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The European Commission Issues Draft Legislation on E-evidence

By Nikolaos Theodorakis

Electronic evidence refers to various types of data in an electronic form that are relevant in investigating and prosecuting criminal offences. This includes content data that are often stored on the servers of online service providers, and other categories of data, such as subscriber data or traffic information regarding an online account. Such data is often essential in criminal investigations to identify a person or to obtain information about their activities.

More than half of all criminal investigations currently include a cross-border request to access electronic evidence (“E-evidence”) such as texts, e-mails or messaging apps. Electronic evidence is needed in around 85% of criminal investigations, and in two-thirds of these investigations there is a need to request evidence from online service providers based in another jurisdiction.

 

The Proposal

The European Commission (“Commission”) is therefore proposing new rules which will make it easier and faster for police and judicial authorities to access the electronic evidence they need in order to prosecute criminals.

For this purpose, the Commission recently proposed new rules, both a Regulation and a Directive, which include the following components:

  • European Production Order: this will allow a judicial authority in a Member State to obtain electronic evidence directly from a service provider in another Member State. The provider needs to respond to requests for e-evidence within 10 days, or within 6 hours in cases of emergency. This timeline is significantly lower compared to the 120 days’ timeline for the existing European Investigation Order, or the average of 10 months for a Mutual Legal Assistance Procedure;
  • European Preservation Order: this allows a judicial authority to request that a service provider or its legal representative preserve specific data for the purposes of a consequent request to provide data via mutual legal assistance, a European Investigation Order or a European Production Order;
  • Stronger safeguards: the new rules guarantee strong protection of fundamental rights, including safeguards for personal data protection. The service providers and persons whose data is being sought will benefit from various safeguards and be entitled to legal remedies;
  • Legal representatives in the EU: to ensure that all providers that offer services in the EU are subject to the same obligations, even if their headquarters are in a third country, they are required to designate a legal representative in the EU for the receipt of, compliance with and enforcement of decisions and orders;
  • Provide legal certainty for businesses and service providers: law enforcement currently often depends on the good will of service providers to hand them the evidence they need. Moving on, the proposal envisions that this framework is legally binding so that it improves legal certainty and clarity as compared to the existing voluntary cooperation.

The overall aim of these new rules is to make it easier and faster for the police and judicial authorities to obtain the electronic evidence they need to efficiently investigate offences. This legislative proposal wishes to modernize the way in which crimes are investigated, in response to the state of the art methods that criminals use. In fact, almost two thirds of crimes where electronic evidence is held in another country cannot be properly investigated due to the time it takes to gather the required evidence or due to the fragmented legal framework.

At the moment, law enforcement and judicial authorities cooperate to obtain electronic evidence by using mutual legal assistance procedures outside the European Union, or the European Investigation Order inside the European Union. However, said procedures are too slow for obtaining electronic evidence, and time is of the essence. Data can be exchanged in a matter of seconds, which simply puts enforcement authorities at a disadvantage if they need to wait for too long before they can access it.

The proposal includes obligations for service providers that are used for communication purposes (e.g. providers of telecommunication services and other electronic communication services, including interpersonal services). It will also apply to providers of information security services that facilitate interactions between users (e.g. online marketplaces and cloud computing services) and for providers of internet infrastructure services (e.g. registries that assign domain names and IP addresses).

The categories of data that can be obtained with a European Production Order include:

  • Subscriber data, which is data that serve to identify a subscriber or customer (e.g. name, email address, billing data);
  • Access data, which can analyzed in combination with other data elements in order to identify a user (e.g. log-in details, IP address etc.);
  • Transactional data, which is data that relates to the provision of the service (e.g. source and destination of message, data on location of a device, date, time and protocol used etc.).

The three categories are also known as ‘non-content data’, to be distinguished from content data, which includes any stored data in a digital format (e.g. text, voice, videos, images, sound etc.).

 

What about legal safeguards?

The proposal contains strong safeguards to guarantee privacy, data protection and the right to judicial redress. For instance, the issuing of European Production or Preservation Orders will only be possible in the context of criminal proceedings. At the same time, all criminal law procedural rights will apply, including in legislation at EU level, such as the right of access to a lawyer and the right of access to the case file. At all times, the fundamental legal principles of legality, necessity and proportionality need to be honored.

