Numerous Times That US (And Other) Regulators Stepped Into Crypto
From capping off the era of ICOs to tightening regulations on private wallets, U.S. financial watchdogs waded deeper into the crypto land than ever in 2020. Numerous Times That US (And Other) Regulators Stepped Into Crypto
As digital assets made strides toward mainstream status in 2020, the guardians of the incumbent financial system have been working hard to minimize disruption caused by their integration. In the U.S., regulatory and law enforcement interventions throughout the year have left some projects out of business, empowered traditional players to take a closer look at crypto, and sent some unequivocal messages to cryptocurrency service providers globally.
SEC vs. Telegram
While the Securities and Exchange Commission first squared off with Telegram over its token sale in October 2019, it wasn’t until the summer of 2020 that the landmark case was settled. The Telegram Open Network was initially set to draw hundreds of millions of Telegram’s messenger users into a global blockhain-based financial ecosystem.
Throughout 2018, TON raised some $1.7 billion by selling contracts associated with Gram, the system’s native token, to qualified investors. Mindful of the potential collision with the U.S securities regulator, Telegram bosses followed a framework known as the Simple Agreement for Future Tokens (SAFT). The first stage of the process entailed the sale of contractual rights to buy tokens if and when the network goes live.
While those legal rights are sold as securities — in this case, under exemption Reg. D — the resultant tokens are, theoretically, not.
In the case of Telegram, the SEC disagreed. The commission’s response was to initiate an emergency action against Telegram and the Telegram Open Network in federal court. The watchdog argued that the two-stage token distribution plan still constituted the sale of unregistered securities, a position that the court ultimately upheld.
The resulting settlement included an $18.5-million penalty, as well as an obligation to return more than $1.2 billion to investors. TON never ended up going live, while its struggle with the SEC went down is history as maybe the final act of the ICO era.
OCC Crypto Custody Authorization
The Office of the Comptroller of the Currency is an independent bureau within the United States Department of the Treasury. The OCC’s job is to charter and supervise national banks and savings associations. U.S. financial institutions that seek to operate nationwide must undergo an extensive review process with the OCC.
On Jul. 22, 2020, the OCC published an interpretive letter authorizing federally chartered banks to provide cryptocurrency custody services. The agency has never prohibited organizations operating within its purview to hold digital assets on behalf of their clients, but the sheer lack of guidance and legal clarity held back the expansion of many credit organizations’ services into the digital asset space.
To clients interested in their banks providing custody services, those banks could say ‘it’s just too risky right now.’
The letter equated encryption key escrow service with physical safekeeping of assets.
The regulator’s forward-thinking approach to digital currencies could be related to the fact that Brian P. Brooks, Acting Comptroller of the Currency, spent two years as the chief legal officer of Coinbase prior to the present appointment.
DoJ’s Billion-Dollar BTC Seizure
Armed with a new set of guidelines coming from the office of the Attorney General, the U.S. Department of Justice spent much of the fall ramping up enforcement action against crypto-related players. The process culminated in a complaint of forfeiture against a billion dollars worth of Bitcoin and BTC forks in early November.
he funds were believed to have been in possession of an unnamed hacker who had previously stolen them from now-defunct online black market Silk Road. In tracking the record-breaking pot of digital wealth, government investigators relied heavily on blockchain analytics firm Chainalysis’ assistance.
As the price of Bitcoin is soaring, in 2021 law enforcement will likely be motivated to invest even more energy and resources in pursuing crypto stolen in previous high-profile heists. Blockchain intelligence firms will surely be there to help.
DoJ & CFTC vs. BitMEX
The fate of crypto derivatives platform BitMEX illustrates what can happen to those who wear out the patience of several U.S. regulators. Incorporated in the Seychelles, BitMEX has long been under suspicion of serving U.S.-based customers, rendering the exchange subject to U.S. anti-money laundering and derivatives trading regulations.
The two-pronged payoff came in early October 2020, when the DoJ brought criminal charges against the platform’s founders for “willfully failing to establish, implement, and maintain an adequate anti-money laundering (“AML”) program,” while the Commodity Futures Trading Commission filed a civil case, charging the firm with facilitating unregistered trading for United States residents. BitMEX was forced to implement emergency changes to its c-suite and bring in a chief compliance officer.
Perhaps the key takeaway from this story was aptly articulated by the SEC Commissioner Hester Pierce, who called the BitMEX case a clear message to the global crypto industry. She said “when there are U.S. users of a product or a service, there’s going to be enforcement of U.S. laws.”
FinCEN v. Self-Hosted Wallets
A week before Christmas, the Treasury’s Financial Crimes Enforcement Network (FinCEN) released a proposal for a long-dreaded regulation designed to increase the transparency of transactions in which digital funds travel from centralized exchanges to private wallets.
If adopted unaltered, the rule will require exchanges to collect personal information about the wallet’s owner from the sender, if the amount transferred exceeds $10,000 in one day, or $3000 in a single transaction.
In addition to promising a lot of extra work for crypto exchanges, the proposed rule can deal yet another blow to the very concept of private, peer-to-peer cryptocurrency transactions. However, some observers argued that it would be enough for those wishing to get back to the territory of pseudonymous transactions to simply transfer the holdings from the wallet on record with FinCEN to a new one.
SEC vs. XRP
Unlike the Telegram Open Network, which the Securities and Exchange Commission shot down before it could ever take off, Ripple’s XRP token has been traded for almost 7 years and on the day the SEC knocked on the door, was ranked #3 cryptocurrency by market capitalization.
While the constant #1 and #2 of the market cap ranking, Bitcoin and Ether, were consistently absolved in the Commission representatives’ statements on the grounds of these assets’ decentralized nature, there has always been some suspense around the question of whether XRP is a currency or security. A considerable portion of the XRP supply is consolidated at the hands of a single firm, Ripple Labs.
In late December 2020, the SEC struck with a lawsuit claiming that XRP is a security and that the token’s distribution amounts to offering investment contracts. The news sent XRP price into a tailspin and prompted a chain of delistings from major exchanges. Although it will take months before the case even reaches trial, it is clear that the SEC’s move will profoundly shift the balance of power in the crypto space.
Treasury vs. BitGo
In the final days of 2020, another arm of the Treasury — the Office of Foreign Asset Controls — reminded crypto businesses with ties to the U.S. about one more source of regulatory scrutiny: compliance with various sanctions programs. The crypto custodian and the watchdog reached a $98,000 settlement over BitGo’s 183 apparent violations of the Treasury’s sanctions between 2015 and 2019.
The firm’s transgression entailed failing to block users residing in sanctioned jurisdictions such as Crimea, Cuba, Iran, Sudan and Syria from using BitGo online wallets.
Jamie Dimon May Soon Turn Away Deposits In Order To Comply With Simple Leverage Regulation, And He’s Not Happy
It’s A Strange Problem: JPMorgan Chase and other big banks are getting more assets than they even want.
You don’t need to feel too sorry for Jamie Dimon, the chief executive officer of JPMorgan Chase & Co., the largest bank in the U.S. by assets and the largest in the world by trading and fee revenue. But it’s easy to see why he might be miffed at the Federal Reserve at the moment.
On March 19, the Fed announced that a temporary regulatory break for banks will expire as scheduled on March 31. Dimon had told investment analysts in January that if the break went away, his bank would have a financial incentive to turn away deposits, as it has done in the past (for large institutional deposits, that is; the bank still likes retail deposits, which tend to be sticky and produce other banking business).
Here’s A Snippet From The Jan. 15 Earnings Call As I Transcribed It From Bloomberg’s Recording:
Remember, we were able to reduce deposits $200 billion within like months last time.
Jennifer Piepszak, Chief Financial Officer:
But we don’t want to do it. It’s very customer unfriendly to say, “Please take your deposits elsewhere … .”
It’s common for Jamie Dimon to complain about “gold-plated” banking regulation, but in this case he seems to have a point. A Fed regulation that makes it unprofitable for banks to take in deposits—when taking in deposits has always been a key function of banks—is a bit hard to justify.
How we got to this point is complicated but interesting. The old style of bank regulation was to limit the leverage of banks. It was analogous to how banks themselves require homebuyers to have some skin in the game. Homebuyers have to put in some of their own money so the mortgage loan they get is smaller than the value of the house they’re purchasing.
That way, if the homeowner stops making payments, the bank can seize the house, sell it, and get back what it lent. Similarly, under simple leverage regulation, banks had to show that the value of their assets (such as the loans they make and cash in the vault) was substantially greater than their liabilities (such as the deposits they take in, which is money they owe to the depositors). Roughly speaking, the excess of assets over liabilities was called capital.
But that simple system failed. Banks can make more money by going big on risky assets like high-interest loans than by investing in safe, low-yielding stuff like Treasury securities.
And as long as regulators treated all assets alike, it made sense to load up on risky ones.
But risky assets are more likely to go bust, so regulators wisely started taking the safety of different assets into account.
It was a big improvement, but not perfect: Some banks understated the riskiness of their assets, which became a problem in the global financial crisis of 2008-09. For instance, some loaded up on the debt of their national governments because it was given a zero risk-weighting, when in fact it was highly risky.
The new system is belt and suspenders. The belt is risk-weighted capital regulation, under which riskier assets require a bank to have more capital against them, while very safe assets require little or none. There’s also a backup system—the suspenders—where all assets are treated alike, just as in the old days.
This is called the supplementary leverage ratio. It was agreed to by a wide range of nations under the auspices of the Bank for International Settlements and took effect in 2018. The SLR is meant to deal with situations where a bank has loads of assets that aren’t as safe as they’re said to be.
The suspenders are supposed to hang loose most of the time while the belt does the real work of holding up the pants, so to speak. In last year’s Covid-19 recession, though, banks suddenly got flooded with more assets than they could handle.
The Fed bought Treasuries to drive down interest rates and paid for them by creating reserves, which show up as assets on banks’ balance sheets. Businesses drew down lines of credit and deposited the proceeds in banks. Consumers’ bank accounts were swollen by government relief checks.
Demand for consumer and business loans was weak, so banks stashed most of the incoming money in Treasury securities or left it in cash. (Funds from customers are both an asset to the bank, because they can invest the money, and a liability, because they have to return it someday.)
Suddenly the suspenders weren’t so loose anymore. Without even trying, banks had acquired a lot more assets on their balance sheets. Most were supersafe, but the SLR applied equally to every dollar of them, regardless of their safety.
Realizing there was a problem, the Federal Reserve and other federal bank regulators in May 2020 exempted Treasuries and reserves at the Fed from the calculation of the supplementary leverage ratio.
Not permanently, but through March 31, 2021. It said the exemption “will provide flexibility to certain depository institutions to expand their balance sheets in order to provide credit to households and businesses in light of the challenges arising from the coronavirus response.”
This year banks lobbied vigorously for the exemption to be extended or even made permanent, but, as mentioned above, on March 19 the Fed said without explanation that the exemption would end at the end of the month.
What happens now? Nothing right away. Banks have more capital than they need, so they won’t have to shed assets starting April 1. Zoltan Pozsar, an analyst at Credit Suisse Group AG, wrote in a note to clients on March 16, ahead of the Fed announcement, that “Neither the Fed nor the market should fear mayhem if the exemption expires.”
One key reason, he said, is that the major banks won’t be affected by the expiring exemption because they never opted into it in the first place for their operating subsidiaries. And, he wrote, 90% of the currently exempt Treasuries and Fed reserves are being held at the operating subsidiary level.
In the longer run, though, there could be problems. Pozsar wasn’t quite as blithe when he discussed the SLR on the Odd Lots podcast aired by Bloomberg on March 3.
If banks such as JPMorgan Chase push away institutional deposits by charging fees or putting on negative interest rates, the money will spill into money-market funds, he predicted. But these funds won’t have any good place to put the money either, he said.
If they pour into Treasury bills, they could push the bill yields negative. But money-market funds can’t afford to earn negative returns because they promise to pay back investors 100 cents on the dollar.
Pozsar said the Fed system could assist by allowing money-market funds to stash more money with it through overnight reverse repurchase agreements. The Federal Reserve Bank of New York did just that two weeks later, announcing on March 17 that it would allow each of its counterparties to do overnight reverse repos of $80 billion a day, up from $30 billion previously.
Pozsar, who used to work for the New York Fed, called that “foaming the runway” for the March 31 expiration of the SLR exemption.
In 2014, when the supplementary leverage ratio was under discussion, Fed staff predicted [PDF] that the impact of the enhanced version of the ratio on the biggest banks would be modest because, after all, the Fed was about to start shrinking its balance sheet. In reality, the balance sheet is bigger than ever now and still growing.
As the Fed continues to buy Treasuries and mortgage bonds and pays for them with reserves, banks’ assets will continue to swell, and eventually the supplementary leverage ratio could become the “binding constraint” on the banks’ behavior; the suspenders will become tight. That would be a return to the bad old days.
Some of the resistance to keeping the leverage exemption in place past March 31 is based on concerns that banks need bigger safety buffers. That’s a legitimate concern. But the question of how much capital banks need is separate from the question of how those capital levels should be determined.
There area actually four ways of setting capital: risk-weighted capital, supplementary leverage ratio, post-stress estimate of risk-weighted capital, and post-stress estimate of supplementary leverage ratio. That ends up causing confusion and treating banks differently when they’re engaged in the same activities.
It’s “not clear you can fix the gaming of one rule by adding more rules,” says a 2017 presentation [PDF] by Robin Greenwood, Sam Hanson, Jeremy Stein, and Adi Sunderam of Harvard University and the National Bureau of Economic Research for a Brookings Papers on Economic Activity conference.
Their preference: a single standard that takes into account stressful scenarios and is “generally more sensitive to the kinds of data that you wouldn’t want to bake into a hard rule.”
The Fed may end up having more to say about this.
Former US Office Of The Comptroller Of The Currency Official Says Crypto Has Backing But Dollar Doesn’t
Former OCC acting comptroller Brian Brooks claimed that cryptocurrencies like Bitcoin “actually are backed by something.”
Brian Brooks, former acting comptroller of the currency of the United States Office of the Comptroller of the Currency, has claimed that cryptocurrencies like Bitcoin (BTC) have some backing, while the U.S. dollar may not have any.
Brooks gave his remarks in a CNBC Squawk Box interview with Joseph Kernen to unpack recent Bitcoin-related remarks by the U.S. Federal Reserve chair Jerome Powell. Earlier this week, Powell argued that cryptos like Bitcoin are “essentially a substitute for gold” but at the same time they are “not backed by anything.”
CNBC host Kernen pointed out that gold has historically been seen as a store of value, expressing confusion over Powell’s comments, stating. “He just said it’s like gold but not a store of value. Does he not think that gold is a store of value?”
In response, Brooks said that there are many reasons why people have flocked to Bitcoin over the past year, including the Fed dramatically increasing the dollar supply. “So when you do that, it means that the dollar is at least a 40% less good store of value than it was a year ago. And that is one of the reasons people opt to Bitcoin,” he stated.
In reference to the United States abandoning the gold standard under President Richard Nixon in 1971, Brooks said:
“The point I really wanna make is the dollar may not actually be backed by anything […] But cryptocurrencies actually are backed by something. They’re backed by underlying networks, and what you’re buying when you buy a crypto token — whatever it is Bitcoin or anything else — you’re buying a piece of a financial network built to transact all kinds of stuff.”
Brooks stated that the increasing number of network applications over the past few years is the main reason that the crypto industry is worth almost a $2 trillion today. “I believe in the wisdom of crowds. I think that crowds are telling you that these networks are where finances are going in the future. I wanna be part of that,” he concluded.
U.S. authorities have been actively investigating the concept of a digital dollar. On Monday, Powell said that the Fed would not proceed with the digital dollar without support from Congress.
House Passes Digital Asset Innovation Act To Clarify Crypto Regulations
U.S. financial regulators will now work together to create modalities for clear-cut crypto regulations in America.
The United States House of Representatives on Tuesday passed H.R. 1602 — the Eliminate Barriers to Innovation Act — introduced by Rep. Patrick McHenry (R-NC).
H.R. 1602 was among six bipartisan financial services-related bills passed by the House on Tuesday, with the McHenry-sponsored legislation focusing on regulatory clarity for cryptocurrencies.
Introduced back in March, the bill seeks to clarify the roles of agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission in the policing of cryptocurrencies in the United States.
The bill also seeks to answer the ongoing debate of whether crypto tokens are securities or commodities.
Addressing the floor of the House during the passage of the bill, McHenry remarked:
“[This bill] requires the Securities and Exchange Commission and the Commodity Futures Trading Commission to establish a working group focused on digital assets. This is the first step in opening up the dialogue between our regulators and market participants and move to needed clarity.”
Learn more: https://t.co/jYrqQbSxXf
Watch the Ranking Member’s remarks pic.twitter.com/BAAyEf91qy
— Financial Services GOP (@FinancialCmte) April 20, 2021
Under the terms of the bill, Congress would have 90 days to establish the working group among participants from the SEC, CFTC and the private sector.
The private-sector participants would draw from fintech and financial services companies as well as small- and medium-scale enterprises and academia.
Once constituted, the working group would have a year to issue a report analyzing the current crypto regulatory climate. The panel’s work would also focus on matters like crypto custody, cybersecurity, private key management and investor protection concerns.
The patchwork nature of crypto regulations in the U.S. continues to be a source of some frustration among industry stakeholders in the country. Some industry insiders have argued that the U.S. is at risk of losing ground in the emerging digital economy due to the lack of regulatory clarity for digital assets.
Earlier in April, Goldman Sachs CEO David Solomon predicted a big evolution for crypto regulations in the United States.
Congress Takes One Step Closer To Regulatory Clarity With H.R. 1602
A bipartisan bill addressing cryptocurrencies made it through the House of Representatives. Next up: the Senate.
The House passed a bill geared toward ultimately clarifying digital asset regulation in the U.S. If it becomes law, the industry might finally have the regulatory clarity it has been seeking.
The U.S. House of Representatives passed H.R. 1602, the “Eliminate Barriers to Innovation Act of 2021,” last week, sending it to the Senate, which referred it to the Senate Banking Committee. If passed and signed into law, the bipartisan bill would commission a working group to evaluate how the U.S. currently treats digital assets.
Why it matters
This might be the first major crypto bill to get anywhere in Congress. What’s more, it’s one that, if passed, would have a direct impact on how the U.S. treats digital assets. This could finally provide companies in this industry with some much-requested regulatory clarity. The fact the bill has support from both parties is another mark in its favor. Of course, if regulatory agencies don’t act until this bill is implemented, it’ll be quite some time before any actual clarity is adopted.
Breaking It Down
The entire House of Representatives passed the “Eliminate Barriers to Innovation Act,” introduced by Reps. Patrick McHenry (R-N.C.) and Stephen Lynch (D-Mass.) in March, making it the first major crypto-specific legislation to get through one of the bodies of Congress.
A number of other bills have also been introduced to define how cryptocurrencies can or should be treated under U.S. law, but few have made any progress.
“It’s the first bill to address regulatory clarity for digital assets and digital asset marketplaces to pass the house, and in a bipartisan fashion no less,” said Amy Davine Kim, chief policy officer at the Chamber of Digital Commerce.
Representatives for McHenry and Lynch did not respond to requests for comment.
According to the terms of the bill, a working group would be established with representatives from the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), financial technology firms, financial firms regulated by the SEC or CFTC, academic institutions or advocates looking at digital assets, small businesses using financial technology, investor protection groups and entities supporting historically underserved businesses.
The group would have one year to evaluate the current legal and regulatory landscape for digital assets, how this landscape impacts crypto markets and how other countries approach the industry.
More important, the group would be asked to draft recommendations for improving the regulatory landscape (and, in turn, improving the markets), as well as best practices to minimize fraud and ensure investors are protected.
The bill asks that the recommendations be limited to the powers the SEC and CFTC already hold.
“It brings a number of stakeholders to the table, so it’s not just the SEC, it’s not just the CFTC, it’s also businesses and thought leaders who actually have expertise in the digital asset space,” Kim said.
Creating a working group with this many stakeholders also brings sunlight to the process of drafting or updating the regulatory framework around digital assets, she noted.
The next step is bringing the bill before the Senate. Right now the Senate Committee on Banking, Housing and Urban Affairs, helmed by Senators Sherrod Brown (D-Ohio) and Pat Toomey (R-Penn.), is looking at the bill.
Kim said the Digital Chamber has already been in touch with some Senators to move the bill forward.
No sponsors have been named yet, according to a search of public records.
A number of other actions last week might further give heft to the idea of regulatory clarity coming to the U.S.
The House of Representatives Committee on Financial Services also renewed the Fintech Task Force last week, under the leadership of Reps. Lynch and Tom Emmer (R-Minn.), both of whom are returning to their roles.
“I’m hopeful that the work of this task force will continue to lay the foundation for a better understanding of these financial technologies, and today’s release of the fintech report is yet another step towards fostering financial innovation and keeping America competitive on the global stage,” Emmer said in a statement.
Global Banking Regulator Plans To Hold Consultation On Crypto Exposure
The group has previously warned of “financial stability concerns” and risks faced by banks when it comes to cryptocurrencies.
The Basel Committee on Banking Supervision has said it will be publishing a consultation paper aimed at banks reducing their risk of exposure to crypto.
According to the Switzerland-based Bank of International Settlements, or BIS, the Basel Committee will publish the paper on crypto exposure this week following its decision to hold a public consultation on the matter. The announcement came during a Friday meeting, during which the committee also discussed the impact of the current pandemic on the banking system as well as any proposed policy initiatives:
“While banks’ exposures to cryptoassets are currently limited, the continued growth and innovation in cryptoassets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.”
The BIS added that though many authorities seek the approval of the Basel Committee, the regulator relies on its members to enforce proposed actions. In other words, the committee’s decisions do not carry the force of law. Banking regulators from countries including Japan, the United States and many nations in Europe are members of the group.
Calling for a “prudential treatment” of crypto has been a common theme for the committee. In 2019, the regulator said that cryptocurrencies were “unsafe to rely on” as a medium of exchange or store of value.
Regulator Interest Is Good For The Crypto Ecosystem, Says BlockFi CEO
Regulatory clarity enables crypto companies to continue to innovate, Zac Prince says.
BlockFi CEO Zac Prince agrees with United States Senator Elizabeth Warren that there is a lot of noise in the crypto industry. Still, he expects that the clarity that comes with regulations will positively impact the ecosystem.
Describing regulators’ interest in crypto as a natural evolution of the technology, Prince said that discussions like Wednesday’s Senate Banking Committee hearings are very positive trends overall for the crypto sector.
It’s easy to miss the forest for al the trees, he said, highlighting that crypto is an asset class that has generated substantial wealth for millions of people. “It’s been the best performing asset class in seven out of the last ten years,” he said.
The crypto industry is creating lots of new jobs across the board, Prince noted, stating, “This is something that we want to continue to happen in America.”
Asked about his opinion on the impending regulations on cryptocurrencies, he said that he expects the rules to be favorable for the business:
“Regulatory clarity enables companies like BlockFi to continue innovating. It enables consumers and investors to participate in this sector with the utmost confidence.”
This week, the Senate Banking Committee discussed a U.S. government-backed central bank digital currency in a session where Senator Warren took a generally critical stance against crypto.
Calling crypto a “fourth-rate alternative to real currency” and a “lousy investment,” she then went on to call Dogecoin (DOGE) a “bogus” currency. Warren said that the volatility of cryptocurrencies makes them unsuitable as a medium of exchange.
Republican Senator Asks FinCEN To Reconsider Controversial Crypto Rule
The FinCEN rule, proposed under former President Donald Trump, needs to be revisited, Sen. Pat Toomey said Thursday.
Proposed U.S. regulation around cryptocurrencies might be counterproductive, the top-ranking Republican on the Senate Banking Committee said Thursday.
A proposed Financial Crimes Enforcement Network (FinCEN) counterparty rule would impose a heavy burden on cryptocurrency firms but may not actually combat illicit activity, Sen. Pat Toomey (R-Pa.) wrote in a letter to Treasury Secretary Janet Yellen.
He also described draft Financial Action Task Force (FATF) guidance as “concerning.”
“Cryptocurrencies stand to dramatically improve consumers’ privacy, access to financial services, and power to make decisions for themselves,” the letter said. “Some have argued that cryptocurrency is a technology that could be as revolutionary as the internet.”
The statement comes a day after Sen. Elizabeth Warren (D-Mass.) railed against bitcoin as a potential tool for criminals that also carries environmental and consumer-protection issues.
The controversial FinCEN rule was proposed by Yellen’s predecessor, former Treasury Secretary Steven Mnuchin, in the waning days of the Donald Trump presidency. Under its provisions, any crypto exchanges or financial institutions would be required to keep name and physical address information for transactions above $3,000, and file reports for transactions above $10,000.
Opponents to the rule say this could impact decentralized finance (DeFi) products, as many smart contracts that store funds do not require names or addresses. DeFi aside, simply maintaining excess records beyond typical know-your-customer (KYC) requirements may prove a burden to smaller exchanges.
A public comment period was extended immediately before Trump left office, and again after current President Joe Biden took over, but the actual proposal is still pending.
“While I recognize that FinCEN and FATF’s proposals are seeking to address the misuse of cryptocurrencies for illicit activity, if adopted, they would have a detrimental impact on financial technology (‘fintech’), the fundamental privacy of Americans, and efforts to combat illicit activity,” Toomey wrote. “I urge you to make significant revisions to them.”
Malicious actors may find it easier to act outside the regulated financial sector should these rules be implemented, Toomey argued.
FATF’s proposed guidance, which would also impose reporting requirements on DeFi, could likewise harm the sector by imposing “onerous recordkeeping requirements” that don’t apply to the U.S. dollar, the senator wrote.
Beyond the burdens on the crypto sector, Toomey suggested FinCEN look at modernizing currency reporting requirements placed around the dollar. The reporting requirements around U.S. dollar transactions are 40 years old and based on thresholds from the time they were implemented.
Law enforcement officials can more effectively track funds and analyze suspicious activity today, the lawmaker said.
Crypto is included in this bucket: Toomey pointed out that the FBI was recently able to recover much of the crypto paid by Colonial Pipeline in a ransomware attack.
“Instead of seeking to impose onerous regulatory requirements on cryptocurrencies, FinCEN should collaborate with stakeholders and analytics firms to understand what existing and emerging capabilities exist for identifying illicit cryptocurrency activity,” he wrote.
A FinCEN spokesperson did not immediately return a request for comment.
Bitcoin, Other Crypto Assets Targeted For Stiff Banking Regulation
Proposal would require banks dealing in some crypto assets to hold substantial buffers in case of losses.
The top global standard setter for banking regulation proposed a strict new rule that would require banks to essentially set aside a dollar in capital for every dollar of bitcoin they own.
The Basel Committee for Banking Supervision, a group of global central bankers and regulators, announced the plan Thursday in a public consultation about how it intends to treat cryptocurrency assets, which it said had prompted concerns about consumer protection, money laundering and terrorist financing.
“Certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increase,” the Basel, Switzerland-based committee said in a statement.
Interest in cryptocurrencies from mainstream financial firms and corporations has surged this year. Mastercard Inc. has said it plans to support some cryptocurrencies on its network and Bank of New York Mellon Corp. has invested in a cryptocurrency startup. Bitcoin rose 3.8% to $37,776.15 from its Wednesday 5 p.m. ET level.
The committee, which includes the Federal Reserve, European Central Bank and other major central banks, doesn’t enforce rules itself but sets minimum standards that regulators around the world agree upon and implement locally. The secretariat for the committee is based at the Bank for International Settlements, known as the central bank for central banks.
The committee said that banks should apply a 1,250% risk weight to bitcoin, which is “similar in effect to the deduction of the asset from capital.” If a bank holds $100 of bitcoin exposure, it would give rise to risk-weighted assets of $1,250, which when multiplied by the minimum capital requirement of 8% results in setting aside at least $100, the committee said in its statement.
The committee cited the lack of record of these assets and the very high volatility in proposing the rules. The capital requirements would put bitcoin and other coins on par with the riskiest assets that banks hold, such as ones for which the bank doesn’t have full information or has very large investments in companies.
As a comparison, according to Basel guidelines banks should apply a 400% risk weighting “for speculative unlisted equity.” Basel guidelines on residential mortgages, for instance, which are relatively safe and are backed by collateral, are as low as 20%.
Physical gold held by a bank has a 0% risk weight, meaning banks don’t need to hold capital against it.
The committee proposed less-stringent capital requirements for crypto assets that meet certain conditions, such as tokenized traditional assets and stablecoins. These type of crypto assets are often pegged to the value of a mainstream currency such as the U.S. dollar, and so are theoretically less volatile.
These are eligible for treatment under the existing Basel rules, while bitcoin would be subject to the “new conservative prudential treatment.”
