CryptoLaw Newsletter #13 - 3 August 2021

US Infrastructure Bill’s crypto impact and another US hearing; DeFi’s key risks; more Binance and BlockFi enforcement actions; will China’s digital yuan become a reserve currency in African nations?

Hello CryptoLawyers,

Many more legal and regulatory updates on digital assets worldwide, some interesting CBDC news and a new article on DeFi’s key risks. We’ve summarized your weekly news on law & crypto below:

Digital assets

  • Mexico  – The country’s Financial Intelligence Unit (UIF, in Spanish) said 12 crypto-exchanges were not registered with it under the Ley Fintech and were operating unlawfully in the country. (El Economista and Coindesk)

  • China – The People’s Bank of China repeated its intention to crack down on ‘illicit activities in crypto’. (Decrypt)

  • US – The bipartisan Infrastructure Bill plans to raise US$ 28 billion in taxes from a wide set of crypto participants. The initial language imposed new disclosure obligations on ‘brokers’. The definition of broker was very wide, potentially imposing KYC obligations on miners and DEXes, according to some commentators.  The definition has been narrowed down after a few intense days of intense discussion, but there is still concern that the disclosure obligations are cast too widely. (Coindesk) (Bloomberg) See our Spotlight below.

  • US – It is becoming a recurring theme: another week, another hearing. Last week, the Senate Committee on Banking held its hearing Cryptocurrencies: What are they good for? Chairman Brown’s opening statement wasn’t particularly crypto-friendly, while Ranking Member Toomey struck a more crypto-welcoming tone. Senator Lummis queried prof. Walch on taxonomy and the importance for lawmakers and regulators to use common terms to discuss cryptoassets. Walch said miners are intermediaries that should be scrutinized more closely and talked about MEV. Jerry Brito from Coin Center, unsurprisingly, compared the potential of digital assets to that of the internet, warning against shutting down crypto participants prematurely. Martha Belcher from the Filecoin Foundation was given the opportunity by Sen. Baines to sketch its anticipated growth in the next five years. She was also questioned by Sen. Tester on crypto-ransomware. Sen. Warren questioned prof. Walch ‘decentralization’ claims. Her conclusion:  ‘…it sounds to me like a lousy tradeoff. Instead of leaving our financial system at the whims of giant banks, crypto puts the system at the whims of some shadowy faceless group of supercoders and miners, which doesn’t sound better to me.’

  • US – Rep. Don Beyer (D-VA) introduced the Digital Asset Market Structure and Investor Protection Act, in order to ‘incorporat[e] digital assets into existing financial regulatory structure’. The ‘regulatory framework is ambiguous’, he said in a press release, and the ‘laws are behind the times’. The bill proposes, among other things, to create statutory definitions for digital assets and digital asset securities, give the SEC authority over digital asset securities and the CFTC over digital assets, and provide the Federal Reserve with explicit authority to issue a digital version of the US dollar.

  • US – New Jersey’s Bureau of Securities gave BlockFi more time before it has to stop creating new BlockFi Interest Accounts. ‘Following ongoing discussions’ with the regulator, ‘they have further postponed the effective date of its previous order to Thursday, 2 September’, BlockFi tweeted. Kentucky’s Department of Financial Institutions issued a cease-and-desist order to BlockFi, adding to the list of regulatory enforcement against by various US states against the company for its BlockFi Interest Account.

  • US – The US Treasury’s OFAC added a bitcoin address to its sanctions list. According to OFAC, the bitcoin address belongs to a Tajiki fundraiser and recruiter for an Islamist group. (Coindesk)

  • Israel – The Ministry of Finance published a bill that would require anyone holding over 200,000 Israeli shekels to report their crypto-holdings to tax authorities. The public comment period ended on 31 July. (Coindesk)

  • Germany  – Specialised funds (Spezialfonds) in Germany are now allowed to invest up to 20% of their funds in crypto-assets such as bitcoin. The new law entered into effect as from 2 August. (Techfortunerand Bloomberg)

  • Malaysia – The Securities Commission Malaysia (SCM) announced enforcement actions against Binance – adding to a suit of regulatory actions against Binance entities worldwide. Binance is illegally operating a Digital Asset Exchange (DAX) in violation of the Capital Markets and Services Act 2007, the SCM said, ‘despite being included in the SC’s Investor Alert List in July 2020’. It issued a public reprimand against Binance Holdings, its CEO Zhao Changpeng and three other Binance entities (registered in the UK, Lithuania and Singapore). Binance has to discontinue its binance.com website and apps in Malaysia within 14 days. SCM also ordered it to cease all media and marketing activities and restrict Malaysian investors from accessing Binance’s Telegram group with immediate effect.