Further, production orders regarding transactional or content data may only be issued for criminal offences that the issuing state punishes with a penalty of at least three years, or for specific cybercrimes and terrorism-related crimes.

Finally, the suggested framework departs from the data storage principle and does not examine where data is stored for jurisdiction purposes. Rather, if the data is needed for the criminal proceedings and relate to services of a provider that offers services in the EU, said provider needs to produce the data irrespective of where it is located. This means that a service provider that stores data of European users outside the EU, e.g. in the US, will need to provide the data to European authorities if addressed with a European Production Order. In the case of a conflicting legal obligation, the EU suggests a review mechanism that will ultimately resort to the competent national court resolving any such conflict. In any event, personal data covered by this proposal must be processed in accordance with the General Data Protection Regulation and the Police Directive.

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CP(TPP) Entered into Force!

By Pratyush Nath Upreti

A much-awaited mega-regional trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which involves eleven countries in the Asia-Pacific region, including Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam, entered into force on December 30th of last year. The CPTPP consists of a total of thirty chapters, along with several annexes to the chapters and four annexure to the agreement.[1]

The United States, under the leadership of Obama, was one of the architects of the Trans-Pacific Partnership Agreement (TPP). However, the current US President Donald Trump signed an executive order withdrawing the USA from the TPP.[2] Post the US withdrawal, some considered the TPP dead and buried, but it received a new life during the Asia-Pacific Economic Cooperation (APEC) summit, which renamed TPP as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).[3] The new version suspended twenty-two items from the original text, in particular, the IP chapter[4] which had received heavy criticism for transplanting the US style of IP protection. For example, the patent term adjustment for unreasonable granting, authority delays, and curtailment was suspended.[5] It was argued that, despite the professed purpose of the harmonization of patent-granting procedures among the member countries, the main intention of the provision was to extend pharmaceutical monopolies. According to the Report, on average the patent term extensions would give 3.6 further years and may amount to 20% of the pharmaceutical sales in the USA.[6] There are other noticeable differences between TPP and CPTPP.[7] In the last few years, there was an outcry on public forums regarding investors, through dispute settlement, restricting the sovereign right to regulate issues related to public interest or creating the risk of a ‘regulatory chill’.[8] Taking this seriously, CPTPP has reaffirmed and endorsed government’s inherent right to regulate in matters related to the public interest.

After more than a year since its new abbreviation, CPTPP came into force last month. Clearly, the CPTPP is a massive trade block representing 495 million people and 13.5 percent of global gross domestic product.[9] It is hard to predict whether it will be a success, but it shows huge potential and perhaps offers an alternative for countries in the light of the strains in the multilateral rules-based trading system.

[1] Comprehensive and Progressive Agreement for Trans-Pacific Partnership text (Released on 21 February 2018) < https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-force/cptpp/comprehensive-and-progressive-agreement-for-trans-pacific-partnership-text#chapters&gt; accessed 15 January 2019.

[2] Presidential Memorandum Regarding Withdrawal of the United States from the Trans-Pacific Partnership Negotiations and Agreement (White House, January 23 2017) <https://www.whitehouse.gov/presidential-actions/presidential-memorandum-regarding-withdrawal-united-states-trans-pacific-partnership-negotiations-agreement/> accessed 14 January 2019.

[3]The Asia-Pacific Economic Cooperation (APEC) 2017 <https://www.apec.org/Meeting-Papers/Leaders-Declarations&gt; accessed 14 January 2019.

[4] For more discussion, see Pratyush Nath Upreti, ‘From TPP to CPTPP: Why intellectual property matters’ (2018) 13(2) Journal of Intellectual Property Law & Practice 100-101

[5] See CPTPP vs TPP (New Zealand Foreign Affairs & Trade) < https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-force/cptpp/understanding-cptpp/tpp-and-cptpp-the-differences-explained/&gt; accessed 13 January 2019.

[6] Charles Clift, ‘The value of patent term extensions to the pharmaceutical industry in the USA’ (2008) 5(3)  Journal of Generic Medicines 201-208.

