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Definition of DeFi and CeFi Decentralized Finance (DeFi): a decentralized structure where smart contracts power financial services autonomously. DeFi circumvents the need for central intermediaries, aiming to establish a transparent and open financial ecosystem. Centralized Finance (CeFi): Rooted in traditional financial principles, CeFi operates through central intermediaries, which act as bridges between fiat currencies and other assets. The advent of DeFi was underlined by the desire to innovate the financial system by simplifying transactions and reducing regulatory burdens. The proponents of DeFi posited that a decentralized architecture could lead to a more streamlined economy. CeFi, on the other hand, evolved as a response to the need for order, control, and safety in financial operations. The European Perspective In May 2023, the ESRB, an essential EU body within the European System of Financial Supervision, presented an incisive analysis of CeFi. The analysis briefly noted that CeFi's essence lies in services run by centralized intermediaries, often the principal conduits between fiat currencies and other assets. The regulatory landscape in the EU has undergone a significant transformation, especially post the financial crisis 2008. Recent directives such as Directive (EU) 2019/879 (commonly referred to as BRRD2) and the introduction of the MiCA Regulation underline the commitment to minimize the potential impact on the financial system and economy, even as non-traditional currencies come under a robust framework. Contrasting Legal Underpinnings of DeFi and CeFi DeFi's trading occurs through decentralized peer-to-peer digital asset exchanges, allowing less data to be in the hands of central institutions. The non-custodial nature of such exchanges permits investors/users greater control over their investments. While CeFi operates within well-established legal paradigms, DeFi offers legal flexibility. It's a double-edged sword; while it fosters innovation and access, it also poses challenges to enforcing traditional legal standards. DeFi's Unique Prospects In stark contrast to CeFi, Decentralised Finance (DeFi) offers unprecedented inclusivity. DeFi has the potential to bridge the gaps left by traditional finance, allowing anyone with an internet connection to access financial services. This is an innovative leap toward financial equality. DeFi, powered by smart contracts and other novel technologies, provides enhanced transparency. Transactions are auditable, minimizing the chances of fraud, and the decentralized nature of the system offers a theoretically higher level of market efficiency. The technology-driven approach of DeFi may, in fact, pave the way for minimizing information asymmetry, which has been a persistent challenge in traditional finance. Current Trends and Future Convergence The European Systemic Risk Board (ESRB) has notably observed that CeFi will likely remain dominant in the financial landscape. Despite the rise of DeFi, the current CeFi predominance in digital-asset markets reveals a preference for convenience over more complex, self-custodial decentralized services. The introduction of the Markets in Crypto-assets (MiCA) Regulation has opened a new chapter in the coexistence of CeFi and DeFi. By putting non-traditional currencies under a robust framework, MiCA strives to enhance investor protection and promote stability within the EU's financial system. Rather than replacing CeFi, DeFi has to find a harmonious space within the existing financial architecture. Legal Guidelines for DeFi Builders DeFi builders must remain vigilant and adaptive to the evolving regulatory landscape. Here are key areas to monitor: Understanding the Regulatory Environment: Familiarize yourself with local and international regulations that may apply to DeFi. This includes monitoring new directives, such as the MiCA Regulation in the EU, that can impact decentralized finance. Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) Protocols: Implement robust AML and KYC procedures in line with global standards to mitigate risks associated with financial crimes. Data Protection and Privacy: Uphold stringent data protection measures to ensure user privacy while balancing the need for transparency and auditability within decentralized systems. Adaptation to Emerging Resolution Regimes: Stay informed about resolution regimes like Directive (EU) 2019/879 (BRRD2) and their potential applicability to decentralized entities. Risk Management and Consumer Protection: Implement comprehensive risk management strategies and maintain clear and transparent communication with users to protect their interests. Engagement with Regulators and Legal Experts: Maintain an open dialogue with regulators and seek guidance from legal experts specializing in decentralized finance. This proactive approach can provide foresight into upcoming regulatory changes. Global Coordination and Collaboration: Consider joining industry associations and engaging with international peers to share best practices and align with global regulatory trends. Embarking on the DeFi journey requires meticulous legal navigation. At Prokopiev Law Group, we bridge the gap between innovation and compliance. Leveraging our broad global network of partners, we ensure your adherence to regulations in the EU and worldwide. The financial landscape is evolving, and so are the legal intricacies. Don’t let legal uncertainties be a roadblock to your innovative pursuits. Reach out to us, and let's unravel the legal maze together, shaping a secure and prosperous future in decentralized finance. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

Artificial Intelligence (AI) plays a pivotal role in many modern-day technologies. Integral to the functioning of these systems is the "input data" or "prompt," which instructs the AI to perform specific tasks or generate new information. Understanding the implications of using personal data within these prompts, especially under the General Data Protection Regulation (GDPR), is vital for legal compliance. What is a Prompt? Prompts are foundational datasets provided to an AI system to initiate a specific action. These can manifest in various forms: Text prompts Image prompts Significantly, prompts may or may not carry personal information. For instance, asking an AI about the capital of France wouldn't entail any personal data. However, instructing the AI to provide a birthday message for Anna Thompson, a financial analyst in Berlin, incorporates the use of personal information. Processing Personal Information: Implications under GDPR If an entity decides to infuse a prompt with personal data, this activity is classified as "processing" under GDPR. Consequently, it's imperative that the entity bases this processing on at least one of the six lawful grounds sanctioned by the GDPR. Below we enumerate these grounds: Consent: Processing can be grounded on an individual's explicit consent. However, GDPR mandates certain stringent criteria for what can be accepted as valid consent. Contract: Personal data can be processed if it is crucial for the execution of a contract involving the concerned individual. Legal Obligations: If European legal obligations dictate an entity to process personal data, this action complies with GDPR. Vital Interests: When it's paramount to safeguard an individual's life or "vital interests", processing their personal data is justified. Public Interest: In scenarios where the processing is mandated for tasks aligned with the broader public good or "public interest," using personal data is lawful. Legitimate Interest: Entities can base their processing on their legitimate interests or those of a third party. However, this is valid only if these interests do not supersede the individual's fundamental rights and freedoms that advocate for protecting their personal data. Data Minimization and Purpose Limitation GDPR emphasizes the principle of data minimization. When using AI, processing only the minimum necessary amount of personal data is essential. Personal data should be processed transparently and fairly. Central to this concept is the idea of purpose limitation. Here's a deeper dive into this principle: Explicit & Legitimate Purposes: Data collection should always have a clear, specific, and legitimate reason, as was mentioned above. No Further Processing Incompatible with Original Purpose: Once data is collected for a specific purpose, it should not be used for another purpose the individual did not originally consent to or is unaware of. For example, if a user provided their email address for a monthly newsletter, using that email address for a different, unrelated marketing campaign without explicit consent would breach the purpose limitation principle. Transparency with Data Subjects: Organizations must be transparent with individuals about data collection purposes. Retention and Purpose Relevance: Data should be kept only as long as necessary for the original purpose. Suppose the purpose of the data collection becomes obsolete. In that case, e.g., an event registration has concluded, the data related to that purpose should be reviewed for deletion unless there's a legal reason to retain it. Data Review and Update: Organizations should regularly review the data they hold to ensure they're processing it only after its initial purpose. This