Banks have until Sept. 10 to respond to the committee’s proposals. Central-bank digital currencies aren’t included in the consultation.
Bank Regulators Plot Toughest Capital Rule For Bitcoin
Banks must set aside enough capital to cover losses on any bitcoin holdings in full, global regulators proposed on Thursday, in a “conservative” step that could prevent widescale use of the cryptocurrency by big lenders.
The Basel Committee on Banking Supervision, made up of regulators from the world’s leading financial centres, proposed a twin approach to capital requirements for cryptoassets held by banks in its first bespoke rule for the nascent sector.
El Salvador has become the world’s first country to adopt bitcoin as legal tender even though central banks globally have repeatedly warned that investors in the cryptocurrency must be ready to lose all their money.
Major economies including China and the United States have signaled in recent weeks a tougher approach, while developing plans to develop their own central bank digital currencies.
The Swiss-based Basel committee said in a consultation paper that while bank exposures to cryptoassets are limited, their continued growth could increase risks to global financial stability from fraud, cyber attacks, money laundering and terrorist finance if capital requirements are not introduced.
Bitcoin and other cryptocurrencies are currently worth around $1.6 trillion globally, which is still tiny compared with bank holdings of loans, derivatives and other major assets.
Basel’s rules require banks to assign “risk weightings” to different types of assets on their books, with these totted up to determine overall capital requirements.
For cryptoassets, Basel is proposing two broad groups.
The first includes certain tokenized traditional assets and stablecoins which would come under existing rules and treated in the same way as bonds, loans, deposits, equities or commodities.
This means the weighting could range between 0% for a tokenized sovereign bond to 1,250% or full value of asset covered by capital.
The value of stablecoins and other group 1 crypto-assets are tied to a traditional asset, such as the dollar in the case of Facebook’s proposed Diem stablecoin.
Nevertheless, given cryptoassets are based on new and rapidly evolving technology like blockchain, this poses a potentially increased likelihood of operational risks which need an “add-on” capital charge for all types, Basel said.
The second group includes cryptocurrencies like bitcoin that would be subject to a new “conservative prudential treatment” with a risk-weighting of 1,250% because of their “unique risks”.
Bitcoin and other cryptocurrencies are not linked to any underlying asset.
Under Basel rules, a 1,250% risk weight translates into banks having to hold capital at least equal in value to their exposures to bitcoin or other group 2 cryptoassets.
“The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss,” it added.
Joseph Edwards, head of research at crypto brokerage Enigma Securities, said a global regulatory framework for cryptoassets is a positive given that banks in Europe are divided over involvement in the sector.
“If something is to be treated as a universal asset, it effectively needs to meet quorum with regards to how many parties will handle it. This should move the needle somewhat on that,” Edwards said.
Bitcoin gained after Basel’s announcement, trading up 1.5% at $37,962 at 1053 GMT.
Few other assets have such conservative treatment under Basel’s existing rules, and include investments in funds or securitizations where banks do not have sufficient information about their underlying exposures.
The value of bitcoin has swung wildly, hitting a record high of around $64,895 in mid-April, before slumping to around $36,834 on Thursday.
Banks’ appetite for cryptocurrencies varies, with HSBC saying it has no plans for a cryptocurrency trading desk because the digital coins are too volatile. Goldman Sachs restarted its crypto trading desk in March.
Basel said that given the rapidly evolving nature of cryptoassets, a further public consultation on capital requirements is likely before final rules are published.
Central bank digital currencies are not included in its proposals.
Bitcoin Plan Roils Crypto World Seeking Regulatory Clarity
International banking regulators’ proposal to classify Bitcoin as the riskiest of assets dragged cryptocurrencies further into the mainstream financial world.
It would also make it extremely costly for banks to hold digital tokens on their balance sheets, potentially delaying crypto’s wider adoption.
The Basel Committee on Banking Supervision proposed that a 1,250% risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies. Bitcoin jumped on the announcement, then erased the gains. It was trading around $36,200 as of 10:30 a.m. in Hong Kong on Friday.
“The only consistency has been the volatility — it’s been big spikes, tons of enthusiasm, followed by big selloffs,” Ross Mayfield, investment strategy analyst at Robert W. Baird & Co., said of Bitcoin’s moves. “If you believe in it you’re probably to stomach the volatility, but if you’re just in it because it seems like the hot way to get a quick buck, that volatility is going to be hard to deal with.”
The Ruling Sparked A Bevy Of Reactions Across Wall Street And Other Financial Centers Worldwide. Here’s A Sampling:
Luke Sully, CEO At Treasury Technology Specialist Ledgermatic:
“It’s a piece of news that both advocates and critics of Bitcoin will declare as a win. It demonstrates that Bitcoin is now a recognized asset class with risk management parameters for the banks, but these same parameters could be a potential deterrent given the onerous capital requirements that may make it an unpalatable business,” he said. “There are a few underlying assumptions in this risk weighting, the most obvious being that the price may go to zero and investors could lose their full allocation. The capital requirements don’t protect the banks clients from transaction, settlement and FX volatility either.”
David Tawil, President Of Prochain Capital, A Crypto Hedge Fund:
To me, this whole thing, along with the IMF, is just a way for those entities to get involved in the conversation. In terms of putting these requirements it’s going to go ahead, and at least for now, take traditional banks that are traditional regulated by these regulatory entities essentially out of this game and that will allow for more and more alternative players, who are not regulated, to go ahead and to pull further ahead,” he said.
“A regulator has very little upside and enormous downside — it’s like being a policeman. You want to protect people. So the furthest you can go in terms of lodging measures that stop activity, the better. And so, I think that they are for the first time inserting themselves. This certainly does not mean the end of cryptocurrency, the end of Bitcoin.”
Marc Chandler, Chief Market Strategist At Bannockburn Global Forex:
“I don’t think these things are good or bad themselves — it depends on what the objective is,” he said. “It’s not decentralized, it’s highly concentrated. Crypto was born in an age in which we had very extreme disparities of wealth and income — how can it not reflect that? The bulk of Bitcoin that’s owned by wallets have more than 100 Bitcoins, that’s more than $300,000 — how many Americans have $300,000 to put into crypto as opposed to retirement money?”
Matt Maley, Chief Market Strategist For Miller Tabak + Co.:
“Obviously tougher capital requirements cause banks to have more capital on hand — that can have an impact on their earnings. The committee is saying because of risks involved — cryptocurrencies are very volatile — you have to have more capital on hand to protect against declines,” he said. “If it’s going to cost banks more to hold these cryptocurrencies on their books, they’re theoretically going to be less likely to hold the same kind of size as they otherwise would.”
Wells Fargo Analyst Mike Mayo Said In A Bloomberg TV Interview With Matt Miller:
“It is getting hammered, but you know what? It’s getting treated like any other higher-risk asset like subprime loans, or CDOs, or derivatives, or structured products. And it is a new product. It’s untested through economic cycles. It’s untested through liquidity.”
Crypto’s Image Takes Beating In Washington, Dimming Fans’ Hopes
Just a few months ago, crypto enthusiasts were hopeful that Washington was warming to digital assets. But cyberattacks demanding Bitcoin ransoms, wild trading and rebukes from regulators have eroded their optimism.
The timing couldn’t be worse. Policy makers are poised to make a number of critical rulings on virtual tokens in the coming months — decisions that may reveal how deep of a hole the industry has to climb out of. Potentially under consideration are whether to approve a Bitcoin exchange-traded fund, allow crypto mutual funds and grant banking licenses to financial firms.
For advocates, the setbacks are fueling anxiety that some of their top priorities will be blocked by federal agencies, and that lawmakers will take take a tougher tack on oversight.
Evidence is growing that Capitol Hill is moving in that direction. Senator Mark Warner, a Virginia Democrat, said last month that cryptocurrencies are “crying out for some level of regulation.” Senator Elizabeth Warren reiterated that view Wednesday.
“Our regulators, and frankly our Congress, are an hour late and a dollar short,” the Massachusetts Democrat said in a Bloomberg TV interview. “We need to catch up with where these cryptocurrencies are going.”
The rough patch started in May when Securities and Exchange Commission Chairman Gary Gensler urged lawmakers to pass a law regulating crypto exchanges, arguing that the lack of oversight posed a serious threat to U.S. investors. The comments shocked Bitcoin proponents who predicted Gensler would be an ally because, unlike most government officials, he’s well versed in virtual coins.
Then came the Colonial Pipeline Co. hack, which triggered fuel shortages across the Eastern U.S. As in previous breaches, the culprits demanded ransom payments in Bitcoin — shining a spotlight on cryptocurrencies’ national security implications.
Long gas lines predictably attracted the attention of lawmakers and the scrutiny could make some on Wall Street nervous about further embracing assets that are routinely linked to illicit transactions.
The Justice Department recovered most of the tokens that Colonial paid out by tracking transactions on the public ledger for Bitcoin, showing how the technology can aid law enforcement agencies.
Still, Warren said a key feature of cryptocurrencies is that they allow people to secretly move money, making the coins a “haven for criminals.” A reminder of her point came Wednesday when JBS USA disclosed that it had paid $11 million to hackers who forced the world’s largest meat producer to shut down all its U.S. beef plants.
Another issue: Bitcoin has lost more than a third of its value since early May. A series of negative tweets from Elon Musk has contributed to the plunge, underscoring to crypto critics that token prices are too volatile and easily influenced by social media to be safe for unsophisticated investors. The frenzy tied to nonfungible tokens and dogecoin — a cryptocurrency created as a joke — has amplified those concerns.
“We can’t deny the potential impact that a negative media narrative might have on the regulatory and legislative conversations in D.C. in the short term,” said Kristin Smith, executive director of the Blockchain Association trade group.
Much of high finance’s focus is on Gensler, who previously taught courses on digital currencies at the Massachusetts Institute of Technology, because the SEC will determine whether a Bitcoin ETF can trade on U.S. exchanges.
The product is seen as a game-changer because it would let investors trade in-and-out of the world’s most popular cryptocurrency throughout the day without exposing them to the risks of having to store their tokens. Adding another layer of safety, consumers could buy ETFs from tightly policed brokers instead of purchasing Bitcoin from unregulated exchanges. And mutual funds and other institutional investors could pump a lot more money into crypto-related assets through ETFs.
An SEC spokeswoman declined to comment.
Under Gensler’s predecessor Jay Clayton, the SEC blocked multiple ETF applications, arguing that Bitcoin is too volatile and susceptible to manipulation. Gensler’s comments that crypto exchanges lack investor protections signals he may share some of those concerns, said Stephen Myrow, a former Treasury Department official during George W. Bush’s administration.
“It’s a big shift from four months ago when everyone said, ‘Gensler taught a crypto class at MIT so we’re going to get all our applications approved,”’ said Myrow, managing partner of Beacon Policy Advisors, a Washington-based firm that tracks regulatory and legislative proposals.
The SEC faces a June 17 deadline on one proposal to list an ETF from VanEck Associates Corp., one of several applications it’s considering. The agency has previously delayed making a decision on VanEck’s plan, and amid Washington’s heightened attention on crypto, it may choose to kick the can down the road again. The regulator may also put off decisions on the five other applications, but the agency needs to respond to each of them by July 16.
The SEC has also expressed worries about mutual funds investing in Bitcoin futures, something that is allowed under existing rules. The agency warned in a May 11 statement that it would be scrutinizing funds’ crypto holdings.
Biden Nominee For Treasury Dept Will Prioritize Crypto Regulation
Brian Nelson said he would push for implementation of the Anti-Money Laundering Act of 2020, “including new regulations around cryptocurrency.”
Brian Nelson, President Joe Biden’s nominee for under secretary of the Treasury Department’s division on terrorism and financial crimes, said he would prioritize implementing new regulations around cryptocurrency.
In a Tuesday hearing of the Senate Committee on Banking, Housing, and Urban Affairs, Nelson said he would be focusing on Anti-Money laundering (AML) regulations if he were to be confirmed for the position in the Treasury Department’s terrorism and financial intelligence arm, adding that cryptocurrency would be a particular priority.
Responding to a question from Nevada Sen. Catherine Cortez Masto regarding “the damage done by crypto heists,” Nelson said the Anti-Money Laundering Act of 2020 reflected expanded regulators’ ability to prevent cryptocurrencies from undermining existing laws. However, he implied that the creation of crypto was also part of “responsible innovation” in the United States.
“If I am confirmed, I will prioritize implementing the pieces of that legislation, including new regulations around cryptocurrency,” said Nelson. “I think that legislation provided new authorities — or clarified the law — that cryptocurrencies or currency in whatever form, be it virtual or fiat, is covered by the Bank Secrecy Act.”
The Financial Crimes Enforcement Network, or FinCEN — which operates within the Treasury Department — has previously used the Bank Secrecy Act to apply to cryptocurrencies in certain cases, though the legislation was passed back in 1970. Nelson said the BSA was a “powerful tool to allow FinCEN to ensure that no matter the form of the currency that they have the tools to regulate.”
“It reflected a balancing of regulating to prevent virtual currency and other types of new technology from undermining our anti-money laundering system while also being respectful of the fact we need to support responsible innovation and preserve that here in the United States.”
At the same Senate hearing, Elizabeth Rosenberg, Biden’s nominee for assistant secretary for terrorist financing at the Treasury Department, said she would look at making the current AML regulatory requirements for crypto “appropriate and consistent.” Janet Yellen, the current Treasury secretary, previously called cryptocurrency a “particular concern” for AML, adding that she believed it was “mainly for illicit financing.”
FinCEN proposed regulations earlier this year that would consider convertible digital currency or digital asset transactions subject to similar Anti-Money Laundering and Combating the Financing of Terrorism requirements. Last month, the Treasury Department also called for exchanges and custodians to report crypto transactions greater than $10,000 to the Internal Revenue Service.
Will Regulation Adapt To Crypto, Or Crypto To Regulation?
Blockchain technology promises to provide humanity and freedom with the rise of Web 3.0, a truly decentralized internet. Some even argue that the significant rise of the decentralized finance (DeFi) sector has become an important symptom of the conceptual shift from centralized services to decentralized ones, with Web 3.0 being its cornerstone.
Moreover, some even compare the invention of blockchain technology to the revolution brought by the advent of the internet itself. Symbolically, the original source code for the World Wide Web, developed by British computer scientist Tim Berners-Lee, is set to be auctioned off at Sotheby’s on June 23 as a nonfungible token, or NFT.
All three of them — NFTs, DeFi and Web 3.0 — are intertwined. But with that internet-blockchain comparison comes a crucial notion: Without proper regulation in the crypto and blockchain space, there will not be the same success in technological innovation as what we saw over the past 25 years, which changed the world as we know it.
It is now becoming obvious that a lack of regulation would harm crypto innovations. As the decentralized technology sector has grown significantly, the space has started to attract increasing attention from regulators globally, which are targeting stablecoins, DeFi, NFTs, crypto assets, smart contracts, unhosted wallets, central bank digital currencies and so on.
Meanwhile, some experts such as Caitlin Long, the founder and CEO of Avanti Financial, for example, see the started “crypto regulatory crackdown” as a positive trend, which will only benefit innovators. And others propose “a right way to regulate crypto.”
On the other hand, the current regulation is not suitable for crypto, and adjusting newly emerged decentralized technologies to it might ruin the core values of decentralization, bringing us back to where we started: with the centralized parties in control over the space. Is that the price we are willing to pay in order to become a regulated industry?
In order to find the right balance, the crypto space requires a much deeper and closer working relationship that would include both regulators and innovators.
Only in a dialogue between crypto businesses and regulators, authorities and industry representatives, will it be possible to find the right way to regulate the emerging tech industry — through smart regulation — and the space that is promising to change our lives — a promise that was fulfilled by proper regulations for the internet at the turn of the last century.
To find out what crypto and blockchain industry representatives think about this regulatory dilemma, Cointelegraph reached out to a number of them to ask for their opinions on the following question: Will crypto lose its core values on the way to being regulated, or will the regulation adapt to decentralized tech and its benefits for society?
2. Agata Ferreira, Law Professor And Expert At The EU Blockchain Observatory And Forum:
“Regulators are on a learning curve when it comes to blockchain in general. Legal and regulatory frameworks are developed incrementally and have been built to govern centralized and intermediated societal design within well-defined jurisdictional boundaries. Decentralized, disintermediated and borderless blockchain networks challenge regulators who have also been taken by surprise by some blockchain innovations — for example, stablecoins.
Regulatory awareness and approaches to blockchain innovation have evolved. Recently, there has been increasing regulatory activity and scrutiny, and we can expect that this trend will continue. Regulators still largely seek to apply existing regulatory principles to crypto, which is not always in sync with decentralized tech.
The hope is that with time, regulators realize the value and acknowledge the benefits of decentralization and adapt their regulatory approaches accordingly. As the technology matures, so will the regulatory approaches to it. Hopefully not through trial and error, but through carefully considered and informed regulatory steps.”
3. Alex Wilson, Co-Founder Of The Giving Block:
“Crypto isn’t going anywhere, and I’m confident it will overcome any regulatory hurdles along the way. I’m sure there will be ups and downs and huge variations among different countries. The countries that embrace crypto now will have a huge leg up on countries that try to stifle crypto because they will miss out on an entire generation of entrepreneurs building crypto companies.
Some countries that have done a relatively good job attracting crypto entrepreneurs include Singapore, Switzerland and Portugal, in part fueled by low or no taxes on crypto. I’m surprised that more countries haven’t tried harder to attract this next generation of entrepreneurs.”
4. Cristina Dolan, Founder And CEO of InsideChains, Vice-Chair Of MIT Enterprise Forum:
“The on-ramps and off-ramps for crypto are regulated by default because the exchanges that offer crypto-to-fiat conversions require Know Your Customer and Anti-Money Laundering processes. There is more visibility across crypto blockchain networks than there is across traditional siloed financial systems that prevent visibility throughout the entire transaction process.
Regulatory acceptance of crypto will enable faster adoption of these valuable and transparent technologies for next-generation financial systems. The level of creativity shown by fintech entrepreneurs is growing exponentially; the recent success of DeFi is just the beginning.
The central bank digital currencies (CDBCs) will offer programmable money. These CDBCs will enable visibility by governments and the ability to program fees and taxes into transactions. The launch of CDBCs will not eliminate nor compete with the entrepreneurial creativity that is fueling the growth of new crypto or DeFi products.
While interest rates remain artificially low, the attraction to crypto-enabled investments will continue to grow especially as regulations become less ambiguous.”
5. Denelle Dixon, CEO And Executive Director Of Stellar Development Foundation:
“Clearly, there is debate on what crypto’s core values really are. Early uses of cryptocurrency attracted people who wanted access to the financial system to be redistributed, out of the hands of institutions and into the hands of people. While being inspired by those initial principles, we see a path to working with existing financial systems.
In fact, linking to the world’s infrastructure is critical to have blockchain actually empower individuals with access. I see regulation as a necessary and iterative process. At Stellar, we have a crystal-clear vision of how our technology helps drive financial inclusion and positive economic growth in the developing world.
Plus, adapting to regulations in different countries and jurisdictions will continue to be necessary for any business that wants to operate globally. We see blockchain/crypto as an opportunity for more collaborative regulation — keeping its core values on the way to delivering a highly positive impact for society.”
6. Diana Barrero Zalles, Director Of ESG And Impact At Emergents @ Weild & Co.:
“Civilizations throughout history have been built on standards that everyone agreed to follow based on an underlying notion of morality and conscience, and justified by a universal recognition of the inherent dignity of each person. Promises should be kept and commitments should be met. Breaking promises is considered unjust while breaching contracts can cause harm to the other party.
Decentralization at the core of crypto presents a new and exciting form of governance that will back a new generation of community-driven innovations and business models. This does not mean decoupling crypto, just because it’s new, from the core principles of justice behind human civilization. Just like centralized decision-makers, communities can come to a consensus to arrive at the right outcome, often more accurately than individuals.
The ‘wisdom of the crowds’ concept suggests that collective intelligence can surpass that of individual experts when solving problems, making decisions, predicting answers and innovating. For a population that is at least 51% likely to be right, a collective estimate will be much closer to being right than any single person’s estimate (e.g., guessing the weight of a cow at a country fair).
Most communities would disapprove of the use of decentralized structures for harm, as shown by the response to The DAO hack, where the Ethereum hard fork was placed to return stolen funds to their rightful owners.
Regulation, which has traditionally upheld society’s basic principles, is now met with a wave of decentralized governance. Regulators around the world are adapting accordingly to enable these structures to develop within existing core principles. We can take a step back from the decentralization vs. centralization debate to evaluate how both can be balanced for the ultimate benefit of the community.”
7. Emin Gün Sirer, CEO Of Avalabs, Professor At Cornell University, Co-Director Of IC3:
“Crypto will always have a base that says traditional regulators have no say in operations on these networks. This ethic is absolutely vital for continuing to build and offer technologies that keep individuals around the world connected to a financial system. As we’ve seen in some authoritarian regimes, access to the legacy financial system can hinge on abandoning your beliefs and conforming to state-approved messaging.
That said, service providers engaging with fiat will always have to answer regulators’ calls. The likeliest outcome is that there is a split in crypto between regulator-approved services and those that make business trade-offs in a commitment to the ideals of permissionless systems.”
8. Marc Powers, Law Professor And Former SEC Attorney:
“Blockchain has the promise to provide the entire world with a technology that advances several worthy core values: financial independence and freedom, financial and political security for many sovereign populations, financial inclusion for billions of people, and allowing cost-effective and speedy peer-to-peer activities without intermediaries.
Whether sovereigns will allow crypto to survive with reasonable regulation which promotes those values is a good question. As a former U.S. Securities and Exchange Commission staffer, I am doubtful but hopeful.
First and foremost, blockchain is the antithesis of a central government or authority, and by implementation, the technology marginalizes our traditional financial intermediaries. Second, groupthink unwilling to consider and develop a more efficient financial system that adapts the technology must change.
I believe there is a chance for our customary laws on finance, banking and capital raising to do so. United States SEC Commissioner Hester Peirce and former acting comptroller of the currency of the U.S. Office of the Comptroller of the Currency Brian Brooks are on the right track here.
However, that is not what happened after the advancement of the last great technology, the internet and the dot-com bust through the passage of SOX, which required thousands of new regulations in the name of consumer and investor protection.
However, calls for regulation this time will be primarily for the benefit of the sovereigns and banks, not truly for consumers or investors. As a result, I see a continuation of a dual system, one crypto-owned, used and managed by the people, the other — the traditional financial system, which will eventually offer central bank digital currencies to its population.”
9. Mati Greenspan, Founder of Quantum Economics:
“Many crypto assets are exceptionally resistant to regulation by design. One of Bitcoin’s main reasons for being invented was to have a currency that is independent of governments and banks, so it makes sense that regulators are having such a tough time overseeing this particular market.
There’s no doubt that over time, they’ll manage to gentrify mainstream usage, but there will always be loopholes and workarounds available, especially for the more technically savvy.”
10. Thibault Verbiest, Chairman Of The IOUR Foundation, Expert At The World Bank and the EU Blockchain Observatory And Forum:
“As long as our societies live in a state system, with rule of law, regulators will always look for legally responsible entities in case of illegal or reprehensible acts, even if it means prosecuting the wrong person. We have seen this attitude since the beginning of the internet when access and hosting providers were prosecuted while they were not the actual perpetrators.
The United States, and then Europe, had to legislate some 20 years ago to protect these intermediaries. Today, this ‘neutrality’ of intermediaries is being challenged in the name of the fight against terrorism or the protection of intellectual property.
A similar phenomenon is at work in the blockchain ecosystem, with the first lawsuits against miners (and certainly tomorrow against block producers in the case of proof-of-stake protocols). DeFi is a real challenge for regulators.
In the current context, regulators naturally target stablecoins backed by national currencies (U.S. dollar, euro, etc.) because the link with a fiat currency necessarily subjects them to existing regulations (AML, KYC, etc.).
But if we talk about perfectly decentralized finance, in which there are no intermediaries, no stablecoins backed by a national currency, and where only non-professionals intervene anonymously, then this world is indeed a wild west for the regulator.
In the end, regulation will probably focus on digital identity, and the real democratic battle will be at this level. The temptation for regulators will be to impose a centralized identity, granted either by the state or by private entities that the state can requisition if necessary (this is already the case with Facebook, in particular). The challenge is, therefore, to promote decentralized identities, managed by users directly from their wallet.”
11. Tim Draper, Founder Of Draper Associates And Draper Fisher Jurvetson:
“Good question. I believe that Bitcoin, as a flag-waver for trust and freedom, will continue to be global. I think that the best governments in their current form are trying to adapt to this new technology, knowing that it will be good long-term for their citizens.
The bad governments that are trying to control their people with their own currencies will make this new, global, trusted and free world difficult and their people will suffer. Of course, the people can vote with their feet.”’
12. Wes Levitt, Head Of Strategy At Theta Labs Inc.:
“Crypto and regulations seem to be meeting in the middle, which is the best outcome to hope for if you believe in crypto values. There was never a plausible scenario where Bitcoin replaces global finance without any input or pushback from government regulators.
Censorship resistance will remain intact because it would be nearly impossible for governments to prevent peer-to-peer crypto transactions. What they can do is enforce surveillance and restrictions on the fiat-to-crypto gateways, which could shut some crypto users out of access to traditional finance.
With respect to CBDCs, they are largely contradictory to crypto’s original values. They are not decentralized, not censorship-resistant (quite the opposite, it will probably be trivial for a central bank to deny you usage of them) and they will be inflationary. I don’t see CBDCs replacing Bitcoin, Ether, etc., but they will coexist. But it is important to recognize that aside from both being digital currencies, CBDCs and Bitcoin have little in common and serve very different purposes.”
13. Yoni Assia, Founder And CEO of eToro:
“Breaking down barriers and increasing access to information, products and services will remain a core value for the crypto industry — this was the purpose it was developed for — and will enhance processes at every level across multiple sectors.
With CBDCs being a big topic for both the industry and policymakers, regulation of crypto in the financial sector is likely to set the scene for regulation of decentralized tech and blockchain more generally. EToro fully supports regulatory measures designed to protect and educate investors and end-users.
We hope that any guidelines put in place will balance the need to protect investors with a desire to support their participation in the crypto markets, and that increased regulation will help to facilitate greater use of a technology that can not only deliver real benefits to the financial services sector, but also facilitate greater financial inclusion globally.”
What Crypto Firms Can Expect From Friday’s FATF Plenary Meeting
Regulatory insiders say the sheer volume of crypto feedback means updated guidance from the FATF could be delayed.
There’s a lot at stake this week as crypto comes further within the creep of global regulations.
The Financial Action Task Force (FATF), an intergovernmental anti-money laundering (AML) body, wraps its second annual review of progress made by member countries to implement a cryptocurrency compliance framework.
It’s been over two years since the FATF recommended bringing cryptocurrency firms (virtual asset service providers, or VASPs, in FATF parlance) within its regulatory framework. This has created challenges for the industry and regulators alike, particularly around areas like the Travel Rule, where third-party VASPs must exchange personally identifiable information (PII) about customers along with transactions.
To further complicate matters, the FATF’s proposed regulations have been forced to expand in step with crypto innovation to accommodate rapidly evolving areas like decentralized finance (DeFi) and stablecoins.
Since the last plenary meeting in March 2021, when FATF issued draft guidance, there has been an overwhelming response from the industry. In short, many in the space are worried regulators will take too broad an approach, particularly when it comes to things like DeFi.
Indeed there has been such an enthusiastic response from the industry, that some are predicting the FATF will likely kick the can down the road to its next plenary meeting in four months’ time, regulatory insiders told CoinDesk.
Bipartisan Crypto Bills Pass US House of Representatives – Again
The Blockchain Innovation Act and parts of the Digital Taxonomy Act were included in the broader Consumer Safety Technology Act.
The U.S. House of Representatives passed two crypto bills on Tuesday evening.
The Consumer Safety Technology Act, sponsored by Rep. Jerry McNerny (D-Calif.), directs the Consumer Product Safety Commission to establish a pilot program to explore use cases for artificial intelligence in commerce.
The two blockchain bills – the Blockchain Innovation Act and parts of the Digital Taxonomy Act – direct the Secretary of Commerce and the Federal Trade Commission (FTC) to study and report on the use of blockchain technology and digital tokens.
The Consumer Safety Technology Act was approved in a previous session of Congress, passing the House in September 2020, but was never approved by the Senate and died at the close of the session.
By reintroducing the bill and passing it onto the Senate again, McNerny and his co-sponsors, including longtime blockchain advocate Rep. Darren Soto (D-Fla.), are giving the bill a second chance.
The blockchain bills are one of many in a series of attempts to provide regulatory clarity on digital asset ownership and management. Many in the crypto market are increasingly demanding regulation, claiming that the lack of a legal framework stifles innovation.