[7] CPTPP vs TPP  n (3).

[8] See Philip Morris Brands Sarl, Philip Morris Products S.A and Abal Hermanos S.A v. Oriental Republic of Uruguay, ICSID Case No: ARB/07. Also see Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12

[9] ‘Benefits of the CPTPP for Yukon’ < https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/regions/YT.aspx?lang=eng&gt; accessed 13 January 2019.

EU Pushes Reform of Investor-State Dispute Settlement

By Gabriel M. Lentner

On 18 January 2019, the EU and its Member States submitted two papers proposing the establishment of a permanent multilateral investment court along with an effective work plan to do so within the UN Working Group under the United Nations Commission on International Trade Law (UNCITRAL). This is important because more and more IP-related disputes are litigated in investment arbitration: see   the cases   of Bridgestone v Panama, Philip   Morris   v  Australia and Philip  Morris  v  Uruguay (involving trademarks), Eli Lilly v Canada and a potential case involving the pharmaceutical company Pfizer under the US-Ecuador Bilateral Investment Treaty involving patents.

 

A Permanent Multilateral Investment Court

The proposal of the EU is part of the ongoing work of the UN Working Group tasked with examining reform of investor-state dispute settlement (ISDS). ISDS in its current form has been criticized on many grounds (such as the lack of appeal, inconsistency of decisions, excessive costs and duration, and lack of transparency).

For the EU, the establishment of a permanent multilateral investment court (MIC) is the only option that can respond to all these criticisms. The MIC would include an appeal mechanism and instead of ad-hoc arbitrators, full-time adjudicators would be deciding cases.

 

The Way Forward

In the second paper, the EU proposes to proceed in several related steps within the UN Working Group to arrive at developing concrete solutions and text proposals, which then could be adopted or endorsed by the UNCITRAL Commission and, ultimately, the General Assembly of the United Nations.

The EU also welcomes the input of civil society and the Academic Forum and Practitioner’s Group at all stages of the process.

So far it is difficult to assess the viability of the EU’s proposal. It remains to be seen whether the EU can garner the necessary support for a future MIC. What the MIC would mean for IP-related disputes is thus also unclear. In principle, however, a permanent dispute settlement body could ensure more predictability and coherence in an area of law that is still affected by uncertainties.

There is Such Thing as Bad (Right of) Publicity

By Marie-Andrée Weiss

Last June, the New York legislature failed, once again, to amend the state’s right of publicity law. A similar bill, Assembly Bill A08155, had the same fate last year. New York Assembly Bill 8155-B had passed the assembly on June 18, 2018, but the Senate did not bring the bill to a vote before the legislature adjourned. This is fortunate, as the bill had several flaws.

 

The current New York right of publicity law

New York statutory right of privacy, Civil Rights Laws §§ 50 and 51, is a narrowly drafted law. The New York Court of Appeals recently described the legislative intent at passing this law as “slender” (Lohan v. Take-Two Interactive Software, Inc.). Indeed, the law does not provide an extensive right of publicity, but merely makes it a misdemeanor to use a living person’s likeness, that is, her name, portrait or picture, “for advertising or trade purposes” without prior written consent. New York does not recognize any other privacy rights, not even at common law.

 

Identity as personal property

The bill clearly differentiated the “right of privacy” from the “right of publicity.” During a person’s lifetime, a person would have had a right to privacy and a right to publicity. Both rights would have prevented the unauthorized use of likenesses and names, but only the right of publicity would have provided the right to sell one’s persona.

The “right of privacy” was defined as a “personal right, which protects against the unauthorized use of a living individual’s name, portrait or picture, voice, or signature for advertising purposes or purposes of trade without written consent.” This is essentially the right that is currently protected in New York. The bill would have also protected a person’s signature, which is not currently protected. Moreover, under the bill, this right of privacy would have expired upon death, just as it does now.

The bill would have also created a “right of publicity,” defined as “an independent property right, derived from and independent of the right of privacy, which protects the unauthorized use of a living or deceased individual’s name, portrait or picture, voice, or signature for advertising purposes or purposes of trade without written consent.”