also helps in maintaining data accuracy and relevance. Data Subject Rights Individuals, or 'data subjects,' have specific rights under GDPR that organizations must uphold: Right to Access: Individuals can request access to their personal data and inquire about how it's being used. Right to Rectification: If personal data is inaccurate or incomplete, individuals have the right to correct it. Right to Erasure ('Right to be Forgotten'): Individuals can demand that their data be deleted under certain conditions. Right to Object: Individuals have the right to object to processing their data in specific circumstances, especially for direct marketing. Data Protection by Design Organizations are encouraged to adopt a 'data protection by design' approach when integrating AI systems. This involves considering privacy at the initial stages of product development, ensuring that systems are designed from the ground up to protect personal data. Risk Assessments A thorough risk assessment should be conducted before deploying AI systems that process personal data. This helps to: Identify potential threats and vulnerabilities. Implement necessary controls to mitigate risks. Ensure GDPR compliance from a risk management perspective. Accountability and Record-Keeping Under GDPR, organizations have to comply and demonstrate their compliance. This means: Maintaining detailed records of data processing activities. Implementing relevant policies and procedures. Regularly reviewing and updating these measures. International Data Transfers AI often operates in a global ecosystem. When personal data crosses European borders, organizations must ensure that the receiving country offers adequate data protection in line with GDPR. Final Thoughts Harnessing the power of AI while navigating GDPR's complex maze can be challenging. However, organizations can innovate responsibly with due diligence, informed decisions, and a commitment to data privacy. As always, engaging legal expertise when in doubt ensures a smoother journey in the evolving landscape of AI and data privacy. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

As artificial intelligence (AI) systems become increasingly sophisticated, they are touching various spheres of legal concern - from intellectual property rights to liability, and from privacy and data protection to discrimination and governance. This article explores these issues, discusses potential risks and implications, and analyzes different legal relationships between AI platforms and their users. Furthermore, it highlights the measures developers can take to manage these challenges, including examining AI's role in creating and testing code. Intellectual Property Rights and AI IP Protection and Ownership: An AI Perspective In the realm of AI, conventional IP laws are being stretched to their limits. The distinction between human-generated and AI-generated content is becoming blurred. AI platforms such as OpenAI, Copilot, and Tabnine demonstrate this by adopting different legal stances. OpenAI, for example, gives the user all rights, titles, and interests in its outputs. Other popular AI platforms retain the rights and grant licenses to users instead. Understanding the Conundrum of AI-Generated Content On the one hand, an AI-generated output may not be unique, making the idea of exclusive rights challenging. On the other hand, granting users a license instead of assigning rights, as practiced by Copilot and Tabnine, brings its own complexities. The right to incorporate user suggestions or feedback and to use customer data for internal business purposes further complicates matters. AI Training and the Challenges of Third-Party IP Usage The use of third-party IP in AI training poses unique challenges. Tabnine, for instance, assures users that their code will solely be used to develop "Tailor Made Services," without granting any IP rights to the platform. However, questions around potential infringement still persist, such as those raised in the ongoing US claim involving Copilot. AI and Software Development: Evaluating Potential Infringements AI's role in software development has brought forward issues around potential infringements. Several platforms have faced allegations of copyright infringements due to the training data used. The legal implications of using AI in software development, such as whether AI-generated code could be seen as a violation of warranties of authorship or open-source code use, warrant careful consideration. Assigning Accountability: Data Scientists, Developers, or Executives? Identifying the responsible party when things go wrong is a challenge in the AI landscape. Is it the data scientists who curated the training data, the developers who integrated the AI into the system, or the executives who approved the usage? The responsibility may lie within the organization, but its precise location remains ambiguous. Understanding the Standards of Care in AI-Driven Decisions When AI tools drive decisions, the standard of care expected may not be clearly defined. This lack of definition brings up a host of legal questions. For instance, should AI outputs be treated as the final word or a mere suggestion? Also, what constitutes a breach of standard care in such contexts? Privacy and Data Protection Complying with Privacy Laws: Challenges and Solutions AI's voracious appetite for data, essential for training and refining models, often collides with privacy regulations. AI systems, especially those based on machine learning, are often termed "black boxes" due to their inherent complexity. This complexity can make it challenging to provide the transparency required under data protection laws. However, newer approaches such as explainable AI can help in simplifying these systems without compromising their functionality. GDPR and AI The General Data Protection Regulation (GDPR) imposes stringent accountability obligations on AI systems processing personal data. Ensuring compliance with these obligations, especially the principles of data minimization and purpose limitation, can be demanding. Cross-border Data Processing: Implications and Precautions AI often involves processing data across borders, leading to jurisdictional issues and potential clashes with different data protection laws. Thorough due diligence and compliance with international data transfer rules help to avert possible legal risks. Governance and Regulation of AI Regulatory Frameworks for AI: Balancing Innovation and Safety Regulations around AI walk a fine line between fostering technological advancement and ensuring public safety. There's an exigent need to scrutinize the balance struck by current frameworks, considering the twin goals of safeguarding the public interest and encouraging innovation. AI and Liability: Exclusionary Tactics and their Consequences In the event of errors or damages caused by AI, attributing liability is a complex task. The ramifications of current tactics, which often seek to limit liability, necessitate thorough investigation. Understanding these will illuminate the broader landscape of legal challenges in the AI field. Recommendations for Developers in the AI Space As AI continues to transform the landscape of various sectors, developers need to stay ahead of the curve. We provide recommendations on handling intellectual property rights, complying with privacy laws, and ensuring transparency, amongst others. The complexities of AI's legal landscape are vast and evolving. By understanding and anticipating these complexities, we can mitigate risks and create a future that best leverages the potential of AI. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

Decentralized Autonomous Organizations (DAOs) are revolutionizing the digital business landscape, providing a robust, resilient, and inherently democratic model for organizational structure and decision-making. DAOs are blockchain-based entities run by smart contracts - self-executing contracts with the terms of the agreement being directly written into lines of code. Blockchain, the underlying technology that enables DAOs, is an innovative form of distributed ledger technology (DLT). This technology allows the recording of transactions across a multitude of computers transparently and securely. By decentralizing the decision-making process and introducing a cryptographic level of security, blockchain technology eradicates the need for centralized governance structures and trust intermediaries. Industry Trends in DAO Support As DAOs continue to burgeon, they are becoming increasingly appealing to various industries. Some prevailing trends include: Interoperability: Various blockchain networks are working towards interoperability, aiming to streamline cross-chain interactions, thus increasing the flexibility and efficiency of DAOs. Tokenization: This trend empowers members to make collective decisions based on their token holdings, injecting a tangible sense of ownership and commitment into the decision-making process. Regulatory recognition: Certain jurisdictions now acknowledge DAOs as legal entities, offering them further legitimacy and increasing potential for mainstream adoption. Challenges of Incorporating DAOs Despite the substantial benefits, incorporating DAOs has its challenges. One of the critical challenges is: Regulatory compliance: Blockchain technology transcends national borders, making it hard to conform to a single