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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.

Naturally, the steady legitimization and expansion of the crypto space led regulators to get more involved than ever before. Below are the biggest cases of U.S. watchdog and law enforcement agencies’ involvement that have arguably been the most consequential in shaping the relationship between the crypto industry and state power in 2020.



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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.


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.

Updated: 3-22-2021

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.

Updated: 3-26-2021

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.

Updated: 4-22-2021

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.”

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.

Updated: 4-29-2021

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.

Updated: 6-8-2021

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.

Updated: 6-11-2021

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.

FinCEN Rules

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.

‘Unique Risks’

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.”

Updated: 6-12-2021

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.

Fuel Shortages

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.

SEC Warning

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.

Updated: 6-22-2021

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.

Updated: 6-23-2021

Will Regulation Adapt To Crypto, Or Crypto To Regulation?

1. Introduction

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.”

Updated: 6-24-2021

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.

Updated: 6-29-2021

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.”

Updated: 6-29-2021

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.”

Updated: 6-30-2021

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.”

Updated: 7-8-2021

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.

Updated: 7-12-2021

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.

Updated: 7-15-2021

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 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.”

Updated: 7-18-2021

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.

Emmer Elaborated:

“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.

Updated: 7-21-2021

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.

Gensler Clarified:

“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.

Updated: 7-27-2021

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.

Updated: 8-2-2021

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.

Updated: 8-2-2021

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.

Permissioned Stablecoins

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.

Updated: 8-5-2021

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.

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.

Updated: 8-12-2021

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.

Updated: 8-15-2021

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.”

She Added:

“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.

Updated: 8-19-2021

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.

Updated: 9-3-2021

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.

Updated: 8-26-2021

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.

Updated: 9-10-2021

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.

The practice — which allows investors to lend their crypto in exchange for interest rates that are much higher than those offered by traditional institutions — has come under scrutiny by the Securities and Exchange Commission, which alerted Coinbase Global Inc. that its planned Lend product may run afoul of securities laws.

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.

Environmental Costs

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.”

Financial Innovation

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.

Updated: 9-13-2021

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.

Updated: 9-16-2021

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.

Updated: 9-18-2021

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.”

New Commissioners

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.

Great Expectations

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.

Updated: 9-20-2021

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.

CFTC, Renewed

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.

Updated: 9-21-2021

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

The Narrative

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.

Biden’s Rule

Changing Of The Guard


Numerous Times That US (And Other) Regulators Stepped Into Crypto

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.

Updated: 9-21-2021

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.

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.

Updated: 9-21-2021

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.

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.”

Updated: 9-21-2021

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.

Setting Precedent

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.

Updated: 9-21-2021

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.

Updated: 9-21-2021

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.

Updated: 9-23-2021

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.

Updated: 9-23-2021

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.


Updated: 9-23-2021

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.

Updated: 9-23-2021

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.

Updated: 9-24-2021

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 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.

Updated: 9-24-2021

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.

Updated: 9-24-2021

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.


Updated: 9-25-2021

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.”

Crypto Rules

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.

Updated: 9-25-2021

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.

Updated: 9-27-2021

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.

Updated: 9-27-2021

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.

Esoteric U.S. Supreme Court cases such as SEC v. W. J. Howey and Reves v. Ernst & Young provide extra levels of legal detail on what it precisely means to be an “investment contract” or a “note.”

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.

Updated: 9-28-2021

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.

Updated: 9-30-2021

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.”

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 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.”

Updated: 10-1-2021

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.

Updated: 10-4-2021

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.

Updated: 10-5-2021

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.

Updated: 10-6-2021

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.”

She Added:

“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.

Updated: 10-6-2021

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.

Updated: 10-7-2021

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.

CBDCs Loom

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.

DeFi Focus

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.”


Updated: 10-8-2021

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.

Updated: 10-11-2021

US Lawmaker Is Most Concerned About Treasury’s Response To Crypto

Exactly 3% of the United States Senate attended the Texas Blockchain Summit on Friday, all addressing their fellow lawmakers’ understanding of crypto and blockchain.

Wyoming Senator Cynthia Lummis said the Treasury Department may be more of a threat to innovation in blockchain and cryptocurrencies in the United States than the Securities and Exchange Commission or the Commodity Futures Trading Commission.

Speaking at the Texas Blockchain Summit in Austin on Friday, Lummis said her recent concerns with the federal agency came from the language concerning brokers of cryptocurrency in the infrastructure bill currently at the center of debate in Congress — Treasury Secretary Janet Yellen has expressed her support of the legislation.

Under the wording passed by the Senate in August, brokers would have to report digital asset transactions worth more than $10,000 to the Internal Revenue Service.

“The definition that was proposed showed a fundamental misunderstanding of Bitcoin and other digital assets,” said Lummis, who claimed many brokers under the bill with little to no knowledge of their clients would not have the information necessary to file reports.

Exactly 3% of the U.S. Senate was in attendance at the Texas Blockchain Summit. Texas Senator Ted Cruz spoke on Bitcoin (BTC) mining being used to monetize energy created through oil and gas extraction rather than “flaring” it — burning the excess off as wasted fuel. Cruz was responding to questions related to the state’s power grid during a severe winter storm in February when the senator left Texas for a brief trip to Cancun.

While Cruz focused mainly on energy concerns, fellow Senators John Cornyn and Lummis both implied the key to avoiding misunderstandings in legislation like the crypto amendment to infrastructure bill depended on engagement from the public rather than relying on lawmakers to educate themselves on the subject.

According to Cornyn, the language in the infrastructure bill was a “little bit of a surprise” to members of Congress who didn’t have the knowledge necessary to speak on the subject.

Cruz claimed “there are not five members of the U.S. Senate who could tell you what Bitcoin is,” but Lummis said she observed “enough understanding” following the debate over infrastructure that the language on crypto was likely to be amended in the House version of the bill.

Congress is currently struggling to pass long-term legislation surrounding infrastructure, budget reconciliation and the debt ceiling.

“I’ve worked with members of both parties who didn’t have any interest in Bitcoin and digital assets and now we know each other, and now we talk regularly about this,” said Lummis. “I do think there will be some changes to that language, but it’s beginning to show a pattern in my mind by the Treasury Department, the IRS, that we’re really going to have to work on keeping the heavy hand of government at bay.”

Originally scheduled for a vote before Sept. 27, the infrastructure bill, which passed in the Senate has been entangled with a $3.5 trillion House proposal in a political maneuver between progressive and moderate Democrats, coupled with Republican attempts to prevent the government from defaulting on its debt. Lawmakers will likely try to move forward this week.


Updated: 10-12-2021

IMF Views ‘Cryptoization’ As Threat To Global Economy

In its semi-annual Global Financial Stability Report, the IMF says the adoption of a cryptocurrency as national currency “carries significant risks and is an inadvisable shortcut.”

The International Monetary Fund (IMF) is worried about the “cryptoization” of the developing world.

In its “Global Financial Stability Report,” released Tuesday, the global financial institution said “cryptoization,” or the use of digital currency by a country, carries “significant risks and is an inadvisable shortcut” for developing countries trying to boost their economies.

The IMF report warned that countries adopting bitcoin or other cryptocurrencies as legal tender could hamper their central banks’ efforts to set monetary policy, cause liquidity risks and destabilize economies.

Although the report doesn’t name El Salvador, the IMF has said repeatedly the Central American country’s Bitcoin Law poses “macroeconomic, financial and legal issues.”

The report highlighted three “challenging transitions” for the global economy: the COVID-19 pandemic, climate change and cryptocurrencies. In recent months, the IMF has expressed deep reservations about the impact of cryptocurrency, even as it tries to encourage innovation that can help the developing world.

To avoid the risks of cryptoization, the report suggested countries enact policies that could help curtail growing crypto demand, including strengthening monetary policy, safeguarding the independence of central banks and implementing “effective legal and regulatory measures to disincentivize foreign currency use.”

Additionally, the report suggested governments in developing countries consider central bank digital currencies (CBDC) that could reduce the need for crypto by satisfying domestic demand for improved payment technologies.


The report also identified stablecoins such as tether and USDC as potential threats to the global financial system, and suggested that “substantial upgrades” to disclosure standards for stablecoin issuers, on par with those for commercial banks and money market funds, be used to ensure the stability of the stablecoin market. The booming $120 billion stablecoin industry is largely unregulated – something that has become a sore spot for regulators in the U.S. and globally.

The report also highlighted the risk of runs on stablecoin issuers, citing the panic selling in June that took Iron Finance’s titan token down to near zero. Runs could, according to the report, have larger systemic risks, including “trigger[ing] a fire sale of commercial paper.”

Updated: 10-13-2021

Algorithms vs. Regulators Battle Royale Kicks Off In China

China is regulating algorithms. How that experiment goes could help Western regulators understand what to embrace—and what to avoid.

China is taking a first step toward regulating algorithms. How that experiment goes could help Western regulators understand what to embrace—and what to avoid—as they ponder tougher controls on Western social-media giants too.

China launched a sweeping three-year plan last month to regulate the use of algorithms, setting itself up as a potential trailblazer as governments around the world step up regulation of Big Tech. According to draft rules released in August, companies can’t use algorithms which lead to addiction or excessive spending. Users should also have the right to opt out.

The broad-based regulations, if implemented strictly, could fundamentally shake up the business models of many successful internet companies. For example ByteDance, the owner of TikTok, has succeeded largely by recommending catchy content with the help of its powerful algorithm.

To be sure, some aspects of China’s proposals are clearly targeted at maintaining government control. Guidelines from the internet watchdog say algorithms should uphold core socialist values and promote positive energy. Democratic societies are unlikely to accept such strictures, and even more benign rules would likely face court challenges.

But watching how China’s moves work out—and how large any collateral economic damage ultimately is—could still prove useful to other countries which also are grappling with the enormous societal impact of internet companies.

The European Union proposed a bill in April to regulate artificial intelligence systems in some so-called high-risk uses like critical infrastructure, college admissions and loan applications. In the U.S., Congress recently conducted a hearing on Facebook after The Wall Street Journal’s investigations into the social-media giant.

The biggest problem for regulating algorithms is how opaque they are. That is becoming a bigger issue as more decisions are made by machines which learn through crunching a vast amount of data. It isn’t easy, sometimes even for the creators of algorithms, to pinpoint the exact reason why an artificial intelligence makes a particular decision.

Biases embedded in the training data could unknowingly seep into the decision-making process. And algorithms can also narrowly focus on some objectives, like amplifying viral content, without considering other impacts. Moreover, they are also continually updating, which makes regulation even harder.

That is a big challenge even for China, which has more powerful tools at its disposal. Another problem is how to make the algorithmic process more transparent and accountable, without taking too broad a brush that could stifle all innovation, especially at smaller companies.

That is one big risk Beijing takes by being a first-mover—it may reap immediate benefits, as it sees it, in terms of enhanced social control and fewer ugly side effects like addiction and indebtedness. But it may also squash the potential emergence of any new ByteDances in the process.

Algorithms have become an integral part of everyday life. Regulations may finally need to catch up—but how to go about it remains a difficult puzzle. Investors in U.S. internet companies, and their detractors, should both be watching China’s experience closely.

SEC Commissioner Says ‘Safe Harbor’ Laws Would’ve Made ICO Problems Worse

Instead of a safe harbor for crypto firms, SEC Commissioner Caroline Crenshaw called for a “bridge” in which crypto firms work with the SEC to determine compliance plans.

Caroline Crenshaw, a commissioner at the United States Securities and Exchange Commission, has said the “safe harbor” proposal would have exacerbated the problems seen during the initial coin offering (ICO) boom of 2017 and 2018.

Crenshaw made the remarks during the annual “SEC Speaks” event this month and posted her speech to the SEC website on Tuesday. The commissioner argues that the impact on investors and markets would have been far greater if safe harbor provisions were in place at the time:

“I think the results would have been even worse for investors and the markets. ICOs and other digital asset offerings raised billions from investors, but most never delivered on their promises. Investors suffered the losses.”

“And I think it is not a coincidence that these problematic offerings pre-dated and continued through the beginning of a multi-year downturn in the value of digital assets, sometimes known as the crypto-winter,” she added.

The safe harbor proposal has been advocated by crypto-friendly SEC Commissioner Hester Peirce. The proposal seeks to grant network developers a three-year grace period to build a decentralized network without fearing SEC legal action but has yet to be embraced by most of the other commissioners.

Peirce, or “Crypto Mom,” put forward a revised version earlier this year in March. Cointelegraph reported on Oct. 5 that North Carolina House Representative Patrick McHenry also put forward a three-year safe harbor proposal in a draft bill of the “Clarity for Digital Tokens Act of 2021.”

Crenshaw argues that instead of pushing the crypto sector toward compliance, the safe harbor proposal would put investors’ capital at further risk, as crypto tokens would be deemed outside of the jurisdiction of the SEC for “several years.”

“I also worry that relaxing regulatory requirements in markets prone to investor protection failures, limited investor redress options because of pseudonymity and disintermediation, and market manipulation, cannot sustain investor confidence or yield lasting broad adoption,” she said.

Instead of a safe harbor, Crenshaw called for a “bridge” in which token issuers and other crypto firms work with the SEC to outline plans for regulatory compliance, or discuss specific exemptions when they are deemed “appropriate”:

“I believe that if market participants accept proactive responsibility for compliance, we can build a bridge that promotes innovation while preserving market integrity and providing the investor protections needed for these new markets to grow.”

“If you likely fall within our jurisdiction, work with us to describe your plan to comply or explain why some exemption is appropriate,” she added.

Crenshaw’s remarks also echo the sentiments of SEC Chair Gary Gensler, who has regularly called for crypto firms to work with the SEC and register with the regulatory body.

Updated: 10-14-2021

Crypto Adoption In Sights: Regulators And Industry Join To Fight Ransomware

As the crypto industry continues to develop at a rapid pace, so do the ransomware attacks, but regulators now seem ready to step in.

With an increasing number of people forced to work from their homes, data suggests that ransomware attacks are at their all-time highest with the frequency of these incidents increasing by 45% over the course of April 2021 alone. Not only that, some are adamant that the rise in ransomware attacks is closely connected to the meteoric growth of the crypto sector.

Also, in the midst of the recent positive crypto market activity, news of the United States regulators aggressively studying the link between crypto and ransomware seems to be dampening the mood somewhat, especially since various government agencies are seemingly seeing crypto ransomware as a big issue requiring stringent action.

As digital asset adoption continues to spread across the U.S., it appears as though lawmakers are looking to better understand how these offerings can be used for a slew of legal as well as illegal purposes.

For example, the Ransom Disclosure Act, which was introduced by Senator Elizabeth Warren and Representative Deborah Ross on Oct. 5, requires victims of ransomware attacks to disclose information about any ransom payments they may have faced to the Department of Homeland Security (DHS).

The goal here, as per Warren and Ross, is to amass critical data on fiat and cryptocurrency payments, which can eventually be used by relevant regulatory agencies to protect investors from cybercrimes as well as to curb any illicit financial activities taking place in the United States. Furthermore, the bill also seeks to investigate the direct role of cryptocurrencies in ransomware attacks, an effort that will be helmed by the Department of Homeland Security.

Similarly and just recently, Deputy Attorney General Lisa Monaco revealed that the Justice Department has launched a new initiative dubbed the National Cryptocurrency Enforcement Team that looks to weed out any projects that can allow criminals to launder their crypto proceeds.

“We want to strengthen our capacity to dismantle the financial ecosystem that enables these criminal actors to flourish and to profit from what they’re doing,” Monaco was quoted as saying.

What’s Driving This Wave?

To gain a better understanding of why the U.S. regulators are making such a concerted effort to crack down upon any crypto-related ransomware, Cointelegraph reached out to Kadan Stadelmann, chief technological officer for open-source blockchain solutions provider Komodo.

In his view, one quick look at data available online shows that all kinds — not just crypto — of ransomware attacks are becoming more frequent, adding: “Just look at the statistics. Palo Alto Networks reported last month that the average ransom payment for 2021 is currently around $570,000 — 82% higher than the 2020 average of $312,000. 2020 was also much worse than 2019.” He added:

“To reverse this trend, a more mature regulatory landscape is necessary for the blockchain industry as well as improved cybersecurity as a whole in the next decade.”

When asked about whether major spending on such research activities is warranted, Stadlemann opined that not only should governments be putting more measures in place but they should also allocate additional funds and resources in regard to the same.

On the subject, he went on to state that governments can begin by adopting policies that ensure companies and anyone running critical infrastructure are better prepared for such events: “Together, having both proactive and reactive plans for cybersecurity would certainly reduce the fallout of ransomware attacks.”

Sharing a relatively similar sentiment, Du Jun, co-founder of cryptocurrency exchange Huobi, told Cointelegraph that it is the responsibility of every government to prevent Anti-Money Laundering (AML) as well as Combating the Financing of Terrorism (CFT) within their borders, adding that it is only natural for the U.S. government to have taken the regulatory actions it has to regulate its crypto market. He added:

“It is difficult to deal with cryptocurrencies as a payment method, given the lack of clarity regarding responsibility for AML/CFT compliance and the lack of a central oversight body.

These actions may introduce challenges to crypto businesses but will be good for the ecosystem in the long run, protecting investors from uncertainty and fostering a better business environment.”

Lastly, he opined that in addition to supervision alone, the American government ought to also allocate more resources to encourage the growth of new businesses within this space, making the country more competitive and appealing to crypto enthusiasts.

The Spending Is Justified

Taking a more numbers-oriented approach to the matter, Marie Tatibouet, chief marketing officer for cryptocurrency trading platform, told Cointelegraph that in 2020, the total ransom paid by cyberattack victims reached nearly $350 million worth of crypto. With that figure in mind, she added:

“This number is inevitably going to keep increasing year on year. So Warren’s ‘Ransom Disclosure Act’ on paper makes sense. If you are a victim, you must disclose information about ransom payments no later than 48 hours after the payment date.”

That said, she did acknowledge that the primary issue that most people have with the U.S. government is that, of late, Biden and company have been cracking down very hard on the crypto industry via the introduction of the recent infrastructure bill, as well as other sanctions. “So, it is understandable why people have been a little cautious about anything that the government does,” Tatibouet added.

Sergey Zhdanov, chief operating officer for digital currency trading platform EXMO, told Cointelegraph that the measures taken by the U.S. confirm the fact that regulatory authorities are not looking to ban cryptocurrencies (the way China did) but rather want to carve out a way through which digital assets can be incorporated into the traditional financial system.

He Then Went On To State:

“Coming up with new effective methods to stop the illegal use of cryptocurrencies and money laundering is a crucial step that will take the crypto industry to its next level of development.”

Increased Regulations A Win-Win For Everyone?

Hunain Naseer, senior editor for OKEx Insights, told Cointelegraph that the regulatory efforts being initiated globally seek to usher in a level of clarity to this space that can help make it easier for investors to enter this fast-growing space with complete peace of mind. He further expounded on the subject by saying:

“It makes sense to focus on such initiatives that make online interactions and commerce, including cryptocurrency transactions, safer for all. These steps will also contribute toward regulators allowing a wider variety of crypto-based financial products for retail.”

Nischal Shetty, founder of cryptocurrency exchange WazirX, told Cointelegraph that any regulatory steps that seek to track and eliminate criminal activities should always be welcome, especially in an industry as fast-growing as this.

In his view, the rationale behind such movements seems to quite clearly be rooted in governments ultimately wishing to protect consumers without stifling innovation, adding: “For crypto, it’s an even more of a positive sign as this proves that digital asset innovation can thrive while ensuring criminal activities are identified and eliminated.”

Furthermore, On Oct 5. blockchain analytics firm Chainalysis announced that it had facilitated the purchase of cybercrime investigative company Excygent for an undisclosed amount, hinting that the buyout will enable the two firms to work together and “dismantle ransomware operations” that may be active globally.

In the past, Chainalysis has collaborated with Excygent on the seizure of cryptocurrency connected to the now-defunct darknet market Silk Road, as well as in the shutting down of various terrorism and child abuse portals operating online.

In general, crypto native blockchain analytics firms have grown to accrue support not only from the U.S. government but also a number of significant private players, with CipherTrace being bought out by a mainstream entity — in this case like MasterCard — earlier this year.

What Is The Future of Ransomware Crime?

As the crypto landscape continues to evolve and grow, Chainalysis CEO Michael Gronager believes that tracing the flow of ransomware payments on the blockchain will be instrumental for law enforcement agencies to deter, analyze and dismantle any ransomware operations in existence today, as he told Cointelegraph:

“As paradoxical as it seems, it can actually be beneficial to investigators when bad actors choose to use cryptocurrency when committing crimes.”

In this regard, it is pertinent to mention that hackers have become wise to the fact that, contrary to what people keep reiterating like crypto is totally anonymous, it is in fact actually extremely easy to trace individual transactions back to their owners, since all records and transitions are maintained on a blockchain.

Additionally, amid the slew of recent big hack stories such as the ones related to Poly Network and SushiSwap, the interesting thing is that the incidents did not result in the platform or its users losing any money, as companies and regulators stepped in to secure the movement of funds through the blockchains.

And while that may be bad for the notion of decentralization, the fact of the matter remains that the funds are safe.

Gronager further alluded to cases such as NetWalker, a ransomware operator who allegedly targeted hospitals during the pandemic and collected more than $25 million from ransom payments in 2020, as well as Suex OTC, a firm that allegedly allowed hackers to access crypto sent as payment for ransomware attacks, as prime examples of why increased defense against ransomware is needed in this day and age.

Thus, the fact that regulatory agencies are making decisive steps to focus on crypto ransomware-related initiatives, is not unilaterally welcomed by everyone in the crypto industry.

While some believe more can be done to make the digital asset ecosystem safer for newer entrants through the use of regulation, others say that the role of ransomware in crypto is overblown and that tight regulation will stifle freedoms and worsen the image of the industry.

However, most agree that ransomware has no place in the industry and that regulation, if done right, will go a long way toward securing the industry and ensuring long-term prosperity and adoption.

U.S. Treasury Offers Crypto Guidance Amid Ransomware Surge

There was $590 million in suspicious activity related to ransomware in the first six months of 2021, exceeding the entire amount in 2020, when $416 million was reported, according to a report released Friday by the U.S. Treasury Department’s Financial Crimes Enforcement Network.

The average amount of reported ransomware transactions per month in 2021 was $102.3 million, according to the report. If the current trend continues, suspicious activity reports filed in 2021 “are projected to have a higher ransomware-related transaction value than SARs filed in the previous 10 years combined,” according to the report. SARs is shorthand for suspicious activity reports.

U.S. based cybersecurity companies filed most of the SARs related to ransomware while banks and cryptocurrency exchanges filed more than a third of the reports. The reports reflect just how quickly ransomware attacks have grown.

The report offers new insight into the scale of ransomware attacks devastating U.S. businesses and impacting critical infrastructure. A Treasury spokesperson said the SARs don’t represent all ransomware payments.

Reporting ransomware payments to the Treasury via a suspicious activity report is often a requirement of cybersecurity insurance policies, according to a person familiar with the matter.

The Treasury Department also identified 68 ransomware variants, noting that the most commonly reported types were REvil, Conti and DarkSide. Ransomware groups often sell their malware, or variant, to affiliates who then use it to plot attacks, in what is known as ransomware-as-a-service.

REvil, Conti and DarkSide are suspected by cybersecurity firms of being tied to Russia in some way — because they use the Russian language or are suspected of being based there.

The report was filed as the Treasury Department issued guidance to the virtual currency industry to prevent exploitation by entities sanctioned by the U.S. and ransomware groups. It is part of a broader effort by the Biden administration to attempt to curb ransomware attacks. In ransomware attacks, hackers encrypt a victim’s files and promise to unlock them if they are paid a fee.

Among the more notable attacks were those in May on Colonial Pipeline Co. in May that squeezed fuel supplies on the East Coast and on the meatpacker JBS SA.

The Treasury report stated that ransomware actors are increasingly requesting payment in cryptocurrencies like Monero, which are designed to enhance anonymity.

Updated: 10-15-2021

Crypto Finally Makes The Cut In OCC’s 2022 Bank Supervision Operating Plan

Though the Office of the Comptroller of the Currency (OCC) has been looking into the crypto industry since at least 2018, this is the first time crypto has been included in the regulator’s annual operating plan.

The Office of the Comptroller of the Currency (OCC) released its 2022 Bank Supervision Operating Plan on Friday and for the first time, crypto made the cut.

In its report, the federal banking regulator listed its 11 supervisory priorities for the fiscal year that ends next September, including cybersecurity, climate change and “fintech partnerships for potential cryptocurrency-related activities and other services.”

Though this is the first time the OCC has directly mentioned crypto as a priority, the regulator has been studying crypto for at least three years. Last July, the OCC published an interpretive letter that allowed nationally chartered banks to offer crypto custody services.

Many in the crypto community attributed the OCC’s crypto push to former Comptroller Brian Brooks, who left the OCC in January to briefly serve as CEO of Binance.US.

Michael Hsu, who replaced Brooks as Comptroller in May, signaled greater caution on crypto, telling the House Financial Services Committee that he planned to keep an open mind on crypto but would be reviewing actions taken under Brooks’ leadership to ensure banks remained safe for consumers.

According to the OCC’s latest plan, the regulator will “identify banks that are implementing significant changes in their operations using new technological innovations…[and] evaluate the appropriateness of the governance processes when banks undertake significant changes.”

How Will DOJ’s New Crypto Enforcement Team Change The Game For Industry Players, Good And Bad?

In a bid to catch up with cybercriminals, the Justice Department is pooling all crypto expertise in one place.

On Oct. 6, the United States Department of Justice, or DOJ, announced the creation of a specialized unit, the National Cryptocurrency Enforcement Team, or NCET, tasked with prosecuting criminal misuses of digital assets and crypto infrastructure, as well as tracing and recovering the ill-gotten cryptocurrency.

The move continues the U.S. authorities’ push to disrupt the corners of the crypto ecosystem that are thought to facilitate illicit activity, such as ransomware attacks. What does the government’s crypto enforcement ramp-up hold for the larger digital asset space?

Pooling Crypto Expertise

The new unit will operate according to the principles articulated almost exactly one year ago in DOJ’s Cryptocurrency Enforcement Framework. The document, for one, asserts the Department’s broad jurisdiction over criminal activity that affects financial or data storage infrastructure inside the U.S.

In addition to investigating its own cases and supporting the efforts of U.S. Attorneys’ Offices across the country, the NCET will promote cooperation between all relevant federal, state and local law enforcement agencies in addressing cryptocurrency-related crime. The team is also tasked with training and advising law enforcement officers on crypto matters and developing investigative strategies.

Operatives for the new task force will come from of both the Money Laundering and Asset Recovery Section and the Computer Crimes and Intellectual Property Section of the DOJ, as well as from a number of U.S. Attorneys’ Offices.

In a conversation with Cointelegraph, Kevin Feldis, partner at law firm Perkins Coie, called both MLARS and CCIPS “very respected components of the Department of Justice,” whose members are “well-versed in handling cross border investigations and coordinating with law enforcement around the globe.”

New Tool For Existing Policies

The NCET is expected to direct its enforcement efforts at illegal or unregistered money services, ransomware payments infrastructure and various other marketplaces where digital money meets criminal activity.

None of this is particularly new, and the DOJ is simply putting together a more streamlined, coordinated mechanism for tackling cybercrime and potentially recovering stolen funds.

The announcement also extends the string of developments that illustrate the Biden administration’s commitment to enforcement-first stance on cybercrime, including criminal activity facilitated by crypto.

Jackson Mueller, Director Of Policy & Government Affairs At Digital Asset Firm Securrency, Commented To Cointelegraph:

This announcement should not come as a surprise to those of us following the Biden administration and its efforts, whether through federal financial regulators, the Treasury Department, the President’s working group on stablecoins, among others, to apply greater scrutiny and enforcement actions against the broader ecosystem.

Mueller added that the emergence of the NCET signals the government’s preference for more enforcement-focused policies rather than the orientation toward engagement and cooperation that many in the industry would prefer to see.

Michael Bahar, chair of Cybersecurity Practice at global law firm Eversheds Sutherland, traces the roots of the NCET initiative back to Joe Biden’s May 2021 executive order, which made it a top priority to bring to bear the full scope of federal government authorities and resources to protect the nation’s computer systems against cyber-attacks. Bahar further commented:

As part of that all-of-government effort, the U.S. Department of Justice is leveraging its decades of experience in following the money and in rooting out money laundering, both to catch the perpetrators and return the money, as well as to undercut the financial incentive for criminals to engage in ransomware attacks in the first place.

Ron Brisé, Government Affairs and Lobbying attorney at law firm Gunster, said that the DOJ is “Connecting the dots across all of its sections to bring a more centralized focus to cryptocurrency-related investigations and prosecutions.” Brisé added that he wouldn’t be surprised to see certain individual states replicate the federal initiative, instituting their own cryptocurrency enforcement teams in the near future.

Wider Implications

Granted, rooting out bad actors of the cryptocurrency sector who give the entire industry a bad name in the eyes of the public (and, quite often, in policymakers’ eyes) is a noble endeavor. Yet, there is also room for legitimate concern for those crypto players who act in good faith and invest substantial resources in compliance — that is, for the overwhelming majority of industry participants.

A scenario where overly aggressive enforcement could create an additional burden for legitimate actors is not difficult to envision.

Kevin Feldis of Perkins Coie believes that DOJ’s focus on ramping up criminal investigations and building capacity to recover illicit crypto proceeds will also likely mean more government scrutiny throughout the industry. Feldis added:

The legal and regulatory landscape is still evolving, and investing in compliance and being a good crypto corporate citizen will likely serve industry players well in the face of this increased government enforcement focus by the DOJ, SEC and others.

At the same time, the kind of expert enforcement that is competent enough to single out criminals while not imposing an excessive burden on the good guys could be a boon to the sector. Having all of the DOJ’s most crypto-savvy people within one well-coordinated force could also lead the NCET to wield its enforcement authority in a targeted fashion.

Gunster’s Ron Brisé notes that the emergence of a specialized crypto unit within the Justice Department could be seen as beneficial, all things considered. He commented:

From a bigger perspective, if there is recourse for those whose digital funds get stolen, the levels of confidence for both consumers and crypto business will increase.

Indeed, if the NCET lives up to its stated mission rather than casting nets that are unnecessarily wide, the crypto space will become a safer place for legitimate financial activity.

Right-wing Indian Group Calls For Stricter Crypto Regulations

The leader of the conservative Hindu group has called for proper policing of the crypto space along with other stricter measures targeted at the digital space.

Mohan Bhagwat, the head of the Rashtriya Swayamsevak Sangh, or RSS — a right-wing Hindu nationalist society — has urged India’s government to pursue crypto regulations “in the larger interest of society.”

According to Asian News International, the RSS chief made these remarks during his speech marking the celebration of the Hindu festive Dussehra.

Despite numerous reports of looming crypto bans, the narrative from government sources has been that stakeholders prefer to create a framework for regulating the market.

A coalition of pro-crypto entities was even able to secure a Supreme Court ruling that overturned a previous ban imposed by the central bank that prevented banks from offering services to cryptocurrency exchanges.

Bhagwat’s comments come amid reports of increasing crypto popularity in India despite the lack of a clear-cut regulatory framework for cryptocurrencies and numerous reports of a possible ban on virtual currencies.

In September, Cointelegraph reported that Indian crypto exchanges were preparing targeted advertising campaigns in preparation for the festive season. However, such content might need to adhere to ad disclaimer policies that educate viewers about the risks involved in cryptocurrency investments.

This growing crypto popularity has also reached India’s entertainment sector with Bollywood stars like Amitabh Bachchan launching their own cryptocurrencies or endorsing major exchanges in the country.

Bhagwat’s stance could indicate a conservative repudiation of the spreading crypto acceptance among the more liberal segments of India’s society.

Indeed, the RSS chief also took streaming platforms to task for failing to censor some of their content from underage viewers.

Bhagwat claimed drug abuse was on the rise and that the money circulating in these markets was being used to promote “anti-national activities.”

Coinbase Wants Coders To Help With Its Crypto Regulation Proposal

A GitHub repository went live Thursday in a bid to make open source a proposed framework to U.S. officials.

Fresh on the heels of Coinbase asking the U.S. government to create a new regulator to oversee the cryptocurrency industry, the exchange is seeking public input via GitHub.

A repository published Thursday by the crypto giant is seeking suggestions from techno-savvy observers.

“This framework represents our good-faith suggestions on a U.S. regulatory framework for digital assets,” Coinbase wrote. “We encourage your contributions to this discussion about the role of digital assets in our shared economic future.”

A Coinbase spokesman confirmed it’s the first time the company has used GitHub to solicit feedback on policy matters. (The company’s engineering team has long used it for open-source code.)

As of press time, one user has proposed two pull requests; two users have chimed in with quick words of encouragement.

The proposal from the publicly traded crypto exchange comes as regulatory discussions in Washington, D.C., swirl – made all the more juicy by the looming prospect of the first approval of a bitcoin futures exchange-traded fund (ETF) by U.S. regulators.

Venture capital giant (and early Coinbase backer) Andreessen Horowitz is also assembling a crypto policy proposal for U.S. lawmakers.


Updated: 10-18-2021

US Treasury Says It Must ‘Modernize And Adapt’ To Digital Currencies

“Digital assets and payments systems could harm the efficacy of our sanctions” if left unchecked, the Treasury said.

The United States Department of the Treasury has issued a review on sanctions and suggested the government do more to develop its infrastructure and policies in regards to digital assets.

In a report on Monday, the Treasury Department said the growing use of digital assets was hampering the implementation of sanctions while balancing funds from legitimate humanitarian organizations.

The department suggested that better communication between itself and the crypto industry, financial institutions and others in addition to “deepening its institutional knowledge and capabilities” could help improve current policy.

“Sanctions are a fundamentally important tool to advance our national security interests,” said Deputy Treasury Secretary Wally Adeyemo. “Treasury’s sanctions review has shown that this powerful instrument continues to deliver results but also faces new challenges. We’re committed to working with partners and allies to modernize and strengthen this critical tool.”

The Report Added:

“If left unchecked, these digital assets and payments systems could harm the efficacy of our sanctions.”

According to the report, the Treasury Department suggested the government adopt a structured policy framework, coordinate with allies and partners when possible, ensure sanctions are understood, enforceable and adaptable, and implement them “to mitigate unintended economic, political, and humanitarian impact.” The department added it should modernize to include the “right expertise, technology, and staff” to handle the challenges of digital assets.

The U.S. Treasury Department has been employing sanctions as part of the government’s efforts to fight ransomware attacks threatening the country’s infrastructure — e.g., when Russia-based DarkSide hackers attacked the Colonial Pipeline system in May.

Last month, the department announced it would impose sanctions on the Czech Republic as well as Russia-based business Suex OTC for allegedly allowing hackers to access cryptocurrency sent as payment for ransomware attacks.

Rep. Tom Emmer Wants Stablecoins Over CBDCs – Interview

The Minnesota congressman is fighting what he sees as the “over-regulation” of the crypto industry and he’s no fan of a central bank-issued digital dollar.

There’s nothing that screams techno-optimist about U.S. Rep. Tom Emmer, the four-term Republican member of Congress from Minnesota. The 60-year-old is a collector of toy trains and tractors. He first learned about cryptocurrency in a book. In a memorable scene from the coronavirus pandemic months, Emmer appeared upside-down on video during a congressional hearing.

But Emmer understands cryptocurrency better than most – especially among his peers in office – and has emerged as one of the industry’s fiercest political advocates. Decentralized technology is “inevitable,” he says, and elected and appointed officials can either support the growth of a homegrown U.S. crypto sector or see it advance elsewhere in the world.

“I’ll go down any rabbit hole when it comes to this because you’ve got to learn it, you’ve got to understand it,” Emmer said last week in a phone interview, reprinted below, on his legislative efforts in the House of Representative. “You do have to play with it a little bit. You got to touch it, you got to smell it, you got to manipulate it, see if you can throw it, catch it.”

Emmer is a powerful ally to have on Capitol Hill. In addition to co-chairing the Congressional Blockchain Caucus, which works to educate other legislators, he is chairman of the National Republican Congressional Committee (NRCC), which works to elect more Republicans to Congress, and is a ranking member of a powerful financial oversight subcommittee.

But his crypto-related work can be seen as an uphill battle. Emmer has spoken at length about how the digital asset industry is already “over-regulated.” Among policymakers, he’s also identified something of a bias against digital privacy and private monies.

And now that Congress sees the $2 trillion (and counting) cryptocurrency industry as a potential tax revenue source and a driver behind a growing ransomware problem, there are risks of heightened oversight or misinformed policy being shoehorned into unrelated legislation.

Emmer recently put forward or co-signed a series of bills looking to clarify cryptocurrency regulation. His “Securities Clarity Act” would work with the “Digital Commodities Exchange Act” to answer once and for all when a cryptocurrency network or company should be overseen by federal securities regulators.

Crypto is one of the few areas that seems to transcend partisan, left versus right, politics. Many Democrats and Republicans see the technology as transformative, hold bitcoin and incorporate it into their brands (check out these campaign non-fungible tokens [NFT] – from blues and reds).

Emmer is a leading voice in this pro-tech camp, but like all decent politicians he knows this policy issue isn’t about him. Crypto, he says, is for the people.

I’m absolutely opposed to the [Oregon Sen. Rob] Portman amendment in the [Biden administration’s] bipartisan infrastructure bill, because I think it was based on, I don’t want to say a false premise, but I just don’t think the $28 billion they expected to collect off of this tax [would be forthcoming].

First, let’s back up. Americans realize the value of crypto and blockchain innovation – and it’s those people who could be harmed by misguided legislation.

That debate over on the Senate side of the Capitol seems to have awakened some elected officials and their staff. When a Senate office receives 40,000 calls in one day, Daniel, like they did during the debates over the infrastructure bill, it really forces those elected representatives to care.

It started with the idea of taxing the industry as a revenue source but it turned into a lot more. A lot of heads are popping up out of the sand saying, “What is this crypto thing?”

You know, I had no idea 55 million Americans are now involved in crypto. It’s got a market of more than $2 trillion. It’s one of the fastest-growing things that we’ve seen in decades. Because of all of that, the government is taking notice.

Along those lines, it looks like the “crypto provision” is going to be passed intact within the infrastructure bill. Do you think that matters?

We’ll have to see what happens with the bill. Depending on what room you’re in and with whom you’re talking, it’s either coming together slowly or it’s going farther apart. If we start with the hypothetical that the bill finds its way back to the floor and passes the House, gets signed by the president’s office and becomes law, that provision would be in there.

But it’s not effective until 2023, so we will have time to change it. Is it the optimal situation, Daniel? No, I prefer that [language] never got there. But I’m confident that cooler heads will prevail – that amendments will be made – and we will be able to take action.

What Does Overregulation Look Like And How Big Of A Risk Is It?

Just take a look at our [U.S. Securities and Exchange Commission] Chair Gary Gensler if you want to know what overregulation is all about or why creating laws, if you will, through enforcement or regulatory enforcement is bad.

As I told him during a hearing [earlier in October], his conclusory public statements and threatened enforcement actions hurt everyday investors the most. Gensler actually believes that most tokens are securities – or at least he claimed to believe that most tokens are securities – because people buy them and expect to profit off of the work of developers and computer scientists.

Since he thinks that most tokens are securities, he also believes that crypto exchanges that trade securities should be under SEC jurisdiction. These are his words.

I asked him specifically if someone who issued a token goes to register it with the SEC if they can trade on the New York Stock Exchange or Nasdaq. The answer right now is no. It couldn’t. I believe the most tokens are commodities or currencies once the project is decentralized.

We’ve got to remember this technology is decentralized after a project is fully developed, there’s no centralized group behind it, whose work investors would be profiting on. So at that point it should not be a security.

I’m going to suggest to you that Gary Gensler and other members of the [Biden] administration are ignorant as to how this area works, which is a big problem for the industry. I don’t believe that, though, I believe he’s very smart and he’s trying to expand his jurisdiction.

I’ll give you an example. He talks about “stable-value” coins. There is no such thing as a “stable-value” coins – they’re stablecoins. He used this term in his testimony before the Banking Committee in the Senate and in his testimony before the Financial Services Committee in the House.

Why would he use that term? Did he just fumble with the words? No. Stable value funds are under the SEC’s jurisdiction, which might suggest “stable value” coins would be, too.

This throws the whole investment marketplace into a confused state. That is bad for individual investors and, frankly, I believe violates his mandate, which is to protect individual investors.

If You Were In Gensler’s Shoes, What Would You Do About Stablecoin Regulation?

I’ve got a bill out there right now called the Securities Clarity Act to try and deal with this problem of the overreaching regulator. A little clarity would go a long way towards solving this jurisdictional question between the SEC and its sister agencies. [Ed. note: Namely, the Commodity Futures Trading Commission.]

The bill would help token issuers easily determine when a token is actually part of a securities contract and when it’s not. You wouldn’t do this by amending the existing securities law, but in creating a new definition called an “investment contract asset.”

This particular bill would help the SEC understand what its jurisdiction is and encourage it to work with the industry to develop a bigger framework that we can all operate under. Then there is the sister bill carried by former Ag Chair [Kenneth Michael] Conaway (R-Texas).

My office has been working with Republican ranking member “GT” Thompson (R- Pa.) of the [House Agriculture Committee] on this bill, which would give the CFTC the authority to regulate crypto spot markets, which are the crypto exchanges, obviously.

This way, crypto exchanges can have one federal regulator rather than going through the burdensome process of getting 53 different licenses to operate across the United States.

The Securities Clarity Act in combination with the Digital Commodities Exchange Act, which is that other bill, will clear up jurisdictional boundaries and allow the marketplace to do what it does best: allow investors to do their homework, get involved in projects and grow new opportunities for themselves and others. That’s what makes this country great.

Shifting gears a little bit, do you think the United States needs a central bank digital currency (CBDC). And, if so, how can we guarantee strong privacy rights in digital public money?

By now people have to know that I am absolutely, adamantly opposed to the United States government or Federal Reserve, specifically, creating a central bank digital currency.

If it’s permissionless and maintains the privacy of cash, I suppose that’s workable. But until you can prove that would work, I adamantly oppose one. The Federal Reserve should never be competing with private business.

There are two main forms of a CBDC. One would impose central bank accounts, users would have bank accounts at the Fed. The Fed would collect KYC [know your customer] information on users and then be able to track their transactions. This is modeled, I would argue, after the Communist Party of China.

This is the United States of America. Why would we ever want to emulate the Communist Party of China? I just disagree that we should never mobilize the Fed into retail banking.

The second way would have financial institutions like banks maintain all KYC information and serve as access points. [CBDC supporters will] probably try to argue this is better for financial institutions – but the Fed would still be able to track all transactions on the blockchain.

Bottom line is, CBDCs aren’t much different than swiping a credit card or a debit card, besides the fact that the central bank is involved and can oversee transactions. Neither one of these examples would maintain any element of privacy.

[Meanwhile], stablecoins actually maintain certain elements of cash because they run on open, permissionless and private blockchains. That’s probably your best solution. The government should allow private citizens to develop this thing.

You said in an interview last spring that crypto is succeeding in part because people are losing faith in the system. Is there a way to square the support of crypto with the American Dream?

Crypto started, right, with Satoshi’s white paper released after the 2008 crash. I think this all comes out of the fact that the United States’s monetary policy, as well as the monetary policy around the globe, is suspect. When a government has a floating currency, when it can seemingly print as much cash as it wants, that’s good until it’s not.

We’re going to back this up. The people who started the crypto craze, way back when, they’re kind of like the financial preppers of our day. They were trying to anticipate a country where you couldn’t trust the currency. Bitcoin is a lot like gold. It holds its value.

I do think it’s compatible with the American Dream because Americans have always been pushing the frontier. Americans have always been free to innovate and this is what our government is going to have to understand: This is going to happen. It’s not a matter of if, it’s a matter of how far.

If our government wants to continue to put up roadblocks because of ignorance, because of fear, if you will, and the desire to control, [the crypto sector will] develop elsewhere. You’re going to have very intelligent, creative Americans and others that continue to develop new methods for transacting between individuals and or entities.

Crypto is not going away. It’s just a matter of whether we will have a light touch regulatory framework that recognizes the potential crypto presents. This is an entirely new opportunity for different groups of people who may never have had access to the financial system.

That’s why I’ve been so outspoken, I want to see that happen right here in this country.

How Far Down The Rabbit Hole Have You Gone? Do You Hold Bitcoin, Play Around With Decentralized Finance?

Well, every time they open another door or trap door, if you will, I fall into it. Personally, I’m going to be careful, because I can tell you I know people very close to me that are actively involved in this marketplace. I will tell you, on an official level, more policymakers need to understand this industry.

A while back we started accepting cryptocurrency for campaign contributions. We did that in selfish self-interest. But if you think about it, we’re trying to appeal to my colleagues and their selfish self-interest, who might notice I started accepting cryptocurrency in my campaign and ask, “What is he getting that we’re not?”

I’ll go down any rabbit hole when it comes to this because you’ve got to learn it, you’ve got to understand it. You do have to play with it a little bit. You got to touch it, you got to smell it, you got to manipulate it, see if you can throw it, catch it.

For some of us my age – we weren’t built the same way you were, Daniel, so it takes us a little bit longer – a virtual wallet is something that you really need to get used to.

