US Fed consultation and crypto’s banking access; US Sen. Warren sets SEC deadline for crypto-questions; BIS report on cross-border CBDC use; UK FCA’s Binance warnings results in first casualty
Scroll down for our Spotlight: An academic analysis of DAO risks and opportunities. By Ann Sofie Cloots
- UK – UK authorities confiscated a record amount of cryptocurrencies. Almost £180 million (close to US$250 million) worth of crypto was confiscated in the context of a money laundering investigation. The seizure is regarded as ‘one of the largest seizures globally and tops the £114million confiscation made by the Met on Thursday, 24 June,’ the Metropolitan Police said in a press release.
- UK – We’re starting to see the ramifications of the slew of regulatory actions against Binance over the past few weeks. A London-based payment processor dropped crypto-exchange Binance as a client. Clear Junction said it acted in ‘full compliance’ with regulations from the Financial Conduct Authority. The decision to suspend payments for Binance was made ‘following the Financial Conduct Authority’s recent announcement that Binance is not permitted to undertake any regulatory activity in the UK’.
- Binance’s founder and CEO Changpeng “CZ” Zhao reacted to the series of regulatory compliance actions against Binance entities (including the FCA’s warning that led payments processor Clear Junction to suspend its services to the crypto exchange). ‘Compliance is a journey’, CZ wrote in an open letter. He pointed to ‘the need for clearer regulatory frameworks in different countries. More regulations are, in fact, positive signs that an industry is maturing’.
- US – A conditional SEC approval for a BTC ETF (exchange traded fund) is the ‘next best’ option, according to former CFTC Chairman Timothy Massad, if it can be done in a way to improve transparency and integrity in the market. For example, the SEC could impose disclosure obligations in its conditional approval, Massad argues. The best option, which is to wait for Congress to strengthen its overall crypto-regulation, is unlikely in the near future, Massad wrote. (Bloomberg)
- US – US Senator Pat Toomey invested in bitcoin and ether days after advocating for less crypto regulation. (Barron’s)
- US – The comment period on the Fed’s proposed Guidelines for Evaluating Account and Services Requests [OP-1747] closed yesterday. The Guidelines matter to crypto companies because it can affect banks’ willingness to open bank accounts for crypto companies. Not long ago, it was difficult for crypto companies to find a bank willing to offer them banking services. That fear has not fully subsided yet. The Fed proposes six guidelines to assess whether a ‘depositary institution’ (a bank) should get access to the Fed’s financial services. Getting cut off from the Fed creates serious trouble for a bank. The principles will therefore be eagerly analysed by banks. One of the principles proposed by the Fed is that providing an account and services to the depository institution should ‘not present or create undue credit, operational, settlement, cyber or other risks to the Reserve Bank.’ Without mentioning crypto by name, this principle can make banks reluctant to offer their services to crypto clients, as they may fear losing access to the Fed and its services as a result. So far 4 comments have been posted on the Fed’s website, although more are awaiting upload. Avanti’s Caitlin Long concluded that the regulatory crypto ‘crackdown has begun’, pointing to these Guidelines. In a Twitter thread, she said this will not affect bitcoin and ether as such, but it will impact ‘intermediaries and US$ access points’.
- US – Senator Elizabeth Warren wrote a letter to SEC Chairman Gary Gensler asking for tougher crypto regulations. Referring to Gensler’s own statements that “there’s really no protection around fraud or manipulation’, she raised concerns over market manipulation on crypto-exchanges and the lack of separation between exchange and customer funds. ‘Scams have surged on “decentralized finance” (DeFi) platforms in particular’, she added. ‘As the cryptocurrency markets continue to grow and expand, the lack of regulation to provide basic investor protections is unsustainable.’ Sen. Warren expects an answer from the SEC by 28 July.
- US – The SEC charged three individuals with insider trading prior to an announcement by Long Blockchain Company (formerly known as Long Island Iced Tea Co.) that it was going to ’pivot’ from its existing beverage business to blockchain technology, which caused the company’s stock price to soar.
- US – Bitcoin fraud concerns draw scrutiny from regulators, WSJ
- El Salvador– ECLAC, the UN’s regional Economic Commission for Latin America and the Caribbean, warned that adopting bitcoin as legal tender in El Salvador raises systemic and money-laundering risks. (Cointelegraph)
- Russia – Russian lawmakers are preparing amendments to the Criminal Code that would allow confiscation of crypto-assets. (Cointelegraph)
- Iran paused electricity exports as the country faces more shortages. Crypto mining in the country is said to contribute to periodic electricity shortages. (Cointelegraph)
- Singapore and Switzerland – Are Singapore and Switzerland the new top contenders for most crypto-friendly jurisdictions? While Malta and Estonia may have been top contenders previously, Singapore has been able to attract scores of crypto companies. Its technology neutral stance may have played a role, argues this Decrypt article (note the article is sponsored by a Swiss investment fund).
- Thailand – The Bank of Thailand warned that cryptocurrencies are not legal tender and should not be used for payments. ‘Recently some enterprises have begun soliciting payments in digital assets such as Bitcoin and Ether as payment for goods and services. The BOT has previously iterated that digital assets are not legal tender and doing so constitutes barter trade between the owner of the digital asset and the provider of goods and services, where the payer and the receiver mutually accept all risks involved,’ the Thai central bank warned. (Bank of Thailand and Coindesk)
- China – The OKGroup will work with Nanjing police on an AML blockchain project. (Coindesk)
- China – The People’s Bank of China is ‘quite worried’ about the global risks of some crypto-assets, in particular stablecoins, according to Deputy Governor Fan Yifei. (CNBC)
Central Bank Digital Currency
- BIS – The Bank for International Settlements (BIS), together with the IMF and World Bank Group, published a report on central-bank digital currencies for cross-border payments. The BIS report looks beyond domestic applications of CBDCs and explores how CBDCs can enhance cross-border payments. Such cross-border payments through CBDCs raise practical questions (infrastructure) as well as macro-financial questions, such as a potential increase in cross-border flows, possible financial stability risks and currency substitution, and reserve currency configurations and backstops, according to the report.
