Numerous Times That US 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 Regulators Stepped Into Crypto
As digital assets made strides toward mainstream status in 2020, the guardians of the incumbent financial system have been working hard to minimize disruption caused by their integration. In the U.S., regulatory and law enforcement interventions throughout the year have left some projects out of business, empowered traditional players to take a closer look at crypto, and sent some unequivocal messages to cryptocurrency service providers globally.
SEC vs. Telegram
While the Securities and Exchange Commission first squared off with Telegram over its token sale in October 2019, it wasn’t until the summer of 2020 that the landmark case was settled. The Telegram Open Network was initially set to draw hundreds of millions of Telegram’s messenger users into a global blockhain-based financial ecosystem.
Throughout 2018, TON raised some $1.7 billion by selling contracts associated with Gram, the system’s native token, to qualified investors. Mindful of the potential collision with the U.S securities regulator, Telegram bosses followed a framework known as the Simple Agreement for Future Tokens (SAFT). The first stage of the process entailed the sale of contractual rights to buy tokens if and when the network goes live.
While those legal rights are sold as securities — in this case, under exemption Reg. D — the resultant tokens are, theoretically, not.
In the case of Telegram, the SEC disagreed. The commission’s response was to initiate an emergency action against Telegram and the Telegram Open Network in federal court. The watchdog argued that the two-stage token distribution plan still constituted the sale of unregistered securities, a position that the court ultimately upheld.
The resulting settlement included an $18.5-million penalty, as well as an obligation to return more than $1.2 billion to investors. TON never ended up going live, while its struggle with the SEC went down is history as maybe the final act of the ICO era.
OCC Crypto Custody Authorization
The Office of the Comptroller of the Currency is an independent bureau within the United States Department of the Treasury. The OCC’s job is to charter and supervise national banks and savings associations. U.S. financial institutions that seek to operate nationwide must undergo an extensive review process with the OCC.
On Jul. 22, 2020, the OCC published an interpretive letter authorizing federally chartered banks to provide cryptocurrency custody services. The agency has never prohibited organizations operating within its purview to hold digital assets on behalf of their clients, but the sheer lack of guidance and legal clarity held back the expansion of many credit organizations’ services into the digital asset space.
To clients interested in their banks providing custody services, those banks could say ‘it’s just too risky right now.’
The letter equated encryption key escrow service with physical safekeeping of assets.
The regulator’s forward-thinking approach to digital currencies could be related to the fact that Brian P. Brooks, Acting Comptroller of the Currency, spent two years as the chief legal officer of Coinbase prior to the present appointment.
DoJ’s Billion-Dollar BTC Seizure
Armed with a new set of guidelines coming from the office of the Attorney General, the U.S. Department of Justice spent much of the fall ramping up enforcement action against crypto-related players. The process culminated in a complaint of forfeiture against a billion dollars worth of Bitcoin and BTC forks in early November.
he funds were believed to have been in possession of an unnamed hacker who had previously stolen them from now-defunct online black market Silk Road. In tracking the record-breaking pot of digital wealth, government investigators relied heavily on blockchain analytics firm Chainalysis’ assistance.
As the price of Bitcoin is soaring, in 2021 law enforcement will likely be motivated to invest even more energy and resources in pursuing crypto stolen in previous high-profile heists. Blockchain intelligence firms will surely be there to help.
DoJ & CFTC vs. BitMEX
The fate of crypto derivatives platform BitMEX illustrates what can happen to those who wear out the patience of several U.S. regulators. Incorporated in the Seychelles, BitMEX has long been under suspicion of serving U.S.-based customers, rendering the exchange subject to U.S. anti-money laundering and derivatives trading regulations.
The two-pronged payoff came in early October 2020, when the DoJ brought criminal charges against the platform’s founders for “willfully failing to establish, implement, and maintain an adequate anti-money laundering (“AML”) program,” while the Commodity Futures Trading Commission filed a civil case, charging the firm with facilitating unregistered trading for United States residents. BitMEX was forced to implement emergency changes to its c-suite and bring in a chief compliance officer.
Perhaps the key takeaway from this story was aptly articulated by the SEC Commissioner Hester Pierce, who called the BitMEX case a clear message to the global crypto industry. She said “when there are U.S. users of a product or a service, there’s going to be enforcement of U.S. laws.”
FinCEN v. Self-Hosted Wallets
A week before Christmas, the Treasury’s Financial Crimes Enforcement Network (FinCEN) released a proposal for a long-dreaded regulation designed to increase the transparency of transactions in which digital funds travel from centralized exchanges to private wallets.
If adopted unaltered, the rule will require exchanges to collect personal information about the wallet’s owner from the sender, if the amount transferred exceeds $10,000 in one day, or $3000 in a single transaction.
In addition to promising a lot of extra work for crypto exchanges, the proposed rule can deal yet another blow to the very concept of private, peer-to-peer cryptocurrency transactions. However, some observers argued that it would be enough for those wishing to get back to the territory of pseudonymous transactions to simply transfer the holdings from the wallet on record with FinCEN to a new one.
SEC vs. XRP
Unlike the Telegram Open Network, which the Securities and Exchange Commission shot down before it could ever take off, Ripple’s XRP token has been traded for almost 7 years and on the day the SEC knocked on the door, was ranked #3 cryptocurrency by market capitalization.
While the constant #1 and #2 of the market cap ranking, Bitcoin and Ether, were consistently absolved in the Commission representatives’ statements on the grounds of these assets’ decentralized nature, there has always been some suspense around the question of whether XRP is a currency or security. A considerable portion of the XRP supply is consolidated at the hands of a single firm, Ripple Labs.
In late December 2020, the SEC struck with a lawsuit claiming that XRP is a security and that the token’s distribution amounts to offering investment contracts. The news sent XRP price into a tailspin and prompted a chain of delistings from major exchanges. Although it will take months before the case even reaches trial, it is clear that the SEC’s move will profoundly shift the balance of power in the crypto space.
Treasury vs. BitGo
In the final days of 2020, another arm of the Treasury — the Office of Foreign Asset Controls — reminded crypto businesses with ties to the U.S. about one more source of regulatory scrutiny: compliance with various sanctions programs. The crypto custodian and the watchdog reached a $98,000 settlement over BitGo’s 183 apparent violations of the Treasury’s sanctions between 2015 and 2019.
The firm’s transgression entailed failing to block users residing in sanctioned jurisdictions such as Crimea, Cuba, Iran, Sudan and Syria from using BitGo online wallets.
Former US Office Of The Comptroller Of The Currency Official Says Crypto Has Backing But Dollar Doesn’t
Former OCC acting comptroller Brian Brooks claimed that cryptocurrencies like Bitcoin “actually are backed by something.”
Brian Brooks, former acting comptroller of the currency of the United States Office of the Comptroller of the Currency, has claimed that cryptocurrencies like Bitcoin (BTC) have some backing, while the U.S. dollar may not have any.
Brooks gave his remarks in a CNBC Squawk Box interview with Joseph Kernen to unpack recent Bitcoin-related remarks by the U.S. Federal Reserve chair Jerome Powell. Earlier this week, Powell argued that cryptos like Bitcoin are “essentially a substitute for gold” but at the same time they are “not backed by anything.”
CNBC host Kernen pointed out that gold has historically been seen as a store of value, expressing confusion over Powell’s comments, stating. “He just said it’s like gold but not a store of value. Does he not think that gold is a store of value?”
In response, Brooks said that there are many reasons why people have flocked to Bitcoin over the past year, including the Fed dramatically increasing the dollar supply. “So when you do that, it means that the dollar is at least a 40% less good store of value than it was a year ago. And that is one of the reasons people opt to Bitcoin,” he stated.
In reference to the United States abandoning the gold standard under President Richard Nixon in 1971, Brooks said:
“The point I really wanna make is the dollar may not actually be backed by anything […] But cryptocurrencies actually are backed by something. They’re backed by underlying networks, and what you’re buying when you buy a crypto token — whatever it is Bitcoin or anything else — you’re buying a piece of a financial network built to transact all kinds of stuff.”
Brooks stated that the increasing number of network applications over the past few years is the main reason that the crypto industry is worth almost a $2 trillion today. “I believe in the wisdom of crowds. I think that crowds are telling you that these networks are where finances are going in the future. I wanna be part of that,” he concluded.
U.S. authorities have been actively investigating the concept of a digital dollar. On Monday, Powell said that the Fed would not proceed with the digital dollar without support from Congress.
House Passes Digital Asset Innovation Act To Clarify Crypto Regulations
U.S. financial regulators will now work together to create modalities for clear-cut crypto regulations in America.
The United States House of Representatives on Tuesday passed H.R. 1602 — the Eliminate Barriers to Innovation Act — introduced by Rep. Patrick McHenry (R-NC).
H.R. 1602 was among six bipartisan financial services-related bills passed by the House on Tuesday, with the McHenry-sponsored legislation focusing on regulatory clarity for cryptocurrencies.
Introduced back in March, the bill seeks to clarify the roles of agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission in the policing of cryptocurrencies in the United States.
The bill also seeks to answer the ongoing debate of whether crypto tokens are securities or commodities.
Addressing the floor of the House during the passage of the bill, McHenry remarked:
“[This bill] requires the Securities and Exchange Commission and the Commodity Futures Trading Commission to establish a working group focused on digital assets. This is the first step in opening up the dialogue between our regulators and market participants and move to needed clarity.”
Learn more: https://t.co/jYrqQbSxXf
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— Financial Services GOP (@FinancialCmte) April 20, 2021
Under the terms of the bill, Congress would have 90 days to establish the working group among participants from the SEC, CFTC and the private sector.
The private-sector participants would draw from fintech and financial services companies as well as small- and medium-scale enterprises and academia.
Once constituted, the working group would have a year to issue a report analyzing the current crypto regulatory climate. The panel’s work would also focus on matters like crypto custody, cybersecurity, private key management and investor protection concerns.
The patchwork nature of crypto regulations in the U.S. continues to be a source of some frustration among industry stakeholders in the country. Some industry insiders have argued that the U.S. is at risk of losing ground in the emerging digital economy due to the lack of regulatory clarity for digital assets.
Earlier in April, Goldman Sachs CEO David Solomon predicted a big evolution for crypto regulations in the United States.
Congress Takes One Step Closer To Regulatory Clarity With H.R. 1602
A bipartisan bill addressing cryptocurrencies made it through the House of Representatives. Next up: the Senate.
The House passed a bill geared toward ultimately clarifying digital asset regulation in the U.S. If it becomes law, the industry might finally have the regulatory clarity it has been seeking.
The U.S. House of Representatives passed H.R. 1602, the “Eliminate Barriers to Innovation Act of 2021,” last week, sending it to the Senate, which referred it to the Senate Banking Committee. If passed and signed into law, the bipartisan bill would commission a working group to evaluate how the U.S. currently treats digital assets.