Law Decoded: Best Regulation Is Self-Regulation, Oct. 11–18

As the crypto space gets all worked up by the impending launch of Bitcoin exchange-traded funds, industry leaders are taking it upon themselves to sketch out the designs of future regulatory regimes.

Between fever-pitch anticipation over the impending approval of a Bitcoin exchange-traded fund, the Commodity Futures Trading Commission’s $42-million-plus settlement with Tether and Bitfinex, and Vladimir Putin brooding over cryptocurrency’s capacity to transfer value, this past week has been saturated with major policy news.

While all the above are instances of state figures’ and institutions’ top-down actions and statements on digital assets, an arguably even more interesting tide has emerged on the side of the crypto industry itself.

Two major players of the digital space, Coinbase and a16z (Andreessen Horowitz), came forward with proposed visions for regulating internet-native economic activity

Below is the concise version of the latest “Law Decoded” newsletter. For the full breakdown of policy developments over the last week, register for the full newsletter below.

Regulatory Push From The Bottom Up

The broad proposal put forth by a16z presents a vision of Web 3.0 as an array of technologies to organize human activities that are fundamentally decentralized. Its policy agenda emphasizes the need for regulators to ensure an environment where the digital infrastructure supporting Web 3.0 could flourish and where risks are addressed in a targeted fashion.

Coinbase’s framework is more narrowly focused on the realm of digital finance. Consistent with a16z’s vision, it argues in favor of designating a separate agency (presumably not the Securities and Exchange Commission) to oversee the activities of what the framers call “marketplaces for digital assets,” or MDAs.

ETF Excitement

A huge part of the crypto crowd seemed on the verge of breaking into tears of joy over multiple signals suggesting that the SEC would not get in the way of a Bitcoin (BTC) ETF. SEC Chair Gary Gensler has previously spoken favorably of the level of investor protection granted by Bitcoin ETFs that are based on BTC futures rather than the “physical” asset.

Gensler’s sentiment provided a background against which subtle cues like Nasdaq’s certification of Valkyrie’s Bitcoin Strategy ETF and a suspiciously well-timed “SEC Investor Ed” tweet made the approval look all but done.

CBDCs Never Sleep

Another week, another crop of reports of central bank digital currency advancement from nearly every time zone. In the United Kingdom, an independent nonprofit called the Digital Pound Foundation will support the nation’s CBDC effort with expert insight.

Over in Japan, a central bank official emphasized the need for the simplicity of the prospective digital yen’s design that would ensure interoperability with commercial payment systems. Finally, the financial brass of the G7 discussed foundational policies around digital national currencies, suggesting that there is enough cross-border coordination to make the major sovereign CBDCs of the future fully interoperable.

Updated: 10-19-2021

Democrats Float $10,000 Threshold For Bank-Account Reporting

Democrats are vowing to crack down on tax cheats by giving banks new requirements to disclose to the IRS accounts that have total annual inflows or withdrawals of at least $10,000.

The plan would help fund President Joe Biden’s multi-trillion-dollar economic agenda, potentially raising $700 billion and reducing the need for tax increases to offset the cost of new social spending.

Democrats say this plan to catch tax evasion by the wealthy and boost federal revenues is critical to address inequalities in a tax system that forces middle-income people to pay all they owe, while high-earners can shield their income from the IRS.

“This is very clear this is about wealthy business owners at the tippy top of the top,” Senate Finance Chair Ron Wyden told reporters on a conference call Tuesday. “If you don’t have $10,000 above your paycheck, Social Security income or the like coming in or going out, there’s no additional reporting,”

The Oregon Democrat said that the plan has carve-outs for when an individual spends a significant amount for a major purchase and does not create any new surveillance for digital currency.

Lawmakers are rejiggering the proposal after a wave of criticism by Republicans and bank lobbyists. The $10,000 threshold replaces the $600 proposed by the Biden administration.

It would exclude wage deposits and payments under federal programs — so that only accounts with “opaque” income streams would be reported to the government, according to a fact sheet from the Treasury Department released Tuesday.

Democrats say there is precedent for requiring banks to report account information to the federal government. The Treasury is proposing two new data points — the sum of all the deposits and the total value of withdrawals — to add to a tax form where banks already report interest amounts and other account data to the IRS.

“Today’s new proposal reflects the Administration’s strong belief that we should zero in on those at the top of the income scale who don’t pay the taxes they owe, while protecting American workers by setting the bank account threshold at $10,000 and providing an exemption for wage earners like teachers and firefighters,” Treasury Secretary Janet Yellen said in a statement Tuesday.

Broad Appeal

Increasing IRS enforcement to collect taxes that are already owed is an idea with widespread support among Democrats.

Moderates, including Senator Joe Manchin of West Virginia and Representative Josh Gottheimer of New Jersey, have both backed giving the IRS more ability to go after tax cheaters. However, the bank account idea was ultimately left out of the House version of the legislation drafted last month.

It has faced strong criticism from Republicans. Senate Minority Leader Mitch McConnell said Tuesday it is tantamount of giving the IRS “new snooping powers” and treating “normal American households like everybody is under audit.”

The revised bank reporting measure has not yet garnered approval from all Democrats. House Ways and Means Committee Chairman Richard Neal said Tuesday he can’t endorse the plan until he’s seen the legislative text. Senate Democrats have so far just released a broad outline.

The Treasury has said it would help them find high-income taxpayers who earn money from small businesses, rental properties and other ways that aren’t directly reported to the IRS. The IRS estimates that taxpayers pay 99% of their taxes owed when there is third-party reporting, like there is for wages and salaries.

That figure drops to 45% when there isn’t such verification. The Treasury estimates that uncollected taxes could total as much as $7 trillion over the next decade.

“Third party reporting would help the IRS zero in on tax cheats when the wealthy don’t honestly report their income,” Senator Elizabeth Warren, a Massachusetts Democrat, said on the call with reporters. “Banks and their wealthy clients are outright lying about this proposal claiming that it would give the IRS information on individual transactions.”

The Treasury said the information will only be used to target high-income taxpayers and that audit rates among those earning less than $400,000 a year won’t increase.

Wealthy individuals, according to the fact sheet, have much more “discretion of whether they pay their taxes” because they are more likely to earn “less visible streams” of income that aren’t automatically reported to the IRS, as is the case for wages and Social Security recipients.

Two Numbers

The Treasury estimates that tax compliance rates are far higher among low- and middle-income households compared with top-earning ones and that tax evasion by the top 1% of taxpayers exceeds $160 billion annually.

Senator Mike Crapo, the top Republican on the Senate Finance Committee, told reporters Tuesday there are better ways to address the tax gap — the shortfall between those taxes owed and those actually paid to the IRS — and improve compliance.

He said that Congress could change the tax code to address deductions that are being abused, and that lawmakers should give the IRS more funding to improve computer systems and taxpayer services so that the agency can better help individuals properly pay what they owe.

Crapo said that it’s possible he could support the bank-reporting plan, but that the threshold would need to be significantly higher than $10,000. That figure would likely get into the millions so that small businesses wouldn’t be affected, he said.


Treasury Seeks More Money For Illicit-Finance Oversight, Including Crypto And Cybercrime

Deputy Treasury Secretary Wally Adeyemo says hiring more staff with technology expertise is critical

The Biden administration’s financial intelligence and sanctions units need significantly more funding and staff to combat national-security threats, including ones arising from ransomware and cryptocurrency markets, the Treasury Department’s second in command told lawmakers Tuesday.

The department needs additional funding to oversee expansive sanction programs, implement major new anti-money-laundering laws and protect the U.S. from terrorists, international criminal groups, state actors and other foes that have become increasingly adept at using an evolving global financial system for their activities, said Deputy Treasury Secretary Wally Adeyemo.

Mr. Adeyemo’s call for more funding at a Senate banking committee hearing follows publication Monday of the administration’s new U.S. sanctions policy review.

The publication is the result of a nine-month Treasury-led audit of sanctions, the first comprehensive review of how the U.S. uses its tools of financial warfare and economic diplomacy since the terrorist attacks of Sept. 11, 2001, Mr. Adeyemo said.

Sanctions will remain a critical policy tool, Treasury officials said, but need to be better calibrated. The Biden administration plans to refocus the vetting process for sanctions to more heavily weigh the potential for unintended harm to vulnerable groups, resistance from allies and other economic and geopolitical fallout, the officials said Monday.

Technological changes—like the growth of digital currencies—are one of the four primary challenges identified in the review that could undermine the power of U.S. sanctions and national security by helping hide illicit activity, including sanctions evasion, Mr. Adeyemo said.

He also said Treasury needs to modernize its operational capabilities, including by hiring people who specialize in blockchain markets and by investing in the technology needed to track money involved in ransomware and other cybercrime.

Since Congress holds the administration’s purse strings, the Treasury needs the backing of lawmakers.

“One of the most important areas for us, frankly, is ensuring that we have a workforce that understands these issues going forward,” Mr. Adeyemo told lawmakers.

The Biden administration has asked for more funding and staff for the three Treasury offices that investigate financial crimes. The Financial Crimes Enforcement Network, an anti-money-laundering unit, is seeking a 50% increase for its budget to $190.5 million next year and wants to expand its staff by 25%.

The Office of Terrorism and Financial Intelligence wants to increase its budget and workforce by 5%. The Internal Revenue Service, whose agents are key to busting international criminal networks using cryptocurrencies, is asking for $41 million to expand its oversight of cybercrimes.

Former Treasury officials from Democratic and Republican administrations say the department, because of its critical and central national-security role, requires more resources after a two-decade expansion in the use of sanctions as a key foreign-policy tool and because criminals and markets have become more financially sophisticated.

Staffing shortfalls are most acute right now as a few senators block political appointments to head the offices responsible for sanctions oversight.

The Biden administration has described ransomware as a national-security threat and has made combating ransomware attacks a priority. The Treasury said Friday that the volume of suspected ransomware payments flagged by U.S. banks has surged this year and is on pace to nearly double last year’s level.

The Treasury on the same day released new guidance urging companies to guard against attacks and avoid paying ransoms.

The Biden administration in September for the first time ever blacklisted a cryptocurrency exchange, a Russian-owned platform accused of helping launder ransomware payments.

Mr. Adeyemo said the Treasury is committed to using sanctions to go after those that use crypto payments to violate U.S. laws by committing ransomware attacks and that the administration sees international coordination as key to that effort.

“Many of these crypto exchanges and cybercriminals that facilitate ransomware exist outside of the United States and have an impact here,” he said.

Treasury intends to make sure U.S. allies and partners also take actions to adopt anti-money-laundering rules for crypto exchanges and to extend existing protections within their traditional financial sectors to cryptocurrencies and other financial technologies started in their jurisdictions, Mr. Adeyemo said.

DeFi Is Like Nothing Regulators Have Seen Before. How Should They Tackle It?

Without middlemen to deputize, the SEC and other regulators will have to rethink their approach to enforcement. A lot could go wrong.

The cryptocurrency industry is going through a period of intense growing pains. Like a lanky tween, it is running faster and jumping higher than ever before, thanks to major milestones such as bitcoin adoption in El Salvador, a continuing surge in non-fungible token (NFT) interest and ever more involvement from established players like Visa.

But, again like an ambitious adolescent, the newly empowered crypto sector is also bumping awkwardly into the constraints imposed by society. Gary Gensler’s Securities and Exchange Commission seems determined to be crypto’s strict disciplinarian, laying down the law about curfews, hemlines and exchange-traded funds.

For nearly a decade, crypto regulation was absent or scattershot. The trade-off for crypto’s adulthood will be much stricter oversight by the graybeards who make the rules.

The metaphor of crypto-as-teenager, though, breaks down on one front: decentralized finance (DeFi). In functional terms, DeFi protocols are venues for trading or lending crypto tokens and derivatives.

But unlike a conventional crypto exchange like Coinbase or Kraken, DeFi protocols exist across a swarm of validating and coordinating nodes rather than as a single portal and matching engine run by an incorporated legal entity.

Furthermore, at least in theory, a DeFi protocol can exist without the formal leadership with which regulators would normally interact. This is a particular challenge for regulators because many existing DeFi systems are designed without any requirement that users reveal their identities.

Again, that’s a stark contrast with entities like Coinbase and Kraken, which have comprehensive “know your customer” processes.

This matters because DeFi is a potential vector for all three of the key risks that financial regulators are tasked with controlling. One is criminal activity, including money laundering, tax evasion and terrorist financing (though these activities already appear very limited across crypto systems).

The second is fraud, which was on major display with a series of fake or deceptive token sales during the 2017 initial coin offering (ICO) boom – facilitated by early iterations of DeFi. The third target is systemic risk. DeFi and crypto still probably aren’t large or influential enough to trigger broader financial contagion in the event of a major market collapse or system failure, but you no longer have to engage in wild speculation to foresee that level of influence in the future.

Traditionally, regulators rely immensely on the people running trading services to control those risks by monitoring their customers and suspicious activity on their platforms. The leaders of traditional financial services themselves sometimes become the linchpin of enforcement – the responsible arm the SEC twists to get what it wants.

Without those pressure points, things will get tricky. “It’s going to be very difficult to regulate DeFi. Much harder than crypto,” says Katherine Kirkpatrick, co-chair of the financial services practice at King & Spalding. “The ultimate question, beyond how to regulate, is how do you enforce the rules? How do you make someone accountable for breaking the rules? It doesn’t make sense to regulate if you have no enforcement mechanism.”

In other words, trying to regulate DeFi is a bit like trying to parent a super-powered 14-year-old who can fly, teleport and turn invisible at will.

Should DeFi be Regulated?

Of course, that demands a question: If you had a kid like that, would you want to lay down the law at all? When something new appears in the world, should we immediately start building fences around it, or give it the space to see just how powerful it is?

Premature or misguided regulation could certainly stifle innovation and growth in DeFi. “If you try to regulate the technology itself rather than activity, you’re going to wind up having unintended consequences,” says Duane Pozza, formerly assistant director in the Division of Financial Practices at the Federal Trade Commission and now a partner at the law firm Wiley Rein.

That could lead to “crushing the technology and probably not even stopping the [unlawful] activity.”

Despite the risk of misguided overreach, though, there are good reasons to want a regulatory framework for DeFi. Above all, it would make the fundamental advantages of the technology accessible to many more participants, particularly public companies and regulated institutions.

That’s especially true now that the idea of private blockchains created by large banks has mostly fizzled out, according to Michael Shaulov, CEO and cofounder of Fireblocks, a DeFi custody and infrastructure provider.

“In the last 10 years, most financial institutions recognized that blockchain and DLT is the future,” says Shaulov, referring to distributed ledger technology. “Now they have quite a few good use cases, but what they all want to do is disintermediate. Uniswap is something that replaces for them the Nasdaq [market].”

Shaulov says he has frequent conversations with large players interested in DeFi, but the current U.S. regulatory landscape is a barrier. Using DeFi in its current state could expose banks like JPMorgan to money laundering or fraud risk.

That’s a major reason the DeFi platform Swarm Markets made the unusual decision to move from a largely unregulated jurisdiction to one with more oversight. The platform launched in the United States in 2018, but the ambiguity of the rules there soon became a constraint.

“The effective tone [of U.S. regulator statements] was, ‘We don’t know, and because we don’t know, we’re not going to make a ruling,’” according to Philipp Pieper, Swarm Markets’ co-founder. “It stated very clearly no one was willing to risk the current structure of the market.”

In mid-2018, Swarm started looking at alternatives, including other lightly regulated domiciles like Malta and Cyprus. “It was clear that wasn’t where things were going to happen,” Pieper chuckles.

Then in 2019, Germany passed new rules clarifying regulation of a variety of crypto-assets, including tokenized securities. Swarm Markets chose to relocate to Germany because that clarity gave it a firm platform for growth, while maintaining the key advantages of DeFi for institutions, including self-custody, decentralized liquidity provision and transparency.

“Controlling my own assets … and choosing whatever custody provider I see fit, that’s a huge differentiator versus putting a couple hundred thousand into a centralized exchange,” says Timo Lehes, managing director at Swarm Markets. Swarm users can also contribute to a liquidity pool and earn fees or yield much as through other DeFi protocols.

Finally, the transparency of a system that records orders to a public blockchain improves market fairness by making manipulation easier to spot. Running a regulated centralized exchange “involves all these questions about how you create an unbiased system,” says Pieper.

But “all of that is answered very cleanly if you build transparently, and show all that to the regulator. Our [regulatory] application documents got thinner and thinner.”

Know Your Customer

Of course, there is a trade-off here and one that will understandably raise the ire of crypto purists. “The result of being a licensed outfit is that we have to do an extensive amount of customer due diligence,” says Pieper. “KYC [know your customer], AML [anti money laundering] and chain analytics. From a customer perspective, it’s no different from what you get today on a centralized exchange.”

By the same token, Swarm Markets has a degree of centralized control built into its system. “If we’re forced by regulators [we can] suspend a user. It could follow that basically funds are frozen, but it’s not that we can then take control of those funds.”

Customer oversight also impacts flows between DeFi protocols and pools, which could soon involve a sharp divide between “clean” and “dirty” operations. Funds from a platform with weak KYC likely won’t be free to flow into regulated and “whitelisted” pools like Swarm Markets’ because it would re-introduce the counterparty risk institutions want to avoid.

It’s an undeniably bitter pill. However, DeFi and crypto technologies also promise a variety of advancements to the KYC process that could make it more palatable.

For instance, zero-knowledge proofs could be used to provide verification of a trader’s eligibility without revealing their identity to a regulated DeFi protocol. Under such a regime, traders could remain completely anonymous unless and until law enforcement subpoenaed their identity records from a protocol, substantially preserving user anonymity.

A related idea is “portable” KYC, which could allow a clearance from one trading venue to be used on another; that could include getting cleared by a centralized exchange like Coinbase and then using that credential elsewhere, possibly with an NFT housed in the KYC’d wallet. Both innovations, though, would require significant regulatory reform to enact.

Is A DAO A Person?

The return of some sort of end-user KYC may be inevitable for any workable DeFi regulation. But on other frontiers, there are strikingly new questions that deserve innovative regulatory approaches.

Biggest among these is the question of how regulators should approach truly decentralized systems. In principle, DeFi systems have bootstrapping mechanisms that rhyme with Bitcoin’s, with protocols that distribute native tokens in exchange for liquidity deposits.

That means a system can have basic rules written by one developer or a small team and potentially grow to the size of a major hedge fund or beyond. In theory this could also include decentralized governance by the user community, making such platforms a species of decentralized autonomous organization (DAO).

To be clear, not all DeFi systems are as decentralized as advertised. But some truly do seem to be exactly what they say: asset markets run by a distributed community rather than a middleman. SushiSwap, which arose from a fork of the more centrally run Uniswap, was one example sources considered on the more authentically decentralized end of the scale.

On one level, this isn’t as complex to regulate as it might sound, according to Stephen Palley, a partner specializing in crypto at the law firm Anderson Kill.

“Lawyers invented robots,” he says. “The corporation is a legal fiction – it has personhood under the law. We have a very robust series of laws that explain what that means.”

That means a DAO, like a corporation, could be the target of legal or regulatory judgments, even if it had no formal leaders.

“We’re starting to see that – who’s responsible for decisions made by an AI? Is it a software developer, is it code?” asks Palley.

“For it to be a code, you have to recognize legal personhood for software. It sounds goofy and science-fictiony, but it’s not too far over the horizon.”

That leaves the question of enforcement a bit up in the air, since there’s no clear mechanism for a national regulator to force decisions onto an effectively stateless entity. But the variety of on-and-off ramps to any crypto system could become chokepoints for enforcement. At an extreme, a government could make it illegal for citizens to transact with a rogue DAO.

The State I’m In

The unhappy truth is that such hypothetical extremes will likely become reality if DeFi continues to grow. Regulators exist to regulate and have little stomach for powerful entities floating beyond their oversight. The modern state’s monopoly on violence as the endpoint of law enforcement will likely find some way to control your access to protocols living in the cloud.

There will undoubtedly be plenty of committed crypto-anarchists willing to test the resolve of regulators. For operators of DeFi systems, there will always be jurisdictions beyond the reach of tough regulation, and it seems plausible that small-time users who take sufficient privacy precautions will continue to take the risk of using them.

Even if they get pushed to the margins, such “pure” DeFi systems will continue to have social value as borderlands of innovation and privacy. In the broader sweep of history, they will be testing grounds for new forms of digital statelessness.

But for those interested in building on DeFi and leveraging most of its advantages to improve the financial system, there will be trade-offs even in the best-case scenario. That may not sound like much fun, but growing up rarely is.

The CFTC Was Proved Right on Bitcoin Futures. What’s Next For The Agency?

For years the commodities overseer was the de facto regulator of crypto markets.

On Sept. 29, 2021, the U.S. Commodity Futures Trading Commission (CFTC) announced it had filed 14 complaints against various crypto trading platforms. It was the busiest day of action for the nation’s top commodities regulator and a noted departure from its usual course. Between 2015 and the end of June 2020 the watchdog had only brought 19 separate enforcement actions related to crypto businesses.

Despite that seemingly paltry number of investigations, for years many participants and observers of the crypto industry viewed the CFTC as the de facto overseer of virtual currencies. The agency of about 700, responsible for monitoring hundreds of trillions of dollars in derivatives trading, first classified bitcoin as a commodity in 2014.

In an industry where there is little positive guidance, where regulators historically seemed averse to commenting on the market, the CFTC stepped up to provide a little clarity. In late 2014, the agency affirmatively stated that digital currencies fall under the definition of a commodity and therefore its remit, in the Commodity Exchange Act (CEA). In 2018, Bloomberg called CFTC “the federal overseer of digital currencies.”

All that is largely subject to change. And indeed it already has. The agency that gave us pro-crypto regulators including “digital dollar” advocates Chris Giancarlo and Daniel Gorfine, stablecoin-defender Brian Quintenz and ETH-positive Heath Tarbert is changing hands. There are currently three out of five vacant “commissioner”-level positions that President Joe Biden intends to fill. Who he appoints will undoubtedly have a significant effect on the next growth phase in crypto.

The CFTC is already ceding ground. Earlier this year Commissioner Dawn Stump, a Republican, said that sister agency the Securities and Exchange Commission (SEC) has a large role to play in regulating crypto markets. This came after SEC Chair Gary Gensler said cryptocurrencies, by and large, were neither currencies or commodities but securities, placing them in his domain.

“There has often been a grossly inaccurate oversimplification offered which suggests [crypto assets] are either securities regulated by the Securities and Exchange Commission, or commodities regulated by the Commodity Futures Trading Commission,” Stump said in August. “Even if a digital asset is a commodity, it is not regulated by the CFTC.”

Going forward, it seems, the CFTC will limit itself to dealing with crypto derivatives – like futures and options contracts – rather than the coins themselves.

This goes a long way in reducing the tension between the CFTC and SEC, in what some commentators call a turf war between agencies with overlapping jurisdictions. Crypto presents a unique challenge for legacy frameworks: Pure cryptos disintermediate builders and stakeholders from the underlying asset.

But in their beginning stages, before they’re broadly adopted or “sufficiently decentralized,” they more often resemble investment contracts. Then there’s the question of who is at the center of a smart contract; Gensler wants coders to take ownership of their code.

Stump and Gensler’s statements also seem to reduce the importance of the supposed continuum between securities and commodities. For years, developers have operated under the understanding that a crypto, issued by a team, could eventually “morph” into a commodity that belongs to the world. That’s what happened with Ethereum’s native currency, ETH, which both SEC and CFTC officials stated point blank was a security during the initial coin offering (ICO).

Giancarlo advocated a Hippocratic, “do no harm” approach towards crypto. Before taking over as chair, he laid his views on the line, stating that blockchains could “revolutionize the world of finance.”

He wanted the agency, founded in 1974 to monitor agricultural products, to become a “21st century regulator.” In 2017, he launched LabCFTC, an internal unit to study digital assets, led by Daniel Gorfine.

Investigations were limited to pretty clear, identifiable, fraudulent schemes; businesses that failed to register with the CFTC; illegal off-exchange transactions; gatekeepers and price manipulators.

In 2018, Giancarlo did the unthinkable and approved bitcoin futures trading. More specifically, he allowed CME Group and Cboe Global Markets to “self-certify” these products. In 2019, then-Chairman Heath Tarbert declared that ETH is a commodity. A year later ErisX, a cryptocurrency derivatives platform, launched the first ether futures contract.

“Reasonable regulation that is carefully tailored to solve for identifiable regulatory risks is helpful in advancing mainstream adoption of new technologies and innovations. It is important, however, to strike an appropriate balance and not prematurely box-in innovation that is still in its early innings of development,” Gorfine told CoinDesk over email.

The SEC’s historically limited role in the crypto industry was positive. It took a back seat, and innovators were allowed to innovate. They oversaw specific institutions, in the same way that states oversee applications of crypto being used as money transmitters, but left the market broadly in the hands of the CFTC. And actors, from BitMEX to CabbageTech Corp., were still brought to justice when they broke the rules.

There are still ways for the CFTC to ensure its greater role in the market. Last year, former U.S. Rep. Mike Conaway proposed the “Digital Commodity Exchange Act” that would create a path for crypto exchanges to be regulated by commodities regulators. The bill died, but Rep. Tom Emmer (R-Minn.) is still talking it up.

Then, there’s the possibility that certain cryptos would qualify for a “de minimis” exception, making them more like foreign currencies.

President Biden’s pick to head up the CFTC is Rostin Behnam, who currently serves as acting chair; law professor Kristin Johnson and government watchdog Christy Goldsmith Romero are likely to be named commissioners. All have experience dealing with crypto and would make fine watchdogs.

“Acting Chairman Behnam is an excellent choice to serve as Chairman of the CFTC. He has a strong understanding of the issues and I believe will ensure that the CFTC remains forward-leaning in its oversight of the markets,” Gorfine said.

In 2018, Behnam even noted how digital currencies could become integrated in “smaller economies.” “These currencies will be outside traditional monetary intermediaries, like government, banks, investors, ministries or international organizations,” he said.

That was then, this is now. It’s unclear how the CFTC of tomorrow will treat the crypto markets. But if comments from the White House, SEC and U.S. Treasury Dept. are any indication, enforcement will pick up and the “do no harm” approach will likely be minimized. But the CFTC’s place in crypto history is still being felt.

Yesterday, the SEC finally allowed a bitcoin futures-focused exchange-traded fund to go to market. I asked Giancarlo about it:
“The SEC’s proposed greenlighting this week of ETFs on bitcoin futures rather than on the spot bitcoin markets suggests lingering hesitancy at the SEC about the stability and health of the spot market.

“It is also a statement of confidence in the quality and effectiveness of the CFTC’s regulation of the bitcoin futures markets, which we greenlighted in 2017 under my administration.

“Yet, our 2017 decision not to block the launch of bitcoin futures faced extensive criticism from both Wall Street and the Washington and international regulatory communities.

“It is remarkable how something so controversial just four years ago is taken as the right and safe course today. It seems that by braving political risk back in 2017, the CFTC provided regulatory certainty essential for the rapid institutionalization of the crypto industry.”

So Will The New CFTC Look Like The Old?

Updated: 10-20-2021

Cryptocurrency Industry Gets Tailored Guidance On Complying With U.S. Sanctions

Treasury’s guidelines for virtual-currency companies are the latest move in the Biden administration’s effort to address risks posed by the emerging sector.

Virtual-currency companies now have a set of Treasury Department guidelines on how to ensure they comply with U.S. sanctions, the latest salvo in an effort by the Biden administration to combat ransomware and other nefarious uses of cryptocurrencies.

The Treasury issued the best practices last week, a move that came after several other major developments. In mid-September, the Treasury for the first time sanctioned a virtual-currency exchange, the Russian-owned SUEX OTC, for allegedly helping launder ransomware payments. In early October, the Justice Department said it was creating a national cryptocurrency enforcement team to tackle investigations and prosecutions of criminal misuses of digital currencies.

“This is the beginning of a concerted effort, a shock-and-awe campaign around ransomware,” said Ari Redbord, a former senior Treasury adviser who now works as head of legal and government affairs at TRM Labs Inc., a company that helps organizations investigate cryptocurrency-related fraud.

The guidance and the designation of SUEX represent relatively recent steps by the Treasury’s sanctions unit into the cryptocurrency space. Another Treasury unit, the Financial Crimes Enforcement Network, has for a decade sought to clarify to cryptocurrency companies their obligations under U.S. anti-money-laundering laws, beginning with changes to rules related to money services businesses in 2011.

In creating guidance for cryptocurrency companies, the Treasury’s Office of Foreign Assets Control, or OFAC, has taken sanctions-compliance principles and practices that have long been the standard in other areas of business and tailored them to the virtual-currency sector, Mr. Redbord said.

The guidance applies to virtual-currency exchangers, administrators, miners, wallet providers and other financial institutions with ties to the industry. It contains a mix of principles that apply across industries and to more traditional currencies and specific tips for virtual-currency companies.

The guidance is helpful for the industry given the continual emergence of new companies and service providers, said Nirvana Patel, chief compliance officer of Prime Trust LLC, which makes tech tools for fintech companies including cryptocurrency exchanges.

“For some of the larger players in the space, this wasn’t really much of a blip on their radar,” Mr. Patel said. “It’s useful for new participants or even other players who are looking to get involved.”

The Guidance Highlights The Importance Of:

• Geolocation Tools To Identify And Block IP Addresses Originating From Sanctioned Countries

• Transaction Monitoring To Identify And Investigate Virtual-Currency Transactions Involving Sanctioned Entities And Individuals

• Conducting Periodic “Look-Backs” Over Transactions If The Treasury’s Sanctions Unit Blacklists A New Virtual-Currency Address

The guidance also clarifies how prohibited virtual-currency transactions are blocked. If a U.S. resident, citizen or company determines that they hold a virtual currency that OFAC requires to be blocked, they must deny all other individuals access to the currency and report the currency to the government within 10 business days, OFAC said.

The guidance was released alongside a report by Treasury’s FinCEN that identified recent ransomware trends in anti-money-laundering law data. Financial institutions are required to report suspicious transactions to FinCEN under the law, the Bank Secrecy Act.

Nearly $600 million in transactions linked to possible ransomware payments were reported by U.S. banks in the first six months of this year, with the total volume of suspected ransomware payments on pace to nearly double since last year, FinCEN said.

The report identified a number of money-laundering typologies associated with ransomware attacks. Those include individuals or organizations requesting payments in anonymity-enhanced cryptocurrencies; the repeated conversion of funds from one virtual currency to another, known as “chain-hopping”; and the use of mixing services and decentralized exchanges.

A virtual currency “mixer” charges customers a fee to send cryptocurrencies to a designated address in a manner designed to conceal the source or owner of the currency.

Centralized exchanges remain the preferred cash-out point where cryptocurrency is converted to a traditional currency, FinCEN said.

“Having this information about [suspicious activity reports] that have been filed, distilling that information, and re-presenting it to those institutions that may have filed those—that is invaluable,” Mr. Patel said. “We need more of this direct feedback.”

Updated: 10-20-2021

Republican SEC Commissioner Criticizes Agency’s Approach To Crypto

Hester Peirce says regulators should work with the cryptocurrency industry to build rules that it can comply with.

A Republican member of the Securities and Exchange Commission criticized the agency’s approach to regulating the cryptocurrency industry, which Chairman Gary Gensler, a Democrat, has likened to the Wild West.

Hester Peirce, one of two Republicans on the five-member commission, said Wednesday that the agency should be making more of an effort to work with cryptocurrency firms to establish rules that they can comply with.

“I think it’s safe to assume that crypto is going to grow in size,” Ms. Peirce said at The Wall Street Journal’s Tech Live conference. “And so what we can do now to invest in building a reasonable framework, I think, will pay off down the line.”

Mr. Gensler, like his predecessor Jay Clayton, a Republican appointed by then-President Donald Trump, has suggested that most cryptocurrencies likely meet the definition of a security and should therefore comply with SEC rules. Among other things, that would mean the online trading platforms that enable individual investors to buy and sell cryptocurrencies should be registered with the SEC.

But Ms. Peirce, who also was appointed by Mr. Trump, said the process of complying with SEC rules is “tremendously hard” and time-consuming for startup companies to follow.

“Regulators tend to be very conservative for a reason,” she said. “If something doesn’t get approved, we’re not going to get blamed; if something does get approved and something goes wrong, we will get blamed. But that hesitation is really costly for smaller entities.”

Ms. Peirce also echoed criticism from crypto investors and some Republican lawmakers of the SEC’s refusal to provide clearer guidance on what sorts of cryptocurrencies might fall outside its remit. Ms. Peirce suggested the agency’s stance is motivated by an interest in expanding its own regulatory purview.

“I do think, at this point, there’s a lot of jurisdictional interest in this space,” she said. “People can see that there’s going to be rapid growth here, and people want to get a toehold on it.”

Mr. Gensler, who taught a course on cryptocurrencies at the Massachusetts Institute of Technology before being tapped by President Joe Biden to lead the SEC, has expressed skepticism about the sector’s prospects.

“I don’t think there’s long-term viability for five or six thousand private forms of money,” he said last month, referring to one estimate for the number of cryptocurrencies in existence. Mr. Gensler has also questioned the industry’s survival prospects beyond this decade, particularly if it remains outside of financial regulations.

Updated: 10-21-2021

What I Learned About Crypto Regulation From A Week In DC

Crypto has arrived in the capital and concerns about stablecoins are very real. Nikhilesh De, CoinDesk’s managing editor for global policy and regulation, takes stock.

Within a 36-hour period, the first bitcoin futures exchange-traded fund (ETF) began trading, the underlying cryptocurrency hit a new all-time high and federal lawmakers dusted off their 2019-era concerns about the Facebook-linked stablecoin project Diem.

I spent most of DC Fintech Week in the U.S. capital to reconnect with people I haven’t seen in two years and put faces to folks I’ve emailed during the coronavirus pandemic but never actually met. In these conversations, I found that the policy/legislative landscape around crypto has greatly matured since my last visit.

Federal lawmakers who couldn’t care less in 2019 are planning to propose legislation regulating different aspects of the industry in the coming months.

There’s also a better understanding of crypto. A lot of the regulatory reaction in late 2019 was focused on the then-Libra project, which was announced by social media giant Facebook that summer.

Libra, at the time, was a pretty visionary project that policymakers saw as having the potential to destabilize the financial system. The project, now named Diem, has been fairly quiet over the past 10 months (this week’s news notwithstanding), and we’re seeing lawmakers focusing on broader swaths of the industry.

What happens in 2022 will depend on how the industry handles these issues and how regulators react to the industry.

It’s Still Early

You’d be forgiven for thinking that all of Washington, D.C., is focused on crypto issues right now. There’s been no shortage of regulators and policymakers revealing new work around crypto, whether that’s the President’s Working Group for Financial Markets’ pending stablecoin report, the Fed’s pending central bank digital currency report, Securities and Exchange Commission (SEC) Chairman Gary Gensler’s increased comments on registration and regulation of crypto exchanges or the Commodity Futures Trading Commission’s (CFTC) recent spate of enforcement actions against industry businesses.

For all that, it’s still pretty early for the industry. A lot of lawmakers have heard of crypto, but it’s not a pressing concern for them. And this is even after the industry helped delay a massive, bipartisan infrastructure bill due to a single provision that impacted it.

The crypto industry is ramping up its engagement with Washington. In a feature for CoinDesk’s Crypto 2022 Policy Week coverage, Rob Garver wrote that companies and trade groups are increasing the number of lobbyists tasked with pushing for crypto-friendly regulations.

This engagement, however, is sort of mixed. At least one congressional staffer described interacting with newer lobbyists as being “painful,” an observation I’ve heard echoed by other industry participants.

We’re also seeing an increase in angry tweets and other social media messages directed at specific lawmakers or regulators. I’m told that these are extremely unhelpful in terms of communicating policy concerns. Great for engagement, though.

Crypto Has Arrived

Even if it isn’t top of mind, lawmakers and regulators are thinking more about crypto than in years past. We’re seeing this in the fact that aspiring ETF issuers are securing regulatory approvals to list retail-accessible trading products and that we are awaiting no less than three different government reports on aspects of the crypto industry that will inform policy.

One of the biggest issues may just be the differences in how different regulators or lawmakers perceive crypto. Individuals focused on consumer protection may be concerned that exchanges shut down every time the crypto markets grow volatile, while securities/commodities-focused regulators may be more worried with the quietly growing turf war between different agencies over who can regulate what.

And there is a huge amount of attention focused on the use of crypto in criminal activity such as ransomware payments.

The industry, as a collective, has to address all of these issues. Regulations are going to come regardless of whether industry acts or not. How severe these regulatory actions are may depend on how proactive the industry is.

Concerns About Stablecoins Are Real

The concern around libra has morphed into concern over stablecoins at large. The revelation that neither tether (USDT), the largest stablecoin by market cap, nor USDC, the second most-issued U.S. dollar-backed stablecoin, are fully backed by U.S. dollars held in regulated bank accounts, did little to help.

But while regulators seem to agree that something should be done to rein in stablecoin issuers, we don’t yet have a clear picture of how that might be done. The president’s working group will publish a report that may recommend creating a special purpose bank-like charter to oversee stablecoin issuers.

This charter would likely benefit stablecoin issuers and the exchanges that list dollar-pegged tokens by granting some level of legitimacy to the projects.

However, the working group will ask Congress to enact a law creating this charter, and I’m told that is not likely to happen.

The alternative is asking the Financial Stability Oversight Council to create a rule around this issue, which lawmakers and industry participants alike have opposed.

Another train of thought centers around treating stablecoins backed by commercial paper and short-term securities as money market funds, meaning something the SEC would regulate.

This would likely not be great for crypto exchanges that list stablecoins like USDT and USDC (Coinbase, for example) as these firms would have to register with the SEC as a securities trading platform and abide by a specific set of rules.

This also seems to be an issue of the industry’s making, but there’s too much in flux to see how these regulations will actually develop.

I joked about how much has happened in 2021 with every person I spoke to. And yet, 2022 is shaping up to be an even more eventful year for crypto policy on several fronts. Watch this space for more heated debate in the coming months.


Treasury Official Acknowledges Most Crypto Transactions Are ‘Legitimate’ But Still Anticipates Additional Sanctions

“The vast majority of digital assets are being used for legitimate purposes, but for those that are primarily in the business of furthering criminal enterprises, we plan to use our tools to go after them,” said Wally Adeyemo.

Wally Adeyemo, the Deputy Secretary of the United States Department of the Treasury, said the department would likely be enforcing more sanctions on companies involved in illicit transactions related to ransomware payments.

Speaking at an online event hosted by the Center for a New American Security with former Treasury Secretary Jack Lew and Ambassador Paula Dobriansky, Adeyemo said the U.S. government would likely be dipping into its toolbox by employing sanctions when criminals threaten national security interests.

He specifically mentioned “crypto exchanges or mixers that are fundamentally in the business of furthering cybercriminals” as possible targets.

“Our view is that the vast majority of digital assets are being used for legitimate purposes, but for those that are primarily in the business of furthering criminal enterprises, we plan to use our tools to go after them,” said Adeyemo. “We also have to admit to ourselves that ultimately the growth of digital assets is a challenge that we have to address when it comes to our sanction regimes.”

Adeyemo added any investigations into illicit crypto sanctions would include collaboration with the FBI, the intelligence community and other agencies. His comments come following an Oct. 18 report saying the department needed to do more to develop its infrastructure and policies in regards to digital assets, as they were hampering the implementation of sanctions while balancing funds from legitimate humanitarian organizations.

The report suggested the U.S. Treasury should modernize to include the “right expertise, technology, and staff” to tackle digital assets.

The government department has been employing sanctions as part of the United States’ efforts to fight ransomware attacks threatening the country’s infrastructure, such as when Russia-based DarkSide hackers attacked the Colonial Pipeline system in May.

Last month, the department announced it would impose sanctions on the Czech Republic as well as Russia-based business Suex OTC for allegedly allowing hackers to access cryptocurrency sent as payment for ransomware attacks.

Updated: 10-22-2021

Trump Banking Regulator Determined Banks Should Be Allowed to Trade Crypto

But the OCC staff’s ruling was never made public.

A U.S. banking regulator during the Donald Trump administration took the position that banks could legally trade cryptocurrencies for their clients, according to a Politico article Friday.

* The determination was made by staff at the Office of the Comptroller of the Currency (OCC), according to the report, which cited unnamed sources. It could enable banks to have digital currencies as assets for trading.

* The determination, which was never made public, counters the aggressively anti-crypto stance of the former President, who in a June interview with Fox Business said that bitcoin seemed “like a scam.”

* Three weeks after the 2020 Presidential election, Coinbase CEO Brian Armstrong even took to Twitter to blast rumored plans by the U.S. Treasury Department to attempt to track owners of self-hosted cryptocurrency wallets with an onerous set of data-collection requirements.

* Michael Hsu, President Joe Biden’s acting head of the national bank regulator, has been reviewing the OCC’s stance on crypto since taking office in May.

Updated: 10-23-2021

Texas Ethics Commission Seeks Pro-Crypto Rule For Political Contributions

If approved, cryptocurrency donations and contributions will need to be reported as in-kind contributions or as investments, not currency.

The Texas Ethics Commission proposed a new rule that permits government officials and politicians to accept Bitcoin (BTC) and cryptocurrency contributions.

The proposal was filed with the Texas Secretary of State, which sought to address and clarify the reporting requirements of political contributions made with cryptocurrencies. According to the filing:

“The new rule permits candidates, officeholders, and political committees to accept cryptocurrency. It does not distinguish between any types of cryptocurrencies, like Bitcoin.”

If approved, cryptocurrency donations and contributions will need to be reported as in-kind contributions or as investments, not currency. According to the Commission, this move “mirrors the way the Federal Election Commission (FEC), Internal Revenue Service (IRS) and Securities and Exchange Commission (SEC) treat cryptocurrency contributions.”

The proposal clarifies that political and governmental campaigns will not be able to permitted to spend cryptocurrencies directly and will require to liquidate cryptocurrencies before spending the proceeds. However, the Commission mentioned:

“The rule would not require filers to liquidate their cryptocurrency holdings within any particular timeframe.”

In addition, the proposal plans to counter the high volatility of cryptocurrencies by directing filers to report the value of any accepted cryptocurrency as the fair market value at the time of receipt.

The legality of every crypto contribution will be determined by an affirmation that the contributor is not a foreign national. According to the filing, the new rule is proposed under Texas Government Code §571.062, which authorizes the Commission to adopt rules to administer Title 15 of the Election Code.

The state of Texas recently approved two house bills that promote cryptocurrency blockchain adoption.

According to a Cointelegraph report, Texas House Bills 1576 and 4474 were signed into law by Governor Greg Abbott that allows the establishment of a blockchain working group and amends the state’s Uniform Commercial Code to recognize cryptocurrencies under commercial law.

Updated: 10-24-2021

Crypto Is Failing As Money. Regulators Can Save It

It might not replace fiat currencies — but, correctly supervised, it could make them a lot more useful.

Cryptocurrency has so far failed to sweep away government-issued money, or to bring about the broader revolution that its most ardent enthusiasts envision. But what if the underlying technology could be harnessed to transform traditional fiat currencies — for example, by making them much easier and cheaper for more people around the world to use?

This goal might be attainable — with help from the governments that crypto was meant to sideline.

Ordinary money leaves a lot to be desired. Most people keep it at large banks, which have sometimes used subterfuge and even outright fraud to tax their customers — and which have proven troublingly fragile in crises.

Moving money can take days, particularly if it must wend its way through the antiquated and hackable network of correspondent banks that handles international transfers. For those who don’t have bank accounts — including millions of Americans, disproportionately Black and Latino — things are worse. Check cashers, ATMs, card issuers and money transmitters all charge burdensome fees.

Bitcoin, the original cryptocurrency, was designed to bypass all this. Anyone with an internet connection could set up a pseudonymous account, controlled with a private key.

Users could send digital tokens anywhere, at any time, thanks to a voluntary network of computers that recorded transactions on a public ledger known as a blockchain. High-powered cryptography and decentralization protected against abuse and malfunction.

The technology inspired hope not only for a more equitable sort of finance, but also for greater stability: The demise of one or more big global banks would do much less damage if payments could proceed without them.

Bitcoin has spawned an entire movement, but it has so far failed as money. Pure cryptocurrencies are far too volatile to be useful except for speculation, illicit trade and the occasional financing of activists in oppressive regimes. The computing power required for the Bitcoin blockchain makes it slow and expensive for smaller transactions, not to mention environmentally damaging.

People are afraid to lose the keys to their crypto (about a fifth of all Bitcoin is estimated to have been lost in this way), so they entrust them to wallet apps and other platforms that often get hacked.

Most crypto “believers” engage through the same types of intermediaries — exchanges, PayPal, specialized ATMs, opaque trust companies — that the technology was intended to replace. Many of these businesses are less safe and more expensive than traditional banks. Their rapid growth threatens more financial instability.

That said, all is not lost. Despite everything, crypto innovation may yet deliver a better payment system.

Consider Stablecoins: They deal with volatility by tying their value to fiat currencies — implicitly recognizing the biggest defect of pure cryptocurrencies. They can run on blockchains that work more efficiently than Bitcoin and have a smaller carbon footprint. At the moment, they’re mainly used by crypto speculators to park funds while deciding what to bet on next, or to earn interest in unregulated lending pools.

