyright. PFPs can be 'minted' with little human intervention beyond the creation of the very first stock character to which each newly minted NFT adds some 'unique' characteristic(s). The "consequence could be that if all of these thousands and thousands of profile pictures have no copyright, then anyone can do whatever they want with them." 

If an NFT is not protected by copyright so that anyone can mint the same image, then surely that NFT is fungible? I mean, if someone wants the image, they just mint it. They don't need the original token, right? And if I 'buy' that image, I might not care which of the many 'NFTs' that have been minted with that image is actually sent to me (maybe the lowest priced).

Similarly, as recently mentioned, ISDA has also considered the issue of fungibility in the context of voluntary carbon credits (which might themselves be tokenised into 'NFTs'). To aid liquidity, it is likely that two or more VCCs would be interchangeable for the purposes of satisfying VCC transfer obligations between traders, even if it was originally critical that the VCCs were uniquely generated in relation to different, specific projects/owners. In essence, the traders are likely only really interested in the fact that a VCC represents a tonne of CO2 reduced or removed (tCO2e). An airline might acquire VCCs generated from a forestry project to offset fuel emissions. Fungibility is therefore not a feature of the asset itself but a matter of context. As ISDA points out by way of example, banknotes are fungible to satisfy payment obligations, but are not fungible for tracing purposes (each note is serialized). Equally, therefore, a unique serial number does not preclude a VCC from being fungible. Accordingly, the issue is whether and in what circumstances different VCCs (or NFTs for that matter) will be treated as interchangeable.

In any event, if an NFT is not actually 'non-fungible' (e.g. by virtue of copyright or in some other context), the next question from a financial regulator's standpoint would be whether the token falls within either a regulated category of token, benefits from another express exemption or is still out of scope of regulation but for some other reason...

Friday, 11 March 2022

Can You Advertise CryptoCurrencies and Other Cryptoassets?

The UK's Advertising Standards Authority has just updated its guidance on advertisements for cryptoassets. I call it 'guidance' even though it claims to be 'advice' (but not 'legal advice' or binding on anyone). I have problems with it from a financial regulatory standpoint, but it's good to know that the ASA is watching the crypto advertising space more generally. Tougher rules on promoting or marketing certain 'qualifying cryptoassets' in the UK are also on the way. If you have concerns about the status of your cryptoasset or related advertising, please get in touch.

Are Cryptoassets Regulated?

On this question, the ASA's guidance functions more as a plea for directly regulating cryptoassets (as is slowly happening) than a reliable guide to whether cryptoassets or related activities may be regulated already, or what 'unregulated' really means. 

The ASA insists that "advertisers must clearly state that cryptoassets are not regulated by the FCA" and are not subject to protections afforded by either Financial Ombudsman Service or the Financial Services Compensation Scheme. 

It's all very well to say that 'cryptoassets' themselves are not regulated, but the real question is whether the cryptoasset could also be another type of instrument that is regulated.

I see new proposals for cryptoassets all the time which would be caught by existing regulation (and could yet be caught by new UK financial promotions rules and other regulation that is being consulted upon in the UK and the EU)

Few people seem to be focusing on what 'fungible' really means in the context of allegedly 'Non-fungible' tokens (NFTs), for example. 

Equally, activities such as operating a cryptoasset exchange or custodian wallet are regulated and require the person or firm carrying on those activities to be registered (for anti-money laundering purposes), even if the cryptoassets being exchanged or safeguarded are not regulated instruments.

In this context, the ASA's statement that "The vast majority of cryptoassets, such as cryptocurrencies are not currently regulated by the Financial Conduct Authority (FCA)" implies that the thousands of cryptoassets and related activities have all been assessed and found not to be regulated by the FCA (or another country's regulator), and that is very doubtful indeed.

Ironically, it may therefore be misleading for an advertisement to state that a cryptoasset is "not regulated by the FCA" unless (at the very least) legal advice to that effect has been obtained. 

Other Reasons Why Ads For Cryptoassets Might be Banned by the ASA

Of course there are other ways that an advertisement for a cryptoasset can be problematic, and the ASA's guidance on that is more helpful. 