Why it matters
This might be the first major crypto bill to get anywhere in Congress. What’s more, it’s one that, if passed, would have a direct impact on how the U.S. treats digital assets. This could finally provide companies in this industry with some much-requested regulatory clarity. The fact the bill has support from both parties is another mark in its favor. Of course, if regulatory agencies don’t act until this bill is implemented, it’ll be quite some time before any actual clarity is adopted.
Breaking It Down
The entire House of Representatives passed the “Eliminate Barriers to Innovation Act,” introduced by Reps. Patrick McHenry (R-N.C.) and Stephen Lynch (D-Mass.) in March, making it the first major crypto-specific legislation to get through one of the bodies of Congress.
A number of other bills have also been introduced to define how cryptocurrencies can or should be treated under U.S. law, but few have made any progress.
“It’s the first bill to address regulatory clarity for digital assets and digital asset marketplaces to pass the house, and in a bipartisan fashion no less,” said Amy Davine Kim, chief policy officer at the Chamber of Digital Commerce.
Representatives for McHenry and Lynch did not respond to requests for comment.
According to the terms of the bill, a working group would be established with representatives from the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), financial technology firms, financial firms regulated by the SEC or CFTC, academic institutions or advocates looking at digital assets, small businesses using financial technology, investor protection groups and entities supporting historically underserved businesses.
The group would have one year to evaluate the current legal and regulatory landscape for digital assets, how this landscape impacts crypto markets and how other countries approach the industry.
More important, the group would be asked to draft recommendations for improving the regulatory landscape (and, in turn, improving the markets), as well as best practices to minimize fraud and ensure investors are protected.
The bill asks that the recommendations be limited to the powers the SEC and CFTC already hold.
“It brings a number of stakeholders to the table, so it’s not just the SEC, it’s not just the CFTC, it’s also businesses and thought leaders who actually have expertise in the digital asset space,” Kim said.
Creating a working group with this many stakeholders also brings sunlight to the process of drafting or updating the regulatory framework around digital assets, she noted.
The next step is bringing the bill before the Senate. Right now the Senate Committee on Banking, Housing and Urban Affairs, helmed by Senators Sherrod Brown (D-Ohio) and Pat Toomey (R-Penn.), is looking at the bill.
Kim said the Digital Chamber has already been in touch with some Senators to move the bill forward.
No sponsors have been named yet, according to a search of public records.
A number of other actions last week might further give heft to the idea of regulatory clarity coming to the U.S.
The House of Representatives Committee on Financial Services also renewed the Fintech Task Force last week, under the leadership of Reps. Lynch and Tom Emmer (R-Minn.), both of whom are returning to their roles.
“I’m hopeful that the work of this task force will continue to lay the foundation for a better understanding of these financial technologies, and today’s release of the fintech report is yet another step towards fostering financial innovation and keeping America competitive on the global stage,” Emmer said in a statement.
Global Banking Regulator Plans To Hold Consultation On Crypto Exposure
The group has previously warned of “financial stability concerns” and risks faced by banks when it comes to cryptocurrencies.
The Basel Committee on Banking Supervision has said it will be publishing a consultation paper aimed at banks reducing their risk of exposure to crypto.
According to the Switzerland-based Bank of International Settlements, or BIS, the Basel Committee will publish the paper on crypto exposure this week following its decision to hold a public consultation on the matter. The announcement came during a Friday meeting, during which the committee also discussed the impact of the current pandemic on the banking system as well as any proposed policy initiatives:
“While banks’ exposures to cryptoassets are currently limited, the continued growth and innovation in cryptoassets and related services, coupled with the heightened interest of some banks, could increase global financial stability concerns and risks to the banking system in the absence of a specified prudential treatment.”
The BIS added that though many authorities seek the approval of the Basel Committee, the regulator relies on its members to enforce proposed actions. In other words, the committee’s decisions do not carry the force of law. Banking regulators from countries including Japan, the United States and many nations in Europe are members of the group.
Calling for a “prudential treatment” of crypto has been a common theme for the committee. In 2019, the regulator said that cryptocurrencies were “unsafe to rely on” as a medium of exchange or store of value.
Regulator Interest Is Good For The Crypto Ecosystem, Says BlockFi CEO
Regulatory clarity enables crypto companies to continue to innovate, Zac Prince says.
BlockFi CEO Zac Prince agrees with United States Senator Elizabeth Warren that there is a lot of noise in the crypto industry. Still, he expects that the clarity that comes with regulations will positively impact the ecosystem.
Describing regulators’ interest in crypto as a natural evolution of the technology, Prince said that discussions like Wednesday’s Senate Banking Committee hearings are very positive trends overall for the crypto sector.
It’s easy to miss the forest for al the trees, he said, highlighting that crypto is an asset class that has generated substantial wealth for millions of people. “It’s been the best performing asset class in seven out of the last ten years,” he said.
The crypto industry is creating lots of new jobs across the board, Prince noted, stating, “This is something that we want to continue to happen in America.”
Asked about his opinion on the impending regulations on cryptocurrencies, he said that he expects the rules to be favorable for the business:
“Regulatory clarity enables companies like BlockFi to continue innovating. It enables consumers and investors to participate in this sector with the utmost confidence.”
This week, the Senate Banking Committee discussed a U.S. government-backed central bank digital currency in a session where Senator Warren took a generally critical stance against crypto.
Calling crypto a “fourth-rate alternative to real currency” and a “lousy investment,” she then went on to call Dogecoin (DOGE) a “bogus” currency. Warren said that the volatility of cryptocurrencies makes them unsuitable as a medium of exchange.
Republican Senator Asks FinCEN To Reconsider Controversial Crypto Rule
The FinCEN rule, proposed under former President Donald Trump, needs to be revisited, Sen. Pat Toomey said Thursday.
Proposed U.S. regulation around cryptocurrencies might be counterproductive, the top-ranking Republican on the Senate Banking Committee said Thursday.
A proposed Financial Crimes Enforcement Network (FinCEN) counterparty rule would impose a heavy burden on cryptocurrency firms but may not actually combat illicit activity, Sen. Pat Toomey (R-Pa.) wrote in a letter to Treasury Secretary Janet Yellen.
He also described draft Financial Action Task Force (FATF) guidance as “concerning.”
“Cryptocurrencies stand to dramatically improve consumers’ privacy, access to financial services, and power to make decisions for themselves,” the letter said. “Some have argued that cryptocurrency is a technology that could be as revolutionary as the internet.”
The statement comes a day after Sen. Elizabeth Warren (D-Mass.) railed against bitcoin as a potential tool for criminals that also carries environmental and consumer-protection issues.
The controversial FinCEN rule was proposed by Yellen’s predecessor, former Treasury Secretary Steven Mnuchin, in the waning days of the Donald Trump presidency. Under its provisions, any crypto exchanges or financial institutions would be required to keep name and physical address information for transactions above $3,000, and file reports for transactions above $10,000.
Opponents to the rule say this could impact decentralized finance (DeFi) products, as many smart contracts that store funds do not require names or addresses. DeFi aside, simply maintaining excess records beyond typical know-your-customer (KYC) requirements may prove a burden to smaller exchanges.
A public comment period was extended immediately before Trump left office, and again after current President Joe Biden took over, but the actual proposal is still pending.
“While I recognize that FinCEN and FATF’s proposals are seeking to address the misuse of cryptocurrencies for illicit activity, if adopted, they would have a detrimental impact on financial technology (‘fintech’), the fundamental privacy of Americans, and efforts to combat illicit activity,” Toomey wrote. “I urge you to make significant revisions to them.”
Malicious actors may find it easier to act outside the regulated financial sector should these rules be implemented, Toomey argued.
FATF’s proposed guidance, which would also impose reporting requirements on DeFi, could likewise harm the sector by imposing “onerous recordkeeping requirements” that don’t apply to the U.S. dollar, the senator wrote.
Beyond the burdens on the crypto sector, Toomey suggested FinCEN look at modernizing currency reporting requirements placed around the dollar. The reporting requirements around U.S. dollar transactions are 40 years old and based on thresholds from the time they were implemented.
Law enforcement officials can more effectively track funds and analyze suspicious activity today, the lawmaker said.
Crypto is included in this bucket: Toomey pointed out that the FBI was recently able to recover much of the crypto paid by Colonial Pipeline in a ransomware attack.
“Instead of seeking to impose onerous regulatory requirements on cryptocurrencies, FinCEN should collaborate with stakeholders and analytics firms to understand what existing and emerging capabilities exist for identifying illicit cryptocurrency activity,” he wrote.
A FinCEN spokesperson did not immediately return a request for comment.
Bitcoin, Other Crypto Assets Targeted For Stiff Banking Regulation
Proposal would require banks dealing in some crypto assets to hold substantial buffers in case of losses.
The top global standard setter for banking regulation proposed a strict new rule that would require banks to essentially set aside a dollar in capital for every dollar of bitcoin they own.
The Basel Committee for Banking Supervision, a group of global central bankers and regulators, announced the plan Thursday in a public consultation about how it intends to treat cryptocurrency assets, which it said had prompted concerns about consumer protection, money laundering and terrorist financing.
“Certain cryptoassets have exhibited a high degree of volatility, and could present risks for banks as exposures increase,” the Basel, Switzerland-based committee said in a statement.
Interest in cryptocurrencies from mainstream financial firms and corporations has surged this year. Mastercard Inc. has said it plans to support some cryptocurrencies on its network and Bank of New York Mellon Corp. has invested in a cryptocurrency startup. Bitcoin rose 3.8% to $37,776.15 from its Wednesday 5 p.m. ET level.
The committee, which includes the Federal Reserve, European Central Bank and other major central banks, doesn’t enforce rules itself but sets minimum standards that regulators around the world agree upon and implement locally. The secretariat for the committee is based at the Bank for International Settlements, known as the central bank for central banks.
The committee said that banks should apply a 1,250% risk weight to bitcoin, which is “similar in effect to the deduction of the asset from capital.” If a bank holds $100 of bitcoin exposure, it would give rise to risk-weighted assets of $1,250, which when multiplied by the minimum capital requirement of 8% results in setting aside at least $100, the committee said in its statement.
The committee cited the lack of record of these assets and the very high volatility in proposing the rules. The capital requirements would put bitcoin and other coins on par with the riskiest assets that banks hold, such as ones for which the bank doesn’t have full information or has very large investments in companies.
As a comparison, according to Basel guidelines banks should apply a 400% risk weighting “for speculative unlisted equity.” Basel guidelines on residential mortgages, for instance, which are relatively safe and are backed by collateral, are as low as 20%.
Physical gold held by a bank has a 0% risk weight, meaning banks don’t need to hold capital against it.