But as a unique form of electronic cash, they have the potential to make transfers easy, instantaneous and cheap. The Facebook-initiated Diem Association, for example, wants to use them to enable payments on mobile apps such as Facebook Messenger and WhatsApp. Ultimately, the infrastructure they use could even provide the rails on which government-issued digital currencies could travel.

Another initiative, known as Lightning, seeks to address Bitcoin’s throughput and energy issues by establishing side channels through which multiple payments can be made, with only the final balance recorded on the blockchain.

The system has allowed one application, Strike, to use Bitcoin as a utility for remittances between the U.S. and El Salvador. Users’ money can enter as dollars in one country and emerge as dollars in the other, spending practically no time in volatile crypto.

Innovations Like These Have Promise — but they also pose risks that regulators need to address.

* They Could Trigger Runs: Stablecoins redeemable for fiat currencies at fixed rates, and fiat-currency balances in apps such as Strike, need to be securely backed.

Often, they aren’t. A recent Bloomberg Businessweek exploration of Tether, the most popular stablecoin with about $70 billion outstanding, found a company “quilted out of red flags.” The lack of clarity — or a lack of funds — could one day spook holders, precipitating a crash as everyone rushes for the exits.

Regulators should insist on backing in the form of high-quality assets, and ideally in fiat currency. In the U.S., this can be achieved by requiring payment apps and stablecoin issuers to invest only in bank deposits that are in turn held at the Federal Reserve, or by creating a narrowly defined banking license allowing them to open reserve accounts directly with the Fed.

* They Could Undermine Traditional Banks: If people could safely keep their money in stablecoins and payment apps, they might stop depositing it at banks, depriving the latter of the resources to make loans. The resulting credit contraction could tank the economy.

A recent analysis by the Bank of England suggests that such concerns are overblown. People will likely be slow, its authors say, to adopt new forms of digital money, allowing time for the system to adapt.

Still, regulators should err on the side of caution, by forbidding stablecoins and payment apps to pay interest, or by reducing the interest they receive on their deposits at the Fed. Such restrictions could be relaxed later, once officials can assess any threat to banking and credit.

* They Could Crash Or Get Hacked: It’s one thing for Facebook’s apps to go dark for a day; it would be another if the company were running a global payment system. The newer protocols aren’t yet proven — as the recent outage of the Solana blockchain demonstrated. Lightning has known vulnerabilities.

Regulators should require enough equity capital to absorb surprise losses and set standards for security and governance — for example, by testing resilience and identifying who’s in charge of handling emergencies.

If a company can’t show it would act responsibly, it shouldn’t be allowed to run a payment system. Also, systems should be interoperable, so that a dollar in one can easily be converted into a dollar in another.

* They Could Abet Crime: Crypto platforms usually identify users only with an alphanumeric address. This has made them useful for ransomware developers, tax cheats and other criminals — and raised concerns that they could undermine international sanctions and anti-money-laundering laws.

Platforms and apps can and should demand identification where needed to enforce the law. If regulators required this — for example, when balances or transactions exceeded certain thresholds — crypto-enabled payment systems could remain broadly accessible and still be much more transparent than the current banking system.

In most cases transactions are already visible on public ledgers, which has helped both law enforcement and the crypto community track down and recover ill-gotten gains.

For many, the speculative frenzy surrounding cryptocurrencies won’t end well. Officials such as U.S. Treasury Secretary Janet Yellen are right to call for urgent measures to address the mounting risks. But they’re also right not to ban crypto altogether, as China has sought to do.

Surging innovation is already driving competition, both private and public, to upgrade a financial system that can certainly stand some improvement. The result could benefit people everywhere — so long as regulators don’t fall any further behind in guarding against the dangers.

Updated: 10-26-2021

US Regulators Are Exploring Policy For Banks To Handle Crypto, Says FDIC Chair

“Establishing clear regulatory expectations will be paramount to give this market an opportunity to grow and mature in a responsible manner,” said Jelena McWilliams.

Jelena McWilliams, the chairperson of the Federal Deposit Insurance Corporation, or FDIC, has said the agency is working with other regulators in the United States to explore “under what circumstances banks can engage in activities involving crypto assets.”

In a speech at the Money20/20 Fintech Conference on Monday, McWilliams said the FDIC, in coordination with the Federal Reserve and the Office of the Comptroller of the Currency, is looking to provide regulatory clarity for banks handling crypto assets, including stablecoins.

The chairperson said the FDIC planned to issue “a series of policy statements” in the coming months on guidance for banks.

According to McWilliams, stablecoins have many potential benefits to consumers, such as faster, cheaper and more efficient payments. However, she claimed that if “one or more were to become a dominant form of payment in the United States or globally,” there could be significant effects on that country’s financial stability with funds no longer being held in insured banks.

“In order to realize the potential benefits stablecoins have to offer, while accounting for potential risks, stablecoins should be subject to well-tailored government oversight,” said the FDIC chairperson. “That oversight should rest on the foundation that stablecoins issued from outside the banking sector are truly backed 1:1 by safe, highly liquid assets.”

McWilliams’ remarks came the same day Bloomberg reported that many U.S. regulators had agreed on the Securities and Exchange Commission leading the nation’s efforts to regulate stablecoins. The Department of the Treasury said in July it was exploring the creation of a type of banking charter for stablecoin issuers.

The seeming lack of regulatory clarity concerning digital assets in the United States has been an issue for many firms fearing legal action or other forms of governmental backlash. Some lawmakers have put forward legislation for U.S. regulators to work with participants in the crypto space to better define what’s expected of them.

Dubai Regulator Announces New Regulations For Investment Tokens

The UAE continues to be one of the friendliest jurisdictions worldwide for the digital asset industry.

The Dubai Financial Services Authority (DFSA) has established a regulatory framework for investment tokens as part of its efforts to stimulate the digital financial and technological environment while also meeting market players’ demands and requirements.

The DFSA is an independent regulatory body in Dubai that is in charge of monitoring and regulating financial services companies wanting to operate in the city. It also licenses and regulates its products and services.

According to a report by Emirati news agency WAM, the DFSA’s regulatory framework defines investment tokens as either “a Security Token or Derivative Token.”

The report notes that the creation of a new regulatory structure is the first step in the DFSA’s Digital Assets Regime, which reflects the suggestions made in Consultation Paper 138 published in March 2021. The consultation paper sought public input on the DFSA’s plans for regulating security Tokens.

As reported by Cointelegraph in March, the financial regulator in Dubai called on members of the public to submit comments on its proposed rules for cryptocurrencies considered to be security tokens.

The investment token framework is designed to safeguard investors and provide legal certainty for market operators.

It specifies the sort of investment tokens that are permitted and which may be listed on a Digital Asset Exchange in the Dubai International Financial Centre, as well as other pertinent information.

The DFSA is also working on plans for unlisted securities not covered by the investment tokens regulatory framework. These are anticipated to include cryptocurrencies, utility tokens and certain stablecoins. The DFSA is expected to publish a follow-up consultation paper in the fourth quarter of this year.

Updated: 10-27-2021

US Regulators Weigh Avenues For Banks To Hold Crypto

Comments from a top U.S. regulator demonstrate crypto’s prominent rise this year and a rush to contain particular aspects of the industry.

A team of U.S. bank regulators is devising ways in which banks may hold crypto on their balance sheets, provide custody and facilitate client trading.

In an interview with Reuters reported Monday, Jelena McWilliams, chair of the Federal Deposit Insurance Corp. (FDIC), said banks needed to be allowed to get involved with crypto.

“If we don’t bring this activity inside the banks, it is going to develop outside of the banks,” McWilliams said.

“The federal regulators won’t be able to regulate it.”

The FDIC is one of the federal banking regulators in the U.S. and one of two entities that provide deposit insurance to federally regulated institutions.

Comments from a top U.S. regulator demonstrate crypto’s prominent rise this year and a rush to regulate and contain particular aspects of the industry as it relates to the traditional finance sector.

Speaking to the Federalist Society in May, McWilliams said her agency wanted to hear from banks about how they are approaching crypto and what role the regulator should play.

A week later, The Office of the Comptroller of the Currency, the Federal Reserve and the FDIC began exploring an interagency policy team to examine the cryptocurrency sector.

“My goal in this interagency group is to basically provide a path for banks to be able to act as a custodian of these assets, use crypto assets, digital assets as some form of collateral,” McWilliams said as cited by Reuters.

“At some point in time, we’re going to tackle how and under what circumstances banks can hold them on their balance sheet.”

CFTC Chief Says Recent Crypto Cases Are ‘Tip Of The Iceberg’

Acting Chairman Behnam urges Congress to consider expanding the agency’s ability to oversee cryptocurrency markets.

The acting head of the Commodity Futures Trading Commission said Wednesday that he plans to continue aggressively policing cryptocurrency markets and called on Congress to consider expanding his agency’s authority to do so.

Rostin Behnam, the CFTC’s acting chairman, noted that the agency has settled two enforcement actions against cryptocurrency companies totaling $140 million. “But this is the tip of the iceberg,” he said in a confirmation hearing before the Senate Agriculture Committee.

The CFTC in recent months has settled cases for $100 million against crypto exchange BitMEX and $41 million against stablecoin issuer Tether Ltd.

Mr. Behnam, who was nominated by President Biden to serve as the CFTC’s permanent chairman, said that the two largest cryptocurrencies, bitcoin and ethereum, represent 60% of the entire crypto market and have been deemed by regulators and courts to be commodities rather than securities.

The CFTC has limited authority to regulate them. It was set up to oversee derivatives such as futures, options and swaps, which are priced off either traditional commodities such as soybeans or crude oil, or financial instruments, such as interest rates. The agency’s authority to monitor so-called cash markets for commodities is limited to stamping out fraud and manipulation, Mr. Behnam said.

In part, that is because some traditional commodities are regulated by other local or federal agencies, such as the U.S. Department of Agriculture or the Federal Energy Regulatory Commission. It is also because traditional commodities are mainly bought and sold by producers or end users, typically companies or banks that use derivatives to hedge risk, rather than individual investors.

Cryptocurrencies such as bitcoin are traded by millions of individual investors, on markets that lack the regulation and oversight afforded by stocks or options.

Crypto’s rapid growth has led to a scramble by federal regulators to create a framework for protecting these investors, reducing fraud and ensuring tax compliance, among other goals.

Its sister agency, the Securities and Exchange Commission, has outlined plans to become more active in policing crypto trading and lending platforms.

Mr. Behnam said he has a good relationship with SEC Chairman Gary Gensler and that the two agencies are working as a team on crypto-related issues. But he suggested Congress should consider expanding the CFTC’s authority to monitor cash markets for cryptocurrency given its size, rapid growth, and risks to consumers and financial stability.

“This would certainly be a departure from our historical role as a derivatives regulator,” Mr. Behnam said. “I think it’s critically important to have a primary cop on the beat, and certainly the CFTC is prepared to do that if this committee so wishes.”

It is unclear how an expansion of the CFTC’s authorities would affect markets for cryptocurrencies such as bitcoin. Crypto trading platforms have sought to avoid regulation by the SEC.

A Crypto Whisperer On How Regulators Toss Retail Into The Deep End

Industry commentator Maya Zehavi shares her views on capital controls, overregulation and crypto’s broken promises.

The big crypto story last week was the U.S. Securities and Exchange Commission (SEC) approving a bitcoin futures ETF. For the uninitiated, ETFs are exchange-traded funds: investment vehicles that track the performance of an underlying asset.

For years, crypto companies have been trying to set up a bitcoin ETF, which would allow traders exposure to crypto via non-crypto exchanges. A bitcoin futures ETF, though, comes with some caveats, one of which is the concept of “contango.” Detractors say it keeps things expensive and inaccessible to the traders it’s purportedly trying to reach.

The idea that retail investors might be getting the short end of the stick also raises questions about why the SEC – helmed by the relatively progressive, consumer protections-oriented Gary Gensler – might have approved a bitcoin futures ETF before a contangoless spot ETF.

“There’s a beauty in the irony of a regulator who is trying to crack down on crypto in the name of consumer protection and financial literacy and market manipulation, while actually throwing the retail [traders] in the deep end and telling you, ‘This is kosher, this is fine and safe.’”

Zehavi is the rare crypto investor with a deep aversion to the sort of pseudo-populist rhetoric that permeates the space. She’s also an entrepreneur and executive – her latest project is still in stealth mode. Earlier this week, we spoke at length about the bitcoin futures ETF, and whether crypto can ever outgrow its lawless roots.

Our conversation, edited and condensed for clarity, is below.

What Do You Feel Are The Most Pressing Issues For Regulators To Home In On?

One, capital raising for U.S.-based projects. Meaning, finding a way where startups can actually raise money, both from private rounds and public rounds, for their tokens, without being at risk for security violations. Until that time where there is a proper safe harbor, regime or something.

The second [thing] is market manipulation. My sense is that they are a lot more focused on trying to regulate stablecoins out of fear that they might be systematic and important to financial market stability, where that framework would actually give them the purview to start or try to regulate protocols that use stablecoins.

And I think that’s a big risk, both for decentralized infrastructure and for different DeFi [decentralized finance] instruments.

Regulators always like to say that they fear capital controls will let toxic assets or toxic risks spill over across markets. This is actually a case where overregulation might end up impeding crypto markets and innovation.

But honestly, I’m just disappointed from the futures ETF. I think that is a perfect case of regulators basically not doing their duty, and in fact impeding protections and obfuscating market costs.

So, instead of making it easier for consumers to get into crypto, they ended up putting a much more expensive crypto instrument in the hands of retail, where they’re up against the big dogs trading the futures, versus the spot prices.

Say More About That – You Think It Would’ve Been Better To Approve A Spot ETF First?

Yes, for sure. It’s just a perfect case study of how consumers say one thing, and then [regulators] act as though they have no qualms in basically accentuating the pain that they’re trying to resolve.

It’s more expensive, and they’re more prone to different market structure volatility, and they’re at the hands of whale market manipulation, just in terms of them trading on the volatility. So, you’re not protecting consumers, you’re not giving them cheap access to the asset class.

You’re basically putting in more modes for them to enter the market, and requiring more sophistication for them to know what kind of exposure they have, than any other asset class.

That’s the whole story of crypto, right? Smaller fish getting screwed over by the people that know what they’re doing, because there aren’t any protections.

I think sometimes the narrative around crypto is that it disintermediates and democratizes access to finance, and yada yada, when in fact, we’re just creating a lot of other intermediaries and different transactional fees that can or can’t be competitive with traditional finance. And we’re also emulating the same kind of primitive and pretending that it’s a novelty, a lot of time.

But there’s a beauty in the irony of a regulator who is trying to crack down on crypto in the name of consumer protection and financial literacy and market manipulation, while actually throwing the retail [traders] in the deep end and telling you, “This is kosher, this is fine and safe.

Like, don’t worry about it, like we’ve gone through all the due diligence.” And basically, you’re endangering retail a lot more than anything else you could have done. Which is just ironic.

You mentioned intermediaries – can government play a role in preventing crypto from replicating the problems in the existing system?

I think instead of taking the paternalistic Elizabeth Warren approach, of thinking you need to be the nanny here, it would be a lot more prudent were regulators to actually try and be the real cop on the market. They need more sticks and not more carrots.

So, actually enforce for dumping on retail.

Make sure market manipulation is something they’re able to – I hate the word “punish” – but try to rewrite the rules so it doesn’t happen, including on crypto exchanges. And maybe even look at market manipulation within different token sales, and actually say, “We’re willing to be the cop,” instead of, “Oh it’s a security, you’re all in the wrong.”

What Are Some Examples Of Market Manipulation In This Context?

Outages on Robinhood or on Coinbase or something like that, that’s market manipulation. That’s basically an exchange coming in and saying, “I’m going to stop the free flow of capital so that I’m not on the hook.” That kind of becomes a risk mitigation protocol by exchanges or by centralized intermediaries.

I think the OpenSea scandal is another one of those, the inside information. I think there’s a lot of stuff we know as an industry that we don’t always publicly call out.

Crypto has historically been a home for scammers and pump-and-dump schemes. Do you think the industry can ever escape its association with this sort of “grift economy,” and can regulation play a role there?

Yeah. You see the projects that have withstood the bear market and have managed to deliver. And I think that is almost like a badge of honor saying “this is a good actor.”

[And] I would take a really close look at the funds. If they’re signaling something that is wrong in these pump-and-dumps, if they’re signaling that they’re not going to liquidate their positions, or they’re not going to take a governance role, and they’re pumping or shilling the token or the project, then maybe the person they should be regulating are the funds, and not the project.

The Revolving Door Is Good For Bitcoin

There are legitimate concerns when regulators and business people can easily swap places, but this cross-pollination may also lead to good policy.

Brian Brooks went from a law firm to a bank to a mortgage company to a crypto exchange to America’s top banking regulatory agency to a crypto exchange again. He’s on the market again – but which way will it be, public sector or private?

The lanky Colorado native with his shock of sandy-brown hair is quite familiar with the revolving door, and may even epitomize the best and the worst of the well-trodden corridor between private interests and public service.

A dizzying number of former regulators – attracted by eye-popping valuations – are returning to private life at crypto firms while, to a lesser extent, business leaders are heading to public office. This trend is not unique to crypto and raises questions about whose interests these public offices truly serve: their own or the people’s.

“If you’re looking for regulation that facilitates commerce and promotes growth, then you want somebody who understands the details of the industry and knows what frameworks are required to get customers comfortable and create safety,” Brooks said in a phone call, dialing in from an airport in the bustling crypto hub of Miami.

His career in brief: After graduating from the University of Chicago Law School in 1994, Brooks was hired by the national law firm O’Melveny & Myers in Washington, D.C., where he worked for 17 years. In 2011, he joined the legal team at OneWest Bank led by future Treasury Secretary Steven Mnuchin, a bank once called a “foreclosure machine.”

Mnuchin was one of Brooks’ clients at O’Melveny & Myers, as was Fannie Mae, the privately owned but U.S. government-supported mortgage giant placed into conservatorship as a result of the 2008 financial crisis; Brooks joined in 2014.

He turned down a position to lead the Consumer Financial Protection Bureau in 2017, and the following year a passion for crypto led him to take a position as Coinbase’s top lawyer and an advisory role at decentralized credit network Spring Labs. In 2020, Brooks was tapped by Donald Trump to serve as acting comptroller of the currency during the final months of the administration under Mnuchin.

At the Office of the Comptroller of the Currency (OCC), informed by his previous time in the public sector, he says, Brooks moved quickly. In just 10 months, he issued a series of interpretative letters allowing banks to custody crypto, hold stablecoin reserves and serve as nodes on public blockchain networks as well as issuing national banking charters to crypto firms Anchorage, Paxos and Protego.

It was perhaps the most significant regulatory advance for the industry since the U.S. Commodity Futures Trading Commission (CFTC) classified bitcoin as a commodity in 2014.

“What I’ve always tried to do in all of my jobs is to make an impact. I think in our market economy there are people in all kinds of sectors who make a big impact. There are people who are public servants working in the government. There are people who are making an impact running big companies,” Brooks told Bloomberg Law in 2015.

Brooks was something of a forerunner when it comes to the increasing connection between crypto startups and public institutions. Though there are legitimate concerns about potential conflicts of interest when regulators and business people can easily swap places, this cross-pollination may also lead to good policy.

Certain roadblocks remain in place, legacies from a similar portal between Wall Street and Washington, but crypto presents its own set of issues.

Playing Catch-Up

“As crypto becomes more mainstream, as crypto seeks more institutional acceptance, as crypto seeks legitimacy in [Washington,] D.C., more crypto firms will be looking to get people involved in government into their firms,” Timi Iwayemi, a research assistant who works on the crypto beat at the Revolving Door Project at Center for Economic and Policy Research, a progressive think tank, said.

Although Iwayemi’s project doesn’t keep hard data, he noted that crypto seems to be playing “catch-up” in its attempt to influence policy by hiring from public officials.

In recent months, at least three former U.S. commodities regulators have announced signing contracts with private cryptocurrency firms. All signaled their support of the emerging industry while still in office at the CFTC.

This includes digital dollar advocates Chris Giancarlo, aka “Crypto Dad” for his pro-crypto touch; Daniel Gorfine, who led the in-agency digital currency lab; and stablecoin-defender Brian Quintenz. Mark Wetjen, who led the CFTC for five years beginning in 2011, joined crypto exchange MIAX to expand operations into futures and derivatives products.

They are by no means alone. Jay Clayton, the former U.S. Securities and Exchange Commission chairman who once said the majority of cryptocurrencies looked like pot-shot securities, joined the advisory board of the crypto custody provider Fireblocks.

He’s also a paid adviser to the hedge fund One River Digital Asset Management, which has exposure to bitcoin and ether. “I’ve always loved the potential efficiencies of this technology,” Clayton told the Financial Times when joining Fireblocks.

“Industry knowledge isn’t siloed,” Iwayemi said.

Binance, which has been filling its ranks with regulatory-whispers, hired former Treasury Department investigator Greg Monahan and Max Baucus, former chairman of the Senate Finance Committee. courted the former adviser to President Barack Obama, Jim Messina, to its board. Andreessen Horowitz (a16z), a venture capitalist firm with an increasingly ambitious crypto book, is in a category of its own.

The firm, which announced a multibillion-dollar crypto fund and initiative to educate pols on Web 3, recently brought on former fellow prosecutor Katie Haun, former director of the SEC’s Division of Corporation Finance Bill Hinman and Brent McIntosh, the former Treasury Department official who specialized in the regulation of digital assets.

“Crypto companies recruiting former regulators is a signal that the industry understands that the mainstreaming of crypto will be a very bumpy road if we don’t level up our expertise around compliance and risk as well as proactively engage, educate and advocate more productively with policy makers,” Chief Policy Officer Teana Baker-Taylor at the Chamber of Digital Commerce, a crypto lobbying group, said.

By and large, positions created for former overseers are sinecures – ambiguously defined “advisory” roles that offer legitimacy but maybe not business smarts. Often companies are paying for a type of branding, other times for a Rolodex. The connections people created while in government can help business insiders get meetings – say, at the U.S. Treasury or SEC – that can help establish some firms above their competitors, Iwayemi said.

Paying for power and influence might be anti-competitive, but perhaps, at this stage of the game, any favorable policy decisions will lift all boats. “Of course [the revolving door] becomes less desirable once the business interests ‘capture’ the regulators; but I gather there is not yet much danger of that,” right-libertarian leaning economist George Selgin said in an email.

Coinbase, the leading U.S. crypto exchange, seems not to have translated into any lasting favors with regulators, despite its calls for increased regulation.

This game of musical chairs between regulators and business folk is just one prong of an industry trying to establish legitimacy and dominance. As CoinDesk reported last week, the crypto industry has also seen a measurable uptick in the amount of dollars spent lobbying regulators, enforcers and politicians.

The money can be spent on bespoke lobbying groups within firms, on outside agitators like the Blockchain Association and Coin Center or even in the form of campaign donations. Despite many firms doubling or tripling their influence-spend, or starting up a program, CoinDesk found little evidence the money is having an effect.

Fewer people have followed Brooks’ model by heading into public office with experience in crypto. Chainalysis former chief technical counsel Michael Mosier joined the Financial Crimes Enforcement Network (FinCEN) as acting director last spring.

Brooks has had a hand in shaping some of those policies, but his legacy is in doubt. Last month, the New York Times did a special report detailing how the nation’s largest accounting firms have paid dividends sending their own employees to work at places like the Treasury or Internal Revenue Service (IRS).

“The accounting industry’s back-and-forth arrangements get results. The taxes that corporations pay, as a percentage of GDP, have been shrinking for years,” the Time’s Andrew Ross Sorkin wrote.

If only Brooks could be so lucky. According to some industry experts, there’s some chance that current OCC or Treasury officials could rewrite Brooks’s pro-crypto rules. There are signs that firms like Circle and Figure, which are applying for bank charters, may face a harder time getting approved.

Brooks, for his part, feels secure in his legacy. “You’re going to find that it’s really hard to rescind bank charters,” he said. Further, his stablecoin guidance “was super-tightly lawyered.”

Another issue with the revolving door in crypto is that sometimes it doesn’t seem to stop spinning. As noted, Brooks took an abrupt departure from Binance.US, citing “strategic differences” with Binance CEO Changpeng Zhao.

But so did Giancarlo, who left BlockFi just as intense regulatory scrutiny of the firm’s lending product kicked up, four months after starting. Brett Redfearn, the ex-SEC official, also left Coinbase after just four months. These quick departures highlight the precarious nature of diving headfirst into crypto.

“That may be a case where they feel like this is something they do not want to actually legitimize,” Iwayemi said. But there’s a litany of potential reasons why it may be so difficult for crypto firms to retain their regulatory talent – ranging from cultural misfits to regulatory uncertainty, he added. “In a way it’s kind of a blight on the industry … it [raises] the question of what is going wrong,” Iwayemi said.

None of the major problems with revolving doors are unique to crypto. Governments rely on industry expertise from the private sector when forming policy. But the easy exchange between top executives in the financial sector and watchdog agencies has had its effect.

It’s the exception to the rule that cabinet-level positions, or ranking enforcers, will have ties to industry at some point in the past or will leave their perch for “greener” pastures. That’s such the case that The Wall Street Journal cheered former FDIC Chairman Sheila Bair (now in crypto) for heading straight to the Pew Charitable Trusts, a public policy charity.

This is despite the fact that there are long-standing rules meant to prevent the worst forms of pay-for-play influence. The Federal Reserve has checks on bank supervisions going straight into private practice (the rules were strengthened in 2016, after public pushback). SEC enforcers are “barred for life” from dealing with specific parties they managed while at the commission.

Senior officials and commissioners are barred from lobbying the SEC for at least one year after leaving. But rules only have so much effect. One of President Obama’s first executive orders was to place limits around lobbyists that worked for the administration – only to see 20% “deregistering” to skirt the rules.

Play Book

Iwayemi says that stricter rules will be necessary across the financial sector, and might need to have specific crypto provisions. But there’s also a positive agenda that can be enforced: governments, instead of turning to the private sector, should look for future regulators and legislators among those with a strong history of public works. They can come from academia, non-profits, even journalism – “industry knowledge isn’t siloed,” he said.

It should also be noted that ex-industry men can prove hardliners in office. The prime example is Gary Gensler, a Goldman Sachs alum who wrote tough derivatives rules while at the CFTC.

He’s continued that track at the SEC, where the former MIT professor who taught blockchain courses is gearing up to take tough action against the crypto industry. Further, the informed opinions of SEC Commissioner Hester Pierce show that you need not have a stake in the industry to want to see it succeed.

The revolving door is much derided in popular culture – perhaps as the most emblematic fault of a corrupt system that favors elites. But at the same time, perhaps at a societal level, we just don’t care.

When you google “revolving door” you are as likely to come across an article on the circular modes of egress than the popular term for the portal between public and private life. Rules can be enforced, people can be shamed, but it’s also a matter for individual regulators to wrestle with. Do I self-deal or not?

It is both unlikely and unfair to cut large swaths of the population out of ever serving the public – it would be operating from the point of view that capitalists can never be trusted. But America has always been a country that aims for the highest liberal ideals – placing innocence before doubt and the possibility of redemption. If interested parties want to serve the public, should they not be given the benefit of the doubt?

So how then might we set policy that inspires them to serve the good of the nation, rather than their own ends? How can we create more Genslers who choose the written law over the law of the markets? I asked Iwayemi.

“That is a difficult philosophical question. A simple answer is: Better pay would definitely lead to stronger government capacity and longer retention of staff. When people are compensated they are happy to stay in sustained public service.” Either way, it comes down to personal enrichment.

Updated: 10-28-2021

US Gov Attorneys To Target Individuals And Gatekeepers For Crypto Prosecutions

Major regulatory agencies plan to work harder to prosecute individuals and companies that have had dodgy dealings with digital assets.

A group of high-level United States government attorneys has outlined their priorities for the enforcement and prosecution of individuals and companies that have committed crypto-related crimes.

Enforcement officials from the U.S. Department of Justice (DoJ), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) spoke about the direction their agencies will take at a panel discussion at the American Bar Association’s Annual Institute on White-Collar Crime in Miami on Wednesday.

In addition to corporate players, lawmakers are taking a closer look at individuals, according to a report on the event by Law360. Principal deputy assistant attorney general of the DoJ’s Criminal Division, Nicholas McQuaid, stated the prosecution of individuals in white-collar cases was a top priority.

He added that the department was expanding its use of data-based probes in cases relating to cryptocurrencies. The DoJ is forming a specialized group within the FBI to work with its fraud section to assist with investigations and prosecutions.

SEC enforcement director Gurbir Grewal commented on the agency’s increased scrutiny of unregistered and fraudulent initial coin offerings (ICOs), unregistered crypto exchanges and crypto lending and award programs. He stated “we’ll make sure that those players and actors are abiding by the rules,” before adding:

“That’s why we’ll be taking a hard look at gatekeepers like auditors and audit firms, attorneys, and underwriters.”

In early September, the SEC threatened legal action against Coinbase over its stablecoin yield program, Lend. Coinbase has since scrapped plans to launch the service.

The SEC also targeted Terraform Labs CEO Do Kwon with a subpoena in September. Being a resident of South Korea, Kwon has contested it on grounds that the regulator had no jurisdiction.

In October 2020, the DoJ filed criminal charges against four BitMEX executives for illegally operating a derivatives exchange; the trial has been set for March 2022.

Acting director of enforcement for the CFTC, Vincent McGonagle, said he was also concerned about digital assets and the decentralized finance (DeFi) sector. He did note that the crypto asset space may not be the sole component of illegal activity as there may be other factors involved such as forex:

“In the digital asset space, we’ve brought several actions against entities where they’re offering digital assets, Bitcoin or others on a margin or finance basis.”

Government agencies are clearly ramping up activity against crypto companies and individuals.

In mid-August, lawmakers urged the SEC and CFTC to form a joint working group on crypto assets so that they could work out how to “effectively use their current jurisdiction cooperatively.” In late September, the CFTC charged 12 New York crypto options firms for failing to register.

On Oct. 18, the New York Attorney General’s office ordered two crypto lending firms to cease activities. The Celsius crypto lending platform stated that it was not one of the two but was working with NY regulators.

FATF Crypto Guidance Looks To Bring Industry In Line With Banks

The message from the regulator is countries have to implement these standards now.

Global anti-money laundering (AML) agency the Financial Action Task Force (FATF) has released its updated guidance for firms that handle cryptocurrency and virtual assets.

It appears designed to corral much of the nascent industry into the existing regulatory framework for banks.

After incorporating industry feedback from April 2021, the updated rules for so-called virtual asset service providers (VASPs), published Thursday, signals that regulation is coming for crypto firms, both centralized and decentralized.

Since 2018, the FATF has issued a series of draft papers and working group documents that sought to define VASPs and virtual assets, and also recommend how countries implement the “Travel Rule” for crypto, shorthand for the requirement that VASPs share customer data for transactions over a certain threshold.


More recently, the FATF has tried to account for transactions to and from “unhosted wallets” (generally referred to as non-custodial wallets among crypto users), and also shoehorn into its framework new areas like decentralized finance (DeFi), non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs).

“We recognize that there are a number of areas where both countries and the private sector have wanted more guidance from the FATF level about how they can implement this in practice,” said FATF policy analyst Ken Menz in an interview with CoinDesk.

“I think this really shows just how fast the virtual asset ecosystem changes, and how quickly new technologies, new businesses, new models appear. I think it is a challenge for anyone to just keep on top of everything new that happens in this industry.”

While the release of FATF’s updated guidance will increase the urgency for VASPs to become compliant, there is also a recommendation that regulators be flexible during the initial rollout, acknowledging the real-world issues VASPs and Travel Rule service providers have pointed out to them.

“The FATF is basically saying that regulators can take a staged approach to enforcement of the Travel Rule so their [local] VASPs can realistically implement it,” said Pelle Braendgaard, CEO of crypto AML firm Notabene.

“They are also recommending that VASPs be able to continue to do transactions with VASPs in non-compliant jurisdictions, to avoid excluding firms in the developing world, for example.”

The message from FATF is that countries have to implement these standards now, Menz stated. However, using the Travel Rule as an example, in that implementation, they might want to consider a staged or phased approach to the implementation of that.

“We recognize there is a lot of effort that goes into building the compliance tools to do this. And there may be a certain level of time that a VASP needs to invest in the necessary technologies to enable them to comply,” Menz said.

One interesting addition on the Travel Rule, buried in paragraph 291 of the updated guidance, is the possibility that a VASP could decide not to share customer data with another VASP deemed to pose a risk to that sensitive data, as pointed out by Siân Jones, the eagle-eyed senior partner at XReg Consulting.

“One thing that leaped out for me was that the updated guidance allows for alternative procedures, including not sending required user information, if a VASP believes a counterpart VASP will not handle transmitted user data securely and the AML/CFT risks are acceptable,” Jones said in an email.

“In such cases, VASPs can still execute a transfer but the implication is that such risk assessments are made on a case-by-case basis and therefore could carry significant compliance burden and cost.”

It’s an open question what effect leveling the regulatory playing field will have on a sector that’s focus has been solely on innovation for the last decade.

Regulatory clarity is much needed in crypto, and the FATF’s acknowledgment that virtual assets are too big to ignore ought to boost mainstream adoption, said David Carlisle, director of policy and regulatory affairs at Elliptic.

In the meantime, FATF’s updated guidance could – perhaps counterintuitively – present the greatest opportunity for banks and larger financial institutions entering the space, according to Carlisle.

“Complying with financial regulation takes time and money, and businesses that have historically invested in compliance resources will have a significant head start,” Carlisle said. “Banks looking to enter the virtual asset space have been eager for greater regulatory clarity, and the FATF is giving them a huge boost in that regard.”

DeFi Defined

The fast-moving DeFi arena has proved to be a tricky area to set out guidance, given that the FATF standards generally apply to financial intermediaries. The guidance indicates that those who maintain “control or sufficient influence” over a DeFi arrangement should be regulated for AML purposes.

This suggests that where DeFi developers have the ability to restrict coin listings on a decentralized exchange, operate a domain that enables user access, or are otherwise able to intervene in the activities of a DeFi marketplace in a significant way – they could very well be captured by regulation, noted Elliptic’s Carlisle.

“Helpfully, the guidance clarifies that individual governance token holders shouldn’t fall within the regulatory perimeter if they don’t exercise this type of influence over activities in a particular DeFi marketplace,” he said.

The guidance sets out how the FATF standards can apply in a DeFi arrangement and encourages countries to take an expansive approach to the definition of what is a VASP, said FATF’s Menz.

“So, not to focus on the terminology, not to focus on whether something calls itself DeFi and look about what we call owner-operators of DeFi arrangements and the extent to which there’s control or sufficient influence over that protocol in determining whether it would be VASP,” said Menz, adding:

“DeFi has exploded in popularity over the last year, but I don’t think we know exactly how it’s going to evolve over the future, to what extent is it going to be incorporated into traditional finance, will protocols become decentralized or be partially decentralized?”

Devilish Detail

While the updated guidance shows a good faith effort to address concerns regarding earlier drafts, there were points that still needed to be revised, according to Travel Rule compliance provider Shyft Network, issues that were outlined in the firm’s response to FATF earlier this year.

For example, FATF’s expansive definition of VASPs creates certain inconsistencies around the concept of key signers or holders of a private key who may be involved in the signing of messages on behalf of smart contracts, particularly in the rapidly-expanding realm of DAOs.

The implication, which FATF’s updated guidance provides only a slight nuance around, is that a DAO’s key signers would be classed as being a VASP, Shyft co-founder Joseph Weinberg said in an email.

Another point of contention is FATF’s unclear distinction between development companies and open-source software developers that are individuals. “The final guidance makes minor edits around the use of the term ‘developers,’ but no further clarity is provided to distinguish between development companies and open-software developers,” Weinberg said.

Finally, the application of a bank-grade AML framework onto unhosted wallets remains a major challenge, he said.

There is a recommendation from FATF that greater use of blockchain analytics must come into play, but the onus when it comes to mitigating money laundering is on VASPs.

“The final guidance does not provide any further clarity on FATF expectations when VASPs transact with unhosted wallets and in fact reinforces the idea that such virtual asset transfers should be treated as higher risk transactions that require enhanced scrutiny and limitations,” Shyft’s Weinberg said.


Crypto DeFi Firms May Need More Oversight, Global Watchdog Says

Crypto firms that offer stablecoins, blockchain-based decentralized finance apps and services supporting peer-to-peer transactions may be required to keep tabs on their users’ identities and funds as a way of preventing money laundering and terrorism financing, a global watchdog said.

In updated guidance issued Thursday, the Financial Action Task Force — which makes anti-money-laundering rules followed by governments worldwide — called for increased disclosure and oversight of the crypto ecosystem.

The organization has members from about 200 countries, and its guidance is followed by agencies such as the U.S. Treasury, which is among regulators that are expected to release their own guidance for stablecoin oversight in the coming days.

The FATF’s updated guidance builds on prior guidelines issued in 2019, as well as a follow-up report from 2020. They challenge an industry that claims it doesn’t need to adhere to many of the existing financial regulations, and they impose new rules on everything from crypto exchanges to custodians in the $2.5 trillion cryptocurrency market.

“We expect that the countries will implement this as soon as possible,” FATF President Marcus Pleyer said on a call with journalists last week.

Broadly, FATF said that just because some function has become automated via a smart contract on a blockchain, that “does not relieve the controlling party of obligations.” Many of those parties may be defined by FATF as Virtual Asset Service Providers, and will have to abide by related anti-money-laundering rules, be licensed or registered, and be supervised.

Here Are Some Highlights Of The FATF Guidance:

* Stablecoins: Effectively, stablecoin providers and even exchanges and custodians that support stablecoins will have to abide by all existing rules, and conduct thorough anti-money-laundering and anti-terrorism-financing checks. FATF urged countries to mitigate risks before new stablecoins are even launched, and to continue monitoring the efforts thereafter.

Peer-To-Peer Transactions. FATF said countries can impose requirements such as additional record-keeping or limiting transactions to only certain approved addresses. “The rapid evolution of this sector means that changes in the level and nature of the risk are likely to come quickly and to merit concerted supervisory attention,” the guidelines said.

* DeFi: Creators, owners and operators — or people who have influence over a DeFi app’s functionalities — may need to comply with FATF rules, the guidelines said. “It seems quite common for DeFi arrangements to call themselves decentralized when they actually include a person with control or sufficient influence, and jurisdictions should apply the VASP definition without respect to self-description,” the guidelines said.

Even if a team of developers behind a DeFi dapp — designed to let people trade, lend and borrow without intermediaries — sold or distributed related governance tokens to investors and users, the team would be responsible for anti-money-laundering checks, the guidance said.

If a central party responsible for the service can’t be identified, countries can ask a regulated entity to be involved in the dapp’s activities to help with mitigating the risks.

Updated: 10-28-2021

FATF Includes Defi In Guidance For Crypto Service Providers

Despite DeFi apps not being VASPs under the FATF standards, the authority still wants them regulated like VASPs.

Decentralized finance, or DeFi, continues driving more interest from regulators and is becoming a part of the major international rules designed for virtual asset service providers, or VASPs.

On Thursday, the Financial Action Task Force, or FATF, issued a new update to its 2019 guidance to a risk-based approach for virtual assets and VASPs, paying particular attention to the DeFi industry.

The new guidance addresses issues identified in the FATF’s 12-month review of the revised FATF standards on virtual assets and VASPs requiring further clarification, and also reflects input from a public consultation in March and April 2021.

The authority has provided significant additional guidance regarding the DeFi industry, despite the fact that DeFi applications not considered VASPs under the FATF standards, as the standards “do not apply to underlying software or technology.” However, the updated guidance states that DeFi developers and maintainers can actually be considered as VASPs:

“Creators, owners and operators or some other persons who maintain control or sufficient influence in the DeFi arrangements, even if those arrangements seem decentralized, may fall under the FATF definition of a VASP where they are providing or actively facilitating VASP services.”

According to Pelle Brændgaard, CEO of crypto compliance startup Notabene, the new guidance is looking to determine VASPs in the DeFi ecosystem based on revenue of its participants.

“If a business is extracting transaction fees or direct revenue from a protocol that they control, they likely will be classified as a VASP. More fully decentralized protocols could be covered under certain cases as well, but not all cases,” Brændgaard told Cointelegraph.

Apart from providing significant additional guidance on DeFi, the new FATF guidance also addresses nonfungible tokens (NFTs), stating that NFTs are excluded from the FATF definition of virtual assets, but “would be covered by the FATF standards as that type of financial asset.”

“Given that the VA space is rapidly evolving, the functional approach is particularly relevant in the context of NFTs and other similar digital assets. Countries should therefore consider the application of the FATF standards to NFTs on a case-by-case basis,” the document reads.

The update also calls for increased urgency from global regulators to implement the Travel Rule, an Anti-Money Laundering and Counter Financing of Terrorism regulation for financial institutions introduced by the FATF in 2019.

“but should continue to ensure that VASPs have alternative measures in place” to mitigate money laundering risks associated with crypto transfers in the interim, the document notes.

“With this updated Guidance, FATF is increasing the urgency yet also acknowledging the real-world issues VASPs and Travel Rule service providers like us have pointed out to them over the last year. They are now recommending that regulators be flexible during the initial rollout,” Brændgaard said.


Global Regulators Back Tougher Rules To Prevent Criminals From Using Crypto

New guidelines could spur more crypto firms to check their customers’ identities and report suspicious transactions to regulators

Cryptocurrency firms could be forced to take greater steps to combat money laundering under new guidelines released on Thursday by the Financial Action Task Force, an international body that coordinates government policy on illicit finance.

The task force called on governments to broaden regulatory oversight of crypto firms and force more of them to take measures such as checking the identities of their customers and reporting suspicious transactions to regulators.

The FATF’s guidelines don’t have the force of law, and would need to be implemented by national regulators in each country. Still, the Paris-based group is influential in setting standards for government policies against money laundering and financing of terrorism, and its guidelines could shape new crypto regulations around the world. More than three dozen countries are FATF members, including the U.S., China and much of Europe.

Representatives of the crypto industry criticized the guidelines, saying they would undermine privacy, stifle innovation or simply not work in the context of blockchain and digital-asset technology.

“It would be inappropriate for anything like these non-specific and confusing standards to replace the current law and regulations we have on the books here in the U.S.,” Peter Van Valkenburgh, research director at crypto advocacy group Coin Center, wrote in a blog post on Thursday.

Among the targets of the FATF’s guidelines is decentralized finance, or DeFi for short. DeFi is an umbrella term for various efforts to implement traditional financial activities—such as lending or trading—using software rather than a central intermediary to oversee transactions.

DeFi has grown rapidly since last year, with over $100 billion of assets posted as collateral in various DeFi projects, according to data provider DeBank.

The guidelines take aim at DeFi projects such as decentralized exchanges, in which crypto traders can swap assets with each other, typically on an anonymous basis. The task force said the people or companies that own or operate such decentralized platforms could be considered virtual asset service providers, or VASPs, a designation that would force them to check users’ identities and take other measures against money laundering.

DeFi developers say their software runs autonomously on the Internet, governed by decentralized communities of users, and thus shouldn’t be the subject of regulation, which typically focuses on financial intermediaries. The FATF cast doubt on such claims in its guidelines.

“It seems quite common for DeFi arrangements to call themselves decentralized when they actually include a person with control or sufficient influence,” the task force wrote.

In other parts of the guidelines, the FATF said companies behind stablecoins should be required to comply with anti-money-laundering rules. Stablecoins, like tether, are digital coins that seek to track the value of a traditional currency like the dollar.

The task force also beefed up an existing rule that requires VASPs to track and share information about customers making virtual-currency transfers—for instance, if a trader moves bitcoin from one crypto exchange to another. The enhanced version of the rule states more explicitly that firms must check that neither the sender nor the recipient of the fund transfer are subject to sanctions.

Digital-currency advocates voiced alarm at a draft set of guidelines that the FATF released in March and urged the group to make changes. The nascent industry’s lobbying effort paid off with some small victories, according to Mr. Van Valkenburgh of Coin Center.

For instance, the final guidelines make it clearer that programmers who simply write code for crypto projects—but don’t operate them as a business—shouldn’t be covered by regulation.

In the U.S., crypto exchanges such as Coinbase Global Inc. and Kraken already comply with rules against money laundering by verifying customer identities and reporting suspicious transactions to the Financial Crimes Enforcement Network, or FinCEN, a unit of the Treasury Department.

But some countries have looser regulatory regimes and are home to crypto firms that don’t police rigorously for illicit activity. The FATF could potentially crack down on such countries by adding them to its list of jurisdictions with deficient protections against money laundering and terrorism financing.

Being added to the FATF’s so-called gray list can harm a country by leading to decreased foreign investment and making banks reluctant to do business there.

Updated: 10-29-2021

US Senator Hagerty To CFPB Director: Don’t Stifle Crypto Innovation

The conversation occurred at a banking committee meeting with Consumer Protections director Rohit Chopra.

United States Senator Bill Hagerty, who was elected in 2020 to represent Tennessee after a stint as Ambassador to Japan, spoke to newly appointed Consumer Financial Protection Bureau Director Rohit Chopra regarding cryptocurrencies in a banking committee hearing, saying, “I just want to make certain as you exercise those oversight responsibilities that we don’t stifle innovation in this arena.”