jurisdiction's legal framework. Additionally, DAOs face: Smart contract vulnerabilities: As DAOs operate based on smart contracts, any inherent bugs or vulnerabilities in these contracts can potentially cripple the entire organization. Governance issues: Ensuring fair, transparent, and effective decision-making can be difficult within a decentralized environment where stakeholder interests may diverge significantly. The Importance of Decentralisation in DAOs Decentralization, the core principle underpinning DAOs, brings forth significant advantages such as: Transparency: All transactions are open for scrutiny by any member, promoting accountability within the organization. Resilience: By dispersing decision-making authority across a network, DAOs can withstand shocks and disruptions that might otherwise incapacitate a traditional, centralized entity. Inclusivity: Decentralisation paves the way for broader participation, enabling stakeholders with token holdings to contribute to the decision-making process. While DAOs hold great promise for creating more democratic, transparent, and resilient organizational structures, their success hinges on overcoming regulatory hurdles and ensuring robust governance mechanisms. Framework for DAO Support Vehicles in Gibraltar In Gibraltar, the following legal entities can be used as DAO support vehicles to provide them with a legal persona that allows them to hold assets, enter into contracts, and interact with traditional legal systems. Private Foundation A Private Foundation is a legal entity with a separate legal personality established by a founder (or founders) who endows the foundation with assets to be utilized for a specific purpose. This purpose can be charitable, non-charitable, or a mix of both. In the context of DAOs, a Private Foundation can be established to hold assets on behalf of the DAO, providing a legal entity through which the DAO can interact with the broader world. Purpose Trust A Purpose Trust is a form of trust that, unlike a traditional trust, is not established for the benefit of identifiable beneficiaries but for the achievement of specific purposes. Gibraltar law recognizes both charitable and non-charitable Purpose Trusts. In the realm of DAOs, a Purpose Trust can be established to hold assets and perform actions to fulfill the DAO's objectives. This arrangement can provide an additional layer of security for the DAO's assets and ensure they are used per the DAO's established purposes. Company Limited by Guarantee A Company Limited by Guarantee (CLG) is a company that does not have share capital or shareholders but instead has members who act as guarantors. This structure is commonly used for non-profit organizations, where the members guarantee to contribute a predetermined amount to cover the company's liabilities. In the context of DAOs, a CLG can provide a traditional legal structure through which the DAO can operate. The DAO could govern the CLG, allowing it to interact with the traditional business world while maintaining a DAO's decentralized governance structure. When to Establish a DAO Support Vehicle The decision to establish a DAO support vehicle largely depends on the specific needs and circumstances of the DAO. In general, a DAO support vehicle should be considered in the following scenarios: Asset Ownership: If the DAO needs to own physical assets or hold intellectual property rights, a support vehicle can provide the legal structure necessary. Contractual Obligations: If the DAO needs to enter into contracts with other entities or individuals, a support vehicle can provide the legal persona to allow this. Regulatory Compliance: A support vehicle can help to navigate regulatory frameworks that may not have been designed with decentralized autonomous organizations in mind. Legal Protection: In case of legal disputes or liabilities, having a legal persona separate from the individual members can provide an added layer of protection. Future of DAOs and Their Legal Interaction As we navigate the intersection between blockchain technology and the existing legal system, the future of DAOs and their legal interactions appear promising yet complex. DAOs are a powerful tool for decentralized governance and could be at the forefront of a new era of corporate structures in which decision-making power is more evenly distributed amongst stakeholders. However, worldwide legal frameworks are yet to catch up with this technology fully. Using traditional legal entities as DAO support vehicles represents a solution to bridge this gap. In this way, DAOs can function within existing legal systems while retaining their decentralized and autonomous nature. However, it is also crucial that lawmakers and regulators continue to develop and adapt legal frameworks to accommodate DAOs better. The future will likely see more jurisdictions offering bespoke legislation to facilitate and regulate DAOs, acknowledging their unique features and requirements. As these developments unfold, the relationship between DAOs and the law will continue to evolve, forging a new path for digital governance and collaboration. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

The Monetary Authority of Singapore (MAS) has released a new set of proposed regulations concerning Digital Payment Token (DPT) service providers. The enhanced regulatory measures, set to effect by year-end, aim to reduce risk and safeguard customer assets. These vital regulatory measures were unveiled in response to a public consultation held in October 2022 that demonstrated considerable interest from diverse participants. Key expectations that emerged from the process included: The segregation of customers' assets from the service provider's holdings, ensuring they are securely held in trust. The implementation of safeguards to protect customers' funds. The commitment to daily reconciliation of customer assets and the maintenance of comprehensive records. Establishing robust access controls to customers' DPTs within Singapore. Ensuring the independence of the custody function from other business operations. Providing clear, unequivocal disclosures on risks associated with having assets held by the DPT service provider. Moreover, to protect the interests of retail investors, MAS has declared a restriction on DPT service providers from facilitating lending or staking activities with retail customers' DPTs. While this proposal received mixed responses, MAS has decided to proceed with it. Nonetheless, such activities can still be facilitated for institutional and accredited investors. MAS acknowledges the inherent risks associated with DPT trading. Consumers are urged to remain vigilant, especially when dealing with unregulated entities, including overseas-based organizations. Although the new measures reduce the risk of asset loss, consumers may still face delays in asset recovery in case of service provider insolvency. Furthermore, MAS announced a separate consultation paper introducing regulatory measures to combat unfair trading practices within the DPT sector. This paper proposes new requirements for DPT service providers and identifies specific wrongful conduct considered an offense. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

The European Commission has set its sights on the next frontier: Web 4.0 and Virtual Worlds, often synonymous with the burgeoning concept of the metaverse. The Commission recently rolled out an extensive strategy outlining how these advanced technologies could revolutionize how European Union (EU) citizens live, work, and interact. The strategy leans on four core themes from the Digital Decade policy program and the Commission's Connectivity package: People and Skills, Business, Government (covering public services and projects), and Governance. Virtual Worlds and Web 4.0 From the Commission's perspective, Virtual Worlds can be described as immersive, enduring environments. These are enabled by 3D and extended reality (XR), blending the digital and physical realms in real time for a diverse array of applications. Web 4.0, according to the Commission, represents the fourth evolution of the World Wide Web. This advanced iteration will feature ambient and artificial intelligence, the Internet of Things (IoT), trusted blockchain transactions, Virtual Worlds, and extended reality capabilities. All these facets contribute to the seamless integration and communication between digital and real objects, resulting in a continuous merger of the physical and digital worlds. The EU is committed to promoting the adoption and development of Virtual Worlds, and this commitment encompasses bridging the gap between virtual world developers and industry users and investing in new technologies uptake and scale-up. Moreover, the EU seeks to empower citizens with the tools and skills to utilize Virtual Worlds safely and confidently. The overarching goal is establishing the EU as a trailblazer in Web 4.0 and Virtual Worlds. The EU is determined to ensure that the emerging metaverse is shaped to reflect its values, principles, and fundamental rights. This aspiration forms a cornerstone of the EU's latest strategy and a series of related initiatives and announcements. Key Tenets of the EU's Strategy on Web 4.0 and Virtual Worlds People and Skills First and foremost, the European Commission aims to increase the cadre of specialists knowledgeable about Web 4.0 and Virtual Worlds