The committee proposed less-stringent capital requirements for crypto assets that meet certain conditions, such as tokenized traditional assets and stablecoins. These type of crypto assets are often pegged to the value of a mainstream currency such as the U.S. dollar, and so are theoretically less volatile.
These are eligible for treatment under the existing Basel rules, while bitcoin would be subject to the “new conservative prudential treatment.”
Banks have until Sept. 10 to respond to the committee’s proposals. Central-bank digital currencies aren’t included in the consultation.
Bank Regulators Plot Toughest Capital Rule For Bitcoin
Banks must set aside enough capital to cover losses on any bitcoin holdings in full, global regulators proposed on Thursday, in a “conservative” step that could prevent widescale use of the cryptocurrency by big lenders.
The Basel Committee on Banking Supervision, made up of regulators from the world’s leading financial centres, proposed a twin approach to capital requirements for cryptoassets held by banks in its first bespoke rule for the nascent sector.
El Salvador has become the world’s first country to adopt bitcoin as legal tender even though central banks globally have repeatedly warned that investors in the cryptocurrency must be ready to lose all their money.
Major economies including China and the United States have signaled in recent weeks a tougher approach, while developing plans to develop their own central bank digital currencies.
The Swiss-based Basel committee said in a consultation paper that while bank exposures to cryptoassets are limited, their continued growth could increase risks to global financial stability from fraud, cyber attacks, money laundering and terrorist finance if capital requirements are not introduced.
Bitcoin and other cryptocurrencies are currently worth around $1.6 trillion globally, which is still tiny compared with bank holdings of loans, derivatives and other major assets.
Basel’s rules require banks to assign “risk weightings” to different types of assets on their books, with these totted up to determine overall capital requirements.
For cryptoassets, Basel is proposing two broad groups.
The first includes certain tokenized traditional assets and stablecoins which would come under existing rules and treated in the same way as bonds, loans, deposits, equities or commodities.
This means the weighting could range between 0% for a tokenized sovereign bond to 1,250% or full value of asset covered by capital.
The value of stablecoins and other group 1 crypto-assets are tied to a traditional asset, such as the dollar in the case of Facebook’s proposed Diem stablecoin.
Nevertheless, given cryptoassets are based on new and rapidly evolving technology like blockchain, this poses a potentially increased likelihood of operational risks which need an “add-on” capital charge for all types, Basel said.
The second group includes cryptocurrencies like bitcoin that would be subject to a new “conservative prudential treatment” with a risk-weighting of 1,250% because of their “unique risks”.
Bitcoin and other cryptocurrencies are not linked to any underlying asset.
Under Basel rules, a 1,250% risk weight translates into banks having to hold capital at least equal in value to their exposures to bitcoin or other group 2 cryptoassets.
“The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss,” it added.
Joseph Edwards, head of research at crypto brokerage Enigma Securities, said a global regulatory framework for cryptoassets is a positive given that banks in Europe are divided over involvement in the sector.
“If something is to be treated as a universal asset, it effectively needs to meet quorum with regards to how many parties will handle it. This should move the needle somewhat on that,” Edwards said.
Bitcoin gained after Basel’s announcement, trading up 1.5% at $37,962 at 1053 GMT.
Few other assets have such conservative treatment under Basel’s existing rules, and include investments in funds or securitizations where banks do not have sufficient information about their underlying exposures.
The value of bitcoin has swung wildly, hitting a record high of around $64,895 in mid-April, before slumping to around $36,834 on Thursday.
Banks’ appetite for cryptocurrencies varies, with HSBC saying it has no plans for a cryptocurrency trading desk because the digital coins are too volatile. Goldman Sachs restarted its crypto trading desk in March.
Basel said that given the rapidly evolving nature of cryptoassets, a further public consultation on capital requirements is likely before final rules are published.
Central bank digital currencies are not included in its proposals.
Bitcoin Plan Roils Crypto World Seeking Regulatory Clarity
International banking regulators’ proposal to classify Bitcoin as the riskiest of assets dragged cryptocurrencies further into the mainstream financial world.
It would also make it extremely costly for banks to hold digital tokens on their balance sheets, potentially delaying crypto’s wider adoption.
The Basel Committee on Banking Supervision proposed that a 1,250% risk weight be applied to a bank’s exposure to Bitcoin and certain other cryptocurrencies. Bitcoin jumped on the announcement, then erased the gains. It was trading around $36,200 as of 10:30 a.m. in Hong Kong on Friday.
“The only consistency has been the volatility — it’s been big spikes, tons of enthusiasm, followed by big selloffs,” Ross Mayfield, investment strategy analyst at Robert W. Baird & Co., said of Bitcoin’s moves. “If you believe in it you’re probably to stomach the volatility, but if you’re just in it because it seems like the hot way to get a quick buck, that volatility is going to be hard to deal with.”
The Ruling Sparked A Bevy Of Reactions Across Wall Street And Other Financial Centers Worldwide. Here’s A Sampling:
Luke Sully, CEO At Treasury Technology Specialist Ledgermatic:
“It’s a piece of news that both advocates and critics of Bitcoin will declare as a win. It demonstrates that Bitcoin is now a recognized asset class with risk management parameters for the banks, but these same parameters could be a potential deterrent given the onerous capital requirements that may make it an unpalatable business,” he said. “There are a few underlying assumptions in this risk weighting, the most obvious being that the price may go to zero and investors could lose their full allocation. The capital requirements don’t protect the banks clients from transaction, settlement and FX volatility either.”
David Tawil, President Of Prochain Capital, A Crypto Hedge Fund:
To me, this whole thing, along with the IMF, is just a way for those entities to get involved in the conversation. In terms of putting these requirements it’s going to go ahead, and at least for now, take traditional banks that are traditional regulated by these regulatory entities essentially out of this game and that will allow for more and more alternative players, who are not regulated, to go ahead and to pull further ahead,” he said.
“A regulator has very little upside and enormous downside — it’s like being a policeman. You want to protect people. So the furthest you can go in terms of lodging measures that stop activity, the better. And so, I think that they are for the first time inserting themselves. This certainly does not mean the end of cryptocurrency, the end of Bitcoin.”
Marc Chandler, Chief Market Strategist At Bannockburn Global Forex:
“I don’t think these things are good or bad themselves — it depends on what the objective is,” he said. “It’s not decentralized, it’s highly concentrated. Crypto was born in an age in which we had very extreme disparities of wealth and income — how can it not reflect that? The bulk of Bitcoin that’s owned by wallets have more than 100 Bitcoins, that’s more than $300,000 — how many Americans have $300,000 to put into crypto as opposed to retirement money?”
Matt Maley, Chief Market Strategist For Miller Tabak + Co.:
“Obviously tougher capital requirements cause banks to have more capital on hand — that can have an impact on their earnings. The committee is saying because of risks involved — cryptocurrencies are very volatile — you have to have more capital on hand to protect against declines,” he said. “If it’s going to cost banks more to hold these cryptocurrencies on their books, they’re theoretically going to be less likely to hold the same kind of size as they otherwise would.”
Wells Fargo Analyst Mike Mayo Said In A Bloomberg TV Interview With Matt Miller:
“It is getting hammered, but you know what? It’s getting treated like any other higher-risk asset like subprime loans, or CDOs, or derivatives, or structured products. And it is a new product. It’s untested through economic cycles. It’s untested through liquidity.”
Crypto’s Image Takes Beating In Washington, Dimming Fans’ Hopes
Just a few months ago, crypto enthusiasts were hopeful that Washington was warming to digital assets. But cyberattacks demanding Bitcoin ransoms, wild trading and rebukes from regulators have eroded their optimism.
The timing couldn’t be worse. Policy makers are poised to make a number of critical rulings on virtual tokens in the coming months — decisions that may reveal how deep of a hole the industry has to climb out of. Potentially under consideration are whether to approve a Bitcoin exchange-traded fund, allow crypto mutual funds and grant banking licenses to financial firms.
For advocates, the setbacks are fueling anxiety that some of their top priorities will be blocked by federal agencies, and that lawmakers will take take a tougher tack on oversight.
Evidence is growing that Capitol Hill is moving in that direction. Senator Mark Warner, a Virginia Democrat, said last month that cryptocurrencies are “crying out for some level of regulation.” Senator Elizabeth Warren reiterated that view Wednesday.
“Our regulators, and frankly our Congress, are an hour late and a dollar short,” the Massachusetts Democrat said in a Bloomberg TV interview. “We need to catch up with where these cryptocurrencies are going.”
The rough patch started in May when Securities and Exchange Commission Chairman Gary Gensler urged lawmakers to pass a law regulating crypto exchanges, arguing that the lack of oversight posed a serious threat to U.S. investors. The comments shocked Bitcoin proponents who predicted Gensler would be an ally because, unlike most government officials, he’s well versed in virtual coins.
Then came the Colonial Pipeline Co. hack, which triggered fuel shortages across the Eastern U.S. As in previous breaches, the culprits demanded ransom payments in Bitcoin — shining a spotlight on cryptocurrencies’ national security implications.
Long gas lines predictably attracted the attention of lawmakers and the scrutiny could make some on Wall Street nervous about further embracing assets that are routinely linked to illicit transactions.
The Justice Department recovered most of the tokens that Colonial paid out by tracking transactions on the public ledger for Bitcoin, showing how the technology can aid law enforcement agencies.
Still, Warren said a key feature of cryptocurrencies is that they allow people to secretly move money, making the coins a “haven for criminals.” A reminder of her point came Wednesday when JBS USA disclosed that it had paid $11 million to hackers who forced the world’s largest meat producer to shut down all its U.S. beef plants.
Another issue: Bitcoin has lost more than a third of its value since early May. A series of negative tweets from Elon Musk has contributed to the plunge, underscoring to crypto critics that token prices are too volatile and easily influenced by social media to be safe for unsophisticated investors. The frenzy tied to nonfungible tokens and dogecoin — a cryptocurrency created as a joke — has amplified those concerns.
“We can’t deny the potential impact that a negative media narrative might have on the regulatory and legislative conversations in D.C. in the short term,” said Kristin Smith, executive director of the Blockchain Association trade group.
Much of high finance’s focus is on Gensler, who previously taught courses on digital currencies at the Massachusetts Institute of Technology, because the SEC will determine whether a Bitcoin ETF can trade on U.S. exchanges.
The product is seen as a game-changer because it would let investors trade in-and-out of the world’s most popular cryptocurrency throughout the day without exposing them to the risks of having to store their tokens. Adding another layer of safety, consumers could buy ETFs from tightly policed brokers instead of purchasing Bitcoin from unregulated exchanges. And mutual funds and other institutional investors could pump a lot more money into crypto-related assets through ETFs.
An SEC spokeswoman declined to comment.
