CryptoLaw Newsletter #38

FSB reports on DeFi and crypto; BlockFi settles with US SEC; mixed crypto signals in India; Canada targets crypto wallets linked to trucker protests; Marshall Islands recognizes DAOs

Hello everyone,

Lots of crypto legal developments again this week. Perhaps the most eye-catching was the Marshall Islands’ decision to recognize DAOs as legal persons – without requiring them to incorporate as LLCs or another corporate form. And much more:

Digital assets

  • Global – Cryptoassets „could reach a point where they represent a threat to global financial stability due to their scale, structural vulnerabilities and increasing interconnectedness with the traditional financial system, the Financial Stability Board (FSB) warned in a new report. The FSB specifically looked at (1) unbacked crypto-assets (such as Bitcoin); (2) stablecoins; and (3) decentralised finance (DeFi) and other platforms on which crypto-assets trade. Much like the OECD’s recent DeFi report, the FSB thinks the „lack of transparent, consistent and trusted data“ on crypto markets and their linkages to the financial system hamper its „ability to identify and quantify risks to financial stability“ for this asset type. Although aggregated metrics are available for on-chain data, sources of such aggregated data „differ in terms of
    methodologies employed, data coverage, and access to and quality of underlying primary data. These deficiencies are largely due to a lack of standardised reporting requirements and
    regulation or compliance with regulation, where unsupervised activity in a borderless sector
    hinders access to reliable information.“ (FSB, Bloomberg)

  • US – BlockFi settled charges brought by the Securities and Exchange Commission (SEC) that it failed to register the offers and sales of its retail crypto lending product. In this „first-of-its-kind“ action, the SEC concluded that the BlockFi Interest Account, in which investors lent crypto assets to BlockFi in exchange for the company’s promise to provide a variable monthly interest payment, was a security: „BlockFi thus borrowed the crypto assets in exchange for a promise to repay with interest. Investors in the BIAs had a reasonable expectation of obtaining a future profit from BlockFi’s efforts in managing the BIAs based on BlockFi’s statements about how it would generate the yield to pay BIA investors interest,“ according to the SEC. The agency also found that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity: „BlockFi made a statement in multiple website posts that its institutional loans were “typically” over-collateralized, when in fact, most institutional loans were not.“ BlockFi will pay a $50m penalty as part of its settlement with the SEC. It will pay an additional $50 million in penalties in parallel proceedings with a number of US states. We’ve witnessed increased regulatory scrutiny of crypto lending products in the past few months. This SEC order is likely only the starting point for more regulatory action on crypto lending products, both in the US and other jurisdictions.

  • India – Central bank Governor Shaktikanta Das said crypto assets have no underlying value („not even a tulip“) and are a threat to financial stability. The sharp remarks from the head of the Reserve Bank of India come only a few days after finance minister Nirmala Sitharaman announced crypto trading would be subject to a 30% tax on gains, on the same level as gambling activities. (Bloomberg Quint) That statement was interpreted by many as a sign that a full-blown ban on cryptoassets was off the table. However, the head of India’s tax agency denied that taxing cryptoassets implied a legalization of crypto trading. The finance minister chimed in, adding she was not going to “legalize or ban” cryptocurrency at this moment but would await feedback from consultations. (Cointelegraph) Meanwhile, crypto exchanges met with finance ministry officials in an attempt to dissuade them from pursuing separate plans to impose a 1% tax deducted at source for all crypto transfers. (Coindesk)

  • USCrypto miners and stakers will be exempt from rules that require digital asset brokers to provide information on client transactions to the Internal Revenue Service (IRS). The statement comes months after an outpour of criticism from the US crypto industry that the proposed new rule was excessively broad and would impose disclosure obligations on crypto stakeholders unable to collect the required information. (Bloomberg) /// The SEC is investigating ties between Binance US and two trading companies that reportedly have ties to Binance founder CZ. (WSJ) /// Rep. Warren Davidson introduced a bill that would block agencies from prohibiting users to transact crypto through self-hosted wallets. (Coindesk) /// A number of large crypto players are backing an industry initiative to comply with anti-money laundering rules imposed by FinCEN. (Coindesk) /// The governor of New Hampshire issued an executive order establishing a committee that will look into „the current status of the cryptocurrency and digital asset industry.” The committee will need to report back by 8 August. (Cointelegraph) /// The state of Colorado will accept crypto for tax payments and other state payments by the end of the summer. (Coindesk)

  • Is Portugal becoming Europe’s bitcoin hub? (Cointelegraph)

  • Hungary – The central bank governor said he agreed with Bank of Russia’s proposal to ban crypto assets. (Coindesk)

  • Israel – The Israel Securities Authority (ISA) plans its first fintech hackathon next month in an attempt to explore potential DLT opportunities for Israel’s financial sector. The hackathon is also an opportunity for collaboration between various actors in the fintech sector. „Bringing together the teams of these technology providers will create an opportunity for regulators and for other stakeholders to gain in-depth technical knowledge on global fintech developments,“ ISA’s chief added. (Coindesk)