within the EU. This talent augmentation strategy includes the following: Promoting and investing in training and education through programs such as Digital Europe and Creative Europe. Attracting skilled professionals globally to expand the EU talent pool. Introducing the Virtual Worlds "Toolbox" to educate the public about these technologies, including guidelines on managing virtual identities and protecting against disinformation. The Commission's approach also emphasizes child-friendly design for Virtual Worlds and educating youth via the "Better Internet for Kids" Portal. Business Environment The Commission acknowledges the strong industrial potential of Europe in the realm of Web 4.0 and Virtual Worlds. Nevertheless, it identifies specific challenges hampering this potential, such as fragmented technical expertise, slow adoption of new technologies, and limited access to finance. To counter these, the strategy proposes: Enhancing collaboration across all levels of the Virtual Worlds production chain. Establishing the "New European Partnership" to facilitate investments in state-of-the-art technologies and the creation of European data spaces. Developing regulatory sandboxes for testing and refining technologies and services related to Virtual Worlds in a risk-free setting. Moreover, the EU is committed to ensuring market competitiveness and interoperability among platforms, thus guarding against the domination of "large market players." Public Services and Projects The strategy envisages the use of digitalization by local and national governments to enhance public services and address societal challenges like health and climate change. Additionally, the Innovation Friendly Regulations Advisory Group will help identify future initiatives for Virtual Worlds public service. Governance and Regulatory Framework The Commission recognizes the scale of societal change that Web 4.0 and Virtual Worlds may bring, warranting "close cooperation" between the EU and Member States. It plans to convene an expert group of Member State representatives to share best practices. The goal is to create a multi-stakeholder governance process to address aspects of Virtual Worlds and Web 4.0 beyond existing Internet governance institutions' scope. Prospective Actions and Way Forward Looking ahead, the Commission encourages the European Parliament and the Council to endorse the strategy and collaborate in its implementation. It expects progress on most of the strategy's action points over the next year, paving the way for a digital future aligned with the core principles and values of the EU. In conclusion, as the EU embarks on this ambitious journey into Web 4.0 and Virtual Worlds, individuals, businesses, and institutions must understand the implications of this transformative strategy. With our vast global network of partners, Prokopiev Law Group stands ready to guide you through this new digital landscape. We ensure your compliance not only within the EU but also on a worldwide scale. Suppose you seek further information or require legal assistance navigating these emerging sectors. In that case, we invite you to reach out to us. Your digital future is just one conversation away. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

As global efforts intensify to fight money laundering and terrorist financing, the State of Kuwait has issued a directive grounded on a study by the National Committee for Anti-Money Laundering and Combating the Financing of Terrorism. This directive is Kuwait's vision of enforcing compliance with Recommendation (15) of the Financial Action Task Force (FATF), an international norm setter in virtual assets transactions. Virtual assets, as per FATF's delineation, are digital representations of value that can be traded, transferred, and utilized for payment or investment purposes. The State of Kuwait emphasizes the following prohibitions: The total ban on using virtual assets as a mode of payment or as a decentralized currency within its jurisdiction. All transactions utilizing virtual currencies as a payment instrument are under this embargo. Disallowing the use of virtual assets as an investment medium. Consequently, service providers are instructed to refrain from offering this service to clients. The prohibition of issuing or conferring any license to any individual or legal entity within Kuwait for providing virtual asset services for commercial gains or in the interest of others. Exceptions to these prohibitions are securities governed by the Central Bank of Kuwait and other financial instruments overseen by the Capital Markets Authority (CMA). Additionally, all activities linked to mining virtual assets or currencies are banned. In line with safeguarding the interests of clients, the directive necessitates consistent communication regarding the risks associated with virtual assets dealings executed outside Kuwait, particularly cryptocurrencies. These virtual currencies, devoid of any legal status, government issuance, or endorsement and unanchored to any underlying asset or issuer, are susceptible to speculative price fluctuations leading to potential substantial losses. Violators of the directive will be subject to the measures or penalties defined in Article (15) of Law No. 106 of 2013 on Anti-Money Laundering and Combating the Financing of Terrorism, alongside penalties as per each regulatory authority. This directive came into effect on 17/07/2023. Link to the primary source. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

The inaugural Hong Kong framework for licensing virtual asset trading platform (VATP) operators was launched on June 1, 2023. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) is the statutory instrument that brought this licensing system to life. The administrative duties and responsibilities for overseeing this licensing system fall under the Securities and Futures Commission (SFC) purview. Who falls under the purview of the AMLO licensing structure? The licensing framework extends its jurisdiction to operators of virtual asset trading platforms (VATPs) both within Hong Kong and abroad. A VATP operator with a physical business location in Hong Kong must acquire a license. Similarly, an overseas VATP operator actively promoting its services to Hong Kong's public also requires a license. However, the licensing structure is tailored explicitly for VATPs operating an automated system to pair up sellers and buyers and those handling virtual assets on behalf of their clients, either directly or indirectly. It does not encapsulate peer-to-peer platforms facilitating transactions outside their platforms or platforms that don't manage clients' virtual assets. Furthermore, the licensing regulations do not cover service providers related to other virtual asset facets, such as custody or payment systems. Who qualifies for the transitional licensing terms? Transitional licensing provisions only extend to international VATP operators with a physical establishment in Hong Kong. VATP operators delivering virtual asset (VA) services (as outlined in the AMLO) in Hong Kong before June 1, 2023, may be considered for the transitional licensing terms. The SFC plans to implement stringent criteria for this purpose and will only entertain VATP operators with a significant presence in Hong Kong before June 1, 2023. In assessing whether a VATP operator has a substantial and meaningful presence, the SFC will consider factors such as: The VATP operator's incorporation status in Hong Kong. The existence of a physical office of the VATP operator in Hong Kong. Whether the Hong Kong staff of the VATP operator exercise central management and control over operations. Whether key personnel operating the trading system are stationed in Hong Kong. The extent of the VATP operator's live operations, considering the number of clients and trading activity volume in Hong Kong. A VATP operator qualifying for the transitional licensing terms and lodging an application to the SFC before February 29, 2024, is considered licensed until the SFC formally decides to either grant or refuse the license application. What steps must be taken to adhere to the AMLO licensing structure? Before lodging a license application, a VATP operator aspiring to be a licensee needs to: (a) Conduct an extensive gap analysis covering the organization's existing structure, governance, operations, systems, and controls to pinpoint areas requiring improvements to align with regulatory obligations; (b) Carry out the necessary upgrades, which might include changes to financial resources, custody arrangements, personnel, policies, documentation, etc.; (c) Create a fully owned subsidiary to serve as the VATP operator's associated entity with the intent to manage client assets and apply for a license from the Registrar of Companies for this subsidiary to operate as a trust or company services provider (TCSP) under AMLO; (d) Hire an independent external assessor to compile a Phase 1 Report (detailed in the section below). Some of the key requirements include: Necessary Financial Resources A licensed VATP operator should maintain a minimum of HK$5 million in paid-up share capital and HK$3 million in liquid assets. Responsible Officers and Executive Directors Applicants must appoint at least two responsible officers (ROs) for VATP services. Each RO must qualify as "fit and proper" and fulfill the requisite experience stipulations. At