Previous attempts to provide regulatory clarity, including Rep. Warren Davidson’s (R-Ohio) Token Taxonomy Act, which was first introduced in 2018, have failed to gain any meaningful traction.
Supporters of blockchain regulation fear that a lack of governmental guidance puts the United States at risk of falling behind other nations, including China.
“Emerging technologies like artificial intelligence, blockchain technology and cryptocurrency are playing a growing importance in our daily lives and are going to be an economic driver for the 21st-century economy,” Soto said in a speech on Tuesday, adding:
“It’s essential that the United States continue to be a global leader in these emerging technologies to ensure that our democratic values remain at the forefront of this technological development.”
Soto said the Consumer Safety Technology Act is the first step toward the Congressional Blockchain Caucus’ long-term goal of creating a Blockchain Center of Excellence in the Department of Commerce.
Expect Even More Oversight Of Crypto From Regulators, Says eToro
Yoni Assia believes that unprecedented retail investor interest will push regulators to be more proactive about crypto regulation.
Crypto-friendly trading platform eToro is expecting regulators to ratchet up their oversight of the crypto industry, given the increasingly high levels of participation by retail traders and smaller investors. In comments for the Financial Times, eToro CEO Yoni Assia said:
“We are seeing a significant increase in the interest of retail investors and traders in the crypto market. As a part of that growth we should expect also regulators to carefully look at this growing business of retail investors in the crypto markets.”
At the start of this year, eToro had itself struggled to keep up with “unprecedented” demand from crypto traders, with over 380,000 new users opening accounts over the span of 11 days.
Assia’s comments to the United Kingdom’s leading financial newspaper also follow hot on the heels of an intervention by the country’s Financial Conduct Authority, which this week ordered leading crypto exchange Binance to cease all regulated activities in the United Kingdom.
While more regulation is a foregone conclusion, in Assia’s view, he also argued that “the most important thing for regulators is to understand crypto, and understand that it is here to stay.” The eToro CEO has a perspective that spans several different jurisdictions.
Based in Israel, almost 70% of eToro’s users are in Europe, and the company now has its sights on the United States, where it hopes to go public following a merger with a special purpose acquisition company.
Crypto literacy is not only key for regulators, Assia said, but traders themselves need to be sober about the risks they are courting in a fast-paced industry. He stated, “An asset that went up 100 per cent can very easily go down 50 per cent. There’s no doubt that if something went up 1,000 per cent it’s very volatile, and you should understand that as part of your portfolio allocation.”
Founded in 2007, eToro has supported Bitcoin (BTC) trading since 2013. Crypto assets reportedly accounted for 16% of its revenue in 2020, and the platform’s number of users was 20.6 million as of the first quarter of this year.
In that same quarter, the company saw new registrations hitting the 3-million mark — a major uptick, as during the course of 2020, eToro had onboarded roughly 5 million new users in total.
Assia has previously characterized 2020 as a “big year for stocks” but noted that 2021 has been “dominated by crypto headlines.” Already in late January, he noted that crypto trading volumes on eToro were up more than 25 times compared with the same period last year.
While Assia has attributed likely regulation to increased consumer demand, other industry experts have a different view. Speaking to Cointelegraph earlier this month, Marc Powers, a law professor and former attorney at the Securities and Exchange Commission, said:
“Regulation […] will be primarily for the benefit of the sovereigns and banks, not truly for consumers or investors. As a result, I see a continuation of a dual system, one crypto-owned, used and managed by the people, the other — the traditional financial system, which will eventually offer central bank digital currencies to its population.”
Bitcoin Leads Crypto Higher In Defiance Of Regulatory Crackdown
Bitcoin pushed higher as proponents took the U.K.’s crypto crackdown in stride after the digital token traded above a key technical level over the weekend.
The largest cryptocurrency advanced as much as 8%, and recently traded at around $34,580 in New York trading. The broader crypto market also climbed, with the total valuation up about 5% to $1.44 trillion, according to CoinGecko pricing.
In one of the most significant moves to date by a regulator amid a global crackdown, Binance Markets Ltd., an affiliate of top global crypto exchange Binance, was banned Sunday by the U.K. financial watchdog from doing any regulated business in the country. Huobi, one of the most popular cryptocurrency platforms in China, said Monday that users in the country are prohibited from trading derivatives.
Crypto bulls often interpret tough regulatory action as a sign that the market is maturing. They also appeared to take further encouragement from Bitcoin’s failure to breach the closely watched $30,000 support level over the weekend.
“We’re seeing the $30,000 level on Bitcoin being defended quite well with a number of tests at that level over the past month,” said Vijay Ayyar, head of Asia-Pacific at crypto exchange Luno Pte. “We saw a lot of downward pressure on prices being defended, so this looks quite bullish at this point.”
Bitcoin has lost about half its value in recent weeks amid concern on its environmental impact and as regulators globally — notably in China — crack down on the industry. The digital currency reached a record near $65,000 in mid-April.
For Luno’s Ayyar, it is too soon to give the all-clear.
“One more push down to $30,000 might not hold given the number of times we’ve tested it and there’s only so much liquidity there,” he said. “Post-$30,000 and we should probably see $24,000 to $25,000.”
Driving ‘Purists Beserk’: Co-Chair Of Blockchain Caucus Wants To ‘Reverse’ Crypto Transactions
Democratic Representative Bill Foster has called for legal power to identify wallet holders and reverse crypto transactions in instances of criminal behavior such as ransomware attacks.
Bill Foster, Democratic Representative and co-chair of the Congressional blockchain caucus, has called for a regulatory framework that would enable third parties to reverse fraudulent or criminal transactions.
Foster is a physicist and a Democratic Rep for Illinois. The blockchain caucus is co-chaired by Democratic Rep Darren Soto, and Republican Reps Tom Emmer and David Schweikert.
Speaking during an online event for news outlet Axios, Foster asserted that unless the Congress or the public can come up with a different solution to ransomware, U.S. regulators need to introduce a legal framework that can “unmask” crypto wallet holders’ identities and reverse crime-related transactions.
The Democrat described the legality of reversing transactions as one of “most fundamental decisions about crypto assets,” and notes that regulators need to be asking:
“Is there a court that you can go to unmask the participants, but also is there a trusted third party or court that you can go to, to reverse fraudulent or mistaken transactions?”
The 65-year-old notes that while his comments “will drive the crypto purists berserk” who value anonymity and uncensorable transactions as core features of crypto, those who have a large amount of their net worth held in digital assets are “going to want to have that security blanket of a trusted third party that can solve the problem.”
The news did of course drive crypto purists berserk, with a thread about Foster’s comments on subreddit “r/CryptoCurrency” sparking a negative reaction earlier today.
User “DepNeanderthal” commented that “anyone that trusts this guy’s ‘trusted third party’ is a sucker.
Government and trust are as close to each other as the North and South Pole.”
While user “Justin534” noted that it’s “literally not possible unless governments attack a network. Which they honestly could actually.”
Foster appears to only want the power to be used in exceptional cases. Speaking with Axios about China’s regulatory approach to cryptocurrency, which has been to essentially ban the entire sector, Foster notes that the U.S. needs to find a common ground and more balanced approach, in which anonymity is respected “99.9% of the time” under normal circumstances.
“But in those rare instances where something fraudulent, criminal or mistaken, as happened, that you have to be able to unmask and potentially reverse those transactions,” he reiterated.
The use of cryptocurrencies to facilitate criminal activity appears to be a key issue for Foster, and he highlighted in an April 5 media release that a lack of regulation is enabling illicit behavior:
“One of the border patrol agents told me that most of the payments made for human trafficking are now being made with Bitcoin, simply because it was not legally traceable.”
Elizabeth Warren Warns Crypto ‘Scams Continue To Surge’ On Exchanges, Calls For SEC Regulation
The missive is the latest from crypto-skeptical legislators and regulators.
Washington lawmakers and regulators continue to beat the drum for greater regulation of cryptocurrencies, with the latest call coming from Sen. Elizabeth Warren of Massachusetts, the powerful democrat on the U.S. Senate Banking Committee.
In a letter sent to Securities Exchange Commission Chairman Gary Gensler Wednesday, Warren wrote to request information on the regulators authority to regulate cryptocurrency exchanges. She asked whether the SEC “has the proper authority to close existing gaps in regulation that leave investors and consumers vulnerable to dangers in the this highly opaque market.”
Her letter follows comments made by Gensler in recent months expressing concern about the forums where Americans go to buy and sell their bitcoin, ether or other digital currencies. He told a House Appropriations subcommittee in May that there were “gaps” in the regulation of cryptocurrencies, arguing that crypto exchanges would be his first priority in addressing those deficiencies.
“We have the SEC trying to protect against fraud in manipulation [in traditional stock exchanges,]” Gensler said. “Not so in the crypto world, and so it’s trying to bring the similar protections to the exchanges where you trade crypto assets, as you might expect on the New York Stock Exchange or Nasdaq.”
In June, Commodity Futures Trading Commission chief, Dan Berkovitz, questioned whether peer-to-peer decentralized exchanges, also known as DeFi exchances, are legal under U.S. law. He said that users of DeFi exchanges are not offered the same fraud and manipulation protections provided by traditional financial institutions and don’t work to prevent fraud or money laundering.
“Not only do I think that unlicensed DeFi markets are a bad idea, I also don’t see how they are legal,” Berkovitz said. U.S. law “requires futures contracts to be traded on a designated contract market licensed and regulated by the CFTC.”
In her letter, Warren pointed out that as the the volume of digital assets traded on these forums has grown exponentially in recent years, complaints about losses due to bad actors have surged.
“The harms to consumers as a result of this under-regulated market are real and continue to proliferate in the absence of effective SEC regulations,” she wrote. “During the six-month period from October 2020 to March 2021, nearly 7,000 people reported losses [to the Federal Trade Commission] from cryptocurrency scams, resulting in a cumulative $80 million lost.”
Those figures, she added, represent an increase of 12 times the number of reports and 1,000% more in reported losses compared to the same period the year earlier.
Warren noted that “scams have surged on DeFi platforms in particular,” where “developers are often anonymous” and can more easily pull off frauds whereby they raise money selling a digital asset” before disappearing with investor funds.
The senator asked Chairman Gensler to report back on whether he believed that these exchanges are operating in a “fair, orderly and efficient’ manner — the standard that the SEC works to promote for all U.S. financial markets, and what help from Congress he needs to enforce that standard on all cryptocurrency markets. She also asked whether there needs to be greater international coordination over the regulation of crypto exchanges.
The letter, along with recent statements by other key lawmakers on financial oversight committees in both the House and Senate, appears to signal that Congress is intent on holding regulator’s feet to the fire when it comes crypto-exchange regulation.
Fed Flags Crypto Assets For First Time In Financial Risk Review
The Federal Reserve singled out a surge in crypto asset prices for the first time in its overall assessment of the stability of the financial system, saying the rise reflected increased risk-taking by investors.
The brief comment, contained in the Fed’s semi-annual Monetary Policy Report to Congress released on Friday, is the latest sign that policy makers are paying more attention to what used to be a tiny sliver of the financial system.
Fed Chair Jerome Powell met with the head of cryptocurrency exchange Coinbase Global Inc. on May 11 and crypto advocate Christopher Giancarlo a day later, according to the central banker’s monthly diary.
Powell’s in-person meeting with Coinbase Chief Executive Officer Brian Armstrong and former Speaker of the U.S. House of Representatives Paul Ryan lasted 30 minutes and took place during a week of intense volatility for crypto currencies including Bitcoin, which fell steeply on that day. Spokespeople for both the Fed and Coinbase declined to comment on what was discussed.
The price of Bitcoin is up some 250% from a year ago, although it is well down from its April high.
Powell has previously said that he wants the Fed to play “a leading role” in the development of international standards for digital currency. The central bank plans to issue a discussion paper this summer highlighting the risks and benefits of digital payments.
In the Monetary Policy Report, the Fed said that that some parts of the financial system had grown more vulnerable to potential instability since its last account to Congress in February, but that the core of system remained resilient.
It characterized equity and commercial real estate prices as high and said that spreads on corporate bonds and leverage loans remained low.
“The surge in the prices of a variety of crypto assets also reflects in part increased risk appetite,” it added.
The central bank also issued a warning about the general level of asset prices.
“Asset prices may be vulnerable to significant declines should investor risk appetite fall, interest rates rise unexpectedly, or the recovery stall,” the report said.
Between Binance and FATF, More Attention Turns To Crypto Compliance: BitGo’s Horowitz
Former Coinbase executive Jeff Horowitz surveys the world of crypto regulation.
Cryptocurrency regulation reads more like a film script than the traditionally dull and stodgy world of financial rulemaking.
Just look at the hot water Binance appears to be in now, with regulatory authorities from the U.K., Japan and Germany, to name a few, calling foul against the exchange.
More broadly, the Financial Action Task Force (FATF), a global anti-money laundering (AML) watchdog, is reviewing the crypto industry annually. But the sector is moving so fast that FATF guidance teams are left scratching their heads, wondering how to deal with things like decentralized finance (DeFi).
For now, the regulatory focus is mainly directed at crypto’s third-party intermediaries, the exchanges, trading desks and custodians. When it comes to this arena of virtual asset service providers (VASPs), Jeff Horowitz, chief compliance officer at BitGo, a digital assets custodian,, understands where regulatory tensions and fault lines lie. Prior to joining BitGo in October, Horowitz spent two years steering compliance efforts at Coinbase, the now-publicly listed crypto exchange.
Asked his opinion on Binance, Horowitz said Binance.US – the arm of the Binance business serving American customers and complying with U.S. regulations – made a “smart move” when it hired former U.S. banking supervisor Brian Brooks. (Brooks previously served as U.S. acting comptroller of the currency, and prior to that worked alongside Horowitz as Coinbase’s chief legal officer.)
“If there’s anybody who can balance being regulated and growing a business, I think Brian will be able to pull it off,” Horowitz said in an interview. “From what I know, Binance.US and Binance.com are two very separate companies. I think embracing regulation is the only path to go for the long run.”
Binance is said to be looking to hire an ex-regulator or government figure like Brooks for the U.K., where a satellite company owned by Binance attempted to become regulated, but was later slapped down by the Financial Conduct Authority (FCA). A Binance spokesperson described the situation as a “misunderstanding” with the FCA.
Coinbase, in the Form S-1 it filed when going public, made mention of Binance’s lack of regulatory compliance as potentially giving it an unfair competitive advantage.
“Coinbase and other entities long ago made a decision to play the long game and go the regulated route. And there is a cost to doing that,” Horowitz said, adding:
“I don’t think anyone wants to change direction there, but they do want this to be a level playing field. I think that is the only way that folks aren’t running to the path of least resistance or finding the one country where they’ll be able to do things that you can’t do in other spaces.”
Have Rules, Will Travel
Preventing regulatory arbitrage, when the rules are still only half-baked, is the challenge being addressed by the FATF, which has made the recommendation that firms like BitGo and Coinbase share customer identification data along with cryptocurrency transactions over a certain amount, known colloquially as the “travel rule.”
Aside from devising a technical travel rule system everyone is happy with, there’s obvious concern among large established businesses when it comes to sharing sensitive customer information with lesser known third parties. That has led to a piecemeal approach, where firms in more buttoned-up jurisdictions like the U.S., Switzerland and Singapore are rolling out products for registered crypto firms in those regions.
In terms of those sorts of products, Horowitz is proud to have been the initial driving force behind the U.S. Travel Rule Working Group (USTRWG), which he originated when he was at Coinbase.
“The reality is there are multiple solutions being built and at some point they’ll need to be interoperable. But we were feeling the regulatory pressure to start building,” he said.
The 30-plus member USTRWG includes a core membership composed of firms like Coinbase, BitGo, Gemini, Fidelity Digital Assets, Paxos and Kraken. No mean feat then to get these bare-knuckle crypto competitors round the table to collaborate.
“I come from traditional finance, where legal and compliance would collaborate and put competition aside for the right thing for the industry,” Horowitz said. “And we just partnered, and I’m pretty proud of that.”
Rep Tom Emmer Introduces Bill To Provide Certainty For Digital Assets
The Security Clarity Act seeks to lessen regulatory burdens for blockchain-based technology.
U.S. congressional representatives introduced a bipartisan bill on July 15 with the goal of providing a clear definition of assets, such as digital tokens and other emerging technologies, under current securities law.
Known as the Security Clarity Act, the bill was introduced by Rep Tom Emmer (R-MN), Rep Darren Soto (D-FL), and Rep Ro Khanna (D-CA). This legislation seeks to change the definition of a term that has been used for more than 75 years. The status of any asset sold as an “investment contract” would become an “investment contract asset.”
According to the release, this bill would provide a solution for those who have complied with current securities registration requirements or qualified for an exemption. After meeting these requirements, entrepreneurs would be able to distribute their assets without the fear of any additional regulatory burdens.
“There has been an unreasonable approach by regulators as to how federal securities laws should be applied to transactions involving the sale of blockchain-based tokens, and this lack of clarity is hurting American innovation. Between regulation by enforcement and the varying legal decisions regarding the classification of these assets, regulatory uncertainty has hindered the growth of blockchain technology, leaving many to take the technology overseas,”
The Securities Clarity Act is meant to be a technology-neutral bill, according to the representative. It would apply equally to all assets, tangible or digital, and states an investment contract asset, like a digital token, is separate and distinct from the offering it may have been a part of.
Congressman Soto Explained:
“As Congress works to protect those who invest in this technology, the Securities Clarity Act will add critical definition and jurisdiction to create certainty for a strong digital asset market in the United States. This is an important first-step in promoting innovation and maximizing the potential of virtual currencies for the U.S. economy, all while protecting customers and the financial well-being of investors,”
Emmer has stated his concern about regulation interfering with Americans benefiting from cryptocurrency before. At a hearing held in June by the US House committee on financial services, Emmer said:
“Over the last few years I’ve been fortunate to meet with many great crypto and blockchain innovators. A common refrain during our discussion is that they so badly want to develop their crypto and blockchain ideas right here in the United States. But they don’t because of continuing uncertainty with crypto regulation.”
The introduction of this bill comes one day after the Chairman of the Federal Reserve Jerome Powell spoke to the House of Representatives about the need for stricter regulation for stable coins.
SEC Chairman Says Cryptocurrency Falls Under Security-Based Swaps Rules
More rules are coming for the cryptocurrency space, according to SEC Chairman Gary Gensler.
The Securities and Exchange Commission, or SEC, may soon issue new rules for the regulation and registration of security-based swaps, including cryptocurrency.
In a speech to the American Bar Association Derivative and Futures Law Committee SEC Chairman Gary Gensler laid out the changes coming to security-based swaps over the next year. The changes are designed to increase transparency and reduce risk to the market.
The new requirements that will go into effect in November include new counterparty protections, requirements for capital and margin, internal risk management, supervision and chief compliance officers, trade acknowledgement and confirmation, and recordkeeping and reporting procedures. Starting next February, for instance, swap data repositories will be expected to disclose data about individual transactions to the public.
“Thus, I’ve asked staff to consider ways we can continue to increase transparency and reduce risk through our unused authorities, particularly with regard to security-based SEFs and position reporting.”
Toward the end of his speech Gensler said trade reporting rules will apply to cryptocurrencies if the products are security-based swaps:
“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.”
Any offer or sale to retail participants must be registered under the Securities Act of 1933. Gensler said the SEC will use all of the tools they have to make sure investors are protected in these cases.
Regulations for cryptocurrencies have been a major talking point within a number of U.S. government agencies in recent months. The Chairman of the Federal Reserve took a hard line on the need for stricter regulations for stablecoins on July 14, going on to discuss the possibility of a US digital dollar before Congress last week.
A bill was also introduced into congress which is meant to provide greater legal definition to digital assets and reduce the fear of future regulations with regard to blockchain-based tokens. On Monday a meeting on regulations for stablecoins by the President’s Working Group on Financial Markets shared that they expect to release recommendations for such regulations in the coming months.
Sen. Warren Urges Treasury Secretary Yellen To Combat Rising Crypto Threats
Elizabeth Warren outlined her concerns about the cryptocurrency market in a letter addressed to Janet Yellen that was obtained by CNBC.
Senator Elizabeth Warren, a Democrat from Massachusetts, has called on United States Treasury Secretary Janet Yellen and other regulators to develop a “comprehensive and coordinated” framework for addressing risks in the cryptocurrency market.
In a letter addressed to Yellen, the Democratic senator said the Financial Stability Oversight Council, also known as FSOC, “must act quickly to use its statutory authority to address cryptocurrencies’ risks and regulate the market to ensure the safety and stability of consumers and our financial system.” She continued:
“As the demand for cryptocurrencies continues to grow and these assets become more embedded in our financial system, consumers, the environment, and our financial system are under growing threats.”
In Warren’s view, an underregulated cryptocurrency market poses a significant risk to hedge funds and banks. She also cited concerns about the use of cryptocurrency in cyberattacks and the threat posed by stablecoins.
Within the United States Senate, Warren has emerged as one of crypto’s biggest detractors. In June, she described digital assets like Dogecoin (DOGE) as a “fourth rate alternative to real currency” and urged the Senate Banking Committee to consider drafting more stringent regulations.
Calls to regulate cryptocurrencies have grown louder in recent months due to the apparent rise in crypto ransomware attacks and the alleged environmental impact of Bitcoin (BTC) mining. As Cointelegraph reported, the Securities and Exchange Commission has proposed working with Congress to table more comprehensive cryptocurrency regulation. Gary Gensler, the newly appointed chairman of the securities regulator, told a congressional subcommittee in March that his agency only spends $325 million annually on researching blockchain technology.
Despite her criticisms of crypto assets in general, Warren appears to be much more open to the idea of a central bank digital currency, or CBDC. The Federal Reserve is in the process of researching CBDC development, but has not made any definitive plans to move ahead. As far as major central banks go, the Fed is considered well behind the adoption curve with respect to CBDCs.
NYDFS Plans To Collect Diversity Data From Banking And Crypto Institutions
All authorized virtual currency service providers will be required to submit diversity data of their boards and management to the NYDFS.The New York State Department of Financial Services (NYDFS) is launching an initiative to promote diversity, equity and inclusion (DEI) in the banking and crypto industries.
According to an industry letter published by NYDFS Superintendent Linda Lacewell on Thursday, under the initiative the department plans to collect and publish data from New York’s regulated banking institutions, non-depository financial institutions and virtual currency service providers that reflects the diversity of their corporate boards and management.
The issue of diversity in the crypto industry made headlines last year against the backdrop of nationwide Black Lives Matter protests, when the CEO of the U.S.-based cryptocurrency exchange Coinbase, Brian Armstrong, announced the exchange was taking a stance against employee-driven social activism.
Within a month, 5% of its employees accepted a severance package. Later in the year, the New York Times published a lengthy report revealing racist and discriminatory treatment of African American employees in the company followed by another report that claimed the company paid women and minorities well under the tech industry average.
Having considered a number of possible actions, the NYDFS determined that publishing management diversity data is the best way to support the finance industry’s diversity efforts, Lacewell explained in the letter.
“Given the limited availability of banking and non-depository financial institution-specific diversity data, making that information public will allow companies to assess where they stand compared to their peers and raise the bar for the entire industry,” Lacewell said.
The letter also said the data will be collected in the fall of 2021 via a survey, and its results are to be published in the first quarter of 2022, categorized by the type of institution and other factors.
NYDFS Stepping In
In Thursday’s letter, Lacewell made it clear that applicable financial institutions will be required to participate in the upcoming NYDFS diversity survey.
“Under Banking Law §37(3) the Superintendent may require any banking organization to make special reports to her at such times as she may prescribe,” the letter said.
The letter explains the DSF will collect data from New York-regulated banking institutions with more than $100 million in assets and all regulated non-depository financial institutions with more than $100 million in gross revenue.
The revenue threshold does not appear to apply to crypto entities, but the diversity survey will also seek to collect data from all authorised virtual currency service providers including “BitLicensees” and virtual currency trust companies, according to the letter.
All qualifying institutions will provide data “related to the gender, racial and ethnic composition of their boards or equivalent body and senior management as of December 31, 2019 and 2020, including information about board tenure and key board and senior management roles.”
This includes Coinbase, Genesis Global Trading, Paxos and others. (Genesis is a CoinDesk sister company.)
A Timely Response
The NYDFS letter, which included diversity statistics for institutions in the banking and crypto industries noted that female participation in the cryptocurrency community is very low.
“The percentage of women in the sector, including developers, investors and interested individuals, usually hovers between 4% and 6%,” the letter said, citing data from crypto statistics and services platform CoinDance from 2018.
That figure has since improved slightly: In 2020, engagement in the bitcoin (BTC, -3.38%) community by gender was 86% male. The letter adds that 92% of venture-backed cryptocurrency and blockchain companies founded around the world from 2012 to 2018 had a founding team that was entirely male, compared to the tech industry standard of 82% for that same period.
On Thursday, as the NYDFS letter was published, the Black Women Blockchain Council (BWBC) a global benefit organization that aims to improve inclusion in the industry, announced it has partnered with ConsenSys to launch a global initiative to train 500,000 black female blockchain developers by 2030.
According to Olayinka Odeniran, founder of BWBC, of the small number of software developers who are specifically focused on blockchain, a smaller percentage are part of the African diaspora, and an even smaller percentage are females.
“We wanted to increase that number because we believe that being able to participate as a creator, as opposed to a consumer, is going to greatly benefit our community,” Odeniran said.
According to the new partnership, BWBC and ConsenSys will be launching specialized programming for black women in blockchain by 2022. The details of the training programs and courses are still in the works, Odeniran said.
Odeniran commended the NYDFS for taking steps to hold institutions accountable for what they say.
“While the public statements from Regulated Banking Institutions and Regulated Non-Depository Financial Institutions in support of DEI initiatives are significant and necessary, it is time to act on those words and make good on good intentions to begin to achieve real change,” the letter said.
As BWBC’s own initiative takes shape, Odeniran is not sure how the industry will respond to the diversity survey.
“I think it’s a good attempt. Now, whether or not organizations will take it seriously, that’s up to those organizations,” Odeniran said.
New Crypto Bill In US Congress Is The Most Comprehensive Yet
Out of the blue, a U.S. lawmaker who previously showed little interest in cryptocurrency has introduced what may be the most sweeping legislation yet to regulate the market.
Rep. Don Beyer’s (D-Va.) bill would allow the Treasury Secretary to veto the creation of stablecoins, direct regulators to define rules for decentralized finance (DeFi) and possibly create a charter for crypto exchanges, among other measures.
The 58-page “Digital Asset Market Structure and Investor Protection Act,” which Beyer introduced Thursday, seeks to create an exhaustive regulatory regime for digital assets. It would do so in part by defining which sorts of cryptocurrencies might be securities, which can be treated as commodities, and bolster tax data collecting for reporting purposes.
As such, the bill seems to address a long-standing desire from the industry for regulatory clarity. But where other bills have attempted to address these issues piecemeal, this one covers multiple issues in one fell swoop. It appears to have been thoroughly researched, even if certain provisions rankled crypto supporters.
It’s unclear what sort of support the bill has, or what a possible timeline for its passage might look like, but its breadth and depth have raised eyebrows in crypto policy circles.
“For a proposed legislation that seemingly came out of nowhere, it is incredibly comprehensive and the authors clearly have an understanding of the underlying technology,” said Marc Goldich, a partner at the law firm of Axler Goldich LLC. “It’s going to take some time to unpack and see how it could impact the industry and it will be interesting to see if this bill has legs, but this is the most well-written draft of crypto legislation to date.”
It also comes from a surprising source. Beyer is the chairman of Congress’ Joint Economic Committee and a member of the tax policy-making House Ways and Means Committee. Up until now, his involvement with digital assets appears to have been tangential at most. According to public records, his top two donors in the most recent election cycle were the law firm of Akin Gump and financial information provider IHS Markit, both of which have done some work with digital assets but focus on traditional lines of business.
Beyer’s office did not immediately respond to several questions about the bill.
The bill also appears to authorize the Federal Reserve, the U.S.’s central bank, to create a central bank digital currency (CBDC), likely in response to statements from Fed officials saying they weren’t sure they had the authority to do so under its current mandate.
Beyer’s bill, the second legislative proposal around cryptocurrencies this week, comes as lawmakers in the U.S. become increasingly active in the digital asset space. On Tuesday, lawmakers held three different hearings that touched on digital assets. Many of the elected officials expressed skepticism about the industry or different facets, discussing consumer protection concerns or pointing to perceived risks to financial stability.
In the Senate, a bipartisan infrastructure bill currently includes a provision that seeks to raise $28 billion by enforcing a broader set of information reporting requirements for crypto users than the U.S. currently has.