“Digital ledger technology offers a tremendous amount of promise in terms of financial innovation and inclusion. It’s an industry where I think the United States is leading, has led, and I’d like to see us continue to lead there. Especially when we look at other countries like China and the Chinese Communist Party that has moved to ban private sector activity in that arena.”

Hagerty introduced legislation with Senator Mark Warner in July to study China’s adoption of a digital currency. Chopra and Hagerty have notably clashed previously during the former’s confirmation hearings, with Hagerty even introducing a bill to require congressional approval for the bureau’s funding.

In a late July Senate floor speech, Hagerty opined, “We’re using the cryptocurrency market as a pay-for. Have we fully vetted how this new regulation and taxation will affect this rapidly developing industry? Will leadership in this industry flee the United States as a result?”

Chopra criticized Facebook’s adoption of Libra during his time on the Federal Trade Commission and advocated for the Federal Reserve to adopt an instant payments service called FedNow.

The CFPB warned consumers against Bitcoin (BTC) as early as 2014, saying at the time that they should “be aware of potential issues with virtual currencies such as unclear costs, volatile exchange rates, the threat of hacking and scams, and that companies may not offer help or refunds for lost or stolen funds.”

Regulators Want To Push Crypto’s Shadow Bankers Into The Light

The message from the powers that be in Washington to the shadow bankers of the crypto world couldn’t be clearer: It’s time to become a real bank.

That’s one of the main takeways from a President’s Working Group on Financial Markets report on stablecoins, which are tokens designed to be stand-ins for dollars and other national currencies in crypto markets. The coins, which are meant to track the dollar or another currency or asset 1-for-1, have become an integral part of crypto markets.

The value of the top stablecoins has exploded almost 500% over the past 12 months and exceeded $130 billion as of October, according to data from Coin Metrics and The Block cited in the report.

The report urges Congress to pass legislation that requires stablecoin issuers to become insured depository institutions subject to the same supervision and regulation as banks.

The goal is to avoid risks, such as fraud, human or computer error, or a crisis of confidence that causes a “run” on stablecoins that triggers losses for coins that investors were led to believe would always be worth $1 each.

There’s a general understanding among the agencies that produced the report that today’s activity can mostly be handled by market regulators, but risks to overall financial stability will increase if stablecoins rapidly grow into real-world uses for payments, according to a senior administration official involved in the report who asked not to be named.

To address that risk, regulators believe Congress needs to intervene and explicitly give the banking overseers powers over stablecoin issuers, the official added, because the main weakness of current legal powers is that the Federal Reserve, Federal Deposit Insurance Corp. or other agencies can’t just reach out and define entities as being in their jurisdiction.

Obviously, given the difficulty that Congress has had in passing any new laws this year, the probability that lawmakers will hunker right down and agree to sweeping crypto-world regulations anytime soon is arguably slim. Still, this report sets down a marker that could influence the direction the industry travels as it matures.

Even if the President’s Working Group on Financial Markets, which includes the Fed, Treasury and Securities and Exchange Commission, gets its wish for legislation, it’s unclear if it will be enough to completely snuff out the stablecoin projects in the decentralized-finance world that are run solely on algorithms without the backing of any real-world assets.

Still, this proposed legislation would be enough to push those coins further into the margins, and create a bifurcated market between legitimate and gray-market tokens.

For big exchanges like Coinbase Global Inc., which is part of a consortium behind the USDC stablecoin, and Binance, which has its own dollar stablecoin called BUSD, a major choice is at hand. They can simply ignore the report and hope the recommendations it makes never actually get passed as law.

Or they can start taking steps now to create or buy banking subsidiaries to manage their stablecoins as well as some of the other products they offer — or would like to offer — that arguably are subject to securities or derivatives regulations.

Taking that step won’t be easy. For one thing, succumbing to the oversight of the government goes against the anti-establishment ethos that is part of the DNA of the crypto industry.

Not to mention, complying with banking rules and paying for deposit insurance will add another layer of costs that will make it harder to profitably issue a stablecoin, especially in the current environment with barely-there interest rates for the safest assets where they can invest the real dollars backing their coins.

Stablecoins, in that case, may need to be viewed as a sort of loss leader rather than something that adds to the bottom line.

Yet, if they’re not willing to play by the government rules, they run the risk of some fierce new competition: Big banks and other financial firms that already are playing by the rules.

Build Back Better Act Would Close Tax Loophole For Crypto Investors

Proposed legislation unveiled Thursday as part of Democrats’ $1.75 trillion social and climate spending plan would close a tax loophole for cryptocurrency investors.

The Build Back Better Act would subject crypto transactions to “wash sale” rules, an anti-abuse measure that currently applies to stocks, bonds and other securities, according to an outline published by the House Rules Committee.

As a result, bitcoin, ethereum, dogecoin and other crypto would be subject to the rules. They prevent investors from claiming tax benefits from an investment loss then quickly buying back that same asset, effectively retaining ownership.

The new proposal would apply after Dec. 31.

The Rules Committee proposed its near-final legislative draft after the White House unveiled a policy framework Thursday morning, the result of months of negotiations among moderate and progressive Democrats.

The legislation may still evolve and its success isn’t guaranteed. Democrats need nearly full party support in both chambers for the measure to pass, given unified Republican opposition. Key holdouts haven’t publicly committed to voting for it.

A House Ways and Means Committee tax proposal last month also sought to subject digital currencies to wash sales.

The IRS treats crypto as property, not as a security, which is how the asset class escapes wash sale rules under present law.

Crypto investors reap two benefits as a result: They can sell crypto for a loss and claim a tax benefit. (They can use the loss to reduce or eliminate capital-gains taxes owed on winning investments in their portfolio.) Then, they can quickly buy back the crypto they sold to capture any rebound in price — which isn’t far-fetched given crypto’s volatility.

By comparison, stock investors aren’t allowed to buy an identical or similar security within 30 days before or 30 days after a sale without triggering penalties.

The measure is among a series of tax reforms that would raise almost $2 trillion for climate investments and a significant widening of the U.S. social safety net, including universal preschool, health-care expansions and financial assistance for child care.

Subjecting crypto and other assets to wash sale rules would raise $16.8 billion over a decade, according to estimates published last month by the Joint Committee on Taxation.

If crypto is ultimately subject to wash-sale rules, investors may be able to speedily establish positions in a different coin without getting tripped up.

Cryptocurrencies are dissimilar enough that selling bitcoin and then quickly buying etherum, for example, likely wouldn’t violate the rules, according to Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management in Washington, D.C.

“The similarities start and end with the coins being exchanged on a blockchain,” Johnson has told CNBC. “Using that logic, stocks traded on an exchange, NYSE or otherwise, are not considered one and the same either.”

Crypto Lending Firms On The Hot Seat: New Regulations Are Coming?

The sheer amount of money invested in the crypto space is causing regulatory dialog to occur at a frenetic pace as regulators struggle to keep pace.

A number of states in the United States, including Kentucky, Texas, Alabama, Vermont, New Jersey and, most recently, New York have been cracking down on crypto lending. Depending on one’s perspective, these can amount to acts of collective desperation or a foretoken of things to come.

Asked about the clampdown on crypto lending firms like BlockFi and Celsius, Firat Cengiz, senior lecturer in law at the University of Liverpool, told Cointelegraph: “The crypto regulatory space is getting increasingly heated, and not only in the U.S. but also in the rest of the world.”

She added that a new regulatory approach is emerging and, as such, “the crypto market will no longer be an example of a free market regulated purely by the ‘invisible hand of the market.’”

“DeFi and stablecoins — rather than exchange or store-of-value coins such as BTC or ETH — will be the key target of emerging regulations,” Cengiz continued. “For instance, the draft EU regulations will ban interest on stablecoins,” which some believe most challenge central finance and banking institutions.

But, Cengiz doesn’t necessarily see the New York State attorney general’s mid-October shutdown of two unnamed crypto lending platforms operating in the state because of “unlawful activities,” as part of this global trend.

“New York State historically has tried to make a political point by targeting crypto,” she said. Meanwhile, others have noted that James is expected to run for governor of the state, so almost everything she does at this point has a political aspect.

Is Crypto Lending Legit?

New York State isn’t alone in raising its eyebrows with regard to crypto lending, however. Alabama, Kentucky, New Jersey and Texas brought cease and desist orders against New Jersey-based crypto lenders BlockFi Inc. in July and Celsius in September.

Both were alleged to have “unlawfully offered unregistered securities in the form of high interest-bearing accounts used to fund their lending operations and proprietary trading.”

Investors often don’t realize that the 8-9% interest they’re earning on their crypto deposits — at a time when savings rates at traditional banks are well below 1% — comes packed with certain risks, i.e., their entire stake can be wiped out if the project is hacked or collapses, regulators have suggested.

“They do have a point,” Lee Reiners, executive director of the Global Financial Markets Center at Duke University School of Law, told Cointelegraph. “The marketing around many of these yield products makes it sound as though they are similar to savings accounts with guaranteed returns, when, in fact, they are not.” Nor do they come with FDIC insurance, like traditional bank saving accounts.

Others have asserted that the (sometimes) double-digit rates being paid for crypto deposits couldn’t be sustained during a sharp crypto price downturn, and especially during a bear market. That is, they are mere “artifacts of an artificially inflated crypto market,” as Kevin Werbach told Roll Call.

“Of course, returns have to come from somewhere,” Reiners, a former supervisor at the Federal Reserve Bank of New York, further explained, adding:

“If you are lending crypto to a DeFi protocol or centralized firm, what are they doing with it to generate that 8% or 9% interest rate you’re getting? Well, they’re just using it to trade other coins, which is profitable when the market is going up. But, if crypto prices decline, those yields can’t be sustained.”

Regulators Are Struggling To Keep Pace

Anne Termine, a partner in the government enforcement and investigations practice at Bracewell LLP and former chief trial attorney at the Commodities Futures Trading Commission (CFTC), said that “there are no easy answers” on the crypto regulatory front, but the sheer amount of money invested in the crypto space now is causing the regulatory dialog to occur at a more frenetic pace, telling Cointelegraph:

“In any industry, innovation comes first and regulation comes after. What’s happening here is that the innovation is happening at such a speed that the regulators are struggling to keep up.”

With regard to the questions surrounding lending, some in the crypto community argue: “Just because we’re offering a product that’s better than what banks can offer doesn’t make us illegitimate… it doesn’t mean we’re an outright fraud,” she added.

And not all crypto protocols should be tarred with the same brush. The big actors in the space are often fairly sophisticated companies that take consumer protection seriously, Termine added.

Asked if regulators have a point that 8-9% saving rates seem perhaps too good to be true, Cengiz answered. “Yes, of course, there are undeniable gaps of consumer protection in the crypto market.”

It still isn’t clear, from a legal standpoint, to what extent lending to or borrowing from a decentralized finance (DeFi) protocol counts as a financial contract under current financial consumer protection rules, she said, adding:

“However, the response to this should not be bringing highly political individual cases, but taking legislative action to provide sufficiently clear regulatory guidance both to consumers and providers. I find it hard to categorize the types of individual actions that you mention as genuinely originating from consumer protection incentives.”

Reiners, for his part, has little patience with the position that state attorneys general like Letitia James are just trying to score political points or protecting legacy banks. “The crypto community always acts like they are victims whenever something like this happens when, in reality, regulators are simply doing their job and enforcing the law. And frankly, I don’t see how going after crypto companies scores any ‘political points.’ It’s not as if there is an anti-crypto lobby out there with votes to be had.”

“A Dangerous Game”

“There is nothing new under the sun,” Geoffrey Goodell, a research associate at University College London and deputy executive director of the UCL Centre for Blockchain Technologies, told Cointelegraph. “Businesses are seeking sources of capital and investors are seeking sources of yield.

In this case, businesses are using the language of asset custodians to suggest safety that does not exist, while dodging traditional regulatory barriers to such activities.” He added that since investors are eager to earn high yields, the situation turns into a “dangerous game that we have seen many times before.”

“The problem with any cryptocurrency not backed by central banks is volatility and potentially losing the investment,” Laura Gonzalez, associate professor of finance at California State University at Long Beach, told Cointelegraph. She added that “There is a significant risk and return tradeoff,” and investors should tread carefully when they enter this space.

Others have suggested that by going after firms like Celsius, BlockFi and others, regulators are simply seizing the low-hanging fruit. It may be more difficult to clamp down on more decentralized lending projects where no individual or company is clearly in charge.

Cengiz acknowledges that decentralized platforms could present “significant problems and complications” for enforcement agencies including locating the jurisdiction responsible for the investigation, deciding on the applicable law and identifying individuals responsible:

“Successful enforcement against decentralized platforms will require a very strong international network between enforcement agencies, which we do not see in any other area of law.”

“Having said this, sometimes crypto platforms make themselves a target of law by blindly ignoring regulatory advice,” Cengiz added. One example: The United Kingdom Financial Conduct Authority (FCA) ordered Binance to cease all operations because Binance failed to ask for FCA authorization “under very clear regulatory guidance.”

A Global Regulatory Dialog

“We are seeing a lot of movement across governments, not just at the federal level but at the worldwide level and certainly at the state level too,” said Termine. “The crypto community is asking: Can we please get coordinated on this.”

Is the same debate going on in other countries as well? Termine said “Absolutely,” all over the world and especially when it comes to the Bank of England (BOE). Its deputy governor, Jon Cunliffe, drew comparisons between the current cryptocurrency boom and the run-up in U.S. sub-prime mortgages in 2008 right before the financial collapse.

Indeed, crypto’s market value, which touched $2.5 trillion in mid-October, was roughly double the value of the subprime market in 2008 — $1.2 trillion — which shows that “you don’t have to account for a large proportion of the financial sector to trigger financial stability problems,” Cunliffe said.

Termine viewed the BOE deputy governor’s remarks as a good example of the growing “fervor” on the part of regulators globally to deal with cryptocurrencies. Cengiz told Cointelegraph:

“Regulators do not seem to understand the dynamics of the crypto market fully, and the actions that they take are likely to discourage at least some consumers from partaking in an emerging and potentially very efficient and innovative investment market.”

She added that the goal should be regulation that “protects citizens against usual hazards of the crypto market such as financial complexity, fraud, cyber attacks, etc. without compromising innovation.”

Reiners was asked if there were any circumstances under which he would support crypto lending, to which he stated: “If it facilitated real economic activity. But right now, all it does is facilitate more speculation in crypto. But from a legal standpoint, if these products are offered outside of banks, they need to be registered as securities.”

In sum, the cryptocurrency and blockchain industry is “not something that can be ignored anymore” by regulators, said Termine, who worked nearly 20 years at the CFTC. “Ten years ago, it seemed that this was a fad,” the province of software engineers in an obscure corner of the world.

No one took the idea of an open decentralized financial network seriously. “But 10 years later, there’s more than $2 trillion of market value floating in this space, and regulators around the world have to sit up and say, ‘We can’t not look anymore.’”

Updated: 10-30-2021

The Major Tax Myths About Cryptocurrency Debunked

More crypto tax enforcement is coming, and many taxpayers are complying going forward, and amending prior returns if they have something to clean up.

Crypto and taxes may not be a match made in heaven, but taxes seem inevitable, and the United States Internal Revenue Service (IRS) has made it clear it is going after people who don’t report.

With IRS summonses to Coinbase, Kraken, Circle and Poloniex, plus other enforcement efforts, the IRS is on the hunt. The IRS sent 10,000 letters in different versions asking for compliance, but all were nudges to encourage taxpayers to be compliant.

The IRS hunt for crypto has often been compared to the IRS hunt for foreign accounts more than a decade ago. Unfortunately, it is not clear if there will ever be a crypto amnesty program emulating the offshore voluntary disclosure programs the IRS formulated for offshore accounts.

The IRS made its first big announcement about crypto in Notice 2014-21, classifying it as property. That has big tax consequences, accentuated by wild price swings. Selling crypto can trigger gain or loss and be taxable. But even buying something with crypto can trigger taxes. Paying employees or contractors does too. Even paying taxes in crypto can trigger more taxes.

We are already seeing crypto audits by the IRS, and by some states (notably California’s Franchise Tax Board), and more are sure to follow. At least now, there are tracking and tax return preparation alternatives that can make the process easier than it was in the early days. Everyone is trying to minimize taxable crypto gains and to defer taxes where legally possible.

Still, it is easy to get confused about the tax treatment and take tax positions that may be hard to defend if you are caught. With that in mind, here are some things I’ve heard, that I’ll call crypto tax myths.

Myth 1

You can’t owe any tax on cryptocurrency transactions unless you receive an IRS Form 1099. If you did not receive a Form 1099, you can check the box on your tax return that says that you did not have any transactions with cryptocurrency.

Actually: Tax may still be owed, even if the payor or broker does not file a Form 1099. A Form 1099 does not create tax where no tax was previously due, and plenty of taxable income is not reported on Forms 1099.

A Form 1099 might be wrong in which case, explain it on your tax return. But if you are audited and your best defense is that you chose not to report your transactions because you did not receive a Form 1099, that is weak.

Myth 2

If you hold your crypto through a private wallet instead of an exchange, you don’t need to report the crypto on your tax returns.

Actually: Private wallet or exchange, the tax rules are the same. The impulse to hide ownership by moving wealth to anonymous holding structures is not new. When Swiss banks began disclosing their U.S. accountholders to the IRS and U.S. Department of Justice, many U.S. taxpayers tried just about everything, but nearly everyone paid in the end, usually with big penalties.

The cryptocurrency question on the IRS Form 1040 is not limited to cryptocurrency held through exchanges. If you say “no,” even though you hold crypto through a private wallet, you are potentially making false statements on a tax return signed under penalties of perjury.

You might be betting that you will never get caught, but thousands of U.S. taxpayers who have Swiss bank accounts who can attest how poorly that bet can played out.

Myth 3

If you hold your crypto through a trust, LLC or other entity, then you do not owe tax on the crypto transactions and do not have to report. Besides (the myth continues), income generated through LLCs is tax-free.

Actually: Owning crypto through an entity may keep the income off your tax return. But unless the entity qualifies (and is registered) as a tax-exempt entity, the entity itself will likely have tax reporting obligations and may owe taxes. For tax purposes, LLCs are taxed as corporations or partnerships, depending on their facts and tax elections.

Single-member LLCs are disregarded, so the LLC income ends up on the sole owner’s return. If your entity is a foreign entity, there are complex U.S. tax rules that can make you directly liable for certain income produced within the foreign entity.

Myth 4

If I structure the sale of my crypto as a loan (or some other non-sale transaction), I don’t have to report the proceeds.

Actually: Consider if you are loaning or selling the crypto. The IRS and courts have robust doctrines to disregard sham transactions. Are you getting the same crypto back that you are loaning?

Are you charging interest on the loan, and paying tax on the interest as you receive it? Some loans may not hold water. And if you sell crypto and receive a promissory note, that may complicate your taxes further with installment sale calculations.

Myth 5

A crypto exchange is a type of trust since you can’t unilaterally change the policies of the exchange. So you do not own the crypto in your account for tax purposes and do not have to report transactions through an exchange.

Actually: The IRS has not said any of this. IRS guidance suggests that the IRS views taxpayers as owning the cryptocurrency held through their exchange accounts. It seems highly unlikely that the IRS would view crypto held through an exchange account as owned by the exchange itself (as trustee), rather than owned by the account holder.

Taxpayers often own their assets through accounts held by institutions, such as bank accounts, investment accounts, 401(k)s, IRAs, etc.

In most cases, the tax law treats taxpayers as owning the money and assets held through these accounts. Some special accounts like 401(k)s and IRAs have special tax rules. And having an account treated as a trust is not necessarily a good tax result.

Beneficiaries of trusts, and particularly foreign trusts, have onerous reporting obligations. Thus, before you consider crypto exchanges as trusts, be careful what you wish for. Calling something a trust does not mean income generated within the trust is exempt from income tax.

Myth 6

Congress’s amendment to Section 1031 of the tax code that limits like-kind exchanges to real property doesn’t make crypto-to-crypto exchanges taxable.

Actually: Section 1001 of the tax code provides that a taxable gain results from the “sale or other disposition of property.” The sale of any type of property for cash or other property can create a taxable gain.

The IRS says crypto is property, so trading crypto for other crypto is a sale of crypto for the value of the new crypto.

Before the Section 1031 amendment took effect in 2018, a crypto-for-crypto swap might have been ok as a like-kind exchange under Section 1031. But the IRS is pushing back on this position in tax audits and has issued guidance that denies tax-free treatment for certain cryptocurrency swaps.

That is not precedential and does not cover the waterfront, but it tells you what the IRS is thinking. In any case, now that Section 1031 has limited like-kind exchange treatment to real property, crypto-to-crypto swaps are taxable unless they qualify for another exception.


Every taxpayer is entitled to plan their affairs and transactions to try to minimize taxes. But they should be wary of quick fixes and theories that sound too good to be true. The IRS appears to believe that many crypto taxpayers are not complying with the tax law, and being careful in the future and doing some clean-up for the past is worth considering. Be careful out there.

Updated: 11-4-2021

Coinbase Pitch For New Token Watchdog Fails To Sway ‘Crypto Mom’

Even “Crypto Mom” signaled she’s no fan of Coinbase Global Inc.’s pitch to create a new regulator to police digital tokens.

Hester Peirce, a Republican member of the U.S. Securities and Exchange Commission, said there’s already so many Washington watchdogs monitoring the financial industry that it hardly makes sense for the government to get even bigger.

“Personally, I don’t think that’s necessary,” Peirce said in a Thursday interview with Bloomberg Television’s Alix Steel as part of the Bloomberg Financial Innovation Summit. “We have such a fragmented regulatory system for financial products and services generally that I don’t know that adding another regulator would be my top preference,” Peirce added, without mentioning Coinbase by name.

Peirce’s vocal support of virtual coins has earned her the affectionate nickname “Crypto Mom” from token enthusiasts. With one of the industry’s biggest defenders in Washington pushing back on Coinbase’s proposal, it’s hard to see a path for it happening anytime soon.

Coinbase, the U.S.’s biggest crypto exchange, unveiled its plan last month, with Chief Policy Analyst Faryar Shirzad arguing that virtual tokens are so new and unique that they shouldn’t be subjected to “legacy regulation.”

Updated: 11-5-2021

Crypto Traders Have Short Window To Avoid House Tax Plan

Cryptocurrency investors would have little time to plan against possible tax increases under legislation advancing in Congress to treat digital assets like stocks and other securities.

House Democrats’ proposed tax-and-spend package would subject digital assets to two anti-abuse rules that already apply to stocks and other securities. The change would restrict tools crypto investors can currently use to hedge against potential losses and lower their capital gains taxes.

A provision applying “constructive sale” rules to digital assets would take effect as soon as the bill is signed into law. The rules would kick in when investors take offsetting short and long positions on an asset to reduce the risk of losing money. Once the offsetting positions are taken, they would have to pay capital gains taxes on the long position as if it was sold—even if it wasn’t.

Cryptocurrency investors would also have to worry about “wash sale” rules beginning in 2022. Those rules bar investors from claiming a deduction when they sell an asset at a loss if they buy a “substantially identical” asset within 30 days before or after the sale.

The new rules for digital assets are part of a host of tax code changes Democrats are looking to put into effect quickly, leaving individuals and corporations without much time to react. But there’s at least a small window, which is more than investors got in 1997 when the constructive sale rules were first enacted on a retroactive basis.

Crypto investors with offsetting positions will want to consider liquidating both positions or at least selling one to avoid being hit with capital gains taxes under the constructive sale rules, said Shehan Chandrasekera, head of tax strategy for CoinTracker, a company that helps people manage and calculate taxes from their cryptocurrency transactions.

Investors hoping to capitalize on tax savings before the wash sale rules take effect will have two months to “aggressively tax-loss harvest,” Chandrasekera said, referring to the strategy of selling cryptocurrency assets at a loss, then buying them back at a lower price to reduce future capital gains taxes.

Investors will need to be careful, however, when carrying out transactions at the end of this year and into next year, said Lisa Zarlenga, a partner at Steptoe & Johnson LLP who advises clients on issues pertaining to the blockchain and digital assets. Selling a cryptocurrency asset at a loss in early January may inadvertently trigger the wash sale rules if an investor purchased a nearly identical asset less than 30 days before in December, she noted.

Congress’s official tax scorekeeper, the Joint Committee on Taxation, estimated Thursday that the changes to the constructive sale and wash sale rules would collectively bring in about $16.8 billion over 10 years.

‘Outsized Impact’

The House could vote on its reconciliation package as soon as Friday after making a handful of last-minute changes. That would ready the bill for the Senate, which is expected to make changes before passage.

The provisions on wash sales and constructive sales are similar to ones included in a proposal advanced by the Ways and Means Committee in September. They are separate from reporting requirements that would be imposed on cryptocurrency brokers, such as exchanges, under the Senate-passed bipartisan infrastructure deal that the House may also consider Friday.

Once the provisions take effect — assuming they remain in the final reconciliation package — it would be “very, very complicated” for cryptocurrency investors and their financial advisers to comply with the rules, Chandrasekera said, noting key characteristics that differentiate cryptocurrency from other financial assets.

Cryptocurrency transactions happen more frequently than those involving stocks and other securities and often across multiple wallets and exchanges, making them more difficult to track, he said. CoinTracker has found the average person has three to five wallets and exchanges.

In addition, there are platforms that have made it easy for the average person to engage in complex financial transactions, such as shorting, with their digital assets, Chandrasekera said.

The House’s bill would also extend the wash sale rules to foreign currency and commodities, but Zarlenga predicted there would be an “outsized impact” on digital assets.

She noted that the bill would provide a carveout for certain business transactions involving sales of foreign currency or commodities — but not digital assets.

There is also an increased risk that the wash sales rules will be triggered unintentionally by trades of “gateway” coins, like Bitcoin or Ethereum, that are bought and sold much more frequently than others, Zarlenga said. A user might convert Ethereum, for example, to a decentralized finance platform’s native token in order to gain access that platform.

“There are going to be so many transactions, and it’s going to be so hard to potentially monitor,” she said.

Official Guidance

Many of the industry’s key questions about the proposed legislative changes wouldn’t get answered until the IRS and Treasury Department put out guidance interpreting the law.

It isn’t clear in the legislation how “substantially identical” will be defined under the wash sale rules, Zarlenga said. Some may assume an investor would have to buy and sell the same cryptocurrency, such as Bitcoin, but it is possible the definition could be broader, she said.

Coinbase, the largest U.S.-based crypto exchange, said it would push Treasury and the IRS to adopt “sensible and tailored” regulations for cryptocurrency.

“As more and more Americans embrace digital assets, these rules should not be overly broad such that they stifle innovation or place unworkable requirements on citizens,” the company said in a statement.

Acting CoC Hsu: More Crypto Regulation Is Needed

The regulator singled out Binance and Tether as allegedly risky players in the blockchain space.

In remarks given at the American Fintech Council’s 2021 Policy Summit, acting Comptroller of the Currency Michael J. Hsu called for greater regulation of universal crypto firms.

“Large, universal crypto firms—especially issuers of highly-circulated stablecoins—should embrace comprehensive, consolidated supervision. At the same time, federal and state bank regulators should prioritize the development of policies, staff and supervisory approaches to bring such firms safely into the bank regulatory perimeter. This would clearly differentiate safe and sound crypto firms from those that are regulated only partially and have a history of control lapses, such as Binance and Tether.”

The Office of the Comptroller of the Currency is responsible for the regulatory oversight of federally chartered banks operating within the United States. Hsu further declared:

“The rapid expansion and mixing of wholesale and retail activities at some crypto firms raise the question of whether there ought to be Glass-Steagall-like separation of activities in the crypto space.”

Glass-Steagall was a 1933 federal law that walled off investment and commercial banking, and was repealed in 1999. Hsu finally cautioned, “In the cryptocurrency space, the rapid growth in users and total market value has only been matched by the growth in scams and consumer complaints.

‘Move fast and break things’ is a common mantra in tech. In the financial services context, it is important to remember that those “things” are people and their money.”

In October, OCC nominee Saul Omarova was pressured to turn over her college thesis on Marxism by Senate Republicans. The OCC, in coordination with other regulators, is expected to issue guidance to banks on how to hold cryptocurrency assets soon. Hsu began scrutinizing Tether’s commercial paper reserves in January.

Updated: 11-9-2021

What FATF’s Latest Guidance Means For DeFi, Stablecoins And Self-Hosted Wallets

Launching a truly “global” stablecoin is likely to get more difficult in the coming year as a result of the guidance, which advises regulators to keep such projects on a short leash.

The Financial Action Task Force (FATF)’s long-awaited update to its guidance on virtual assets lays out a comprehensive set of guidelines to regulate the quickly evolving cryptocurrency space.

With this update released, digital assets firms in the coming years are likely to encounter more clarity on anti-money-laundering and combatting the financing of terrorism (AML/CFT) regulations around the globe, even if some jurisdictions do opt for more restrictive policies than others.

The intergovernmental body’s updated guidance should not surprise anyone who has been tracking regulator discussion on crypto illicit finance, but it does address topics that have faced great regulatory uncertainty, such as decentralized finance (DeFi), stablecoins and “travel rule” compliance.

What it offers is not one way of dealing with these issues, but it unpacks and defines the risks that jurisdictions must address, often providing a diversity of approaches to keep emerging digital asset developments within a solid regulatory perimeter.

DeFi Usually Isn’t Decentralized

FATF warns regulators to not blindly accept the crypto industry marketing that loosely calls various platforms “decentralized.” In function, these platforms typically have a natural, if not legal, person somewhere who controls or influences their activities. The term “controls or influences” is key and offers a framework to analyze who should be the entity obliged to follow AML/CFT regulations.

In FATF’s view, almost all DeFi platforms are still Virtual Asset Service Providers (VASP). FATF offers a broad playbook for bringing DeFi platforms under regulatory oversight, including one suggestion that if a DeFi platform truly has no entity running it, a jurisdiction could order that a VASP be put in place as its obliged entity.

Implications: The rise of new DeFi platforms probably will slow in 2022. And there will likely be contentious legal battles between regulators and blockchain entrepreneurs over who “controls or influences” various DeFi protocols. It is also likely that many organizers of DeFi platforms will start accelerating attempts to become truly decentralized, such as trying to dissolve the on- and off-chain ties that specific individuals may have with platforms.

DeFi platforms that operate without following AML/CFT requirements like other regulated VASPs will increasingly be seen as riskier enterprises by those VASPs. DeFi activity is not going to go away but it will probably shrink, just as the once-booming initial coin offering (ICO) phase did a few years ago.

Keep Stablecoin Projects On A Short Leash Before Launch

According to FATF, there is one major factor that determines the risks from stablecoins: the potential for wide market adoption. FATF emphasizes that jurisdictions must supervise stablecoin projects before they launch and ensure that these projects have AML/CFT mitigation measures in place in the planning stage.

Implications: Launching a global stablecoin that is truly “global” is likely to get more difficult in the coming year. Regulators will likely feel more urgency to oversee stablecoin issuers and to establish rules and procedures specific to this type of cryptoasset.

And although FATF focuses on AML/CFT and sanctions regulation, it seems likely that other types of financial regulators will be emboldened to assert their authority over stablecoins in their respective areas of oversight (e.g., securities regulation, consumer protection, etc.).

The United States government certainly is in line with FATF’s take on stablecoins, with the Biden administration last week calling for the U.S. Congress to introduce legislation that increases regulatory oversight on stablecoin issuers.
You can’t stop unhosted wallets…

… But VASPs Can Restrict Users’ Engagement With Them, As Appropriate

FATF does not recommend the outright banning of such wallets, where the private keys that control the funds are held by the user rather than an exchange or another centralized entity. Instead, it pushes regulators to pursue a risk-based approach.

The guidance acknowledges that unhosted wallets lack VASP oversight and thus bring certain risks by not having an obliged entity as an intermediary. Still, FATF explains that regulators need to study the nature and extent of the risks around unhosted wallets in their jurisdictions and manage those risks accordingly.

The guidance suggests that one appropriate risk-based approach might be for VASPs to restrict or even prohibit their users from transacting with unhosted wallets. But again, policies should depend on the risk environment and VASPs should use technical tools like blockchain analysis software to counter much of the risk. There is not a one-size-fits-all approach for dealing with unhosted wallets.

Implications: Unhosted wallets have long faced some scrutiny from serious and compliant VASPs and that scrutiny is likely to increase, especially until VASPs develop formal risk-based restrictions such as transaction or volume limits between their users and unhosted wallets.

FATF’s directive to study and understand the risks around unhosted wallets may be a boon to blockchain analysis firms. It also may encourage blockchain privacy advocates to double down on their support for anonymizing software.

The regulated crypto space is likely to grow, but the unhosted ecosystem will remain as a niche area with significant development and innovation.
VASPs need to get on board with the travel rule already

FATF makes it clear that VASPs must comply with the travel rule and should not let perfect be the enemy of the good.

Even if the crypto industry does not have an agreed-upon compliance solution, VASPs must do what they can to record, and pass on to the next institution, the data about sender and recipient that the rule requires. There are lots of possible technologies that would do this, and FATF leaves it up to the industry to implement as appropriate.

Probably the handiest part of this update is a table with all the information that VASPs need to record and/or transmit, depending on whether the entity is the originator or beneficiary of a virtual asset transaction (see Table 1 on page 59). Also, FATF acknowledges the importance of data handling and privacy and hammers home the point that VASPs must do due diligence on counterparty VASPs before sharing travel rule-related data with them.

Implications: This should accelerate the industry’s experimentation with travel rule compliance. At the very least, some VASPs may not wait for industry-wide solutions and will probably try to create their own channels and mechanisms to comply, even if this may be an inefficient approach overall. But if there was any skepticism in the industry about the need to implement the travel rule, there’s little room for debate on it any more.

Loose Ends

I noticed two things purposefully left out of the update that I believe are important.

One, this guidance explicitly does not relate to central bank digital currencies (CBDC). There is a good reason for this. CBDCs will likely be regulated as fiat currencies and including them under the guidance for permissionless virtual assets may complicate matters. Plus, there are only a few CBDCs that have actually launched.

It would be a bit premature for FATF to address CBDCs. However, as CBDC pilots progress, they will deserve more attention by FATF. CBDCs will not proliferate without bringing new financial crime risks, as I spelled out last year in a Lawfare paper.

The other thing left out of the guidance is the risk arising from the potential of merchants widely adopting virtual assets as payments for goods and services. FATF specifies that a merchant accepting cryptocurrencies is not a VASP, but that a company that processes crypto payments on a merchant’s behalf is one.

As with CBDCs, it may be premature to develop AML/CFT and sanctions guidance for the merchant crypto payments that don’t involve an intermediary payment processor. But regulators will have to give attention to this if merchant crypto payments scale up, especially if a significant number of merchants use unhosted wallets, as I discussed earlier this year in this article.


Basel Committee To Review Proposed Capital Requirements For Banks With Crypto Assets

The banking regulator plans to issue a new consultative document in 2022.

The global standard-setter for banking regulation plans to elaborate on its proposed capital requirements for crypto assets after receiving criticism from leading global banks.

* The Bank for International Settlements’ Basel Committee said Tuesday that it will “further specify” the proposed capital requirement and issue a new consultative document by mid-2022.

* The statement was released after the committee reviewed comments on its consultation from June, which said banks exposed to high-risk crypto assets like bitcoin should hold capital equal to the exposure.

* Under that proposal, a bank with an original exposure to crypto of $100 has a minimum capital requirement of $100.

* A forum of some of the largest global banks, including JPMorgan Chase and Deutsche Bank, opposed the requirement, calling it “overly conservative” and said it could preclude bank involvement in the crypto market.

* In Tuesday’s statement, the Basel Committee said its members had reiterated the importance of “developing a conservative risk-based global minimum standard” to manage risks to the banking system from crypto assets that is consistent with the general principles laid out in its previous consultation.

Updated: 11-11-2021

European Commission Urges Members To Agree On Crypto Regulations

The commission is hoping to finalize its proposed regulatory sandbox for financial products based on distributed ledger technology by the end of the year.

The European Commission, the executive branch that proposes legislation for the European Union, is urging its members to agree on its proposed Markets in Crypto Assets (MiCA) regulations this autumn, according to statements by the EU commissioner for financial services during a web forum Wednesday.

Commissioner Mairead McGuinness said that the commission is also hoping to finalize its proposed regulatory sandbox for financial products based on distributed ledger technology (DLT) by the end of the year.

“Crypto assets are evolving fast, enabling homegrown firms to enter the market, while also attracting retail investors,” McGuinness said. ”It is our policy and our duty as policy makers to put sound rules in place as quickly as possible.”

The tight deadlines underscore EU regulators’ more urgent pace than their U.S. counterparts in developing a sweeping regulatory framework for crypto assets. Only last week, U.S. regulators released their first recommendations for regulating stablecoins or cryptocurrencies pegged to the value of other assets like the U.S. dollar. Meanwhile, McGuinness said that MiCA is introducing a “bespoke regime” for previously unregulated crypto assets, including stablecoins.

While some critics fear that MiCA’s hyper-focus on stablecoin issuers may drive innovation from the region, the commission said that proposed legislation in the framework will make it easier for crypto companies to expand through the EU via a licensing system that allows firms regulated in one member state to start operating in others.

Despite McGuinness’ call to action, Eva Maydell, a member of the EU Parliament, said on Wednesday during a webinar that there are still open questions concerning MiCA. While the European Commission supports the interests of the EU as a whole, the European parliament directly represents the citizens of the union.

Maydell warned it will “take a bit longer than planned” to finalize a position on the framework, although she did not specify a timeline. “But we have to make clear that we don’t want to ban businesses in that particular sphere,” Maydell said.

Meanwhile, the DLT pilot regime will create a safe space for market players to experiment with issuing, trading and settling securities using blockchain technology, McGuinness said.

EU parliamentarian Eva Kaili, who reports on the proposed DLT regime, said during an interview with CoinDesk that the provisions in the proposed regime “will operate in a uniform manner across the EU just like what MiCA is trying to do for crypto assets.”

McGuinness said on Wednesday that the sandbox will run for five years, and at the end of that period, regulators will decide on reviewing the legislation to ensure it is “fostering responsible innovation.”

McGuinness is hopeful that the Commission will agree on the pilot regime by the end of the year. “So as of next year, market participants will be able to test the use of DLT on a large scale in asset classes such as shares on bonds,” McGuinness said.

US Congress Plans ‘Demystifying Crypto’ Committee Hearing For Nov. 17

Representative Don Beyer — Who Has previously proposed legislation expanding the regulatory and legal framework for digital assets in the U.S. — will be chairing the hearing.

The Joint Economic Committee, which includes Republican and Democratic members of both the United States House of Representatives and Senate, will be holding a hearing on the role of government concerning crypto.

According to the Joint Economic Committee’s, or JEC’s, schedule for next week, Congresspeople will be listening to industry experts speak at a hearing called “Demystifying Crypto: Digital Assets and the Role of Government” on Nov. 17. Representative Don Beyer — who has previously proposed legislation expanding the regulatory and legal framework for digital assets in the U.S. — will be chairing the hearing.

Industry experts scheduled to speak include Alexis Goldstein, director of financial policy at the Open Markets Institute; Tim Massad, former chair of the Commodity Futures Trading Commission; Kevin Werbach, director of the Blockchain and Digital Asset Project at the Wharton School of the University of Pennsylvania; and Peter Van Valkenburgh, director of research at Coin Center.

Lawmakers including Senator Rob Portman and Senator Ted Cruz, who have both previously spoken in favor of crypto regulation, are JEC members.

Much of the discussion surrounding crypto regulation in the U.S. has been outside full sessions of the House or Senate, instead often limited to meetings of the House Committee on Financial Services or the Senate Committee on Banking, Housing and Urban Affairs.

However, the issue took center stage in Congress in August when the debate over the wording of the current infrastructure bill included tax reporting requirements for crypto developers, transaction validators and node operators.

The bill has since passed both the House of Representatives and the Senate without additional clarification on crypto brokers and is awaiting approval from President Joe Biden. The U.S. president is expected to sign the bill into law on Monday.

Updated: 11-19-2021

The Crypto Industry’s Solution For Regulation: We’ll Handle It

Big exchanges and investors say traditional agencies don’t have the tools or expertise to oversee the sector.

The cryptocurrency industry suddenly found itself in the crosshairs of a host of U.S. state and federal regulators this fall, facing millions of dollars of fines, threats of lawsuits, and warnings of new rules to come. Crypto executives say the abrupt—and sometimes overlapping—spate of enforcement threatens to chill innovation, especially in areas where it’s not clear which laws apply. Their solution? Let the industry help regulate itself.

Major exchanges including Coinbase and Gemini and prominent investors like Andreessen Horowitz have floated the idea of a crypto self-regulatory organization (SRO), arguing it could be better suited to oversee the new and complex industry on some issues than traditional agencies, which have struggled to apply decades-old rules to the new market. Supporters say an SRO could be more agile in deciding on rules around new products, using its members’ expertise and resources.

“The job of a regulator is not easy when you’re confronting something new,” says Greg Xethalis, chief compliance officer at crypto investment firm Multicoin Capital. “The question is, how do you get to an environment where the regulatory infrastructure can be more nimble?”

Self-regulation has a long history on Wall Street. SROs, which are funded and governed by their own members, set rules, perform inspections, and mete out penalties to members, with authority delegated by Congress and regulators such as the Securities and Exchange Commission.

A few years after Congress formed the SEC as part of President Franklin D. Roosevelt’s New Deal, the agency delegated some oversight of brokers and brokerage firms to the newly formed National Association of Securities Dealers, an SRO.

Eighty years and a few reorganizations later, the NASD is now the Financial Industry Regulatory Authority, or Finra, with 3,600 employees helping to license, police, and levy penalties on hundreds of thousands of brokers, under the SEC’s supervision. A similar SRO polices commodities brokers, and the major stock exchanges are themselves self-regulatory organizations.

For crypto, an SRO could be responsible to go after at least some infractions—referring serious fraud to agencies like the SEC. For example, the SRO could adjudicate whether a newly issued token should be classified as a security, a commodity, or something else, which proponents say would go a long way toward helping firms issue new ones without fearing an enforcement action years later.

It could also handle such mundane tasks as setting product disclosure rules or standards governing how to manage customer data. Its behavior would be overseen by the SEC and other agencies, which would have the final say if they disagree with an SRO’s decisions.

Established SROs such as Finra have been criticized for weak enforcement that caters to their members rather than the public they’re supposed to serve, with some detractors comparing them to cartels. And some crypto skeptics say an SRO wouldn’t be able to adequately address what they see as the industry’s biggest problems: fraud and serious legal violations that are the bread and butter of powerful watchdogs such as the SEC and the Commodity Futures Trading Commission.

Already this year, the SEC has threatened Coinbase with a lawsuit over a proposed product, multiple state regulators have gone after crypto firms for allegedly selling unregistered securities, and the CFTC has fined Tether $41 million for lying about the assets backing its stablecoin.

“This is an industry that needs guardrails and potentially structural changes,” says Andrew Park, a senior policy analyst for the Americans for Financial Reform, an investor advocacy group, pointing to stablecoins and other crypto products that have close parallels to the traditional financial system but aren’t following the same regulations. “If there was an armed robbery going on, an SRO is outside giving the getaway car a parking ticket.”

Industry advocates have already tried to form a crypto SRO, but this has yet to gain acceptance from lawmakers. One contender started by Gemini has been inactive for years. Another, called the Association for Digital Asset Markets (ADAM), has members including crypto exchange FTX and investor Galaxy Digital and has developed a code of conduct that could serve as a foundation if it were to gain SRO status.

Most who support forming an SRO agree that such an organization would likely need an act of Congress to allow the SEC, CFTC, or other regulators to register it and potentially delegate authority to it.

Although such a bill could take years to pass, senators that include Wyoming Republican Cynthia Lummis have said they plan to create comprehensive crypto legislation that could provide an opportunity for supporters of an SRO to put their plan into action.

“If we can show that SROs would actually increase regulation and registration under the oversight of the SEC and CFTC, it would get buy-in from the agencies and also give the industry an opportunity to have a voice,” says Michelle Bond, chief executive officer of ADAM.

BOTTOM LINE – Crypto executives propose to play a role in how the industry is policed. While it could take years for self-regulation to happen, some lawmakers appear open to the idea.

Robinhood Exec Says Proposal For A Single Digital Asset Regulator Is Stupid

Robinhood’s chief legal officer is not enamored with a recent Coinbase proposal for a separate regulatory body for the crypto space.

Robinhood’s chief legal officer Dan Gallagher described the idea of creating a new digital asset regulator was “just plain silly” at a conference on Wednesday.

Robinhood is a popular commission-free trading app that offers digital assets, and rival crypto asset exchange Coinbase put foward the idea of a new regulator in October.

Gallagher told attendees at the Georgetown University Financial Markets Quality Conference that “it doesn’t make sense” to add additional agencies to “the alphabet soup of Washington.”

He went on to say that attempting to transfer authority from agencies like the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) to another regulator was “one of the stupidest ideas I’ve heard in this space in a long time.”

Gallagher previously served as a commissioner on the Securities and Exchange Commission during the Obama administration. He was speaking as part of the Future of Digital Assets Panel at the conference.

While he didn’t specifically mention Coinbase, the criticism was implied. On Oct. 14, Coinbase proposed a new federal regulatory body. Coinbase chief policy officer Faryar Shirzad worte:

“To avoid fragmented and inconsistent regulatory oversight of these unique and concurrent innovations, responsibility over digital assets markets should be assigned to a single federal regulator.”