For instance, snowing consumers with jargon, concealing or trivialising the risks or tax implications will result in the ASA concluding that you're preying on consumers' inexperience or 'credulity' (gullibility). 

Missing key information and/or failing to explain that values can go down as well as up, or the basis used to calculate any projections/forecasts, will also mean your ad falls victim to the ASA rules, as will missing a statement that past performance is not a guide to a cryptoasset's future performance.

If you have concerns about the status of your cryptoasset or related advertising, please get in touch.


Saturday, 5 March 2022

How To Fix The UK Card Acquiring Market for SMEs

The Payment Systems Regulator (PSR) is consulting on remedies to address its findings that the payment card acquiring market does not work well for merchants with turnover of up to £50m a year - by far the majority by number! Responses to the consultation are due on 6 April 2022. If my experience of working in the card acquiring market for several decades is anything to go by, the kind of remedies that the PSR is recommending seem likely to improve the experience of all participants...

Key Problems in the Card Acquiring Market 

The PSR identified three features of the acquiring market that restrict the ability and willingness of merchants to shop around for acquiring services and switch between card acquirers to get a better service at better prices: 

  • Lack of published pricing for card-acquiring services: pricing structures and approaches also differ, making it hard to compare prices across independent sales organisations (ISOs), acquirers and ‘payment facilitators’ who gather together transactions from small merchants (those with the GBP equivalent of less than 1 million USD turnover each year).
  • The indefinite duration of acquiring service contracts: there is no clear trigger for merchants to think about shopping around and switching. 
  • Point of sale (POS) terminals and leases: terminals won’t work with a new card-acquirer, so need to be replaced; and there may be a charge for terminating an existing terminal lease (which spreads the cost of terminals over a period of up to 5 years while the related acquiring contract has a minimum term of 12 months). 

Remedies Being Considered 

To help resolve these problems, the PSR is considering four remedies in combination: 

  • Summary information boxes 
  • Boosting the use of digital comparison tools by merchants 
  • Trigger messaging 
  • Removing barriers to switching to that arise from POS terminals/leases.

The combination is important. Summary boxes may not work as expected, and transparency is more effective to aid shopping around and switching when combined with remedies that facilitate service comparison, personalised information on product use and trigger remedies. Price simplification may also be required if other remedies prove ineffective. 

To aid in the design of the remedies, the PSR is asking card acquirers to provide: 

  • mock summary boxes and trigger warnings; 
  • technical specifications for summary boxes, trigger warnings, the submission of data to DCTs and POS terminal portability; and 
  • an explanation of system changes required. 

Summary information boxes 

Acquirers would have to provide standardised key facts information setting out key price and non-price features, both in bespoke format provided to each merchant, and in generic format which would be published more widely: 

  • Bespoke individual summary: tailored information for each merchant about the pricing and other service information, with consumption data and information on options to migrate to other tariffs or how to switch acquirer.
  • Generic summary: information for all customers and potential customers on acquirer websites to enable merchants to quickly assess pricing and service options across a range of acquirers. 

Boosting digital comparison tools (DCT) for merchants 

DCTs are simply online intermediary services used to compare and potentially to switch or purchase products from a range of providers. DCTs are not as well established in the acquiring market as they are in markets for consumer services such as loans, insurance and utilities. The PSR found that merchants tend to land on ISO ‘lead-generation’ web sites when looking for an acquirer. 

To work effectively, experience from consumer markets shows that DCTs for card acquiring should cover both pricing and non-price service elements of card-acquiring services. This would involve: 

  1. acquirers publishing and updating their pricing and other service data regularly in formats which are consistent and easily usable, so DCTs could collate comparative pricing and other service data; and 
  2. merchants being able to share their acquirer transaction data, so that DCTs and other third parties could: 
  • determine the key service parameters, such as brand and category of card, types of transaction (e.g. card-present/not-present, MOTO), frequency of each transaction type; and 
  • use the merchant’s specific transaction data to calculate whether the merchant would be better off with a different acquirer. 

It would also likely improve merchant trust in DCTs if the PSR were to audit DCTs’ comparison methodologies and tools (as Ofcom does, for example). The PSR plans a feasibility study in this respect. 

