CryptoLaw Newsletter 16

US regulators on DeFi, Japan plans to tighten crypto rules, first crypto-exchange registers in South Korea, BIS explores tokenized green bonds, crypto not protected by law says China high court.

Digital assets

  • China – A high court in China’s Shandong province held that crypto-assets are ‘not protected by law’. The claimant had lost over US$ 10,000 worth of crypto-assets and went to court to seek judicial remedies for the loss. The lower court had refused to grant the claimant’s case and now the high court confirmed that ‘investing or trading cryptocurrency isn’t protected by law.’ (Cointelegraph) The Changting People’s Court in Fujian province had previously ruled that Bitcoin ownership is not protected under commodity laws. (Cointelegraph)

  • South Korea – The first crypto-exchange to register with the Financial Intelligence Unit (FIU) before a 24 September deadline is Upbit, South Korea’s largest exchange. Korean authorities have warned crypto-exchanges that they face criminal penalties if they do not comply with registration requirements meant to implement stricter KYC/AML rules. The financial regulator warned the requirements also apply to foreign crypto-exchanges offering services in South Korea. The new measures prompted Binance to stop trades and payments involving Korean won. (Coindesk)

  • Japan – The Financial Services Agency is considering tightening the legal framework on crypto-assets to improve investor protection. It hopes to have new rules in place by the middle of next year. (Cointelegraph)

  • Supranational – The Bank for International Settlements is exploring the tokenization of green bonds. Together with private sector partners, the BIS hopes its project Genesis can use blockchain-based technology to offer the green investments in small denominations and track the environmental impact of the investments throughout the bonds’ lifecycle. Partners include Digital Asset, a consortium including Standard Chartered, AllInfra and others.

  • Binance – Investors plan to sue Binance for losses caused by a Binance outage on May 19 during a time of market volatility. A Swiss litigation finance firm has committed US$5 million to bring an arbitration case against the crypto exchange. White & Case has been asked to represent the affected investors. Binance has an opaque corporate structure, as a London High Court found recently. Its terms & conditions stipulate that any disputes need to be brought before the Hong Kong International Arbitration Centre, which, according to the FT, “seldom hears consumer cases and charges hefty fees to adjudicate disputes”. (Financial Times)

  • US – Congress has introduced 18 bills in its current session that directly impact cryptocurrencies, blockchain technology, or central bank digital currencies. In addition to the widely discussed Infrastructure Bill, there was the Blockchain Regulatory Certainty Act, the Token Taxonomy Act, Securities Clarity Act, the Eliminate Barriers To Innovation Act and the Digital Asset Market Structure and Investor Protection Act. (Forbes)

  • US – CFTC Commissioner Stump appears to be fed up with simplistic questions of whether a token is a security or a commodity. An online presentation should put the matter to rest. Entitled Digital assets: Clarifying CFTC Regulatory Authority & the Fallacy of the Question “Is it a commodity or a Security?”, the presentation clarifies that the CFTC does not regulate commodities (including digital assets considered to be commodities). The CFTC only regulates derivatives on digital assets. The CFTC has enforcement powers over the assets it regulates. In addition, it has the authority to enforce anti-manipulation and anti-fraud rules over cash commodities, even if it has no authority to regulate those same commodities. “Before considering whether to redesign the regulatory structure in the crypto context, let’s get the facts straight about our current system,” the CFTC’s accompanying press release added.

  • US – Both VanEck and ProShares filed separate applications with the SEC to withdraw their ether-linked ETF filings, only a few days after both companies (separately) applied to launch those ETFs. The reason for the withdrawals remains unclear. (Cointelegraph)

  • El Salvador – President Bukele said merchants won’t be forced into accepting bitcoin, although the BitcoinLaw he pushed through parliament says otherwise. (Decrypt) Merchants voiced concerns over the prospect of having to accept a volatile token as payment. With only two weeks to go before the law comes into effect, time to provide legal clarity is running out.