least one RO should hold a position on the corporation's board of directors and be actively involved in or directly oversee the VATP service (commonly referred to as an executive director). Every individual executive director needs to be approved by the SFC as an RO. Due to their seniority, board members cannot choose to be approved only as licensed representatives. At least one RO must be continually available to supervise the VATP operator's business, meaning one RO must ordinarily reside in Hong Kong. Formation of a Token Admission and Review Committee A licensed VATP operator is obliged to establish a token admission and review committee. This committee sets the criteria for admitting virtual assets to trading, suspending and withdrawing virtual assets from trading, imposing requirements on virtual asset issuers listed on the VATP, and conducting regular reviews of these criteria and requirements. Deployment of a Market Surveillance System A licensed VATP operator must implement a market surveillance system, provided by a reputable and independent provider, to identify, monitor, and prevent any market manipulative or abusive activities on its VATP. Custody Stipulations A licensed VATP operator must set up an "associated entity" for holding client assets. This associated entity must: (a) Be incorporated in Hong Kong; (b) Be wholly owned by the VATP operator; (c) Hold a TCSP license from the Registrar of Companies; (d) Retain client assets in trust; (e) Conduct no other business besides receiving or retaining client assets on behalf of the VATP operator. A minimum of 98% of client virtual assets must always be maintained in cold storage unless the SFC approves otherwise in specific instances. All seeds and private keys (and their backups) must be securely stored in Hong Kong. Insurance or Compensation Provisions for Potential Losses A licensed VATP operator must implement a compensation mechanism to offset potential losses resulting from hacking incidents, theft, fraud, or default. This mechanism should cover possible losses of 50% of client virtual assets in cold storage and 100% in hot and other storage. The compensation provision could comprise one or a mix of: (a) Third-party insurance; (b) Designated funds (held as a demand deposit or time deposit maturing in six months or less) or virtual assets of the VATP operator or any corporation within the same group of companies as the VATP operator that are held in trust for this purpose; (c) Bank guarantee issued by an authorized financial institution in Hong Kong. The SFC must greenlight the compensation provision and any modifications to it. What is the procedure for applying for a license? Required Data An applicant seeking a license must provide comprehensive information to the SFC regarding its business proposition, ultimate owners, directors, proposed responsible officers, and the associated entity created to hold client assets. Suppose the applicant is utilizing the transitional licensing provisions. In that case, confirmations of having operated the VATP in Hong Kong immediately before June 1, 2023, and adherence to regulatory requirements from the date the license is issued must also be provided. Method of Application Applications must be submitted digitally through the SFC's WINGS platform. Application Charges The applicant must pay application fees to the SFC. Currently, these fees are HK$4,740 for the VATP operator, HK$2,950 for each proposed responsible officer, and HK$1,790 for each licensed representative. Additional charges will apply if the applicant seeks to be licensed under the SFO. Submission of External Assessor Reports Along with the Application The license applicant must appoint an external assessor to evaluate its prospective business and submit the assessor's reports to the SFC during the license application (Phase 1 Report) and after the SFC has provisionally approved the application (Phase 2 Report) but before final approval. Allocating up to six months to finalize the Phase 1 Report is advised. Different external assessors may be appointed to review varying aspects of the applicant's business. The chosen assessor(s) must be independent, with the requisite expertise and technical knowledge to conduct the necessary assessments. The SFC clarified that the same service provider for a specific system could not also function as the external assessor. The SFC retains the right to object to the appointment of any external assessor. The SFC has released its Scope of External Assessment Reports, outlining its expectations for the Phase 1 and Phase 2 Reports. The Phase 1 Report should examine the proposed structure, governance, operations, systems, and controls of the VATP, concentrating on key areas like governance and staffing, token admission, virtual asset custody, client identification, anti-money laundering, market surveillance, risk management, and cybersecurity. The assessor should evaluate whether the VATP operator's policies and procedures comply with legal and regulatory requirements and are clearly documented. The Phase 2 Report should provide the assessor's evaluation of the actual adoption and effectiveness of the planned policies, procedures, systems, and controls. Only after being satisfied with the findings of the Phase 2 Report will the SFC give the final approval for a license application. External assessment reports are necessary to facilitate the SFC's processing of license applications. However, this requirement implies a further commitment of time and costs for license applicants in terms of identifying and appointing an external assessor and coordinating with the external assessor to review the VATP's proposed structure, governance, operations, systems, controls, and the final reports. What activities does a license authorize? Activities Allowed A licensed VATP operator can conduct virtual asset trading with "professional investors" (as the SFO outlines). A licensed VATP operator may also provide certain virtual asset trading services to retail investors. Activities Not Allowed The activities prohibited for a licensed VATP operator include the following: Offering financial aid to its clients for virtual asset acquisition (e.g., margin trading is not allowed) Providing, trading, or dealing in virtual asset futures contracts or related derivatives Offering algorithmic trading services to its clients Arranging with clients to utilize client virtual assets held by the VATP for generating returns for clients or any other parties (e.g., lending, borrowing, staking, etc.) Engaging in proprietary trading or market making on a proprietary basis Possibility to offer virtual assets to retail investors A licensed VATP operator can trade in eligible large-cap virtual assets with retail investors. Eligible large-cap virtual assets appear in at least two "acceptable indices" issued by two independent index providers. An index provider is deemed independent if it isn't part of the same group of companies as the virtual asset issuer or the licensed VATP operator. An "acceptable index" is defined as one that measures the performance of the largest virtual assets globally and satisfies the following criteria: (a) The index should be investible with sufficiently liquid constituent virtual assets (b) The index should be objectively calculated and abide by established rules (c) The index provider should have the required expertise and resources to construct, maintain, and review the index's methodology and rules (d) The methodology and rules of the index should be well-documented, consistent, and transparent At least one of the indices should be issued by an index provider in compliance with the IOSCO Principles for Financial Benchmarks, with experience publishing indices for conventional securities markets. The SFC may allow a licensed VATP operator to offer trading in other virtual assets to retail investors on a case-by-case basis. What are the ongoing license requirements? A licensed VATP operator must: (a) maintain consistent compliance with regulatory requirements under the AMLO (b) always meet financial resource requirements for minimum paid-up share capital and minimum liquid capital (c) periodically make regulatory filings to the SFC, including financial resources returns, annual returns, and annual business risk management questionnaire (d) make various ad hoc regulatory filings and applications to the SFC, for example, due to changes to personnel, ultimate owners, and scope of business activities (e) ensure continuous training for its representatives (f) promptly report to the SFC any significant breaches or non-compliance with regulatory requirements Is compliance with the SFO licensing regime necessary? The SFC recommends that a VATP operator obtain licenses under the AMLO and the SFO, even if the operator plans to list tokens not classified as "securities" under the SFO. The SFC will concurrently process applications under the AMLO and SFO using a streamlined approach. The SFC suggests dual licenses because the characteristics and features of virtual assets may change over time, and a token's classification may shift from a non-security token to a security token, and vice versa. Having licenses under both the AMLO and the SFO ensures that any changes in a token's nature would not result in a licensing regime breach. If an applicant applies for a license under the AMLO only, it will likely need to justify to the