The bill would have made an individual’s persona his or her personal property, “freely transferable or descendible, in whole or in part by contract or by means of any trust or testamentary instrument.” The bill would, therefore, have made it possible to transfer one’s persona, by selling it or licensing it, for a limited or unlimited time, and these contracts would have been able to survive death.

 

The dangers of making identity a transferable personal property

SAG-AFTRA, a performers’ union, supported the bill. Its New York President urged its New York members to let their representatives know that they were in favor of passing the bill. However, the bill, as written, could have placed actors in danger of losing the right to use and profit financially from their personality.

The Fantine character, created by Victor Hugo in Les Misérables, sold her hair so she could send money to her daughter Cosette. One can imagine an actress, who once played Fantine in a Les Mis production, but who has since fallen on hard times, selling her entire persona in order to make ends meet. Hair can grow again, but under the bill, a persona could have been sold off for a long time, even forever. One could even imagine a persona becoming a commodity under the new law, with producers buying personas straight out of a ‘central-casting’ database. Representative Morelle noted during the debate that “[i]f someone looks like another person, that’s not covered under this. You could go find someone who looks like Robert De Niro, or you could find someone that looks like another actor.”

The bill would have thankfully forbidden parents or guardians from assigning the right of publicity of a minor and would have rendered such assignments unenforceable. Under this bill. Fantine could have sold her own persona, but not Cosette’s.

 

A descendible right of publicity

Unlike other states, such as California, New York does not have a post-mortem right of publicity. The bill would have provided such a right for forty years after a person’s death, whether she was famous or not. At the expiration of the forty-year period, the image of an individual would have been freely usable.

This right would have been descendible, either by testament or by intestate succession. Either way, the right would have been enforced by a person or persons possessing at least a fifty-one percent interest of the individual’s right of publicity.

Persons claiming to be successors in the right of publicity of a deceased individual, or licensees of such rights, would have had to register their claim with the New York Secretary of State and pay a $100 fee. Thereafter, their claim would have been posted on a public web site specifically designed for that purpose. Parties interested in licensing or buying a particular right of publicity could have used this registry to find out who owns a particular right. Failure of a licensee or successor to register a persona would have been a defense for unauthorized use of the deceased’s persona. The sponsor of the bill, Representative Joseph Morelle, specified during the debate that the law would apply to anyone seeking damages in New York, provided that the interest had been registered in the New York registry.

The Electronic Frontier Foundation argued in a memorandum sent to the New York legislature that the law would pressure heirs to benefit commercially from the image of their deceased relatives, noting that in “a large estate, an inheritable and transferable right of publicity may add to the tax burden and thus lead heirs with no choice but to pursue advertising deals or some other commercial venture.” Indeed, deceased artists such as Glenn Gould or Franck Zappa are back on the road performing as holograms.

 

Fake News, Deepfakes and the right to publicity

The bill addressed the issue of “digital replica,” which it defined as a “computer-generated or electronic reproduction” of the likeness or voice of a person, whether alive or dead. Representative Morelle explained that the bill aimed at codifying the recent Lohan v. Take-Two Interactive Software decision, where the court found that New York right of privacy law, which protects unauthorized use of a “portrait,” encompasses the “graphical representation of a person in a video game or like media.”

Use of such digital replicas would have been forbidden, without prior authorization, in expressive works such as a live performance, a dramatic work, or a musical performance “in a manner that is intended to create, and that does create, the clear impression that the individual represented by the digital replica is performing, the activity for which he or she is known.” Athletes’ digital replicas could not have been used in audiovisual works either, if doing so created “the clear impression that the athlete represented by the digital replica is engaging in an athletic activity for which he or she is known.” This was probably aimed at protecting athletes against the unauthorized use of their likenesses in video games.

The dystopian movie The Congress featured actress Robyn Wright selling the right to her digital image to a studio, under an agreement which forbade her to ever act again. Even more sinister is the prospect of selling one’s digital image for making pornographic movies. Indeed, Artificial Intelligence (AI) technology allows creation of “deepfakes” video where a person is depicted as performing sexual acts. Such technology can be used to seek revenge (so-called revenge porn) or simply to create porn movies featuring celebrities. The bill specifically addressed the issue of unauthorized use of digital replicas in a pornographic work and would have forbidden the use of digital replicas in a manner intended to create, or which did create “the impression that the individual represented by the digital replica is performing [in such pornographic work]”.