  • Germany, Italy and Netherlands – Binance will discontinue futures and derivatives products to users in these three EU countries. The company will stop offering new positions in the three countries with immediate effect. Users with open positions have 90 days to close them. Just a few days ago, the company had announced it would stop offering cryptocurrency margin trading involving the euro, sterling and Australian dollar. The moves follow a string of regulatory actions worldwide targeting Binance entities. (CNBC)


CBDC

  • 81 countries, covering 90% of the world economy, are now exploring a central bank digital currency. But of the four historically most influential central banks in the world, (the US Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England), the United States is furthest behind in its work on digital currencies,’ according to the Atlantic Council. It developed a helpful global CBDC Tracker – see our blog post here.

  • Will CBDCs crowd out bank deposits? This academic paper thinks they will, but the authors suggest how central banks can mitigate this effect (hint: by providing additional central bank funds or disincentivizing large-scale CBDC accumulation through low CBDC interest rates).

  • Estonia – A blockchain-based digital euro could in theory support almost unlimited numbers of payments being processed at the same time … with a smaller carbon footprint than the card payment systemwe currently have, said the Central Bank of Estonia (Eesti Pank) after a project with the European Central Bank and seven other euro-area central banks. The experiment saw payments made in digital money between people with digital identities from Estonia, Latvia, Lithuania and Spain. Up to300,000 simultaneous payments a second were made in the test and money reached the payee in less than two seconds.

  • Ukraine – The newly approved Law on Payments Services authorizes the National Bank of Ukraine to issue a central bank digital currency. The Law builds on EU standards, such as those in the EU’s PSD2 and EMD, to ensure future compatibility with a digital euro. (Cointelegraph)

  • US – Fed Governor Lael Brainard said she ‘can’t wrap her head’ around the possibility of ‘other major jurisdictions’ having their CBDC, but not the US. (Reuters)

  • On the continent of Africa, 14 countries ‘discussed the possibility of adopting the renminbi as part of a reserve currency management initiative by central banks in the region’. Michael Kimani (Kioneki, @pesa_africa) tweeted: ‘Makes me wonder how this will look like, with the development of a digital currency project by China (DCEP) and national and international blockchain service network (BSN) by China. Maybe a digital currency Renminbi as Africa reserve currency + governed by BSN network’.


DeFi

  • What are the key risks of DeFi? A new paper discusses five: (i) interconnections with the traditional financial system, (ii) operational risks stemming from underlying blockchains, (iii) smart contract-based vulnerabilities, (iv) other governance and regulatory risks, and (v) scalability challenges.

  • Politico dedicated a piece to DeFi and regulation, entitled Crypto-based ‘shadow financial market’ spooks regulators. It quoted Alabama Securities Commission Director Joseph Borg: ‘It’s between unknown participants without any intermediaries … So now the question is, who do we put this on?’.


Academic corner

  • CBDCs: J. Gross and J. Schiller (University of Bayreuth), ‘A Model for Central Bank Digital Currencies: Do CBDCs Disrupt the Financial Sector?’, SSRN, updated 29 July 2021

  • DeFi: N. Carter (Castle Island Ventures) and L. Jeng (Georgetown University Law Center), ‘DeFi Protocol Risks: the Paradox of DeFi, SSRN, 14 June 14, 2021      


Revolving door

An Abu Dhabi Global Market regulator and former director of the Monetary Authority of Singapore joined the advisory board of the Blockchain Association Singapore. Richard Teng is the former CEO of the Financial Services Regulatory Authority at Abu Dhabi Global Market (ADGM). He also served as the Chief Regulatory Officer of the Singapore Exchange. Prior to that, he was the Director of Corporate Finance at the Monetary Authority of Singapore. (Coindesk and PR Newswire/BAS)


Spotlight: The US infrastructure bill and its impact on crypto-assets

It was a relatively obscure reference to crypto-assets on a White House Fact Sheet on the Infrastructure Bill that set off alarms in the crypto community last week.

The hotly debated, bipartisan Infrastructure Bill, with its proposed US$ 1 trillion of spending, needs to be financed somehow. Either through new taxes, reduced spending or better enforcement of existing tax obligations.

The Bill looks at the latter option for crypto-assets: the Bill would be financed through various measures, including ‘strengthening tax enforcement when it comes to crypto currencies’, according to the White House fact sheet.

Seemingly innocuous, this reference soon turned out to target greater tax disclosure obligations for crypto ‘brokers’. And the definition of brokers in the initial language was very broad, setting off a frantic wave of behind-the-scenes talks and open letters between crypto advocates and Senate staffers to narrow the scope of the definition.

Read more on our blog here

 

Thanks for reading! Happy to hear your comments and suggestions (ascc2 at cam dot ac dot uk).

By Ann Sofie Cloots, Slaughter & May Lecturer in Company Law, University of Cambridge.  I write this newsletter and blog posts in my personal capacity.
Not legal advice.

 

 

Subscribe to our news Letter

Contact us

Subscribe to our news Letter

Subscribe to our newsletter

Thank you!