CryptoLaw Newsletter #37

Will DeFi regulation fail? UK tax guidance on DeFi lending/staking. ESMA wants MiCA rules finalized. CFTC chair asks for greater crypto-powers. Russia to treat crypto as foreign currencies.

Hello everyone,

We’re very happy to (finally!) share the key takeways and a full transcript of our interview with Dr. Joachim Schwerin, Principal Economist at the European Commission (expressing his personal views). What I loved about our chat is that Dr. Schwerin transcends the usual factual questions about DeFi and really puts it into a broader perspective: what draws people to decentralized structures? Read more below.

Digital assets

  • Russia reportedly plans to treat cryptocurrencies as foreign currencies. Banks are allowed to act as intermediaries, with all crypto purchases required to go through licensed companies with full user identification. Banks will need to use blockchain analytics tools created by the Russian Financial Monitoring Service. Foreign crypto exchanges will need to establish an office in the country. (Decrypt)

  • US – The Department of Justice brought charges against a New York-based couple for allegedly laundering USD 4.5 billion worth of crypto-assets linked to the hack of crypto-exchange Bitfinex in 2016. Roughly 3.6 billion of the stolen cryptoassets have been seized, according to the DoJ. (Reuters) /// The CFTC chair wants a greater role for the agency in regulating cryptoassets. Chair Benham said the agency’s authority is limited to addressing fraud and manipulation of digital assets without a clear regulatory framework. „“In essence, this is an unregulated market […] there is so much that we are not able to see because of this limited authority,” Chair Benham said in a Senate committee hearing. “There is no one regulator, either state or federal, with sufficient visibility into digital asset commodity trading activity to fully police conflicts of interest and deceptive trading practices impacting retail customers”. (Reuters) /// Can staking rewards be taxed, even before they are sold? A couple went to court, claiming that the Internal Revenue Service (IRS) should not have taxed them on Tezos staking rewards that they had not yet claimed or sold. The court sided with the couple. The IRS will reimburse the tax with interest. (Cointelegraph) /// Crypto is on the 2022 priority list of the Federal Deposit Insurance Corporation (FDIC). /// A US lawmaker wants the US to “go after crypto investors trying to use Puerto Rico as a tax shelter.” (Decrypt)

  • Ukraine – Ukrainians are turning to bitcoin and other crypto-assets to crowd-fund the fight against Russia, according to blockchain analytics company Elliptic.

  • EU – „We, at #ESMA, would like to see the finalisation of the legislative process around MiCA. So far, only some national supervisors can rely on a domestic legislative regime for #cryptoassets. This does not offer the common EU approach to the current risks,“ tweeted the European Securities and Markets Authority on behalf of ESMA Chair Verena Ross. Ross delivered the keynote speech at a fintech conference and added that ESMA will continue to work „actively“ with national supervisors until the draft Markets in Crypto Assets (MiCA) regulation is adopted.

  • Ireland – It’s „highly unlikely“ that the central bank will allow investment funds aimed at retail investors to hold cryptoassets. (Bloomberg)

  • Financial Stability Board – The FSB is looking at stablecoins and other digital assets. “I do expect that for some of them, we do have international regulatory convergence… primarily stablecoins and digital asset service providers,” Reuters quoted FSB member Ophele. “I do think we could achieve, deliver on these issues in the next few quarters… the FSB is going full steam on this issue,” he added. (Reuters)


  • US – A Federal Reserve research note looks at money in the digital age: (or put this under Digital assets?): .ask what it means to use [money] as a store of value and a medium of exchange. That question is, in essence, a legal one. Who (if anyone) stands behind the associated commitments and what rules (if any) govern it?“A Lawyer’s Perspective on U.S. Payment System Evolution and Money in the Digital Age by Jess Cheng and Joseph Torregrossa.


  • UK – How will returns from DeFi lending and staking be taxed? Revenue & customs authority HMRC added guidance on the topic in its Cryptoassets Manual. „You will need to determine whether the return has the nature of income in the hands of the lender/liquidity provider or whether the return has the nature of capital. That is, was the return earned by the lender/liquidity provider by providing a service to the borrower/DeFi lending platform, or was the return realised from the capital growth of an asset owned by the lender/liquidity provider?“ The manual gives a few rules of thumb: if the lender/liquidity provider knows the return they will receive (for example, (5% per annum), this suggests a revenue receipt. If the return is „unknown and speculative (and could result in a loss from the activity), this would indicate a capital receipt“.

  • CryptoLaw YouTube series – DeFi is not just an extension of traditional finance. Although DeFi is often described that way, “in my opinion, that is completely wrong,”  said Dr. Joachim Schwerin, Principal Economist at the European Commission (expressing his personal views). This is “very well understood in Europe, actually.”  Dr. Schwerin emphasized the importance of understanding DeFi from a broader perspective. The question of what „drives people to form such collectives that are outside the centralized control“ is underdeveloped. And although we may often focus on DeFi’s risk, „we should not exaggerate“ those risks. „The more so as there is quite some interest by incumbents to flag a lot of risks” in DeFi.  If you try to „really cut down DeFi, prohibit it, prevent it, you will fail,” We won’t get DeFi back into the box, he warned. „So live with it, deal with it, but do it in a positive way.”  However, he also warned the DeFi space of the challenge ahead: DeFiers also have to understand that, if they are not just playing around, but consuming energy and creating risks, then „you have an obligation to act on that together with the society in which you live.”  Click here for our key takeaways and a full transcript.


  • IMF – The International Monetary Fund took a deep-dive into 6 advanced CBDC projects in the hope of identifying insights. Behind the Scenes of Central Bank Digital Currency looked into the CBDC projects of the Bahamas, China, Canada, Sweden, the Eastern Carribean Central Bank and Uruguay and wants to „study and discuss their key experiences and lessons“.

  • Zambia wants to finalize its research on a potential CBDC by Q4, but warns against crypto. (Bloomberg)

  • Myanmar – The military junta wants its own digital currency. (Bloomberg) Supporters of ousted Aung San Suu Kyi, however, use Tether.


  • US – The Treasury released a Study on the Facilitation of Money Laundering and Terror Finance Through the Trade of Works in Art. The report looked at the money laundering risks of art in general, but noted that NFTs „may present new risks, depending on the structure and market incentives.“ „Depending on the nature and characteristics of the NFTs offered, these [NFT] platforms may be considered virtual asset service providers (VASP) by FATF and may come under FinCEN’s regulations. Digital assets that are unique, rather than interchangeable, and that are used in practice as collectibles rather than as payment or investment instruments, depending on their characteristics, are generally not considered to be virtual assets under the FATF definition.“


  • EU – The European Union needs to understand the metaverse better before it can decide how to regulate it, said Margrethe Vestager, Vice President of the European Commission. (Reuters)

Smart contracts

  • Upcoming event – LawTech UK is organising an afternoon session on smart contracts. Contracts – just smarter will take place on Feb. 28 as a hybrid event.

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