CryptoLaw Newsletter #44

DeFi copies TradFi risks, says IOSCO; next EU battle = KYC; more trouble for interest-bearing crypto products in US; Dubai gets crypto.com hub; de-banking lawsuit ends with victory for crypto miner.

Hello everyone,

Excited to announce that Jacob Robinson is turning these weekly newsletters into a podcast! Check out the Law of Code podcast, hosted by Jacob (@jacobrobinsonjd), discussing the ongoing regulation, cases and other events in CryptoLaw with the brightest minds in the space.

TLDR:

  1. What makes DeFi centralized? Potentially a lot, according to IOSCO.

  2. The EU’s landmark crypto regulation is moving to the next stage of negotiations. But the crypto industry is already focused on the next legal battle: draft anti-money laundering rules targeting all crypto transactions regardless of size, covering also non-custodial wallets. 

  3. Dubai’s new rulebook is starting to attract big crypto.

  4. More regulatory trouble for interest-bearing crypto products in the US.

  5. An Italian bank improperly closed a crypto miner’s bank account, says a Bosnian court, ordering millions in compensation.

  6. Did the son of the world’s third richest man buy valuable NFTs through ‚insider trading‘? Legally speaking: most likely not, due to the limits of our insider trading rules.

  7. DeFi & programmable disclosure: Georgetown law prof. Brummer has a fresh look at disclosure in the age of smart contracts.

Key developments

  • After the DeFi reports from the OECD and the Financial Stability Board earlier this year, there’s a new kid in town: IOSCO’s DeFi report. IOSCO is the International Organisation of Securities Committees, a club of securities regulators from around the world. Part of the report is unsurprising: a description of the DeFi landscape (quite a clear one) and the commonly listed risks. But there are a few surprising statements. Read more here (website under construction).

    • If you’re interested in DeFi & regulation, check out our interviews on the topic here (with US SEC Commissioner Hester Peirce, European Commission Principal Economist Dr. Joachim Schwerin, Wharton’s Kevin Werbach and Sheila Warren, formerly at the World Economic Forum and now the first CEO of the Crypto Council for Innovation).

  • US state regulators are going after interest-bearing crypto accounts again. Seven state regulators have issued cease-and-desist or similar orders against Voyager Digital, claiming the interest-bearing crypto products offered by the Canadian company should have been registered as securities.

  • The EU’s draft Markets in Crypto Assets Regulation (MiCA) moved to the next stage. After some heated discussions in the European Parliament, the draft text is now set for trilogue negotiations between the Parliament (with rapporter MEP Stefan Berger), the Commission and the Council.

  • But another storm is brewing in the EU: the crypto industry is criticising draft rules that would impose know-your-customer obligations for all crypto payments (not just those above €1,000 as is currently the case for bank transfers). The EU also wants to extend those KYC rules to transfers involving self-hosted (non-custodial) wallets, although it’s unclear how such rule could be enforced. The Parliament’s ECON committee is expected to vote on the matter on Thursday. Coinbase’s CEO tweeted the “crypto surveillance regime” is “anti-innovation, anti-privacy and anti-law enforcement”, while Circle’s Jeremy Allaire responded it was an “enormous folly for Europe”. However, some MEPs were adamant the ‘“crypto bro’s” wouldn’t be able to sway the vote.

     

  • Dubai’s attempts to attract crypto companies with its crypto rulebook is starting to pay off: crypto.com is opening an office in Dubai (but will remain headquartered in Singapore), while Bybit plans to relocate its headquarters from Singapore to Dubai. The emirate announced plans for a crypto-dedicated regulatory and licensing authority. Soon after, crypto exchanges FTX and Binance obtained operational licenses.

And also…

  • The UK Finance Minister is expected to announce a new regulatory regime for crypto in the next few weeks. The new rules will focus on stablecoins.