Under Gensler’s predecessor Jay Clayton, the SEC blocked multiple ETF applications, arguing that Bitcoin is too volatile and susceptible to manipulation. Gensler’s comments that crypto exchanges lack investor protections signals he may share some of those concerns, said Stephen Myrow, a former Treasury Department official during George W. Bush’s administration.
“It’s a big shift from four months ago when everyone said, ‘Gensler taught a crypto class at MIT so we’re going to get all our applications approved,”’ said Myrow, managing partner of Beacon Policy Advisors, a Washington-based firm that tracks regulatory and legislative proposals.
The SEC faces a June 17 deadline on one proposal to list an ETF from VanEck Associates Corp., one of several applications it’s considering. The agency has previously delayed making a decision on VanEck’s plan, and amid Washington’s heightened attention on crypto, it may choose to kick the can down the road again. The regulator may also put off decisions on the five other applications, but the agency needs to respond to each of them by July 16.
The SEC has also expressed worries about mutual funds investing in Bitcoin futures, something that is allowed under existing rules. The agency warned in a May 11 statement that it would be scrutinizing funds’ crypto holdings.
Biden Nominee For Treasury Dept Will Prioritize Crypto Regulation
Brian Nelson said he would push for implementation of the Anti-Money Laundering Act of 2020, “including new regulations around cryptocurrency.”
Brian Nelson, President Joe Biden’s nominee for under secretary of the Treasury Department’s division on terrorism and financial crimes, said he would prioritize implementing new regulations around cryptocurrency.
In a Tuesday hearing of the Senate Committee on Banking, Housing, and Urban Affairs, Nelson said he would be focusing on Anti-Money laundering (AML) regulations if he were to be confirmed for the position in the Treasury Department’s terrorism and financial intelligence arm, adding that cryptocurrency would be a particular priority.
Responding to a question from Nevada Sen. Catherine Cortez Masto regarding “the damage done by crypto heists,” Nelson said the Anti-Money Laundering Act of 2020 reflected expanded regulators’ ability to prevent cryptocurrencies from undermining existing laws. However, he implied that the creation of crypto was also part of “responsible innovation” in the United States.
“If I am confirmed, I will prioritize implementing the pieces of that legislation, including new regulations around cryptocurrency,” said Nelson. “I think that legislation provided new authorities — or clarified the law — that cryptocurrencies or currency in whatever form, be it virtual or fiat, is covered by the Bank Secrecy Act.”
The Financial Crimes Enforcement Network, or FinCEN — which operates within the Treasury Department — has previously used the Bank Secrecy Act to apply to cryptocurrencies in certain cases, though the legislation was passed back in 1970. Nelson said the BSA was a “powerful tool to allow FinCEN to ensure that no matter the form of the currency that they have the tools to regulate.”
“It reflected a balancing of regulating to prevent virtual currency and other types of new technology from undermining our anti-money laundering system while also being respectful of the fact we need to support responsible innovation and preserve that here in the United States.”
At the same Senate hearing, Elizabeth Rosenberg, Biden’s nominee for assistant secretary for terrorist financing at the Treasury Department, said she would look at making the current AML regulatory requirements for crypto “appropriate and consistent.” Janet Yellen, the current Treasury secretary, previously called cryptocurrency a “particular concern” for AML, adding that she believed it was “mainly for illicit financing.”
FinCEN proposed regulations earlier this year that would consider convertible digital currency or digital asset transactions subject to similar Anti-Money Laundering and Combating the Financing of Terrorism requirements. Last month, the Treasury Department also called for exchanges and custodians to report crypto transactions greater than $10,000 to the Internal Revenue Service.
Will Regulation Adapt To Crypto, Or Crypto To Regulation?
Blockchain technology promises to provide humanity and freedom with the rise of Web 3.0, a truly decentralized internet. Some even argue that the significant rise of the decentralized finance (DeFi) sector has become an important symptom of the conceptual shift from centralized services to decentralized ones, with Web 3.0 being its cornerstone.
Moreover, some even compare the invention of blockchain technology to the revolution brought by the advent of the internet itself. Symbolically, the original source code for the World Wide Web, developed by British computer scientist Tim Berners-Lee, is set to be auctioned off at Sotheby’s on June 23 as a nonfungible token, or NFT.
All three of them — NFTs, DeFi and Web 3.0 — are intertwined. But with that internet-blockchain comparison comes a crucial notion: Without proper regulation in the crypto and blockchain space, there will not be the same success in technological innovation as what we saw over the past 25 years, which changed the world as we know it.
It is now becoming obvious that a lack of regulation would harm crypto innovations. As the decentralized technology sector has grown significantly, the space has started to attract increasing attention from regulators globally, which are targeting stablecoins, DeFi, NFTs, crypto assets, smart contracts, unhosted wallets, central bank digital currencies and so on.
Meanwhile, some experts such as Caitlin Long, the founder and CEO of Avanti Financial, for example, see the started “crypto regulatory crackdown” as a positive trend, which will only benefit innovators. And others propose “a right way to regulate crypto.”
On the other hand, the current regulation is not suitable for crypto, and adjusting newly emerged decentralized technologies to it might ruin the core values of decentralization, bringing us back to where we started: with the centralized parties in control over the space. Is that the price we are willing to pay in order to become a regulated industry?
In order to find the right balance, the crypto space requires a much deeper and closer working relationship that would include both regulators and innovators.
Only in a dialogue between crypto businesses and regulators, authorities and industry representatives, will it be possible to find the right way to regulate the emerging tech industry — through smart regulation — and the space that is promising to change our lives — a promise that was fulfilled by proper regulations for the internet at the turn of the last century.
To find out what crypto and blockchain industry representatives think about this regulatory dilemma, Cointelegraph reached out to a number of them to ask for their opinions on the following question: Will crypto lose its core values on the way to being regulated, or will the regulation adapt to decentralized tech and its benefits for society?
2. Agata Ferreira, Law Professor And Expert At The EU Blockchain Observatory And Forum:
“Regulators are on a learning curve when it comes to blockchain in general. Legal and regulatory frameworks are developed incrementally and have been built to govern centralized and intermediated societal design within well-defined jurisdictional boundaries. Decentralized, disintermediated and borderless blockchain networks challenge regulators who have also been taken by surprise by some blockchain innovations — for example, stablecoins.
Regulatory awareness and approaches to blockchain innovation have evolved. Recently, there has been increasing regulatory activity and scrutiny, and we can expect that this trend will continue. Regulators still largely seek to apply existing regulatory principles to crypto, which is not always in sync with decentralized tech.
The hope is that with time, regulators realize the value and acknowledge the benefits of decentralization and adapt their regulatory approaches accordingly. As the technology matures, so will the regulatory approaches to it. Hopefully not through trial and error, but through carefully considered and informed regulatory steps.”
3. Alex Wilson, Co-Founder Of The Giving Block:
“Crypto isn’t going anywhere, and I’m confident it will overcome any regulatory hurdles along the way. I’m sure there will be ups and downs and huge variations among different countries. The countries that embrace crypto now will have a huge leg up on countries that try to stifle crypto because they will miss out on an entire generation of entrepreneurs building crypto companies.
Some countries that have done a relatively good job attracting crypto entrepreneurs include Singapore, Switzerland and Portugal, in part fueled by low or no taxes on crypto. I’m surprised that more countries haven’t tried harder to attract this next generation of entrepreneurs.”
4. Cristina Dolan, Founder And CEO of InsideChains, Vice-Chair Of MIT Enterprise Forum:
“The on-ramps and off-ramps for crypto are regulated by default because the exchanges that offer crypto-to-fiat conversions require Know Your Customer and Anti-Money Laundering processes. There is more visibility across crypto blockchain networks than there is across traditional siloed financial systems that prevent visibility throughout the entire transaction process.
Regulatory acceptance of crypto will enable faster adoption of these valuable and transparent technologies for next-generation financial systems. The level of creativity shown by fintech entrepreneurs is growing exponentially; the recent success of DeFi is just the beginning.
The central bank digital currencies (CDBCs) will offer programmable money. These CDBCs will enable visibility by governments and the ability to program fees and taxes into transactions. The launch of CDBCs will not eliminate nor compete with the entrepreneurial creativity that is fueling the growth of new crypto or DeFi products.
While interest rates remain artificially low, the attraction to crypto-enabled investments will continue to grow especially as regulations become less ambiguous.”
5. Denelle Dixon, CEO And Executive Director Of Stellar Development Foundation:
“Clearly, there is debate on what crypto’s core values really are. Early uses of cryptocurrency attracted people who wanted access to the financial system to be redistributed, out of the hands of institutions and into the hands of people. While being inspired by those initial principles, we see a path to working with existing financial systems.
In fact, linking to the world’s infrastructure is critical to have blockchain actually empower individuals with access. I see regulation as a necessary and iterative process. At Stellar, we have a crystal-clear vision of how our technology helps drive financial inclusion and positive economic growth in the developing world.
Plus, adapting to regulations in different countries and jurisdictions will continue to be necessary for any business that wants to operate globally. We see blockchain/crypto as an opportunity for more collaborative regulation — keeping its core values on the way to delivering a highly positive impact for society.”
6. Diana Barrero Zalles, Director Of ESG And Impact At Emergents @ Weild & Co.:
“Civilizations throughout history have been built on standards that everyone agreed to follow based on an underlying notion of morality and conscience, and justified by a universal recognition of the inherent dignity of each person. Promises should be kept and commitments should be met. Breaking promises is considered unjust while breaching contracts can cause harm to the other party.
Decentralization at the core of crypto presents a new and exciting form of governance that will back a new generation of community-driven innovations and business models. This does not mean decoupling crypto, just because it’s new, from the core principles of justice behind human civilization. Just like centralized decision-makers, communities can come to a consensus to arrive at the right outcome, often more accurately than individuals.
The ‘wisdom of the crowds’ concept suggests that collective intelligence can surpass that of individual experts when solving problems, making decisions, predicting answers and innovating. For a population that is at least 51% likely to be right, a collective estimate will be much closer to being right than any single person’s estimate (e.g., guessing the weight of a cow at a country fair).
Most communities would disapprove of the use of decentralized structures for harm, as shown by the response to The DAO hack, where the Ethereum hard fork was placed to return stolen funds to their rightful owners.
Regulation, which has traditionally upheld society’s basic principles, is now met with a wave of decentralized governance. Regulators around the world are adapting accordingly to enable these structures to develop within existing core principles. We can take a step back from the decentralization vs. centralization debate to evaluate how both can be balanced for the ultimate benefit of the community.”
7. Emin Gün Sirer, CEO Of Avalabs, Professor At Cornell University, Co-Director Of IC3:
“Crypto will always have a base that says traditional regulators have no say in operations on these networks. This ethic is absolutely vital for continuing to build and offer technologies that keep individuals around the world connected to a financial system. As we’ve seen in some authoritarian regimes, access to the legacy financial system can hinge on abandoning your beliefs and conforming to state-approved messaging.