Representative Morelle also mentioned during the debate that digital replicas can be used to create fake news, for instance, by making political figures look and sound as if they are saying something they did not actually say, which brings us to the First Amendment issues this bill raised.

 

First Amendment Issues

New York courts found that the use of a person’s likeness with respect to “newsworthy events or matters of public interest” is non-commercial and therefore not actionable under New York’s right of publicity law (Stephano v. News Group Publs.).

Use of digital replicas would have been authorized for parody, satire, commentary or criticism purposes, or “in a work of political, public interest, or newsworthy value,” or if the use was de minimis or incidental.

The bill would have explicitly provided a First Amendment defense to the use of a persona without prior consent, including use in a book, play or movie. This is in line with the recent California case, Olivia de Havilland v. Fox Networks, which had pitted the centenarian actress against the producer of Feud: Bette and Joan, an eight-part television show about the Joan Crawford/Bette Davis rivalry. Catherine Zeta-Jones portrayed Olivia de Havilland, and was shown in the movie giving an interview wherein she referred to her sister Joan Fontaine as a ‘bitch’, among a few more unsavory comments. Olivia de Havilland sued for infringement of her California right to publicity but lost because the use of her name and likeness in the movie was protected by the First Amendment. The case shows how public figures cannot always rely on their right of publicity to censor speech about themselves which they deem unsavory.

It has been reported that Olivia de Havilland plans to ask the Supreme Court to review the case, and the New York legislature is likely to introduce a new version of its right of publicity bill in the coming months. Right of publicity is developing, warts, holograms, and all.

What’s New in the US-Mexico-Canada Agreement (USMCA)

As readers know, NAFTA has been turned into the United States – Mexico – Canada Agreement (USMCA). Along with changes to minimize barriers in the automobile and dairy sectors, intellectual property rights, data protection, and dispute settlement have undergone considerable alterations. These changes are addressed here.

 

IP Protection Extended

As for intellectual property rights, the negotiations have resulted in enhanced protections, an outcome mainly desired by the US (and with considerable similarities with the 2015 TPP text).

In regard to copyrights, Art.20.H.7 of the USMCA stipulates that, following the author’s death, his or her intellectual property rights shall be protected for 70 years onwards (thereby extending protection from the 50-year standard, by which Canada currently abides). In cases where no person’s life is used as a basis for the copyright term, the minimum is now set to 75 years from the date of the first authorized publication. In NAFTA, the minimum was 50 years.

Biologics are a field which NAFTA did not specifically regulate. Under the USMCA Art.20.F.14, however, patent protection for new pharmaceutical products that are (or contain) biologics will last 10 years from the date of first marketing approval of that product in the Party concerned. Note that biologics protection in Canada is currently only 8 years. It is also important to highlight that the USMCA provides for a patent-term restoration system, enacted after request, in cases where the applicant’s patent issuance has been ‘unreasonably’ delayed (Art.20.F.9).

 

IP Enforcement

Of utmost importance are the advanced enforcement provisions of IP rights protection. Under NAFTA, the competent authorities could act only after the filing of an application by the right holder (Art.1718). The USMCA provides for the ex officio authority of border officials to initiate border measures against suspected counterfeit trademark goods or pirated copyright goods which are imported, destined for export, in transit, or entering/exiting a free trade zone or a bonded warehouse; this is intended to combat the phenomenon of weak counterfeiting (Art.20.J.6). Further, the USMCA provides for the establishment of a new IP Committee, with the task of holding consultations on several cooperation issues (Art.20.B.3).