SFC why it doesn't need a license under the SFO. If the SFO and AMLO requirements differ, a dual-licensed VATP operator must comply with the stricter requirement. Can an existing SFC-licensed corporation apply for a dual license under the AMLO? A VATP operator licensed under the SFO is required to conduct VATP operations solely. As a result, existing SFC-licensed corporations that want to operate a VATP must establish a new entity for this purpose. What alternatives exist if you wish to avoid applying for a license? If you operate a VATP in Hong Kong and don't want to apply for a license under the AMLO, you must either: (a) Restructure your operations to avoid triggering a license obligation under the AMLO, as much as possible, or (b) Cease your business in Hong Kong – the deadline for winding down your business is May 31 2024. If you operate a VATP outside Hong Kong, you must stop actively promoting your services to the public in Hong Kong. At Prokopiev Law Group, we have established partnerships with leading legal firms worldwide to ensure a seamless and integrated service for your business, no matter where you operate. Our global reach allows us to navigate international regulations and complexities efficiently, ensuring your company's compliance with local and international laws. Link to the SFC website. The information provided is not legal, tax, investment, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be automatically generated. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information.

Hong Kong's digital landscape is undergoing a transformation. To bolster the growth of Web3 and virtual asset sectors, the government has initiated several proactive measures. One of these strides is the introduction of a new regulatory licensing regime to govern virtual asset trading platforms. Initial Regulatory Framework for Virtual Asset Exchanges Under the Securities and Futures Ordinance (Cap. 571) (SFO), the Securities and Futures Commission of Hong Kong (SFC) implemented an opt-in licensing regime. This allowed virtual asset exchanges to apply for SFC licenses to trade in both securities-type and non-securities-type virtual assets, effectively bringing them under SFC's supervisory umbrella. The Turn of Tides: Amendments to the AMLO In December 2022, a significant change came about with amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615), otherwise known as the AMLO. These changes heralded a new licensing regime (AMLO Licensing Regime) for centralized virtual asset service providers (VASPs), bringing them under the SFC's purview. This move introduced statutory anti-money laundering and counter-financing of terrorism (AML/CFT) obligations, as well as new penalties for noncompliance. Unveiling the Dual Licensing Regime June 1, 2023, marked a watershed moment in Hong Kong's virtual asset trading industry with the initiation of the Dual Licensing Regime for virtual asset trading platforms (VATPs), following SFC's Consultation Conclusions in May 2023. The Role of the Securities and Futures Commission (SFC) The SFC has been empowered to regulate VATPs for their dealings with security and non-security tokens under the SFO and the AMLO. The SFC’s authority to supervise security tokens and any other virtual asset products classified as "security" under the SFO regime continues, but it has gained additional supervisory powers over non-security tokens under the new AMLO regime. Defining the Regulatory Groundwork: Key Laws and Guidelines VATPs, now deemed Platform Operators, must adhere to the laws and regulations specified in the SFO and AMLO, along with the Guidelines for Virtual Asset Trading Platform Operators (VATP Guidelines) released in May 2023. These guidelines define critical requirements that Platform Operators must comply with, ranging from establishment requirements (like fitness, competency, and financial soundness) to ongoing obligations (like client onboarding procedures, asset custody, due diligence, cybersecurity, and operational control). Tackling Money Laundering and Terrorism Financing: Supplementary Guidelines To further reinforce the AML/CFT obligations, the SFC has provided supplementary guidelines, including the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism, and the Prevention of Money Laundering and Terrorist Financing Guideline. These guidelines are tailored to the unique nature of virtual assets, underscoring the importance of AML/CFT measures in this rapidly growing field. Identifying Potential Licensees The AMLO Licensing Regime mandates an SFC license for anyone in Hong Kong who operates or advertises the operation of a virtual asset service. Additionally, any individual or entity, regardless of geographical location, actively marketing any virtual asset service to the Hong Kong public must also obtain this license. For VATP operators providing virtual asset services before June 2023, the SFC has outlined transitional arrangements under the AMLO Licensing Regime, potentially easing their transition into the new regulatory landscape. Consequences of Noncompliance The penalties for noncompliance under the AMLO are severe. Failure to meet the licensing requirements can result in a fine of HK$5 million and imprisonment for seven years, with additional fines for continuing offenses. Moreover, the AMLO Licensing Regime introduces two criminal offenses for fraudulent activities involving virtual assets, applicable to any individual, not just VASPs. The penalties range from hefty fines to substantial periods of imprisonment, further underlining the serious consequences of disregarding the new regulatory measures. At Prokopiev Law Group, we stand ready to guide you through the intricate landscape of the Dual Licensing Regime. Leveraging our broad global network, we ensure your compliance worldwide in this rapidly evolving sector. Don't hesitate to contact us for tailored guidance uniquely suited to navigate your business through the complexities of virtual asset trading. Reach out today, and let us help you unlock new opportunities. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

The dawn of the digital age has prompted a shift towards smooth, automated data-sharing mechanisms, mainly through smart contracts. Smart contracts have emerged as a vital tool in our digitized economies by guaranteeing technical protection and facilitating efficient data exchanges. However, their lack of interoperability has raised concerns among EU policymakers, as it poses barriers to system integration, competitive diversity, and user choice. In response to these concerns, the EU has proposed the Data Act - a piece of legislation intended to define clear rules and standards for using smart contracts in automating data-sharing within its jurisdiction. Scope and Application The Data Act presents a definition of smart contracts. They are described as "a computer program used for the automated execution of an agreement or part thereof, using a sequence of electronic data records and ensuring their integrity and the accuracy of their chronological ordering." This definition explicitly targets smart contracts facilitating the execution of contractual arrangements between different entities, excluding those automating internal business processes. The Act stresses technological neutrality, meaning the definition can encompass a broad range of automation techniques, including blockchain or distributed ledger technology. "Essential Requirements" for Smart Contracts The Data Act emphasizes smart contracts must possess robust features to avoid functional errors and third-party manipulation. They must also have stringent access control mechanisms at governance and smart contract layers to ensure proper functioning and security. Another crucial requirement is the incorporation of 'safe termination and interruption' functions. These can reset or instruct the contract to cease operation, preventing any unintended executions in the future. The Act also stipulates the need for smart contracts to archive transactional data, along with the logic and code used. Finally, smart contracts must align with the terms of the data-sharing agreement they execute. Non-adherence to these requirements could result in non-compliance with the Data Act, attracting potential regulatory repercussions. Therefore, every smart contract vendor or commercial deployer must self-assess compliance and make an EU declaration of conformity. Enforcement of the Data Act The enforcement of the Data Act brings to light the crucial role played by smart contract vendors or persons deploying the contract commercially. They are responsible for self-assessing compliance with the essential requirements and making an EU declaration of conformity. A standardization organization appointed by the European Commission is entrusted with defining the standards for the "essential requirements." They must ensure smart contracts abide by the necessary standards for interoperability, safety, and functionality. Compliance with the Data Act's provisions is a matter of EU-level scrutiny and extends to the national level. The competent authorities within individual Member States are responsible for enforcing the Act's requirements, ensuring that the high standards outlined in the legislation are upheld. The 'Kill Switch' Controversy One of the Data Act's more contentious provisions, the requirement for a 'kill switch' function, has been met with