Gallagher said Robinhood has taken a more conservative approach than Coinbase to avoid getting into regulatory hot water. Where Coinbase supports 51 different cryptocurrencies, Robinhood only supports seven.

“We have to be very careful and deliberate,” he said. “You can’t just be taking on new coins if by the next day some regulator is going to call them a security.”

Currently, the digital asset space is monitored by a number of government agencies, including the SEC and CFTC. The SEC deals with the regulation of securities like stocks and shares. It remains a hot topic of debate whether many cryptocurrencies count as securities or commodities.

Describing the current regulatory climate for digital asset exchanges, Gallagher said: “It’s a very tense situation, and it does call for regulatory clarity which we haven’t seen yet.”

“You can’t just rush into whatever makes the most sense. You have to take on board what your current regulators might think of this new technology.”

Rather than creating an additional regulator, Gallagher suggested that the solution would be for the SEC, CFTC and FINRA “to create a regime with existing authority that’s light touch enough and recognizes the benefits of the technology.”

“You have to take into account entities in a regulatory framework that allows firms, companies, enterprises, individuals to be in a market where sometimes it’s a security, sometimes it’s not. Sometimes it’s a commodity, sometimes it’s not. Right? And not worry that there’s going to be some gotcha that comes after you post facto.”

On Oct 27, CFTC acting chair Rostin Behnam suggested during his confirmation hearing that the agency is tasked with overseeing 60% of the digital asset market as the “primary cop on the beat.”

Updated: 11-23-2021

Crypto Oversight Road Map Is Set by U.S. Banking Regulators

U.S. banking agencies provided more insight into their plans for regulating cryptocurrencies on Tuesday, issuing a to-do list of their priorities for next year and announcing a new policy that would require banks to seek permission before offering digital currency products.

The Federal Reserve and other banking agencies released an agenda outlining areas of focus, including how they plan to weigh custody, crypto-backed loans and the possibility of capital standards, according to a joint statement. Separately, the Office of the Comptroller of the Currency said that banks must get an additional sign-off from the regulator before engaging with digital coins.

“Throughout 2022, the agencies plan to provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible,” the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said in the statement.

While the agenda doesn’t affect any current regulations, the topics officials said they want to clarify next year could shape how the agencies ultimately regulate the way banks use crypto. Their “crypto-asset road map” overlaps with moves the OCC made in 2020 to open up banking to digital coins when Brian Brooks was in charge of the agency, though current Acting Comptroller Michael Hsu paused those efforts.

After concluding what they called a “crypto sprint” to study how agencies were approaching crypto, the banking regulators settled on several areas they need to clarify. Those issues include how banks should properly maintain custody of crypto assets, what firms should do to help consumers make transactions, how stablecoins should be issued and what capital and liquidity standards should be for lenders’ crypto holdings.

The OCC followed the release of the road map with a new policy on how banks should interpret its previous crypto directives. Hsu’s agency instructed the banks it regulates to seek pre-approval before they can manage custody of digital coins, hold deposited dollars to back stablecoins and handle crypto transactions tied to a distributed ledger, which is the technology underpinning the industry.

Lenders will have to ask for special permission and demonstrate they have sufficient risk controls before the OCC will sign off, according to the agency.

Following their 2022 road map and other recent recommendations, the OCC and other agencies could soon be weighing new rules for regulating tokens more like bank assets.

The President’s Working Group on Financial Markets wants Congress to take up legislation requiring that stablecoins only be issued by regulated banks. The group of agency heads has also called for government overseers to assess whether tokens pose risks to the wider financial system.

Still, it’s uncertain whether the three bank agencies will be able to agree on anything in the near term. The OCC is still awaiting the confirmation of a permanent leader, and the Biden administration hasn’t yet nominated a vice chairman to run the Fed’s supervision work. Meanwhile, the FDIC is still run by a Trump administration appointee, Jelena McWilliams.

Fed Did ‘Policy Sprints’ Around Crypto Assets To Address Regulatory Clarity

Government agencies are planning to adjust compliance standards on existing laws and regulations related to custody services, buying and selling crypto, crypto-collateralized loans, HODLing and the issuance of stablecoins.

The United States Federal Reserve is planning to address ambiguities that they feel are plaguing digital asset regulation in the country following rapid analyses by government agencies.

In a Nov. 23 announcement, the Board of Governors of the Federal Reserve System said it recently worked with the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency on a series of “policy sprints” aimed at addressing regulatory clarity in the crypto space. The interagency effort included building a greater understanding of the terminology surrounding crypto assets, identifying potential risks, and analyzing existing regulatory frameworks to determine if any changes were necessary.

According to the Fed, the three agencies plan to address whether “certain crypto-related activities conducted by banking organizations are legally permissible” in addition to potentially adjusting compliance and enforcement standards on existing laws and regulations related to custody services, the buying and selling of cryptocurrencies, loans collateralized by crypto, HODLing, and the issuance of stablecoins in 2022.

The trio also intend to consult with the Basel Committee on Banking Supervision, a global committee of banking supervisors and central banks, which provides recommendations for banks considering holding crypto.

“The emerging crypto-asset sector presents potential opportunities and risks to banking organizations, their customers, and the overall financial system,” said the Fed. “The interagency sprints quickly advanced and built on agencies’ combined knowledge, which helped identify and assess key issues related to potential crypto-asset activities conducted by banking organizations.”

The announcement follows a Nov. 1 report from the President’s Working Group on Financial Markets suggesting that legislation is “urgently needed” to address the potential financial risks of stablecoins.

At present, a seeming legislative tug-of-war is occurring between U.S. government agencies in regulating the crypto space, with much of the force behind the Securities and Exchange Commission and the Commodity Futures Trading Commission.

Roughly half of the seats for the Fed’s Board of Governors could be filled with fresh blood starting in 2022 following the expected departure of Richard Clarida. On Monday, President Joe Biden announced he would be nominating Jerome Powell for a second term as Fed chair, with the potential to last until 2026.

However, as Powell is an existing board member, there will likely still be three empty seats for the U.S. President to fill during his first term. On Monday, the White House said Biden aimed to announce his picks for those positions as well as for the Fed’s vice chair for supervision in early December with a focus on “improving the diversity in the Board’s composition.”

The Senate Banking Committee announced on Tuesday that Powell would be testifying alongside Treasury Secretary Janet Yellen in a Nov. 30 hearing to address oversight of the Fed and Treasury in the Coronavirus Aid, Relief, and Economic Security Act. However, to be confirmed as the next Fed chair, Powell will still need to attend a hearing in front of the same committee before the Senate can vote on his nomination.

US Senator Pat Toomey Supports Digital Dollar, Nomination Of Powell As Fed Chair

“The idea of having a tokenized dollar that is capable of being exchanged on a peer-to-peer basis on a platform where developers can innovate and develop new products and services… I think there’s a strong case for that,” said Pat Toomey.

Pennsylvania Senator Pat Toomey, one of the lawmakers who supported amending the language around crypto in the recently passed infrastructure law, said the United States should lead the world in the adoption of a central bank digital currency, or CBDC.

In a Tuesday interview with Bloomberg’s David Westin, Toomey said the U.S. dollar should have “the most sophisticated capabilities of any currency in the world” as the country could benefit from a digital dollar. However, the senator said the rollout of any U.S. central bank digital currency should not rely on the Federal Reserve as a traditional bank for retail accounts, citing issues with privacy.

“The idea of having a tokenized dollar that is capable of being exchanged on a peer-to-peer basis on a platform where developers can innovate and develop new products and services… I think there’s a strong case for that,” said Toomey.

The Pennsylvania senator added that he would vote in favor of Jerome Powell’s nomination for a second term as Fed chair. Toomey cited Powell’s role in stabilizing U.S. financial markets during the early months of the pandemic as well as the fact he’s been “in action for some time now.”

One of fifty Republican lawmakers currently serving in the Senate, Toomey is crossing partisan lines in supporting President Joe Biden’s nomination of Powell. At a time when party politics in the U.S. seemingly embeds itself in every piece of legislation put forth and the Democratic Party controls each chamber of Congress by only a slim majority, every vote counts when it comes to enacting policy.

Toomey was behind a bipartisan effort to amend some of the provisions in the recently passed infrastructure law to not apply to developers, miners and others in the crypto space. The bill ultimately passed both the Senate and House without any clarification on crypto, but lawmakers introduced legislation on Thursday to “fix” its tax reporting requirements.

Updated: 11-24-2021

European Council Takes One Step Closer To Ratifying Landmark Crypto Regulation

The European Council and Parliament will now negotiate the rules set out in the framework.

The European Union’s (EU) proposed framework for regulating crypto is one step closer to ratification.

On Wednesday, the European Council, which sets the EU’s political agenda, adopted its position on the Markets in Crypto Assets (MiCA) framework, according to a statement on its website. This means that the Council and the European Parliament can now enter into negotiations on the proposal before it is formally adopted as law. This agreement also formed the Council’s negotiating mandate for discussing MiCA with the European Parliament.

The MiCA framework broadly captures cryptocurrencies like bitcoin and promises to make it simpler for crypto firms to expand throughout the EU by facilitating a passportable license.

Created in the wake of Facebook’s plans for issuing a “basket-backed stablecoin” or cryptocurrency pegged to the value of a combination of other assets or currencies, MiCA places a heavy emphasis on regulating stablecoin issuers in particular. The proposed MiCA framework referred to this type of stablecoin as “asset-referenced tokens” and dedicated about a fifth of the package to outlining requirements for issuers of these tokens.

The European Council’s own 405-page negotiation mandate for MiCA shows the EU might not be easing up on issuers of asset-referenced tokens, stating they should “be subject to more stringent requirements than issuers of other cryptoassets.”

The negotiation mandate also contained a number of exceptions to the MiCA framework. For one, the Council has agreed that credit institutions authorized under the EU’s capital requirements directive “should not need another authorisation under [MiCA] in order to issue asset-referenced tokens.” These institutions, the document said, should also be exempt from the capital requirements stablecoin issuers are required to maintain under MiCA.

The Council’s document also said that the MiCA regulations do not apply to non-fungible tokens (NFTs) “including digital art and collectibles, whose value is attributable to each cryptoasset’s unique characteristics and the utility it gives to the token holder.”

The document said that the regulations also do not apply to tokens “representing services or physical assets that are unique and not fungible, such as product guarantees or real estate.”

Other potential exceptions include crypto assets that are offered for free or as rewards, and transactions between global organizations like the International Monetary Fund and the Bank for International Settlements.

“It is appropriate to exempt certain intragroup transactions and some public entities from the scope as they do not pose risks,” the document said.

The MiCA framework was introduced in September 2020 by the European Commission, the EU’s executive branch. On Wednesday, the Council adopted its position on another framework, the Digital Operational Resilience Act (DORA) alongside MiCA. Both frameworks are part of the Union’s larger digital finance initiative.

Sec Open Meeting On Dec. 2 To Include Crypto Panel Discussion

The SEC is opening discussion on crypto and blockchain technology with regard to american investors.

The u.s. securities and exchange commission, or sec, announced wednesday the title of the upcoming crypto panel for its dec. 2 investor advisory meeting will be “helping to ensure investor protection and market integrity in the face of new technologies.” previously, on nov. 15, the commission announced the meeting would be open to the public. panelists and moderators will attend remotely.

The crypto panel discussion agenda will focus on the regulatory framework covering digital assets, market structure issues and defining risk in emerging technologies. additional topics are expected to include blockchain technologies, crypto-based exchange-traded fundsetfs and stablecoins.

Half Of The Panelists Are In Blockchain Specific Roles:

* Ali Emdad, Professor And Associate Dean, Earl G. Graves School Of Business And Management At Morgan State University, And Founding Director Of The Center For The Study Of Blockchain And Financial Technology
* Tyrone Ross, Ceo, Onramp Invest
* Sydney Schaub, Chief Legal Officer, General Counsel And Corporate Secretary, Gemini
* Kristin Smith, Executive Director, The Blockchain Association

The remainder of the panel is composed of luminary law professors and financial markets experts.

The portion of the meeting that is dedicated to the crypto panel discussion is slated to run from 10:45 am to 12:45 pm est. introductory remarks for the whole meeting begin at 10:00 am est, and will be webcast on the SEC’S website.

Readers can likely anticipate questions on topics like the sec’s recent decision to decline approval of jan vaneck’s spot etf proposal and the nature of the commission’s engagement with crypto companies, but the exact questions to be discussed by the panel are not yet known to the public.

Updated: 11-25-2021

European Council Approves Two Digital Asset Proposals

A framework for digital assets in Europe is moving ahead in the labyrinth of the European Union.

The European Union’s planned framework for regulating cryptocurrencies is one step closer to becoming official. On Wednesday, the European Council, which guides the EU’s political agenda, announced its position on the Markets in Crypto Assets (MiCA) framework and the Digital Operational Resilience Act (DORA).

Following the deal, which must then be ratified, the European Council and Parliament may now begin discussions on the initiative before it is finally approved as legislation.

The MiCA framework is designed to safeguard investors and consumers from fraud, including guarantees that investors’ money is secure in the event of a hack. If authorities believe that certain virtual currency exchange platforms are posing a threat to investors or users, they could impose more stringent regulations on them under MiCA.

The MiCA’s other major aim is to govern stablecoin issuers, following Facebook’s desire to establish a stablecoin, initially dubbed “Libra,” backed by a basket of fiat currencies.

The European Central Bank (ECB) has said that the new regulations will establish comparable cultural standards for payment service providers to guarantee user safety. According to the ECB’s most recent announcement, the framework will also contain provisions addressing company governance and risk management, as well as prohibitions on providing services such as high-risk payment instruments.

The European Council’s own MiCA negotiation mandate, which is over 400 pages long, suggests that the EU will not be relaxing its stance on asset-referenced token issuers. It says they should be subject to more stringent obligations than issuers of other crypto assets.

A number of exclusions were included in the negotiation mandate for MiCA. The Council has agreed that asset-referenced tokens authorized under the EU’s capital requirements directive “should not require another authorization under [MiCA] to be issued.” Under MiCA, the banks and other financial institutions that provide settlement services to stablecoins should be exempt from capital requirements.

According to the Council, nonfungible tokens, including digital art and collectibles that are valued based on each crypto asset’s distinctive characteristics and thbenefits it offers, are not subject to MiCA rules. The rules do not apply to tokens that represent unique services or real assets, such as “product guarantees or real estate.”

The European Commission released the MiCA framework in September 2020, as part of its larger digital finance initiative.

Updated: 11-29-2021

Lines In The Sand: US Congress Is Bringing Partisan Politics To Crypto

“There are too many members of Congress that don’t have enough of a base of understanding. Congress needs to come in and bring regulations to this space.”

Cryptocurrency is now a hot topic in United States politics. It wasn’t always like this, however, especially since just a small percentage of U.S. politicians seem to have a baseline understanding of digital currencies.

Nonetheless, it’s now a wedge issue poised to morph into a destructive political football destined to occupy a new, uncomfortable space in the consistently devolving culture war. Although this is certainly uninspiring news for common sense political discourse in the United States, it remains to be determined how this will affect the cryptocurrency ecosystem.

Let’s Start With How We Got Here

A few legislators in Congress have been quietly working on common-sense cryptocurrency regulation for the last couple of years. These informed Democrats and Republicans in the U.S. House of Representatives and Senate have thoughtfully taken up the matter and drafted legislative measures to define cryptocurrencies, hedge investor risk, defend against fraud and integrate digital currency into a long-established centralized system.

Those waiting for lawmakers on either side of the aisle to embrace total decentralization will be waiting a very long time. Nobody in the 117th Congress is considering this, and it’s unlikely anyone in the 118th, 119th or 120th will either.

Until recently, cryptocurrency and blockchain matters weren’t discussed in the halls of Congress, just like they weren’t coffee table issues for the majority of disinterested American citizens. They weren’t political wedge issues and were never topics of debate between candidates Donald Trump and Joe Biden in the 2020 presidential campaign. Most Americans simply didn’t know or didn’t care about cryptocurrency.

Things changed for several reasons, not the least of which were the Twitter proclivities of billionaire and Dogecoin enthusiast Elon Musk. On April 25, Musk tweeted: “Am hosting SNL on May 8.” The price of Dogecoin closed at $0.27 that day. The following day, NBC confirmed Musk’s announcement, and the memecoin closed at $0.32.

Soon after, Shark Tank star and billionaire Dallas Mavericks owner Mark Cuban announced that BitPay handles “Mavs Doge sales,” also saying on the The Ellen DeGeneres Show: “At the Mavs, we sell a lot of merchandise for Dogecoin, and you should look at it for the Ellen Shop.”

At that point, crypto newbies eager to make a quick buck clamored to open accounts on welcoming trading platforms like Robinhood and cryptocurrency exchanges like Coinbase. DOGE started buzzing, inexperienced speculators flocked, HODLer’s held on, and just before Musk’s opening monologue, Dogecoin topped out at nearly $0.75. Musk’s performance was uninspiring, and Crypto Twitter was unimpressed. During a skit later in the show, Musk’s character said Dogecoin was a “hustle.”

Dogecoin began its precipitous descent. FOMO, as it so often does, led to FUD — sometimes sad, desperately delusional FUD. Two of Washington, DC’s most prolific, competitive politicians took notice and quickly took up positions on either side of the cryptocurrency regulatory debate.

Cue Senator Warren

Musk’s apparent market manipulation and his Saturday Night Live appearance weren’t the only motivators for Senator Elizabeth Warren to speak out about cryptocurrency. She certainly must have noticed the market’s seesaw-like reaction to China banning cryptocurrency transactions for financial institutions on May 18.

Warren has also expressed concerns about token volatility in the past, criticizing Robinhood’s checkered history of alleged cheating — having frozen out traders from selling Dogecoin when it was tanking on May 8, just after Musk’s SNL appearance. On June 9, Warren talked to Bloomberg Technology about crypto, telling the publication: “It’s the Wild West out there, and it makes it not a good way to buy and sell things and not a good investment — and an environmental disaster.”

Next to Senator Bernie Sanders, Warren is the most influential progressive voice in the upper house. Although the senator is unable to set policy — only moderate legislation can pass this Senate — she’s very influential, and her positions are echoed by a sizable portion of the Democratic base. Those constituents who know little or nothing about cryptocurrency will likely accept her rhetoric as fully accurate.

Warren believes that cryptocurrency is a “lousy investment” for the average person. It really doesn’t matter that she and other legislators could change the taxable status of crypto for purchasing goods with the stroke of a pen, or that cryptocurrency is a good investment for those willing and interested in educating themselves, or that crypto volatility has no impact on the uninvested.

Her message to the base is simple, clear and effective: Cryptocurrency is bad for the little guy. It’s good for the rich. It’s just another tool to be used to stick it to the middle class.

Senator Cruz, Always Looking For An Opportunity To Stir The Pot

Senator Ted Cruz may not be the most influential voice on the conservative side of the aisle, but he’s still a formidable politician. It’s unclear if he took up the cryptocurrency matter in reaction to Senator Warren or he simply stumbled upon an opportunity to hammer Democrats. Cruz is a long-term political opportunist who is smart and talented enough to know how to expand the base, yet he’s often ignorant about the issues that he’s for or against.

On June 9, Cruz told Fox News host Sean Hannity that he doesn’t understand Bitcoin: “It is a new cryptocurrency. To be honest, I don’t fully understand it. […] It has upside, but be careful.” He also said that people are going to use Bitcoin as a “hedge” against inflation because President Biden is proposing “$7 trillion in new spending.”

Cruz is right that the U.S. is currently experiencing inflation, although it’s unrelated to unallocated federal infrastructure dollars. It’s the result of several factors, including COVID-19-related supply chain delays. Cruz is also correct that Bitcoin is a cryptocurrency, but it’s not new. The senator certainly didn’t understand cryptocurrency at the time of the Hannity interview but still managed to present himself as an informed voice — as the conservative anti-Warren cryptocurrency hero with a political ax to grind.

In early August, he twisted the China crypto-ban narrative to make a political point to counter the tax reporting requirements of Biden’s Infrastructure Investment and Jobs Act and tweeted: “Democrats hate crypto currencies,” pointing the finger at Saule Omarova, Biden’s pick for comptroller of the currency who’s unlikely to be a friend to crypto.

Senator Warren is a legislative activist who frequently understands the ins and outs of almost every issue that she takes on. Although she’s off the mark when it comes to cryptocurrency, her rigid ideological leanings make it almost impossible to convince her otherwise. Senator Cruz is a seasoned political operator. He understands the electoral landscape of present-day conservatism better than most and will say almost anything if it serves him politically.

When it comes to cryptocurrency, it’s difficult to see how ideology isn’t more of a driver for either Senator than are facts and on the ground or market realities. Still, there’s value to be found in their baseline arguments. If cryptocurrency is to be adopted by mainstream Americans, it absolutely requires reasonable regulation that doesn’t stifle the industry and put the nation at a competitive, global disadvantage.

Christine Trent Parker — an attorney at Reed Smith whose focus is on regulatory, enforcement and transactional matters related to cryptocurrencies — believes that retail customers want “the innovative financial products that are offered overseas, in the foreign exchanges. […] They see that and they want that and they’re going to go follow it wherever it is.”

Many of those products aren’t unavailable in the U.S., and those that are accessible have no consumer protections. Parker is concerned that “the political fault lines,” like the positions taken up by Senators Warren and Cruz, have “stymied the US regulators” from offering products that cater to retail customers and have a consumer-protection element.

What’s Going On In Good Faith?

There are other lawmakers in Congress quietly engaged in good-faith efforts that may eventually benefit retail customers as well as institutional investors and cryptocurrency providers. In the Senate, Republicans Pat Toomey, Cynthia Lummis and Rob Portman recently teamed up with Democrats Mark Warner and Kyrsten Sinema to negotiate a compromise amendment to fix controversial cryptocurrency language in the Infrastructure Investment and Jobs Act.

The amendment did not receive the required unanimous consent from all 100 senators, with Richard Shelby objecting, and did not find its way into the final legislation.

Also, in late May, Sinema and Lummis announced that they will co-chair the U.S. Senate Financial Innovation Caucus. According to a press release from Lummis, the caucus will focus on responsible financial innovation, distributed ledger technology and digital assets.

On the national security front, Senator Bill Hagerty introduced legislation to study the implications of China’s efforts to implement its own digital currency, while Senator Marco Rubio and Senator Warren have drafted bills focusing on the role of cryptocurrency in ransomware attacks.

Senate lawmakers Maggie Hassan and Joni Ernst co-sponsored a bill to “help improve oversight of cryptocurrency mining operations in foreign countries.” The legislation would require the secretary of the Treasury, in consultation with other agencies, to determine how other nations mine digital currencies, identify the dollar value of digital currency mined each year from 2016 to 2022, and identify potential supply chain disruptions with respect to mining operations.

Although the Senate is still considered the kinder, gentler chamber of Congress, bipartisan consensus among members is rare. Kristin Smith, executive director of the Blockchain Association, tells Cointelegraph that cryptocurrency regulation is an issue where lawmakers should be able to find common ground:

“Crypto really is bipartisan. It’s important as a narrative against what’s happening in China. It’s important from a financial inclusion perspective. It’s important from an innovation and jobs creation perspective. These are issues that both Republicans and Democrats care about.”

As active as the Senate has been recently, the real heavy lifting is happening in the House of Representatives. Lawmakers have already introduced well over a dozen bills, many of which are bipartisan.

Much of that legislation was incubated in the Congressional Blockchain Caucus. Originally formed in 2016, current co-chairs Bill Foster, Darren Soto, Tom Emmer and David Schweikert lead 31 bipartisan caucus members. The caucus believes in the future of blockchain technology, understands that Congress has a role to play in its development and has decided on a light-touch regulatory approach.

Unlike outspoken lawmakers like Senators Cruz and Warren, Blockchain Caucus members rarely appear on mainstream media news outlets, but their efforts in the space are far more significant. A congressional staffer close to the matter tells Cointelegraph:

“As these partisan leanings on this are emerging and we’re seeing it more and more, I think the emphasis and the focus need to be on the Blockchain Caucus, the [bipartisan] work that the caucus is doing, and not pay too much attention to the partisanship.”

In July, the co-chairs sent a letter to the IRS requesting guidance on taxes applied to block rewards distributed in a proof-of-stake network. They wrote that “It is important that tax policy does not indirectly dissuade U.S. taxpayers from participating in this promising new technology.”

Representative Emmer also introduced the Blockchain Regulatory Certainty Act, to protect software developers and non-controlling blockchain service providers, as well as two companion bills: the Blockchain Promotion Act and the Safe Harbor for Taxpayers with Forked Assets Act.

On the other side of the aisle, Representative Soto co-sponsored the Blockchain Promotion Act and the U.S. Virtual Currency Market and Regulatory Competitiveness Act, a bill that would recommend regulatory structure and would require the Commodity Futures Trading Commission and the Securities and Exchange Commission to determine the benefits of digital currencies to the commodity market.

The only legislation to move beyond the introductory phase was sponsored by caucus member Patrick McHenry. The bill passed the House in April and, if adopted, would order the SEC and the CFTC to form a working group to analyze the regulatory framework for digital assets in the United States.

Additional bills call for the establishment of a National Blockchain Technology Coordination Office, a report about unfair trade practices related to tokens, a study to consider the use of blockchain technology to improve election security, and a requirement to report cryptocurrency ransom payments.

Risks To The Ecosystem From Politics

According to Smith, the passage of comprehensive cryptocurrency legislation is still far out on the horizon. She tells Cointelegraph:

“There’s still a knowledge gap. […] There are too many members of Congress that don’t have enough of a base of understanding. Congress needs to come in and bring regulations to this space. I think we’re several years away from something like that getting traction.”

While trade organizations learn the Washington landscape and work to educate lawmakers, the best-case scenario is that cooler heads prevail.

If moderate legislators win the hearts and minds of the U.S. electorate, the investment community is less likely to be stifled by excessive, stand-alone regulatory bills, as there are pro-crypto senators on both sides of the aisle. It’s all but impossible that any bill with overly burdensome regulation would ever find its way out of the legislative committee let alone onto President Biden’s desk.

Moderates would also ensure that fraud, never-ending market volatility and investor manipulation couldn’t become long-term normative behaviors. Sooner or later, a U.S. president will receive meaningful legislation that properly defines cryptocurrency, assigns federal regulatory jurisdiction, implements common-sense fraud controls and helps stabilize the market.

A semi-informed public is demanding it. Institutional investors, which are the largest political donors, expect it and industry competitors need it. Eden Doniger, general counsel and chief compliance officer of BitPay, tells Cointelegraph:

“Clear and tailored federal legislation on crypto will create a level and equitable playing field for all companies in the space. […] All of this will boost business and consumer confidence and thus increase adoption.”

On the other hand, if Senators Warren and Cruz, and those who line up behind them, succeed in making cryptocurrency a political wedge issue, the ecosystem could devolve into toxic political sludge, from the inside out. Bipartisan legislative efforts would stagnate.

The congressional staffer says, “If cryptocurrency becomes hyper politicized then it will be harder, in the future, to further craft a regulatory environment for this space.”

According to the staffer, legislation will “have to endure a lot of back and forth” depending on which party’s majority is in power at the time. The regulatory environment would sway like a “pendulum.” The crypto community would have a difficult time insulating itself from the noxious effects of hyperpartisanship.

If right-vs.-left thinking infiltrates the crypto trading community, which it’s already starting to do, and Republicans become pro-crypto while Democrats identify as anti-crypto, the politically agnostic nature of the community could begin to fray and disintegrate. On social media, just about any cryptocurrency room on Clubhouse represents a multitude of demographics.

There’s some semblance of unanimity, and, to an extent, everyone gets along. There are certainly heated debates, but they revolve around things like Bitcoin evangelism, specific altcoins or preferred exchange platforms.

Imagine the Clubhouse or Twitter space devolving into Progressive Crypto and Conservative Crypto. Envision Republican and Democratic crypto influencers on YouTube and TikTok. Imagine this bleeds beyond social media and infects makers of blockchain platforms and token developers — right-wing executives vs. left-wing programmers, single-issue cryptocurrency voters vs. multi-issue policy voters vs. crypto-social-ideological voters.

Cryptocurrency has come a long way since 2008, primarily because members of the community share the same goals and are driven by similar innovative aspirations. Yet, the industry is still in its infancy. Surviving politicization from the inside is questionable.

The second destructive outcome comes from the outside. The crypto ecosystem is growing faster than any technology in the modern era, yet most people in the United States, and the world, are not involved. If they’re introduced to cryptocurrency by media outlets like Fox News or MSNBC — two networks focused almost entirely on politics — they will only see digital currency matters through an ideological lens.

If the general public is corrupted before it fully comprehends the benefits of the technologies, conservatives may simply love crypto while progressives hate it. Independents won’t be able to decide how they feel about it.

Subsequently, cryptocurrency may not be adopted by the average American and might struggle to maintain a foothold in the United States. The innovative ecosystem could idle for years while politicians fight it out at the ballot box and the nation falls well behind other countries with better-informed citizens. The congressional staffer says:

“Crypto is going to thrive with or without the United States. Now the onus is on us to keep these opportunities here.”

Arguably, it’s in the best interest of everyone to start engaging with the political climate in Washington and propping up middle-of-the-road politicians who are working diligently on cryptocurrencies. Otherwise, it’s not going to be fly-by-night corrupt whales or federal regulators pulling the rug out from under the ecosystem, it’s going to be the politically motivated fearmongers in Washington with the loudest voices.

Updated: 11-30-2021

Crypto’s Impact On Sanctions: Are Regulators’ Concerns Justified?

Cryptocurrencies, including CBDC’s, have now become a part of the narrative on sanctions due to high adoption.

The use of cryptocurrencies to evade international sanctions from various international governmental organizations like the United Nations (UN), the International Monetary Fund (IMF) and the World Bank, among others, has been a concern for regulators ever since the creation of cryptocurrencies.

The rapidly increasing adoption of digital currencies in the last two years makes this discussion more important than ever, especially with the advent of central bank digital currencies (CBDCs) like the digital yuan.

In an interview on Nov.17, United States Deputy Treasury Secretary Wally Adeyemo said that the efficacy of U.S. sanctions would not be undermined by central bank digital currencies.

Adeyemo’s remarks follow comments from sanctioned Russian oligarch Oleg Deripaska, who urged the Russian government to use Bitcoin to evade U.S. sanctions and even weaken the dominance of the U.S. dollar. Deripaska said, “The U.S. had realized long ago that uncontrolled digital payments are capable of not only nullifying the effectiveness of the entire mechanism of economic sanctions but also taking down the dollar as a whole.”

The Biden administration at large has taken a hard stance against cryptocurrency firms that are abetting such causes. It has found cryptocurrency exchanges guilty of enabling ransomware attacks facilitated through rival countries.

Ransomware Attacks Are The Tip Of The Iceberg

In September, the Treasury Department Office of Foreign Assets Control sanctioned over-the-counter broker Suex by adding it to the list of Specially Designated Nationals for whom assets are blocked and any U.S. persons are prohibited from engaging in financial transactions with them. The broker’s offices in Moscow and Prague were also listed by the government agency as a part of their sanctions, including 25 cryptocurrency addresses for Bitcoin (BTC), Ether (ETH) and Tether (USDT).

More recently, on Nov. 8, the regulator sanctioned the cryptocurrency exchange Chatex and seized $6.1 million in cryptocurrency tokens from the firm. Both these exchanges were sanctioned for the same reasons, i.e. accepting cryptocurrencies that were used to pay off hackers for ransomware attacks.

Cointelegraph discussed these sanctions with Ari Redbord, the head of legal and government affairs at TRM Labs — a blockchain intelligence protocol. Redbord previously served as a senior adviser to the Deputy Secretary and the Undersecretary for Terrorism and Financial Intelligence at the United States Treasury.

Redbord told Cointelegraph, “These are non-compliant nested exchanges or parasite virtual asset service providers that nest on the infrastructure of larger compliant exchanges in order to take advantage of their speed and liquidity.”

Exchanges such as these live in the shadows of the largely compliant cryptocurrency ecosystem and do not have adequate compliance procedures in place to avoid illicit financial risks. Redbord mentioned further the administration’s stance on the issue:

“The administration has been very clear that ransomware is not a crypto problem. It is a cyber problem and the focus should be on hardening cyber defenses. Treasury has been very intentional in its actions — only going after the illicit underbelly of the crypto ecosystem — for example, parasite VASPs and darknet mixing services — rather than the overwhelmingly licit and growing crypto economy.”

Terrorist financing with cryptocurrencies is also a major concern for regulators. Indeed, it is one of the primary motivators behind the Indian regulator’s intention to ban cryptocurrencies, which led to a panic sell in the region when the development was revealed.

Redbord mentioned that over the last year, there has been a global shift to a “post-post” 9-11 world wherein the battlefield is now predominantly digital. He added, “We have seen cryptocurrency used in terrorist financing, ransomware payments and programmatic money laundering by nation-state actors such as North Korea. But, we have also seen law enforcement use blockchain analytics tools […] to track and trace the flow of funds in order to mitigate the risks posed by these illicit actors.”

The fact that the majority of cryptocurrencies and the blockchains enabling them are open-sourced means that law enforcement, regulators and financial institutions have better visibility of the flow of funds than in fiat-enabled transaction mechanisms. In order to effectively ensure that cryptocurrencies aren’t being used in the evasion of sanctions, however, it is essential that financial watchdogs have an enhanced understanding of the asset class and technology that backs it.

Charlie Chen, chief marketing officer of decentralized finance protocol Horizon Finance, told Cointelegraph, “Governments and financial institutions have not yet learned how to work with cryptocurrencies, so they really can be chosen to commit crimes. The world is full of stories like that of the Silk Road. There are real criminal cases involving cryptocurrencies and there are convictions, which means there is evidence.”

CBDCs To Have Minimal Impact On Sanctions

Another aspect of the cryptoverse that could potentially impact the sanctions is central bank digital currencies. China is currently the leader where CBDCs are concerned with the most advanced CBDC program — the Digital Currency Electronic Payment or the digital yuan.

In the past, major Chinese banks with operations in the U.S. have made tentative steps to comply with American sanctions. But some have worried that the adoption of this CBDC in global markets could lead to the weakening of the dollar over time unless the United States comes up to pace with China’s program.

Chen, however, believes that there is little chance that CBDCs could be used to bypass economic sanctions. He said, “At the moment, most international transactions are made in U.S. dollars, and Russian companies will find it problematic to persuade their partners to abandon transactions in USD in favor of a digital ruble.”

He added that the existing mechanisms and algorithms for tracking transactions already allow for detecting suspicious transactions, and in the future, these mechanisms would only become more advanced and efficient.

Currently, there are no barriers that would prevent paying a sanctioned party for a service with cryptocurrencies like Bitcoin. Even with the use of popular cryptocurrencies and whitelisted wallets, these transactions would go unnoticed by the financial regulators. However, Chen explained that problems would arise when the tokens are exchanged for fiat currencies and transferred to the bank account of the sanctioned party.

Chen added, “If you are using a major exchange like Binance, this bank transfer will not work. Therefore, you will have to use smaller exchange services that are so popular in post-Soviet space.”

While cryptocurrencies grow more mainstream every day, in many jurisdictions around the world, they remain largely unregulated and adoption is still nascent. As such, the ability of cryptocurrencies to be used at the scale of a nation-state to avoid sanctions remains to be determined.

One thing is clear, whether crypto turns out to be the next iteration of money or merely another form of investment, regulators are monitoring its use in illicit activities such as sanction avoidance.

White House Considering Richard Cordray As Top Fed Banking Regulator

Ohio attorney served as Consumer Financial Protection Bureau’s first confirmed director.

President Biden is considering Richard Cordray, the first director of the Consumer Financial Protection Bureau, to serve as the Federal Reserve’s top banking regulator, according to people familiar with the matter.

If nominated and confirmed by the Senate, Mr. Cordray would become the government’s most influential overseer of the U.S. banking system, succeeding Randal Quarles as the Fed’s vice chairman of banking supervision.

Mr. Cordray, an attorney, served as head of the CFPB from 2012 to 2017, a watchdog Congress created after the 2008 financial crisis to regulate lenders and other companies tied to consumer finance. He is currently a top official at the Education Department, serving as the chief operating officer of Federal Student Aid, overseeing the $1.6 trillion student-loan program.

Mr. Cordray declined to comment. The White House said last week it would announce additional Fed appointments beginning in early December.

Senate Banking Committee Chairman Sherrod Brown (D., Ohio) said Tuesday that Mr. Cordray was one of several candidates under consideration.

“I’m talking to the White House about him and a number of other people,” he said.

At the CFPB, Mr. Cordray brought significant changes to consumer finance, a corner of the financial industry that had previously escaped regulatory scrutiny. The agency tightened underwriting standards for mortgages, required more disclosure on credit-card rates and fees, and introduced federal oversight to payday lending.

Mr. Cordray’s nomination for the Fed post could hearten progressive Democrats who have called for the central bank to take a tougher approach to regulating big banks and addressing financial risks posed by climate change. Sen. Elizabeth Warren (D., Mass.) has privately pushed senior White House officials to consider Mr. Cordray for the role, one of the people familiar with the matter said. A spokeswoman for Ms. Warren declined to comment.

Without citing a specific candidate, Ms. Warren said Monday that the Fed job should go to “someone who has the insight to recognize how important regulation is to the effective functioning of the financial markets and has the courage to follow through on that insight.”

Mr. Cordray won Senate confirmation on a 66-34 vote in 2013 for a five-year term as the CFPB’s head, following a lengthy delay. He received backing from 12 Republicans, including five who remain in the Senate. Before the vote, he had been serving as CFPB director for over a year through a recess appointment.

Mr. Cordray could face a closer confirmation vote if he is nominated for the Fed job. “I like Richard. I respect Richard. Richard is to the left of Lenin,” said Sen. John Kennedy (R., La.), a member of the banking committee, which holds hearings on Fed nominees. “Richard believes that only government can make America great. He and I disagree.”

Sen. Mike Rounds (R., S.D.) hinted that Mr. Cordray’s previous clashes with Republicans from his tenure at the CFPB could make for a bruising confirmation fight. “We all have history with him already, and the president should know that,” he told reporters. Mr. Rounds said he would wait for a formal nomination before “we begin the process of consulting, and perhaps advising [the president] to withdraw” a nomination.

The administration has struggled to fill some top financial regulatory posts with individuals who can satisfy its allies on Capitol Hill and maneuver through an evenly divided Senate.

For instance, the White House considered at least three candidates for another banking post, comptroller of the currency, before settling on Saule Omarova, a Cornell University law professor, who is unlikely to win confirmation. Opposition from Republicans and a group of moderate Democrats has likely scuttled her nomination, though the White House said last week that it still supports her.

Mr. Biden last week said he would nominate Fed Chairman Jerome Powell to a second four-year term atop the central bank when his current position expires in February. He also said he would elevate Fed governor Lael Brainard to succeed Vice Chairman Richard Clarida when his term expires next year.

With Mr. Clarida’s departure, one existing vacancy and Mr. Quarles’s resignation set to take effect at the end of this year, Mr. Biden has three seats to fill on the Fed’s seven-member board, including the vice chair of supervision.

Mr. Biden has pledged to ensure his future Fed appointments improve the diversity of the central bank’s leadership. Nominating Mr. Cordray, a white man, could increase scrutiny on the administration’s choices for the remaining seats.

“I was hoping for more diversity in the nominations,” said Julia Coronado, a former Fed economist and founder of economic-advisory firm MacroPolicy Perspectives.

The president’s decision to reappoint Mr. Powell won bipartisan backing but followed a last-ditch effort by some progressive Democrats to push for new leadership at the Fed, with critics objecting to the direction of bank regulation under Messrs. Powell and Quarles.

At a Sept. 22 news conference, Mr. Powell said he would defer on the regulatory agenda to whoever is installed as the vice chair for supervision because the Dodd-Frank law that created the post provides specific authority to that position. “I respect that authority. I respect that that’s the person who will set the regulatory agenda going forward, and I would accept that,” he said.

The Fed has several regulatory policy issues to tackle. These include an important potential tweak to how the Fed counts deposits held at the central bank toward banks’ leverage ratio. The Fed allowed a temporary, pandemic-related reprieve from the capital requirements to expire this spring, but it promised to consider a broader revamp to the rule’s treatment of ultrasafe assets.

It isn’t known whether new Fed governors might review changes to the postcrisis rulebook made during the Trump administration. Mr. Powell and supporters of those changes have referred to them as a “tailoring” of complex and unworkable rules. Some Democratic critics say the changes have substantially weakened the original overhauls.

The Biden administration has eyed tapping an experienced regulator who could focus on rebooting a bank-supervisory process at the Fed that some Democrats say was weakened under Mr. Quarles.

People who know Mr. Cordray have described him as hardworking and soft-spoken, with an encyclopedic mind. He sailed to five straight wins on the TV game show “Jeopardy!” in 1987, in part by knowing the names of the wives of French Emperor Napoleon and identifying Harold Abrahams as a 1924 Olympics champion.

He clerked for two Supreme Court associate justices, Byron White and Anthony Kennedy, before entering politics as an Ohio state representative in 1991.

Mr. Cordray left his post at the CFPB to run for governor of Ohio, a race the Democrat lost in 2018 to Republican Mike DeWine.

While Mr. Cordray ran the CFPB, it imposed new restrictions on high-interest payday loans—small, short-term consumer loans that can have interest rates as high as 400%. The agency adopted the “arbitration rule,” which made it easier for consumers to band together to sue over complaints about bank accounts, credit cards and other products. Under the Trump administration, the CFPB eased the payday restrictions while Congress overturned the arbitration rule.

Mr. Cordray earned a reputation as an aggressive litigator during his years as a state attorney general, when he pursued high-profile lawsuits against some of the country’s largest financial firms. He also took a lead role in the multistate probe into foreclosure abuses by the largest U.S. banks, calling several companies’ foreclosure practices a “business model built on fraud.”

Under Mr. Cordray, the bureau frequently bumped heads with businesses. Companies accused the CFPB of penalizing them without providing a heads-up that they were breaking the rules and giving them a fair chance to comply. New rules, the companies also argued, created needless costs that made financial products more expensive for customers.

Representatives of the American Banking Association and the Financial Services Forum, industry groups that represent banks, declined to comment Tuesday.

Mr. Cordray previously served as attorney general of Ohio from 2008 until 2011, after he was also defeated by Mr. DeWine. He previously served as the state’s solicitor general and treasurer. He ran unsuccessfully for a seat in the House of Representatives in 1992 and the U.S. Senate in 2000.

Updated: 12-1-2021

Sen. Lummis Likely To Oppose Powell’s Fed Nomination On Crypto Grounds

The Wyoming senator is likely to vote against President Biden’s nominees to head the U.S. Federal Reserve, and will rally other senators against them, said a Lummis aide.

Crypto-friendly U.S. Sen. Cynthia Lummis (R-Wyo.) has expressed significant concerns about the crypto track records of President Joe Biden’s nominees to head the Federal Reserve for its next term, current Fed Chair Jerome Powell and Fed Governor Lael Brainard.

As a result, Lummis is likely to oppose the nominations and rally other senators against them unless the Fed addresses her concerns, an aide to Lummis told CoinDesk.

The Republican senator wrote in an op-ed in Tuesday’s Wall Street Journal that “over the past year my faith in the Fed has been deeply shaken by its political approach to digital assets in my home state.”

She explained that Wyoming created a heavily regulated bank structure called a special purpose depository institution, or SPDI, in 2019, and began discussing with the Fed whether these vehicles could be considered banks and gain access the federal payment system.

But the two Wyoming-based institutions that received SPDI charters in 2020 – crypto exchange Kraken and bank and stablecoin issuer Avanti – have not yet been approved by the Fed, which says it’s still determining whether they qualify as banks.

Lummis says the delay amounts to a legal violation because in 1994 the Congress required the Fed to act on all bank applications within a year.

The senator wrote that, as a result, she’s “deeply concerned” about Powell and Brainard’s nominations, though she called them both “smart and qualified.”

She continued, “But while Mr. Powell and Ms. Brainard have said they want to promote responsible financial innovation, when Wyoming provided a perfect opportunity the Fed instead inexplicably chose to ignore its legal obligations. I want to know why but haven’t received an answer.”

Crypto CEOs To Testify Before House Financial Services Committee

FTX’s Sam Bankman-Fried, Bitfury’s Brian Brooks and Circle’s Jeremy Allaire are among the executives who will speak at the Dec. 8 hearing.

CEOs from six major cryptocurrency companies will testify at a Dec. 8 hearing of the House Financial Services Committee, committee Chair Maxine Waters (D-Calif.) announced Wednesday.

* FTX’s Sam Bankman-Fried, Circle’s Jeremy Allaire, Bitfury’s Brian Brooks, Paxos’ Charles Cascarilla, Stellar Development Foundation’s Denelle Dixon and Coinbase’s Alesia Haas will speak at the session entitled “Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States.”

* Waters has been an outspoken critic of crypto largely because of its unregulated nature.

* In June, she announced that she was forming a group of Democrat House members to tackle growing concerns about cryptocurrency.

* Bankman-Fried, the CEO of the crypto derivatives exchange FTX, said in September that tighter regulation of crypto exchanges would have positive effects for investors.

