CryptoLaw Newsletter #41

Biden’s Exec Order on crypto is out; EU’s Russia sanctions cover crypto; Thailand eases crypto tax rules; FTX Europe gets Cyprus license; Dubai launches crypto regulator; South Africa plans more rules

Hello everyone,

US President Biden signed a long-awaitied crypto executive order. The EU clarifies its sanctions cover cryptoassets. Binance is in talks with Dubai authorities over a potential license, while the UK FCA reiterates its Binance warning. Crypto exchange FTX has a European entity in Switzerland and obtained regulatory approval from Cyprus’ CySec. Thailand eases its crypto tax rules once more to assuage industry concerns. And South Africa plans more crypto laws this year.

Lots of crypto-law news again this week!

Digital assets

  • US – A lot of buzz this morning around President Biden’s Executive Order on crypto asssets. Crypto twitter reacted quite positively to the summary Fact Sheet published today. Janet Yellen’s comments (accidentally released a little too early) coincided with a rise in crypto prices. While many public statements in the US have focused on crypto risks, the Fact Sheet first mentions potential benefits – and then the risks. The 6 key priorities for the Biden Administration cover the 3 often-cited risks (consumer and investor protection, financial stability and illicit finance) and 3 opportunities (U.S. leadership in the global financial system and economic competitiveness, financial inclusion and responsible innovation). Yellen’s prematurely released comments also struck a (surprisingly?) positive note: the “Treasury will work to promote a fairer, more inclusive, and more efficient financial system”, while countering crypto risks. Biden also ordered a number of crypto-reports from various government agencies, including one to be submitted within 180 days by the Treasury on CBDCs (and one from the AG on the need for any legislative changes for a CBDC) and another one from the Treasury on the implications of digital assets for financial markets and payment systems. Coverage by AP and Reuters.

  • Ukraine – Russia

    • Last week, we wrote about lawmakers’ fears that Russia could evade sanctions by turning to crypto – a scenario that most experts see as highly unlikely, at least on a large scale. Yet politicians lawmakers didn’t seem content with the expert view. “We are taking measures, in particular on cryptocurrencies or crypto assets, which should not be used to circumvent the financial sanctions,” said French Finance Minister Le Maire. Estonia‘s prime minister Kaja Kallas issued a similar warning. US Senator Warren is drafting a bill to “make it easier to verify the identities of customers and transfers to private crypto wallets by requiring financial institutions to keep detailed records and submit reports”, although a Treasury official reiterated that “[i]t will be extremely challenging to evade our sanctions without detection.” Meanwhile, more countries joined crypto sanctions against Russian persons, including Switzerland and Singapore, with Japan contemplating similar steps. It marks the first time in decades that Singapore unilaterally imposes sanctions without backing from the UN Security Council.

    • The EU expanded its measures against Russian and Belarussian individuals and entities, adding crypto-assets are covered by the measures. Crypto-asset “fall under the scope of ‘transferable securities’“, it said. Moreover, “loans and credit can be provided by any means, including crypto assets”.

    • Plummeting volumes of ruble-denominated crypto transactions (halving from US$70m on 28 Feb. to $14m on 3 March) support expert predictions that crypto provides no safe heaven for sanction-evading Russians.

    • Law firm Debevoise summarizes US sanctions and their implications for digital assets.

  • Dubai adopted its first-crypto law and will set up an independent regulator to “oversee the development of the best business environment in the world for virtual assets in terms of regulation, licensing, governance, and in line with local and global financial systems.” The independent authority will oversee Dubai’s free zones and special development zones, with the exception of the Dubai International Financial Centre. Binance reportedly is negotiating with the Dubai World Trade free zone to obtain a license. Separately, the UAE‘s Securities and Commodities Authority (SCA) said that it “has come closer to issuing the regulatory and supervisory framework related to virtual assets issued for investment purposes” across the UAE, aligned with FATF’s guidance. SCA issued reminder that it remains the “sole authority in the UAE mainland – except the financial free zones, ADGM and DIFC- for licensing, supervising and overseeing the virtual assets activities and services issued for investment purposes (not virtual assets issued for payment purposes)” and for AML compliance. The UAE consists of seven emirates, of which Dubai is one.

  • South Africa – More crypto regulation is coming by the end of 2022, said the country’s Treasury. Crypto asset services providers will be brought under the Financial Intelligence Centre Act as accountable institutions for AML purposes, following FATF recommendations. In addition, persons giving crypto advice or intermediary services, such as crypto exchanges or brokers, will be brought under the Financial Advisory and Intermediary Services Act. They will need to be recognised financial service providers. Both changes will be implemented this year, according to the Treasury. Some industry members welcomed the scheduled changes, while others said the measures could harm marginalised communities. One proposed to exclude people on very low incomes from verification/compliance measures, “because really, if, for example, that threshold was at R5,000 / month [$330], what possible harm can a person do with that amount?”

  • UK – Cryptoassets topped the list of the Financial Conduct Authority’s 16,400 scam enquiries between April-September 2020. The FCA opened over 300 cases relating to possible crypto-companies not registered with the FCA and has 50 live investigations (incl. criminal probes), into unauthorised businesses. /// The FCA also published a statement on an agreement between Binance group entity Bifinity and the parent company of crypto company Digivault registered under the Money Laundering Regulations. It said the agreement may make individuals and entities of the Binance group the beneficial owners of Digivault under the MLR. The FCA reiterated its previously published concerns about Binance entities operating in the UK and warned that it can suspend or cancel a firm’s cryptoasset registration if it is not satisfied the firm or its beneficial owner is fit and proper.