- Ghana – The Bank of Ghana plans a CBDC pilot in September. The BoG’s First Deputy Governor, Maxwell Opoku-Afari, said the central bank is ‘in the advanced stages of piloting a digital currency to move the economy towards a cash-lite environment’, according to Modern Ghana. The Deputy Governor said a CBDC could further advance financial inclusion, promote the efficiency and stability of the payment system and foster competition in the financial sector (Modern Ghana and Coindesk)
- ECB – The European Central Bank’s President Christine Lagarde said the Bank’s Governing Council will likely agree to start an ‘exploratory phase’ of a digital euro at a meeting next week. That does not mean an EU-wide CBDC is likely in the near future: it will probably take ‘a couple of years of work before the decision is taken on whether to implement it.’ (Bloomberg)
- Coindesk talked to Christian Catalini from the Diem (formerly Libra) Association and Benedicte Nolens from BIS Innovation Hub in Hong Kong on the future of CBDCs. (Coindesk)
- Australia – The Australian government offered grants to two blockchain companies, hoping they will offer blockchain-based solutions for supply chains. Everledger and Convergence.Tech received AU$3 million and AU$2.6 million, respectively. These two blockchain pilot projects can ‘help to ease regulatory burdens’, according to a ministerial press release. ‘The Blockchain Pilot Grants will demonstrate the potential for blockchain to help businesses to save money and cut red tape by improving processes such as tracking products throughout the supply chain and transferring customer information,’ according to Australian Minister Christian Porter.
- Blockchain For Europe published a set of Regulatory Principles for Decentralised Finance (DeFi). The document points to DeFi’s promises of financial inclusion and reduced AML (anti-money laundering) risks due to the transparency of on-chain transactions. (Note that this requires tools to extract the relevant on-chain data.) The Principles call on regulators to regulate ‘activity and outcome’ rather than technology as such. ‘We need regulations that control the DeFi risks, we should not force regulations on DeFi that are designed to prevent centralised bad actors,’ the document notes. AML rules will require ‘a new paradigm that is not focused on the roles and responsibilities of gatekeepers’ but instead uses technology to increase compliance and monitoring, it adds. One principle states that ‘[r]egulations should not introduce analogue or manual steps into otherwise digital processes’, while another would allow financial intermediaries to collaborate when identifying clients (KYC) for AML purposes.
- DeFi Education Fund – The lobbying/education fund approved by UNI tokenholders after a governance vote on Uniswap continues to ruffle feathers. First there was a spirited debate about whether DeFi should get involved in lobbying/PR/educational efforts through a centralised committee with UNI funding in the first place. Then there was lots of discussion about the amount (1 million UNI tokens) requested for the new fund and the selection and pay of committee members. Now another mini-storm erupted as the Fund sold half of the allocated UNI tokens in one go. Although many UNI tokenholders appear to agree that outreach is useful, there is concern over how the governance won approval from just a handful of large UNI tokenholders, who some argue may benefit indirectly from the Fund. (We could draw an analogy with corporate law rules that prevent interested directors from voting in board meetings, but of course a DAO is not a company and governance proposals are not directors…) (Decrypt)
- ‘New Swiss DLT framework Act adopted and partially in force’, T. G. Albert, Journal of Int’l Banking Law and Regulation (I.B.L.R. 2021, 36(5), 215-219, paywall)
- ‘Squaring the circle? Stablecoins, deposit guarantee protection and substitutability of stablecoins for bank deposits’, Ph. L. Athanassiou, Journal of Int’l Banking Law and Regulation (I.B.L.R. 2021, 36(5), 210-214, paywall)
- ‘Regulating digital assets in the United States: security tokens, utility tokens and stablecoins’, T. Nagai and G. Ugeux, Journal of Int’l Banking Law and Regulation (I.B.L.R. 2021, 36(5), 183-201, paywall)
- ‘Copyright issues and NFTs’, M. Nga and M. Weber, Computers & Law (Comps. & Law 2021, Jun, 56-60, paywall)
- See also ‘The Rise of Decentralized Autonomous Organizations: Opportunities and Challenges’, ‘Bitcoin Governance as a Decentralized Financial Market Infrastructure’, ‘Dynamism in Financial Market Regulation: Harnessing Regulatory and Supervisory Technologies’ and more in Stanford Journal of Blockchain Law & Policy, Vol. 4(2), freely available online.
- US – The Financial Crimes Enforcement Network (FinCEN) appointed Michele Korver to take up its brand new position of Chief Digital Currency Advisor. Prior to her FinCEN appointment, Ms Korver was Digital Currency Counsel at the US Department of Justice and also advised the US delegation to FATF.
Spotlight: Aaron Wright’s academic analysis of legal risks and opportunities of DAOs
DeFi is a hot topic and one that begs the question: what else can be decentralized in addition to finance? Where will the ‘De’ in ‘DeFi’ lead us to? Finance was an obvious first application of decentralized networks of smart contracts. The next frontier is that of decentralized (autonomous) organisations or D(A)Os.
DAOs are already gathering the attention of public authorities. A number of DAOs are already fully functional. More than US$780 million worth of assets is managed by DAOs, according to one source.
Read more on our blog…