 

Digital Trade Chapter

When the original NAFTA came into force in 1994, digital trade was not considered in the agreement. USMCA, however, dedicates a whole chapter to it (Chapter 19). Two key points in Chapter 19 should be emphasized. First, the rules on data localization restrict policies that require companies to store personal information within the local jurisdiction, which seems to conflict with what is provided for in the relevant EU regulations. The cross-border transfer, storage and processing of data is facilitated under the USMCA through, inter alia, the prohibition of custom duties on the transfer of digital products and the requirement that Parties do not (unnecessarily) restrict the cross-border transfer of personal information.  Second, Art.20.J.11 introduces a safe-harbor provision for Internet Service Providers by requiring that parties limit the Providers’ liability for monetary relief in instances of infringements where they merely maintain, transmit, or store unauthorized information, but do not control, initiate or direct the infringement.

 

Limitation of Investor-State Dispute Settlement

Reformation of the dispute settlement mechanism is another field of practical and legal interest. Chapter 11 of NAFTA provided for investor-state dispute settlement (ISDS) for protected investments. The foreign investor had recourse to an arbitral tribunal to challenge host State measures. Canada has now entirely withdrawn from the ISDS system. Thus, investor-state disputes are only permitted between the US and Mexico, and only under certain conditions. First, they are only available for alleged violations of the standards of national treatment and ‘most-favored nation’, as well as direct expropriation disputes. Furthermore, ISDS is only available after local remedies have been exhausted or after a time lapse of 30 months. As far as minimum standards of treatment (fair and equitable treatment) and indirect expropriation are concerned, the investors can only pursue a claim before domestic courts.

Notably, specific categories of US investors are permitted to initiate proceedings relating to oil, gas, transportation, infrastructure, and power generation concession contracts concluded between them and the Mexican government (USMCA Annex 14-E). Yet, the state-to-state dispute settlement mechanism of NAFTA’s Chapter 19 has not undergone modification and remains in place.

 

Conclusion

The parties have chosen to maintain many of the original NAFTA principles, such as that bilateral and trilateral elements can coexist. The USMCA agreement, therefore, represents a compromise, bringing changes in some areas while leaving others untouched.

The UK House of Commons Treasury Committee Report on Crypto Assets

By Jonathan Cardenas[1]

On September 19, 2018, the UK House of Commons Treasury Committee (the “Committee”) published a Report on Crypto-assets (the “Report”), which provides regulatory policy recommendations for the UK Government, the UK Financial Conduct Authority (the “FCA”) and the Bank of England.[2]   The Report forms part of the Committee’s Digital Currencies Inquiry, which was launched in February 2018 to examine the potential impact of distributed ledger-based digital currencies on the UK financial system and to prepare a balanced regulatory response from the UK Government.[3]  This article briefly summarizes the Committee’s UK regulatory policy recommendations.

 

  1. Crypto Asset Risk

The Committee’s regulatory policy recommendations are structured around a variety of risks that crypto assets pose to crypto asset investors.  These risks include: high price volatility; loss of investment due to fraud and/or third-party hacking of crypto asset exchanges; loss of access to crypto asset exchange accounts and/or digital wallets due to unrecoverable lost passwords; price manipulation due to poor market liquidity and relatively low trading volumes; potential facilitation of money laundering and terrorist financing; and, macro risk to UK financial stability.  Mindful of these risks, the Committee notes that crypto assets presently fall outside the scope of FCA regulation merely because the “transferring, buying and selling of crypto assets, including the commercial operation of crypto asset exchanges”[4] do not meet legal definitional criteria to be considered as either a “specified investment” under the Financial Services and Markets Act 2000 (Regulated Activities) Order (the “Regulated Activities Order”), or as “funds” or “electronic money” under applicable payment services and electronic money regulation, as referenced in expert witness reports provided to the Committee.[5]

 

  1. Initial Coin Offerings

Consumer fraud in the context of initial coin offerings (“ICOs”) is a topic of special concern to the Committee.  The Committee recognizes that there is currently “little the FCA can do to protect individuals”[6] from fraudulent ICOs as a result of a regulatory loophole that permits ICOs to escape FCA jurisdiction.  Since most ICOs do not directly promise financial returns, but rather, offer future access to a service or utility, they do not fall squarely within UK law definitions of “financial instrument,”[7] as referenced in expert witness reports provided to the Committee, and therefore are not FCA regulated.