Trigger messages 

A ‘trigger message’ would be a standardised message sent by acquirers to merchants ahead of say, the expiry of the initial contract term, to prompt a search of the market and switching. 

 The PSR is considering fixed term contracts, so that the expiry acts as a trigger for comparing switching options; but also trigger messages such as a cheaper tariff becoming available. 

Information items in the messages could include how much the contract price has increased, how much would be saved by switching to the lowest tariff and how to switch to new POS terminals. 

The PSR also notes that the FCA’s work on current account and home insurance switching suggests that SMEs will respond better to personalised information on the financial impact of switching, as well as non-price benefits. Ofcom’s experience also suggests that such messages should be kept short and simple, action focussed, personalised, designed to remind customers and give them a deadline, designed to help customers plan, and be tested with a target audience. Visual presentation of information was helpful where complete, precise, specific and jargon free. 

Trigger information is best presented when customers log-in to their account, whereas calls and text messages are not as effective for communicating this type of information.

POS Terminals as Technical Barriers to Switching Acquirers 

Point of Sale (POS) terminals are the devices used by merchants to capture card details from customers when a transaction is made. 

POS terminals may be offered by or through an acquirer or separately by an ISO, but they typically operate with only one acquirer. So a merchant wishing to switch acquirer will also need to terminate both the ‘merchant service’ contract for card-acquiring as well as a lease for their POS terminal. But card-acquiring contracts are usually for a term of 12 months while POS terminal leases last up to five years and renew automatically for up to 18 months, and may involve termination charges. 

In addition, merchants and their staff may be used to a certain POS terminal, so may be reluctant to switch to a different unit offered by a different acquirer. 

The PSR is looking at both the contractual and technical barriers to switching POS terminals and contracts, but has a preference for removing technical barriers first. 

The technical barriers include physical reconfiguration that may be required to make a POS terminal work with a new acquirer’s systems; certification required by each new card-acquirer and for each payment scheme; and the fact that the new acquirer’s terminal manager may not support terminals from a previous acquirer (changing terminal manager will require unlocking and resetting cryptographic keys). 

Technical remedies could involve requiring a new acquirer to replace the merchant’s POS terminals, but the PSR would prefer to focus initially on trying to ensure that POS terminals are portable between acquirers. 


Merchants don't need to wait for the PSR remedies to switch acquirers, but the problems and remedies do show the kind of effort required to search for the right acquiring service and organise a switch. I've advised merchants of all sizes and card acquirers, ISOs and payment facilitators. Even large merchants struggle with the challenge of switching, and they retain experienced consultants to help determine the service/features required; the most efficient way to meet those needs; and to evaluate which acquirers can genuinely deliver and at what price. 

But that process is time-consuming and frustrating for acquirers as well. And even at the smaller end of the market there is plenty of scope for both the merchant and the acquirer to misunderstand the merchant's requirements and the acquirer's ability to deliver.

The kind of remedies that the PSR is recommending therefore seem likely to improve the experience of acquirers, payment facilitators, ISOs and merchants alike. 

Wednesday, 16 February 2022

The New "Consumer Duty" For UK Financial Services Firms

The FCA has proposed a new "consumer duty" that will apply to most firms it supervises where products and services are offered to ‘retail customers’. In effect, the FCA says the duty will amount to a higher statutory standard of care for consumers than results from the FCA's current set of Principles for Business and conduct rules. It is intended to stop short of being an actual statutory or general law "duty of care", even though the standard is said to reflect the common law concept of how 'a reasonable prudent firm would act'; and it will not create a fiduciary duty or advisory obligation where one does not already exist. I guess 'cakeism' is not confined to Downing Street! Final rules are due by 1 August 2022 and firms should have until 30 April 2023 to fully implement the changes needed to comply (but will need to be able to demonstrate their progress toward implementation when asked). The scale of change should be 'seismic' - like simultaneously preparing for 'Treating Customers Fairly' and the Senior Managers and Certification Regime while trying to run a business (or changing all four wheels on a race car, mid-corner). But whether it will actually deliver better outcomes for consumers remains to be seen... Please let me know if you would like any help.