  • Canada – Truckers protesting against covid measures in Canada by blocking access points along the US-Canadian border have received an estimated CA$1 million worth of bitcoin donations. The Canadian government announced a number of countermeasures. It is expanding anti-money laundering laws to cover crowdfunding platforms, including crypto transactions. (Coindesk) 34 crypto wallets linked to the trucker protests have been sanctioned. (Coindesk) The measures come days after a Canadian MP introduced a bill to encourage crypto growth in the country. Bill C-249, entitled „Encouraging the Growth of the Cryptoasset Sector Act“, had a first hearing in the House of Commons. (Cointelegraph)

  • UK – The Financial Conduct Authority (FCA) has concerns over Binance‘s partnership with retail payment processor PaySafe. The recent partnership gives Binance and its users access to the UK payments network Faster Payment Service, just months after the crypto exchange lost access to the payments network after the FCA ordered it to stop all regulated activities in the jurisdiction. (FT)

  • Belarus – President Lukashenko signed a decree that will allow the free circulation of crypto assets. AT the same time, the decree allows the country’s crypto regulator Hi-Tech Park to keep a register with listing crypto wallet addressed associated, or thought to be associated, with unlawful activities. (BlockchainNews)

  • Global – How much cryptocurrency is currently held by known criminal entities on the blockchain, and could therefore theoretically be seized by law enforcement? Blockchain analytics firm Chainalysis identified 4,068 criminal crypto ‘whales’ (holding at least $1m worth of crypto, of which at least 10% comes from criminal activity), collectively holding over $25 billion worth of crypto. Illicit funds received by criminal whales also come from more varied sources than the funds making up overall criminal balances. Darknet markets are the biggest source of illicit funds sent to criminal whales (37.7% of their funds), followed by scams second (32.4%) and stolen funds third (24.3%). This contrasts with the patterns observed for overall crypto crime (including non-whales), where the vast majority comes from stolen funds. (Chainalysis)


  • Global – The FSB’s report on cryptoassets (see above) zooms in on DeFi. The general tone sound very much like that in the OECD’s recent DeFi report. Probably no coincidence. Rights attached to governance tokens „could be understood to be analogous to shareholders’ voting rights in traditional finance“, according to the FSB. Although DeFi platforms „purport“ to rely on governance tokenholders for voting,“in practice, governance may be concentrated, including through the use of committee structures for management purposes with regular meetings held through social media platforms“ or individuals associated with the project who hold „disproportionately large portions“ of the total token supply. „Without sufficient regulation and market oversight, DeFi and associated platforms, might present risks to financial stability. Some of these risks are becoming apparent, such as concentration risk in terms of protocols and technology used. The sector has already seen numerous operational and cybersecurity incidents, and failures of governance,“ the report added.


  • US – New Jersey Rep. Josh Gottheimer published the draft of a stablecoin bill to clarify the definition and status of certain stablecoins. The draft introduces a category of ‘qualified’ stablecoin, redeemable on demand 1:1 by US dollars. The draft rules explicitly state that such stablecoins are neither securities nor commodities. Interestingly, the draft does not require issuers of qualified stablecoins to become banks. We’ve seen many proposals to regulate stablecoin issuers as banks. Some argue such proposals would nip innovation in the bud, while others emphasize the risks to taxpayers of classifying stablecoin issuers as banks and therefore give stablecoin issuers (and their clients) the same state protection as banks (and their clients). Rep. Gottheimer’s draft takes a different approach. He does not propose to make stablecoin issuers banks. Instead, the proposals allows non-bank entities to issue qualified stablecoins, provided they meet certain criteria, such as collateral requirements (100% collateral, held in a limited number of assets) and insurance requirements. (CNBC)


  • UK – HM Revenue and Customs (HMRC) seized three NFTs as part of an investigation into alleged tax evasion fraud. It’s the first time the tax authority seizes NFTS, the BBC reported.


  • China ­ More than 2 million yuan (US$315,000) worth of e-CNY is being used each day in the Winter Olympics, according to a People’s Bank of China official Mu Changchun. He added that most foreign users seemed to be using the digital yuan through hardware wallets, while domestic users mostly rely on software wallets. (Reuters)

  • EU – A digital euro bill will be introduced in 2023, according to the European Commission. (Politico)

  • Kenya – The Central Bank of Kenya published a discussion paper solliciting feedback on a potential CBDC. The relatively short (28 page) paper gives a broad overview of the payments landscape in Kenya, followed by a high-level overview of CBCD risks and opportunities. According to the paper, CBDCs may only offer limited opportunities in the country, where mobile payment still „has a huge potential for growth“. Feedback on the discussion paper can be submitted by 20 May.

  • Russia – Bank of Russia continues with its digital ruble plans, with three banks participating in the CBDC pilot, while reiterating its calls for a crypto ban. (Coindesk)


  • Marshall Islands – DAOs are now recognized as legal entities in the Marshall Islands. (Coindesk) Although a few jurisdictions have amended their company laws to allow DAOs to incorporate as types of limited liability companies, the Marshall Islands don’t impose the same requirement on DAOs to incorporate as LLCs or other corporate forms. That appears to be a global first. DAOs are widely expected to be the next big ‘boom’ in the crypto sector. However, there is still much uncertainty around their legal classification.

  • Law firm – An analysis on the legal issues confronting formation and operation of DAOs in the US, by Braumiller Law. The analysis suggests DAOs could be classified as cooperative associations. Other commentators had previously focused on the likely default classification of unincorporated DAOs as partnerships or even business trusts in the US.

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