That said, service providers engaging with fiat will always have to answer regulators’ calls. The likeliest outcome is that there is a split in crypto between regulator-approved services and those that make business trade-offs in a commitment to the ideals of permissionless systems.”
8. Marc Powers, Law Professor And Former SEC Attorney:
“Blockchain has the promise to provide the entire world with a technology that advances several worthy core values: financial independence and freedom, financial and political security for many sovereign populations, financial inclusion for billions of people, and allowing cost-effective and speedy peer-to-peer activities without intermediaries.
Whether sovereigns will allow crypto to survive with reasonable regulation which promotes those values is a good question. As a former U.S. Securities and Exchange Commission staffer, I am doubtful but hopeful.
First and foremost, blockchain is the antithesis of a central government or authority, and by implementation, the technology marginalizes our traditional financial intermediaries. Second, groupthink unwilling to consider and develop a more efficient financial system that adapts the technology must change.
I believe there is a chance for our customary laws on finance, banking and capital raising to do so. United States SEC Commissioner Hester Peirce and former acting comptroller of the currency of the U.S. Office of the Comptroller of the Currency Brian Brooks are on the right track here.
However, that is not what happened after the advancement of the last great technology, the internet and the dot-com bust through the passage of SOX, which required thousands of new regulations in the name of consumer and investor protection.
However, calls for regulation this time will be primarily for the benefit of the sovereigns and banks, not truly for consumers or investors. As a result, I see a continuation of a dual system, one crypto-owned, used and managed by the people, the other — the traditional financial system, which will eventually offer central bank digital currencies to its population.”
9. Mati Greenspan, Founder of Quantum Economics:
“Many crypto assets are exceptionally resistant to regulation by design. One of Bitcoin’s main reasons for being invented was to have a currency that is independent of governments and banks, so it makes sense that regulators are having such a tough time overseeing this particular market.
There’s no doubt that over time, they’ll manage to gentrify mainstream usage, but there will always be loopholes and workarounds available, especially for the more technically savvy.”
10. Thibault Verbiest, Chairman Of The IOUR Foundation, Expert At The World Bank and the EU Blockchain Observatory And Forum:
“As long as our societies live in a state system, with rule of law, regulators will always look for legally responsible entities in case of illegal or reprehensible acts, even if it means prosecuting the wrong person. We have seen this attitude since the beginning of the internet when access and hosting providers were prosecuted while they were not the actual perpetrators.
The United States, and then Europe, had to legislate some 20 years ago to protect these intermediaries. Today, this ‘neutrality’ of intermediaries is being challenged in the name of the fight against terrorism or the protection of intellectual property.
A similar phenomenon is at work in the blockchain ecosystem, with the first lawsuits against miners (and certainly tomorrow against block producers in the case of proof-of-stake protocols). DeFi is a real challenge for regulators.
In the current context, regulators naturally target stablecoins backed by national currencies (U.S. dollar, euro, etc.) because the link with a fiat currency necessarily subjects them to existing regulations (AML, KYC, etc.).
But if we talk about perfectly decentralized finance, in which there are no intermediaries, no stablecoins backed by a national currency, and where only non-professionals intervene anonymously, then this world is indeed a wild west for the regulator.
In the end, regulation will probably focus on digital identity, and the real democratic battle will be at this level. The temptation for regulators will be to impose a centralized identity, granted either by the state or by private entities that the state can requisition if necessary (this is already the case with Facebook, in particular). The challenge is, therefore, to promote decentralized identities, managed by users directly from their wallet.”
11. Tim Draper, Founder Of Draper Associates And Draper Fisher Jurvetson:
“Good question. I believe that Bitcoin, as a flag-waver for trust and freedom, will continue to be global. I think that the best governments in their current form are trying to adapt to this new technology, knowing that it will be good long-term for their citizens.
The bad governments that are trying to control their people with their own currencies will make this new, global, trusted and free world difficult and their people will suffer. Of course, the people can vote with their feet.”’
12. Wes Levitt, Head Of Strategy At Theta Labs Inc.:
“Crypto and regulations seem to be meeting in the middle, which is the best outcome to hope for if you believe in crypto values. There was never a plausible scenario where Bitcoin replaces global finance without any input or pushback from government regulators.
Censorship resistance will remain intact because it would be nearly impossible for governments to prevent peer-to-peer crypto transactions. What they can do is enforce surveillance and restrictions on the fiat-to-crypto gateways, which could shut some crypto users out of access to traditional finance.
With respect to CBDCs, they are largely contradictory to crypto’s original values. They are not decentralized, not censorship-resistant (quite the opposite, it will probably be trivial for a central bank to deny you usage of them) and they will be inflationary. I don’t see CBDCs replacing Bitcoin, Ether, etc., but they will coexist. But it is important to recognize that aside from both being digital currencies, CBDCs and Bitcoin have little in common and serve very different purposes.”
13. Yoni Assia, Founder And CEO of eToro:
“Breaking down barriers and increasing access to information, products and services will remain a core value for the crypto industry — this was the purpose it was developed for — and will enhance processes at every level across multiple sectors.
With CBDCs being a big topic for both the industry and policymakers, regulation of crypto in the financial sector is likely to set the scene for regulation of decentralized tech and blockchain more generally. EToro fully supports regulatory measures designed to protect and educate investors and end-users.
We hope that any guidelines put in place will balance the need to protect investors with a desire to support their participation in the crypto markets, and that increased regulation will help to facilitate greater use of a technology that can not only deliver real benefits to the financial services sector, but also facilitate greater financial inclusion globally.”
What Crypto Firms Can Expect From Friday’s FATF Plenary Meeting
Regulatory insiders say the sheer volume of crypto feedback means updated guidance from the FATF could be delayed.
There’s a lot at stake this week as crypto comes further within the creep of global regulations.
The Financial Action Task Force (FATF), an intergovernmental anti-money laundering (AML) body, wraps its second annual review of progress made by member countries to implement a cryptocurrency compliance framework.
It’s been over two years since the FATF recommended bringing cryptocurrency firms (virtual asset service providers, or VASPs, in FATF parlance) within its regulatory framework. This has created challenges for the industry and regulators alike, particularly around areas like the Travel Rule, where third-party VASPs must exchange personally identifiable information (PII) about customers along with transactions.
To further complicate matters, the FATF’s proposed regulations have been forced to expand in step with crypto innovation to accommodate rapidly evolving areas like decentralized finance (DeFi) and stablecoins.
Since the last plenary meeting in March 2021, when FATF issued draft guidance, there has been an overwhelming response from the industry. In short, many in the space are worried regulators will take too broad an approach, particularly when it comes to things like DeFi.
Indeed there has been such an enthusiastic response from the industry, that some are predicting the FATF will likely kick the can down the road to its next plenary meeting in four months’ time, regulatory insiders told CoinDesk.
Bipartisan Crypto Bills Pass US House of Representatives – Again
The Blockchain Innovation Act and parts of the Digital Taxonomy Act were included in the broader Consumer Safety Technology Act.
The U.S. House of Representatives passed two crypto bills on Tuesday evening.
The Consumer Safety Technology Act, sponsored by Rep. Jerry McNerny (D-Calif.), directs the Consumer Product Safety Commission to establish a pilot program to explore use cases for artificial intelligence in commerce.
The two blockchain bills – the Blockchain Innovation Act and parts of the Digital Taxonomy Act – direct the Secretary of Commerce and the Federal Trade Commission (FTC) to study and report on the use of blockchain technology and digital tokens.
The Consumer Safety Technology Act was approved in a previous session of Congress, passing the House in September 2020, but was never approved by the Senate and died at the close of the session.
By reintroducing the bill and passing it onto the Senate again, McNerny and his co-sponsors, including longtime blockchain advocate Rep. Darren Soto (D-Fla.), are giving the bill a second chance.
The blockchain bills are one of many in a series of attempts to provide regulatory clarity on digital asset ownership and management. Many in the crypto market are increasingly demanding regulation, claiming that the lack of a legal framework stifles innovation.
Previous attempts to provide regulatory clarity, including Rep. Warren Davidson’s (R-Ohio) Token Taxonomy Act, which was first introduced in 2018, have failed to gain any meaningful traction.
Supporters of blockchain regulation fear that a lack of governmental guidance puts the United States at risk of falling behind other nations, including China.
“Emerging technologies like artificial intelligence, blockchain technology and cryptocurrency are playing a growing importance in our daily lives and are going to be an economic driver for the 21st-century economy,” Soto said in a speech on Tuesday, adding:
“It’s essential that the United States continue to be a global leader in these emerging technologies to ensure that our democratic values remain at the forefront of this technological development.”
Soto said the Consumer Safety Technology Act is the first step toward the Congressional Blockchain Caucus’ long-term goal of creating a Blockchain Center of Excellence in the Department of Commerce.
Expect Even More Oversight Of Crypto From Regulators, Says eToro
Yoni Assia believes that unprecedented retail investor interest will push regulators to be more proactive about crypto regulation.
Crypto-friendly trading platform eToro is expecting regulators to ratchet up their oversight of the crypto industry, given the increasingly high levels of participation by retail traders and smaller investors. In comments for the Financial Times, eToro CEO Yoni Assia said:
“We are seeing a significant increase in the interest of retail investors and traders in the crypto market. As a part of that growth we should expect also regulators to carefully look at this growing business of retail investors in the crypto markets.”
At the start of this year, eToro had itself struggled to keep up with “unprecedented” demand from crypto traders, with over 380,000 new users opening accounts over the span of 11 days.
Assia’s comments to the United Kingdom’s leading financial newspaper also follow hot on the heels of an intervention by the country’s Financial Conduct Authority, which this week ordered leading crypto exchange Binance to cease all regulated activities in the United Kingdom.
While more regulation is a foregone conclusion, in Assia’s view, he also argued that “the most important thing for regulators is to understand crypto, and understand that it is here to stay.” The eToro CEO has a perspective that spans several different jurisdictions.
Based in Israel, almost 70% of eToro’s users are in Europe, and the company now has its sights on the United States, where it hopes to go public following a merger with a special purpose acquisition company.
Crypto literacy is not only key for regulators, Assia said, but traders themselves need to be sober about the risks they are courting in a fast-paced industry. He stated, “An asset that went up 100 per cent can very easily go down 50 per cent. There’s no doubt that if something went up 1,000 per cent it’s very volatile, and you should understand that as part of your portfolio allocation.”
Founded in 2007, eToro has supported Bitcoin (BTC) trading since 2013. Crypto assets reportedly accounted for 16% of its revenue in 2020, and the platform’s number of users was 20.6 million as of the first quarter of this year.
In that same quarter, the company saw new registrations hitting the 3-million mark — a major uptick, as during the course of 2020, eToro had onboarded roughly 5 million new users in total.