However, this plan remains a narrowly focused part of the infrastructure bill. Beyer’s proposal, in contrast, is all about crypto, and would likely need a co-sponsor on a committee with market jurisdiction (Senate Banking or House Financial Services) to go anywhere.
Securities vs. Commodities
Under the terms of Beyer’s bill, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) would have to more firmly define what aspects of the crypto market fall under their respective jurisdictions.
The first section lays out where the SEC’s oversight is focused: if passed, the bill would create a definition for “digital asset securities,” referring to cryptocurrencies or tokens that provide holders with any sort of equity.
If a holder has a right to equity, profits, interest, dividend payments or voting rights, the token would fall under the bill’s definition of a digital asset security.
The term would also apply to tokens issued through an initial coin offering (ICO) meant to fund the development of a product or platform.
The bill also would add digital asset securities to the Securities Exchange Act of 1934’s provision on registration with the SEC and exemptions from such requirements.
Perhaps most importantly, however, is a provision on “desecuritization.” The section lays out a path for a token that is treated as a digital asset security to become a cryptocurrency that will not be treated as a security, echoing SEC Commissioner Hester Peirce’s longstanding efforts to create a safe harbor for crypto projects to get off the ground.
“Registration of any class of digital asset security pursuant to this subsection or status as a security (or both) shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a desecuritization certification with the Commission,” the bill reads.
Beyer’s bill says the SEC should evaluate any such application against the criteria for a digital asset security laid out in the section.
Cryptocurrencies that don’t fall under the SEC’s jurisdiction would fall under the CFTC’s, according to the bill. Ahead of that, the bill would have these two agencies publish a proposed rulemaking to classify the 25 most-traded cryptocurrencies and the 25 cryptocurrencies with the highest market capitalizations (so up to 50 total) as either securities or commodities. This data would be sourced from “an appropriate publicly available website” such as CoinMarketCap.
It does not appear that the public or parties can appeal any such designation under the current language.
Several other provisions address different aspects of the U.S. securities regulatory framework, such as Securities Investor Protection Corporation insurance and broker definitions.
The second section, which reiterates what a digital asset security is, focuses on the Commodity Exchange Act, and codifies bitcoin, ether “and their hardforks” (splinter currencies) into law as commodities. This would help enable exchanges to launch derivative products and crypto trading platforms to more comfortably list and trade these assets.
Another section of the bill extensively lays out how the U.S. should look at stablecoins – digital assets that act as substitutes for dollars or other government-issued money – and appears to authorize a Fed-issued CBDC.
The stablecoin provision may create hurdles for issuers. The Treasury Department would have oversight and veto power over the creation and usage of all stablecoins in the U.S. under its terms.
“Beginning on the date of the enactment of this section, no person may issue, use, or permit to be used a digital asset fiat-based stablecoin that is not approved by the Secretary of the Treasury under subsection,” the bill said.
In other words, the bill appears to give the Treasury Department the ability to restrict trading of any and all stablecoins. An issuer would have to apply, and the department would consult with the Fed, the SEC, CFTC and possibly foreign central banks or financial regulators before it decides whether to approve the proposal.
The bill also explicitly prohibits Treasury from grandfathering any stablecoins into its new regime, instead saying all existing stablecoins must apply for permission to continue operations.
“They effectively make it illegal to not only issue fiat-based stablecoins but to also use them. It would be interesting to see how that is enforced and how it relates to algorithmic stablecoins,” said Goldich.
This has implications for existing and growing projects like Paxos, the issuer of the PAX stablecoin, and Circle, operator of USDC.
Despite the apparent opposition to private stablecoins, the bill does allow for a blockchain-based version of the dollar.
“The Board of Governors of the Federal Reserve System, after consultation with the Secretary of the Treasury, is authorized to use distributed ledger technology for the creation, distribution and recordation of all transactions involving digital Federal reserve notes,” the bill said. “The said notes shall be obligations of the United States and shall be considered legal tender and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues.”
Assault On Anonymity
While the stablecoin provision is likely to be the most controversial, the bill also would require the Financial Crimes Enforcement Network (FinCEN) to draft regulations around anonymity-enhancing services for crypto.
“The purpose of the rule … shall be to ensure that anonymizing services, money mule and anonymity-enhanced convertible virtual currencies are not used to prevent association of an individual customer with the movement of a digital asset, digital asset security or virtual currency of which the customer is the direct or beneficial owner,” the bill said.
This means that crypto exchanges or other entities would be prohibited from letting customers use mixers or similar services, which is likely to chafe privacy-conscious users.
While the bill does not explicitly define regulations for issues like DeFi, custody, wash trading, trading platforms or ransomware, it does direct various federal agencies to evaluate what regulation may look like and publish reports on their views.
The various agencies would have to include regulatory recommendations for Congress in these reports.
“DeFi, in general, is largely unaddressed by the bill but the hammer could ultimately drop, as the proposed legislation orders the Fed Reserve, SEC, [Office of the Comptroller of the Currency], CFTC and Treasury to submit a report summarizing DeFi in U.S. and (among other things) provide recommendations re[garding] appropriate DeFi regulation & investor protection, & various legal obligations [with regard to] DeFi hacks, fraud, & manipulation” Goldich said.
The bill also would shorten the CFTC’s “actual delivery” framework from four weeks to 24 hours, meaning an exchange would have to more-or-less immediately transfer control of an asset to a buyer after a transaction is conducted.
This transfer would either have to be recorded on the asset’s blockchain or on a trade repository registered with the CFTC.
This may pose a challenge for exchanges, because it gives them less time to ensure that a customer has full and sole control over any cryptos they’ve acquired than under the CFTC’s current guidance.
Beyer’s bill would also create an “optional” federal charter for crypto trading and clearing platforms. These chartered entities would be bound by the Bank Secrecy Act (BSA) and other laws, the bill said.
Much of the bill repeats details in different sections, addressing possible loopholes by amending multiple laws and directing several federal agencies to converge on regulations.
SEC Has No Authority Over Crypto, CFTC Commissioner Argues
Former CFTC Chair Christopher Giancarlo argued that the CFTC is the only U.S. regulatory agency that has experience regulating markets for Bitcoin and crypto.
Amid the United States Securities and Exchange Commission’s expanding the scope of oversight of the cryptocurrency industry, a commissioner with the Commodity Futures Trading Commission argued that crypto regulation doesn’t fall under the SEC’s jurisdiction.
CFTC commissioner Brian Quintenz took to Twitter on Wednesday to declare that cryptocurrencies like Bitcoin (BTC) should be regulated by the CFTC rather than the SEC.
Quintenz stressed that cryptocurrencies are commodities and thus fall under the CFTC’s jurisdiction, as opposed to securities that are regulated by the SEC, stating:
“Just so we’re all clear here, the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil….or crypto assets.”
Quintenz’s remarks came just about half an hour after former CFTC Chair Christopher Giancarlo made a similar statement on Twitter, arguing that the CFTC is the only U.S. regulatory agency that has experience regulating markets for Bitcoin and crypto.
“If the Biden Administration is serious about sensible cryptocurrency regulation, it needs to nominate a CFTC chairman,” Giancarlo noted.
Only one US regulatory agency has experience regulating markets for #Bitcoin & #Crypto and it is not @SECGov. It is @CFTC. If #BidenAdministration is serious about sensible #Cryptocurrency #regulation, it needs to nominate a CFTC #chairman.
— Chris Giancarlo (@giancarloMKTS) August 4, 2021
The U.S. House Committee on Agriculture, a standing committee in the U.S. House of Representatives, subsequently supported Quintenz’s statement. The committee’s official Twitter account argued that crypto is “bigger than the SEC” and that Congress “needs to write the rules of the road to protect investors and innovation in the digital economy.”
The new statements apparently come in response to recent remarks by SEC Chair Gary Gensler calling for increased regulatory oversight of the crypto industry to expand the regulatory scope with decentralized exchanges. Gensler reportedly outlined that there’s been much discussion about what kind of digital assets should fall under the SEC’s purview as the authority previously confirmed that major cryptocurrencies such as Bitcoin and Ether (ETH) were not securities.
Gensler Tells Elizabeth Warren SEC Needs More Authority To Regulate Crypto
Congress should focus on trading, lending and decentralized finance, the securities regulator said.
U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler wants his agency to have greater authority and resources to crack down on the crypto sector.
In a letter to U.S. Sen. Elizabeth Warren (D-Mass.), Gensler said Congress should grant the agency with additional oversight and enforcement abilities to monitor “transactions, products and platforms” in the U.S. crypto sector.
“In my view, the legislative priority should center on crypto trading, lending and DeFi (decentralized finance) platforms.
Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending,” he said.
Gensler’s letter, shared publicly on Wednesday, is a response to an open letter published by Warren last month, when the Massachusetts Democrat asked what authority the SEC has in regulating crypto exchanges and whether there are any gaps.
Warren pointed to how cryptocurrency exchanges serve as custodians for customer funds, saying that the “the lack of regulation to provide basic investor protections is unsustainable.”
“Right now, I believe investors using these platforms are not adequately protected,” Gensler said in his letter.
Stable Value Tokens
Gensler reiterated previous remarks he’s made about stablecoins in his response.
The SEC chairman, who previously ran the Commodity Futures Trading Commission (CFTC) from 2009 to 2014, said stablecoin users may be trying – if not outright able – to evade anti-money laundering, tax, sanctions and other regulations.
“There is an existing stablecoin market worth $113 billion, including four large stablecoins – some of which have been around for seven years,” he said. “These stablecoins are embedded in crypto trading and lending platforms. To trade crypto-to-crypto, usually, somebody uses stablecoins. In July, nearly three-quarters of trading on all crypto trading platforms occurred between a stablecoin and some other token.”
Gensler has previously warned that stablecoins might fall under securities regulations if they are themselves backed by securities.
In a statement on Wednesday referring to crypto as the “Wild West of our financial system,” Warren said the industry needs better regulation to protect both the financial system and investors.
“I’m glad SEC Chair Gensler agrees and has directed the SEC to use its full authority to address these risks, and that he has also identified where additional regulatory authority may need to be granted by Congress,” Warren said. “I’m going to continue to engage with the SEC and other federal regulators on this, and will work to close regulatory gaps through legislation.”
It’s unclear whether Warren intends to introduce legislation calling for new regulations to address Gensler’s concerns or whether other federal agencies or private companies will also be solicited for their views on the issue.
Stronger Crypto Regulations In US Won’t Necessarily Help Prevent Fraud, Says Okcoin CCO
Megan Monroe said an “incubator” approach might be one possible solution to the current “patchwork of financial regulations” in the United States.
Though Okcoin chief compliance officer Megan Monroe said that there are still certain grey areas over cryptocurrencies in the United States, further regulation may not be the best solution.
In a statement to Cointelegraph, Monroe said current U.S. regulations are sufficient to police cryptocurrency exchanges, token issuers and custody wallet providers, but “jurisdictional boundaries of these federal financial regulators are neither clear nor collaborative.”
Rather, she advocated for a framework with greater clarity to determine which crypto firms should be subject to regulation and let investors know which protections are available.
“A clear regulatory framework with established jurisdictional boundaries, flexible compliance standards and open communication channels with registrants (as well as with state regulators) would be a good way to initiate an evolving framework for market participants to grow their businesses,” said the Okcoin chief compliance officer.
“[This] would provide retail customers that seek to work with regulated entities a clearer understanding of the investor protections that would be available to them.”
“We do not believe that further regulation will necessarily prevent fraud and platform abuse […] Fraud should not be limited to focusing on retail customer regulatory compliance issues in the securities markets.”
Two of the major government agencies handling digital asset regulation in the United States, the Securities and Exchange Commission, or SEC, and the Commodity Futures Trading Commission, or CFTC, have different jurisdictional claims regarding crypto.
The SEC often determines whether tokens are securities using the Howey Test, with Chairperson Gary Gensler arguing the crypto industry, including decentralized exchanges, falls within the regulatory purview of the federal agency.
Former CFTC chair Christopher Giancarlo has claimed that cryptocurrencies are commodities and thus would be subject to regulation by the government body. However, CFTC commissioner Dawn Stump told Cointelegraph “the CFTC does not regulate commodities, and thus it does not regulate crypto assets even if they are commodities.”
The apparent lack of clarity can be seemingly confusing to crypto firms that are considering relocating to the U.S., or local ones making the transition to the digital space.
David Schwartz, chief technology officer of Ripple Labs, told Cointelegraph earlier this year that it was “difficult to figure out which laws apply and how they apply to something new,” like cryptocurrencies or blockchain technology.
“Over time, the regulators have educated themselves about the industry and expanded their scope to incorporate new blockchain technology, such as decentralized exchanges and DApps,” said Monroe. “But, the regulations still lag behind the industry innovation, which is why the regulators have yet to provide comprehensive regulatory guidance on decentralized finance technology.”
The Okcoin chief compliance officer said that an “incubator” approach might be one possible solution to this “patchwork of financial regulations,” wherein crypto traders and businesses could operate without fear of legal action for a set period of time. She also encouraged projects to clearly identify the risks to both investors and users, and for greater communication and collaboration between agencies like the CFTC, SEC and Financial Crimes Enforcement Network.
Former SEC Chair Jay Clayton Joins Fireblocks Advisory Board
In his new role, Clayton will aid Fireblocks in navigating the regulatory hurdles for developing and deploying digital asset infrastructure, especially around capital markets.
Jay Clayton, the former chair of the United States Securities and Exchange Commission, has accepted an advisory role with blockchain infrastructure provider Fireblocks — marking a significant addition to a company that only recently achieved unicorn status.
In joining Fireblocks’ advisory board, Clayton acknowledged that he shares the company’s view that “digital asset custody requires the same level of service as traditional custody while also striving for better regulatory outcomes.”
Michael Shaulov, CEO and co-founder of Fireblocks, said Clayton will “help to advance further the safety and security of the Fireblocks infrastructure for capital market participants and investors.”
Clayton headed the SEC between 2017 and 2020, where he helped navigate complex and frequently evolving regulatory requirements for the digital asset industry. Clayton was present during the 2017 cryptocurrency bull market where issues surrounding initial coin offerings and security tokens were at the fore.
Fireblocks represents Clayton’s second high-profile crypto engagement since leaving the securities regulator in December 2020. In March of this year, Clayton joined a regulatory advisory council for One River Asset Management, a crypto-focused investment manager. The asset manager said Clayton was tapped for his vast regulatory and policy experience.
Crypto regulations in general and tax-reporting requirements, in particular, have been top of mind for the digital asset market in recent months. Current SEC Chair Gary Gensler is reportedly keen on bringing more regulatory oversight to the cryptocurrency market. Meanwhile, the recently passed infrastructure bill has certain provisions that may classify blockchain infrastructure providers as “brokers,” which would subject them to tax requirements.
However, there is growing hope that the Treasury Department will clarify crypto tax reporting rules in the near future.
On the SEC front, the securities regulator continues to receive applications for Bitcoin (BTC) exchange-traded funds, though the general consensus is that approval is unlikely this year.
Ex-SEC Chair Jay Clayton Sees Crypto Following Existing Legal Framework
Former top securities regulator Jay Clayton sees existing U.S. regulations as a solid precedent for rules about cryptocurrencies.
Clayton — who spent several years as chairman of the U.S. Securities and Exchange Commission — is joining the advisory board of Fireblocks in the latest recruitment by a crypto firm preparing for greater government oversight. The company’s platform specializes in digital assets used for payments, gaming and non-fungible tokens, or NFTs.
“New technology should not cause us to change the fundamental protections in our securities and other financial markets,” Clayton said in emailed comments. In terms of crypto provisions currently in the U.S. infrastructure bill, “clarity around the taxation of digital assets is a good thing. A good place to start for that clarity is what function are those assets providing and should they be taxed like other assets that are providing that function.”
Regulatory interest in crypto has surged globally as prices have risen, and it’s being adopted more globally — both factors helping to fuel a rise in interest from regulators. Crypto firms like Binance and BitMEX have chosen people familiar with regulation for top jobs as they seek to navigate a world that’s moving from a “Wild West” to a more rules-oriented system. Fireblocks recently raised $310 million in a Series D round that values it at $2 billion, sealing its status as a unicorn.
“If you look at the financial sector today, the digitization of these processes will make traditional forms of finance more resilient and efficient,” said Michael Shaulov, chief executive office and co-founder of Fireblocks, in emailed comments. “Jay’s insights on market practices and regulations in finance will help our customers understand how these new digital solutions and investment opportunities best fit within regulatory objectives as well as the incumbent technology.”
As one illustration of how important governments may be for crypto going forward, the U.S. infrastructure bill’s crypto provisions took much of the industry by surprise. Despite efforts to get some of the language rolled back, many were left dissatisfied with the existing provisions.
“To the extent that a digital asset is a store of value, I would think about taxing it the same way you tax the purchase or sale of a similar store of value like, for example, gold,” Clayton said.
Crypto-friendly CFTC Commissioner Brian Quintenz Reportedly Plans To Step Down
Quintenz’s 5-year term at the agency was originally scheduled to end in April 2020, but he has twice extended his departure.
Brian Quintenz, who has served as one of the commissioners with the Commodity Futures Trading Commission, or CFTC, reportedly plans to leave the agency on Aug. 31.
According to a Thursday report from the Wall Street Journal, Quintenz is expected to announce his move into the private sector after leaving the CFTC later this month. He hinted that his future career could include a focus on “innovation, particularly related to cryptocurrency and DeFi” and planned to continue advocating for the crypto space.
Quintenz was first nominated to the position by President Barack Obama in March 2016 before being re-nominated by Trump in May 2017 and confirmed that August. His term at the CFTC was scheduled to end in April 2020, but he announced, at that time, that he would stay “until the earlier of the confirmation of my successor or October 31, 2020,” later extending this to “until the Senate acts on a confirmation.”
Many in the industry know Quintenz as one of the leading voices in favor of crypto at the CFTC. He has argued cryptocurrencies like Bitcoin (BTC) should be regulated by the CFTC rather than the Securities and Exchange Commission and also called on crypto industry stakeholders to create a self-regulatory framework.
The CFTC has five commissioners in its panel. With the departure of Quintenz and former chairperson Heath Tarbert, there are two empty seats available to be filled with nominations from President Joe Biden. CFTC Commissioner Rostin Behnam has been acting as chairperson since Tarbert left in January.
Banks vs. Exchanges — Regulators Overwhelmingly Penalize Fiat, Not Crypto
Data from a recent report suggest that enforcement actions from U.S. regulators against those in the crypto space cost those firms less than 1% of that in traditional finance for the last 20 years.
While regulators have often targeted projects in and out of the crypto space, the fines levied against digital asset exchanges are a fraction of those against traditional financial institutions.
According to data from Good Jobs First’s violation tracker, the platform analyzed 50 of the biggest fines regulators levied against major banks, investment firms, and brokers over the last 20 years. Bank of America accrued roughly $82 billion covering 251 different fines including securities violations, while JPMorgan Chase and Citigroup were also some of the most fined banks in the U.S. since 2000 with penalties totaling $35.9 billion and $25.5 billion, respectively.
While both major banks and crypto exchanges have often been penalized for securities violations, data suggest that enforcement actions from U.S. regulators against those in the crypto space cost those firms less than 1% of that in traditional finance. Cointelegraph previously reported that from 2009 to early 2021, fines for crypto-related violations have totaled $2.5 billion in the United States, while Good Jobs First’s data shows there were $332.9 billion in penalties from banks, investment firms, and brokers in the last 20 years.
One of the largest actions came from the Securities and Exchange Commission, or SEC, against Telegram’s 2018 initial coin offering. The company was ordered to pay $1.2 billion in disgorgement and $18.5 million in civil penalties in 2020 after being charged for violating securities laws. In contrast, Bank of America was the target of the largest fine from the Department of Justice — $16.6 billion — for selling “toxic” mortgages related to the 2008 financial crisis.
In cases which involved the SEC, Commodity Futures Trading Commission, and Financial Crimes Enforcement Network against crypto firms and individuals, unregistered securities offerings and fraud accounted for more than 90% of all fines. “Toxic securities abuses,” as Good Jobs First describes them, accounted for roughly 29% — $97 billion — of the $332.9 billion in total penalties. Investor protection violations came in second with $68 billion.
2 New Bills Ask CFTC To Clarify Crypto Regulation, Prevent Price Manipulation
Crypto-friendly congressman Darren Soto (D-Fla.) is the sponsor of both bills.
Two bills introduced in the U.S. Congress on Wednesday seek to push the Commodity Futures Trading Commission (CFTC) to clarify the regulation of cryptocurrencies, prevent price manipulation, boost acceptance of blockchain technology and, ultimately, make U.S. cryptocurrency businesses more globally competitive.
The bills were both introduced by Rep. Darren Soto (D-Fla.) and co-sponsored by bipartisan crypto-friendly congressmen in the Congressional Blockchain Caucus.
The newly proposed pieces of legislation would, if passed, provide the CFTC with greater regulatory authority over cryptocurrency. It comes as the regulators at the Securities and Exchange Commission (SEC) and CFTC vie for control of cryptocurrency regulation and seek to define spheres of control in the cryptocurrency industry.
The Virtual Currency Consumer Protection Act of 2021 calls on the CFTC, in conjunction with the heads of the SEC and other relevant federal agencies, to produce a cryptocurrency report that aims to promote “fair and transparent virtual currency markets by examining the potential for price manipulation.”
The second bill, the U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2021, which was co-sponsored by Rep. Tom Emmer (R-Minn.), similarly pushes the CFTC to “promote United States competitiveness in the evolving global virtual currency marketplace,” specifically by issuing clarity on cryptocurrency regulation and, if deemed appropriate, suggesting legislative changes.
This is the third iteration of the two bills, which were both first proposed in 2018.
Though crypto firms continue to be the target of enforcement action by U.S. regulators — in August, BitMEX agreed to pay up to $100 million to resolve a case from the CFTC and FinCEN — there are signs lawmakers in the country are becoming increasingly aware of the economic impact of not having clear guidelines for innovative companies. Many U.S. senators and representatives have gotten behind proposals to amend language in an infrastructure going to the Senate this month. The legislation suggests implementing tighter rules on businesses handling cryptocurrencies and expanding reporting requirements for brokers.
Over-Regulating Crypto Would Be ‘Disaster’: Q&A With Cam Harvey
U.S. regulators face a tough balancing act when it comes to addressing “yield farming” in cryptocurrencies without pushing important financial innovation offshore, according to Duke University finance professor Campbell Harvey.
Harvey, the co-author of a new book called “DeFi and the Future of Finance,” sat down this week for a Q&A about the case and its implications for the rapidly growing world of decentralized-finance, or DeFi, where yield farming is done through algorithms without a centralized exchange like Coinbase. Below are lightly edited highlights of the interview.
Q: What Do You Think About The Sec’s Notice To Coinbase?
A: Number one, it’s mysterious because we don’t really know what the SEC’s case is. The Wells notice is a notice that they will be taking action, and often what happens after that is there’s negotiation. And this is the reason that all of the details of the case are not laid out. Because if you’re about to negotiate with somebody, you don’t put all your cards on the table.
You probably saw the tweet storm, Coinbase CEO Brian Armstrong is very upset. And one of the reasons is that it’s hard to argue when you don’t really know what the case is going to be. I believe that he’s got another agenda. And this goes well beyond Coinbase. Right now, there’s just so much uncertainty in this space.
We need some resolution of that uncertainty. And basically, given that his company is the leading firm in the space, given that it is a fully regulated exchange, given they had a successful IPO, he is taking the lead and has a broader agenda to basically try to get some clarity here and to raise public awareness of what’s really at stake.
This notice about the savings accounts that Coinbase is going to offer is only one of the uncertainties, there are many other things, including some of the key assets that Coinbase is actually trading.
Q. So Does This Look Like A Product That Falls Under Securities Or Banking Laws?
A. So this is pretty key. There’s two securities acts; the Securities Act of 1933 and the Securities Exchange Act 1934, which makes a list of things that are securities like notes, bonds, stocks, options, you know the usual things. And then it says, “investment contracts.” And “investment contract” wasn’t really defined that well. But there’s this famous (Supreme Court) decision, called the Howey Test that defined what an investment contract actually was.
In my opinion, this is not about the Howey Test, this is not about an investment contract, this is about a note as defined in the act. There is an equivalent of the Howey Test decision for notes and that’s a decision called Reves (v. Ernst & Young) and it goes through, in much more detail, what a note is.
But in my opinion, and again this is just kind of my thinking here, people are thinking that well, if I deposit my money at a bank in a savings account or by certificate of deposit, and I might be able to lock in, well I can’t get 4%, but I can lock in something, that’s not a security. So why should Coinbase’s 4% yield product be a security?
So you think about what’s happening, you put your money to the bank and what does the bank do with it? It doesn’t put it on reserve at the at the Fed. Maybe it puts part of it there. But it rehypothecates that money. So it uses that money and engages in risky activity, lending it out to others. So now think about what Coinbase is doing. Same idea.
You’re depositing dollars — effectively, with a USDC token — and you’re getting a rate of return. And then what is Coinbase doing with your USDC? Well, they’re taking the USDC and they are investing in these different protocols to try to earn some reward and savings rates and that’s basically how they’re going to make more than 4% but they’ll pay you 4%. So it seems really similar to what the bank is doing.
Q. So It Sounds Like If They Were To Be Regulated, It Should Be More From A Banking Regulator Than The SEC?
A. So there’s this really important case, and this is what I think the SEC is going to base their case on, and the case is called Marine Bank v. Weaver. And it’s 1982. And the case was whether a certificate of deposit, a CD, was a security. And in this case, the court decided that a certificate of deposit issued by an FDIC-insured bank was not a security.
OK, so the key thing is that the bank is FDIC-insured, FDIC-regulated. And this case is very clear that, in other contexts, the CD could be considered a security. So this, in my opinion, is going to be the key thing that Coinbase has to overcome, because they are not FDIC-insured. And what they’re doing is definitely risky, so you cannot say that the rehypothecation is not without risk.
Maybe this pushes Coinbase to the spot where they have to become a bank. And I’ve long thought that it would make sense for them to have a banking operation, given they’re a centralized exchange.
Q: This Event This Week, The Wells Notice, Do You Think It’s A Game Changer For Defi At All, And This Whole Notion Of Yield Farming?
So this is really a key question and it’s really important to realize that the SEC is going after a centralized exchange/broker. And that’s Coinbase. It’s more difficult to go after an algorithm. To go after a decentralized exchange is like going after an algorithm.
Q. I’m Curious, If You Got A Call From The White House Or Congress And The Question Was, Basically, Cam, What Should We Do About This? What’s Your Take On What The Regulation Approach Should Be To This Whole Industry?
A. It is a balancing act. So the regulators want to do the right thing by reducing the chance that unscrupulous people take advantage of the uninformed. And indeed, that was the genesis of the Securities Act of 1933, as to what happened in the run-up before the crash of 1929.
So I totally understand that and the regulators are motivated to do that. But they fully realize, if they are too harsh in terms of their regulation, then they stifle innovation or make the U.S. so unattractive that the good ideas move offshore. And they realize that the U.S. has been a leader in innovation for quite a long time. If you look at the companies that have had the growth over the last 20 years or 10 years, they’re U.S. companies. So there’s a strong incentive to keep that entrepreneurial environment alive.
You need to balance. For example, to eliminate all of the risk would be a disaster of a strategy. There has to be some risk here.
You can’t cover everything. If you cover everything, then the regulations are going to be so harsh that you move offshore. So my advice is basically that balancing act.
The way that you need to evaluate this is, well, what are the real downsides to the consumers? And actually some of the downsides are much greater, in my opinion, outside of what Coinbase is offering. So you see some ridiculous yields that are advertised. And look, anything above 10% you need to be very skeptical about and you’re just inviting like Ponzi-sort of schemes.
And I would go into the negotiation wanting to maintain that balance. That you don’t want to do something that hurts the growth opportunities for the whole country. … And It might be, as we’ve talked about, that this would be better served, not from the SEC’s point of view but maybe the FDIC.
European Finance Regulator Calls Crypto ‘Volatile’ But Innovative
The European Securities and Markets Authority published a report on financial trends and risks last week.
Crypto assets and distributed ledger technology (DLT) topped the European Securities and Markets Authority’s (ESMA) 2021 financial innovation scoreboard, according to a new report published by the institution.
The 110-page report, titled “Trends, Risks and Vulnerabilities,” treated cryptocurrency as a trending financial innovation as well as a threat to sustainable finance due to its “soaring” environmental cost, particularly in relation to crypto mining. The report suggested that crypto asset volatility, along with the rise of decentralized finance (DeFi), central bank digital currencies (CBDC) and stablecoins, are contributing to increasing risk across all asset classes.