Scope of the Consumer Duty

As explained further below, the consumer duty will be delivered in a framework of three elements: a new 'consumer principle'; some 'cross-cutting rules'; and 'four outcomes'. 

A concept of "reasonableness" will apply to all three elements. This is intended to create an 'objective standard of conduct' that could reasonably be expected of a prudent firm which carries on the same activity in relation to the same product or service; and with the necessary understanding of the needs and characteristics of its customers (based on the needs and characteristics of an average customer). Factors that can influence what is reasonable include:

  • the nature of the product or service being offered or provided;
  • the nature of the firm’s role and relationship with customers; 
  • the potential of the product or service to harm consumers (higher risk means additional care); 
  • the complexity of the product or service (again, more complex products and services involve extra care); 
  • the role of the firm in the distribution chain; 
  • the reasonable expectations of consumers, based on the nature and quality of the product or service as presented and previous interaction with consumers;
  • the specific characteristics of consumers, recognising and responding to their diverse needs, including vulnerability or protected characteristics.

The scope of the 'duty' will be the same as the current 'conduct of business' rule books or other applicable regulation (e.g. for payment services); and exemptions from financial promotions rules, for example. Firms in a chain will need to agree where their responsibilities meet.

The Consumer Duty applies to products and services offered to ‘retail customers’, as defined within the scope of the FCA Handbook in each sector. For example: 

  • consumer credit: the Consumer Duty applies to all regulated credit-related activities;
  • deposit-taking: the duty applies to consumers, micro-enterprises and charities with a turnover of less than £1m (in line with the banking customer test);
  • insurance: the duty follows the position in the Insurance Conduct of Business Sourcebook (ICOBS), so does not apply to reinsurance or contracts of large risk sold to commercial customers;
  • investments: the duty applies to business conducted with retail clients as defined in the Conduct of Business Sourcebook (COBS);
  • mortgages: the duty follows the position in the Mortgage Conduct Business Sourcebook (MCOB), so applies to all regulated mortgage contracts, but not, for example, unregulated buy-to-let contracts or commercial lending. Where the owner of a mortgage book is unregulated but a regulated firm is the loan servicer, the Consumer Duty would apply 'in an appropriate and proportionate manner to their function';
  • payment services: the duty applies to business conducted with consumers, micro-enterprises and charities in line with the Payment Services Regulations 2017 (so could be contracted out of for larger corporate/charity customers).

There are some exclusions, but the duty can apply to prospective customers as well as unregulated activity that is ancillary to regulated activity. 

Firms will need to take additional care to ensure vulnerable consumers achieve outcomes that are as good as those of other consumers. 

Framework of the Consumer Duty

A new consumer principle: The FCA will add a 12th Principle for Business ("A firm must act to deliver good outcomes for retail clients"). This is considered to be a higher standard than "A firm must pay due regard to the interests of its customers and treat them fairly" ('treating customers fairly" or 'TCF'). While this overarching standard of conduct is 'clarified and amplified' through 'cross-cutting rules' and four (non-exhaustive/exclusive) 'four outcomes' it must be judged on its own, in terms of what is reasonably expected given the nature of the firm's role and the product or service it offers. 

Cross-cutting rules: Firms must: 

  • Act in good faith (characterised by honesty, fair and open dealing and consistency with the reasonable expectations of consumers);
  • Avoid causing foreseeable harm to customers (including taking proactive steps to avoid it where that is within the firm’s control);
  • Enable and support customers to pursue their financial objectives (establishing an environment in which consumers can act in their own interests; understanding consumers’ behavioural biases and the impact that their vulnerability can have on their needs; using their knowledge of how consumers behave to enable and support them to make good decisions). 

The “four outcomes”

  • the quality of firms’ products and services: these must be 'fit for purpose'; designed to meet consumers’ needs; and targeted at the consumers whose needs they are designed to meet, with different requirements for firms depending on their role in the distribution chain as 'manufacturers' and/or 'distributors';

  • the price and value of products and services: the FCA wants both manufacturers and distributors to ensure the pricing represents fair value to consumers and to regularly assess that outcome;
  • consumer understanding: firms’ communications must consistently support consumers by enabling them to make informed decisions about their products and services, giving consumers the information they need, at the right time, and presented in a way they can understand. Communications must be clear, fair and not misleading, as well as tailored in various ways, accurate, relevant and timely; and
  • support for consumers: must meets consumers’ needs throughout their relationship with the firm, to enable them to realise the benefits of the products and services they buy and ensure they are not hindered from acting in their own interests. 