Assia has previously characterized 2020 as a “big year for stocks” but noted that 2021 has been “dominated by crypto headlines.” Already in late January, he noted that crypto trading volumes on eToro were up more than 25 times compared with the same period last year.
While Assia has attributed likely regulation to increased consumer demand, other industry experts have a different view. Speaking to Cointelegraph earlier this month, Marc Powers, a law professor and former attorney at the Securities and Exchange Commission, said:
“Regulation […] will be primarily for the benefit of the sovereigns and banks, not truly for consumers or investors. As a result, I see a continuation of a dual system, one crypto-owned, used and managed by the people, the other — the traditional financial system, which will eventually offer central bank digital currencies to its population.”
Bitcoin Leads Crypto Higher In Defiance Of Regulatory Crackdown
Bitcoin pushed higher as proponents took the U.K.’s crypto crackdown in stride after the digital token traded above a key technical level over the weekend.
The largest cryptocurrency advanced as much as 8%, and recently traded at around $34,580 in New York trading. The broader crypto market also climbed, with the total valuation up about 5% to $1.44 trillion, according to CoinGecko pricing.
In one of the most significant moves to date by a regulator amid a global crackdown, Binance Markets Ltd., an affiliate of top global crypto exchange Binance, was banned Sunday by the U.K. financial watchdog from doing any regulated business in the country. Huobi, one of the most popular cryptocurrency platforms in China, said Monday that users in the country are prohibited from trading derivatives.
Crypto bulls often interpret tough regulatory action as a sign that the market is maturing. They also appeared to take further encouragement from Bitcoin’s failure to breach the closely watched $30,000 support level over the weekend.
“We’re seeing the $30,000 level on Bitcoin being defended quite well with a number of tests at that level over the past month,” said Vijay Ayyar, head of Asia-Pacific at crypto exchange Luno Pte. “We saw a lot of downward pressure on prices being defended, so this looks quite bullish at this point.”
Bitcoin has lost about half its value in recent weeks amid concern on its environmental impact and as regulators globally — notably in China — crack down on the industry. The digital currency reached a record near $65,000 in mid-April.
For Luno’s Ayyar, it is too soon to give the all-clear.
“One more push down to $30,000 might not hold given the number of times we’ve tested it and there’s only so much liquidity there,” he said. “Post-$30,000 and we should probably see $24,000 to $25,000.”
Driving ‘Purists Beserk’: Co-Chair Of Blockchain Caucus Wants To ‘Reverse’ Crypto Transactions
Democratic Representative Bill Foster has called for legal power to identify wallet holders and reverse crypto transactions in instances of criminal behavior such as ransomware attacks.
Bill Foster, Democratic Representative and co-chair of the Congressional blockchain caucus, has called for a regulatory framework that would enable third parties to reverse fraudulent or criminal transactions.
Foster is a physicist and a Democratic Rep for Illinois. The blockchain caucus is co-chaired by Democratic Rep Darren Soto, and Republican Reps Tom Emmer and David Schweikert.
Speaking during an online event for news outlet Axios, Foster asserted that unless the Congress or the public can come up with a different solution to ransomware, U.S. regulators need to introduce a legal framework that can “unmask” crypto wallet holders’ identities and reverse crime-related transactions.
The Democrat described the legality of reversing transactions as one of “most fundamental decisions about crypto assets,” and notes that regulators need to be asking:
“Is there a court that you can go to unmask the participants, but also is there a trusted third party or court that you can go to, to reverse fraudulent or mistaken transactions?”
The 65-year-old notes that while his comments “will drive the crypto purists berserk” who value anonymity and uncensorable transactions as core features of crypto, those who have a large amount of their net worth held in digital assets are “going to want to have that security blanket of a trusted third party that can solve the problem.”
The news did of course drive crypto purists berserk, with a thread about Foster’s comments on subreddit “r/CryptoCurrency” sparking a negative reaction earlier today.
User “DepNeanderthal” commented that “anyone that trusts this guy’s ‘trusted third party’ is a sucker.
Government and trust are as close to each other as the North and South Pole.”
While user “Justin534” noted that it’s “literally not possible unless governments attack a network. Which they honestly could actually.”
Foster appears to only want the power to be used in exceptional cases. Speaking with Axios about China’s regulatory approach to cryptocurrency, which has been to essentially ban the entire sector, Foster notes that the U.S. needs to find a common ground and more balanced approach, in which anonymity is respected “99.9% of the time” under normal circumstances.
“But in those rare instances where something fraudulent, criminal or mistaken, as happened, that you have to be able to unmask and potentially reverse those transactions,” he reiterated.
The use of cryptocurrencies to facilitate criminal activity appears to be a key issue for Foster, and he highlighted in an April 5 media release that a lack of regulation is enabling illicit behavior:
“One of the border patrol agents told me that most of the payments made for human trafficking are now being made with Bitcoin, simply because it was not legally traceable.”
Elizabeth Warren Warns Crypto ‘Scams Continue To Surge’ On Exchanges, Calls For SEC Regulation
The missive is the latest from crypto-skeptical legislators and regulators.
Washington lawmakers and regulators continue to beat the drum for greater regulation of cryptocurrencies, with the latest call coming from Sen. Elizabeth Warren of Massachusetts, the powerful democrat on the U.S. Senate Banking Committee.
In a letter sent to Securities Exchange Commission Chairman Gary Gensler Wednesday, Warren wrote to request information on the regulators authority to regulate cryptocurrency exchanges. She asked whether the SEC “has the proper authority to close existing gaps in regulation that leave investors and consumers vulnerable to dangers in the this highly opaque market.”
Her letter follows comments made by Gensler in recent months expressing concern about the forums where Americans go to buy and sell their bitcoin, ether or other digital currencies. He told a House Appropriations subcommittee in May that there were “gaps” in the regulation of cryptocurrencies, arguing that crypto exchanges would be his first priority in addressing those deficiencies.
“We have the SEC trying to protect against fraud in manipulation [in traditional stock exchanges,]” Gensler said. “Not so in the crypto world, and so it’s trying to bring the similar protections to the exchanges where you trade crypto assets, as you might expect on the New York Stock Exchange or Nasdaq.”
In June, Commodity Futures Trading Commission chief, Dan Berkovitz, questioned whether peer-to-peer decentralized exchanges, also known as DeFi exchances, are legal under U.S. law. He said that users of DeFi exchanges are not offered the same fraud and manipulation protections provided by traditional financial institutions and don’t work to prevent fraud or money laundering.
“Not only do I think that unlicensed DeFi markets are a bad idea, I also don’t see how they are legal,” Berkovitz said. U.S. law “requires futures contracts to be traded on a designated contract market licensed and regulated by the CFTC.”
In her letter, Warren pointed out that as the the volume of digital assets traded on these forums has grown exponentially in recent years, complaints about losses due to bad actors have surged.
“The harms to consumers as a result of this under-regulated market are real and continue to proliferate in the absence of effective SEC regulations,” she wrote. “During the six-month period from October 2020 to March 2021, nearly 7,000 people reported losses [to the Federal Trade Commission] from cryptocurrency scams, resulting in a cumulative $80 million lost.”
Those figures, she added, represent an increase of 12 times the number of reports and 1,000% more in reported losses compared to the same period the year earlier.
Warren noted that “scams have surged on DeFi platforms in particular,” where “developers are often anonymous” and can more easily pull off frauds whereby they raise money selling a digital asset” before disappearing with investor funds.
The senator asked Chairman Gensler to report back on whether he believed that these exchanges are operating in a “fair, orderly and efficient’ manner — the standard that the SEC works to promote for all U.S. financial markets, and what help from Congress he needs to enforce that standard on all cryptocurrency markets. She also asked whether there needs to be greater international coordination over the regulation of crypto exchanges.
The letter, along with recent statements by other key lawmakers on financial oversight committees in both the House and Senate, appears to signal that Congress is intent on holding regulator’s feet to the fire when it comes crypto-exchange regulation.
Fed Flags Crypto Assets For First Time In Financial Risk Review
The Federal Reserve singled out a surge in crypto asset prices for the first time in its overall assessment of the stability of the financial system, saying the rise reflected increased risk-taking by investors.
The brief comment, contained in the Fed’s semi-annual Monetary Policy Report to Congress released on Friday, is the latest sign that policy makers are paying more attention to what used to be a tiny sliver of the financial system.
Fed Chair Jerome Powell met with the head of cryptocurrency exchange Coinbase Global Inc. on May 11 and crypto advocate Christopher Giancarlo a day later, according to the central banker’s monthly diary.
Powell’s in-person meeting with Coinbase Chief Executive Officer Brian Armstrong and former Speaker of the U.S. House of Representatives Paul Ryan lasted 30 minutes and took place during a week of intense volatility for crypto currencies including Bitcoin, which fell steeply on that day. Spokespeople for both the Fed and Coinbase declined to comment on what was discussed.
The price of Bitcoin is up some 250% from a year ago, although it is well down from its April high.
Powell has previously said that he wants the Fed to play “a leading role” in the development of international standards for digital currency. The central bank plans to issue a discussion paper this summer highlighting the risks and benefits of digital payments.
In the Monetary Policy Report, the Fed said that that some parts of the financial system had grown more vulnerable to potential instability since its last account to Congress in February, but that the core of system remained resilient.
It characterized equity and commercial real estate prices as high and said that spreads on corporate bonds and leverage loans remained low.
“The surge in the prices of a variety of crypto assets also reflects in part increased risk appetite,” it added.
The central bank also issued a warning about the general level of asset prices.
“Asset prices may be vulnerable to significant declines should investor risk appetite fall, interest rates rise unexpectedly, or the recovery stall,” the report said.
Between Binance and FATF, More Attention Turns To Crypto Compliance: BitGo’s Horowitz
Former Coinbase executive Jeff Horowitz surveys the world of crypto regulation.
Cryptocurrency regulation reads more like a film script than the traditionally dull and stodgy world of financial rulemaking.
Just look at the hot water Binance appears to be in now, with regulatory authorities from the U.K., Japan and Germany, to name a few, calling foul against the exchange.
More broadly, the Financial Action Task Force (FATF), a global anti-money laundering (AML) watchdog, is reviewing the crypto industry annually. But the sector is moving so fast that FATF guidance teams are left scratching their heads, wondering how to deal with things like decentralized finance (DeFi).
For now, the regulatory focus is mainly directed at crypto’s third-party intermediaries, the exchanges, trading desks and custodians. When it comes to this arena of virtual asset service providers (VASPs), Jeff Horowitz, chief compliance officer at BitGo, a digital assets custodian,, understands where regulatory tensions and fault lines lie. Prior to joining BitGo in October, Horowitz spent two years steering compliance efforts at Coinbase, the now-publicly listed crypto exchange.
