CryptoLaw Newsletter #11 - 20 July 2021

Crypto prices edge lower again, but regulatory scrutiny intensified. China published a white paper on its digital yuan. The ECB announced it will spend the next two years designing a marketable digital euro. Paraguay is no El Salvador. And should we keep going back to US Free Banking era analogies to assess stablecoins?

Our selection of legal highlights this week:

Digital assets

  • Bitcoin mining – New data shows the geographic shift of bitcoin mining. China’s share declined significantly, even before the government’s crypto crackdown, according to research from the Cambridge Centre for Alternative Finance. The US and Kazakhstan saw hash-rates increase. For a summary, see our blog post here.
  • Binance – UK, Italy, Hong Kong, Lithuania and counting.
    • UK – Visa and Mastercard continue to allow customers to interact with Binance. Visa said it was aware of the UK Financial Conduct Authority’s warnings on Binance and that it is in ‘dialogue with Binance to monitor developments’. A couple of big UK banks recently blocked their customers from making payments to Binance. Payment processor Clear Junction suspended relations with Binance in the wake of the FCA’s warning. (FT)
    • Italy’s market regulator Consob warned consumers that entities in the Binance Group are not authorized to provide investment services and activities in the country. (Reuters)
    • Hong Kong’s Securities and Futures Commission said it was ‘aware’ that Binance offered trading of stock tokens (tokens that closely track the price of the underlying. securities they track). The SFC warned that no Binance entity is licensed or registered to conduct regulated activities in Hong Kong. Stock tokens ‘are likely to be ‘securities’ under the Securities and Futures Ordinance (SFO)’. As a result, marketing or distributing such tokens may well be a ‘regulated activity’ that requires a licence from the SFC. Earlier in the day, Binance announced it would discontinue trading of stock tokens. Binance.com ceded the purchase of stock tokens with immediate effect. Existing stock token holders have until 14 October to close their positions.
    • Lithuania – The Bank of Lithuania also issued a warning against crypto-exchange Binance, UAB and other crypto-asset service providers. The Lithuanian central bank warned the company ‘about its unlicensed investment services provided in Lithuania as well as requested it to ensure that its publicly available information complies with legal requirements and is not misleading.’ Companies that are registered in Lithuania as virtual currency exchange operators ‘are not supervised as financial service providers.’ In language reminiscent of similar warnings by the Bank of England, the Bank of Lithuania warned consumers ‘risk losing all their investments’.
  • Turkey – A cryptocurrency bill will be submitted to the Turkish Parliament in October. If approved, Turkey’s Capital Markets Board will oversee cryptocurrency companies and companies with crypto-exposure will face minimum capital requirements. (Coindesk)
  • Pakistan – The federal government in Pakistan established a committee to study cryptocurrency regulation. (Reuters)
  • US – Another turn in the SEC’s lawsuit against Ripple Labs. Ripple Labs can depose former SEC official William Hinman, a federal judge at the Southern District court of New York ordered. The SEC had argued depositions of its senior officials would open the floodgates, but the judge rejected that argument, saying this was not ‘a run-of-the-mill SEC enforcement case’. According to the judge, the case ‘involves significant policy decisions in our markets, the amount in controversy is substantial and the public’s interest in this case is significant.’ (Bloomberg)
  • US – Circle plans to go public through a SPAC merger. The investor presentation sheds more light on the revenue earned on its stablecoin USDC, the #2 stablecoin after Tether. Risk factors list ongoing litigation, including liabilities that Circle faces due to its previous ownership of crypto-exchange Poloniex. Circle plans to settle an SEC investigation for approximately $10.4 million. It set aside a reserve of slight over $1 million for an ongoing OFAC investigation.
  • US – The Attorney General of the state of New Jersey issued a cease-and-desist order against BlockFi, ordering the company to stop accepting new clients residing in New Jersey for its BlockFi Interest Account beginning July 22, 2021. The company’s CEO tweeted that its interest-bearing account ‘is not a security, and we therefore disagree with the action by the New Jersey Bureau of Securities.’ (Forbes)
  • US – The US hopes to fight ransomware attacks by promising bounties to be paid out in crypto. (Bloomberg)
  • US – US Representatives reintroduced a law that wants to bring greater legal clarity to how digital assets are classified by law. The proposed Securities Clarity Act, this time reintroduced as a bipartisan bill, wants digital assets to be legally classified as commodities rather than as securities. This would significantly reduce the risk of securities law violations and run-ins with the SEC for crypto start-ups. (Coindesk)
  • UK – The Financial Conduct Authority (FCA) plans a £11 million digital campaign to warn investors about the risks of investing in crypto-assets. In a draft speech, the FCA’s CEO pointed to the risk of especially younger people investing in crypto-assets for fun.
    • ‘We’ve seen an explosion among younger people speculating on cryptocurrencies or other high-risk investments. In the last year, we published research that found nearly 2.5 million people in the UK had bought cryptoassets. Analysis this year found those ‘having a go’ at this kind of investing were younger and, proportionally, more likely from an ethnic minority. There is evidence too that, as with the GameStop episode, more people see investment as entertainment – behaving less rationally and more emotionally, egged on by anonymous and unaccountable social media influencers. This is a category of consumer that we are not used to engaging with – 18 to 30-year-olds more likely to be drawn in by social media. That’s why we are creating an £11m digital marketing campaign to warn them of the risks.’
  • Hong Kong authorities arrested members of an alleged money laundering scheme using cryptocurrencies to process HK$1.2 billion (US$155 million) of unlawful funds. The operation was the first of its kind, according to SCMP. The majority of funds were channelled through Singapore, prompting Hong Kong law enforcement to seek local assistance. (SCMP)
  • Paraguay – When drafts of a planned Bitcoin Law were leaked, critics were quick to point out the bill was a poor copy/paste job collecting bits and pieces from failed Colombian and Argentinian bills, with some additions. An upgrade, co-sponsored by a second Paraguayan parliamentarian, was said to be ready last Wednesday but no updates have been provided yet. If approved, the law would touch, among other things, on tax, crypto-mining and exchanges. (Decrypt)
  • India – New Delhi’s High Court issued notice to the Securities and Exchange Board of India and others on a plea that wants standardized disclaimers on advertisement by crypto exchanges, such as Wazi rX, on national television. The Court slated the matter for August, but meanwhile issued notices of the plaintiffs’ plea to SEBI, the Ministry of Information and others. (New Indian Express)