Impact of the Consumer Duty

The impact of the Consumer Duty will be enormous on an industry that tends to see compliance as a bolt-on to commercial operations and a cost-centre rather than an inherent part of product development lifecycle, even if policies, processes and procedures incorporate the concept of 'Treating Customers Fairly' and require legal/compliance checks and approvals.

The FCA expects firms to consider and determine what behaviours, policies, procedures, monitoring and feedback/reporting is necessary for them to satisfy the Consumer Duty - and be able to demonstrate how they have implemented the duty. 

Firms will need to be proactive and show that their focus is on consumer impact/outcomes rather than the firm's own compliance processes; and acting reasonably, rather than merely 'taking all reasonable steps' to comply with the duty and related rules.

The FCA expects senior managers to be responsible for ensuring the Consumer Duty is met across any business areas that they are responsible for, rather than mandating one senior manager as solely responsible under the Senior Managers and Certification Regime (SM&CR). There will be a new rule requiring all conduct rules staff within firms to “act to deliver good outcomes for retail customers” where their firms’ activities fall within scope of the Consumer Duty. 

In these circumstances, it would seem that the implementation process will be similar to preparation for the introduction of 'Treating Customers Fairly' principle as well as SM&CR, but the FCA will expect  to see more evidence of the impact of the higher standard both culturally and in terms of changes to organisation, policies, processes and procedures. 

The scale of change should therefore be 'seismic'. But whether it will actually deliver better outcomes for consumers remains to be seen... 

Please let me know if you would like any help.


Tuesday, 8 February 2022

A Quick Guide To Carbon Credits And Why DLT/Blockchains May Help

Fans of 'net zero' and 'cryptoassets' alike need to get to grips with developments in the markets for carbon credits, as recently explained in the ISDA paper on the legal implications of voluntary carbon credits ("VCCs"). Voluntary emission reduction/removal schemes are those not mandated by law - so there's no fine or penalty system as there is for EU allowances trading scheme, for example. ISDA recommends that VCCs should be recognized as a form of (intangible) property in each jurisdiction, just as the UK Jurisdiction Taskforce’s statement on the status of crypto assets and smart contracts provided legal certainty under English law that cryptoassets are capable of being owned. Distributed ledger tech/blockchains also seem apt for recording/tokenising/trading VCCs as their state/status may change often, and that will be of interest to many stakeholders in different countries, running different software/systems... but I appreciate that's a lot to take in/on!

What are VCCs?

VCCs are issued under certain non-statutory standards by, say, an industry body, to certify the reduction or removal of carbon dioxide from the atmosphere (one VCC means the relevant body has certified that one tonne of CO2 has been reduced or removed ("one tCO2e")). The VCC might be 'cancelled' or 'retired' and included in the accounts of the original project operator to meet its own emissions reduction obligations or sold buyers who book them as a way of neutralizing their own emissions. In the case of a sale, the revenues generated help fund either the original or subsequent reduction/removal project. A cancelled/retired VCC is removed from circulation, just like the carbon it represents. While not subject to a statutory regime, some VCCs may be recognized for statutory compliance so the distinction between 'mandatory' and 'voluntary' credits is blurring. There remains a distinction between a VCC that qualifies for compliance in a mandatory scheme (making it a distinct legal instrument) and one that can be swapped for a mandatory unit (merely facilitating compliance with the scheme using the mandatory units, but at least 'recognized).


Quality/Standardisation: concerns over 'greenwashing' mean the quality of the underlying project affects the quality of the VCC. Buyers focus on the project methodology used to generate the VCCs and the impact of projects. Standardization is therefore challenging. 

Double Counting: It's critical to avoid the benefit of the carbon reduction corresponding to the VCC being claimed more than once (e.g. a VCC sold to a third party for offsetting also being used to avoid the obligation to purchase carbon credits; or where different schemes cover the same activity (renewable energy certificate and carbon offset). 