The Committee concurs with the view of U.S. Securities and Exchange Commission Chairman Jay Clayton that ICOs should not escape the ambit of securities regulation merely because they change the form, and not the actual substance, of a securities offering.[8]  The Committee also concurs with the view expressed in an FCA warning that consumers should be prepared to lose their entire investment in early stage ICO projects due to the FCA’s lack of jurisdiction and consequent inability to protect consumers.[9]  As a result, the Committee recommends that the Regulated Activities Order be updated, as a matter of urgency, in order to bring ICOs within the scope of FCA jurisdiction.

 

  1. Crypto Asset Exchanges

The facilitation of money laundering and terrorist financing through crypto asset exchanges is another area of major concern addressed by the Committee.  Crypto asset exchanges are not currently required to comply with anti-money laundering (“AML”) rules under UK law because their activities are not specifically captured by the language of UK AML regulation, including, most notably, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.[10]  Although current UK AML regulation does not target crypto asset exchange activity, crypto asset exchanges do fall within the scope of the European Union’s 5th Anti-Money Laundering Directive (the “5th AML Directive”).[11]  As a consequence, the Committee recommends that the UK Government either (1) transpose the 5th AML Directive into UK law prior to the UK’s planned exit from the EU, or (2) replicate relevant provisions of the 5th AML Directive in UK law as quickly as possible.

 

  1. Regulatory Implementation

The Committee proposes two ways of introducing crypto asset regulation in the UK: (1) by amendment of existing financial services regulation or, (2) by adoption of new regulation tailored specifically to crypto assets.

Amending the existing financial services regulatory framework would involve classifying crypto asset activity as a regulated activity within the Regulated Activities Order.  Doing so would enable the FCA to regulate crypto asset activities by, for example, mandating that licenses be obtained in order to carry out specified crypto activities in the UK.  This approach has previously been used in the context of peer-to-peer lending,[12] and is regarded as the fastest way of providing the FCA with the powers needed to regulate crypto asset activities and protect UK consumers.

Adopting a new regulatory framework separate from pre-existing financial services rules would allow for a more flexible and tailored approach to crypto asset regulation, but would also require substantially more time to formulate and finalize.

Given the rapid growth of crypto asset markets and the expanding set of risks faced by UK consumers, the Committee recommends that the UK Government regulate crypto asset activities by expanding the scope of the Regulated Activities Order, rather than by adopting a separate body of rules.  The Committee also recommends that the UK Government examine the exact type of crypto asset “activity” that would be included in an amended Regulated Activities Order, as well as the ramifications of doing so.

The Committee notes that although the global regulatory response to crypto assets is in early stages, the UK is in a position to learn from the experience of other jurisdictions given the fact that the UK has not yet introduced any specific type of crypto asset regulation.  As a result, the Committee encourages UK regulators to engage with their international counterparts in order to ensure that best practices are applied in the UK.

[1] Disclaimer: The views and opinions expressed in this article are those of the author alone.  The material in this article has been prepared for informational purposes only and is not intended to serve as legal advice.

[2] UK House of Commons Treasury Committee, Crypto-assets, Twenty-Second Report of Session 2017-19, 19 September 2018. Available at: https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/910/910.pdf.

[3] UK House of Commons Treasury Committee, Digital Currencies inquiry: Scope of the inquiry, 2017.  Available at: https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/inquiries1/parliament-2017/digital-currencies-17-19/.

[4] UK House of Commons Treasury Committee, Evidence – Financial Conduct Authority (DGC0028): Financial Conduct Authority’s written submission on digital currencies, April 2018.  Available at: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/digital-currencies/written/81677.pdf.

[5] UK House of Commons Treasury Committee, Evidence – Financial Conduct Authority (DGC0028): Financial Conduct Authority’s written submission on digital currencies, April 2018.

[6] UK House of Commons Treasury Committee, Crypto-assets, 19 September 2018, at para 87.

[7] UK House of Commons Treasury Committee, Oral evidence: Digital Currencies, Statement of David Geale, Q 193, HC 910, 4 July 2018. Available at: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-committee/digital-currencies/oral/86572.html.

[8] U.S. Securities and Exchange Commission, Statement on Cryptocurrencies and Initial Coin Offerings, December 11, 2017. Available at: https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11.