resistance from the blockchain and smart contract community. This function would enable the termination or interruption of smart contract operations in cases of fraud, security breaches, or illegal activities. Critics argue that such a function would contradict the fundamental principle of decentralization. Despite these concerns, the Data Act stipulates that if a smart contract is used to automate a data-sharing contract, there are, by definition, two parties involved, and one of them should be capable of operating the 'kill switch.' Roadmap for the Data Act The Data Act's text must undergo a series of technical drafting refinements, translations into all EU official languages, and final formal adoption by the European Parliament and Council. To ease the transition, businesses will have a 20-month grace period to ensure compliance with the Data Act, likely beginning from December 2023 when the Act is expected to be finalized. * * * Navigating the new complexities of the EU's Data Act can seem daunting, especially with its implications for smart contracts. At Prokopiev Law Group, we speak the language of startups and are here to guide you through these changes. If you're a startup using smart contracts for data-sharing or are looking to ensure existing contracts comply with the new regulations, reach out to us. With our expertise, we can turn these regulatory challenges into opportunities. Write to us today, and let's navigate this journey together. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

Announced on July 16, 2020, by the Court of Justice for the European Union (CJEU), Schrems II invalidated the previous EU-US Privacy Shield framework, a mechanism to safeguard personal data transfers between the EU and the US. The court deemed that the framework didn't sufficiently mitigate the risk of extensive US surveillance practices nor provide EU citizens with adequate legal remedies. In the aftermath of the Schrems II ruling, uncertainty loomed over the EU-US data transfers. European organizations grappled with a considerable challenge - how to lawfully exchange personal data with US-based companies without falling foul of GDPR's strict regulations. The gap left by the defunct EU-US Privacy Shield needed a replacement to restore confidence and security in cross-Atlantic data transactions. EU-US Data Privacy Framework (DPF) On the third anniversary of Schrems II, the EU Commission approved the adequacy decision for the EU-US Data Privacy Framework (DPF). This new scheme aims to provide a mechanism for transferring personal data from the European Union to US-based companies. It constitutes a separate justification tool under Chapter V of the GDPR, alongside other established measures such as Standard Contractual Clauses and Binding Corporate Rules. The DPF was built to satisfy GDPR's stringent data protection requirements. It permits data transfers from the EU (or by entities subject to GDPR) to US companies that have agreed to participate in the DPF program. These companies must meet minimum data protection standards, reaffirming GDPR's principle that personal data should only be transferred to a country outside the EU with adequate safeguards in place. Compliance Monitoring The responsibility for monitoring adherence to the DPF program rests with the US Department of Commerce and the US Federal Trade Commission. These bodies ensure US-based entities abide by the specified minimum data protection standards, demonstrating a commitment to securing data transfers. Rights of Redress for EU Citizens The United States has agreed to limit the access of administrative authorities to personal data subject to GDPR. In the event of privacy rights violations, EU citizens now have the right to seek redress through an independent court. This newly introduced mechanism reflects the commitment to safeguard EU citizens' data and aligns with the core principles of GDPR. The Journey from EU/US Privacy Shield to DPF Invalidation of Previous Frameworks The legal journey from the Privacy Shield to the Data Privacy Framework (DPF) was not without turmoil. The fall of the Privacy Shield marked the second time the CJEU struck down an international data transfer scheme. Its predecessor, the Safe Harbor framework, was invalidated on similar grounds in 2015. These invalidations spotlighted the recurring privacy tension between Europe and the US, setting the stage for the advent of the DPF. Difficulties Faced by EU Companies The Safe Harbor and the Privacy Shield invalidations created a quandary for EU firms. The legal uncertainty posed a significant risk to their business continuity, mainly those heavily reliant on transatlantic data flows. Companies found themselves in a precarious balancing act, managing the legal requirements of GDPR while maintaining productive ties with their US counterparts. Intended Benefits of the DPF The introduction of the DPF offers a ray of hope for these companies. It is not merely a rebranded data transfer tool but a more comprehensive and robust framework. The DPF is envisioned to bolster the certainty of lawful data transfer, reduce the risk of non-compliance penalties, and bridge the transatlantic privacy divide by instilling greater trust in cross-border data exchanges. Requirements of GDPR for Data Exporters "Adequate" Level of Data Protection The GDPR strongly emphasizes the need for an "adequate" level of data protection when exporting data outside the EU. This means that the recipient country should provide comparable data privacy protections to the ones established in the EU. Role of an Adequacy Decision by the EU Commission The Commission's adequacy decision plays a crucial role in this context. It is a formal declaration that the third country's data protection regime meets GDPR's high standards. The recent adequacy decision for the DPF showcases the EU's acceptance of this new framework as an effective GDPR compliance tool. The Challenge with US Privacy Laws The challenge for the EU lies in reconciling GDPR requirements with US privacy laws, which have traditionally allowed broader governmental access to personal data. The DPF attempts to meet this challenge head-on by restricting government access and providing EU citizens with avenues for redress if their privacy rights are violated. EDPB's Suggested Improvements The European Data Protection Board, while generally supportive of the adequacy decision, recommended specific improvements to align the DPF with GDPR further. These suggestions included enhancing oversight of data access by US public authorities, improving clarity on legal remedies for EU citizens, and periodically revisiting the decision to ensure ongoing compliance. Obligations for US Entities under DPF Under the DPF, US entities must adhere to stringent core privacy principles. These include data minimization, purpose limitation, and offering robust data subject rights. Such principles mirror GDPR's approach, fostering an environment that respects and prioritizes data privacy. Compliance with the DPF is not voluntary or self-certified. An enforcement body monitors adherence to the framework's provisions, demonstrating a commitment to accountability and a departure from the self-regulatory model of the previous frameworks. Enhancements for the Protection of EU Citizens' Data Executive Order 14086 limits the US intelligence community's access to personal data and ensures recourse for EU citizens whose data rights may have been violated. The Executive Order introduces a two-layer protection mechanism. First, it reinforces safeguards at the federal level. Second, it bolsters individual redress mechanisms, underpinning the DPF's foundation and objectives. What Lies Ahead? Our journey towards fully implementing and operationalizing the Data Privacy Framework (DPF) has key milestones that bear significance. To fully understand the scope of this undertaking, let's walk through the timeline: Late 2023: A tentative deadline for the Data Privacy Framework to become fully operational has been set. Although this deadline is not set in stone, and the exact date might fluctuate due to many factors, it's the current target. Completion of the certification process for US entities, the establishment of the oversight body, and other necessary steps should ideally be achieved by this time. July 2024: This marks a critical juncture in the DPF's lifecycle. By this date, the European Commission plans to conduct an exhaustive review of the Data Privacy Framework. This review aims to verify the effective functioning of the DPF, examining its operational efficiency and identifying areas that require fine-tuning or restructuring. This rigorous process reflects the commitment of the EU to ensuring optimal data protection for its citizens. Despite the adoption of the DPF, some uncertainties remain. Businesses are waiting for further guidance on the certification process. Until this process is finalized, a level of ambiguity persists. Given the legal complexities, the DPF will likely face challenges, possibly even a CJEU review. The DPF must withstand these legal tests, as it forms the cornerstone of transatlantic data exchanges. As such, the future of the DPF will be closely watched, its success or failure shaping the landscape of international data transfer regulations. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be AI-generated. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.