“Most crypto assets (CAs) are highly volatile in price and operate outside of the existing EU regulatory framework, which raises investor protection issues,” the report said.
ESMA is an independent European Union (EU) authority tasked with improving investor protection and promoting stable and orderly financial markets. The scoreboard prioritizes financial innovations that require deeper analysis and potential policy responses, and ranks them based on how they relate to ESMA objectives.
The ESMA report was released just as EU regulators began gearing up for the implementation of all-encompassing cryptocurrency regulations, new anti-money laundering (AML) rules and tax reporting requirements for virtual asset service providers and investors. Additionally, the European Central Bank (ECB) is set to begin a two-year investigation into a digital euro in October.
According to the report, a rise in risk-taking behavior and market exuberance are to blame for increasing volatility in equity markets.
“Increased [risk-taking] behavior has led to volatility in equity (e.g., GameStop-related market movements) and crypto asset markets, as well as to the materialization of event-driven risks such as in the case of Archegos or Greensill,” the report said, referring to the recent fall of New York investment giant Archegos, and London-based lender Greensill Capital.
Earlier this year, retail investors came together to rally behind GameStop stock, leading to massive losses for new traders as the price plummeted following initial hype of the movement.
“Going forward, we expect to continue to see a prolonged period of risk to institutional and retail investors of further – possibly significant – market corrections and see very high risks across the whole of the ESMA remit,” the report said.
The report cautions against the risks surrounding crypto assets, adding that the crypto market capitalization fell by almost 40% in May, highlighting their high price volatility.
The Ultimate Villain: Stablecoins
The report suggests that the EU’s upcoming Markets in Crypto Assets (MiCA) regulatory framework is designed to address these risks. The sweeping framework will apply in 27 member states, and includes particularly harsh restrictions on stablecoins (crypto backed by fiat reserves like the U.S. dollar), including requiring stablecoin issuers to own at least 3% of the coin’s reserves.
The report reiterates that stablecoins are not an EU favorite.
“Market developments around private stablecoins continue to be under scrutiny by global regulators, given the potential impact mass stablecoin adoption could have on financial systems. This call for more transparency and legal certainty has been reinforced as tether, the largest stablecoin, presented a breakdown of its reserves for the first time in May 2021,” the report said, referring to Tether revealing 49% of its reserves were made up of unspecified commercial paper.
The EU’s stance on stablecoins was made clearer when, just last week, ECB President Christine Lagarde said that in her view, stablecoins were pretending to be currencies, and that they are actually assets.
According to the report, sustainable finance is expanding in Europe, with a 20% growth of environmental, social and governance (ESG) fund assets and a 40% rise in outstanding sustainable debt instruments in 2020.
But the energy consumption of certain DLT protocols is a source of environmental concern, the report said.
“Innovation can support sustainability by addressing ESG information gaps through Green financial technology (FinTech) solutions, but the environmental cost of one particular innovation – cryptocurrencies – is soaring,” the report said.
With mounting pressure on global leaders and institutions to up their game against climate change, cryptocurrencies, particularly bitcoin, have come under fire for the large amounts of energy required to mine and maintain their networks.
“Estimates vary but they agree that the carbon footprint of cryptocurrencies is far from negligible,” the report said. “These developments trigger discussions about possible regulatory responses to the unintended consequences of innovation, and in particular of crypto mining.”
Alongside innovations like artificial intelligence and machine learning, the report emphasized the proliferation of distributed ledger technology (DLT), DeFi and CBDCs.
“DeFi holds the same benefits as blockchain technology on which it is built, namely disintermediation, round-the-clock availability and censorship resistance. It also faces similar challenges and risks, including in relation to operational resilience, scalability and governance,” the report said.
It goes on to say that CBDCs and stablecoin use combined with an increased interest in crypto assets from institutional investors are blurring the boundaries between centralized traditional financial systems and DeFi, and thereby “increasing the risks of potential spillover of DeFi risks to the real economy.”
“These risks are further intensified by the rapid growth of DeFi and the recent price performance of the main crypto assets,” the report said.
The growing risk to investors might be pushing regulators to step in throughout the EU, according to the report.
“Regulators’ engagement with FinTech through innovation hubs and regulatory sandboxes is becoming mainstream across the EU, with benefits for both parties,” the report said.
Fintech innovation hubs are working efficiently, the report suggests, adding that all member states have at least one hub set up.
Regulatory sandboxes are less common, with eight currently operating in the EU, including in Denmark and the Netherlands.
“Both regulators and innovators increasingly recognize the benefits of innovation hubs and regulatory sandboxes, namely spurring innovation while staying alert to emerging risks,” the report said.
Aside from the risks involved, DLT has the potential to enhance efficiency in financial processes and firms while improving consumer outcomes, the report said, adding that applications are still limited.
“Scalability, interoperability and cyber-resilience will require monitoring as DLT develops. Other challenges include anonymity as well as governance and privacy issues,” the report said.
US Lawmakers Propose Adding Digital Assets To ‘Wash Sale’ Rule And Raising Capital Gains Tax
If passed, the plan would raise the capital gains tax rate for “certain high income individuals” to 28.8%, while eliminating the “wash sale” loophole for crypto users.
Democrats in the United States House of Representatives have proposed tax initiatives that could affect crypto users to fund a $3.5 trillion spending package.
According to a document released by the House Committee on Ways and Means on Monday, the proposal would increase the tax rate on long-term capital gains from the existing 20% to 25% for “certain high-income individuals.” A surtax of 3.8% on net investment income would seemingly apply to the proposed changes, bringing the U.S. capital gains and dividends tax rate to 28.8% for wealthy crypto users.
In addition, the tax plan would add digital assets to the “wash sale” rules, which prohibit investors from claiming capital gains deductions on certain assets repurchased within 30 days of a sale, “previously applicable to stock and other securities.”
Existing tax laws under the IRS consider cryptocurrencies as property in wash sales — which some crypto users have been able to use to avoid capital gains — while the proposal from U.S. lawmakers would close this loophole.
If passed and signed into law, the plan would require crypto users to report taxes according to the new wash sale rules starting on Dec. 31, while the capital gains tax rate would apply to transactions made after Sept. 13.
However, the bill for the $3.5 trillion spending package has not yet been finalized. In April, President Joe Biden’s administration suggested raising the capital gains tax rate for wealthy individuals to 43.4%.
The tax plan from House Democrats follows the passage of an infrastructure bill in the Senate that suggests implementing tighter rules on businesses that handle cryptocurrencies and expanding reporting requirements for brokers.
Many Democratic and Republican lawmakers have pushed for amending the language in the bill to clarify the role of cryptocurrencies, while the House is scheduled to vote on the proposal by Sept. 27.
EU Regulator Sees Crypto As Sign Of Increased Risk-Taking In Current Climate
An ESMA report views crypto assets’ volatility in the first half of 2021 as an indication of “possible market exuberance.”
The European Securities and Markets Authority (ESMA) has published its report on trends, risks and vulnerabilities in the European Union markets during the first half of 2021 (1H21).
Its takeaways included the argument that crypto markets’ extraordinary volatility and growth make a compelling case for the need for a targeted regulatory regime, as sketched out in the European Commission’s proposed Markets in Crypto-Assets regulations.
Much has been riding on the EU and global market’s recovery during 1H21 amid the ongoing impact of the COVID-19 pandemic. ESMA’s report notes that the economic outlook has continued to improve overall, with the European economy now forecast to have reached its pre-pandemic output by the end of 2022, earlier than had been expected.
This recovery has been fueled by the relaxation of public health restrictions, some reduction in uncertainty, and central banks’ activism in providing supportive monetary policies. When it comes to the medium-term risks of the current climate, ESMA has taken the crypto markets as a bellwether of market sentiment and dynamics during the past six months:
“Rising valuations across asset classes, massive price swings in cryptoassets and event-driven risks observed in 1H21 amid elevated trading volumes raise questions about increased risk-taking behaviour and possible market exuberance.”
This exuberance, in the ESMA’s view, has been visible in the GameStop saga and the broader rise of social media-fueled retail trading, coupled with the huge price growth in crypto assets in the first quarter of this year. Much of this increase in trading activity has been happening outside the EU’s regulatory perimeter, the report underlines, raising investor protection concerns.
The ESMA attributed rising consumer confidence during this period to a range of factors, including innovative new business models and gamified features in online and mobile trading platforms.
Parallel to the retail trading boom, ESMA is keeping a close eye on decentralized finance (DeFi), noting that the 47 billion euros ($55.3 billion) locked in DeFi in early September was down from its heights in mid-May, yet up 1,200% from the end of July 2020.
The ESMA recognized DeFi’s benefits, including disintermediation, 24/7 availability and censorship resistance, and noted that the increasing use of stablecoins and central bank digital currencies are likely to make the boundaries between traditional finance and DeFi more porous over time.
However, especially due to institutional investors’ proactivity, the ESMA considered that there is a growing possibility that DeFi risks will spill over into the real economy, even though the market remains small for the time being.
The report also noted that institutional investors are starting to consider Bitcoin’s (BTC) environmental impact in terms of their ESG targets, which is feeding into the growing interest in Ether (ETH). Alongside its environmental credentials, the ESMA attributed ETH’s success to its smart contract functionality, the DeFi boom, and the blockchain’s role in the nonfungible token ecosystem.
The regulator’s assessment has been echoed by Pantera Capital CEO Dan Morehead, who this summer argued that the blockchain’s upgrade will likely help Ether to outflank Bitcoin as the largest cryptocurrency.
What Biden’s New Agency Picks Hold For Crypto Regulation
The three officials tapped by the Biden administration for CFTC roles come with promising crypto credentials, but can they live up to the promise?
On Sept. 14, United States President Joe Biden revealed his picks to fill two vacant seats at the United States Commodity Futures Trading Commission (CFTC). In addition, the president nominated Rostin Behnam, who has run the derivatives regulator as acting chairman since January, to assume the office on the permanent basis.
The appointments are unlikely to face serious obstacles on their way to confirmation, as nominees will have to secure a simple majority vote in a Senate currently controlled by Democrats.
What can the crypto industry expect of the CFTC if Behnam assumes permanent chairmanship and Kristin Johnson and Christy Goldsmith Romero join the agency as commissioners?
Bringing The Commission Up To Strength
In 2015, the CFTC came forward and defined Bitcoin (BTC) and other digital currencies as commodities under the U.S. Commodity Exchange Act, joining the ranks of U.S. government agencies engaged in the regulation of the cryptocurrency space.
The agency also asserted jurisdiction in cases when “a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.”
The CFTC, which is designed to be five-strong when fully staffed, has been down to acting chairman and two commissioners this year. Heath Tarbert, the former chairman, departed in March, and Brian Quintenz stepped down at the end of August. Furthermore, Dan Berkovitz, one of the remaining commissioners, has announced his intention to leave on Oct. 15.
Nominations come amid the Biden administration being criticized for taking its time to fill vacant positions in several key regulatory agencies, including the CFTC. If confirmed, the new additions to the agency will give Democrats a 3-1 majority on the panel.
From Acting To Permanent Chairman
Acting Chairman Behnam has been with the CFTC since July 2017 when he had been sworn in as a commissioner. Serving under the crypto-friendly Chairman Giancarlo, Behnam has spoken favorably of digital currencies and their transformative potential on several occasions.
For one, speaking at a regulatory summit in 2018, Behnam opined that cryptocurrencies — or virtual currencies in the CFTC parlance — were set to become “part of the economic practices of any country, anywhere,” aptly observing that “some places, small economies, may become dependent on virtual assets for survival.” Finally, Behnam acknowledged limits to regulators’ reach if digital currencies continue to proliferate:
“These currencies will be outside traditional monetary intermediaries, like government, banks, investors, ministries, or international organizations.”
More recently, the acting CFTC boss talked about the need for maintaining a constructive conversation between policymakers and innovators in the field of financial technology and how it is urgent for keeping U.S. innovation at home. In remarks in March 2020 regarding a crypto-related Commission action, Behnam stated:
“I have long advocated for a more inclusive conversation regarding the advent of financial technology, believing that a thorough examination and discussion of the technology within our current legal and regulatory framework will best serve technologists, market participants, and customers.”
It sounds like what the industry is longing for, doesn’t it? Yet, it would be premature to base expectations of the derivatives regulator’s future policies on these declarations alone. After all, like any U.S. financial regulator whose statutory goal is market participants’ protection in the first place, the CFTC can always be expected to err on the side of caution when innovation is perceived to be at odds with consumer safety.
Commenting on the recent settlement between BitMEX with both the CFTC and FinCEN, Behnam noted: “The CFTC will take prompt action when activities impacting CFTC jurisdictional markets raise customer and consumer protection concerns.”
Biden’s two picks for the vacant CFTC commissioner seats are Emory University law professor Kristin Johnson and Christy Goldsmith Romero, the current special inspector general of the Troubled Asset Relief Program, a federal law enforcement agency that deals with financial crimes related to the U.S. government’s bailout program.
Professor Kristin Johnson’s recent work focuses on the implications of emerging financial technologies including distributed digital ledger technology (DLT) and artificial intelligence (AI) for financial regulation.
Prior to her academic appointments at Emory and, before that, Tulane, she worked in corporate finance, most notably as assistant general counsel and vice president at JP Morgan.
In her capacity as the TARP Inspector General, Christy Goldsmith Romero investigates financial institution crime related to bailouts executed under the program. In this role, she works closely with the SEC, an agency where she previously served as senior counsel in the enforcement division.
On the surface, the trio appears to be a winning combination of an innovation-friendly chairman, a legal scholar with a deep understanding of cutting-edge financial technology and an expert financial crime investigator.
Daniel Davis, a partner at law firm Katten Muchin Rosenman LLP and former general counsel for the CFTC, believes that each of Biden’s picks has the potential to bring positive changes for crypto regulation. Acting Chairman Behnam, if he assumes the office permanently, will be in an excellent position to move the regulatory conversation forward.
In addition to that, Ms. Johnson and Ms. Goldsmith Romero each bring excellent crypto-related credentials to their potential roles as commissioners. Davis further noted regarding the two nominees:
“Both have taught law school courses related to crypto. Ms. Johnson has also written extensively on topics such as financial services regulation and how decentralized finance (DeFi) could fit within the current regulatory structure with some innovative ideas. One would expect that crypto-related issues would form an important part of their respective agendas if confirmed.”
In this light, it is indeed tempting to view the prospective CFTC reinforcements with optimism, but with some reservations. For one, as the example of the current SEC boss Gary Gensler shows, being knowledgeable about digital finance and teaching blockchain classes at a top university does not necessarily translate into becoming the crypto industry’s ally when the person assumes a high office at a regulatory agency.
US As An Anatomical Theater Of Crypto Regulation
Gary Gensler gets grilled on Capitol Hill as crypto looms large on national political agendas from Cuba to South Korea.
Fall is traditionally the open season for United States financial regulators. The thicket of news coming out of Capitol Hill, federal courts and various regulatory agencies can feel overwhelming around this time, especially for those of us residing outside of these venerable institutions’ purview.
It is also clear that the outcomes of these legal battles will have tremendous effects on crypto markets, adoption and, generally, the relationship between state power and the industry worldwide. But that is not the only reason for anyone interested in how the old world adapts to digital finance to follow U.S. developments closely.
Gensler Of The Hill
Security and Exchange Commission Chair Gary Gensler appeared in front of the Senate Committee on Banking, Housing, and Urban Affairs last week. During the hearing, we didn’t get much clarity on how Gensler wants to handle stablecoins beyond his opinion that many of them “might well be securities.”
It was good to at least see some senators, such as Pat Toomey, willing to call Gensler out for inconsistencies and omissions in his argumentation. What was worrisome was seeing mostly Republicans on the stop-stifling-innovation side and mostly Democrats on the stricter-investor-protection side (despite all the laughs and memes that Senator Warren’s Ethereum fees spiel produced).
Crypto becoming yet another partisan issue is a nightmare scenario — luckily, it does not seem to be that way outside of this particular Senate hearing yet.
The Commodity Futures Trading Commission, which has historically been more lenient toward the corner of the crypto space that falls under its jurisdiction, will soon have a permanent chairman and two new commissioners. All three nominees — the acting chairman who spoke amply in favor of innovation, a legal scholar specializing in digital finance, and another with a strong enforcement background — seem to have the potential to be a force for good for crypto, but let’s not get too excited just yet.
Crypto Goes Political
The rest of the world keeps supplying major policy developments for digital assets. Cuba recognized cryptocurrency and now allows its use as a remittance and investment vehicle. Over in El Salvador, President Nayib Bukele’s opponents made a political statement by setting a crypto kiosk ablaze.
In South Korea, the majority party clashed with the finance minister over a controversial crypto tax code, attempting to postpone its implementation. Notice a common theme? All over the world, cryptocurrency-related issues are part of political agendas.
BBA Pushes For Crypto Regulatory Clarity In Massachusetts
The Boston Blockchain Association has published crypto regulatory advisory guidelines for lawmakers in Massachusetts to consider.
The Boston Blockchain Association, or BBA, together with Boston-based media house Media Shower and the Chamber of Digital Commerce, are working to lobby for favorable crypto regulations in Massachusetts.
According to a release issued on Monday, the BBA in collaboration with Media Shower and the Chamber of Digital Commerce has released a crypto regulatory toolkit for lawmakers in the state.
Dubbed the Massachusetts Edition of the Legislator’s Toolkit for Blockchain Technology, the document reportedly aims to guide the state’s policymakers toward enacting laws that will benefit the cryptocurrency industry within the Commonwealth.
The policy document reportedly covers five core recommendations for crypto-related legislative actions including tax laws, regulatory sandboxes, and the creation of a working group to study blockchain technology.
Legal and regulatory sandboxes often provide a suitable environment for crypto startups to begin early operations without being burdened by onerous laws and guidelines.
According to the announcement, the policy document is similar to the Texas Edition of the toolkit developed by the Texas Blockchain Council.
The crypto regulatory toolkit comes as Massachusetts lawmakers are considering three cryptocurrency and blockchain-focused pieces of legislation including Senate Bill 200, which is aimed at studying novel tech and its areas of application.
Crypto policy toolkits by industry proponents are becoming a regular feature of the dialog between blockchain groups and policymakers. These interactions are often aimed at smoothening regulatory concerns to prevent the establishment of unfavorable crypto laws.
Indeed, the International Association for Trusted Blockchain Applications (INATBA) stated back in March that several provisions of the European Commission’s Markets in Crypto Assets regulations could be disadvantageous for smaller cryptocurrency startups.
As previously reported by Cointelegraph, the World Economic Forum published a policy toolkit for decentralized finance regulations back in June.
Witness The Rise Of The Crypto Nominee
Nominees for federal office are increasingly coming with crypto knowledge.
This week, I consider the increasing number of regulatory nominees who bring some familiarity with digital assets to the table, even if their prospective jobs don’t require it; the U.S. Treasury Department’s imminent, and highly consequential, moves to regulate the industry; and the clampdown on crypto lending at the state and federal levels.
More than ever, the old saying of “you may not be interested in politics but politics is interested in you” is ringing true for a field that until recently Washington considered too small to matter and too weird to comprehend. Neither description applies much anymore.
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Rise Of The Crypto Nominee
An increasing number of nominees to state and federal regulatory posts have some sort of cryptocurrency background, whether as a researcher, participant or academic studying the sector. For those clamoring for regulatory clarity, this is likely a good sign. Moreover, this trend will likely continue.
Why It Matters
Financial regulators will be responsible for how the U.S. government approaches stablecoins, decentralized finance, central bank digital currencies and a host of other crypto-related issues. Having regulators who understand crypto will increase the likelihood of more informed proposals (note: this doesn’t mean friendlier-to-crypto proposals).
Breaking It Down
Something a little odd is happening.
Last week, U.S. President Joe Biden announced he intended to nominate Kristin Johnson, a professor of law at Emory University, and Christy Goldsmith Romero, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and an adjunct professor at both Georgetown University and the University of Virginia, to the Commodity Futures Trading Commission (CFTC), a key federal regulator.
Before that, New York Governor Kathy Hochul announced she intended to nominate Adrienne Harris, a professor at the University of Michigan and adviser to the Digital Dollar Project to be the new Superintendent of the New York Department of Financial Services (NYDFS).
Biden’s pending Consumer Financial Protection Bureau director is Rohit Chopra, who has also served as a commissioner on the Federal Trade Commission.
And the next Vice Chair for Supervision at the Federal Reserve is rumored to be Lael Brainard, who is already on the U.S. central bank’s board as a Governor.
Each and every one of these candidates has experience – in some way or another – in crypto.
This probably was a coincidence. I don’t think Biden was explicitly looking for financial product experts who have dedicated time and research into crypto. But the fact that we’re now seeing so many potential regulators who have crypto in their background is interesting at the least.
We were discussing this in the State of Crypto Telegram group the other day and it does seem like this is going to be an emerging trend. Candidates for regulatory agencies may well have more and more crypto experience in the near term.
John Collins, a partner at FS Vector, told me to expect more crypto-native or crypto-savvy political appointees after Biden won the 2020 election in November.
Part of this is because as crypto becomes increasingly popular or mainstream, the chances of any given individual knowing about it also rise. But cryptocurrencies are also presenting possible new methods for solving existing financial issues, or new options for providing services like lending.
Johnson, one of the CFTC commissioner nominee-designates, was described as being an expert in “complex financial products regulation,” including transactions and settlement. This type of knowledge will be invaluable to regulating new crypto derivatives products.
As in the case of Securities and Exchange Commission (SEC) Chair Gary Gensler, who taught a course on cryptocurrencies and blockchain while at MIT, I suspect this isn’t a signal of whether we’ll see favorable or unfavorable regulations for crypto, but whatever regulations we do see will demonstrate a greater understanding of this sector and related technologies than in years past.
However, we are seeing a lot more regulatory scrutiny of crypto now than we did a year ago, from multiple departments and branches of government. This scrutiny is only going to intensify, whether that’s through state regulator crackdowns on crypto lending firms (see below), federal crackdowns on stablecoins or actual guidance from agencies on how to approach digital asset products.
Better “tough but savvy” than “tough and clueless.”
Treasury Gets Busy
The U.S. Treasury Department plans to produce at least two different types of crypto-related actions in the near future.
The government wing will soon unveil sanctions and guidance to take on ransomware attacks. The goal is to mitigate future attacks that would require crypto payments.
While details are scarce (so far), The Wall Street Journal reported that these actions will be specific to companies, rather than a broadside against crypto in general. What we do know is Treasury will announce its actions within the next few days.
The Treasury Department also plans to publish a report on stablecoins for the President’s Working Group on Financial Markets.
The working group is composed of the heads of most federal financial regulators, including the SEC, CFTC, Federal Reserve and Treasury Department. The group has been looking at stablecoins since at least last year during the Trump administration.
The group is considering what sort of risks stablecoins present to financial stability and investors, as well as what sort of regulations make sense.
SEC Chair Gensler hinted that some of these stablecoins might be securities, if they are backed by stuff other than U.S. dollars (like, say, money market funds or commercial paper).
I haven’t heard yet whether this report will be made public, and it’s even less clear how quickly the working group might act on the recommendations. Still, how the Treasury views stablecoins will be pivotal for a segment of the crypto industry worth over $100 billion.
Everybody Hates Crypto Lending
Stop me if you’ve heard this one before. Regulators in the U.S. states of Texas, New Jersey and Alabama have all alleged that a crypto lender is violating securities laws with its core lending products.
Anyways, New Jersey issued a cease-and-desist, Texas scheduled a hearing for next year and Alabama published a show-cause order against Celsius, in an episode pretty reminiscent of how state regulators viewed BlockFi Interest Accounts just weeks before.
The allegations against Celsius are pretty straightforward: The regulators all say Celsius’ “Earn Rewards” product resembles notes or investment contracts, which are subject to registration as a security in the respective states where Celsius operates.
“Respondents are, in part, illegally funding their lending operations, proprietary trading and other revenue-generating activities through the sale of unregistered securities in the form of cryptocurrency interest-earning accounts,” according to the Texas order.
A Celsius spokesperson told CoinDesk the company disagrees with the allegations.
Separately, Coinbase revealed it has scrapped its plans to introduce a lending product after the Securities and Exchange Commission sent a conditional Wells Notice to the company.
Interestingly, Nexo co-founder Antoni Trenchev seemed to imply he hadn’t received any messages from state regulators. He told my colleague Nate DiCamillo his company is preparing for when regulators reach out, saying every company operating in the U.S. will have to “cross the same bridge” eventually.
Changing Of The Guard
Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)
After all the news of the other week, not a whole lot this week on whether we’ll see any confirmation hearings or votes for the heads of these federal agencies.
Senator Warren’s Office Confuses MakerDAO For Failed 2016 Project The DAO
Elizabeth Warren’s office has allegedly confused top 10 DeFi protocol MakerDAO with an early experiment in decentralized autonomous organizations that failed in 2016.
Recent dialogue between MakerDAO developers and the office of anti-crypto Senator Elizabeth Warren has revealed a concerning lack of familiarity with the current decentralized finance (DeFi) ecosystem.
On Monday, a screenshot appearing to show a dialogue between members of the MakerDAO community discussing the conclusions from a recent meeting with the office of Senator Warren circulated on social media.
In the screenshot, pseudonymous MakerDAO Governance delegate “PaperImperium” claims to have spent much of the time convincing Warren that Maker is not the same project as The DAO — an infamous early experiment in decentralized autonomy organizations (DAOs) that suffered a major hack before failing in 2016.
“I spent much of the time convincing her we’re not the DAO” pic.twitter.com/ZIUIBwaAEZ
— banteg (@bantg) September 20, 2021
MakerDAO is currently sixth-largest DeFi protocol commanding a total value locked of more than $8.2 billion, according to DeFi Llama.
Despite the confusion, the delegate also concluded that the Senator is “not super interested in us,” adding that they “have a commitment for another meeting” that is expected to take place within three weeks.
While the screenshots shared to social media claim appear to be citing Senator Warren directly, a Sept. 17 thread posted to MakerDAO’s governance forum indicates that the project’s delegates were to meet with Warren’s “economic and banking advisors.”
The meeting comes after increased efforts by MakerDAO to promote initiatives to establish a dialogue between the crypto industry and lawmakers.
Elizabeth Warren has recently become a pariah to the crypto industry due to having labeled crypto as “the new shadow bank” and a “lousy investment.”
Earlier this month, she suggested that prohibiting U.S. banks from holding the reserves to back private stablecoins in a move that could “effectively end the surging market” would be “worth considering.”
The DAO was one of the first major projects on Ethereum, launched in 2016 after raising $150 million USD worth of Ether (ETH) through a token sale. The DAO was hacked due to code vulnerabilities and $60 million in ETH was stolen less than three months after it halaunched.
It was one of the most heavily invested crypto projects to date, having attracted 14% of all circulating ETH at the time.
As a result of the incident, the Ethereum community opted to hard fork Ethereum to reverse the attack, with dissenting voices maintaining the old chain to spawn the Ethereum Classic classic chain.
Crypto Faces Existential Threat As Crackdown Gathers Steam
Cryptocurrency firms are fighting for lobbyists and fielding subpoenas in what could be an existential fight over how the multitrillion-dollar industry should be regulated.
In the past month, lobbyists have been overwhelmed by firms seeking representation in Washington, as regulators threaten the cryptocurrency companies with lawsuits or cease-and-desist orders. Current and former enforcers say those warnings are likely just the beginning.
Over the last decade, the cryptocurrency market has grown from a little-known project shared among technologists and libertarians to a massive and largely unregulated industry.
But even as the sector has found innovative ways to record ownership digitally and transfer money cheaply, it’s also launched savings accounts and investment funds, products that regulators say ought to follow the same rules as those in traditional financial networks.
As the cryptocurrency industry gears up for a regulatory battle, some lobbyists, who asked to withhold their names to discuss client matters, said they were so deluged by crypto firms looking to hire them in August that they had to turn down some potential clients.
Some of the crypto firms said they were being targeted by or expected to be targeted by regulators, the lobbyists said.
Earlier this month, the Securities and Exchange Commission sent a notice to Coinbase Global Inc. that it could be sued for offering proposed accounts with high interest rates.
“Absolutely these firms should be preparing if they aren’t already,” said Owen Tedford, an analyst with Washington-based Beacon Policy Advisors. “It wouldn’t be surprising in the slightest bit to see the Coinbase notice in some ways being a warning shot to the entire industry.”
Nearly a third of new registrations for lobbyists in the finance industry in August and September were for crypto firms or advocacy groups, according to Senate filings. Coinbase in August hired two new firms, doubling its Washington presence, with additions including Andrew Olmem, the deputy director of the National Economic Council in the Trump White House.