Pricing: a lack of reliable, transparent price discovery means buyers have little comfort they are paying the right price and sellers may struggle to fund projects. 

Article 6 of the Paris Agreement/COP26: this aims to establish a new international carbon market, whereby countries set their own contributions through the trading of emissions reductions (internationally transferred mitigation outcomes ("ITMOs")). Countries could purchase emissions reductions from others who've already met their target. There are rules on ITMO transfers; the potential to link emissions trading schemes; a process for trading carbon credits from emissions-reduction projects; a framework for cooperation with inactive countries (e.g. through development aid).  The implications for VCC markets will be clearer after the rules are further developed (e.g. whether VCCs should be treated as ITMOs) but this complexity will likely reduce the supply of VCCs, ease of transacting and liquidity in the near term. 

Fragmentation: The fragmented nature of the VCC markets by geography and different schemes, registries, carbon standards, methodologies, and VCCs themselves hampers standardization and the development of an effective, liquid market.

Legal Treatment: the legal nature of VCCs differs in that they can be viewed as intangible property in one jurisdiction but a 'bundle of contractual rights' in another. That means different rules for how VCCs can be created, traded and retired; how security is taken and enforced; and how VCCs would be treated on insolvency. In theory, there are several potential different jurisdictions whose laws could apply to a VCC: the jurisdiction of the register in which the VCCs are recorded; the jurisdiction of incorporation of the registrar; the governing law of the carbon standard rules and/or registry rules; and/or the law of the location of the project from which the VCCs are generated.

Steps could be taken in national legislation and international treaty to resolve differences. Distributed ledger technology (DLT) could record VCCs in the ledger where digital assets are considered intangible property. For instance, in the context of the EU Emissions Trading regime, the German Emissions Trading Act (TEHG) provides that if EUAs are registered in a person’s account, the account is deemed to be correct and that person has legal title to the EUAs; and the EU Registry Regulation provides for legal ownership of allowances and the finality of transactions.

Importantly, the legal status of a VCC as an asset in itself is distinct from the legal treatment of a transaction in relation to that VCC, so an instrument used as the basis for a transaction relating to a VCCs could be subject to financial regulation (e.g. a listed future, an OTC forward or option or a unit in a collective investment scheme), even if the underlying VCCs themselves are not considered regulated financial instruments.

Fungibility: to aid the development of a liquid market, VCCs should be interchangeable for the purposes of satisfying transfer obligations between traders. This is not a feature of the asset itself but the context. Banknotes are fungible to satisfy payment obligations, but are not fungible for tracing purposes (each note is serialized). A unique serial number does not preclude a VCC from being fungible, so the issue is whether and why the market will treat different VCCs as interchangeable for the purposes of settlement/delivery [this raises interesting questions as to whether/when non-fungible tokens (NFTs) might actually be 'non-fungible'...]. Fungibility of VCCs depends on:

  • Commonality of unit of measurement: each VCC corresponds with one tCO2e reduced or removed;
  • market acceptance of common standards for vetting the approval and verification of VCC-producing projects, at least by an agreed approach to segmenting the market as a whole;
  • Adherence to generalised carbon standards and registry rules, as opposed to only specific registry rules. interoperable registers;
  • Locating registers in jurisdictions that provide clarity over the legal treatment of VCCs;
  • Targeted legislative amendments in jurisdictions where elements of the VCC lifecycle are dependent on a local statutory regime (e.g. what rights do traders, non-debtor counterparties or the holders of securities have against each other or intermediaries acting for either participant in the event of insolvency in a particular jurisdiction).


ISDA recommends that VCCs should be recognized as a form of (intangible) property in each jurisdiction, just as the UK Jurisdiction Taskforce’s statement on the status of crypto assets and smart contracts provided legal certainty under English law that cryptoassets are capable of being owned. 

Distributed ledger tech/blockchains also seem apt for recording/tokenising/trading VCCs as their state/status may change often, and that will be of interest to many stakeholders in different countries, running different software/systems...

That's an awful lot to take in/on!