Starting in June 2024, the European landscape for digital assets will be drastically reshaped with the implementation of the Market in Crypto Assets Regulation (MiCA). As a significant portion of cryptocurrency service providers are likely to be encompassed within this regulation, the relevance of MiCA for these entities is becoming increasingly pertinent. Cryptocurrency services resemble traditional financial services, such as payment services. However, it remains to be seen how the stipulations of MiCA align with the existing regulatory framework under the Payment Services Directive 2 (PSD2). MiCA, PSD2, and Crypto Transactions: A Comparison Imagine a consumer (let's call him Alex) wishing to purchase an electronic voucher (e-voucher) from a vendor (let's call her Becky) using fiat currency (say, Euros). Alex initiates the transaction on Becky's website. A third-party service provider (referred to as "TP") steps in to manage the transaction. TP collects the payment from Alex and transfers it to Becky's account. Once the payment is completed, the e-voucher is sent electronically to Alex. This is a typical transaction overseen by the guidelines of PSD2, where the third-party entity (TP) is required to possess a PSD2 license, except for certain exemptions. To better appreciate the impact of the Market in Crypto Assets Regulation (MiCA) on the financial transaction landscape, let's re-envision our earlier example. This time, we're introducing a twist: crypto tokens and Distributed Ledger Technology (DLT) are now involved in the transaction. Payment in Crypto Let's return to our previous characters: Alex (the consumer), Becky (the vendor), and TP (the third-party facilitator). Now, Alex wants to acquire an e-voucher from Becky, but with a marked difference from our previous scenario. Becky's e-voucher is offered through a blockchain network, and Alex is able to purchase it using crypto tokens. Let's break down this new transaction structure: Alex initiates the purchase, intending to pay with crypto tokens stored in a digital wallet. TP steps in, employing 'smart contracts' to facilitate the transaction. TP manages Alex's crypto tokens, transferring the correct amount to Becky's digital wallet. Once the payment is completed, the e-voucher is sent to Alex through the blockchain, directed by TP's smart contracts. In this case, TP's services - managing Alex's crypto assets and transferring them to Becky - are now under the umbrella of 'crypto-services' as delineated by MiCA. Consequently, TP needs to secure a MiCA license to operate legally. Bridging the Crypto-Fiat Gap Let's consider another permutation in our transaction scenario: this time, Alex (the consumer) wants to pay with crypto tokens, but Becky (the vendor) only accepts fiat currency (Euros). How does our third-party service provider (TP) navigate this dichotomy? Alex chooses the e-voucher and intends to pay with his crypto tokens. As before, TP manages the transaction. However, now TP has an added responsibility: converting Alex's crypto tokens into Becky's preferred fiat currency. TP carries out the exchange of crypto tokens for fiat currency, transferring the equivalent fiat amount into Becky's account. On successful payment, the e-voucher is dispatched to Alex. In this situation, TP's role has expanded. They not only manage the crypto assets but also handle the crypto-to-fiat exchange. According to MiCA, both these functions constitute 'crypto-services.' Thus, to legally facilitate such transactions, TP would need to possess a MiCA license. Dual Licensing for Crypto and Fiat Transactions As we further unravel the complexities of the digital asset landscape, a crucial point of intersection between MiCA and the PSD2 directive emerges. It concerns 'crypto-related payment services,' an area where the scopes of both regulations seemingly converge. What does this entail for our third-party service provider (TP)? Acquiring a MiCA license might seem like a comprehensive solution for TP to legally facilitate all crypto transactions. However, MiCA makes an explicit reference to PSD2 when crypto-related payment services come into play. For TP to provide such services, it must either qualify as a payment institution under PSD2 or collaborate with an external institution that already does. This raises an important question: what exactly falls under the umbrella of 'crypto-related payment services'? Let's clarify: managing crypto-assets, providing exchange services, or operating a trading platform are all deemed as 'crypto services' under MiCA. But does any payment service linked to providing these crypto services also qualify as a 'crypto-related payment service'? The boundaries are not yet crystal clear. To complicate matters further, let's consider a scenario where TP facilitates payment services for transactions involving both crypto and fiat currencies. In such a case, TP essentially provides the same type of service but with different currencies. And this may lead to a crucial legal requirement: dual licensing. In other words, to legally facilitate these transactions, TP would need to acquire not one but two licenses: MiCA for crypto transactions and PSD2 for fiat currency transactions. Interestingly, PSD2 contains an exemption for certain payment service providers: if the payment instrument is only usable within a restricted network of providers or for a select range of goods or services, providers are excused from needing a PSD2 license. However, MiCA doesn't seem to adopt these PSD2 exceptions. MiCA’s language suggests it only considers 'authorized' providers, with 'authorized' presumably meaning those who hold a PSD2 license. The term doesn’t seem to cover providers exempted under PSD2 but still able to offer payment services. In a twist, this could mean that a payment service provider, though not needing a PSD2 license for conventional payment services, could need both PSD2 and MiCA licenses when handling crypto tokens. * * * Don't let regulatory complexities hinder your growth. Reach out to us at Prokopiev Law Group today and pave the way for a seamless future in digital finance. Your success is our mission. DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. Some parts of the text may be AI-generated. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.