* Brooks, who took over as CEO of the mining company Bitfury in November, was the acting comptroller of the Office of the Comptroller of the Currency (OCC), the regulator for U.S. national banks, between May 2020 and January 2021. He also had a brief stint as CEO of the crypto exchange Binance’s U.S. arm.

Updated: 12-2-2021

Lummis Says Fed Is ‘Violating The Law’ With Wyoming Blockchain Bank Delays

The Republican senator for Wyoming has called on her colleagues to withhold support for Fed chair Jay Powell.

Republican senator for Wyoming Cynthia Lummis has argued that the Federal Reserve is “violating the law” by delaying the processing of applications from crypto-native banks to receive accounts at the central bank.

In a Nov. 30 op-ed for the Wall Street Journal, Lummis claimed that the Fed was treating the Special Purpose Depository Institutions (SPDIs), also known as ‘blockchain banks’, in her home state unfairly. She called on her Republican colleagues to withhold support for Fed chair Jay Powell who was reappointed by President Biden on Nov. 23.

In Feb. 2019, Wyoming state legislature approved SPDIs to serve businesses unable to secure banking services from the Federal Deposit Insurance Corporation (FDIC) due to their dealings with crypto.

In 2020, two Wyoming SPDIs Kraken and Avanti received their bank charters. Shortly after, they applied for master accounts with the Federal Reserve Bank of Kansas City. Their applications are yet to be approved.

The state has been in discussions whether SPDIs should be considered banks under federal law. In the article, Lummis claimed that SPDIs should, “without a doubt,” be considered banks under federal law and that “Wyoming checked every box.” She added that SPDIs meet the standard set by Congress in the Federal Reserve Act for what constitutes a bank.

She said that “in fact the Fed is violating the law by delaying” issuing the SPDIs approval, citing federal courts which have stated that the Fed “has a duty to give payment system access to all banks and credit unions conducting legal activities.”

On Oct. 7, Lummis filed documents revealing that she had purchased an unknown amount of Bitcoin (BTC) on Aug. 16 worth somewhere between $50,001 and $100,000.

Lummis made the purchase less than two weeks after she and other senators attempted to gain support for a pro-crypto amendment into President Joe Biden’s infrastructure bill.

Updated: 12-3-2021

US Lawmaker Urges Congressional Action On Crypto As Government Avoids Shutdown

“Chairman Gensler’s failure to provide clear rules of the road for cryptocurrencies underscores the need for Congress to act,” said Senator Pat Toomey.

Pennsylvania Senator Pat Toomey, one of the ranking members of the Senate Banking Committee, has suggested Congress step in with legislation should the Securities and Exchange Commission (SEC) be unable to provide sufficient guidance on cryptocurrencies.

In a Friday announcement from the Senate Banking Committee, Toomey said he was dissatisfied with the answers SEC chair Gary Gensler had provided on the differences between securities and commodities in regards to token projects and stablecoins.

The senator questioned some of the SEC’s seeming disparities in enforcement actions between crypto firms and advisory services companies, including Glass Lewis for similar allegations of providing “fraudulent and misleading information.”

“For investors to benefit from a fair and competitive marketplace, federal agencies should answer questions about whether — and if so, how — new and emerging technologies fit under existing regulations,” said Toomey. “Chairman Gensler’s failure to provide clear rules of the road for cryptocurrencies underscores the need for Congress to act.”

Toomey has previously come out in support of the U.S. government launching a central bank digital currency and said he would vote in favor of President Joe Biden’s pick for the next Federal Reserve chair, Jerome Powell. In addition, the senator was behind a bipartisan effort in August to amend some of the provisions in the recently passed infrastructure law to not apply to developers, miners and others in the crypto space.

Other U.S. lawmakers have proposed solutions to the tax reporting requirements following Biden signing the bill into law, as Toomey said Congress would “have to do it in subsequent legislation.”

Though Congress has not yet acted on crypto as Toomey suggested, both the House and Senate were occupied passing a bill extending funding for the U.S. government through Feb. 18 in an effort to avoid a shutdown. President Biden signed the “Further Extending Government Funding Act” into law today.

Updated: 12-4-2021

FTX Releases Crypto Regulation Proposals Before Us Congressional Hearing

The “FTX’s Key Principles for Market Regulation” blog consists of a 10-points proposal aiming to help U.S. regulators build a crypto-centric regulatory framework.

Bahamian-based cryptocurrency exchange FTX released a list of principles and proposals to help policymakers build the regulatory framework. The policy recommends the market-structure choices made by several leading crypto exchanges and suggests its implementation across all jurisdictions.

FTX shared its blog FTX’s Key Principles for Market Regulation after Maxine Waters, the chair of the House Committee on Financial Services, invited several CEOs of major crypto firms to testify on the topic of digital assets and the future of finance.

Out of the 10 key principles, one of the recommendations calls for an alternative regulatory approach that proposes a unified regulatory regime for spot and derivatives marketplaces. According to the blog:

“The regulatory label on a given product or market need not change the core goals of regulation, and the same rulesets should generally apply across all markets.”

FTX also explains the need for a direct membership market structure, i.e, allowing entities to perform regulated trades without the involvement of a third party. The exchange also suggests a regulation demanding greater transparency around the custodians of crypto assets, arguing that the platform “users should be given visibility” into how custodial services plan to address concerns related to fraud and theft.

The blog further demands frameworks for reporting transactional activity to avoid market manipulation and ensure customer protection. FTX also pointed out the need for regulating stablecoin issuance:

“A platform operator that permits the use of stable coins for settlement of transactions should be required to explain the standards the platform operator uses in deciding which stable coins it permits for such purposes.”

In August, FTX CEO Sam Bankman-Fried announced the exchange’s proactive measures to streamline its Know Your Customer (KYC) operations.

Citing the importance of KYC tools for cryptocurrency’s mainstream adoption, Bankman-Fried inaugurated a new feature on FTX that confirms a user’s jurisdiction based on their registered phone number:

“We check users’ phone numbers against their submitted names in KYC1, in order to further verify them. When this doesn’t work or there isn’t data, we’ll require KYC2 to access some features of the site, including futures.”

Updated: 12-23-2021

Wyoming Sen. Lummis To Propose New Crypto Regulator, Clear Guidance In 2022 Bill


The bitcoin-holding U.S. senator is trying to “fully integrate” crypto into the U.S. financial system, an aide said.

U.S. Sen. Cynthia Lummis (R-Wyo.), one of Bitcoin’s most vocal advocates on Capitol Hill, will pitch Congress next year on creating a crypto regulatory body as part of her sweeping digital asset policy bill, a senior aide told CoinDesk.

Lummis, who sits on the Senate Banking committee, wants nothing short of full normalization for digital assets in the U.S., the aide said. Her upcoming bill will propose doing just that with federal rules for stablecoins, consumer protection provisions and updated taxation guidance, as well as a new watchdog: a self-regulatory organization administered by the executive branch’s securities and swaps regulators.

Many of these issues are currently regulated at the state level.

Lummis previously told CoinDesk she was working on a ”comprehensive” bill slated for this calendar year.

Bloomberg reported its updated timeline and scope Thursday.

Numerous Times That US (And Other) Regulators Stepped Into Crypto

The effort comes as Congress grapples with digital assets on multiple fronts. House members grilled key crypto executives earlier this month in a hearing as much about education as it was about oversight of the fast-growing industry.

Lummis’ bill will target one of the executives’ major gripes: that securities laws are too murky to work with crypto and its many token types. The aide said her proposals include clear guidance to regulators on the different asset classes.

Updated: 2-3-2022

US Lawmakers Reintroduce Bill To Provide Tax Relief For Small Crypto Transactions

The legislation by a bipartisan group of House representatives would exempt realized crypto gains under $200.

A bipartisan group of U.S. House representatives has reintroduced a bill that would exempt consumers from paying taxes on crypto payments of less than $200.

* The “Virtual Currency Tax Fairness Act” – an amendment to the Internal Revenue Service’s tax code announced on Thursday by Reps. Suzan DelBene (D-Wash.), David Schweikert (R-Ariz.), Darren Soto (D-Fla.) and Tom Emmer (R-Minn.) – would simplify tax burdens on daily crypto users who must now report even the smallest capital gains.

* “Virtual currency has evolved rapidly in the past few years with more opportunities to use it in our everyday lives,” DelBene said in the announcement. “The U.S. must stay on top of these changes and ensure that our tax code evolves with our use of virtual currency.”

* The lawmakers last introduced the legislation as the “The Virtual Currency Tax Fairness Act of 2020” in January 2021. Consumers must now report changes in a cryptocurrency’s value in dollars from when they purchased the crypto to when it was used in a transaction, including even minor retail purchases.

* If it becomes law, the legislation would retroactively apply to all qualifying transactions from Dec. 31, 2021.

* Jerry Brito, executive director of the crypto think tank Coin Center, which has lobbied for the bill, said the legislation would “relieve users from having to keep track of small personal transactions … Not only will this create a level playing field for digital currencies, it will also help unleash innovation on applications like micropayments, which can consist of dozens of transactions per minute and thus are difficult to square with the current law.”

* Emmer, Schweikert and Soto are co-chairs of the Congressional Blockchain Caucus, along with Bill Foster (D-Ill.).

Updated: 3-7-2022

European Parliament Proposes Expanding ‘Travel Rule’ to Every Single Crypto Transaction

Two major factions within the European Parliament propose to expand the “travel rule” to virtually every transaction of digital assets.

A possibly transformative digital assets regulation draft is threatening to shake up the European crypto landscape.

On Feb. 9, two major factions of the European Parliament submitted a policy blueprint that aims to apply existing regulations designed to counter money laundering and terrorism financing to all crypto transactions. The draft was spearheaded by Belgian parliament member (MEP) Assita Kanko (European Conservatives and Reformists) and Spanish MEP Ernest Urtasun (Greens–European Free Alliance).

The current version of the “travel rule” obliges banks and payment companies to store information that “travels” between payers and recipients and make it available to authorities for several years. The policy only triggers when a transaction exceeds the threshold of 1,000 euros.

Some have pointed out the regulation blueprint resembles the official advice of the Financial Action Task Force (FATF) – an intergovernmental organization founded by the G7 group of nations to combat money laundering and terrorism financing – a little bit too closely.

“Is the FATF supposed to have such a strong influence on how European policy is shaped?” asked Thomas Spaas, a Belgian attorney specializing in crypto regulation. “With such legislation, crypto exchanges will have to do even more of what they were already doing anyway: keeping records of their customers. This means yet more paperwork for crypto companies and another obstacle for new entrepreneurs to overcome.”

The regulation was introduced independently of FATF.

Kanko and Urtasun propose to drop the threshold for crypto transactions, which would effectively force exchanges and wallet providers to record the “travel information” for every single transfer. European authorities would obtain the name of the sender and the recipient, the sender’s home address, passport number and the wallet address of both the sender and recipient.

Kanko and Urtasun argue in their draft that small transactions with cryptocurrencies are often used to fund terrorism or launder money.

Such a loophole would enable the use of digital assets to fund and hide criminal activities, since illicit capital can anonymously move without any geographical limitations with a good chance of remaining undetected, the MEPs explain. This would justify the need to remove the 1,000 euro threshold for crypto transactions.

The blueprint also mentions the curation of a white list for crypto exchanges that successfully implemented satisfactory KYC procedures for users. They could possibly be exempted from having to record every single transaction. Kanko specifically mentioned Binance as a crypto exchange that could possibly acquire a spot on the white list.

Uneven Playing Field

The regulation draft sparked debate within the European crypto industry. Key players in Europe are often receptive to and relaxed about regulations being drafted in Brussels. However, the hefty expansion of the “travel rule” has business owners worried about the possible risk of stifling the competitiveness of the region.

“A complete implementation of the ‘travel rule’ will prove to be difficult, considering not every technology allows this particular information to be stored and transferred. It would be much easier to set up a global register of identified addresses, a procedure also used in banking,” said Marc Toledo, managing director of Belgian crypto exchange Bit4You and director of the Blockchain Association of Belgium.

According to Toledo, the EU shouldn’t identify crypto as an enemy in their fight to combat financial crime.

“The enemy is and will always be anonymity and badly implemented KYC procedures. Regulators will have to coordinate closely with crypto exchanges to pinpoint solutions that increase security without hindering the future and competitiveness of the European crypto industry,” he said.

Olivier van Duijn, CEO of the Dutch crypto exchange LiteBit, also pointed to possible risks of weakening Europe’s crypto industry.

“It’s always great to take further measures against money laundering and terrorist financing, but it is unfortunate that a ‘traditional’ approach to managing risks in a new sector is being adopted. This policy will be implemented in certain countries or regions sooner than within others. That could create an uneven playing field,” van Duijn said.


Updated: 3-14-2022

European Parliament Votes Against Pow Ban, Providing Huge Relief To The Crypto Industry

The moderate version of the regulatory framework’s draft prevailed in the ECON committee voting.

Earlier on Monday, members of the European Parliament’s Committee on Economic and Monetary Affairs voted against a version of the Markets in Crypto Assets, or MiCA, bill that could have effectively banned proof-of-work-based cryptocurrencies within the EU.

This comes as a huge relief for the crypto industry, whose representatives had previously warned about the threat of a hardline regulatory scenario.

MiCA is a regulatory framework that contains 126 articles as well as a detailed plan of their implementation by the EU’s and member states’ institutions. The draft was introduced by the European Commission back in 2020 as a part of its Digital Finance strategy.

MiCA covers a wide range of crypto-related subjects, such as the status of all major currencies and stablecoins, the operations of mining and exchange platforms — with some notable exclusions such as digital currencies issued by central banks, or CBDCs — security tokens, nonfungible tokens, or NFTs and decentralized finance, or DeFi.

The main intrigue of Monday’s parliamentary session lay in the significant differences between two versions of the draft that were up for a vote. One of them contained language that could outlaw any operations with the cryptocurrencies that rely on the proof-of-ork, or PoW, protocol.

The problematic line would require currency providers to submit a detailed plan of their compliance with environmental sustainability standards.

In the case of Bitcoin (BTC) and some other decentralized systems, such details couldn’t be provided in principle, as there’s no existing central operator or an individual or collective decision-maker.

That is why this version of the draft was previously corrected to remove such a regulatory deadlock. As the European Parliament Committee on Economics and Monetary Affairs member Stefan Berger assured earlier, the problematic language was not supposed to emerge in the final draft.

Ultimately, the hardline version of MiCa did appear on the floor but was not supported by the majority of the MEPs. As Patrick Hansen, head of strategy at crypto firm Unstoppable Finance reported, 32 members of the ECON committee voted against the restrictive version and only 24 cast their votes in favor. The latter minority consisted largely of the members of the Green fraction and thProgressive Alliance of Socialists and Democrats.

The more moderate version of MiCA, which will now continue its journey through the EU institutions, doesn’t contain any direct or implicated ban on PoW mining. Instead, it directs the European Commission, the EU’s chief executive body, to present a legislative proposal “with a view to including in the EU sustainable finance taxonomy any crypto-asset mining activities” by Jan. 1, 2025.

Crypto mining could still be categorized as an “unsustainable” activity before January 2025, thus getting barred from the support and investment of European companies and governments. However, this is still quite far from an outright ban, the enactment of which could have dramatically altered the state of crypto in Europe.

Next up for the MiCa is a three-way consideration by the European Parliament, the European Commission and the Council of the European Union.


Environmental Sustainability Key Sticking Point In EU MiCA Bill

The European Union’s MiCA bill has had a line related to environmental sustainability added back in, which could be problematic for Bitcoin miners in the region.

The legal standing of Bitcoin mining in the European Union hinges on the results of today‘s vote in the European Parliamentary Committee on Markets in Crypto Assets (MiCA).

A controversial line concerning the “minimum environmental sustainability” of crypto mining has been reintroduced to the bill after previously being taken out. The new line would require blockchain operators to submit a rollout plan detailing how they will come into environmental sustainability compliance. Failure to submit a plan may prohibit coins from being mined or traded in the EU.

Although it is not specifically stated, the bill would directly affect proof-of-work (PoW) chains. PoW is the consensus algorithm used by the Bitcoin network, Ethereum and several other crypto assets.

Since Bitcoin (BTC) is decentralized, however, no rollout plan can be issued on its behalf. The absence of such a plan may threaten the existence of Bitcoin mining operations across the EU.

The EU accounts for about 12-14% of the global hashing power on the Bitcoin network, with Germany and Ireland contributing the majority of that, according to last year’s data from Cambridge University and Statista.

Concerns over energy consumption and carbon emissions of Bitcoin mining are now at the forefront of the debate over how the EU should regulate it. However, those concerns start to look out of place when faced with the raw data.

According to a report by Frankfurt School last November, as of August 2021, the Bitcoin network annually required 90.86 Terrawatt hours (Tw/H) of energy. That is about 0.05% of total global consumption. The network is responsible for only around 0.08% of the total global carbon emissions, though these metrics are difficult to calculate accurately.

French member of parliament Pierre Person warned that a prohibition on mining would drive talent and innovation out of the region. He said in a Saturday tweet that by banning Bitcoin and Ether (ETH), and “complicating the use of NFT and DeFi, the European Parliament is mortgaging our monetary and financial sovereignty.”

If the bill is passed as-is, Ethereum will not be involved for long. The network is expected to complete the Ethereum 2.0 “Merge” at some point this year into a proof-of-stake (PoS) network that will not require physical mining rigs to reach network consensus. There may be more serious ramifications for Bitcoin miners, however.


Updated: 3-19-2022

European ‘MiCA’ Regulation On Digital Assets: Where Do We Stand?

With the MiCA regulation, the European Union is getting specific legislation for crypto assets that is harmonized across EU member states.

The proposed European Union Regulation on Markets in Crypto Assets, or MiCA, (hereinafter the “regulation”) was put to a vote in the European Union Parliament’s Committee on Economic and Monetary Affairs on March 14, 2022, and in the end, the proposed amendment to ban or restrict proof-of-work-based crypto assets, which would have effectively resulted in a ban on Bitcoin (BTC), was rejected.

The question of how crypto assets will be assessed from an environmental regulation perspective remains, however, with the Member of the European Parliament in charge of the text indicating that crypto assets will be included, like all other financial products, in the area of the union’s taxonomy (the process of classifying economic activities that have a favorable impact on the environment), without specifying the treatment of these assets in view of this taxonomy.

Numerous Times That US (And Other) Regulators Stepped Into Crypto

The proposed regulation is part of the digital finance package that also includes a proposal for a pilot scheme for market infrastructures based on distributed ledger technology (DLT) of interest to the security token sector, adopted by the Parliament’s Economic and Monetary Affairs Committee in January this year and due to come into force by the end of 2022.

The EU Commission has been considering several options for regulating the crypto asset sector. It finally chose the option of full harmonization within the EU of the rules applicable to issuers and service providers in crypto assets, with an EU passport, over the option of an opt-in regime to obtain the EU passport with the application of national regimes. For stablecoins, the Commission has favored a tailor-made legislative regime combined with regulation under the E-Money Directive.

Let us take stock of the main provisions of the MiCA Regulation, which, after the trialogue among the Council, the Parliament and the Commission following the vote on March 14, should also enter into force before the end of the year and which pursues four objectives: legal certainty, support for innovation, consumer and investor protection and market integrity, and financial stability.

In addition to determining the competent authorities and their administrative sanctioning powers, as well as the anti-market abuse rules, the main provisions of the Regulation relate to the purpose and scope of the Regulation (I), the rules applicable to the issuance of utility crypto assets (II), asset-referenced tokens (III), electronic money crypto assets (IV), and the rules applicable to crypto asset service providers (V).

I. Purpose And Scope Of The Regulation

The Purpose Of The Regulation Is To Establish Rules Concerning:

* Transparency And Disclosure Requirements For The Issuance And Admission To Trading Of Crypto Assets.

* The Authorization And Supervision Of Crypto Asset Service Providers, Issuers Of Asset-Based Tokens And Issuers Of Electronic Money Tokens.

* The Operation, Organization And Governance Of Asset-Based Token Issuers, Electronic Money Token Issuers And Crypto Asset Service Providers.

* Consumer Protection Rules For The Issuance, Trading, Exchange And Custody Of Crypto-Assets.

* Measures To Prevent Market Abuse In Order To Ensure The Integrity Of The Crypto-Asset Markets.

The Regulation Applies To Persons In The EU Who Issue Crypto Assets Or Provide Services Relating To Crypto Assets. The Regulation Does Not Apply To:

* Crypto assets that are financial instruments (equity securities issued by companies with shares, debt securities, units or shares in collective investment undertakings and financial futures contracts) or electronic money except where the latter qualifies as electronic money tokens under the Regulation.

* Certain entities or persons, such as the European Central Bank and the national central banks of the member states, insurance undertakings, a liquidator or administrator acting in insolvency proceedings, persons providing crypto asset services exclusively for their parent undertaking, their subsidiaries or other subsidiaries of their parent undertaking, the European Investment Bank, the European Investment Bank and public international organizations.

Authorized credit institutions and investment firms will only be subject to certain provisions of the Regulation or will have the provisions governing them adapted.

II. Rules Applicable To The Issuance Of Crypto Utilities

This category, which the Regulation calls “crypto-assets other than tokens referring to assets or electronic money tokens,” corresponds to crypto assets intended to provide digital access to a good or service, available on the DLT system, and which are only accepted by the issuer of this token (“utility tokens”).

These “utility tokens” have a non-financial purpose related to the operation of a digital platform and digital services and should be considered as a special type of crypto asset. These may include cryptocurrencies such as Bitcoin, Ether (ETH) or Tezos (XTZ).

The Regulation prohibits offering to the public or seeking admission to trading on a trading venue crypto assets unless the issuer is a legal entity and a white paper complying with the Regulation has been prepared, notified to the competent authority and published.

Rules in terms of fair, honest and professional conduct and communications are provided for, as well as in terms of managing conflicts of interest and compliance with protocol security standards.

The obligation to produce a white paper does not apply when crypto assets are offered free of charge (which is not the case when buyers provide personal data or when the issuer receives payment of third-party fees, commissions or other benefits); are automatically created by mining or transaction validation; when they are unique and nonfungible (nonfungible tokens are, therefore, excluded from the obligation to publish a white paper); offered to fewer than 150 persons per member state; the amount of the offer does not exceed 1 million euro over a period of 12 months; or when the offer is reserved solely for qualified investors.

It should also be noted that the issuer of crypto assets must offer a right of withdrawal to the consumer, which can be exercised over a period of 14 calendar days.

III. Rules Applicable To The Issuance Of Asset-Referenced Tokens

This category of crypto assets consists of tokens that aim to maintain a stable value by referring to several legal tender currencies, one or more commodities, one or more crypto assets, or a basket of these assets. By stabilizing their value, these asset-based tokens are often intended to be used by their holders as a means of payment for the acquisition of goods or services and as a store of value.

An issuer wishing to offer or apply for admission to trading on a trading venue of asset tokens is required to obtain authorization from the competent authority of its home member state unless the average amount outstanding of the asset tokens does not exceed 5 million euro over a period of 12 months, or the offer is intended only for qualified investors.

The authorization gives access to the European passport. A white paper must be prepared.

Such an issuer is subject to a number of obligations, including those relating to marketing communications, conflicts of interest and governance: 350,000 or 2% of average reserve assets, whichever is higher.

These reserve assets must be prudently and efficiently managed, segregated from the issuer’s assets and entrusted to credit institutions or crypto asset service providers. These reserve assets may only be partially invested in highly liquid and low-risk financial instruments.

Furthermore, interest payments to holders of such tokens are prohibited.

Specific rules are provided for acquisitions of issuers of tokens referring to assets, including the obligation to notify the competent authority of the proposed acquisition, which may object to the acquisition.

Finally, there are additional obligations for issuers whose tokens refer to assets that are material. The European Banking Authority shall determine what tokens are material, for example, in view of the market capitalization of the tokens (such determination may also be requested voluntarily by the issuer).

IV. Rules Applicable To The Issuance Of Crypto Assets Of Electronic Money

This third category corresponds to crypto assets intended primarily as a means of payment with the aim of stabilizing their value by reference to a single fiat currency. Like e-money, these crypto assets are electronic substitutes for coins and banknotes and are used to make payments. They differ from e-money in that holders of e-money always have a claim on the e-money institution and have the contractual right to demand repayment of the e-money held, at any time and at face value, in legal tender fiat currency, which is not necessarily the case for e-money tokens.

The main obligation for the issuer of electronic money tokens is the authorization as a credit institution or as an electronic money institution within the meaning of Directive 2009/110/EC (hereinafter “Electronic Money Directive”), which it must obtain, as well as the publication of a white paper in accordance with the Regulation.

Such authorization and publication of a white paper will not be required if the electronic money tokens can only be held by qualified investors or if the average outstanding amount of tokens over 12 months does not exceed 5 million euro (or such lower threshold as may be set by a member state).

Holders of electronic money tokens have a claim on the issuer of the tokens. Electronic money tokens that do not confer a claim on all their holders are prohibited.

By way of derogation from the Electronic Money Directive, no issuer of electronic money tokens or provider of crypto asset services shall grant interest to the holders of such tokens.

Specific rules are provided for electronic money tokens of significant importance.

V. Rules Applicable To Providers Of Crypto Asset Services

Crypto asset services shall only be provided by legal persons who have their registered office in a member state of the union and who have been authorized as crypto asset service providers.

Authorization as a crypto asset service provider will be valid throughout the union and must enable crypto asset service providers to provide throughout the union the services for which they have been authorized, either under the right of establishment, including through a branch or under the freedom to provide services.

Crypto asset service providers will act honestly, fairly and professionally in the best interests of their clients and potential clients and will provide their clients with fair, clear and not misleading information, in particular in their commercial communications, which must be identified as such.

Crypto asset service providers must warn their customers of the risks associated with the purchase of crypto assets. They must make their pricing policy available to the public by posting it in a prominent place on their website.

A Crypto Asset Service Provider Must At All Times Have In Place Prudential Safeguards In An Amount At Least Equal To The Higher Of The Following Two Amounts:

(A) The Amount Of The Minimum Ongoing Capital Requirement Applicable To It, Depending On The Nature Of The Crypto Asset Services It Provides, Either:

* For The Services Of Reception And Transmission Of Orders On Behalf Of Third Parties, Advice On Crypto Assets, Execution Of Orders On Crypto Assets On Behalf Of Third Parties And Placement Of Crypto-Assets: 50,000 Euros.

* For Services Of Custody And Administration Of Crypto Assets On Behalf Of Third Parties: 125,000 Euros.

* For Services Of Operating A Platform For Trading Crypto Assets, Exchanging Crypto Assets For Fiat Currency Or For Other Crypto Assets: 150,000 Euros.

(B) One-Quarter Of The Previous Year’s Fixed Overheads, Which Are Recalculated Annually.

There are a number of specific obligations depending on the crypto asset service. An acquisition regime for crypto asset service providers is also provided.

Updated: 3-22-2022

Crypto Implicated In Child Porn, Terrorism, French Official Says, Calling For End To Online Anonymity

The head of France’s anti-dirty money unit said the authorities should be able to access information about even small online transfers.

Crypto transfers are being used to fund terrorism in Syria and Iraq and child pornography in Southeast Asia, the head of France’s financial intelligence unit said Tuesday.

Guillaume Valette-Valla, director of Tracfin, the country’s anti-money laundering body, told lawmakers at the European Parliament that even those making small online payments should be forced to reveal their identity. Such small anonymous transactions shouldn’t be allowed, he added.

The warning comes as the European Central Bank’s Christine Lagarde warned of cryptocurrencies’ role in evading the financial sanctions placed on Russia after its invasion of Ukraine.

“We have observed several times the use of crypto assets from Europe” being used to fund “terrorism, and complicity with terrorism, in the Syria-Iraq region,” Valette-Valla told a joint session of the European Parliament’s economic and civil liberties committees Tuesday.

Similar cases relating to child pornography were “sadly recurrent,” he added, saying that last week he had transferred three cases to the public prosecutor in which small transactions had been made to view live cases of child abuse in Southeast Asia.

Valette-Valla’s organization, Tracfin, is part of the French economics ministry and is responsible for gathering intelligence on suspected illicit finance from financial companies and other sources, passing its findings to judicial authorities for potential prosecution.

“Your assembly could give a big plus to our operational activity” by ensuring “deanonymization from the first euro” of a crypto payment, he said, saying that individual transfers linked to criminal activity were sometimes under 10 euros (US$11).

The lawmakers are currently considering plans to extend existing payment transparency rules to the crypto sector in a way that could end online anonymity altogether.

Under these rules, known colloquially as the travel rule, conventional bank transfers need to identify parties involved in any transaction over 1,000 euros, with suspicious transactions passed on to the authorities.

But lawmakers are leaning towards abolishing that lower threshold for crypto transactions because large digital payments can easily be broken up into smaller chunks that evade detection, a practice known as smurfing.

Assita Kanko, the Belgian lawmaker responsible for marshaling the European Parliament’s views on the new proposals, seems undeterred by the backlash to those plans from the crypto industry, and might even extend the proposals further into crypto holdings that are held privately rather than via intermediaries.

“I’m convinced that proper regulation of crypto transfers will help, not harm, the growth and innovation in this sector. It will increase trust and help our authorities to push back against abuse,” Kanko said at the hearing.

“We are discussing proposals to include transfers involving unhosted wallets while working on guarantees for personal data protection.”

Kanko appeared to gain support from global money laundering standard setters the Financial Action Task Force (FATF).

“The scale of use of unhosted wallets is not to that extent that we are worried currently, but I think we closely have to observe it,” FATF President Marcus Pleyer told lawmakers. “There might come the moment when we have to indeed take them into the scope of the regulation.”

Updated: 3-24-2022

UK Regulators Say Crypto Adoption Poses Financial Risk, Call For More Oversight

The watchdogs worry that international norms could come too late.

The U.K.’s central bank on Thursday warned that crypto could pose a risk to markets if it continues to grow and called for an expansion of powers to oversee the financial assets.

The London-based regulators worry that international norms could come too late to control financial market risks, and the Bank of England has urged U.K. banks to approach virtual assets with utmost caution.

With a market capitalization worth around 0.4% of the world’s financial assets, crypto and decentralized finance (DeFi) pose a limited risk to financial markets at this time. Regulators, however, are worried that the growth of blockchain technology means that could soon change.

“If the pace of growth seen in recent years continues, and as these assets become more interconnected with the wider financial system, crypto assets and DeFi will present financial stability risks,” according to a report published by the Bank of England’s Financial Policy Committee (FPC), which is responsible for monitoring stability risks.

“Enhanced regulatory and law enforcement frameworks are needed, both domestically and at a global level,” the report added. It also called on other regulators to ensure that markets don’t overheat, to stop financial firms from taking unnecessary risk and to curb scams and market abuse.

Bank of England Governor Andrew Bailey on Wednesday called for “high levels” of international collaboration to stop decentralized finance from spiraling out of the authorities’ control. Bailey added that this will take time. In the meantime, U.K. watchdogs appear to be worried about loopholes in the system.

“There is currently scope for regulatory arbitrage, and there is a danger that risks grow rapidly before an internationally agreed framework is in place,” the FPC said.

The Basel Committee on Banking Supervision, a global organization, is due to establish rules that would tell banks how careful they need to be when investing in crypto, but appears to be dragging its feet after a first draft met a slew of opposition from financial institutions that said the regulators were being far too cautious.

Sam Woods, CEO of the Prudential Regulation Authority (PRA), which is responsible for checking the books of individual banks and insurers in the U.K., said in a letter dated Thursday that the PRA is also planning to vet individual crypto exposures in a survey that will take place this year.

“Many of these markets are new and untested,” Woods said, referring to the “extreme volatility and/or limited price history of these [crypto] assets.”

In most cases, banks would have to deduct any digital asset holdings from their capital, as well as plan for specific extra risks like fraud or cyberattacks, he said. This means that, unlike conventional financial assets like mortgages, a banks’ store of crypto cannot be used to vouch for further lending, Woods added.

That warning was echoed by the Financial Conduct Authority (FCA), which is responsible for overseeing traditional finance.

Firms should be clear and honest with their clients when selling crypto assets, even though they technically don’t count as financial products and so lie outside of the FCA’s remit, the regulator said on Thursday.


Updated: 3-24-2022

Green ‘Light:’ The EU’s Approach To Crypto Balances Eco-Values With Regulatory Relevance

European policymakers have backed away from passing rules which would have unfairly targeted Bitcoin for environmental reasons.

Last week, Bitcoin (BTC) dodged a regulatory bullet in the European Union when proposed cryptocurrency legislation was altered to not include a ban on proof-of-work- (PoW)-based crypto assets. Policymakers had raised a number of concerns about the relative anonymity of crypto transactions and their environmental impact. Some experts including Tim Frost, founder and CEO of Yield App, believe that the “climate change” angle reflects a hidden attempt to ban Bitcoin. But, why?

The proposed EU regulation on Markets in Crypto Assets (MiCA) can be seen as a hybrid approach, which sometimes treats crypto assets as securities and at other times treats them as currency.

This has left legislators divided, as the European Council, composed of representatives of the respective countries, believes the European Banking Authority (EBA) should be the new crypto watchdog, while the European Parliament would hand that role to the European Securities and Markets Authority (ESMA).

Green Protectionism And Green Deals

While an outright ban on proof-of-work, which would have hobbled Bitcoin, has been avoided, the environmental rhetoric surrounding the EU push for regulation remains. This reflects a trend towards “green protectionism” in EU regulation: The EU is attempting to protect its market and institutions (in this case, its currency, which is less than a decade older than BTC) using environmental concerns as a rallying cry.

This approach has already attracted the ire of the EU’s trade partners. In 2019, shortly after European Commission President Ursula von der Leyen assumed office, the EU officially declared its “Green Deal” goal of having net-zero greenhouse gas emissions by 2050. This followed a wave of greens winning in the European Parliament earlier that year.

The idea of a “Green Deal” had originally been promoted by the United States Democratic Party but was opposed by former President Donald Trump, which prompted Europeans to borrow the concept.

The EU intends to pursue this goal by shifting to renewable energy sources for electricity generation, increasing housing energy efficiency and creating “smart infrastructure.” The price tag for the program was set as one trillion euros in the first decade.

According to the Valdai Club, “The symbolic significance is as follows: the EU declares itself a global leader in promoting the climate agenda and sets new standards for cooperation between the state, business and society in countering climate change.”

Green — With Envy? Bitcoin vs. Euro

The European banking system has faced several major crises since the introduction of the euro as a common currency within the eurozone in 1999, notably the financial crisis in 2008, the 2011 euro sovereign debt crisis and the COVID crisis.

Pervasive problems such as negative inflation and difficulties in coordinating monetary policy have often left the bloc relying on several stronger economies such as Germany to bail out weaker states such as Portugal, Italy, Greece and Spain in times of need. This has elicited questions about the long-term sustainability of the currency.

To make matters worse, austerity mandates have often empowered populist politicians such as Italy’s Five Star party to threaten withdrawal from the euro bloc. This has weakened Brussels’ aspirations to sell the euro as an alternative “world reserve currency” to the U.S. dollar.

While trade in euros dwarfs the global volume of cryptocurrency transactions by several orders of magnitude, it’s understandable that eurocrats would want to avoid competition with a liquid medium of exchange.

Europe’s Financial Targets

According to Tim Frost, founder and CEO of fintech firm Yield App, “there has been little work undertaken to truly understand the actual environmental impact of mining cryptocurrencies, not least compared to the oil and gas industry that the EU and other global governments are still very happy to support through kickbacks and incentives.”

He adds that “if regulators were seriously concerned about the environmental impact of industries, then cryptocurrency would surely be the last industry to be considered.”

Frost voiced suspicion about singling out of cryptocurrency in the environmental debate, which he said was “somewhat lopsided, if not suspicious,” given that the proof-of-work system originally targeted by legislators was an essential part of the architecture of Bitcoin, which accounts for the lion’s share of the cryptocurrency economy.

It can be said, however, that both the euro and cryptocurrency possess a unique set of political risks in that they are not tied to traditional states engaging in traditional monetary policy.

EU regulators have already been accused of trying to “punish” the United Kingdom for Brexit as a warning sign to other potential leavers, so it’s not unfair to argue that attempts to hobble crypto could be driven more by self-interest than by environmental notions.

Brussels As An Exporter Of Regulatory Standards

Setting new rules involving trade is also seen as a win for European lawmakers in and of itself. During Donald Trump’s time in office, many opined that the U.S. could no longer be seen as “the leader of the free world” in terms of policy initiatives and was focusing on “America first.”

The United States, in the eyes of Europeans, had turned its back on global regulatory initiatives. The most poignant reflection of this was Washington D.C.’s decision to pull out of the Paris Agreement on climate change.

Trump’s backtracking on the Iran deal was another indicator that the U.S. had switched to favoring unilateral policymaking and was willing to “weaponize” its role in the global economy as well as that of the dollar.

This left the EU with a window of opportunity to take a leadership role. While international formats such as the G-20 and Organization for Economic Co-operation and Development (OECD) had larger aggregate economies, they lacked the EU’s expertise as a consensus-based supranational union capable of establishing and maintaining standards.

In the late 1990s, when the internet and global banking were first coming into their own, the OECD had taken the lead in introducing new global regulations to prevent companies from utilizing low-tax jurisdictions.

In 2000, the OECD introduced a “blacklist” of uncooperative tax havens and identified 31 such jurisdictions by 2002. At the time, the OECD countries accounted for the lion’s share of the global economy. These were able to force all of them to implement its standards of transparency and exchange of information.

Taken together, these forces underlie what on the surface looks as the push to emphasize environmental concerns the EU’s emerging crypto regulation.

Updated: 3-25-2022

EU Lawmakers To Vote On Blocking Anonymous Crypto Payments, Documents Show

The European Parliament also wants to curb payments to tax havens and check people’s identity even for payments between unhosted wallets.

Members of the European Parliament are likely to vote to end the anonymity of even small crypto payments at a committee meeting to be held next week, documents seen by CoinDesk show.

Lawmakers at the Economic Affairs Committee are also poised to include crypto transfers to self-hosted or private wallets (also referred to as unhosted wallets) in anti-money laundering (AML) checks, and want to halt crypto transfers between the EU and jurisdictions like Turkey and Hong Kong.

Under existing laws, payees need to be identified for any bank transfer over EUR 1,000 ($1,099). The bloc’s national governments have already said they want to scrap that lower limit when extending the rules to crypto assets – on the basis that large transactions could just be broken up into smaller ones, a practice known as “smurfing.”

Urged by national laundering officials, who cite crypto’s use in funding terrorism and child abuse, lawmakers seem set to agree to require identity checks for any size of crypto payment. Even the right-wing lawmakers who oppose the move to de-anonymize transactions appear to acknowledge they won’t win the vote.

Internal parliament documents seen by CoinDesk, dated March 25 suggest lawmakers will also tell crypto service providers to refrain from making or aiding any transfers deemed at high risk of money laundering or crime.

That will in practice make it harder, or perhaps impossible, to make transfers from the EU to anywhere deemed by the bloc as a tax haven, such as the U.S. and U.K. Virgin Islands, Turkey, Russia or Hong Kong, or places like Iran and the Cayman Islands seen as dirty-money hotspots.

Assita Kanko, one of the lead lawmakers responsible for marshalling the parliament’s views on the law, also said Tuesday she wants to extend the measures to include privately held crypto assets, in spite of uncertainty over how transactions between unhosted wallets could be enforced.

EU’s MiCA Bill Moves Forward Without Bitcoin Limiting Provision

The EU’s landmark legislative package for governing crypto assets is moving on to the next stage of negotiations without the divisive provision seeking to restrict the use of proof-of-work crypto.

The European Union’s (EU) proposed Markets in Crypto Assets (MiCA) regulatory package is moving forward to the next phase of discussions without a controversial provision seeking to restrict the use of cryptos like bitcoin (BTC) that are based on proof-of-work.

* In the past few days, EU lawmakers have been negotiating a mandate for the proposed landmark legislation for digital assets, which does not contain a provision seeking to limit the use of proof-of-work cryptocurrencies in the EU, before it moves on to the trilogue negotiations between the parliament, council and commission.

* Earlier in the week, Stefan Berger, the parliamentarian overseeing the MiCA framework, expressed concerns that other EU leaders in favor of limiting the use of proof-of-work cryptocurrencies would make one last attempt to take the legislation to a full parliamentary vote ahead of the trilogue.

* The parliament has not challenged the negotiation mandate for MiCA, Berger tweeted early on Friday. The deadline for challenging the mandate ended at midnight on Thursday, according to Berger.

* The provision in question was defeated in a close committee vote on March 14.

* EU officials are also debating a number of issues including the inclusion of non-fungible tokens (NFTs) and decentralized finance (DeFi) in the MiCA
package, as well as which EU agencies should be given supervision powers over the crypto space.

* Berger said the MiCA trilogue is set to begin next week.

Updated: 3-28-2022

Crypto Privacy Positions Harden Ahead of Crunch EU Vote

Lawmakers don’t appear swayed by crypto industry claims as they consider applying anti-laundering identification rules to the sector, but some argue the EU plans are unworkable or unlawful.

The crypto industry is sounding the alarm over new European Union rules due to be agreed Thursday, which they say would invade privacy and treat new technologies less fairly than cash or traditional bank transfers.

Those arguments don’t appear to have swayed key lawmakers, who remain adamant that tougher rules are needed to stop crypto being used to process dirty money. Others, however, have argued the proposals currently on the table could be unworkable or even unlawful.

Big players in the sector including Coinbase (COIN) have already come out swinging against the so-called travel rule, which would extend anti-money laundering identity checks to payments made in digital currencies, even if they are under an existing threshold of 1,000 euros ($1,098).

“This revision would unleash an entire surveillance regime on exchanges like Coinbase, stifle innovation, and undermine the self-hosted wallets that individuals use to securely protect their digital assets,” said Coinbase Chief Legal Officer Paul Grewal in a blog post on Monday.

“The truth is that digital assets are in general a markedly inferior way for criminals to hide their illicit financial activity,” he added, saying the immutable nature of blockchain technology makes it less attractive to those with something to hide.

Parliamentarians are also seeking to extend the checks to cover privately managed unhosted wallets that store crypto, despite fears that such rules could prove unenforceable. Paul Tang, one of the members of the European Parliament on the Economic Affairs Committee that will vote on the matter later this week, was unbowed by what he called a “social media storm by crypto bros.”

“Money going to unhosted wallets may end up in the wrong place, for example with terrorist groups,” Tang, a Dutch socialist, tweeted Monday, saying wallet owners would need to be identified just like bank customers are. Another reason to scrap thresholds, argues Tang, is “smurfing,” or the practice of coordinating small money transfers to escape threshold rules.

Tang and others may have been swayed by the views of national governments keen to scrap anonymity, and by officials who tell them crypto is used to fund terorrism and child porn. Others, though, argue that any decision they take could end up getting vetoed by judges.

“The travel rule … is really a massive and indiscriminate personal data collection and transfer scheme,” said Mikołaj Barczentewicz, associate professor at the U.K.’s University of Surrey and Fellow of Stanford Law School, told CoinDesk in a written interview Monday.

Proponents of the new rules, Barczentewicz continued, are “saying that it is necessary for all crypto service providers to transfer sensitive data of their clients, even when there is not even the slightest suspicion of a criminal connection.”

That privacy restriction “is very likely not as effective as less rights-restricting alternatives,” he said, even were the 1,000 euro limit maintained – and all the more so because those with nefarious aims could simply circumvent them.

Legally speaking, the claim the rules go further than they need to is not just a soundbite, he added. In a 2014 case, the EU’s highest court struck down laws requiring phone companies to keep call data, saying that the invasion of privacy went way beyond what was needed to help the police fight terrorism. “The analogy is very clear.”

If the new rules are passed and subsequently challenged in national courts, said Barczentewicz, “the EU Court of Justice will then have the power to invalidate the rules if it finds that they conflict with the EU Charter of Fundamental Rights,” which safeguards the right to privacy.

“What we seem to be dealing with here is an attempt to do ‘something about crypto and crime,’ without a serious, evidence-based reflection on how best to do it,” Barczentewicz concluded.

EU Parliament Can Outlaw Transacting With ‘Unhosted’ Wallets, Crypto Advocate Warns

The proposed legislation would require exchanges to verify personal data behind any transaction.

Less than a week after a potential ban on proof-of-work (PoW) digital assets was dropped from the EU’s prospective MiCA framework, a new threat to the crypto industry could be emerging in the European Union. This time, it is non-custodial, or unhosted, wallets that are in regulators’ crosshairs.

On Thursday, March 31, the European Parliament Committee on Economic and Monetary Affairs will vote on an Anti-Money Laundering (AML) regulatory package that seeks to revise the current Transfer of Funds Regulation (TFR) in a way that extends the requirement of financial institutions to attach information on the transacting parties to crypto assets.

The rapporteurs of the regulation are Ernest Urtasun from the Greens and Assita Kano from the Conservatives and Reformists group.

As crypto advocate Patrick Hansen from blockchain firm Unstoppable DeFi warned, the latest draft of the regulation would require crypto service providers not only to collect personal data related to transfers made to and from unhosted wallets (as they are already obliged to do) but also to “verify the accuracy of information with respect to the originator or beneficiary behind the unhosted wallet.”

The obvious problem with this language is that, in many cases, it can be difficult, if not impossible, for crypto service providers to verify an “unhosted” counterpart. Thus, to stay compliant and safeguard their place in the EU market, these companies would be forced to cut off transactions with unhosted wallets, Hansen fears.