Asked his opinion on Binance, Horowitz said Binance.US – the arm of the Binance business serving American customers and complying with U.S. regulations – made a “smart move” when it hired former U.S. banking supervisor Brian Brooks. (Brooks previously served as U.S. acting comptroller of the currency, and prior to that worked alongside Horowitz as Coinbase’s chief legal officer.)
“If there’s anybody who can balance being regulated and growing a business, I think Brian will be able to pull it off,” Horowitz said in an interview. “From what I know, Binance.US and Binance.com are two very separate companies. I think embracing regulation is the only path to go for the long run.”
Binance is said to be looking to hire an ex-regulator or government figure like Brooks for the U.K., where a satellite company owned by Binance attempted to become regulated, but was later slapped down by the Financial Conduct Authority (FCA). A Binance spokesperson described the situation as a “misunderstanding” with the FCA.
Coinbase, in the Form S-1 it filed when going public, made mention of Binance’s lack of regulatory compliance as potentially giving it an unfair competitive advantage.
“Coinbase and other entities long ago made a decision to play the long game and go the regulated route. And there is a cost to doing that,” Horowitz said, adding:
“I don’t think anyone wants to change direction there, but they do want this to be a level playing field. I think that is the only way that folks aren’t running to the path of least resistance or finding the one country where they’ll be able to do things that you can’t do in other spaces.”
Have Rules, Will Travel
Preventing regulatory arbitrage, when the rules are still only half-baked, is the challenge being addressed by the FATF, which has made the recommendation that firms like BitGo and Coinbase share customer identification data along with cryptocurrency transactions over a certain amount, known colloquially as the “travel rule.”
Aside from devising a technical travel rule system everyone is happy with, there’s obvious concern among large established businesses when it comes to sharing sensitive customer information with lesser known third parties. That has led to a piecemeal approach, where firms in more buttoned-up jurisdictions like the U.S., Switzerland and Singapore are rolling out products for registered crypto firms in those regions.
In terms of those sorts of products, Horowitz is proud to have been the initial driving force behind the U.S. Travel Rule Working Group (USTRWG), which he originated when he was at Coinbase.
“The reality is there are multiple solutions being built and at some point they’ll need to be interoperable. But we were feeling the regulatory pressure to start building,” he said.
The 30-plus member USTRWG includes a core membership composed of firms like Coinbase, BitGo, Gemini, Fidelity Digital Assets, Paxos and Kraken. No mean feat then to get these bare-knuckle crypto competitors round the table to collaborate.
“I come from traditional finance, where legal and compliance would collaborate and put competition aside for the right thing for the industry,” Horowitz said. “And we just partnered, and I’m pretty proud of that.”
Rep Tom Emmer Introduces Bill To Provide Certainty For Digital Assets
The Security Clarity Act seeks to lessen regulatory burdens for blockchain-based technology.
U.S. congressional representatives introduced a bipartisan bill on July 15 with the goal of providing a clear definition of assets, such as digital tokens and other emerging technologies, under current securities law.
Known as the Security Clarity Act, the bill was introduced by Rep Tom Emmer (R-MN), Rep Darren Soto (D-FL), and Rep Ro Khanna (D-CA). This legislation seeks to change the definition of a term that has been used for more than 75 years. The status of any asset sold as an “investment contract” would become an “investment contract asset.”
According to the release, this bill would provide a solution for those who have complied with current securities registration requirements or qualified for an exemption. After meeting these requirements, entrepreneurs would be able to distribute their assets without the fear of any additional regulatory burdens.
“There has been an unreasonable approach by regulators as to how federal securities laws should be applied to transactions involving the sale of blockchain-based tokens, and this lack of clarity is hurting American innovation. Between regulation by enforcement and the varying legal decisions regarding the classification of these assets, regulatory uncertainty has hindered the growth of blockchain technology, leaving many to take the technology overseas,”
The Securities Clarity Act is meant to be a technology-neutral bill, according to the representative. It would apply equally to all assets, tangible or digital, and states an investment contract asset, like a digital token, is separate and distinct from the offering it may have been a part of.
Congressman Soto Explained:
“As Congress works to protect those who invest in this technology, the Securities Clarity Act will add critical definition and jurisdiction to create certainty for a strong digital asset market in the United States. This is an important first-step in promoting innovation and maximizing the potential of virtual currencies for the U.S. economy, all while protecting customers and the financial well-being of investors,”
Emmer has stated his concern about regulation interfering with Americans benefiting from cryptocurrency before. At a hearing held in June by the US House committee on financial services, Emmer said:
“Over the last few years I’ve been fortunate to meet with many great crypto and blockchain innovators. A common refrain during our discussion is that they so badly want to develop their crypto and blockchain ideas right here in the United States. But they don’t because of continuing uncertainty with crypto regulation.”
The introduction of this bill comes one day after the Chairman of the Federal Reserve Jerome Powell spoke to the House of Representatives about the need for stricter regulation for stable coins.
SEC Chairman Says Cryptocurrency Falls Under Security-Based Swaps Rules
More rules are coming for the cryptocurrency space, according to SEC Chairman Gary Gensler.
The Securities and Exchange Commission, or SEC, may soon issue new rules for the regulation and registration of security-based swaps, including cryptocurrency.
In a speech to the American Bar Association Derivative and Futures Law Committee SEC Chairman Gary Gensler laid out the changes coming to security-based swaps over the next year. The changes are designed to increase transparency and reduce risk to the market.
The new requirements that will go into effect in November include new counterparty protections, requirements for capital and margin, internal risk management, supervision and chief compliance officers, trade acknowledgement and confirmation, and recordkeeping and reporting procedures. Starting next February, for instance, swap data repositories will be expected to disclose data about individual transactions to the public.
“Thus, I’ve asked staff to consider ways we can continue to increase transparency and reduce risk through our unused authorities, particularly with regard to security-based SEFs and position reporting.”
Toward the end of his speech Gensler said trade reporting rules will apply to cryptocurrencies if the products are security-based swaps:
“Make no mistake: It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms — whether in the decentralized or centralized finance space — are implicated by the securities laws and must work within our securities regime.”
Any offer or sale to retail participants must be registered under the Securities Act of 1933. Gensler said the SEC will use all of the tools they have to make sure investors are protected in these cases.
Regulations for cryptocurrencies have been a major talking point within a number of U.S. government agencies in recent months. The Chairman of the Federal Reserve took a hard line on the need for stricter regulations for stablecoins on July 14, going on to discuss the possibility of a US digital dollar before Congress last week.
A bill was also introduced into congress which is meant to provide greater legal definition to digital assets and reduce the fear of future regulations with regard to blockchain-based tokens. On Monday a meeting on regulations for stablecoins by the President’s Working Group on Financial Markets shared that they expect to release recommendations for such regulations in the coming months.
Sen. Warren Urges Treasury Secretary Yellen To Combat Rising Crypto Threats
Elizabeth Warren outlined her concerns about the cryptocurrency market in a letter addressed to Janet Yellen that was obtained by CNBC.
Senator Elizabeth Warren, a Democrat from Massachusetts, has called on United States Treasury Secretary Janet Yellen and other regulators to develop a “comprehensive and coordinated” framework for addressing risks in the cryptocurrency market.
In a letter addressed to Yellen, the Democratic senator said the Financial Stability Oversight Council, also known as FSOC, “must act quickly to use its statutory authority to address cryptocurrencies’ risks and regulate the market to ensure the safety and stability of consumers and our financial system.” She continued:
“As the demand for cryptocurrencies continues to grow and these assets become more embedded in our financial system, consumers, the environment, and our financial system are under growing threats.”
In Warren’s view, an underregulated cryptocurrency market poses a significant risk to hedge funds and banks. She also cited concerns about the use of cryptocurrency in cyberattacks and the threat posed by stablecoins.
Within the United States Senate, Warren has emerged as one of crypto’s biggest detractors. In June, she described digital assets like Dogecoin (DOGE) as a “fourth rate alternative to real currency” and urged the Senate Banking Committee to consider drafting more stringent regulations.
Calls to regulate cryptocurrencies have grown louder in recent months due to the apparent rise in crypto ransomware attacks and the alleged environmental impact of Bitcoin (BTC) mining. As Cointelegraph reported, the Securities and Exchange Commission has proposed working with Congress to table more comprehensive cryptocurrency regulation. Gary Gensler, the newly appointed chairman of the securities regulator, told a congressional subcommittee in March that his agency only spends $325 million annually on researching blockchain technology.
Despite her criticisms of crypto assets in general, Warren appears to be much more open to the idea of a central bank digital currency, or CBDC. The Federal Reserve is in the process of researching CBDC development, but has not made any definitive plans to move ahead. As far as major central banks go, the Fed is considered well behind the adoption curve with respect to CBDCs.
NYDFS Plans To Collect Diversity Data From Banking And Crypto Institutions
All authorized virtual currency service providers will be required to submit diversity data of their boards and management to the NYDFS.The New York State Department of Financial Services (NYDFS) is launching an initiative to promote diversity, equity and inclusion (DEI) in the banking and crypto industries.
According to an industry letter published by NYDFS Superintendent Linda Lacewell on Thursday, under the initiative the department plans to collect and publish data from New York’s regulated banking institutions, non-depository financial institutions and virtual currency service providers that reflects the diversity of their corporate boards and management.
The issue of diversity in the crypto industry made headlines last year against the backdrop of nationwide Black Lives Matter protests, when the CEO of the U.S.-based cryptocurrency exchange Coinbase, Brian Armstrong, announced the exchange was taking a stance against employee-driven social activism.
Within a month, 5% of its employees accepted a severance package. Later in the year, the New York Times published a lengthy report revealing racist and discriminatory treatment of African American employees in the company followed by another report that claimed the company paid women and minorities well under the tech industry average.
Having considered a number of possible actions, the NYDFS determined that publishing management diversity data is the best way to support the finance industry’s diversity efforts, Lacewell explained in the letter.
“Given the limited availability of banking and non-depository financial institution-specific diversity data, making that information public will allow companies to assess where they stand compared to their peers and raise the bar for the entire industry,” Lacewell said.
The letter also said the data will be collected in the fall of 2021 via a survey, and its results are to be published in the first quarter of 2022, categorized by the type of institution and other factors.
NYDFS Stepping In
In Thursday’s letter, Lacewell made it clear that applicable financial institutions will be required to participate in the upcoming NYDFS diversity survey.
“Under Banking Law §37(3) the Superintendent may require any banking organization to make special reports to her at such times as she may prescribe,” the letter said.
The letter explains the DSF will collect data from New York-regulated banking institutions with more than $100 million in assets and all regulated non-depository financial institutions with more than $100 million in gross revenue.
The revenue threshold does not appear to apply to crypto entities, but the diversity survey will also seek to collect data from all authorised virtual currency service providers including “BitLicensees” and virtual currency trust companies, according to the letter.