  • And more US news – As expected: crypto lobbying is skyrocketing, more than quadrupling since 2018. Coinbase, Ripple and the Blockchain Association top the pack, with IBM and Meta and the Chamber of Commerce also chipping in. There are now 320 crypto-lobbyists in the US. The crypto industry spent $9 million on lobbying in 2021 – still only a fraction of tech lobbying./// The SEC charged siblings in a $124 million fraud case, involving “misleading” roadshows of the “unregistered fraudulent” offering of a security, Ormeus Coin. The SEC accused the pair of acting as “modern-day snake-oil salesmen”. /// Crypto exchange BitMEX’s third founder pleaded guilty to AML violations. /// The CFTC charged four individuals with running a $44m bitcoin Ponzi scheme. Three of them were separately indicted by the DOJ for alleged criminal charges of wire fraud and money laundering. /// A Tennessee couple sued the IRS for a refund on tax they paid on Tezos tokens earned through staking. The IRS sent a check for a refund (including interest), but the couple rejected it. It wants the lawsuit to continue. The IRS is seeking dismissal of the lawsuit. Law firm Baker McKenzie explains. /// The state of Virginia‘s Senate passed a bill allowing banks to offer crypto custody services, if they meet “26 protocols”, including adequate insurance coverage. The bill is now awaiting the Governor’s signature. /// Meanwhile, a bill proposing a 3-year moratorium on fossil fuel-powered PoW mining in New York State has reached 45 sponsors in the state Assembly (out of 150 assembly members).

  • Switzerland – The Swiss National Bank outlined criteria for admitting DLT trading facilities to the Swiss Interbank Clearing (SIC) system. The central bank will “now admit DLT trading facilities with FINMA licences to the SIC system, provided they operate a securities settlement system and settle payments in Swiss francs via the SIC system”. /// Bitcoin and Tether will be recognized as de-facto currencies in the city of Lugano, together with the city’s own LVGA Points coin, its mayor declared. The decision amounts to a “de facto” legalization, as the Swiss franc remains the only legal tender in Switzerland.

  • Cyprus – Crypto exchange FTX is expanding into Europe. Headquartered in Switzerland, FTX Europe obtained approval from Cyprus’ market regulator CySec and will partner with a Cyprus-based licensed investment firm “with passportable licenses across the European economic area.”

  • Thailand is easing parts of its crypto tax rules until 2023. Digital asset transactions on government-approved exchanges will be exempt from a 7% value-added-tax (VAT), as will transfers of any government CBDC.

  • China – China’s share in global bitcoin transactions has dropped rapdily from 90% to 10%; according to the People’s Bank of China. The Financial Stability Bureau of the central bank stated in a note that all peer-to-peer exchanges in the country had been eradicated. /// Authorites in Guangdong province reportedly busted a crypto mining group, seizing 190 mining devices.

  • Pakistan‘s central bank governor Reza Baqir is a fan of the ‘blockchain, not bitcoin’ mantra. “There is no way that the regulator or a law enforcement agency has visibility on who is doing transactions and for what purpose” in the crypto industry. He sees “a lot of misuses [of cryptocurrency], including human rights violations, trafficking of people, money laundering, and many other things.”

  • Energy consumption – Bitcoin mining is responsible for 0.1% of all carbon emissions, said CoinShares. The carbon emission of bitcoin mining for 2021 was 41 metric tons of CO2, as compared to other industries emitting between 1,992 and 53 metric tons of CO2 annually, according to the company.

  • Crypto.com restricted access to its crypto-lending products further. Restricted countries now include the UK, Switzerland, the US and Germany, among others. Users from these countries have one week to repay their crypto loans, the company announced. If they fail to repay by March 15, their collateral will be sold. Some wondered whether Crypto.com’s extensive marketing costs are taking a toll, while others think regulatory crackdown on crypto lending products explains this decision.


DeFi

  • Academic corner – “Decentralized Financial Market Infrastructures: Evolution from Intermediated Structures to Decentralized Structures for Financial Agreements” published by Tim Swanson and several co-authors in the Journal of Fintech, Vol. 1(2). Decentralized financial market infrastructure (dFMI) “enables a change in business structure, where a re-alignment of incentives can take place such that those firms taking risks can fully bear the consequences of these risks.”


DAOs

  • DAOs have become mainstream enough for the NY Times to write this article about them. “Are these ventures simply vehicles to enrich insiders and exploit consumers, or early experiments in a new way of doing business?”


NFTs

  • US – The SEC is reportedly targeting NFT creators and marketplaces with subpoenas over alleged illegal securities offerings. Fractional NFTs are on the SEC’s radar.

  • IranOpenSea blocked Iran-based users from its NFT platform, citing US sanctions compliance.


CBDCs

  • The Philippines‘ central bank is rolling out a pilot CBDC implementation. BSP Governor Benjamin Diokno said the pilot “aims to build organizational capacity and hands-on knowledge of key aspects of CBDC that are relevant for a use case around addressing frictions in the national payment system.”

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