Even if legislators put some guidelines for verification procedures in place, the potential operational costs of compliance would likely scare off smaller players and lead to further market concentration.

The draft also includes the obligation to inform the “competent AML authorities” of any transfer worth 1,000 EUR or more to/from an unhosted wallet. Moreover, in one year after the bill’s enactment, the EU Commission would be required to assess whether any “additional specific measures to mitigate the risks” from such transactions are needed.

It’s not quite clear what additional measures could be implied but, as Hansen warned, this could mean anything down to the outright ban on non-custodial wallets.

Updated: 3-30-2022

Small Digital Euro Payments Won’t Need Laundering Checks, ECB Official Says

The proposals regarding the potential future central bank digital currency come as lawmakers prepare to scrap anonymous bitcoin payments.

A potential new digital euro would allow anonymous transactions for small payments in spite of anti-money laundering (AML) norms, a leading member of the European Central Bank (ECB) said.

The suggestion made by ECB Executive Board member Fabio Panetta on Wednesday of giving a special treatment to the central bank digital currency (CBDC) stands in contrast to proposed rules for private cryptocurrencies like bitcoin, where lawmakers are debating a plan to outlaw privacy for even low-value transactions.

Normally, financial transactions are subject to checks called “know your customer,” or KYC – meaning that financial institutions have to check the identity of those involved to ensure funds aren’t being laundered or used to fund crime.

Panetta, the official leading work on the digital euro, today said he was prepared to soften those rules for people using any putative new digital currency issued by the ECB, at least in the case of small payments.

“A greater degree of privacy could be considered for lower-value online and offline payments” made using the digital euro, Panetta told lawmakers on the European Parliament’s Economic and Monetary Affairs Committee Wednesday.

“These payments could be subject to simplified AML/CFT checks,” he added, referring to EU rules against money laundering and terrorism financing.

The EU has strict rules on protecting personal data, and privacy protections are the number one feature Europeans want in a digital euro, according to a 2021 ECB survey. ECB experts have floated ideas like “anonymity vouchers” that would allow people to shield a limited value of transactions from the authorities.

But more detailed research published today and based on focused discussions with panels of EU citizens put more emphasis on universal acceptance and security checks like iris recognition.

“We have investigated various options to address the trade-off between retaining a high degree of privacy and other important public policy objectives,” Panetta said.

But they come in the week that the EU prepares to end the possibility for anonymous crypto payments altogether. The European Parliament is due to vote Thursday on how to extend existing money laundering controls to crypto payments.

An existing threshold of EUR 1,000 ($1,100) under which a payer’s details don’t have to be recorded seems likely to be scrapped for virtual assets, as lawmakers say it’s too easy to circumvent the rules by splitting up large payments.

The ECB is currently investigating whether to issue the digital currency. A formal ECB decision to move ahead, as well as draft legislation that could underpin the move, are expected next year.

ECB Official Calls For ‘Less Tolerant’ Approach To Bitcoin ‘Gambling’

Fabio Panetta’s remarks come as EU lawmakers consider measures to end anonymous crypto transactions and cut off unregulated exchanges.

Policymakers should take a “less tolerant” approach to technologies like Bitcoin, the European Central Bank’s Fabio Panetta said Wednesday, citing the high energy needed to generate new coins.

The comments come as European Union lawmakers are expected to pass controversial proposals that could outlaw anonymous crypto transactions and cut off unregulated exchanges from the financial system, which they are due to discuss Thursday.

“It would be ideal from a social viewpoint to intervene and have a less tolerant approach towards these activities,” said Panetta, who is a member of the ECB’s executive board, to a meeting of the European Parliament’s Economic Affairs Committee. He said, bitcoin-type activities were “pure gambling, wasting enormous amounts of energy.”

The crypto assets are “not used for payments, do not pay any dividend” and have “no economic activity behind them,” he said.

“They have no social role.”

“The difficulty is how to intervene with this,” he said. “It certainly would require a coordinated international effort.”

His remarks came in response to a question from socialist EU lawmaker Eero Heinäluoma of Finland, who said that Russia was accepting bitcoin (BTC) “as a tool to circumvent sanctions.”

Just two weeks ago, lawmakers on the committee narrowly voted against measures that could have imposed restrictions on currencies such as bitcoin due to the environmental impact of the proof-of-work technology it uses.

Updated: 3-31-2022

EU Parliament Passes Privacy-Busting Crypto Rules Despite Industry Criticism

Lawmakers are set to end even the smallest anonymous crypto transactions, and plan measures that could see unregulated exchanges cut off.

European Union lawmakers voted today in favor of controversial measures to outlaw anonymous crypto transactions, a move the industry said would stifle innovation and invade privacy.

More than 90 lawmakers voted in favor of the proposal, according to documents seen by CoinDesk.

The proposals are intended to extend anti-money laundering (AML) requirements that apply to conventional payments over EUR 1,000 ($1,114) to the crypto sector. They also scrap the floor for crypto payments, so payers and recipients of even the smallest crypto transactions would need to be identified, including for transactions with unhosted or self-hosted wallets.

Further measures under discussion could see unregulated crypto exchanges cut off from the conventional financial system.

National governments said in December they wanted to scrap the EUR 1,000 threshold for crypto, on the basis that digital payments can easily circumvent the limit, and to include private wallets that aren’t operated by regulated crypto asset providers.

Members of the center-right European People’s Party (EPP) opposed many of the more controversial changes, condemning what they called a “de facto ban of self-hosted wallets.”

“Such proposals are neither warranted nor proportionate,” said EPP economic spokesperson, Markus Ferber, in an emailed statement Thursday. “With this approach of regulating new technologies, the European Union will fall further behind other, more open-minded jurisdictions.”

A separate legal proposal also discussed today would stop transfers being made to “non-compliant” crypto service providers, which includes those operating in the EU without authorization or that are not affiliated to or established in any jurisdiction.

The Thursday vote came in spite of objections from major industry participants, such as Coinbase, and from legal experts who warned that overly heavy handed privacy violations could face legal challenges in EU courts.

Under the new rules, Coinbase would have to report to the authorities any time a customer received over EUR 1,000 of crypto from a self-hosted wallet, the exchange’s CEO Brian Armstrong warned in a tweet posted Wednesday.

The plans must also be agreed on by both the parliament and national ministers, who meet as the EU Council, in order to pass into law.

Bitcoin’s price dropped about 2% in minutes as the vote came through, falling from $47,500 to $46,400.

Updated: 4-6-2022

Unhosted Is Unwelcome: EU’s Attack On Noncustodial Wallets Is Part Of A Larger Trend

Regulators on both sides of the Atlantic seem to be nervous about people transacting with their wallets.

Last week, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties, Justice and Home Affairs (LIBE) voted in favor of a regulatory update that could compromise the exchange platforms’ ability to deal with noncustodial crypto wallets.

Should the regulatory project make it to the legislation phase in the upcoming months, it would place severe disclosure requirements on transactions between noncustodial wallets and crypto exchanges in the European Union — a process whose signs are visible in other parts of the globe as well.

What Happened

On Thursday, March 31, ECON and LIBE members voted on the Anti-Money Laundering (AML) regulatory package, which seeks to revise the current Transfer of Funds Regulation (TFR).

The revised version of the TFR brings several legal threats to “unhosted,” or self-custodied, wallets. It would require crypto service providers to “verify the accuracy of [the] information concerning the originator or beneficiary behind the unhosted wallet” for every transaction made between a service provider (typically, a crypto exchange) and an unhosted wallet.

It can be difficult, if not impossible, for crypto service providers to verify each “unhosted” counterpart.

Hence, as crypto advocate Patrick Hansen from blockchain firm Unstoppable DeFi warned, to stay compliant and not compromise their legal position in the European market, some companies might want to block transactions with self-custodied wallets altogether if they face such surveillance and disclosure requirements.

Smaller companies might find the potential costs of compliance too high and leave the market to established players, which would lead to further market centralization.

The legislation would also oblige crypto companies to inform “competent AML authorities” ‘of any transfer worth 1,000 euros (about $1,010) or more made to or from an “unhosted” wallet, a surveillance threshold that is even lower than that of fiat banking operations.

The next step for the legislation is the announcement at the plenary session of the EU Parliament, which, according to Hansen, could take place sometime in April.

Should it remain unchallenged there, the legislation will make its way to the trialogue negotiations between the European Parliament, the European Commission and the Council of Europe.

These negotiations could take months, but their conclusion will mark the draft becoming law. After that, the crypto industry would have from nine to 18 months to come in full compliance with the legislation.

A Part Of A Larger Trend

With its increased activity on the crypto regulation front, the European Union isn’t alone in its suspicion of noncustodial wallets. Apart from the local initiatives to impose tighter scrutiny on every crypto transaction, for example, in the Netherlands and Switzerland, U.S. regulators have set their sights on noncustodial wallets in recent years.

In 2020, the U.S. Financial Crimes Enforcement Network (FinCEN) proposed a rule that would synchronize the recording and record-keeping requirements for digital assets to those of fiat transfer funds.

In the proposed framework, any transactions to or from “unhosted” wallets exceeding $10,000 would require banks and money service businesses to verify the identity of the customer (including name and physical address) and to file this information with FinCEN.

Following this, in 2021, the international Financial Action Task Force (FATF) drafted guidance with recommendations for virtual asset providers (VASPs) to classify the transfers to and from “unhosted” wallets as higher-risk transactions, with respective scrutiny and limitations to be applied.

The new FATF guidance is also aimed at extending the scope of the Travel Rule to VASPs if a virtual asset transfer involves a self-custodied wallet.

Both proposals faced harsh criticism from the crypto industry stakeholders and were eventually delayed. In January 2022, however, the Department of the Treasury reintroduced the proposal to tighten the grip over noncustodial wallets in its new regulatory plan.

To Resist or To Adapt?

“Seven years ago, I forecasted that these regulations were coming, it was just a matter of when and under what conditions,” Justin Newton, CEO of compliance solutions provider Netki, commented to Cointelegraph.

The firm provides KYC/AML technology and develops remote identity verification solutions for blockchain businesses. Newton pointed out that both the FATF guidance and the legislation in Singapore emphasize both-ends transaction verification.

U.S. President Joe Biden’s executive order on crypto highlights the consolidatory dynamic in crypto regulation, which will likely bring FinCEN’s unfinished business back into the spotlight at some point. “Sooner rather than later,” Newton added. He further commented:

“The Biden Executive order specifically spoke about bringing U.S. regulations in line with global standards, and this EU proposal is in line with FATF guidance. The EU vote should trigger U.S. companies to start embracing KYC compliance to get ahead of impending regulations in the states.”

Considering this, Newton believes that the regulators won’t leave the industry any room to ignore their demands. It might be more productive to seek a compromise on the matter, especially given that the problem has its technological solutions.

The main threat to privacy isn’t a counterparty knowing who you are, but the fact that on-chain transaction transparency allows both the institutional third parties and curious individuals to track and de-anonymize your activity:

“Fortunately, newer technologies such as Lightning see this level of on-chain transparency as a bug rather than a feature, and we can hope for better privacy for our crypto transactions than is available on most blockchains today.”

What’s Next?

While the new rules around “unhosted” wallets will require crypto services providers to adapt, they might be less of a threat to the industry than some stakeholders currently believe.

By integrating existing off-the-shelf compliance solutions that equally value privacy, crypto can relatively seamlessly embrace compliance while preserving financial freedoms. Newton said:

“These new rules highlight the need to select compliance solutions that have the vision to see these new rules coming and have built their platforms to be prepared. Today, that means including noncustodial wallets in your Travel Rule solution.

Tomorrow, it will be privacy coins and layer-2 networks such as Lightning. The taxman is coming as well, so any Compliance Communications Protocol should be prepared to support those new rules.”

But behind any optimism, problems that can’t be resolved in a win-win fashion remain. In addition to small market players who may not necessarily be in a position to adopt high-end compliance solutions, the tightening scrutiny could undermine global financial inclusion.

After all, what regulators call “unhosted” wallets is an essential tool for the underbanked and the financially underserved globally.

Updated: 4-22-2022

EU Officials Considered BTC Trading Ban To Enforce Proposed Mining Ban

Previously unseen documents detailing the EU’s conversations around banning Bitcoin have come to light following a freedom of information request.

European Union officials discussed banning Bitcoin (BTC) trading during a debate on a proposal to ban proof-of-work (PoW) mining, according to documents obtained through a freedom of information request.

According to a report published by German digital culture organization Netzpolitik, officials from the EU went as far as suggesting that an all-out ban on trading Bitcoin should be enforced in order to curb its overall energy consumption.

The most worrying comments, from the crypto community’s perspective, came from a document that detailed some minutes from an EU meeting with Sweden’s financial supervisor and an environmental protection agency.

These officials suggested that regulators should pressure the Bitcoin community to switch to a proof-of-stake (PoS) mechanism instead of its current energy-intensive proof-of-work mechanism. An unidentified official in the discussion said:

“Ethereum started moving [to PoS] because of its community […] If Ethereum is able to shift, we could legitimately request the same from BTC. We need to ‘protect’ other crypto coins that are sustainable. We don’t see [the] need to ‘protect’ the Bitcoin community.”

Another unnamed speaker suggested that the EU could reasonably place a blanket ban on trading any crypto assets that used a PoW algorithm.

The answer to this question was redacted in the document to protect the “ongoing decision-making process,” but it brings attention to the fact that the EU was seriously considering such dramatic regulation.

When discussing the potential effect of an outright Bitcoin ban on investors and retail traders, the officials were largely unconcerned, claiming that all Bitcoin investors are fully aware of downside risk.

“Participants in BTC are fully aware of the volatility of the currency/investment risk. [We] do not need additional protection measures.”

This report comes as Bitcoin’s energy usage continues to draw attention from environmental organizations and regulators. According to the University of Cambridge’s Bitcoin Electricity Consumption Index, Bitcoin mining currently consumes roughly 139 terawatt-hours (Twh) of electricity every year.

For comparison, the entire United Kingdom only used an estimated 265 Twh in 2021, according to Statista.

At the end of March, Ripple co-founder Chris Larsen teamed up with Greenpeace to pressure Bitcoin to change its consensus mechanism to PoS, much like Ethereum intends to do later this year.

The EU’s Economic and Monetary Affairs Committee recently voted against legislation calling for a ban on proof-of-work mining. However, these documents do provide unique insight into the lengths that some EU officials are willing to go to in order to crack down on mining-related energy usage.

While it appears that PoS cryptocurrencies remain safe from sweeping regulatory action in the near term, Bitcoin mining will continue to be a contested issue in the EU.

Emmanuel Macron On Crypto: ‘I Don’t Believe In A Self-Regulated Financial Sector’

In an interview, the sitting French president voiced his support for MiCA regulation and the digital euro project.

Mere days before the second round of the fateful presidential election in France, the incumbent president of the Republic, Emmanuel Macron, sat down with local media to share his thoughts on the digital economy — a subject on which he hasn’t spoken much previously.

While emphasizing the importance of the sector, Macron once again reiterated his support for the pan-European approach to financial technology regulation.

The interview with French publication The Big Wale came on Friday, two days before the runoff that will see Macron face the right-wing populist Marine Le Pen.

According to most polls, Macron is likely to win, yet the margin is expected to be very thin. In the 2017 election, he outpaced Le Pen with 66.1% of the vote in the second round.

Responding to a sequence of questions about the digital economy, Web 3.0 and crypto, the incumbent president stood firm by his trademark cautiousness toward innovation:

“It represents […] an opportunity not to be missed […] for France and Europe to lead the future generations of the web. But it is also a social and societal challenge.”

Macron seemed pleased to note how the number of French unicorn companies ⁠— that is, private startups valued at $1 billion or more ⁠— rose from three to 26 during his presidential term, while overall investments in French startups increased fivefold.

He also mentioned setting the bar at 100 French companies with a unicorn status and 10 being European giants by 2030.

One way to achieve that, Macron said, would be to expand code learning in public schools to train 400,000 to 500,000 additional developers over the next five years.

The president also elaborated on his earlier mention of the “European metaverse,” saying that it is important that European players do not depend on American or Chinese technological giants “mastering the technological building blocks associated with Web3.”

Europe, he maintained, has an edge in the nonfungible token (NFT) sector due to its immense cultural heritage. Macron said:

“We cannot consider our cultural policy without this revolution. I want our main cultural institutions to develop an NFT policy, by promoting, disseminating and protecting the digital twins or variations of their physical collections.”

Commenting on the European Parliament’s recent crypto regulations, Macron supported the current approach (and the MiCA framework specifically), noting that the new rules should not hinder innovation:

“I don’t believe in a self-regulated financial sector. This would be neither sustainable nor democratic. It is up to the public authorities to define the right conditions to allow the sector to develop in confidence while encouraging innovation.”

The 44-year-old politician also vocally supported the digital euro project, which has been the target of pushback from the public recently.


Updated: 4-25-2022

ECB’s Panetta Blasts Crypto As ‘Ponzi Scheme’ Fueled By Greed

The central banker compared crypto market dynamics to the 2008 financial crisis and called for additional regulation and taxes.

European Central Bank Executive Board member Fabio Panetta on Monday called for new global standards to regulate crypto assets, and also suggested they could be taxed more heavily given their high energy consumption.

According to the published text of a speech to be given later in the day, Panetta said crypto-assets were harmful to society and without social or economic value.

“Crypto-assets are speculative assets that can cause major damage to society,” Panetta said. “They derive their value mainly from greed, they rely on the greed of others and the hope that the scheme continues unhindered.”

But the bubble could burst, he added, comparing crypto dynamics to a “Ponzi scheme,” and showing “strikingly similar dynamics” to the sub-prime mortgages that caused the 2008 financial crisis.

“We must not repeat the same mistakes,” Panetta said in his speech, set to be given at Columbia University in New York at 1 p.m. ET.

“Now is the time to ensure that crypto-assets are only used within clear, regulated boundaries and for purposes that add value to society” to avoid a “lawless frenzy of risk-taking.”

Panetta has been a keen proponent of the ECB issuing a digital euro – perhaps in part because a central bank digital currency could stave off the need for private-sector stablecoins such as tether (USDT) – but has also called for a crackdown on the crypto market more generally.

Tether, the issuer of USDT, has faced legal proceedings regarding the exact content of its reserves – and Panetta warned that holders suddenly seeking to redeem their assets could spread turbulence to commercial debt and banking markets.

He added there needed to be an upgrade of disclosure requirements that are at present “highly problematic.”

Crypto-assets are too volatile and transfers take too long to process to be useful as a form of money, are a “potential means” to circumvent financial sanctions, and could also harm investment and climate change, Panetta said.

He called for crypto-assets to be taxed in line with other financial instruments – with extra levies for the most environmentally unfriendly, such as the energy-intensive proof of work mechanism that underpins bitcoin (BTC).

He also called for the extension of anti-money laundering norms, including for peer-to-peer payments – a controversial measure currently under discussion by European Union legislators that some warn could stifle innovation and harm privacy.

A proposed new EU anti-money laundering authority – currently intended to supervise a clutch of major banks and payment companies following a string of scandals at lenders such as Denmark’s Danske Bank – could also cover the riskiest crypto providers, he said.

ECB Needs ‘Globally Coordinated Regulatory Action’ On Crypto, Says Official

One of Fabio Panetta’s concerns seemed to be how the ECB and lawmakers address the taxation of cryptoassets, describing current requirements as “minimal.”

European Central Bank executive board member Fabio Panetta said lawmakers across the world must decide how to regulate cryptocurrencies based on potential risks.

In a written statement for a speech to Columbia University on Monday, Panetta said global policymakers had made some progress in addressing regulatory frameworks on digital assets, but “not swiftly enough to keep pace with the emerging challenges.”

According to the ECB official, the world needs crypto regulated based on Anti-Money Laundering and Countering the Financing of Terrorism rules of the Financial Action Task Force, strengthening public disclosure and reporting on regulatory compliance from the industry, and setting up “strict transparency requirements” and “standards of conduct.”

One of Panetta’s chief concerns seemed to be how the central bank and lawmakers address the taxation of crypto assets, describing current requirements as “minimal” and “very difficult to identify tax-relevant activities.”

The ECB official proposed taxing crypto assets based on proof-of-work at a higher rate than other financial instruments based on “negative externalities that lead to sunk costs for society, such as high pollution.”

“We should bring taxation on crypto-assets into line with the taxation of other instruments and aim for alignment across jurisdictions, given the global nature of the crypto market,” said Panetta.

“The introduction of reporting obligations for transactions above certain thresholds, as just recently proposed by the Organisation for Economic Co-operation and Development (OECD), would enhance transparency and combat tax evasion.”

According to Panetta, Europe is “leading the way” in bringing cryptocurrencies into its regulatory purview, while the United States is working to supervise crypto service providers over perceived risks.

He pointed to the Regulation of Markets in Crypto-Assets, or MiCA, as a step toward creating a “harmonised European approach” to crypto as well as the global authority Financial Stability Board cooperating with other financial regulators.

“We need to make coordinated efforts at the global level to bring crypto-assets into the regulatory purview. And we need to ensure that they are subject to standards in line with those applied to the financial system […] We should make faster progress if we want to ensure that crypto-assets do not trigger a lawless frenzy of risk-taking.”

The ECB has been working on the development of a central bank digital currency, with legislation on a digital euro expected in 2023. ECB president Christine Lagarde has previously hinted the central bank could roll out the digital currency by 2025.


Updated: 4-27-2022

EU Crypto Laundering Plans Could Overwhelm Authorities, Bank Regulator Says

Officials urged lawmakers to think again as they approach the last stage of privacy-busting proposals.

New European Union proposals to monitor crypto transactions with unhosted wallets could breach the risk-based approach set out by international money laundering regulators, an official from the bloc’s own banking authority has said.

Policymakers from the European Commission also warned any decision to scrap a 1,000-euro threshold for identifying crypto payers would need to be backed by evidence.

On March 31, the European Parliament voted through controversial provisions to identify participants in crypto payments, including transactions with wallets that aren’t hosted by any regulated exchange – leading to warnings from the industry that the bloc could stifle innovation and cramp privacy.

In particular, plans to force large transactions with unhosted wallets to be automatically reported to the authorities could prove overwhelming, the European Banking Authority’s Joana Neto said at an event held Wednesday at the European Parliament in Brussels.

“It’s very resource intensive,” said Neto, who is an anti-money laundering data specialist.

“Who’s going to handle this? … If it’s going to be the competent authority, what are they going to do with that information?” A requirement to report missing data to the authorities was “amazing in theory,” but might not be practical, she added.

“The essence of the risk-based approach is not exactly reflected in the draft from the European Parliament,” she continued, referring to the principle of matching data collection to the threat of actual money laundering.

Lawmakers also supported governments in proposing to remove a 1,000-euro threshold that already applies to conventional bank transfers. That means crypto payments, uniquely, would have to identify the participants even if they are of small value.

Some legal experts have warned that such an approach risks legal challenge given privacy concerns, and officials from the European Commission said that approach would need to be justified by lawmakers and governments.

“Our message to the co-legislator is that the solution they must take must be risk based and proportionate,” said Gabriel Hugonnot of the European Commission’s financial crime team. “Are there differences in the risks that justify a different treatment?”

The battle continues to rage on that question, with the industry pointing to figures from Chainalysis that suggest just 0.15% of crypto transactions involve illicit addresses. Some lawmakers, on the other hand, say it’s too easy to break up a large digital payment into lots of smaller chunks to circumvent any regulatory limits.

Hugonnot also appeared to confirm suspicion that current draft rules could spell the end of privacy-enhancing techniques.

“In all the provisions of the anti-money laundering package we are trying to improve the fight against any and all anonymous devices,” Hugonnot said, referring to recent EU proposals to ban large cash transactions and anonymous bearer shares. That suggests there could be no legitimate use for crypto tools like mixers or tumblers, he added.

Hugonnot also hit out at “fake debates” exaggerating the impact of the plans, including denying industry claims that crypto users would need to prove their identity each time they made a payment.

“All the information that is asked [such as the payer’s name and address] doesn’t need to be directly attached to the transfer,” he said, but could be requested by crypto wallet providers separately.

Europe’s Lawmakers Set To Advance Discussion of Controversial Crypto AML Rules

Talks on contentious anti-money laundering rules for the sector are reaching the closing stage, but some hope there’ll be wiggle room on small payments, unhosted wallets and transition periods.

Talks involving the European Union’s parliament, commission and council begin Thursday on controversial anti-money laundering rules for crypto transactions, the last stage towards the passage into law of measures that some have said could kill privacy and stifle innovation.

Many in the industry question the premise that tough new rules are needed against a tide of criminal behavior, but more pragmatic voices are looking at the legislative details that could prove crucial – such as how the law will treat small payments and unhosted wallets, as well as when the new law would take effect.

The draft legislation would require crypto providers to verify customer details and report suspicious transactions to the authorities – but the industry has complained it could prove burdensome to implement, and would end digital anonymity.

A last-minute protest led by Coinbase (COIN) and similar companies largely fell on deaf ears, and on March 31 European Parliament lawmakers voted to apply tough money-laundering rules to the sector, arguing the rules were needed to curb crime.

Now, attention turns to what the final form of the law will be – where talks are reaching the closing stage.

Both lawmakers at the European Parliament and national government meeting in the EU’s Council have said they want to see tighter monitoring of which parties take part in crypto transactions.

They say that should apply even for the smallest payments – unlike for conventional bank transfers where customer identity only needs to be verified for transactions over 1,000 euros ($1,066) – as it’s easier to circumvent by chopping up digital payments into small chunks.

In practical terms that may not make much difference, according to a recent blog by Oldrich Peslar, head of legal at the Rockaway Blockchain Fund.

“I do not think that this is some tragedy” to apply checks to small crypto payments, Peslar said, because it is “all information any compliant service provider could already have,” and gathering it “is not an administrative burden nor any invasion of privacy.”


But from a legal point of view, it could constitute an unfair intrusion into personal affairs that could invite a legal challenge, blockchain law expert Thibault Schrepel told CoinDesk.

“You are putting [on] more obligations if it’s crypto-related than if it’s not,” Schrepel, an associate professor of law at the Free University of Amsterdam, said in an interview.

“That would be the worst outcome,” he added, potentially infringing EU human rights law – not the least because money laundering is more widespread using other, more traditional means of payment.

Lawmakers could be swayed by the risk of a legal challenge, Schrepel believes – but in practice it may be difficult to get them to retreat from a position they share with the Council.

In other areas there is less consensus on the right approach – and, for the law to become final, lawmakers and governments will have to thrash out their differences in a series of closed-door meetings, beginning Thursday.

That includes the parliament’s proposals to make checks apply to unhosted wallets, and to have a central blacklist of dodgy providers. Those are issues that concern Peslar, warning they could spell the end of privacy-enhancing features such as mixers or currencies like monero (XMR).

Extending bank-style know-your-customer checks to self-guarded crypto holders – such as a wallet not hosted by a central exchange – “isn’t aligned with my values,” and is out of line with how cash is treated, he told CoinDesk. “We should protect [the] privacy of people, not destroy it.”

Governments may come riding to the rescue. If the final text edges towards the position of the Council of the EU, representing national ministries, that would mean a better outcome for unhosted wallets, Blockchain for Europe has said.

Yet, the lobby group’s Secretary-General Robert Kopitsch told us, it’s not so much about what the law does, as when.

The Council says the new rules should wait for crypto licensing legislation to take effect, and apply only two years after the separate Markets in Crypto Assets Regulation is finalized.

The MiCA legislation, which could allow crypto operators to work across the EU if they meet financial-stability and investor protection norms, is also currently in its closing stages of negotiation.

Lawmakers, however, want to see a phasing in of between nine and 18 months, while French central banker François Villeroy de Galhau on Tuesday said the rules should be implemented by “at the latest early 2024.”

That matters a lot, Kopitsch believes – because crypto providers might decide to drop services altogether rather than face the legal risk of a rushed job.

The timeline for implementing is “actually the biggest problem” of the forthcoming negotiations, Kopitsch said, noting the importance of coordinating with other jurisdictions such as the U.S. “In nine months you cannot do anything.”

Step Back

Some would rather take a step back from the fine print of negotiations and remind lawmakers that crypto is not the bogeyman of illicit finance

For criminal behavior “it’s not bitcoin these people are going to use, because it’s traceable,” Pascal Gauthier told CoinDesk, saying that cash and conventional finance would be far more attractive to those seeking to hide than transparent blockchains.

Gauthier, CEO of Ledger, a French company that produces hardware that can be used as unhosted wallets, cited data that suggests trades with illicit addresses represented just 0.15% of transactions last year.

(Chainalysis, which carried out the research, also suggests that figure could be as much as double as new dubious activities come to light.)

Claims of widespread illicit behavior “are false arguments that have been debunked,” Gauthier said, adding that lawmakers who actually want to ban crypto all together were using financial crime concerns as a fig leaf.

But there are also plenty of voices urging the EU to press on with strong constraints on the sector – including global standard setters the Financial Action Task Force, officials who warn crypto is implicated in child porn and terrorism, and the European Central Bank’s Fabio Panetta, who likens crypto to a lawless Wild West.

Even if the industry sees those views as a wild mischaracterization of crypto risks, they are bound to color the end result. The final version of EU anti-money laundering laws won’t be admired by everyone, but optimists within the sector are hoping lawmakers will at least make the best of a bad job.

Updated: 4-29-2022

Banks Don’t Need Extra Crypto Protections Yet, EU Regulator Says

The European Banking Authority said it will start work this year to map out crypto activities and spot new financial risks.

Banks’ exposures to crypto aren’t yet big enough to warrant extra protections designed to limit risks to the overall economy, the European Banking Authority said.

Crypto markets are too small and their regulation too immature to move ahead, the Paris-based watchdog said, after being asked by the European Commission whether to expand an existing regulatory toolkit for macroprudential risks to areas like cyber security, climate change and crypto.

“The EBA considers it premature to introduce new macroeconomic tools to address the systemic aspects of these risks at this stage,” the EBA said. “The EBA emphasizes the need for monitoring of the crypto-asset sector, in particular identifying old and new mechanisms, vulnerabilities and risks that can make crypto assets a source of systemic risk or threat to financial stability.”

Noting growing consumer interest and the emergence of stablecoins, and with a new European Union law known as the Markets in Crypto Assets Regulation (MiCA) set to be finalized soon, the EBA said it will map crypto-asset activities within the bloc – potentially leading to further regulatory action.

Macroprudential policy gives powers to ban banks from overexposure to particular sectors if they worry there could be a wider impact on the economy.

The suggestion from the EBA, which in March warned consumers to think twice before staking money on crypto, follows comments from officials at the Bank of England that it is also considering extending macro measures to cover virtual assets.

The commission’s idea has previously got a mixed reception from among the EU’s 27 member countries.

In a letter dated March 17, Swedish authorities said it wasn’t clear if existing rules were enough to tackle crypto risks.

Just four days later, the Italian central bank suggested keeping the focus on more traditional policies that look at individual banks, as crypto exposures are “currently tiny … the use of crypto assets for payments is limited to niche groups.”

Updated: 5-2-2022

Top EU Official Calls For Global Crypto Agreement

Europe and the U.S. should work together to limit “significant risks” to investors and the environment, Mairead McGuinness said.

The European Union’s financial services commissioner, Mairead McGuinness, has called for a new “global agreement on crypto” to protect investors and limit the environmental impact of bitcoin (BTC) mining.

* McGuinness, the EU’s most senior financial-services official, said she wanted to ensure “no product remains unregulated,” and warned of risks like sanctions evasion and financial instability, writing in The Hill.

* The EU is in the closing stages of passing new laws to regulate cryptocurrencies, including the Markets in Crypto Assets Regulation (MiCA), and recently came close to heavily restricting the energy-intensive proof of work technology that underpins bitcoin.

* Finance ministers from major jurisdictions warned of the risk of a regulatory gap back in February.

Updated: 5-3-2022

EU Commission Report Suggests Rethink Of Regulatory Approach To DeFi

The report highlights DeFi’s potential for lower financial audit costs and substantial opportunities for financial integration across borders.

Analysts from the European Commission showed an unexpected understanding of how decentralized finance (DeFi) actually functions, having defined it as something different from the traditional financial system and acknowledging that it would require rethinking the approach to regulation.

On Monday, May 2, crypto venture advisor at Presight Capital and a long-term expert on European regulation Patrick Hansen shared some important details from the EU Commission’s “European Financial Stability and Integration Review 2022.” T report, dated April 7, contains a 12-page chapter on DeFi, in which the authors demonstrate a sensible approach to the topic.

The report defines DeFi as “a newly emerging form of autonomous financial intermediation in a decentralized digital environment powered by […] “smart contracts” on public blockchains.” It acknowledges the smart contracts to be “substitutes for regulated intermediaries” and suggests regulatory efforts to focus on communication with the specific DeFi teams that create these contracts.

Underscoring the difference between tDeFi and the traditional finance system, the report recognizes the key advantages of the former:

“Compared to the traditional financial system, DeFi claims to increase the security, efficiency, transparency, accessibility, openness and interoperability of financial services.”

Special attention is drawn to the public blockchain’s potential for researchers and supervisors who can have free access to the entire time series of historical and real-time trading data, which, in turn, could facilitate a better understanding of the risks that “often remain obscure in the traditional financial system.”

Among other things, the report highlights DeFi’s potential lower financial audit costs and substantial opportunities for financial integration across borders. It also advocates a sensible approach to regulation, proposing to shift the balance from an entity-based to an activity-based strategy:

“However, it is obvious that simply copying traditional regulatory approaches in a decentralised environment may not be an option, since they have traditionally focused on intermediaries that play a central role in the financial system. Adapting the regulatory framework to a decentralised environment may be challenging and would require a rethink of how we approach regulation.”

As Hansen concludes, despite the “worrisome takes on the regulation of […] project teams and code,” he is pleasantly surprised by the level of knowledge that the DeFi chapter manifests. In that sense, the document comes as a relief after a series of the controversial episodes in the EU’s regulation routine — a last-moment reversion of a planned PoW-mining ban in the MiCa draft and the attack on non-custodial wallets in the amendments to the Transfer of Funds Regulation.

Updated: 5-4-2022

Council of Europe Calls For Crypto Laundering Clampdown

The council’s Moneyval committee warned of fraud, tax evasion and market manipulation taking place through virtual assets.

European states were urged to clamp down on crypto-enabled money laundering by the Council of Europe’s Moneyval committee in a report published Wednesday.

Moneyval, which monitors smaller European states’ compliance with dirty-money norms, warned of the challenges posed by decentralized finance, privacy coins and what it said was market manipulation of major crypto assets.

“It is well known that money launderers have been abusing cryptocurrencies from their inception a decade ago,” Moneyval Chair Elżbieta Frankow-Jaśkiewicz said in a foreword to the report. “Methods are becoming ever more sophisticated, and larger in scale,” extending from drug trafficking into areas such as fraud, corruption and tax evasion.

The expert committee joined standard-setters like the Financial Action Task Force (FATF) in calling for a tougher approach to virtual assets. Jurisdictions, such as the European Union, are already in the course of implementing controversial FATF rules to identify crypto users and enable funds to be traced, which some in the industry have warned could harm privacy and innovation.

The rapidly evolving technology, which often spreads across multiple jurisdictions, poses a challenge for regulators, the report said, calling for enhanced regulation and supervision and better coordination among national agencies. A study due later this year will examine cryptocurrency laundering trends, it said.

“There is suspicion that some of the smaller cryptocurrencies are being set up specifically with the motive of laundering,” Frankow-Jaśkiewicz said. In addition, “the larger virtual assets are seeing heavy market manipulation, which is a major predicate offense for money laundering.”

Moneyval supervises the typically smaller European territories that are not overseen by Paris-based FATF, including fintech hubs such as Malta, Gibraltar and Estonia.

Though a monitoring body, its peer reviews of and recommendations to individual jurisdictions can influence national legislative reforms.

European Watchdog Lists Crypto Next To Lawyers, Accountants As An AML Threat

The annual supervision report from MONEYVAL concluded that 18 of the 22 jurisdictions have an insufficient level of compliance with AML standards.

Europe’s Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) watchdog, MONEYVAL, has listed monitoring the crypto sector along with “gatekeeper” professionals, such as lawyers and accountants, as priorities in European nations’ push to combat money laundering.

In a media release based on the findings of its annual report, MONEYVAL called upon European jurisdictions to assess compliance with international standards and implement stricter regulatory policies to combat money laundering facilitated by crypto assets.

Elżbieta Frankow-Jaśkiewicz, chief of MONEVYAL, cited the Pandora Papers as an example of how professionals serving as “gatekeepers” could aid the rich and corrupt to launder their money. She also claimed that the popularity of crypto assets for money laundering is on the rise:

“A newer money laundering trend is related to the emerging virtual assets sector, the increasing global use of cryptocurrencies, and other components of the rapidly evolving ecosystem of so-called “decentralized finance” (DeFi).”

Moneyval is an AML oversight body of the Council of Europe, spanning 47 European jurisdictions. The task force is responsible for reviewing and recommending policy changes that influence national legislative reforms.

The report concluded that the median level of compliance with the Financial Action Task Force (FATF) standards is below the satisfactory threshold among its supervised jurisdictions. Eighteen out of the 22 jurisdictions evaluated by MONEYVAL showed an insufficient level of compliance with AML standards.

The European watchdog will also conduct a separate study to examine money laundering trends related to virtual assets later this year.

Numerous Times That US (And Other) Regulators Stepped Into Crypto

While regulatory authorities continue to raise concerns around the use of cryptocurrencies for money laundering and other illicit activities, the latest data from blockchain analysis firm Chainalysis suggest that less than 1% of the total circulating supply of crypto was used for illegal activities in 2021.

Updated: 6-7-2022

Lummis-Gillibrand Bill Establishes SEC-CFTC Balance Of Power Over Crypto Markets

The comprehensive new bill sorts out regulators and addresses taxes, environmental impact, security and other major questions surrounding digital assets.

The long-awaited Responsible Financial Innovation Act to create a regulatory framework for digital assets was introduced in the United States Senate on Tuesday. The official text of the 69-page document was also released.

The bipartisan bill, sponsored by Senators Cynthia Lummis of Wyoming and Kirsten Gillibrand of New York, “addresses CFTC and SEC jurisdiction, stablecoin regulation, banking, tax treatment of digital assets, and interagency coordination,” according to a statement.

The statement continues, “Understanding that most digital assets are much more similar to commodities than securities, the bill gives the CFTC clear authority over applicable digital asset spot markets.”

The senators appeared on CNBC Tuesday morning, and a large part of the interview revolved around splitting responsibilities between the SEC and CFTC.

“We’re trying to just fit the digital asset world into our current regulatory framework. […] We spent a lot of time on the definition of the modern Howey test,” Lummis added. She said that she was meeting with SEC chairman Gary Gensler that day, and Gillibrand had met with him the day before. She added:

“We’re going to continue to work with both the CFTC and the SEC to make sure that we both have found the right mix of using the Howey test to sort out which of those agencies best can regulate. We think that, because we’re using the Howey test, it’s going to come out just fine.”

“It is our job fundamentally for Congress to write these laws and the regulators to implement them. They don’t decide what they get to keep and what they don’t,” Gillibrand said in that interview.

Gensler has been adamant in declaring most cryptocurrencies are securities subject to his agency’s authority.

The CFTC, which is far smaller than the SEC, will be authorized to collect fees from entities engaged in cash or spot digital asset activities to finance its additional regulatory responsibilities.

The bill addresses a range of issues relating to crypto. It commissions a study on the environmental impact of digital assets, creates an advisory committee on innovation and orders the development of cybersecurity guidelines. It also creates a tax structure and mandates an analysis of the use of digital assets in retirement savings.

“It takes a long time to build a regulatory framework for a new industry,” Gillibrand said. The bill now has to pass through the Senate banking, agriculture, intelligence and financial services committees.

Blockchain Association executive director Kristin Smith said in a statement on the association’s website, “The bipartisan legislation announced today by Senators Lummis and Gillibrand represents a milestone moment for crypto policy and a major step forward for the crypto industry in Washington.”




Updated: 7-27-2022

European Banking Regulator Sees ‘Major Concern’ In Retaining Staff To Handle Crypto

José Manuel Campa reportedly suggested the European Banking Authority may be unprepared for regulating the changes that come with a “very dynamic” crypto space.

The chair of the European Banking Authority, or EBA, a European Union agency that regulates banking activities, has reportedly expressed concern that a dearth of talent experienced in the crypto space could hurt its ability to oversee the market.

According to a Wednesday report from the Financial Times, EBA chair José Manuel Campa said that hiring and retaining staff knowledgeable about cryptocurrencies was a “major concern,” given the growing demand for experts in the public and private sectors.

Campa suggested that many industry experts could be more drawn to positions paying wages higher than those at the EBA, which were comparable to government jobs in the European Commission.

In addition, the chairperson reportedly hinted the EBA may be unprepared for exercising its authority over token offerings and other digital asset products, with many regulators often unable to keep up with a “very dynamic” crypto space.

“I don’t know exactly what I would be confronted with in two years,” said Campa, according to the report. By 2025, he added, “[crypto may have] moved and transformed into other uses that I cannot anticipate.”

“My concern is more about making sure the risk we have identified […] is properly managed. If we don’t do as well as we should have, we’ll have to live with the consequences.”

Under the EU’s proposed Markets in Crypto-Assets, or MiCA, law, the EBA would oversee “significant” tokens used as a means of payment and popular tokens linked to traditional assets.

The legislation aims to harmonize crypto regulations among the EU’s 27 member countries, including giving the EBA and European Securities and Market Authority authority to prohibit or restrict the provision of virtual asset service providers, as well as over the marketing, distribution or sale of tokens in certain cases.

Many global regulators announced the hiring or appointment of staffers with experience in the crypto space, following some firms in the private sector cutting their numbers of employees amid a bear market.

In June, Cointelegraph reported the United States Financial Industry Regulatory Authority, or FINRA, planned to “bulk up” its capability to monitor crypto by offering to hire employees terminated from exchanges.

Updated: 7-28-2022

Ex-CFTC Chairman Sees Europe’s MiCA Bill As Threat To US Crypto Industry


Numerous Times That US (And Other) Regulators Stepped Into Crypto

Chris Giancarlo says the United States should take the lead in regulating digital assets.

NEW YORK – Former Commodity Futures Trading Commission chief Chris Giancarlo is worried that the European Union’s fast-moving Markets in Crypto Assets (MiCA) bill could lead to the global export of European-style crypto regulation, hurting U.S. regulators’ ability to effectively create rules of their own.

The landmark legal framework, which hasn’t been made law yet, aims to provide regulatory clarity to the growing crypto industry in Europe.

“I’m very concerned with the rapidity of MiCA’s evolution,” Giancarlo said at Solidus Labs’ annual DACOM summit in New York on Thursday. “It’s got some very expansive provisions that would, in a sense, export its approach to crypto assets to the United States.”

As the U.S. struggles to provide regulatory clarity to the domestic crypto industry, global regulatory frameworks like MiCA could fill the gap. CFTC Commissioner Caroline Pham, who recently relaunched the CFTC’s Global Markets Advisory Committee, told attendees on Thursday that market structures, once set, are extremely difficult to change.

“Once those market structures change and shift and harden and all that enormous money and investment of capital comes into those new market structures, it’s very hard to change it back,” Pham said.

Several crypto bills have been introduced in Congress, but efforts to establish a regulatory framework have been slow.

“Congress does need to continue its momentum,” Giancarlo said. “We need to get our own framework out there, and our framework needs to make clear that for U.S. activities there will be U.S. regulation, not regulation coming out of Europe. I have great respect for Europe, but their markets are very different.”

Pham said, “It’s so important that we are rule makers, not rule takers.”

Updated: 11-4-2022

EU Delays Vote On MiCA Crypto Legislation Until February

Technical issues in the lengthy text could delay the start of the licensing regime set out in the Markets in Crypto Assets regulation.

European Union lawmakers won’t vote on the Markets in Crypto Assets regulation (MiCA) until February, likely meaning further delays in the landmark licensing regime for crypto companies within the bloc, a spokesperson for the European Parliament has told CoinDesk.

A previous tentative plan for the Parliament to vote at its December plenary session has been abandoned given the length and complexity of the text, CoinDesk was told.

The political outline of the legislation, which sets reserve requirements for stablecoins intended to avoid a terraUSD-style collapse, was approved in June, and the final text published in October.

However, the text still needs to be formally signed off by both lawmakers and national governments that make up the EU’s Council.

EU procedures require legal acts such as MiCA, which was negotiated in English, to be available in all the bloc’s 24 official languages.

The law’s provisions, which require crypto companies such as wallet providers and exchange platforms to seek authorization from national regulators, start to apply between 12 and 18 months after the final law is published in the EU’s Official Journal – an event originally foreseen for spring of next year, but which now seems set to be pushed back.

Updated: 11-8-2022

MiCA Legislation Good News For Crypto Players — Binance Europe VP

The European Union’s Markets in Crypto-Assets legislation could create an easier environment for exchanges to operate in, according to Binance’s vice president of Europe.

Smaller cryptocurrency exchanges and start-ups could benefit from the European Union’s Markets in Crypto-assets (MiCA) regulation, according to Martin Bruncko, Binance’s executive vice president of Europe.