All qualifying institutions will provide data “related to the gender, racial and ethnic composition of their boards or equivalent body and senior management as of December 31, 2019 and 2020, including information about board tenure and key board and senior management roles.”
This includes Coinbase, Genesis Global Trading, Paxos and others. (Genesis is a CoinDesk sister company.)
A Timely Response
The NYDFS letter, which included diversity statistics for institutions in the banking and crypto industries noted that female participation in the cryptocurrency community is very low.
“The percentage of women in the sector, including developers, investors and interested individuals, usually hovers between 4% and 6%,” the letter said, citing data from crypto statistics and services platform CoinDance from 2018.
That figure has since improved slightly: In 2020, engagement in the bitcoin (BTC, -3.38%) community by gender was 86% male. The letter adds that 92% of venture-backed cryptocurrency and blockchain companies founded around the world from 2012 to 2018 had a founding team that was entirely male, compared to the tech industry standard of 82% for that same period.
On Thursday, as the NYDFS letter was published, the Black Women Blockchain Council (BWBC) a global benefit organization that aims to improve inclusion in the industry, announced it has partnered with ConsenSys to launch a global initiative to train 500,000 black female blockchain developers by 2030.
According to Olayinka Odeniran, founder of BWBC, of the small number of software developers who are specifically focused on blockchain, a smaller percentage are part of the African diaspora, and an even smaller percentage are females.
“We wanted to increase that number because we believe that being able to participate as a creator, as opposed to a consumer, is going to greatly benefit our community,” Odeniran said.
According to the new partnership, BWBC and ConsenSys will be launching specialized programming for black women in blockchain by 2022. The details of the training programs and courses are still in the works, Odeniran said.
Odeniran commended the NYDFS for taking steps to hold institutions accountable for what they say.
“While the public statements from Regulated Banking Institutions and Regulated Non-Depository Financial Institutions in support of DEI initiatives are significant and necessary, it is time to act on those words and make good on good intentions to begin to achieve real change,” the letter said.
As BWBC’s own initiative takes shape, Odeniran is not sure how the industry will respond to the diversity survey.
“I think it’s a good attempt. Now, whether or not organizations will take it seriously, that’s up to those organizations,” Odeniran said.
New Crypto Bill In US Congress Is The Most Comprehensive Yet
Out of the blue, a U.S. lawmaker who previously showed little interest in cryptocurrency has introduced what may be the most sweeping legislation yet to regulate the market.
Rep. Don Beyer’s (D-Va.) bill would allow the Treasury Secretary to veto the creation of stablecoins, direct regulators to define rules for decentralized finance (DeFi) and possibly create a charter for crypto exchanges, among other measures.
The 58-page “Digital Asset Market Structure and Investor Protection Act,” which Beyer introduced Thursday, seeks to create an exhaustive regulatory regime for digital assets. It would do so in part by defining which sorts of cryptocurrencies might be securities, which can be treated as commodities, and bolster tax data collecting for reporting purposes.
As such, the bill seems to address a long-standing desire from the industry for regulatory clarity. But where other bills have attempted to address these issues piecemeal, this one covers multiple issues in one fell swoop. It appears to have been thoroughly researched, even if certain provisions rankled crypto supporters.
It’s unclear what sort of support the bill has, or what a possible timeline for its passage might look like, but its breadth and depth have raised eyebrows in crypto policy circles.
“For a proposed legislation that seemingly came out of nowhere, it is incredibly comprehensive and the authors clearly have an understanding of the underlying technology,” said Marc Goldich, a partner at the law firm of Axler Goldich LLC. “It’s going to take some time to unpack and see how it could impact the industry and it will be interesting to see if this bill has legs, but this is the most well-written draft of crypto legislation to date.”
It also comes from a surprising source. Beyer is the chairman of Congress’ Joint Economic Committee and a member of the tax policy-making House Ways and Means Committee. Up until now, his involvement with digital assets appears to have been tangential at most. According to public records, his top two donors in the most recent election cycle were the law firm of Akin Gump and financial information provider IHS Markit, both of which have done some work with digital assets but focus on traditional lines of business.
Beyer’s office did not immediately respond to several questions about the bill.
The bill also appears to authorize the Federal Reserve, the U.S.’s central bank, to create a central bank digital currency (CBDC), likely in response to statements from Fed officials saying they weren’t sure they had the authority to do so under its current mandate.
Beyer’s bill, the second legislative proposal around cryptocurrencies this week, comes as lawmakers in the U.S. become increasingly active in the digital asset space. On Tuesday, lawmakers held three different hearings that touched on digital assets. Many of the elected officials expressed skepticism about the industry or different facets, discussing consumer protection concerns or pointing to perceived risks to financial stability.
In the Senate, a bipartisan infrastructure bill currently includes a provision that seeks to raise $28 billion by enforcing a broader set of information reporting requirements for crypto users than the U.S. currently has.
However, this plan remains a narrowly focused part of the infrastructure bill. Beyer’s proposal, in contrast, is all about crypto, and would likely need a co-sponsor on a committee with market jurisdiction (Senate Banking or House Financial Services) to go anywhere.
Securities vs. Commodities
Under the terms of Beyer’s bill, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) would have to more firmly define what aspects of the crypto market fall under their respective jurisdictions.
The first section lays out where the SEC’s oversight is focused: if passed, the bill would create a definition for “digital asset securities,” referring to cryptocurrencies or tokens that provide holders with any sort of equity.
If a holder has a right to equity, profits, interest, dividend payments or voting rights, the token would fall under the bill’s definition of a digital asset security.
The term would also apply to tokens issued through an initial coin offering (ICO) meant to fund the development of a product or platform.
The bill also would add digital asset securities to the Securities Exchange Act of 1934’s provision on registration with the SEC and exemptions from such requirements.
Perhaps most importantly, however, is a provision on “desecuritization.” The section lays out a path for a token that is treated as a digital asset security to become a cryptocurrency that will not be treated as a security, echoing SEC Commissioner Hester Peirce’s longstanding efforts to create a safe harbor for crypto projects to get off the ground.
“Registration of any class of digital asset security pursuant to this subsection or status as a security (or both) shall be terminated ninety days, or such shorter period as the Commission may determine, after the issuer files a desecuritization certification with the Commission,” the bill reads.
Beyer’s bill says the SEC should evaluate any such application against the criteria for a digital asset security laid out in the section.
Cryptocurrencies that don’t fall under the SEC’s jurisdiction would fall under the CFTC’s, according to the bill. Ahead of that, the bill would have these two agencies publish a proposed rulemaking to classify the 25 most-traded cryptocurrencies and the 25 cryptocurrencies with the highest market capitalizations (so up to 50 total) as either securities or commodities. This data would be sourced from “an appropriate publicly available website” such as CoinMarketCap.
It does not appear that the public or parties can appeal any such designation under the current language.
Several other provisions address different aspects of the U.S. securities regulatory framework, such as Securities Investor Protection Corporation insurance and broker definitions.
The second section, which reiterates what a digital asset security is, focuses on the Commodity Exchange Act, and codifies bitcoin, ether “and their hardforks” (splinter currencies) into law as commodities. This would help enable exchanges to launch derivative products and crypto trading platforms to more comfortably list and trade these assets.
Another section of the bill extensively lays out how the U.S. should look at stablecoins – digital assets that act as substitutes for dollars or other government-issued money – and appears to authorize a Fed-issued CBDC.
The stablecoin provision may create hurdles for issuers. The Treasury Department would have oversight and veto power over the creation and usage of all stablecoins in the U.S. under its terms.
“Beginning on the date of the enactment of this section, no person may issue, use, or permit to be used a digital asset fiat-based stablecoin that is not approved by the Secretary of the Treasury under subsection,” the bill said.
In other words, the bill appears to give the Treasury Department the ability to restrict trading of any and all stablecoins. An issuer would have to apply, and the department would consult with the Fed, the SEC, CFTC and possibly foreign central banks or financial regulators before it decides whether to approve the proposal.
The bill also explicitly prohibits Treasury from grandfathering any stablecoins into its new regime, instead saying all existing stablecoins must apply for permission to continue operations.
“They effectively make it illegal to not only issue fiat-based stablecoins but to also use them. It would be interesting to see how that is enforced and how it relates to algorithmic stablecoins,” said Goldich.
This has implications for existing and growing projects like Paxos, the issuer of the PAX stablecoin, and Circle, operator of USDC.
Despite the apparent opposition to private stablecoins, the bill does allow for a blockchain-based version of the dollar.
“The Board of Governors of the Federal Reserve System, after consultation with the Secretary of the Treasury, is authorized to use distributed ledger technology for the creation, distribution and recordation of all transactions involving digital Federal reserve notes,” the bill said. “The said notes shall be obligations of the United States and shall be considered legal tender and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public dues.”
Assault On Anonymity
While the stablecoin provision is likely to be the most controversial, the bill also would require the Financial Crimes Enforcement Network (FinCEN) to draft regulations around anonymity-enhancing services for crypto.
“The purpose of the rule … shall be to ensure that anonymizing services, money mule and anonymity-enhanced convertible virtual currencies are not used to prevent association of an individual customer with the movement of a digital asset, digital asset security or virtual currency of which the customer is the direct or beneficial owner,” the bill said.
This means that crypto exchanges or other entities would be prohibited from letting customers use mixers or similar services, which is likely to chafe privacy-conscious users.
While the bill does not explicitly define regulations for issues like DeFi, custody, wash trading, trading platforms or ransomware, it does direct various federal agencies to evaluate what regulation may look like and publish reports on their views.
The various agencies would have to include regulatory recommendations for Congress in these reports.
“DeFi, in general, is largely unaddressed by the bill but the hammer could ultimately drop, as the proposed legislation orders the Fed Reserve, SEC, [Office of the Comptroller of the Currency], CFTC and Treasury to submit a report summarizing DeFi in U.S. and (among other things) provide recommendations re[garding] appropriate DeFi regulation & investor protection, & various legal obligations [with regard to] DeFi hacks, fraud, & manipulation” Goldich said.
The bill also would shorten the CFTC’s “actual delivery” framework from four weeks to 24 hours, meaning an exchange would have to more-or-less immediately transfer control of an asset to a buyer after a transaction is conducted.
This transfer would either have to be recorded on the asset’s blockchain or on a trade repository registered with the CFTC.
This may pose a challenge for exchanges, because it gives them less time to ensure that a customer has full and sole control over any cryptos they’ve acquired than under the CFTC’s current guidance.
Beyer’s bill would also create an “optional” federal charter for crypto trading and clearing platforms. These chartered entities would be bound by the Bank Secrecy Act (BSA) and other laws, the bill said.
Much of the bill repeats details in different sections, addressing possible loopholes by amending multiple laws and directing several federal agencies to converge on regulations.