An affiliate of the Diem Association, a group of companies including Facebook Inc. that plans to launch a new cryptocurrency, hired new lobbyists, as did the Digital Currency Group, a crypto-focused venture capital firm.
SEC Chair Gary Gensler drew first blood last week. On Friday, Coinbase quietly abandoned the lending product, announcing the move in a short update to a months-old blog post.
“Crypto lending might be the easiest way for the SEC to get its hooks into the industry, but it’s very clear they’re looking at cryptocurrencies themselves,” said Tyler Gellasch, a former counsel at the SEC who heads the Healthy Markets Association, whose members include large asset managers.
If many cryptocurrencies are deemed securities, exchanges such as Coinbase and the rest of the crypto industry “will not be able to make money the way they do today.”
Crypto lending incumbents, such as BlockFi Inc. and Celsius Network Inc., have already garnered more than $35 billion in deposits of traditional cryptocurrencies such as Bitcoin, as well as stablecoins, whose values are pegged at $1 and are considered a replacement for fiat money.
Crypto industry executives have said they suspect rival firms in the traditional finance industry, such as large banks, are responsible for pushing regulators.
In a September “Ask Me Anything” event with customers, Celsius Network Chief Executive Officer Alex Mashinsky said he believed bank executives had called the SEC and state regulators to complain about crypto lending firms.
“We have to work twice as hard because these guys have the largest lobbyists working for them at both at the state and the federal level,” Mashinsky said. “We’ll prevail. The fight is over all the money in the world, right?”
The latest battle is over crypto lending firms, which sometimes offer depositors double-digit yields. The firms say they’re able to do that by lending the deposits at even higher rates to institutional investors, who need to borrow crypto for their own trading.
Regulators believe many of the companies should have registered their products as securities, subjecting them to additional disclosure and oversight.
The products are sometimes marketed as alternatives to bank savings accounts, and some regulators said investors might be fooled into thinking they were taking little risk.
The dispute came to a head earlier this month when Coinbase CEO Brian Armstrong in a series of tweets accused the SEC of “sketchy behavior” and disputed that Coinbase’s proposed accounts were securities.
1/ Some really sketchy behavior coming out of the SEC recently.
— Brian Armstrong (@brian_armstrong) September 8, 2021
Gensler said during a Senate Banking hearing last week that Coinbase hasn’t registered with the SEC even though “dozens of tokens” on its exchange might be securities. A Coinbase spokesperson said the firm doesn’t believe it offers any securities on its platform.
Crypto executives say they’re frustrated that regulators are threatening to sue them, rather than giving them guidance on how they can stay within the law.
Last week, BlockFi CEO Zac Prince at the SALT Conference in New York said the SEC and other regulators needed to give his industry clarity on what’s allowed. Five states have already taken action against his firm, accusing it of offering unregistered securities to their residents.
Prince at the conference said federal guidance is needed, rather than state actions. BlockFi announced Wednesday that New Jersey agreed to extend its order to stop offering the accounts until December.
Even some firms with similar products that did file with the SEC crave more agency guidance. Circle Internet Financial Inc., for example, offers high-yield deposit accounts to corporate clients and notified the SEC under an exemption geared toward accredited investors, said CEO Jeremy Allaire.
“We would love to understand if regulators in the United States want to regulate crypto lending and work with the industry to define what they care about there and define the rules of engagement,” Allaire said. “The United States has been extraordinarily reluctant to provide clarity around digital assets.”
Enforcers, for their part, believe the law is already clear. During the banking hearing, Gensler pointed to long-standing court decisions that helped define the agency’s purview, and said many crypto products and even cryptocurrencies probably fall into its remit.
Gellasch, the former SEC counsel, said that if exchanges are found to be offering securities, that could force them to register with the agency.
Some crypto advocates in Washington said they hope spats such as the one between the SEC and Coinbase do make it to court, so that a judge, rather than agency employees, can determine what’s in bounds for the firms.
“I want them to have the courage of their convictions and fight it if they really think their product isn’t a security,” said Jerry Brito, executive director of Coin Center, a crypto advocacy think tank.
Joe Rotunda, director of the enforcement division for the Texas State Securities Board, said that other crypto lending firms shouldn’t expect his agency or other states to hold back even as the SEC starts to move.
“I’m very relieved to see that federal regulators are taking a close look at cryptocurrency depository accounts,” said Rotunda, who said his agency and others are still investigating other firms that offer similar products. “At the same time, they still haven’t done anything.”
Coinbase To Propose Crypto Regulations To Us Officials
Coinbase is said to be working on a pitch to federal regulators on how to oversee the crypto industry.
Crypto exchange Coinbase is preparing to pitch a proposed regulatory framework to federal officials.
The exchange plans to publicly roll out this proposal in the coming days, according to sources familiar with the regulatory discussions. Details of the proposal were not available at press time, but among other matters the company intends to argue what should and should not be defined as a security within the U.S.
When reached by CoinDesk, a Coinbase spokesperson declined to comment.
The news comes after Coinbase announced it was ceasing plans to offer a crypto lending product, which the Securities and Exchange Commission (SEC) said would violate securities laws.
Earlier this month, Coinbase Chief Legal Officer Paul Grewal and CEO Brian Armstrong revealed that the SEC had sent a Wells Notice to the exchange, which said the regulator would sue Coinbase should its “Lend” product launch.
The SEC cited two U.S. Supreme Court precedents – the Howey and Reves cases – in arguing that Lend appeared to violate securities laws.
While Coinbase did not publish the Wells Notice, legal experts told CoinDesk the regulator might be comparing Lend to stocks or certificates of interest, which are securities under the SEC’s purview.
Coinbase has a long history of trying to create frameworks and tools to standardize how exchanges approach crypto listings and products, at least within the U.S.
The exchange was a founding member of the Crypto Rating Council, a 2019 effort that sought to create a common understanding of how closely any given cryptocurrency resembled a security.
The group rated a cryptocurrency from between 1 and 5, with a 1 referring to something that is definitely not a security (such as bitcoin), and a 5 referring to something that did appear to be a security (the CRC has not announced any cryptocurrencies that fit that description).
The CRC published its approach and a scorecard that projects could use for self-evaluation last year.
Coinbase also published an open-source technical framework last year for crypto developers.
Projects that adopted the framework could ensure their cryptocurrencies would be compatible with Coinbase’s listing and trading technical back end, should the exchange approve these cryptocurrencies for its platform.
CFTC Commissioner: Agency Doesn’t Have Enforcement Resources Without Congress
“We’re not necessarily looking for more authority without more resources,” said Dan Berkovitz in regards to crypto markets.
Dan Berkovitz, one of three commissioners currently serving at the U.S. Commodity Futures Trading Commission, or CFTC, said while the agency is suited to futures contracts, swaps, and options trading, it would need additional resources to handle the cash market for crypto assets.
Speaking at the Managed Funds Association Digital Assets Conference on Tuesday, Berkovitz said the Commodity Futures Trading Commission enforcement actions in the crypto space have been “aggressive,” citing a $100 million civil monetary penalty against derivatives exchange BitMEX. Though he said the agency had the “capability and the expertise” to further regulate crypto assets, it was currently unable to do so due to a “resource issue.”
“If Congress were to determine that our jurisdiction should be expanded to somehow regulate the cash market, we would really need additional resources to do that,” said Berkovitz.
“Cryptocurrency markets, we’re not necessarily looking for more authority without more resources. We’re staying in our lane.”
Berkovitz noted there was “a lot of coordination” between the agency, the Securities and Exchange Commission, the Financial Crimes Enforcement Network, the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Department of the Treasury.
The CFTC worked with the Financial Crimes Enforcement Network to settle the case against BitMEX, and has coordinated with the SEC to investigate trading apps dealing in crypto.
“We’re all pretty familiar with the lanes that we go in,” said Berkovitz, referring to the jurisdictions of the respective agencies. “I think coordination is actually excellent.”
The CFTC commissioner also doubled down on his comments from June that decentralized finance platforms were likely illegal under the Commodity Exchange Act. According to Berkovitz, there was a “spectrum of centralization” around projects in the DeFi space that could make them subject to registration at the CFTC.
Five commissioners normally serve at the CFTC, but the agency has been shaken up by the departure of former chair Heath Tarbert in January and Brian Quintenz on Aug. 31. Berkovitz has also announced he plans to leave the commission on Oct. 15, leaving only acting chair Rostin Behnam and Dawn Stump.
Earlier this month, President Joe Biden said he planned to nominate Behnam to assume his position on a permanent basis in addition to filling the remaining seats with law professor Kristin Johnson and former SEC enforcement division senior counsel Christy Goldsmith Romero.
All must be confirmed by the Democrat-controlled Senate, but the White House has not yet announced a possible replacement for Berkovitz.
Banks Oppose Strict Basel Rules Targeting Cryptocurrencies
Forum for lenders including JPMorgan and Deutsche Bank argues rules would push crypto trading into unregulated corners of the financial system.
The biggest U.S. and European banks oppose strict new rules that would require them to set aside a dollar in capital for every dollar of bitcoin they own, a group of trade associations representing the lenders told the top global standard setter for banking regulation.
The Basel Committee for Banking Supervision, a group of global central bankers and regulators, proposed the new rules in June. The Global Financial Markets Association, a forum for banks including JPMorgan Chase & Co. and Deutsche Bank AG , and five other industry associations pushed against them in a letter published Tuesday, arguing that the most traded cryptocurrencies, including bitcoin, shouldn’t face such strict capital requirements.
Bank regulators have said they are concerned about consumer protection, money laundering and terrorist financing threats from the use of cryptocurrencies. But the trade associations said that the proposed new rules are counterproductive because they would prevent banks from holding cryptocurrencies, which would be forced into unregulated corners of the financial system.
“We find the proposals in the consultation to be so overly conservative and simplistic that they, in effect, would preclude bank involvement in crypto asset markets,” the associations wrote in the letter to the Basel Committee.
A spokesperson for the Basel Committee didn’t immediately respond to a request for comment.
The committee said in June that banks should apply a 1,250% risk weight to bitcoin, which it said is “similar in effect to the deduction of the asset from capital.” If a bank holds $100 of bitcoin exposure, it would give rise to risk-weighted assets of $1,250, which when multiplied by the minimum capital requirement of 8% results in setting aside at least $100, the committee said.
The committee, which includes the Federal Reserve, the European Central Bank and other major central banks, doesn’t enforce rules itself but sets minimum standards that regulators around the world agree upon and implement locally.
The trade associations said that such a high risk weight wasn’t necessary for bitcoin and other heavily traded cryptocurrencies, such as ether.
The associations also said the Basel Committee’s definition of stablecoins, whose value is pegged to the U.S. dollar or other currencies, stipulated such narrow price fluctuations that it risked them falling under the same capital requirements applied to bitcoin.
The associations said allowing a 0.25-percentage-point difference in price between stablecoins and their underlying asset, rather than the proposed 0.1 percentage point, would encompass more assets.
The world’s largest stablecoin by market value, tether, moved 0.1 percentage point above or below the U.S. dollar’s value 124 times last year, according to the associations’ analysis. Rival stablecoin USD Coin broke from that range on 15 occasions.
The letter was signed by the Financial Services Forum, the Futures Industry Association, the Institute of International Finance, the International Swaps and Derivatives Association and the Chamber of Digital Commerce, as well as the Global Financial Markets Association.
Basel Draft Rules Make Crypto Too Costly For Banks To Trade, Says Industry
Proposed rules would make “bank involvement in the cryptoasset market cost-prohibitive from a capital perspective,” industry associations have told regulators.
Nine banking industry associations have submitted a letter to the Basel Committee on Banking Supervision (BCBS) in response to its proposal to introduce stringent capital requirements for banks looking to hold crypto assets on their books.
In June of this year, the BCBS had published a consultation paper that assigned a 1,250% risk weight to Bitcoin (BTC), meaning that banks would need to hold $1 in capital for each $1 worth of exposure they have to Bitcoin.
In their letter this week, industry groups — among them, the derivatives associations ISDA and FIA, the Institute of International Finance, European markets body AFME and the Chamber of Digital Commerce — argued that the prudential framework envisaged by the BCBS would create “material impediments to regulated bank participation in cryptoasset markets.”
They argued that “certain elements of the proposal make bank involvement in the cryptoasset market cost-prohibitive from a capital perspective,” adding, “This approach is especially concerning given the rapid growth of cryptoasset-related market activity with participants that fall outside the perimeter of prudential and market regulations.”
To improve upon the BCBS’ proposal, the associates have argued for a more nuanced taxonomy of various crypto assets and their varying risk profiles. Instead of a crude “application of a single, undifferentiated 1250% risk weight,” the letter includes a detailed appendix that makes the case for taking into account aspects such as the existence of a liquid, two-way market for some crypto assets.
Despite their numerous disagreements with the letter of the BCBS’ proposals, the associations nonetheless underscored the need for regulatory certainty “in the near to medium term, particularly given the pace of evolution and client demand for cryptoassets.”
The letter also noted that at present, banks’ exposure to crypto remains limited but emphasized that the industry views this limited exposure as being “neither desirable nor sustainable” for several reasons.
These reasons include the potential benefits that distributed ledger technology holds for the financial services sector and existing, significant demand for crypto-related products and services from customers. Moreover, the letter argued that the benefits of crypto assets and their underlying technology:
“Will be realized most widely and transparently when regulated banks […] are able to play a meaningful role. In particular, the public and the regulatory community would benefit from bank involvement in the cryptoasset space because of this long history of identifying, monitoring and managing risks from both a prudential and conduct perspective on an ongoing basis.”
The letter has proposed that the BCBS should be able to make more use of the existing international prudential framework — e.g., Basel III — to achieve its goals and to implement a framework that is product agnostic.
UAE Regulators Approve Crypto Trading In Dubai Free Zone
Dubai authorities continue driving more adoption to the cryptocurrency industry by pushing more regulatory approvals.
Financial regulators in the United Arab Emirates have reached an arrangement to officially allow and support cryptocurrency trading in an economicfree zone in Dubai.
The Dubai World Trade Centre Authority (DWTCA) announced Wednesday that it had signed an agreement with the UAE’s Securities and Commodities Authority (SCA) to support the regulation and trading of crypto assets within the DWTCA free zone.
The new initiative establishes a framework enabling the DWTCA to issue necessary approvals and licenses for financial activities related to cryptocurrencies. As part of the agreement, the SCA will also supervise major crypto-related activities, such as issuance, listing, trading and licensing processes.
According to the announcement, the agreement was signed by SCA acting CEO Maryam Al Suwaidi, DWTCA director-general Helal Saeed Al Marri, as well as an executive at the Dubai Department of Tourism and Commerce Marketing.
Al Suwaidi said that the new project comes in line with the DWTCA’s commitment to expand its services as a free zone and support new technologies such as nonfungible tokens. “As Dubai continues its drive towards an innovation and digital-led economy, DWTCA is looking to support businesses underpinned by blockchain and cryptographic technologies,” he added.
The DWTCA and the SCA did not immediately respond to Cointelegraph’s request for comment. The authorities previously entered a similar agreement to stimulate the crypto industry development in the Dubai Airport Free Zone Authority in May.
The new agreement further reinforces the UAE’s growing commitment to become a crypto-friendly global hub.
In April, Minister of Economy Abdulla Bin Touq Al Marri declared that cryptocurrencies and asset tokenization will be key to the country’s plans to double its economy in 10 years. The local stock exchange, Nasdaq Dubai, subsequently listed a public Bitcoin (BTC) fund by Canadian digital asset investment fund manager 3iQ in June.
US House Passes National Defense Act Containing Crypto Provision
The bill would clarify regulations of cryptocurrencies.
The U.S. House of Representatives has included a crypto provision in this year’s version of the annual defense budget bill.
The National Defense Authorization Act, which lays out the policy guidelines for defense and authorizes military spending, includes a provision from the Eliminate Barriers to Innovation Act.
The defense bill generally receives wide bipartisan support and is seen as a must-pass bill. Tacking the provision onto the bill, which the House passed on Thursday, signals a chance the crypto provision could soon pass into law.
The Senate still has to vote on its own version of the bill before the two legislative groups reconcile their versions of the bill. All of Congress will have to vote on the final bill. The provision, inserted by Rep. Patrick McHenry (R-N.C.), seeks to promote U.S. international competitiveness by clarifying how cryptocurrencies are regulated.
The proposed legislation would require the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to clearly define which agency has oversight of which aspects of the crypto market.
If the bill is enacted into law, Congress would create a working group within 90 days of the bill’s passage composed of SEC and CFTC representatives.
The group is expected to also include non-governmental representatives from fintech and small businesses, among others.
Over the course of a year, the group would then be required to analyze the current regulations and their impact on the primary and secondary markets while filing a report describing how current regulations affect the country’s competitiveness.
Canadian Regulators Warn Against ‘Gambling Style’ Advertising And Marketing In Guidelines For Crypto Companies
“Misleading advertisements and improper marketing strategies may encourage investors to take on risks they would normally avoid,” said CSA chair Louis Morisset.
The Canadian Securities Administrators, or CSA, and Investment Industry Regulatory Organization of Canada, or IIROC, have issued guidelines for crypto trading platforms operating in the country to avoid “advertising and marketing materials that could mislead investors.”
In a Thursday publication, the Canadian regulators’ guidelines warn crypto companies not to advertise “gambling style” promotions in which an investor is encouraged to sign up within a given time limit to take advantage of a reward or opportunity.
Though the guidance was seemingly vague on restrictions concerning social media posts, the regulators recommended trading platforms designate an individual to review and approve communications and set up a system to ensure all messages are in compliance with regulatory guidelines.
“Misleading advertisements and improper marketing strategies may encourage investors to take on risks they would normally avoid, and not respecting the requirements under securities law and IIROC rules may raise concerns about a crypto trading platform’s fitness for registration,” said CSA chair Louis Morisset.
Some of the seemingly egregious examples provided by the regulators included exchanges suggesting that they are registered under current securities laws or otherwise approved by regulators. The CSA and IIROC encouraged trading platforms to consult with their legal teams prior to releasing advertising and marketing announcements to the public.
The IIROC is a self-regulatory body that proposes measures to protect investors and support healthy domestic capital markets while the CSA is a national standards group covering Canada’s ten provinces and three territories.
The two securities bodies have previously issued joint statements regarding rules on crypto industry players and worked together to clarify the use of crypto with the country’s securities laws.
Crypto’s ‘Peak FUD’ Moment Has Arrived As Hammer Drops In China
Among the countless pieces of technical jargon and acronyms that the cryptocurrency community throws around, there’s one important concept that’s easy to understand even for the liberal-arts majors among us: FUD.
That stands for “Fear, Uncertainty and Doubt” and it’s sort of a catch-all pejorative used to dismiss the seemingly never-ending list of concerns and criticisms that perpetually dog the digital-asset class even as it continues to grow at a breathtaking pace.
It all started with Bitcoin’s reputation as the currency of choice for drug traffickers, money launderers, tax cheats and malware ransomists.
Upon that foundation, a skyscraper of FUD has been erected that now contains concerns about crypto’s rapacious energy use and even its potential to spread contagion to the traditional financial system as the dollar value of tokenized assets grows into the trillions.
Of course, potentially the biggest threat is the fear, uncertainty and doubt about what governments around the world will do about it all.
As a result, China’s decision to ban all crypto transactions and mining, coupled with intensifying scrutiny of blockchain assets by the Securities and Exchange Commission and other U.S. regulators, is creating a peak FUD moment for crypto.
Yet, the remarkable thing is that — like the proverbial “wall of worry” that never seems to hurt the stock market — growing FUD never seems to do much damage to the value of crypto assets. At least, not for long.
Yes, Bitcoin is down 5% following China’s latest ban on all crypto transactions and vow to root out mining of digital assets, but that’s just another day in the virtual office for this volatile asset class. Bitcoin and other coins actually were hit harder earlier this week when concerns over China Evergrande Group spread throughout all manner of global markets.
“If the regulators look at something unfavorably, there’s a contingent of crypto investors who say, ‘That makes me like that more, not less,’” said Stephane Ouellette, CEO and co-founder of FRNT Financial Inc., a crypto-focused capital-markets platform. That’s “because of the anti-establishment mentality that crypto was born out of.”
There’s also a bit of a Chicken Little element to the spread of FUD — so many past purported threats to the asset class never quite came to fruition.
Last month, the FUD centered around the U.S. infrastructure bill in Congress that contained mandates on tax compliance for cryptocurrency brokerages.
Yet it didn’t do much to dent the bullish sentiment within the crypto-community, with Bitcoin, Ether and others continuing to rally. Newer coins like Cardano and Solana more than doubled.
August volumes on Binance, the world’s largest crypto exchange, jumped 65% in the month and open interest in Ethereum futures and perpetual futures jumped 41%, according to researcher CryptoCompare.
A website called 99Bitcoins.com tracks what it considers to be “Bitcoin obituaries,” or hot takes declaring the token to be worthless by writers and websites with significant audiences. Bitcoin has died 430 times, according to their tally.
“The bad news isn’t unexpected — it comes with all sorts of new technologies,” said Zack Voell, director of research at Compass Mining. “But I expect it to dissipate and shed some of its regularity as crypto becomes increasingly more mainstream and more widely understood.”
For Sam Bankman-Fried, chief executive officer of exchange FTX, a lot of the FUD-filled headlines these days don’t necessarily represent a more negative period for crypto. “There’s just a lot more attention focused on it and particularly a lot more attention focused on trying to set apart the negatives in the industry,” he said.
When it comes to actions by governments, the consensus among the industry’s players tends to be that regulations may change the way participants in the market conduct transactions — but any news of the asset class’s demise is greatly exaggerated.
As Brian Mosoff, CEO of Canadian crypto-investment firm Ether Capital Corp., put it: “You can’t regulate at the protocol level, meaning you can’t change the code of Bitcoin.”
“I don’t think it matters that much what regulators do,” he said during an interview on Bloomberg’s “What Goes Up” podcast.
“It’ll change how people interact with these assets and how they interact from specific jurisdictions.
But I don’t think the assets themselves are going to just disappear overnight,” he added. “What’s going to get regulated here are the access points and the marketplaces.”
Still, to Art Hogan, chief strategist at National Securities, there could be a “whistling past the graveyard” mentality in place as crypto investors ignore what may end up being a major sea change when it comes to regulatory scrutiny.
“It just hasn’t settled in yet,” he said. “But that likely changes pretty abruptly. And cryptocurrencies tend to have abrupt moves. They’re never calm, they’re never steady. It’s either a volatile move higher — and oftentimes followed by volatile moves lower.”
One thing that’s for sure is that the stakes are growing higher, as more and more big-money investors from traditional markets — like hedge-fund billionaire Steve Cohen — get converted into crypto true believers.
Another luminary of the hedge fund world, Ray Dalio of Bridgewater Associates, weighed in on Bitcoin this week on Bloomberg TV, calling it a “tremendous accomplishment” from a technology perspective. Of course, even that praise was dripping with FUD.
If “successful, there’s the risk the government will outlaw it,” he said.
Acting OCC Head Warns That ‘Fools Gold’ In DeFi Reminds Him Of Lead-Up To GFC
While crypto has weathered past hacks, scams and crashes, acting OCC head Michael Hsu warns that the risks may be multiplying as the technology goes mainstream.
Acting head of the United States Office of the Comptroller of the Currency (OCC) Michael Hsu has warned that the exotic financial products developed in some quarters of crypto and DeFi are reminiscent of those that precipitated the 2008 Global Financial Crisis (GFC).
Speaking before the Blockchain Association on Sept. 21, Hsu warned that “innovation for innovation’s sake […] risks creating a mountain of fool’s good,” drawing analogies between the rapid proliferation of digital asset derivatives and the explosion in mortgage and debt derivatives, such as the Credit Default Swaps (CDS) that preceded the 2008 global financial crisis:
“I have seen one fool’s gold rush from up close in the lead up to the 2008 financial crisis. It feels like we may be on the cusp of another with cryptocurrencies (crypto) and decentralized finance (DeFi) […] Crypto/DeFi today is on a path that looks similar to CDS in the early 2000s.”
Hsu notes that “it was nearly impossible to hedge the risk of a borrower defaulting” prior to the creation of CDS in the mid-1990s. However, by the time he joined the SEC in 2004, the acting OCC head recounted that credit derivatives promised investors higher risk-adjusted returns using innovative products that “relied heavily on math and financial engineering.”
“They believed they were leading a financial revolution, creating an entirely different asset class, using an entirely different set of models. Sound familiar? Today, programmers and coders, instead of quants and financial engineers, are the core innovators.”
Hsu asserts that by the time the crisis unfolded, the original mission of CDS “to create an instrument that could improve risk management and thus lower the cost of credit” had been “turned onto itself, cloaked in impenetrable math and jargon, and supercharged with yield and fees to ensure growth.”
Drawing parallels between exotic DeFi derivatives and the systemic risk that underpinned the collapse of the U.S. housing market in 2008, Hsu noted that “most innovation seems focused on enhancing trading” in crypto now rather than realizing the vision for greater financial autonomy articulated by Satoshi Nakamoto in the Bitcoin Whitepaper.
Hsu cites several risks that could destabilize the crypto sector including “a run on a large stablecoin […] forks, hacks, rug pulls, vampire attacks, and flash loans.” While acknowledging that crypto has withstood all of the aforementioned incidents thus far, Hsu warns that such threats could loom larger as the cryptocurrency user base grows:
“My hypothesis is that until recently, most users have been hardcore believers in the technology and thus are both understanding of the risks and willing to forgive them.
As the scope and reach of crypto/DeFi expands, though, more mainstream users, with regular expectations of safe and sound money, will dominate and drive reactions.”
Ultimately, Hsu’s outlook for crypto isn’t entirely bleak, with the official concluding that if the industry “applies the lessons from the 2008 crisis — anchor innovation in clear purpose, foster an environment for skeptics to speak up, and follow the money — the risks of fool’s gold can be mitigated and the real promise of blockchain innovation can be achieved.”
However, the days of Hsu’s tenure as head of the OCC appear to be numbered, with the Biden administration reportedly moving to nominate law professor Saule Omarova to lead the institution.
If nominated, analysts believe Omarova will seek a tightening of regulations overseeing both the crypto and mainstream financial industries. Omarova previously described digital assets as a tool for private interests to abuse that are outside of the regulatory purview.
SEC Is ‘Open To Discussion’ When It Comes To Crypto: Kraken Chief Lawyer
Kraken’s Marco Santori points to the adversarial stance taken by some crypto firms toward regulators.
Amid a fraught period for some high-profile United States crypto firms and financial regulators, Kraken chief legal officer Marco Santori is calling for a dose of pragmatism going forward.
Speaking on Bloomberg’s QuickTake Stock broadcast on Thursday, Santori told viewers, “You’re living in a fantasy world if you don’t believe that this industry is going to face heavier, more Wall Street-like regulation from governments in the U.S. and abroad.”
Santori’s comments follow threats by the U.S. Securities and Exchange Commission earlier this month to sue the well-known crypto exchange Coinbase over a crypto yield program the commission deemed to be a security. The move sparked the exchange’s CEO, Brian Armstrong, to adopt a combative and resistant stance on social media, although the exchange has since announced it will scrap the program at issue, in line with the SEC’s wishes.
Commenting directly on the developments, Santori said, “I’ve certainly followed Brian’s tweets, and I’ll say that look, you’re just not being honest with yourself about the crypto community if a little bit of you doesn’t think he’s saying what a lot of people are thinking.” He soon pivoted, however, taking pains to articulate the more pragmatic agenda he’s pursuing at Kraken:
“I can’t support that kind of approach with regulators. It’s never been successful historically, and from our experience, we’ve found the SEC to be open to discussion.”
U.S. financial regulators, particularly under SEC Chair Gary Gensler, have indicated they intend to introduce a host of policy changes this year that will affect token offerings, decentralized finance, stablecoins, custody, exchange-traded funds and lending platforms.
Despite his hawkish tone, Gensler has appealed to industry actors to engage with the agency going forward. With the regulatory outlook still evolving, the crypto markets, meanwhile, remain highly sensitive to the possible implications of each of the regulator’s crypto-related public interventions.
The Fight To Control The $2 Trillion Crypto Market Is Heating Up
Investors are being rattled by volatility as the two biggest economies — the U.S. and China — seek to tighten their grip on Bitcoin and other digital currencies.
It’s not that governments like China are banning cryptocurrencies because they necessarily expect the technology to fail. It’s that they want to be in charge of an experiment with potentially trillions of dollars in play.
With its latest move, China joins a small list of nations that are crypto prohibitionists.
And it is a swing in the opposite direction of El Salvador, which adopted Bitcoin as legal tender this year and was lauded by Libertarians as well as Bitcoin believers. In the U.S., where crypto trading is allowed but regulators are taking a close look, some see an opportunity in China’s deepening crackdown.