Cointelegraph had a one-on-one interview with Martin Bruncko during the Web Summit conference in Lisbon early in November 2022. Heading up Binance’s operations across Europe, Bruncko offered unique insights into the exchange’s growth across the continent and its perspective on the regulatory environment.

The European Parliament Committee passed the MiCA crypto policy on Oct. 10, which aims to create a one-size-fits-all regulatory framework for the industry across the 27 countries that make up the European Union.

Bruncko told Cointelegraph that the European crypto landscape is currently fragmented, with all 27 countries in Europe having different regulatory regimes ranging from “fairly restrictive to non-existent.”

This has led to time-consuming and financially demanding requirements for exchanges to ensure that they are fully compliant in different jurisdictions:

“This is exactly the issue right now and this is why we’re actually, I would say almost excited about MiCA, because it’s creating a single market.”

Bruncko stressed that the current landscape hamstrung smaller players that were looking to scale across the continent, given the costs of ensuring compliance across different borders:

“In principle, it’s good news for every crypto player in Europe because, again, now you can just operate within one single market. It’s just making it so much easier to grow your business, to scale your business with much less cost.”

Bruncko also believes that early-stage crypto companies will also benefit from the legislation by being able to focus on growth rather than legal and compliance considerations.

Europe remains a focal point for Binance, which views the continent as one of the largest and most advanced crypto economies in the world.

Given that financial innovation and leading fintechs are centered in Europe, Bruncko stressed that the wider region will continue to be an important operational space for the exchange:

“A lot of major crypto projects were started out of Europe. If you take Ethereum, it effectively started in London, Switzerland and a bunch of other places. Ever since then, we’ve had a huge amount of various successful, influential projects coming out of Europe.”

Bruncko said that Binance has been pushing to ensure regulatory compliance across Europe over the past year. The exchange is regulated in five European countries, including two G7 members.

Updated: 11-28-2022

ECB President Reiterates Calls For ‘MiCA II’ In Response To FTX Collapse

In June, Christine Lagarde said a potential MiCA II framework “should regulate the activities of crypto-asset staking and lending, which are definitely increasing.”

Christine Lagarde, president of the European Central Bank, or ECB, has once again called regulation and supervision of crypto an “absolute necessity” for the European Union in the wake of the collapse of crypto exchange FTX.

At a Nov. 28 hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Lagarde cited Facebook’s Libra as an example of the ECB’s involvement which was “helpful to stop some of the players” from engaging with crypto firms.

However, she said the situation with FTX — involved with crypto assets as opposed to stablecoins — was more about the “stability and reliability” of the exchange and the ECB needed to step up as a global regulator to address people’s increasing interest in digital assets.

“At least Europe [on the road to crypto regulation] is ahead of the pack,” said the ECB president. “But as I said previously, it’s one step in the right direction. This is not it — there will have to be a MiCA II, which embraces broader what it aims to regulate and to supervise, and that is very much needed.”

The Markets in Crypto Assets bill, or MiCA, is awaiting final approval following legal and linguistic checks by EU lawmakers. The European Parliament economics committee accepted the MiCA framework in October following trialogue negotiations between the EU Council, the European Commission and the European Parliament. Many expect the policy to go into effect starting in 2024.

Lagarde referred to MiCA II — presumably additional legislation building on the work lawmakers did for the original bill — in June. At the time, the ECB president said the framework “should regulate the activities of crypto-asset staking and lending, which are definitely increasing.”

European Parliament economics committee member Stefan Berger, one of the proponents of the MiCA framework, also cited the downfall of FTX in advocating for crypto regulation on Nov. 9:

“The FTX case makes it clear what dangers a completely unregulated crypto market and crypto exchanges without licenses entail. We still have a large number of crypto asset service providers whose concept is not understandable. MiCA addresses exactly this problem. With a global MiCA, the FTX crash would not have happened.”

The ECB is currently conducting the two-year investigative phase of its digital euro project, exploring the use of online payments validated by third parties. Some officials within the EU expect to see legislation related to a digital euro in 2023.


Updated: 11-30-2022

EU’s MiCA Law May Have An FTX-Shaped Loophole

A much-heralded new law could still allow slapdash offshore companies to ply their trade in the bloc.

Officials in the European Union (EU) say their landmark new legislation, the Markets in Crypto Assets Regulation (MiCA), would have prevented FTX-style collapses – but there’s also a major loophole that could allow offshore companies to continue to operate within the bloc.

Even when the Markets in Crypto Assets legislation goes into force in the coming years, companies like FTX, based in the Bahamas, would still be able to serve EU clients without extra regulation, thanks to a technique known as reverse solicitation.

MiCA requires companies targeting the EU market to register with a local regulator, with checks on their governance and marketing – ensuring that, for example, they don’t mislead potential investors, or misuse client funds, as FTX was alleged to have done before it filed for bankruptcy earlier in November.

But the text – politically approved but not yet formally enacted – contains some pretty wide exemptions that could in reality allow EU citizens to go to a foreign crypto site and buy all the bitcoin they want.

Reverse solicitation exists because, on a practical level, it’s hard for regulators to enforce financial rules on overseas firms, and because they don’t want to block companies from seeking foreign expertise outright.

But it can also be abused, such as via standard contract clauses which deem a trade to have taken place at the client’s sole request.

MiCA broadly allows the practice, but, compared to other EU financial service laws, includes stronger powers for supervisors to stop solicitation being abused – including an ad ban for unauthorized products.

However, the detailed ground rules need to be set by the European Securities and Markets Authority (ESMA), which has to issue guidelines, and its officials already see this topic as a source of concern.

Reverse solicitation “might be a particularly pronounced problem in this space of crypto assets, and that is something that is of concern for us,” Steffen Kern, head of ESMA’s Risk Analysis and Economics Department, told lawmakers Wednesday.

“Service providers outside the EU play a dominant role in crypto markets and should be expected to do so” even after MiCA is implemented, Kern added.

One answer, favored by the European Commission, which proposed MiCA and is now responsible for monitoring the new law, is to ensure other jurisdictions play ball using the same rulebook.

“Crypto asset markets are global, interconnected and mobile,” Alexandra Jour-Schroeder, a deputy director-general at the commission’s financial-services arm, told lawmakers on Wednesday, She said unilateral clampdowns in places like China have done little to curb citizens’ access to crypto.

“We have to be vigilant that our EU protections are not undermined by jurisdictions that ultimately fail to regulate and supervise their companies,” she said. She added that she wants other countries to adopt crypto rules on the EU model.

In traditional finance, received wisdom is that the problem will largely solve itself. Alhough you might find the odd client from overseas, to really scale up in the EU market you’ll need a proper marketing campaign, which means you need to be based there; a regulatory badge of approval will prove a selling point, the argument goes.

“In financial services there’s a flight to quality over time” due precisely to FTX-style scandals, Barney Reynolds, a partner in the financial services practice of London law firm Shearman, told CoinDesk. “Business gravitates to where the most sophisticated regulators and regulations are.”

The question is whether that logic applies in a sector where people are as likely to get advice from Reddit or YouTube as from a regulated financier, and where decentralized freedom from government control is part of the attraction.

Jour-Schroder might be able to persuade the U.S. and U.K. to regulate crypto, but what about Bahamas, Dubai and Antigua, or those firms that deny they have any headquarters at all?

It’s that kind of question that leaves some lawmakers nonplussed, and concerned that EU registration confers an unfair disadvantage.

“Companies physically present in the EU targeting EU consumers have to adhere to all these principles, rules and regulations,” Dutch lawmaker Michiel Hoogeveen told CoinDesk after the Wednesday hearing. “There’s a disbalance, and a loophole.”

“I don’t really think they [the commission] have a concrete answer, and it’s something that we have to look into in the future – to find out how to prevent these loopholes from happening,” Hoogeveen said.

Updated: 1-17-2023

European Union Postpones MiCA Vote To April

The holdup comes because of issues in translating the text into 24 different languages.

The European Union’s landmark crypto legislation, the Markets in Crypto Assets regulation, or MiCA, has been delayed until April because of issues in translating the rules into the 24 official languages in the EU.

“MiCA is tabled to be voted by the plenary in April and to my knowledge, the delay is technical, caused by translating issues,” an official familiar with the matter said.

EU procedures require legal acts such as MiCA, which was negotiated in English, to be available in all the bloc’s 24 official languages.

In November, the EU delayed the vote until February, and CoinDesk reported then that technical issues in the lengthy text could delay the start of the licensing regime, which was expected to go into effect in 2024.

EU officials said MiCA would have prevented the mismanagement at crypto exchange FTX, which collapsed in November. But the legislation, CoinDesk reported, has a major loophole in which companies such as FTX based outside the EU would be able to serve EU customers without extra regulation.

European legislators have agreed upon the law in principle, but the almost 400-page text needs to be formally signed off by both lawmakers and national governments that make up the EU’s Governing Council.

The law will apply to all member nations, but much of the implementation and interpretation will depend on regulators in each countries.

MiCA introduces the first-ever common licensing regime for crypto wallets and exchanges to operate across the EU to serve its population of 450 million, and it has a reserve requirement for stablecoin issuers. The law is seen as a standard setter that will influence crypto rulemaking across the world.

Updated: 1-18-2023

EU Postpones Final Vote On MiCA For The Second Time In Two Months

The final vote was delayed due to issues in the translation of the 400-page legal document.

The final vote on the European Union’s (EU) much-awaited set of crypto rules, known as the Markets in Crypto Assets regulation (MiCA), was deferred to April 2023. It marks the second delay in the final vote, which was previously postponed from November 2022 to February 2023.

The latest delay is due to a technical issue where the official 400-page document couldn’t be translated into the 24 official languages of the EU, according to The Block. Legal documents like the MiCA, which are drafted in English, must comply with EU regulations and be published in all 24 official languages of the union.

The first delay in November 2022 that deferred the final vote to February was also caused by translation issues. A delay in the final vote means European financial regulators must wait longer before drafting the implementation rules for the legislation.

Once the MiCA has received official approval, the financial regulators have 12 to 18 months to create the technical standards.

The European parliamentary committee passed the MiCA legislation in October 2022, nearly two years after it was first introduced in September 2020.

The second delay comes even when there has been a growing demand for approval of the legislation, especially in the wake of the crypto contagion caused by FTX.

Stefan Berger, a member of the European Parliament’s economics committee, has described the FTX collapse as one of the “Lehman Brothers moments” that “must be prevented,” when arguing for the necessity of regulations such as MiCA.

With MiCA, European policymakers aim to set a standard regulation to establish harmonized rules for crypto assets at the EU level, thereby providing legal certainty for crypto assets not covered by existing EU legislation.

The crypto regulation will establish guidelines for the operation, structure and governance of issuers of digital asset tokens. The legislation will also offer rules on transparency and disclosure requirements for issuing and trading crypto assets.


Updated: 1-24-2023

MiCA At The Door: How European Crypto Firms Are Getting Ready For Sweeping Legislation

Adapting how crypto exchanges operate under the new regulation won’t be easy, but it might make it easier for them to get bank accounts in Europe.

The European Union’s sweeping Market in Crypto-Assets (MiCA) legislation is slowly moving toward becoming law, and local crypto companies are getting ready for the change.

The new regulations, which will be the law for all 27 EU member countries, apply stricter rules than are now in place in some European countries.

In addition to very detailed rules and limitations for stablecoin issuers, which CoinDesk has been covering in depth, MiCA demands an unprecedented level of transparency from crypto exchanges.

Under the legislation, not only must crypto companies keep the public informed about their pricing process and trading volumes in real time, but they must settle all trades the same day those trades happen.

Exchanges must keep separate their own funds, including crypto, and funds belonging to their clients. The regulation also explicitly prohibits insider trading.

Most importantly, MiCA introduces a universal licensing approach for all EU member states, making it the most comprehensive legislation of its kind anywhere in the world.

Frédéric Montagnon, founder of French blockchain company Arianee, told CoinDesk the MiCA licensing and other rules are “more complex, more sophisticated” than those currently established by the French regulator, adding, “During the MICA process, they took a large part of what was done in France and made it deeper.”

At the moment, licensing is only mandatory in France for those crypto companies that provide any kind of crypto custody, meaning they store users’ funds in their own accounts. For those that don’t provide custody services, licensing is optional.

MiCA – which as an EU-wide directive must be enacted at the member-state level – will make it obligatory for everyone.
Banking and insurance for crypto

On the first site, things won’t change much for the 60 companies that have already registered with the French Financial Markets Authority (AMF) and “have already adapted their processes to what the French regulator told them to do,” Montagnon said.

“There is nothing in MiCA that is impossible to reach for a startup.”

However, there’ll be one important change: If the final version of MiCA makes it mandatory for cryptocurrency service providers to get their businesses insured, it will be a headache for startups in France, Montagnon said.

“It’s hard to find someone to insure clients’ funds, especially in crypto, especially after the FTX crash,” Montagnon said. French banks have been unfriendly to crypto firms because it’s also nearly impossible for them to secure an audit by a reputable company.

Some local household names among banks do work with select crypto companies (Montagnon won’t say which banks), but for most firms it’s almost impossible to get a bank account.

“The real challenge is to find a bank and insurance. And that’s really disappointing. You pass all the steps, you have your license and the market still says no. I would want to imagine that with MiCA that will change,” Montagnon said, but he is pessimistic that will happen.

In Germany, says Sven Wagenknecht, editor-in-chief of crypto news website BTC-ECHO, getting a bank account is also a pain for crypto startups.

“In Germany, most banks are against crypto,” he told CoinDesk. Smaller banks, such as N26 and Solaris, for example, are friendlier to the industry, but the biggest ones, like Deutsche Bank, are still keeping away from crypto.

This may change once a pan-European regulation is in place, he believes: “Banks need some clarity in regulation, and MiCA is a step forward.”

There is another part of MiCA that can push European banks and crypto closer, at least in Germany, Wagenknecht said: MiCA will make applying for a crypto custody license an easier and more transparent process than current German regulation offers.

This will give a green light to the German banks that are interested in providing crypto custody themselves, such as Sparkasse, which has been reportedly working on a crypto trading service, and Hauck & Aufhäuser, which acquired a licensed crypto custodian Kapilendo in 2019.

Securing a crypto custodian license in Germany at the moment is a very taxing process, Wagenknecht said, and just a handful of companies currently possess one.

“You have to wait long time and you don’t know what you’re doing wrong – it’s not a very transparent process and it’s very hard for a company without a lot of funding,” he said

John Ehlers, chief operating officer of the Luxembourg-based crypto exchange Bitstamp, believes crypto companies will find greater comfort under MiCA.

The licenses for virtual assets providers under MiCA, unlike some of the current, lighter registration regimes in Europe (for example, in France) requires detailed disclosures: “MiCA license is a real license, a prudential license. They look at how you run your business. It’s very in-depth,” Ehlers said.

That level of transparency will likely give some peace of mind to banks and other traditional businesses that have been uneasy about crypto so far, Ehlers said. “You’re not at the same footing with the credit institutions, but you’re at the table with them.”

Time To Get Ready

However, the gap between what a crypto service is doing now to comply with regional laws and what it will have to do under MiCA can be quite wide, so companies must start getting ready now, Ehlers said.

“It’s always more complicated and takes more time than you think. My advice for the industry is you need to start now, prepare yourself for the MiCA application. What does your company do today and what does MiCA require?” Ehlers said.

On the user side of things, the onboarding process might become a bit longer for crypto exchange clients, Ehlers said. Exchanges will need to figure out how suitable a user is for certain kinds of products.

At the same time, users will be entitled to more information about the assets listed on exchanges so they can make more educated choices while trading.

After MiCA passes, crypto companies will have 18 months to adapt. It’s hard to tell when exactly the regulation will become law because the vote has already been postponed twice, most recently pushed to April.

In the long run, MiCA will make the life of European crypto services easier, Wagenknecht said, with a more coherent approach towards regulation. But in the beginning there might be some pains harmonizing the existing national regulations with MiCA.

One example is Germany’s law for blockchain securities, which is different from MiCA’s approach.

Some experts are already saying MiCA is not comprehensive enough and that the regulators of the world must go further. For example, a research group commissioned by the French government called for special attention to the metaverse, especially to users’ data protection rules, in October. The current text of MiCA does not contain any mentions of the metaverse.

There is also a concern that however profoundly Europe will be regulating crypto, it won’t really work until other parts of the world follow suit.

“There’s no point in Europe being on its own, because this is a global development, and we can’t put barriers on it,” European Commissioner Mairead McGuinness told CoinDesk.


Updated: 3-17-2023

Netherlands Will Take Tough Line Enforcing MiCA, Dutch Regulator Says

Laura van Geest said she won’t undercut new EU crypto laws, even if that drives business from the country.

The Netherlands will take a tough line enforcing new European Union crypto rules, even if it means business goes elsewhere, the head of the Dutch Authority for Financial Markets (AFM) has said in an article published Friday.

AFM Chair Laura van Geest said cryptocurrency wasn’t good news, linking it to fraud, manipulation and speculation, and said the EU’s Markets in Crypto Assets regulation (MiCA) will only partly address its risks.

“Given the previous history, we see no reason to be lenient in enforcement” when it comes to applying the MiCA rules, which will require wallet providers and exchanges to seek licenses which will let them operate across the EU bloc in around 18 months’ time.

MiCA offers a single set of rules that will be put into practice by national authorities such as the AFM, potentially meaning some crypto firms will simply look for the regulator that offers the easiest regime.

Van Geest said she’d have preferred to have more consistent supervision by EU-level agencies, but won’t be undercutting standards to attract business.

“It is not for nothing that a MiCA 2 is already being presaged,” she said, noting that the regulation doesn’t apply to problematic areas like crypto lending.

Lawmakers at the European Parliament are set to formally vote on the law in April.

Updated: 4-20-2023

Why The EU Has MiCA And The U.S. Has Securities Law Confusion


Numerous Times That US (And Other) Regulators Stepped Into Crypto

The European Parliament has passed a landmark set of crypto rules.

The European Parliament went ahead and did it: Today, after years of deliberations and at least two official delays, the landmark Markets in Crypto-Assets (MiCA) regulatory framework was voted in.

European Union legislators also passed a separate crypto-related rule known as the Transfer of Funds regulation that imposes stronger surveillance and identification requirements for crypto operators, CoinDesk’s Jack Schickler reported.

The rules were described as a “world first” by the European Commission’s Mairead McGuinness, and also an “end of the Wild West era for crypto assets,” according to Green Party lawmaker Ernest Urtasun.

The laws, which will be enforced at the state-level, still need to be officially approved by the supra-governmental body called the EU Council, are just about cleared to take effect next year. (The Council’s approval is more of a formality at this point, considering it already approved the text of the law last year.)

For many, MiCA represents a crucial step forward for the crypto industry. It’s the first major attempt to provide a comprehensive set of rules for crypto companies so they know in advance what they can and cannot do and where their responsibilities lie if they want to operate in the 27-nation strong trading bloc.

The European Union hopes it sets the global standard (and, in some sense, is worried about MiCA’s effectiveness in the EU if similar rules are not adopted everywhere).

CoinDesk has written a number of overviews of the legal framework. But. in short, MiCA requires crypto firms – like wallet providers and exchanges – to be licensed by the EU, and comply with money laundering and terrorism finance safeguards if they want to serve EU-based customers.

Some have balked at the reporting standards, which will undoubtedly weaken privacy for crypto users in the name of customer safety and national security.

But considering how regulatory uncertainty has damped the crypto industry’s ability to grow over the past decade (that’s been a recurring line from crypto lobbyists and advocates), the move brings some amount of welcomed transparency and stability.

Binance CEO Changpeng Zhao tweeted his support, calling MiCA “a pragmatic solution” with which his exchange will comply.

All this is in comparison to the two other massive crypto markets – the U.S. and China. At least on paper, China has officially banned all crypto activity – but recent smoke signals suggest that freeze could thaw (at least in a Hong Kong financial sandbox).

The country has not been able to stamp out crypto trading or mining entirely, and legitimizing some portions of the industry could be a boon for those looking to return.

Meanwhile, in the U.S. there seems to be a coordinated effort of elected representatives, unelected regulators and overpaid policymakers as well as the Federal Reserve and Biden administration to get crypto out of the wider economy.

It seems to be part of what President Joe Biden called a “whole-of-government approach” to dealing with crypto in an executive order at the beginning of 2022, before the worst excesses and calamities of the year came to light.

There are still authorities in the U.S. working to legitimize and regulate crypto, even if some high-powered officials like Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), are opposed to writing new rules.

According to Gensler, the financial rules already on the books are clear enough to cover the novel peculiarities of decentralized tech.

Political infighting between those who want to give crypto time to find its legs and those who prefer knee-capping it has left the entire industry worse for wear.

Right now, ether (ETH), the second-largest cryptocurrency by market cap and the native token of the Ethereum blockchain, is in a situation similar to Schrödinger’s security – stuck in a superposition of being both lawful and not, essentially because Gensler has said ether may and may not have fallen afoul of the Howey Test definition of a security.

Such legal insecurity has led the chief executive of Coinbase, the largest U.S. crypto exchange to say it may have to leave the country. You can say it’s an empty threat considering Coinbase’s business is built around extracting fees from U.S. customers, but Brian Armstrong is hardly alone.

In all fairness, Gensler is calling for common-sense oversight of increasingly powerful financial rails. Boil down what he wants – for exchanges to register with the SEC and bulk up their customer identification systems – and I’m sure it’s not too far off from the EU’s new standards.

Of course, the difference between the EU and U.S. is that one took a “whole-of-government” approach to dealing with crypto, while the other merely says it will.

Industry Leaders And Policymakers React To Passage Of MiCA In EU

Many lauded the bill’s approval, suggesting that its anticipated passage could leave the United States at a disadvantage for attracting crypto firms and investments.

Though a crypto-focused regulatory framework still needs approval from the European Council before final passage, many in the space have reacted positively to the Markets in Crypto Assets, or MiCA, bill moving forward.

On April 20, the European Parliament voted to pass MiCA after two delays starting in November 2022. The bill aims to create a consistent regulatory framework for crypto assets among the European Union member states.

Though EU lawmakers still need to conduct legal and linguistic checks for MiCA as well as publish the bill in the EU journal, the policy could go into effect as early as 2024, depending on the European Council vote.

Many crypto industry leaders and policymakers largely lauded the bill’s approval.

Changpeng “CZ” Zhao, CEO of Binance, suggested he would begin implementing changes to the exchange in the next 12-to-18 months in order to be in compliance with the potential new framework.

Others targeted the United States for seemingly falling behind in digital asset regulation — a move that could drive companies to the EU with the implementation of MiCA.

“Overall we think this is a pragmatic solution to the challenges we collectively face,” said CZ. “There are now clear rules of the game for crypto exchanges to operate in the EU.”

Prior to the European Parliament vote, EU Commissioner for Financial Stability Mairead McGuinness told lawmakers they were “ahead of many other jurisdictions” in regard to crypto regulation. More than 500 members of parliament ended up voting in favor of MiCA.

One of the key votes for the crypto framework followed a crypto market crash and the bankruptcies of high-profile firms that had many lawmakers across the globe calling for regulatory clarity.

Christine Lagarde, president of the European Central Bank, also suggested that policymakers needed to implement a broader framework in response to the collapse of FTX, proposing a “MiCA II” in the future.

Is Europe’s MiCA A Template For Global Crypto Regulation?

Formally enacted Thursday, the EU’s Markets in Crypto-Assets Regulation is the most comprehensive framework of its kind. How will it influence how non-EU states regulate digital assets?

Today, the European Parliament approved the European Union’s crypto-assets framework, the Markets in Crypto-Assets Regulation (MiCA).

It was a nonevent, in that the outcome of the vote was expected. Yet, it is momentous because it gets the EU’s 27 members closer to being the first in the world to having a comprehensive crypto law.

With just a couple of final administrative steps outstanding, the enforcement clock will start ticking in June this year, giving 12 to 18 months for the rules to kick in.

For the avoidance of doubt, the rules were agreed upon last summer. It took this long to clear the 571-page law through the EU’s legal and translation services. That’s all there was to the delay, despite conspiracy theories and rumours that something darker was afoot.

Legal and compliance teams should study the final text to make sure the details they captured last year when the text was agreed upon politically didn’t change under the scrutiny of the legal services – but changes will be marginal.

Is MiCA The Best That The Regulatory World Has To Offer?

The market is as positive as a market can be about regulation. Through booms and busts, U.S. enforcement frenzies, and layoffs, the centralized crypto market has fallen in love with MiCA.

It offers a licence tailored to crypto-asset services and stablecoin issuers that is passport-able across 27 EU member states and 450 million people.

It deliberately refrains from regulating decentralized finance (DeFi) or non-fungible token (NFT) activities. It borrows from capital markets regulation – the 2014 Markets in Financial Instruments Directive (MiFID) – but it does not copy it.

For example, there are no suitability tests to divide between knowledgeable and nonknowledgeable crypto investors. Rules on stablecoins issuers will give consumers confidence that their tokens are properly reserved and always redeemable.

While banks, custodians and asset managers are currently weary of the reputational risk of dealing with crypto, MiCA stands to build institutional comfort with crypto as an asset-class.

MiCA is legislation written by competent technocrats who serendipitously timed the negotiations with the bull market and thus captured political interest and optimism that has since vanished in the EU.

In my opinion, MiCA is a politically acceptable and workable compromise, building on existing rules frameworks. It was important to get it done now that the market is mature enough and profitability pressures are testing governance and risk management.

It gives entrepreneurs certainty and it stops policymakers from a knee-jerk reaction to an industry issue.

One Key Weakness

By choosing to rely on available regulatory frameworks, the Commission set MiCA to regulate token issuers as entities, not token exchanges as activities.

That is, the requirements are on the issuer, regardless of how its token is used. This, I believe, limits how future-proof MiCA is.

Regulatory professionals will recognize these terms; they have a history. Over the past decade, the mantra for authorities from Europe to Asia has been to adapt to the unbundling of financial services by creating activity-based, not entity-based, regulation.

For example, we now focus on the activity of buy-now-pay-later specifically, rather than just on banks as a type of entity.

Issuing tokens as bearer instruments makes this impossible – the issuer is not in charge, or not thus far in charge, of determining whether their token is used to pay or to invest.

The EU squared this circle by focusing on probabilities. It said that a token pegged to a currency is more likely to be used for payments than anything else, so it should follow that regulatory framework.

In EU language, this is an e-money token (EMT), a token that fluctuates freely is more like an investment, and is regulated as such.

A lot of political energy was spent on tokens pegged to a basket of currencies, commodities or other assets. This was Europe chasing the ghost of Facebook’s libra stablecoin experiment, while the market was busy moving on.

The rules on these assets are complicated and opaque in their attempt to address both the payments and the investment use case.

This points to how crypto complicates the normal payment versus investment distinction. MiCA Level 2 technical rules will seek to draw a clearer line, but it will be difficult. There are 20 technical standards to be written for MiCA, and this may be one of the more complex ones.

Perhaps by setting its legal framework the EU can create the market behaviors anticipated in the legislation – i.e., what token is to be used for payments, and what is for investment.

Finally, while the market function of EMTs can be comparable to that of e-money, their technology is like other tokens. So far, the EU has been flip-flopping on technology neutrality.

For anti-money laundering purposes, because of their underlying technology, EMTs are treated differently from e-money.

But in June the Commission will suggest that EMTs should offer the same consumer protections as e-money, including reversible payments, despite their underlying technology.

Will MiCA Become A Global Template?

For international companies, the key question is when and how the global crypto order will be established.

Regulators are asking themselves the same. For a market as digitally accessible as crypto, there are very few rules in Europe that can protect EU citizens from subpar services offered from abroad.

This would be particularly true if a non-European exchange chooses to offer a hyped-up token (e.g., Terra’s luna, which collapsed spectacularly last summer) and Europeans flock to it without solicitation.

The international framework is being established by the Financial Stability Board, and will have to be rolled out by the G-20 members. Because MiCA came first, the EU is very keen that the FSB aligns.

Learning a lesson from the FTX scandal, the FSB might take a tougher stance on the commingling of activities and funds. In parallel, the U.K., now outside the EU, is setting its own stablecoin and crypto-asset services rules, similar to MiCA.

In short, Europe has a good chance to export MiCA, albeit with a time lag. But the combination of this time lag and the bear market may in the meantime expose companies to erratic regulators, and consumers to unstable businesses.


Updated: 7-26-2023

Bitcoin Bills Pass Congressional Committee In ‘Huge Win’ For US Bitcoin Industry

Numerous Times That US (And Other) Regulators Stepped Into Crypto

Two crypto regulatory bills have been passed by the United States House Financial Services Committee that could finally provide some much-needed regulatory clarity.

A key United States House panel has approved a pair of bills that could finally deliver some regulatory clarity to crypto firms — including clarifying the differences in jurisdiction between the U.S. securities and commodities regulators.

On July 26, the majority of U.S. lawmakers voted in favor of the Financial Innovation and Technology for the 21st Century Act, as well as the Blockchain Regulatory Certainty Act.

The House Financial Services Committee approved the Financial Innovation and Technology for the 21st Century Act in a 35-15 vote, which would establish rules for crypto firms on when to register with either the Commodity Futures Trading Commission or the Securities and Exchange Commission.

The Republican bill also outlines a process for firms to certify with the SEC that their projects are adequately decentralized, allowing them to register digital assets as digital commodities with the CFTC.

Republican Congressman French Hill, who also serves as the vice chairman of the House Financial Services Committee, said he was proud the bill had passed its first hurdle, and that it had been passed by the committee with bipartisan support.

“We have crafted landmark legislation that establishes robust consumer protections and clear rules of the road for market participants while keeping innovation in the United States.”

Meanwhile, the bipartisan Blockchain Regulatory Certainty Act, sponsored by Republican Congressman Tom Emmer and Democratic Congressman Darren Soto, aims to set out guidelines removing hurdles and requirements for “blockchain developers and service providers” such as miners, multisignature service providers and decentralized finance platforms.

Emmer praised the passing of the Blockchain Regulatory Certainty Act as a “huge win” for the United States.

Emmer explained that the Blockchain Regulatory Certainty Act “specifically deals with what blockchain-related entities qualify as money transmitters” in the United States. If passed in the House of Representatives, the bill “will clear things up by affirming to the blockchain community that if you don’t custody customer funds, you are not a money transmitter,” Emmer added.

Despite the passing of these acts, a number of Republicans and Democrats refused to support another proposed piece of legislation, dubbed The Digital Assets Market Structure bill.

Democratic Representative Maxine Waters condemned the bill for too closely heeding the calls of the crypto industry and ignoring regulatory guidance from the SEC.

“As I have said before, we don’t need to invent new regulatory structures simply because crypto companies refuse to follow rules of the road. Our securities laws have protected investors and retirees for 90 years while supporting capital formation and facilitating innovation,” said Waters.


Crypto Regulatory Framework Bill Endorsed by House Financial Services Committee

* Senate Remains Big Hurdle For Crypto-Friendly Legislation

* Republican-Led Bill Would Elevate Cftc In Regulating Crypto

Legislation championed by crypto advocates that sets clearer rules for the nascent industry was approved by a key US House panel on Wednesday.

The Republican-led bill was approved by the House Financial Services Committee in a 35-15 vote, mostly along party lines. A handful of Democrats, including Jim Himes of Connecticut and Ritchie Torres of New York, also voted in favor of the legislation and argued the status quo wasn’t working.

Chairman Patrick McHenry of North Carolina touted the legislation and the potential for crypto. “This is a software revolution and a financial revolution if done correctly,” he said.

Clearing that first step is a win for crypto advocates who have said existing rules aren’t clear and are seeking to stymie the US Securities and Exchange Commission, which has ramped up its enforcement against the industry following the collapse of high-profile companies, including FTX.

The House Agriculture Committee, led by Pennsylvania Republican Glenn Thompson, will consider its own portion of the bill Thursday, including $120 million in additional funding for the Commodity Futures Trading Commission, which would get new powers to oversee the asset class under the legislation.

Republicans warned that crypto companies will head overseas without a clear regulatory framework.

Even if the full House votes in favor of the bill, it faces long odds in the Democrat-led Senate, where Banking Chairman Sherrod Brown of Ohio has been a skeptic of the crypto industry.

The legislation would establish rules for when crypto firms must register with the SEC or the CFTC. It lays out a process for digital-asset issuers to certify to the SEC that a blockchain network is sufficiently decentralized, which would allow related tokens to be classified as commodities overseen by the CFTC. The bill would also require the two agencies to engage in joint rulemaking and would mandate studies on issues, including nonfungible tokens and decentralized finance, or “DeFi.”

In addition, the bill includes language to stipulate that a digital asset itself isn’t a security just because it’s sold as part of an investment contract — appearing to conform the legislation to a recent ruling from a federal judge in the SEC’s case against Ripple Labs Inc.

Republicans have been hoping that decision will bolster their legislative efforts and show their Democratic colleagues that new laws are necessary.

But the effort still faces pushback, including from SEC Chair Gary Gensler who has said new rules aren’t needed to define when a token is under its jurisdiction and that existing securities laws are clear — crypto firms just refuse to follow them.

Several Democrats on the House Financial Services Committee echoed Gensler’s view and argued the bill would allow crypto to bypass protections in existing securities laws. The top Democrat on the committee, Maxine Waters of California, called the bill “a wish list for Big Crypto,” and other Democrats including crypto opponent Brad Sherman of California suggested Sam Bankman-Fried, the indicted former head of FTX, would be cheering on just such a bill.

“This is going to be a disaster,” said Democrat Stephen Lynch of Massachusetts, who called it was the worst bill he’d seen in his 20 years on the panel.

But bill sponsor French Hill of Arkansas and McHenry said customer protections in the legislation would prevent self-dealing, including diverting assets to affiliates and trading against customers.

Republicans blocked a proposal by Representative Bill Foster of Illinois to require what he called digital “license plates” for every digital wallet. The underlying identity of the owner of the wallet could only be uncovered by a court order. Foster argued this would enable the government to crack down on illicit crypto activity, but Republicans argued such license plates weren’t necessary and would threaten privacy.

Waters and McHenry also said they continue to work together on separate legislation governing stablecoins, with Waters saying they are “very close” to a deal. The committee is scheduled to consider the legislation on Thursday, but a deal may take longer to reach.

Updated: 7-27-2023

‘Pro-Crypto Bill’ Passes Out Of US House Agriculture Committee

The Republican bill, dubbed FIT for the 21st Century, was drafted by two House committees and passed after strenuous preparations by members of both parties.

Tact was pervasive in the United States House of Representatives Agricultural Committee’s consideration of the Financial Innovation and Technology for the 21st Century Act on July 27. With many references to bipartisanship and self-congratulatory mentions of the members’ cooperation and hard work, the committee plowed through a series of amendments calmly and quickly.

The bill, co-written by Republican members of the Agriculture Committee and Financial Services Committee, seeks to create a comprehensive regulatory framework for digital assets. It was debated in the Financial Services Committee along with several other bills a day earlier.

Ranking member David Scott introduced the Democrats’ concerns, claiming that consumer protections need to be strengthened in the bill. It does not provide for third-party auditing, he said.

In addition, funding for the Commodity Futures Trading Commission (CFTC) was not increased in line with the new authorities the bill would give it, though it was later pointed out that the bill provides the CFTC with the minimum level of funding requested by Chair Rostin Behnam.

The bipartisanship took a while to show through, as Rep. Alma Adams called the bill “a fast track to investor confusion.” Her amendment to guarantee diversity on the boards of market participants was later voted down.

The provisional registration measures evoked comments from several legislators. Eventually, an amendment proposed by Rep. Yadira Caraveo to require provisionally registered parties to belong to a futures trade association was passed, with the purpose of providing some oversight of them while regulations were being worked out.

Market participants will also be required to have physical addresses under an amendment by Rep. Jasmine Crockett. Disclosure requirements were also strengthened.

The chair, Rep. Glenn Thompson, and the ranking member agreed to study decentralized finance further. The bill was successfully passed out of the committee.

The crypto community has vocally supported the bill. Crypto Council for Innovation CEO Sheila Warren praised the committee’s passage of the bill in a statement:

“It’s a significant marker that shows keeping the status quo is not an option. There is too much at risk for consumers, US competitiveness and national security to take a back seat.”

Warren added, “The definition of ‘digital asset trading system’ should be narrowed and the new exclusion category to the definition of ‘digital asset’ included in Section 101 and the restrictions on mixed digital asset transactions further clarified.”



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Shield Bitcoin Wallets From Theft Via Time Delay (#GotBitcoin?)

Blockstream Launches Bitcoin Mining Farm With Fidelity As Early Customer (#GotBitcoin?)

Commerzbank Tests Blockchain Machine To Machine Payments With Daimler (#GotBitcoin?)

Bitcoin’s Historical Returns Look Very Attractive As Online Banks Lower Payouts On Savings Accounts (#GotBitcoin?)

Man Takes Bitcoin Miner Seller To Tribunal Over Electricity Bill And Wins (#GotBitcoin?)

Bitcoin’s Computing Power Sets Record As Over 100K New Miners Go Online (#GotBitcoin?)

Walmart Coin And Libra Perform Major Public Relations For Bitcoin (#GotBitcoin?)

Judge Says Buying Bitcoin Via Credit Card Not Necessarily A Cash Advance (#GotBitcoin?)

Poll: If You’re A Stockowner Or Crypto-Currency Holder. What Will You Do When The Recession Comes?

1 In 5 Crypto Holders Are Women, New Report Reveals (#GotBitcoin?)

Beating Bakkt, Ledgerx Is First To Launch ‘Physical’ Bitcoin Futures In Us (#GotBitcoin?)

Facebook Warns Investors That Libra Stablecoin May Never Launch (#GotBitcoin?)

Government Money Printing Is ‘Rocket Fuel’ For Bitcoin (#GotBitcoin?)

Bitcoin-Friendly Square Cash App Stock Price Up 56% In 2019 (#GotBitcoin?)

Safeway Shoppers Can Now Get Bitcoin Back As Change At 894 US Stores (#GotBitcoin?)

TD Ameritrade CEO: There’s ‘Heightened Interest Again’ With Bitcoin (#GotBitcoin?)

Venezuela Sets New Bitcoin Volume Record Thanks To 10,000,000% Inflation (#GotBitcoin?)

Newegg Adds Bitcoin Payment Option To 73 More Countries (#GotBitcoin?)

China’s Schizophrenic Relationship With Bitcoin (#GotBitcoin?)

More Companies Build Products Around Crypto Hardware Wallets (#GotBitcoin?)

Bakkt Is Scheduled To Start Testing Its Bitcoin Futures Contracts Today (#GotBitcoin?)

Bitcoin Network Now 8 Times More Powerful Than It Was At $20K Price (#GotBitcoin?)

Crypto Exchange BitMEX Under Investigation By CFTC: Bloomberg (#GotBitcoin?)

“Bitcoin An ‘Unstoppable Force,” Says US Congressman At Crypto Hearing (#GotBitcoin?)

Bitcoin Network Is Moving $3 Billion Daily, Up 210% Since April (#GotBitcoin?)

Cryptocurrency Startups Get Partial Green Light From Washington

Fundstrat’s Tom Lee: Bitcoin Pullback Is Healthy, Fewer Searches Аre Good (#GotBitcoin?)

Bitcoin Lightning Nodes Are Snatching Funds From Bad Actors (#GotBitcoin?)

The Provident Bank Now Offers Deposit Services For Crypto-Related Entities (#GotBitcoin?)

Bitcoin Could Help Stop News Censorship From Space (#GotBitcoin?)

US Sanctions On Iran Crypto Mining — Inevitable Or Impossible? (#GotBitcoin?)

US Lawmaker Reintroduces ‘Safe Harbor’ Crypto Tax Bill In Congress (#GotBitcoin?)

EU Central Bank Won’t Add Bitcoin To Reserves — Says It’s Not A Currency (#GotBitcoin?)

The Miami Dolphins Now Accept Bitcoin And Litecoin Crypt-Currency Payments (#GotBitcoin?)

Trump Bashes Bitcoin And Alt-Right Is Mad As Hell (#GotBitcoin?)

Goldman Sachs Ramps Up Development Of New Secret Crypto Project (#GotBitcoin?)

Blockchain And AI Bond, Explained (#GotBitcoin?)

Grayscale Bitcoin Trust Outperformed Indexes In First Half Of 2019 (#GotBitcoin?)

XRP Is The Worst Performing Major Crypto Of 2019 (GotBitcoin?)

Bitcoin Back Near $12K As BTC Shorters Lose $44 Million In One Morning (#GotBitcoin?)

As Deutsche Bank Axes 18K Jobs, Bitcoin Offers A ‘Plan ฿”: VanEck Exec (#GotBitcoin?)

Argentina Drives Global LocalBitcoins Volume To Highest Since November (#GotBitcoin?)

‘I Would Buy’ Bitcoin If Growth Continues — Investment Legend Mobius (#GotBitcoin?)

Lawmakers Push For New Bitcoin Rules (#GotBitcoin?)

Facebook’s Libra Is Bad For African Americans (#GotBitcoin?)

Crypto Firm Charity Announces Alliance To Support Feminine Health (#GotBitcoin?)

Canadian Startup Wants To Upgrade Millions Of ATMs To Sell Bitcoin (#GotBitcoin?)

Trump Says US ‘Should Match’ China’s Money Printing Game (#GotBitcoin?)

Casa Launches Lightning Node Mobile App For Bitcoin Newbies (#GotBitcoin?)

Bitcoin Rally Fuels Market In Crypto Derivatives (#GotBitcoin?)

World’s First Zero-Fiat ‘Bitcoin Bond’ Now Available On Bloomberg Terminal (#GotBitcoin?)

Buying Bitcoin Has Been Profitable 98.2% Of The Days Since Creation (#GotBitcoin?)

Another Crypto Exchange Receives License For Crypto Futures

From ‘Ponzi’ To ‘We’re Working On It’ — BIS Chief Reverses Stance On Crypto (#GotBitcoin?)

These Are The Cities Googling ‘Bitcoin’ As Interest Hits 17-Month High (#GotBitcoin?)

Venezuelan Explains How Bitcoin Saves His Family (#GotBitcoin?)

Quantum Computing Vs. Blockchain: Impact On Cryptography

This Fund Is Riding Bitcoin To Top (#GotBitcoin?)

Bitcoin’s Surge Leaves Smaller Digital Currencies In The Dust (#GotBitcoin?)

Bitcoin Exchange Hits $1 Trillion In Trading Volume (#GotBitcoin?)

Bitcoin Breaks $200 Billion Market Cap For The First Time In 17 Months (#GotBitcoin?)

You Can Now Make State Tax Payments In Bitcoin (#GotBitcoin?)

Religious Organizations Make Ideal Places To Mine Bitcoin (#GotBitcoin?)

Goldman Sacs And JP Morgan Chase Finally Concede To Crypto-Currencies (#GotBitcoin?)

Bitcoin Heading For Fifth Month Of Gains Despite Price Correction (#GotBitcoin?)

Breez Reveals Lightning-Powered Bitcoin Payments App For IPhone (#GotBitcoin?)

Big Four Auditing Firm PwC Releases Cryptocurrency Auditing Software (#GotBitcoin?)

Amazon-Owned Twitch Quietly Brings Back Bitcoin Payments (#GotBitcoin?)

JPMorgan Will Pilot ‘JPM Coin’ Stablecoin By End Of 2019: Report (#GotBitcoin?)

Is There A Big Short In Bitcoin? (#GotBitcoin?)

Coinbase Hit With Outage As Bitcoin Price Drops $1.8K In 15 Minutes

Samourai Wallet Releases Privacy-Enhancing CoinJoin Feature (#GotBitcoin?)

There Are Now More Than 5,000 Bitcoin ATMs Around The World (#GotBitcoin?)

You Can Now Get Bitcoin Rewards When Booking At Hotels.Com (#GotBitcoin?)

North America’s Largest Solar Bitcoin Mining Farm Coming To California (#GotBitcoin?)

Bitcoin On Track For Best Second Quarter Price Gain On Record (#GotBitcoin?)

Bitcoin Hash Rate Climbs To New Record High Boosting Network Security (#GotBitcoin?)

Bitcoin Exceeds 1Million Active Addresses While Coinbase Custodies $1.3B In Assets

Why Bitcoin’s Price Suddenly Surged Back $5K (#GotBitcoin?)

Zebpay Becomes First Exchange To Add Lightning Payments For All Users (#GotBitcoin?)

Coinbase’s New Customer Incentive: Interest Payments, With A Crypto Twist (#GotBitcoin?)

The Best Bitcoin Debit (Cashback) Cards Of 2019 (#GotBitcoin?)

Real Estate Brokerages Now Accepting Bitcoin (#GotBitcoin?)

Ernst & Young Introduces Tax Tool For Reporting Cryptocurrencies (#GotBitcoin?)

Recession Is Looming, or Not. Here’s How To Know (#GotBitcoin?)

How Will Bitcoin Behave During A Recession? (#GotBitcoin?)

Many U.S. Financial Officers Think a Recession Will Hit Next Year (#GotBitcoin?)

Definite Signs of An Imminent Recession (#GotBitcoin?)

What A Recession Could Mean for Women’s Unemployment (#GotBitcoin?)

Investors Run Out of Options As Bitcoin, Stocks, Bonds, Oil Cave To Recession Fears (#GotBitcoin?)

Goldman Is Looking To Reduce “Marcus” Lending Goal On Credit (Recession) Caution (#GotBitcoin?)

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