[9] Financial Conduct Authority, Consumer warning about the risks of Initial Coin Offerings (‘ICOs’), 9 December 2017. Available at: https://www.fca.org.uk/news/statements/initial-coin-offerings.

[10] The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692), 26 June 2017. Available at: http://www.legislation.gov.uk/uksi/2017/692/made.

[11] Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, OJ L 156, 19.6.2018, p. 43–74. Available at: https://eur-lex.europa.eu/legal-content/en/TXT/?uri=CELEX%3A32018L0843.

[12] See Financial Conduct Authority, The FCA’s regulatory approach to crowdfunding (and similar activities), Consultation Paper 13/13, October 2013. Available at: https://www.fca.org.uk/publication/consultation/cp13-13.pdf.

The European Commission Wants to Reform the World Trade Organization

By Gabriel M. Lentner and Filippo Faccin

On September 18, 2018, the EU Commission issued a concept paper on WTO reform. In this paper, the EU Commission recognizes that the rules-based multilateral trading system faces its deepest crisis since its inception. Against this background, the Commission seeks to move the debate toward a focus on the reform of the WTO.

The concept paper covers 3 issues:

  • Rulemaking and development
  • Regular work and transparency
  • Dispute settlement

 

Rulemaking and Development

The first proposals in this area concern industrial subsidies and state-owned enterprises (SOEs).

Recognizing the low level of compliance with the Agreement on Subsidies and Countervailing Measures (SCM Agreement) the EU proposes, inter alia, the creation of a general rebuttable presumption according to which if a subsidy is not notified or is counter-notified, it would be presumed to be a subsidy or even a subsidy causing serious prejudice.

As regards SOEs, a clarification of what constitutes a public body is proposed that seeks to broaden the existing definition, which, according to the EU Commission does not capture many relevant SOEs. In addition, rules concerning enhanced transparency about the level and degree of state control in SOEs and other market-distorting support are proposed.

Other proposals in this context are concerned with the expansion of the list of prohibited subsidies or the creation of a rebuttable presumption of serious prejudice. Non-insolvent companies without a credible restructuring plan or companies that use dual pricing will no longer have access to grants.

Establishing new rules to address barriers to services and investment, such as in the field of forced technology transfer are another priority.

The Commission also proposes to strengthen the procedural aspects of the WTO’s rulemaking activities. It argues that the EU should maintain support for multilateral negotiations and full outcomes in areas where this is possible, and should also explore the feasibility of amending the WTO agreement so as to create a new Annex IV.b. This annex would contain a set of plurilateral agreements that are applied on an MFN-basis and which could be amended through a simplified process.

Furthermore, the EU seeks to strengthen the role of the WTO secretariat in support of the various negotiation processes as well as the implementation and monitoring functions.

 

Regular Work and Transparency

The EU has consistently criticized the slow processes and the burdensome bureaucracy of the WTO, which paralyzes its regular work.

The solution that has been proposed is the development of rules that oblige members to provide substantive answers within specific deadlines and the increase of cross-committee coordination on issues related to market access.

The EU Commission concept paper defends the strengthening of the organization’s monitoring powers to check whether countries are implementing multilateral agreements and transparent trade policies. In particular, the EU Commission wants the WTO to implement:

  • More effective committee-level monitoring
  • Incentives for improving notification compliance
  • Sanctions for willful and repeated non-compliance
  • Counter-notifications
  • A strengthening of the Trade Policy Review Mechanism (TPRM).

 

Dispute Settlement

The Commission paper states that the dispute settlement system is “at grave danger, and swift action by members is needed to preserve it”.

A solution is necessary to end US blocking new appointments and to prevent the imminent stalemate of the appeal body.

The first stage of a general reform will be a comprehensive amendment of the provision of the Dispute Settlement Understanding (DSU) related to the functioning of the Appellate Body (AB).  This amendment would:

  • Narrow the 90-day limit to resolve a dispute
  • Increase the number of members of the appeal body from 7 to 9 (This would help to increase the efficiency of the appeal body, while improving the geographical balance)
  • Configure the membership of the appeal body to work full-time (currently, de jure, it is a part-time job)