  • The UK’s financial regulator gave an update on its Temporary Registration Regime, a transition scheme to bring crypto companies into compliance with anti-money laundering registration. “The TRR will close on 1 April, for all but for a small number of firms where it is strictly necessary to continue to have temporary registration. This is necessary where a firm may be pursuing an appeal“, for example, the Financial Conduct Authority wrote. Around 100 companies had applied to become registered with the FCA, but only 33 received approval so far. A few companies were still in limbo on the TRR list ahead of the looming deadline, including Revolut.

  • The Bank of England called for greater regulatory coordination and tougher crypto rules at home and abroad.

  • Policymakers should have a „less tolerant approach“ towards bitcoin activities, hinted European Central Bank executive Fabio Panetta. He thinks crypto assets have „no social role“.

  • The same day, the ECB published a report on payment preferences as part of its digital euro research.

  • Crypto lobbying in Canada: the Canadian Web3 Council calls for a coordinated regulatory approach.

  • Italian bank UniCredit closed a crypto miner’s bank account and needs to pay the plaintiff €131 million in compensation, ruled a Bosnian court. UniCredit already appealed. Crypto companies have long faced bank access problems and some of them (successfully) fought against de-banking in court.

  • The US White House hopes to bring in over US$10 million in revenue over the next decade by changing the crypto rules – mostly crypto tax reporting obligations.

  • The White House is also calling for public comments on crypto’s energy use

  • US Treasury chair Janet Yellen acknowledges “benefits from crypto”.

  • US lawmakers submitted an ECASH bill, proposing privacy-preserving e-cash to be issued by the Treasury.

  • Crypto exchange Kraken is one step closer to obtaining a coveted US Federal Reserve Master account.

  • The Central Bank of Sudan warned citizens against using crypto as a hedge against skyrocketing inflation.

  • Last week we wrote about Russia’s U-turn on crypto assets. And the crypto-friendly statements continue: crypto mining should be legalized, said the country’s deputy energy minister this week.

  • Japan plans to amend its Foreign Exchange Act targeting crypto’s ability to evade Russian sanctions.

  • Vietnam wants Finance Ministry to research crypto legal framework.

  • Former SEC official Carlo Berdejo joined SyndicateDAO (an investment DAO).

  • The US Department of Justice charged Frosties NFT creators with wire fraud and money laundering charges after a rug pull, in a first for the agency.

  • Did the son of one of the world’s wealthiest men buy 3 NFTs on OpenSea through ‘insider trading’? “If HypeBears were a stock, the pre-reveal trading of [two of these NFTs] and others would likely have sounded alarms at the Securities and Exchange Commission prompting it to investigate what looks and smells like a case of insider trading”, wrote Forbes. “But in the largely unregulated world of cryptocurrencies and NFTs, transactions that smack of market manipulation and insider trading are rampant–and not explicitly illegal.” That’s right: in most countries, insider trading is only outlawed on financial markets – for now. But other legal remedies may be available, such as fraud or misleading advertisement.

Academic corner

  • DeFi disclosure NFTs? Brummer discusses programmable disclosure tools embedded within DeFi’s tech stack. Data can be wrapped in NFTs and combined with smart contracts to create new disclosure experiences for users. For example, a financial service may only whitelist users who own a token obtained after completing a short quizz on the product’s risk. This can re-orient disclosure towards its original goal, Brummer argues: to be read.

Upcoming events

  • Does safe DeFi require CBDCs?, Bank for International Settlements Innovation Hub and the Swiss Central Bank, Zurich, 4 April, with public livestream.

Markets in brief

  • Ethereum side-chain Ronin, built fort the popular crypto game Axie Infinity, suffered a US$625 million exploit. Binance paused deposits and withdrawals on the Ronin network until further notice.

  • OpenSea will start listing Solana NFTs.

  • Ripple co-founder faces ire of crypto twitter after proposing switch to Proof of Stake for Bitcoin.

Thanks for reading!

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