  • Iran – Bitcoin miners, at least those authorized to mine bitcoin, will be able to resume their operations in September. Iran experienced serious electricity outages and one of the mitigation measures was to ban bitcoin mining. (Cointelegraph)

  • UK – Bitstamp’s founder Nejc Kodrič sued its new owner NXMH before the High Court in London. Kodrič claims NXMH is trying to force him to sell his remaining shares in the crypto exchange company at a price ‘very significantly’ below their market value. The lawsuit comes as Bitstamp plans to go public through an IPO, allegedly targeting a valuation of US$ 1 billion. (The Block)


Stablecoins

  • The dust has not settled yet on the question of whether US-backed stablecoins are really backed by US dollars or other highly liquid reserves. Tether’s reserve breakdown raised some eyebrows. Tether’s largest competitor, USDC, is trying to capitalize on this by touting more stable reserves than Tether. From next month onwards, USDC reserves ‘will be held in cash and short-duration US government treasuries’, according to Coinbase COO Emily Choi. Just last month, an update on USDC reserves showed only 61% of its reserves were in cash or cash equivalents.  (Decrypt, Coindesk and Twitter)


NFTs

  • What happens when you bought an NFT that is delisted from OpenSea’s secondary market, due to copyright infringement claims? You can lose a lot of money. Sad Frog NFT owners can no longer re-sell their digital collectibles on the largest secondary market for NFTs after a Digital Millennium Copyright Act takedown request was submitted to OpenSea. (The Defiant)


DeFi

  • US – SEC Chair Gary Gensler wants to regulate decentralized finance. DeFi is ‘a bit of a misnomer’, he said, as there may be (centralized) parties running the governance and profiting from fees. ‘These platforms facilitate something that might be decentralized in some aspects but highly centralized in other aspects.’ (Wall Street Journal)

  • Global DeFi adoption – ‘DeFi adoption is strongest in high-income countries that already had substantial cryptocurrency usage, especially amongst traders and institutional investors,’ according to blockchain analytics company Chainalysis. The top-5 countries of DeFi adoption are: the US, Vietnam, Thailand, China and the UK. India, The Netherlands and Canada follow. The vast majority of DeFi transactions by volume involve institutional and professional investors, with only a fraction involving small retail investors.  

  • US – SEC Commissioner Hester Peirce and CFTC Commissioner Dan Berkovitz talked about DeFi regulatory concerns in a panel discussion. See our spotlight below.


DLT

  • EU – With some delay in the reporting: the Economic and Monetary Affairs Committee agreed on a pilot regime for distributed ledger technology.  MEPs on the Committee gave green light for a temporary pilot regime for financial services based on DLT. The sandbox allows for temporary derogations from certain requirements under the EU financial services legislation. “The experience gained through the pilot regime should help to identify possible practical proposals for suitable new rules on trading and settlement of transactions in financial instruments based on DLT,” a press release said.


Trading places

  • Binance hired the former head of the Abu Dhabi Global Market, Richard Teng, as CEO for its Singapore operations. (Coindesk) Binance has been adding former regulators and public officials to its ranks to boost its reputation with (rather hostile) regulators. The crypto exchange has faced intense regulatory scrutiny in recent weeks, including for its alleged lack of KYC compliance and for offering stock tokens without the necessary regulatory approvals.


Upcoming events

  • Adopting Cryptocurrencies as Legal Tender and the Future of Money – webinar organized by SMU (Singapore Management University). Date: 14 September. Speakers include Douglas Arner, Angela Walch, Nydia Remolina and Rosa Maria Lastra. Register here.


Spotlight – DeFi’s regulatory challenges: SEC’s Peirce and CFTC’s Berkovitz discuss

US SEC Chair Gary Gensler warned that many DeFi projects may not be as decentralized as they claim in a recent WSJ interview.

CFTC Commissioner Dan Berkovitz did not pull his punches on DeFi in a recent speech:

“A system without intermediaries is a Hobbesian marketplace with each person looking out for themselves.  Caveat emptor—‘let the buyer beware.’

Not only do I think that unlicensed DeFi markets for derivative instruments are a bad idea, I also do not see how they are legal under the [Commodities Exchange Act].” 

SEC Commissioner Peirce has struck a much softer tone on DeFi, proposing a safe harbour to shield early-stage DeFi projects from securities laws for a few years.

We might have expected fireworks when Berkovitz and Peirce both aired their views on DeFi and regulation in a joint panel discussion. The discussion showed both Commissioners came to the stage from very different starting points…

Read our full blog post here

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