 

Stablecoins

  • Initially, Libra (now Diem) acted as a lightning rod for all public official scrutiny of stablecoins. More recently, we’ve seen increased attention for other stablecoins, in particular Tether. Fed Chairman Jay Powell asked for stricter crypto- and stablecoin regulation: ‘If they are going to be a significant part of the payments universe, which we don’t think crypto assets will be, but stablecoins might be, then we need an appropriate regulatory framework, which frankly we don’t have.’ (TIME/NextAdvisor) The US Treasury’s Janet Yellen discussed stablecoins at a meeting yesterday with the President’s Working Group on Financial Markets, Office of the Comptroller of the Currency and FDIC. The group ‘plans to issue recommendations in the coming months for fixing any regulatory gaps around stablecoins’. (Reuters) In other jurisdictions the concern over stablecoins is growing as well. The academic paper highlighted in our Academic Corner below delves into the risks of private stablecoins and looks at policy options.

 

DeFi

  • Japan’s Financial Services Agency created a new unit to oversee digital currency regulation, which will also oversee decentralized finance. (Reuters) Many public authorities have been preoccupied with CBDCs and stablecoins and few have focused explicitly on DeFi. The FSA’s action could be the opening shot for more DeFi regulatory action elsewhere in the coming months.

 

CBDC

  • China – Foreigners will be able to use the digital yuan, or e-CNY, according to a progress report by the People’s Bank of China, issued both in Mandarin and English. ‘Those without bank accounts can enjoy basic financial services provided via e-CNY wallet, and foreign residents temporarily travelling in China can open an e-CNY wallet to meet daily payment needs’. (See our Spotlight below for a summary of the whitepaper). (CNBC) Just a few days later, US senators asked the US Olympic Committee to ensure US athletes shun the e-CNY at the Winter Olympics next year, citing surveillance concerns. (Coindesk)
  • EU – The European Central Bank announced its plans on a digital euro. An ECB blog announced that ‘a project to get ready for the possible issuance of a digital euro’ had been formally launched. This doesn’t mean we will end up with a digital euro: ‘a decision about whether or not to issue a digital euro will only come at a later stage’. For now, the ECB is only committing the ‘resources necessary to design a marketable product’ – a project that will take 2 years. A digital euro could foster financial inclusion, according to the ECB, and lower transaction costs. The blog post also touted the ‘minimal’ energy consumption that the digital euro would require, as compared to crypto-assets such as bitcoin. Open questions remain: for example, the ECB will need to decide whether to use a centralised ledger for any future digital euro, a distributed ledger or a ledger only stored on a user’s device. After this 2-year study period, the ECB plans to start developing a digital euro, ‘which could take around three years.’
  • US – Federal Reserve chairman Jerome Powell thinks a digital dollar may make bitcoin, stablecoins and other crypto-assets obsolete. (Forbes) The Fed will publish a report on a potential digital dollar. Initially scheduled for this summer, the report is now expected in September.

 

Academic corner

  • Taming wildcat stablecoins, an article by a finance professor of Yale’s management school, Gary Gorton, and an attorney at the US Fed’s Board of Governors, Jeffery Zhang. The authors argue that there’s nothing new about privately produced money. Like others before them, Gorton and Zhang discuss the Free Banking period in the US. ‘Based on lessons learned from history, we argue that privately produced monies are not an effective medium of exchange because they are not always accepted at par and are subject to runs.’ The authors propose ways to address the systemic risks that stablecoins create, such as regulating stablecoin issuers as banks and issuing a central bank digital currency.
  • Crypto-investor Nic Carter agrees that, by and large, stablecoins show analogies with the US free banking era. However, he criticizes a ‘selective’ historical analysis that focuses exclusively on the failures of this particular US experiment. He points to ‘successful historical instances of free banking – Scotland, Canada, Sweden, and Switzerland – in which bank failures were uncommon, notes were mutually accepted by rival banks and traded at par.’ Why are central bankers so keen to point to the failures of the free banking-era notes? His answer: ‘Because they are deeply conflicted’, to sell us the idea of CBDCs instead. (Coindesk)

 

Spotlight: China’s latest report on its CBDC, the e-CNY

Last week, the People’s Bank of China published a white paper on its central bank digital currency, the digital yuan (often referred to as the e-CNY).

The 15-page report by the Working Group on E-CNY Research and Development of the People’s Bank of China was published both in Mandarin and English. We already knew the PBoC was exploring a two-tier, retail CBDC. The white paper sheds some light on its design features, but many questions remain unanswered.

Read more on our blog here

 

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