Understanding the many dimensions of this multi-pronged battle to control the market will be key for the millions of investors hoping to cash in on the crypto craze.
The fight is set to reverberate through the global financial system, where every day brings news of products such as Bitcoin exchange-traded funds, bizarrely named digital tokens and NFT assets. The ultra-rich are also involved, and mainstream financial institutions are embracing digital currencies.
More broadly, the fight will also influence socio-cultural discussions over everything from climate change to inequality, and trade to fiat currencies. How the world’s two biggest economies — the U.S. and China — fare in their effort at oversight over the market will likely have the most far-reaching impact.
“Crypto has become too big to ignore,” said Matt Hougan, chief investment officer at Bitwise Asset Management. “Five years ago, at least in regulators’ minds, it was people wearing hoodies playing Dungeons & Dragons and trading among themselves. Today it’s a $2 trillion industry and every major Wall Street bank is helping investors gain exposure to it, and now they have to deal with it.”
China rattled financial markets this week by announcing that all crypto-related transactions will be considered illegal, echoing less definitive exclusions dating back to 2013 that cracked down on initial coin offerings, crypto exchanges and cryptocurrency mining — in which it had become the world’s leader.
Instead, the Chinese government aims to unleash its own cryptocurrency. It’s one of 81 nations that are exploring their own digital currencies, a list that started with early adopters like Venezuela and Estonia but now includes larger nations, including the U.S.
China’s 1.4 billion population will likely give it an edge when it begins rolling out the digital yuan on a global scale at the winter Olympics in Beijing in 2022 — a prospect that has some U.S. politicians wanting to ban American athletes from using the e-coin while there.
“For China, I think it’s pretty clear they want to promote the digital yuan, and that they are simply taking care of the competition,” said Nicolas Christin, an associate professor at Carnegie Mellon University.
China said that 10 regulatory agencies, including the central bank, would work together to track down crypto-related activity. The ban even says that overseas exchanges are barred from providing services to mainland investors.
The country’s moves over the past few years already had the effect of squeezing local trading volumes, said Randall Kroszner, deputy dean at the University of Chicago Booth School of Business and former governor of the Federal Reserve System. “Even with a VPN, it can be very difficult to connect and can be slowed down,” he said.
Governments crack down on crypto for two reasons, Bitwise’s Hougan says. They want to curb crypto mining — the energy-intensive computing process involved in creating the digital currency and verifying transactions. And second, perhaps more critically, they want to be able to monitor currency transactions and negate any challenge to their homegrown digital currencies.
Gary Gensler’s Approach
In the U.S., the government’s regulatory strategy has been different. The approach is aimed at trying to avoid problems, according to Christin at Carnegie Mellon University. For example, financial markets have historically held up high barriers of entry for certain types of transactions, but no such stringent controls are in place for cryptocurrency trades.
That leaves the door open for inexperienced investors to take highly leveraged positions that could lead to potentially catastrophic financial losses.
“Now of course there is a line of thought that people should be able to do whatever they want — after all, it’s their money,” Christin said. “But the question is whether a lot of retail-level folks engaging in these markets are actually equipped to judge the risks rationally, as opposed to engaging in gambling-like behavior.”
U.S. Securities and Exchange Commission Chair Gary Gensler, who has termed crypto as the “Wild West,” is signaling a robust oversight regime over the industry. Coinbase Global Inc.’s planned Lend program, which would have let users earn 4% by lending their tokens, was a flash point in growing tensions between the regulator and the industry. BlockFi CEO Zac Prince recently said the SEC and other regulators needed to give his industry clarity on what’s allowed.
Gensler has in fact been interested in the crypto world for years and once taught a class at MIT’s Sloan School of Management called “Blockchain and Money.” He’s even signaled a pathway for the SEC to approve an ETF tracking Bitcoin futures.
Caution from regulators is understandable. Scammers have ripped off billions of dollars in crypto pump-and-dump schemes, using myriad tactics to draw in unsuspecting investors.
“The government is worried about consumer protections,” said James Seyffart, an analyst for Bloomberg Intelligence. “The U.S. government generally doesn’t ban new technology, they usually embrace innovation. There is going to be new regulation but they just need to give guidance for people.”
Former U.S. Treasury Secretary Lawrence Summers says that rather than resist regulation, the crypto industry should embrace it for its own good. Given the large financial sums involved in crypto, it’s unrealistic for the industry to expect to operate in secrecy without government oversight, Summers said in an interview on Bloomberg TV.
The crypto industry should shed the idea that it’ll function as a “libertarian paradise” where government rules can’t be imposed, Summers said.
Crypto Exchange Stops Taking China Users As Beijing Widens Ban
Huobi, China’s largest Bitcoin exchange, has halted new registrations for domestic users, taking one of the first actions to comply with Beijing’s latest crypto ban.
The exchange operator has stopped letting traders use mainland China mobile numbers to register new accounts, after the People’s Bank of China said Friday all crypto-related transactions will be considered illicit financial activity. New sign-ups are still available for Hong Kong users, but mainland China is no longer an option for new-account creation. A Huobi spokesperson declined to comment.
China’s latest pronouncement — issued by the central bank along with nine other government agencies including the public security ministry — is the culmination of years of attempted crackdown on the rise of Bitcoin and its peers. Friday’s notice specifically called out offshore exchanges targeting Chinese users, banning them from hiring locally for roles from marketing to payment settlement and tech.
In 2017 China told local exchanges to stop hosting trades between fiat money and crypto tokens, spurring companies like Huobi to set up shops in friendlier jurisdictions like Singapore and Malta for their main trading platforms. Still, Huobi offers Chinese users services like over-the-counter trading and crypto-to-crypto transactions.
In June, Huobi banned existing Chinese users from trading riskier products like derivatives, after China’s cabinet called for a renewed crackdown on crypto trading and mining. There is no indication that Chinese users are barred from Huobi altogether.
Former Oracle Corp. coder Leon Li founded Huobi in 2013 in Beijing and later received backing from venture firms ZhenFund and Sequoia China. It’s widely regarded as one of the big three crypto exchanges that originated in China, along with OKEx and Binance.
Users can still use mainland China numbers to register on OKEx and Binance as of Saturday afternoon in Hong Kong.
What’s ‘Crypto Lending’? Why Are Regulators After It?
Investors frustrated with minuscule yields from banks savings accounts have found a would-be savior: so-called crypto lending accounts that can pay interest rates of 9% or higher. Upstart crypto firms like Celsius Network and BlockFi Inc. think the accounts could be the killer app that brings a whole new cohort of investors into cryptocurrencies; thus far, the firms say they’ve collected more than $35 billion in deposits.
But the accounts are also drawing criticism from traditional financial firms, who say they’re riskier than they appear, and from some regulators, who claim the accounts are being offered illegally. The conflict could push questions about regulation and crypto’s place in the U.S. financial system to a head.
1. What Is Crypto Lending?
At first blush, crypto lending accounts look a lot like savings accounts offered by banks, but with cryptocurrencies instead of traditional money. An investor opens an account, deposits cryptocurrency and earns interest. Many deposits come in the form of Bitcoin, while other investors use stablecoins, tokens whose price is often pegged at $1 while others use lesser-known cryptocurrencies that have wide price fluctuations.
The firms typically pay interest in the same currencies that are deposited. Some accounts have rates that change daily, while others get a fixed rate while the money is locked up for a fixed time, as with a certificate of deposit.
2. How Can This Offer Such Big Returns?
The firms that offer the accounts say that they’re able to lend customers’ deposits to institutional investors at even higher rates. The institutions sometimes need to borrow crypto to execute their own trades, such as to bet that the price of crypto will fall or to take advantage of price differences in other financial instruments.
But regulators have said they believe some crypto lending firms are using the money for other business activities. The bottom line is that there aren’t uniform disclosures on what exactly the deposits can and can’t be used for.
3. How Does It Compare With Regular Bank Products?
Crypto lending accounts typically carry yields that dwarf those of traditional bank accounts. While the average bank savings rate was 0.06% at the end of August, for example, Celsius Network says it can pay 8.88% on deposits of some U.S. dollar-backed stablecoins.
4. How Big Is Crypto Lending?
The business of offering the accounts is big and has been growing fast. Celsius, one of the largest such companies, says it has more than $20 billion worth of deposits. BlockFi Inc. says it has more than $10 billion. Gemini Trust Co. began offering accounts in February and says it has more than $3 billion in deposits.
5. How Does It Fit Into The Crypto World?
While Bitcoin trading is seen as volatile and risky, companies offering interest accounts say they’re a steadier source of returns for investors. Celsius and BlockFi, as well as competitors like Gemini, deal directly with their customers and pay them interest, throwing them in the bucket of “centralized finance.”
Some investors have earned similar yields by lending their deposits through “decentralized finance,” or DeFi, protocols, where computer code, rather than an intermediary, manages the interest payments. Lending out crypto to earn interest via DeFi is sometimes called yield farming.
6. What Are Regulators Doing?
Few of the firms offering the accounts have sought approvals from federal regulators, and that’s led to a heavy backlash this year. In July, securities regulators for Alabama, Texas, New Jersey, Kentucky and Vermont brought actions against BlockFi alleging that the company was offering unregistered securities.
Several of the same states brought actions against Celsius Network in September. Coinbase Global Inc. planned to offer similar accounts but dropped that proposal after the Securities and Exchange Commission told the company it might sue.
7. What Are The Dangers For Consumers?
Regulators and investor advocates are most worried that consumers don’t understand that they’re taking on much more risk than they would in a bank savings account. Because the crypto accounts aren’t insured, customers can lose their deposits if a firm goes bust, is hacked, or otherwise loses its customers’ funds.
8. What Does This Conflict Mean For The Broader Crypto World?
Regulators appear to believe the crypto lending accounts are some of the lowest hanging fruit in their bid to bring some law and order to the crypto world — after all, with firms like Celsius and BlockFi there’s a clear entity to sue, rather than just some computer code as in some DeFi transactions.
The moves against the firms could be just the start of a broader crackdown. In years past, the SEC more or less put an end to a boom in what were known as initial coin offerings, or ICOs, by entrepreneurs hoping to launch the next Bitcoin, when it ruled that most counted as securities — endeavors where investors pool funds and get returns that depend on the actions of others.
9. What Happens If Crypto Accounts Are Deemed Securities?
That designation opens the firms up to an entire new regime of registrations and disclosure requirements. That could bring more investor protection to the space, but it also probably means higher costs for the crypto firms, and possibly the end of such outsize returns for investors.
Leaders of crypto lending firms dispute that their products are securities and say that federal agencies need to give them guidelines on how to stay within the bounds of the law rather than bring lawsuits, as the SEC threatened to do against Coinbase.
Gary Gensler, You Should Be Watching How Canada Is Regulating Coinbase
In Canada, there’s no question whether crypto exchanges offer securities and if they should be regulated as such.
The question of how to regulate cryptocurrencies, and by extension cryptocurrency exchanges, is getting heated.
Securities and Exchange Commission (SEC) Chair Gary Gensler has been regularly hinting that exchanges such as Coinbase should be registering with the SEC because they offer “dozens of tokens that may be securities.” A frustrated Brian Armstrong, Coinbase’s CEO, has accused the SEC of “sketchy behavior” and is planning to publish his own advice on how authorities should regulate crypto.
Up north in Canada, all is quiet. The debate over whether cryptocurrency exchanges need to register with Canada’s version of the SEC has already been settled. In a March 2021 notice, the Canadian Securities Administrators confirmed that crypto exchanges do need to be registered with a securities regulator. Exchanges that want to keep serving Canadians are rushing to comply.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and a financial writer at a large Canadian bank. He runs the popular Moneyness blog.
Given how excruciatingly vague the status of cryptocurrency regulation remains in the U.S., it’s striking how Canada’s version of the SEC has been able to bring rapid clarity to the issue.
Is it possible that countries casting around for a definitive solution to regulating cryptocurrency exchanges adopt the Canadian blueprint?
You Probably List Some Securities, So Get Regulated
Before turning to Canada, let’s review the situation in the U.S. The SEC’s jurisdiction over cryptocurrency exchanges like Coinbase and Kraken hinges on whether the tokens these exchanges list are deemed to be securities. The SEC has said that bitcoin and ether aren’t securities. XRP is.
If tokens are securities, and Kraken and Coinbase list them, then Kraken and Coinbase are securities exchanges and they must register with the SEC. Delisting security tokens like XRP is how exchanges like Kraken and Coinbase avoid the registration requirement.
But what about shibu inu, dogecoin, USDC or the thousands of other tokens? Are they securities?
Divining the security-or-not status of a token seems to be more art than science. It rests on how lawyers interpret the SEC’s definition of security, which includes a long list of instruments like notes, stocks, bonds, investment contract, fractional undivided interest and more.
Now, perhaps SEC officials could comb through every one of the thousands of crypto tokens created over the last 12 years and make a list of which of them are securities or not. And then Coinbase and Kraken could delist everything that the SEC says is a security and thus avoid SEC registration requirements.
But in his recent public pronouncements, SEC Chair Gensler has taken a less helpful approach. It goes a bit like this: “Coinbase, you list 300 tokens, and odds are that a bunch of them are securities (we’re not going to say which), so you should register with the SEC anyways.”
Not Your Keys, Not Your Coins (And Definitely A Security)
If Gensler’s approach to pulling crypto exchanges under the ambit of securities law seems oblique and vague, the Canadian Securities Administrators (CSA) has taken a much more direct approach. The CSA is an umbrella organization for Canada’s provincial and territorial securities regulators, the biggest of which is the Ontario Securities Commission (OSC).
To bring Coinbase and Kraken under the jurisdiction of securities law, the CSA has created a new catch-all term: a crypto contract. Crypto contracts are securities, and because Coinbase and Kraken offer them these platforms come under the ambit of Canadian securities law.
Let me explain a bit more.
Pretty much everyone (including Canada’s regulators) agree that bitcoin is not a security. But according to the CSA, the bitcoin that a Coinbase client holds in their Coinbase account isn’t actually bitcoin. It is a contractual right or claim to underlying bitcoin, or as the CSA terms it, a crypto contract.
Furthermore, the CSA deems all crypto contracts to be securities, even if the underlying crypto, say bitcoin, isn’t itself a security. Since Coinbase and other exchanges deal in crypto contracts and offer a marketplace for them, they must register with one of Canada’s provincial securities regulators.
This approach is remarkably different from the U.S. In the words of law professor Ryan Clements, the CSA’s assertion about crypto contracts is one that “no other international securities regulator has yet taken.”
The CSA’s list of requirements is long and demanding (see Appendix B of this document). Canadian exchanges and dealers, a category that now includes Coinbase, must abide by a set of universal market integrity requirements that cover things like abusive trading, front running, client priority, and more. Coinbase would be required to consider appropriateness and suitability when dealing with clients. And that’s just a sample.
Many exchanges won’t meet the CSA’s requirements, or can’t. Binance quit Ontario in June. FTX no longer onboards users from Ontario either. OKEX stopped serving Quebec and Ontario customers and Huobi has declared all of Canada to be a ‘restricted jurisdiction.’
But Canadian cryptocurrency venues such as Wealthsimple and Coinberry have fallen into line. And they don’t seem too salty about it, either. Coinberry’s CEO Andrei Poliakov has welcomed the CSA’s “measured” regulations as an “end to the ‘wild west’ of cryptocurrency in Canada.”
You can see why regulation would be welcome up north. Canadians were collectively stunned by the collapse of local cryptocurrency exchange QuadrigaCX, which at the time was Canada’s largest. Regulation is seen by all parties – customers, regulators, and cryptocurrency businesses – as a way to purge Canada of future crypto awfulness.
Will large U.S. exchanges like Kraken and Coinbase that serve Canadians choose to comply with Canadian securities laws?
To bring Coinbase and Kraken under the jurisdiction of securities law, the CSA has created a new catch-all term: a crypto contract.
Kraken has long disputed Canada’s assertion that a Kraken customers’ bitcoin balances are a type of Kraken IOU, and thus a security. In a 2019 letter to Canadian securities regulators, Kraken’s lawyers likened Kraken to a “bailee;” that is, in the same way the provider of a safety deposit box doesn’t take title to the box’s contents, Kraken doesn’t take title to the customer’s bitcoins. And so Kraken is offering a service, namely storage, and not a security.
But Canadian regulators never bought Kraken’s claim. The CSA has taken the old bitcoin maxim “not your keys not your bitcoin” to heart and ruled that crypto held at a platform like Kraken is not true crypto, but a contract for crypto.
It remains to be seen if any of the big U.S. crypto exchanges will go to court to defend what they see as their bailee business model against the CSA’s concept of a “crypto contracts.”
That would mean wading into Canadian securities law, which like its U.S. cousin boasts a long list of bewildering instruments that are defined to be securities, including the amorphous “investment contract” category. (Whereas the U.S. relies on Howey to define what an investment contract is, Canada has Pacific Coin vs the OSC.)
Or maybe Coinbase and Kraken will just suck it up and comply with CSA guidance.
From the perspective of consumers, I’d argue the Canadian approach makes a lot of sense.
Coinbase may not be regulated by the SEC, but it does operate under a specific U.S. regulatory framework. It holds 43 different money transmitter licenses, each one issued by a state financial department.
This is a strange fit, though. State money transmittal law is geared towards regulating remittance companies like Western Union or MoneyGram. Coinbase is very different from Western Union.
It facilitates billions of dollars worth of trading each day, rivaling large, regulated securities exchanges such as the Toronto Stock Exchange, NYSE American, and the Nasdaq BX. It’s not apparent how a supervisory official who oversees remittance agents is equipped to deal with an international trading platform.
By contrast, the Canadian approach says that if you are a payments company like Western Union, then you’ll be regulated like a payments company. And if you are an exchange like Coinbase, you can’t pass as a payments company for regulatory purposes. You’re going to fall under securities law because that’s the most appropriate regulatory category for you and your customers.
Whether Canada’s approach to crypto regulation becomes another export to the U.S., along with maple syrup or hockey, remains to be seen. But you can be sure that Gary Gensler is watching and pondering the idea of crypto contracts.
Crypto Tax ‘A Top Enforcement Priority,’ Reminds IRS Commissioner
The IRS’ commissioner says crypto gains are taxable in the cannabis industry as the IRS treats cryptocurrencies as property.
The United States Internal Revenue Service continues to propose new tax reforms to regulate the crypto investments in the U.S., with the latest notice sharing tax obligations for the marijuana industry.
The notice, signed by IRS Small Business/Self-Employed Division Commissioner De Lon Harris, reflects the priorities of the United States federal agency to ensure cryptocurrency tax compliance among local businesses that grow, distribute and sell cannabis.
Commissioner Harris said that the use of cryptocurrencies in the cannabis industry is one of the top enforcement priorities of the IRS. The statement coincides with the recent proposal by the Senate lawmakers from July 2021 that intends to tighten taxation and reporting rules on businesses dealing in cryptocurrencies. According to Harris:
“Those who use it [cryptocurrencies] need to understand that the IRS considers it property, and there are gains that are taxable.”
In addition, the IRS commissioner recommended cannabis businesses work with reputable exchanges for converting cryptocurrencies into U.S. dollars.
The IRS has not yet asked businesses to report high-worth crypto transactions explicitly. However, companies will need to file Form 8300 for every transaction that exceeds $10,000.
The Senate’s bipartisan infrastructure deal recently that saw last-minute amendments proposed means to raise funds worth $28 billion by taxing crypto investments and transactions.
Following suit, more recently, on Sept. 13, Democrats in the House of Representatives proposed new tax initiatives that would increase the tax rate on long-term capital gains. If approved, the law will increase crypto taxes for “certain high-income individuals” by 5%.
According to Cointelegraph’s report, the bill also recommends a surtax of 3.8% on net investment income, bringing up the tax rate to 28.8% for select investors.
Additionally, the new tax plan will impose the wash-sale rule on cryptocurrencies and other digital assets, which prevents investors from claiming capital gains deductions. Currently, U.S. lawmakers suspect crypto investors of using wash sales to manipulate the capital gains of their portfolio.
Fed’s Powell Has No Intent To Ban Bitcoin Or Crypto
Powell testified before the House Financial Services Committee on Thursday on matters related to the economy and the COVID-19 pandemic.
United States Federal Reserve Chairman Jerome Powell believes the federal government needs to regulate the cryptocurrency market but that a blanket ban on Bitcoin (BTC) and other digital assets is not in the cards.
Speaking in response to a question from Representative Ted Budd, Powell clarified that a China-style ban on digital assets was not something he’s considering.
Budd’s question came in response to Powell raising doubts about the regulatory status of stablecoins and the central bank’s ongoing deliberations around a so-called “digital dollar.” (In Powell’s view, a central bank digital currency, or CBDC, could perform many of the functions of stablecoins and cryptocurrencies but without the regulatory risk.)
“Stablecoins are like money market funds [and] like bank deposits, but they’re, to some extent, outside the regulatory perimeter, and it’s appropriate they be regulated,” he said. “Same activity, same regulation.”
— LilMoonLambo (@LilMoonLambo) September 30, 2021
A central bank digital currency has been on the Fed’s radar for some time, but policymakers remain undecided on whether to pursue the project. In the meantime, the central bank has commissioned several research reports on the advantages and potential roadblocks of issuing a CBDC.
Powell oversees the central bank’s Federal Open Market Committee, which is responsible for setting U.S. monetary policy. Earlier this month, the committee decided to leave its existing stimulus programs intact but said that the pandemic-induced bond purchase program could be winding down soon. The warning appears to have put some downward pressure on risk assets, which include stocks and cryptocurrencies.
Bitcoin Stalls As U.S., China Go After Cryptocurrencies
Regulatory pressure pinches off third-quarter rally following steep spring selloff.
Bitcoin came under one of the most intense regulatory crackdowns in its brief history during the third quarter, choking off attempts by traders to lift the digital currency out of its steep spring selloff.
The governments of the two largest economies in the world took direct aim at bitcoin and the cryptocurrency market. In the U.S., agencies like the Securities and Exchange Commission have promised a crackdown on the sector.
The Treasury Department is preparing a report on stablecoins—digital currencies that tout values fixed to the dollar—amid concern about their potential to cause problems in both crypto and traditional markets. And powerful U.S. Sen. Elizabeth Warren (D., Mass.) has emerged in Congress as a vocal critic of cryptocurrencies.
China went further. The country banned bitcoin and cryptocurrencies. Bitcoin “miners,” companies largely located in China that operate the computers that actually run the network, were forced to leave the country. Online exchanges catering to Chinese citizens that had moved offshore after prior bans have stopped or soon will stop accepting new customers from China.
All of this had an effect on bitcoin’s price. At the start of the third quarter, the digital currency continued a slide that began after its price peaked at a record high of $63,381 set on April 15.
By mid-July, with the price below $31,000, bitcoin began to rally. The gains stuck and bitcoin, at around $41,000, is up about 17% for the quarter.
Yet the regulatory pressure prevented the rally from going further. Bitcoin at one point regained the $50,000 level, only to give up ground as China imposed its ban.
So, at current levels, bitcoin remains about a third below the April record.
“It’s probably one of the most fascinating 90-day periods we’ve had,” said Bill Barhydt, the co-founder and chief executive of Abra, a crypto-trading services firm.
Other cryptos also had a mixed quarter. Ether, the native currency of the Ethereum network, rose about 24% in the quarter, to $2,820. But it is down about 29% from the quarter’s high point of $3,952 set on Sept. 5. Meanwhile, dogecoin, a favorite of meme traders, fell from 25 cents on June 30 to 20 cents on Sept. 29.
The regulatory pressure damped momentum in other ways, too. The number of daily transactions on the bitcoin network has fallen to a range of about 175,000 to 200,000. That is about equal with levels from the 2018 bitcoin bear market and is well off highs above 300,000 earlier in the year, according to data from research firm Glassnode.
While the regulatory crackdown is an immediate factor affecting prices, the quarter’s action also appeared to fit within bitcoin’s distinct boom-bust cycles. In 2013, bitcoin’s price rose to about $1,100, then plunged by 87% through 2016. In 2017, the price rose to nearly $20,000, then fell 84% over the subsequent year.
It looks like the cycle is repeating itself again, said Lukas Enzersdorfer-Konrad, the chief product officer at European crypto broker Bitpanda.
What drives these phases in crypto, he said, is the adoption rate. The momentum phase draws in new people. This drives the price higher, which eventually overheats the small market. That leads to a “cool off” phase while the market and industry absorb the new growth.
The market looks like it is out of a momentum phase and back into an “accumulation” phase, Mr. Enzersdorfer-Konrad said. If that is so, bitcoin could be in for up to another year of this kind of rangebound trading.
Other corners of the crypto market had a little more life during the quarter, only to fall off by the end of September.
The total amount of money in the so-called DeFi sector—a collection of bank-like financial services tied to cryptocurrencies—has fallen to about $81 billion from a record high of $97 billion in early September, according to website DeFi Pulse.
Sales of NFTs, or nonfungible tokens, also rose and fell in the quarter. These are unique, bitcoin-like digital tokens that often represent digital artwork or other real-world assets.
NFT sales reached a high on Aug. 29 of about $267 million, according to data site NonFungible.com. That is up from only $2.4 million on June 30. However, sales in September fell sharply. On Sept. 27, sales totaled $18 million.
One group of investors remains bullish: venture capitalists. Crypto companies raised a record $7.5 billion in the third quarter, according to data from research firm PitchBook. That is more than the $5.3 billion raised in all of 2020 and the $7 billion raised in the first quarter, the previous record.
Trends like that are why Abra’s Mr. Barhydt is still optimistic. He thinks the current market pause could be short lived. “I don’t think we’re done,” he said. “You’re going to see another explosive move in crypto.”
French Regulator Warns Against Unauthorized Crypto Platforms
AMF once again advised investors to only invest in crypto through authorized services listed on official websites.
French stock market regulator, the Autorité des Marchés Financiers (AMF), continues monitoring the cryptocurrency market to warn investors about unauthorized crypto services.
On Friday, AMF updated its web portals, identifying those that offer crypto and foreign exchange (forex) investments through unauthorized entities. The list included four websites related to cryptocurrency derivatives investments alongside 12 forex-related sites.
According to the regulator, the listed entities have been offering investment products without being authorized to provide such services. To protect investors from potentially fraudulent investments, AMF and French Prudential Supervision and Resolution Authority (ACPR) regularly update the blacklist of unauthorized investment providers. Still, those lists are “not intended to be complete” as “new unauthorized entities appear regularly.”
The authority strongly recommended that investors follow the list of authorized investment providers using the online register of financial service providers as well as the list of authorized providers in the financial investment advisor or crowdfunding categories.
The AMF’s latest warning comes shortly after Paris-based derivatives fund manager Melanion Capital launched a Bitcoin (BTC) exchange-traded fund (ETF) in August. Melanion CEO Jad Comair reportedly said that getting the fund approved by AMF was “a real challenge because of the sensibilities and politics currently surrounding Bitcoin and Bitcoin investing.”
Global authorities have been increasingly expressing concerns over unregulated crypto investment services recently.
In mid-August, the Australian Securities and Investments Commission advised citizens to only invest in crypto via financial institutions holding an Australian Financial Services license. According to the Australian Competition and Consumer Commission, crypto scams made up more than 50% of Australian investors’ losses in the first six months of 2021.
Earlier this year, Bank of France governor Francois Villeroy de Galhau urged Europe to prioritize crypto regulation due to the risk of digital assets challenging its monetary sovereignty.
Northern Data Drops 43% After German Regulator Files Complaint
Northern Data AG fell as much as 42.5% after the German financial regulator filed a complaint with Frankfurt prosecutors asking them to investigate people at the company for market manipulation.
Bafin confirmed the filing but declined to provide any details as the case is now in the hands of investigators. A spokeswoman for Frankfurt prosecutors said she can’t immediately comment. Wirtschaftswoche reported the Bafin complaint earlier on Friday.
Northern Data didn’t immediately reply to emails and a voicemail message seeking comment. The information technology company provides solutions for crypto-currency and Bitcoin blockchain infrastructures.
The IRS Wants To Look At Your Bank Account
Its quest for missing revenue would threaten taxpayer privacy.
On your next trip to the ATM, imagine that Uncle Sam is looking over your shoulder. As if your annual tax filing wasn’t invasive enough, the Biden Administration would like a look at your checking account.
Charles Rettig, commissioner of the Internal Revenue Service, wants banks to report annual cash flows for ordinary account holders. Treasury Secretary Janet Yellen is promoting the plan, and the House Ways and Means Committee is debating whether to include this mandate in the Democrats’ $3.5 trillion spending bill.
Ms. Yellen says the reporting will help to catch wealthy tax dodgers. In a recent letter to the committee she said the plan would reveal “opaque income streams that disproportionately accrue to the top.” Treasury and congressional Democrats hope taxpayers will report income more accurately if they know the feds have their account information.
Yet the IRS plans to review every account above a $600 balance, or with more than $600 of transactions in a year. So every American with a job could get looked over. A group of 41 industry groups recently warned congressional leaders that the plan “is not remotely targeted” to detect major tax avoidance.
It’s also a privacy breach waiting to happen. Not long ago the confidential tax records of Jeff Bezos, Mike Bloomberg and other wealthy Americans were exposed by ProPublica. Whoever leaked or hacked those records committed a crime, but the IRS has revealed nothing from its promised investigation.
Adding bank account info to the IRS trove would risk the disclosure of savings and spending information of political adversaries in the same way.
Twenty-three state treasurers and auditors signed a letter last month opposing the plan, calling it “one of the largest infringements of data privacy in our nation’s history.” Nebraska Treasurer John Murante says his state won’t comply if the reporting rule takes effect.
Casting a wide net over personal finances is a longstanding aim for Democrats and the political left. President Obama in 2009 formed a panel to discuss closing the “tax gap,” arguing that widespread underreporting of income costs the government hundreds of billions a year.
The House continues to debate the bank account proposal, but the spending bill already includes $80 billion for the IRS to hire thousands of new staffers. Treasury estimates that these changes would collect $700 billion in revenue over the coming decade.
But Rep. Kevin Brady, the top Republican on Ways and Means, points out that the tax gap is murkier than Democrats admit.
“The IRS will admit their data is seven years old,” Mr. Brady told CNBC in July, noting that the agency’s estimates don’t account for the 2017 federal tax reform that limited many loopholes. “What they’re saying is give us a ton of money, let’s hire a bunch of auditors and we think this will create revenue.”
Overestimating the results of greater enforcement lets the Biden Administration attach a higher revenue number to its multi-trillion-dollar spending proposal. That’s bad enough. But the bigger threat of giving the IRS access to the details of your bank account is that politicians will eventually find a way to control how you save and spend your own money. This is a bad idea that deserves to die.
Companies Want FASB To Focus On Crypto, ESG-Related Rule Making
Finance executives call for clear guidance on key accounting issues as the U.S. standard setter weighs long-term priorities.
Executives at large public companies want the Financial Accounting Standards Board to write rules on how to treat cryptocurrency assets and transactions related to environmental, social and governance issues.
The U.S. accounting standard setter in June launched an agenda consultation, its first in five years, seeking the public’s views on what its long-term priorities should be. Depending on the feedback, the FASB could consider new accounting projects.
The board in the coming months expects to discuss its staff’s summary of the public’s responses, which were due late last month, a FASB spokeswoman said.
Companies—alongside other stakeholders such as investors, auditors and academics—have weighed in on those priorities in letters to the FASB, which sets standards for public and private companies as well as nonprofits in the U.S.
Businesses such as telecommunications firm Charter Communications Inc. and software firm Autodesk Inc. are urging the FASB to pursue rule making on a range of accounting issues. These include digital assets such as bitcoin and energy transactions—for example, renewable-energy certificates and carbon-offset credits, which companies can purchase and apply toward their greenhouse gas emissions-reduction targets.
In both cases, there are currently no specific accounting rules for companies to follow. Some companies in their comment letters said they expect transactions related to these areas to become more significant to their overall business in the future.
Charter Communications said the FASB should develop accounting guidance for carbon offsets as well as renewable-energy credits. One credit is earned for every megawatt-hour of electricity that a company generates from a renewable-energy resource.
The Stamford, Conn.-based company said it is working toward becoming carbon-neutral and potentially striking more energy-related transactions, but doesn’t have a clear framework that would guide those.
“Uncertainty exists today on what…accounting literature to apply,” Kevin Howard, Charter Communications’ chief accounting officer and controller, wrote in a Sept. 22 letter.
Autodesk’s chief accounting officer, Stephen Hope, echoed this sentiment in a Sept. 21 letter, stating that the lack of clear accounting guidance for renewable-energy credits and carbon offsets leads to incomparable financial reporting for investors.
U.S. regulators in recent months have made new efforts against climate change a priority. Securities and Exchange Commission Chairman Gary Gensler has asked his staff to write a rule proposal by the end of the year that would force businesses to disclose climate-related risks.
Companies also are pushing for definitive rules around accounting for bitcoin and other cryptocurrency assets, which have drawn regulators’ interest after sharp swings in digital currency in recent months. Most finance chiefs so far have avoided investing corporate cash into crypto assets over concerns about its market volatility.
Because there are no specific binding accounting rules, companies with crypto holdings currently classify them as indefinite-lived intangible assets—similar to trademarks and website domains—following nonbinding guidelines from the Association of International Certified Professional Accountants.
The FASB in recent years has decided against adding the issue to its agenda, saying investing in cryptocurrencies isn’t widespread among companies.
Payment provider Square Inc., one of a handful of companies that has invested in bitcoin, proposed officially allowing companies to classify the assets as inventory if they plan to resell them.
An alternative crypto accounting model could also reduce companies’ reliance on performance metrics beyond generally accepted accounting principles, the company said.
“We feel it is important that the economic substance of bitcoin transactions be reflected in the accounting model and per discussions with our stakeholders, that is currently not being accomplished,” Ajmere Dale, Square’s chief accounting officer, wrote Sept. 22.
Circle Reveals Cooperation In Ongoing SEC Investigation
Circle has published filings revealing it is cooperating with a subpoena from the SEC that it received in July.
Circle, the company behind the world’s second-largest stablecoin USD Coin (USDC), has been subpoenaed by the United States Securities and Exchange Commission.
According to a Monday regulatory filing from Circle, the SEC issued an “investigative subpoena” from its Enforcement Division in July.
Circle Stated That It Would Be Fully Cooperating With The Regulator After Receiving The Request:
“In addition, in July 2021, we received an investigative subpoena from the SEC Enforcement Division requesting documents and information regarding certain of our holdings, customer programs, and operations. We are cooperating fully with their investigation.”
The Circle filing is part of its plan to go public via a special-purpose acquisition vehicle through a merger with Concord Acquisition Corp, with the firm valued at $4.5 billion.
Circle issued an identical statement in an August filing amid the SEC’s investigations into its operation of former subsidiary Poloniex. That same month, Circle agreed to pay the SEC more than $10 million in fines for charges against Poloniex for operating as an unregistered cryptocurrency exchange.
In late July, Circle released a disclosure report revealing that 61% of USDC’s reserves were held in cash and cash equivalents and the remainder in commercial paper accounts, treasuries and bonds.
In early September, the SEC threatened to sue USDC-issuing Centre Consortium member Coinbase over a proposed lending product that would yield interest rates for select holders of USDC.
US Lawmaker Proposes Safe Harbor For Digital Tokens In New Bill
The “Clarity for Digital Tokens Act of 2021” bill seemingly builds on an initiative from SEC commissioner Hester Peirce, who has called for creating a safe harbor for projects that raise funds to build decentralized networks.
North Carolina House Representative Patrick McHenry has proposed a bill that would amend one of the laws governing the United States Securities and Exchange Commission (SEC) to provide a safe harbor for certain token projects.
In a draft of the “Clarity for Digital Tokens Act of 2021,” provided by the House Committee on Financial Services, McHenry suggested amending the Securities Act of 1933 to establish a safe harbor for token development teams.
He proposed letting projects offer tokens without registering for up to three years, during which time teams would be given the opportunity to create a fully decentralized network.
McHenry’s bill seemingly builds on an initiative from SEC commissioner Hester Peirce, who has called for the creation of a safe harbor for projects that raise funds to build decentralized networks after first floating the concept in 2019.
Peirce’s proposal likewise suggests granting network developers a three-year grace period to build a decentralized network without threats of legal action from the SEC.
“If adopted, the proposed safe harbor could be the most groundbreaking development for the U.S. cryptocurrency market to date,” Peirce said in February 2020.
“By putting development first and giving projects runway to build robust networks, the proposed safe harbor puts an important stake in the ground towards supporting American access and acceptance of digital asset markets.”
The proposal comes the same day SEC chair Gary Gensler spoke to the committee regarding oversight of the government agency. McHenry said Gensler had made “concerning and contradictory” statements on crypto assets concerning the SEC’s enforcement actions and regulatory purview.
“We need to nurture innovation and technology in this country, not send it overseas,” said McHenry. “This bill […] helps bring legal certainty to digital asset projects that we badly need regulatory clarity to launch.”
Kristin Smith, executive director of the Blockchain Association, commended McHenry’s efforts to create a safe harbor, emphasizing the collaboration between innovators and regulators.
The Chamber of Digital Commerce, a crypto advocacy group in the United States, said the bill “has the potential to provide a much needed clear path forward for those creating new innovations and solutions leveraging digital tokens.”
McHenry — known by many in Congress as “Mr. Fintech” — has put forth several pieces of pro-crypto legislation, including suggesting that the Commodity Futures Trading Commission and SEC “establish a joint working group on digital assets” to address regulatory clarity in the crypto space.
He has also told his fellow lawmakers that attempts to stop Bitcoin (BTC) were futile as the cryptocurrency was an “unstoppable force.”
A16z Recommends US Regulate Crypto With Decentralization In Mind
The venture capital firm makes four proposals to Congress.
Venture capital firm Andreessen Horowitz (a16z) has suggested four areas where the U.S. government can govern cryptocurrency and blockchain technology.
The firm outlined Tuesday what it sees as key issues in the decentralized finance (DeFi) sector, including consumer protections, decentralized autonomous organizations (DAOs), regulatory fragmentation and overlap as well as tax reporting, and clarity regarding certain blockchain ecosystems.
“Each of our four proposals is designed to stand on its own, but taken together, they represent the start to a comprehensive approach to supervision, oversight and taxation in a decentralized environment,” the firm said.
Specifically, a16z’s consumer protections proposal, filed in response to a call from U.S. Sen. Pat Toomey (R-Pa.) of the Senate Banking Committee, recommended creating a simple disclosure-based supervision regime under the Consumer Financial Protection Act.
DAOs, meanwhile, are to be given similar legal rights to those of a standard incorporated entity, including tax requirements and being allowed to open bank accounts and sign legal agreements.
The firm suggested three ways to shore up regulatory fragmentation and overlap. Those included harmonizing areas of jurisdiction among agencies, establishing an industry self-regulatory organization and setting up a nonprofit for technical oversight.
In its fourth proposal, a16z reiterated the comments it made in August about the U.S. infrastructure bill that is pending in Congress.
“The United States tax and regulatory environments are designed for centralized operations. Yet, as currently drafted, the infrastructure bill pending in Congress would impose tax reporting requirements on a wide array of actors who would have no ability to comply,” the firm said.
In August, Toomey, the Senate Banking Committee’s ranking member, issued a request for feedback in a bid to solicit ideas and legislative proposals on the best regulatory approaches to crypto and blockchain. Proposals were submitted from Aug. 26 through to Sept. 27.
US Justice Dept Announces Launch Of National Crypto Enforcement Team
“We need to make sure that folks can have confidence when they’re using these systems and we need to make sure we’re poised to root out abuse that can take hold on them,” said Lisa Monaco.
An official from the Office of the Attorney General has said the United States government is going to take a more active role in enforcement action against actors using cryptocurrencies for money laundering and other cybercrimes.
Speaking at the Aspen Institute Cyber Summit on Wednesday, Deputy Attorney General Lisa Monaco said the Justice Department had launched the National Cryptocurrency Enforcement Team, an initiative aimed at going after platforms “that help criminals launder or hide their criminal proceeds.”
Monaco cited her office’s work against Darknet-based Bitcoin (BTC) mixing service Helix in August but said the U.S. government should be doing more.
“We want to strengthen our capacity to dismantle the financial ecosystem that enables these criminal actors to flourish and — quite frankly — to profit from what they’re doing,” said Monaco. “We’re going to do that by drawing on our cyber experts and cyber prosecutors and money-laundering experts.”
“Cryptocurrency exchanges want to be the banks of the future. We need to make sure that folks can have confidence when they’re using these systems, and we need to make sure we’re poised to root out abuse that can take hold on them.”
Monaco has often been a central figure in the U.S. government’s response to major ransomware and cyberattacks involving cryptocurrency payments. She was part of a task force that “found and recaptured” millions of dollars worth of Bitcoin paid to Russia-based DarkSide hackers following an attack on the Colonial Pipeline system in May.
The Deputy Attorney General also announced a civil cyber fraud initiative aimed at pursuing government contractors who fail to report breaches and follow security standards.
Justice Department Sets Up National Cryptocurrency Enforcement Team
Announcement comes as law enforcement and regulators look for ways to disrupt illicit cryptocurrency transactions.
The U.S. Justice Department is creating a national cryptocurrency enforcement team to tackle investigations and prosecutions of criminal misuses of cryptocurrency and to recover the illicit proceeds from these crimes, Deputy Attorney General Lisa Monaco said Wednesday.
The creation of the National Cryptocurrency Enforcement Team, which would be under the supervision of Assistant Attorney General Kenneth Polite Jr., will focus on crimes committed by virtual currency exchanges and mixing and tumbling services, the DOJ said in a statement. The team also would help trace and recover assets lost to fraud and extortion, the DOJ said.
A virtual currency “mixer” or “tumbler” charges customers a fee to send cryptocurrencies to a designated address in a manner designed to conceal the source or owner of the currency.
NCET would strengthen DOJ’s capacity “to dismantle the financial entities that enable criminal actors to flourish—and quite frankly to profit—from abusing cryptocurrency platforms,” Ms. Monaco said. “As the technology advances, so too must the department evolve with it so that we’re poised to root out abuse on these platforms and ensure user confidence in these systems,” she said.
The team would combine expertise from the DOJ criminal division’s money-laundering and asset recovery section and its computer crime and intellectual property section, as well as from U.S. Attorneys’ Offices across the country.
NCET also is looking for a leader with experience with criminal investigations and in the underlying technology for cryptocurrency and blockchain.
The announcement comes as U.S. law enforcement and regulators continue to look for ways to disrupt illicit crypto transactions.
The Biden administration last month blacklisted a Russian-owned cryptocurrency exchange for allegedly helping launder ransomware payments, an action meant to deter future cyber-extortion attacks by disrupting their primary means of profit.
Larry Dean Harmon, an operator of a bitcoin “mixer” called Helix, pleaded guilty in August to conspiracy to launder money, the U.S. Justice Department said. He was also fined $60 million by the Financial Crimes Enforcement Network, a bureau of the U.S. Treasury Department, for allegedly violating anti-money-laundering laws.
How To Talk To Your Legislator About The Crypto Safe Harbor
The Peirce/McHenry proposal is a healthy middle ground for regulation.
Yesterday, Rep. Patrick McHenry (R-NC), the ranking member of the House Financial Services Committee, introduced a bill that would provide a “safe harbor” for crypto startups looking to raise capital through token sales.
The bill is based on safe harbor rules laid out by U.S. Securities and Exchange Commissioner Hester Pierce, a longtime crypto ally.
The proposal is a nuanced attempt to square the circle at the heart of crypto network funding. The quandary goes something like this: If the token for a new network is classified as a security from the start, only institutional players and venture capitalists will be able to buy it.
That makes it less likely that the network will have a truly decentralized user base or development community. On the other hand, you can’t give crypto carte blanche on securities regulation or you’ll wind up with rampant fraud, as we saw during the initial coin offering (ICO) boom in 2017.
The Pierce/McHenry proposal would give new crypto startups three years to build and sell tokens without having them classified as securities.
The goal would be to reach a level of “sufficient decentralization” during that window, allowing them to earn classification as a commodity – the conventional wisdom around bitcoin and ethereum – rather than a security. On the whole, it’s a proposal that seems very in tune with the way crypto networks grow.
But the proposal also includes a lot of the kinds of safeguards the SEC should want. In exchange for safe harbor, it requires projects to provide certain disclosures, including naming core team members. It also sets at least two key technical hurdles: Projects must have open-source code and be viewable with a block explorer.
Those provisions would in themselves be huge anti-fraud measures, allowing projects to be fully community-vetted on ideas, execution and operations. Outright frauds like BitConnect or OneCoin would be unlikely to make it past the starting post.
After three years in this “safe harbor,” projects would have to evaluate their own progress toward decentralization and file a report with the SEC. If they fail to meet certain standards, such as development from outside of the core team, they then would have to register as a security within another three months.
That would effectively be an admission that the growth of the system still depended mainly on the work of the core development team, meaning it would fail the Howey Test that defines a security.
Endorsements of the McHenry bill have come from industry groups, including the Chamber of Digital Commerce and Coin Center. It’s unclear what its political chances are, at least while Democrats still control both houses of Congress.
But its introduction is an opportunity for politically motivated individuals and organizations to engage with their legislators on crypto. If you want to call or email, here’s contact information for the Senate and House offices.
You probably won’t get to talk to a human being (much less a senator), but the offices do track the volume of inbound comments they get on bills. Voicing support for the McHenry/Pierce crypto safe harbor proposal is one way to (maybe) help stave off what seems poised to become a much more aggressive regulatory regime under SEC Chairman Gary Gensler.
U.S. CEO of Crypto-Focused Broker Has Regulation On Her Mind
In August, the Israeli brokerage eToro hired Lule Demmissie, a longtime wealth-management director at TD Ameritrade and, more recently, president at Ally Invest, to head its growing presence in the U.S. Demmissie, who moved to the U.S. from Ethiopia when she was a teenager, has a lot on her plate.
The 13-year-old firm with 23 million users globally is joining a crowded field, trying to attract the same young retail investors as Coinbase Global Inc., Robinhood Markets Inc., Charles Schwab Corp. and many more.
What makes eToro different, Demmissie says, is that it combines social media and investing, allowing users to mimic their favorite influencers’ portfolios. That may be a tough sell to regulators, who are circling the industry, especially those brokerages that are seen trying to “gameify” investing.
Currently, eToro offers U.S. investors only cryptocurrency products, but it plans to add equities by year-end and its “copy-trading” feature soon after.
It’s also planning to go public through a special purpose acquisition company, or SPAC, and could list on Nasdaq by year-end. The firm’s Americas business amounted to 12% of funded accounts at the end of the second quarter, up from 6% a year earlier.
Demmissie, 47, works with a team based in Hoboken, New Jersey, where she spends two days a week. The rest of the time she operates out of her home in Brooklyn, where she recently answered questions by phone.
Her comments have been condensed and edited for clarity.
Tell me about your career before eToro.
I started out at JPMorgan and I supported the wealth business and the asset-management business there. That’s where I cut my teeth into our industry at a young age. Then, one of the advisers working at JPMorgan started up a practice at Merrill Lynch and he recruited me to be a financial adviser.
I learned the emotional tick-tock of how people think about their money. At that time, self-directed investing was not what it is today.
People needed an understanding of what money did and how to think of financial investing and how to extract their emotion out of money.
Then I decided I wanted to get my MBA and went to Columbia. After Columbia is when I got into things like product development and strategy.
You worked at Morgan Stanley for most of a decade, then TD Ameritrade and then Ally. Tell me about those jumps.
At that time (in 2009), disruption was starting to really well up and players like TD Ameritrade and others were nipping at the heels of the establishment players. And so TD Ameritrade recruited me to build out their wealth business for individual investors, not active traders. And at that time Robinhood was not around.
So I helped build it. We helped build out the commission-free ETF programs, the trading tools for self-directed investors. I built out the wealth business, all of their robo-advisory business.
It was just a ball. I was there about eight years and I felt like, ‘OK, I think I can even go smaller.’ That’s when Ally asked me to mature their investment business.
What Kind Of Shift Has The Industry Undergone In This Period?
Investing has gone and will continue to go through the disintermediation that has happened in every other sector of our society. We have institutional powers sort of disintegrating and maybe more individual voices are rising in terms of how that industry is structured.
What I love about this program and the ultimate reason why I stepped out of Ally and came here is the premise by which eToro built its DNA, which is that the retail investor doesn’t need a parent. They need guidance and education and a very easy system to use.
With So Many Competitors, How Is eToro Different?
There are three premises of this company. One is the ability to access instruments that typically one was not able to. The second is the ability to merge the social voice of influencers or people around the world who might be really good investors and traders and sharing the intel on the platform.
Lastly, the ease with which I can copy them if I want to. I’ve not seen the financial firms of eToro’s stature move into the future like this.
I would say from a differentiation perspective, the biggest component is copy trader (which lets users copy the portfolios of successful investors on the platform.)
There’s Been Push-Back To Brokerages Recently, Especially The ‘Gameification’ Aspect. Are You Worried About Regulation?
It would be naive to say that’s not on our minds. It’s important to make sure that we avail ourselves of being part of thought leadership conversations as regulations are being formed. We think that at the end of the day, good regulation is a win-win for everyone.
It allows everybody to play within a certain, known field and everybody knows the game in terms of how they’re supposed to act. So we’re not scared of regulation, but obviously knowing it and understanding it is going to be a nuanced process. And we’re eager to be part of that conversation as well.
Tell Me More About The Plans To IPO. Why Now?
EToro is a fairly established company in terms of size and stature and so I think they thought that at this point that we were in the right stage of our maturity to be able to go public.
Anything Else You Want To Mention?
We’re in this debate right now over, ‘Can the retail investor do it themselves? Will they get themselves in trouble? Will they shoot themselves in the foot? Do we need a sort of parental arm over them?’ One thing that is really important for us to bring into these conversations is to not think of it as an either/or equation.
We’re committed to have an investment business that can one day also have things that people can follow, portfolios and strategies that they can track, but then also do things on their own as well. Having investment conversations be more nuanced is going to be very important for retail investors and the evolution of our industry.
US Senator Warren Introduces Bill To Study Crypto’s Role In Ransomware
The Ransom Disclosure Act aims to help the Department of Homeland Security gather critical data on ransom payments in cryptocurrency and fiat.
As cryptocurrency adoption continues apace in the United States, lawmakers want to better understand how it’s used — for both legal and illegal purposes.
The Ransom Disclosure Act, introduced by Senator Elizabeth Warren and Representative Deborah Ross, would require victims of ransomware attacks to disclose information about ransom payments to the Department of Homeland Security (DHS).
The bill, introduced on Tuesday, aims to gather critical data on fiat and cryptocurrency payments and protect investors from cybercrimes.
In an ongoing effort to curb illicit financial activities in the U.S., Warren’s legislation aims to develop “a fuller picture” of ransomware attacks:
“My bill with Congresswoman Ross would set disclosure requirements when ransoms are paid and allow us to learn how much money cybercriminals are siphoning from American entities to finance criminal enterprises — and help us go after them.”
The bill will also support a study to find links between cryptocurrencies and their role in ransomware attacks, led by the Secretary of Homeland Security. The gathered information will be used to provide recommendations for improving the nation’s cybersecurity.
As Ross pointed out, U.S. investors are not yet required to report ransomware payments, which, according to her, is key to countering ransomware attacks.
The new legislation “will implement important reporting requirements, including the amount of ransom demanded and paid, and the type of currency used,” she said.
The bill would require ransomware victims in the U.S. to disclose ransoms within 48 hours of payment through a website to be set up by the DHS.
While federal authorities continue to introduce bills to regulate the crypto market, a report shared by the U.S. Securities and Exchange Commission urges Congress to “clarify the status of digital assets to make clear when it is a security.”
Moreover, a recent bill from Monday, the Clarity for Digital Tokens Act of 2021, requests the SEC for a safe harbor for certain token projects.
Proposed by Representative Patrick McHenry, the bill suggests an amendment to the Securities Act of 1933 that would allow projects to offer cryptocurrency tokens without registering with authorities for up to three years.
Regulatory Uncertainty A Recurring Theme At London’s Token2049
The crypto community needs to do a better job of lobbying and educating politicians, said Galaxy Digital chief Mike Novogratz.
Regulatory uncertainty kept coming up at London’s Token2049 conference on Thursday.
Speaking via Zoom, Galaxy Digital CEO Mike Novogratz said U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler was smart and committed but questioned the scope of the regulator’s purview where crypto is concerned.
“Gensler wants to be the sheriff of crypto, but he doesn’t have full authority because of the newness of our industry,” Novogratz told the crowd in London.
Ascertaining whether crypto becomes a security when it’s lent to someone is a nuanced question, the Galaxy chief said, lamenting a period of continued regulatory uncertainty. However, the crypto industry has brought some of this on itself by a lack of education, according to Novogratz.
“The crypto community at large, myself included, didn’t do a good enough job lobbying domestic politicians, educating them, so they really understand what they’re talking about,” he said.
The biggest decision is how stablecoins are approached, Novogratz added, warning against options designed to give central bankers better dashboards and describing himself as a “giant alarm ringer” about centralized stablecoins.
“A central bank–issued currency, I think, quite frankly, will be a disaster,” Novogratz said, referring to central bank digital currencies (CBDC). “Governments are not good at innovating and I don’t think anyone in the West wants to give up as much privacy as the Chinese are willing to give up.”
‘Going Through This Pain Together’
A morning panel focused on institutional crypto trading echoed the need for clarity.
Michael Moro, CEO of Genesis Trading (which shares a parent company with CoinDesk, Digital Currency Group) pointed to a cloudy regulatory climate being precipitated by U.S. financial supervisors.
“When Chairman Gensler comes out and says most of the tokens that are out there trading are a security but doesn’t name which ones are the securities, that’s more regulator cloudiness,” said Moro.
Where the U.S. is cloudy, Europe is fragmented, added Darren Jordan, managing director of BitGo Europe. “We are all going through this pain together,” he said.
It’s also a common misconception that crypto is unregulated and like the Wild West, said the panelists.
“It feels like being a bank nowadays at times,” said Max Boonen, founder of crypto trading firm B2C2, and a former fixed-income trader at Goldman Sachs.
The view from those in decentralized finance (DeFi) was that education should be around how aligned smart contracts and regulation really are, according to Stani Kulechov, CEO of lending platform Aave.
“My academic background is as a lawyer and I’ve always thought smart contracts have a killer use case in regtech,” said Kulechov. “The whole ecosystem is auditable every second by anyone. You can create this amazing risk mitigation that we didn’t have in 2008.”
White House Considering Executive Order On Crypto Oversight
The order would include the Treasury Department, Commerce Department, National Science Foundation and national security agencies.
The U.S. government may expand its efforts to study and regulate the roughly $2 trillion digital asset sector.
The Biden administration is considering an executive order for federal agencies, which would require them to study the crypto industry and provide recommendations on their oversight, Bloomberg reported Friday, citing unnamed sources.
According to the report, the order would include the Treasury Department, Commerce Department, National Science Foundation and national security agencies. In addition to asking agencies to study different aspects of the industry, the order “would clarify the responsibilities” different agencies have around crypto and blockchain.
Requests for comment sent to the White House, Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) were not immediately returned. The Treasury Department declined to comment.
Federal agencies have already been studying or providing regulatory guidance around the digital asset sector for years. The Office of the Comptroller of the Currency (OCC), SEC and CFTC have issued guidance letters, informal statements and public rulemaking efforts to direct how different aspects of the crypto industry should comply with federal law.
The OCC, Federal Deposit Insurance Corporation (FDIC) and Federal Reserve – three federal bank regulators – formed a “sprint team” to coordinate their work around crypto earlier this year.
According to Bloomberg’s report, one of the executive order’s provisions would coordinate this effort.
The Biden administration has ramped up the U.S. government’s work around crypto in recent months. In September, the Treasury Department’s Office of Foreign Assets Control sanctioned a crypto exchange in a first as part of its response to a spate of ransomware attacks.
The President’s Working Group on Financial Markets is also set to consider a report that would recommend Congress enact legislation to create a special purpose charter for stablecoin issuers, treating these entities akin to banks.
The Federal Reserve, the U.S. central bank, is also set to issue reports on stablecoins – digital asset tokens whose values are pegged to another asset, such as U.S. dollars – and central bank digital currencies (CBDCs).
Bank of England Says Crypto Regulation Needed As Risks Grow
The bank has taken a stronger line than in July, when it warned of a “spillover” into traditional markets.
The Bank of England said crypto assets are becoming more integrated into the U.K.’s financial system and while they don’t yet pose a major risk, increased regulation is needed as their influence grows.
* Regulation is needed at both the national and international level, the bank said in its Financial Stability Report published Friday.
* The report takes a stronger line than in July, when it warned of a “spillover” into traditional markets and noted that interest from institutional investors, banks and payments operators was a concern.
* “The Financial Policy Committee (FPC) considers that financial institutions should take a cautious and prudent approach to any adoption of these assets,” the bank said Friday.
* Central banks are, however, becoming more concerned about stablecoins in particular. The Bank for International Settlements, the organization that represents most of the world’s central banks, earlier this week published preliminary guidance on how regulators can oversee them.