CryptoLaw Newsletter #9 - 6 July 2021

Wyoming’s first DAO LLC, US crypto-hearing, BIS research on drivers of US crypto adoption and more Binance woes
 Scroll down for our Spotlight: BIS research on what drives crypto adoption in the US. By Ann Sofie Cloots
 

‘One of the biggest risks for bitcoin right now is regulation,’ according to CNBC. In the same vein, UBS told its clients: ‘We’ve long warned that shifting investor sentiment or regulatory crackdowns could pop bubble-like crypto markets.’

We will see more regulatory and even legislative action on crypto-assets in the weeks and months ahead, without a doubt. Here’s a highlight of what has been going on this week on the crypto & law front:

Digital assets

  • UK – Another 13 crypto firms have withdrawn their license application with FCA, bringing the total to 64. Only 6 firms have been registered thus far, with dozens more still being assessment. (Reuters)

  • Australia – The Australian Securities and Investments Commission (ASIC) launched a consultation on crypto-backed exchange traded products (ETPs). Consultation Paper 343 seeks feedback on proposals about investment products, such as ETPs, that offer retail investors exposure to crypto-assets. ASIC hopes feedback will help identify crypto-assets that are ‘appropriate underlying assets’. Its proposal sets out ‘good practice’ on pricing, custody, risk management and disclosure. ASIC is requesting information, both qualitative and quantitative, specifically on compliance costs, impacts on competition and other impacts. Comments close on 27 July. ASIC plans to publish its good practice document in Q3 2021.

  • Binance plans to boost compliance with AML (anti-money laundering) rules after regulatory warnings and actions in Ontario (Canada), Japan and the UK. Binance wants to use a specialised tool from CipherTrace to strengthen compliance with the so-called ‘travel rule’ of the Financial Action Task Force. (Cointelegraph)

  • Thailand – Binance’s woes continued this week. The Thai SEC filed a criminal complaint with the Thai police against the crypto-exchange for operating an unlicensed digital-asset business. The Thai SEC’s announcement said Binance had failed to respond within the given deadline to a written warning sent in April. (Coindesk)

  • Cayman Islands – Piling on to the regulatory pressure on Binance, the Monetary Authority of the Cayman Islands said Binance was not regulated there. ‘Binance Group and Binance Holdings Limited are not registered, licensed, regulated or otherwise authorized by the Authority to operate a cryptocurrency exchange from or within the Cayman Islands,’ the regulator said. (Coindesk)

  • UK  – Chancellor Rishi Shunak included CBDC, stablecoins and cryptocurrencies, as well as DLT for financial markets on the government’s list of financial reforms. (Cointelegraph) While many governments plan to step up regulation and enforcement, the UK sees digital assets as an integral part to its post-Brexit plans to cement is position as a fintech hub. According to Sunak’s speech, the UK government wants to sharpen its competitive advantage in financial services. ‘To promote the adoption of cutting-edge technologies we’re taking forward recommendations in Ron Kalifa’s review of UK Fintech [which proposed a new legal framework for digital assets] …exploring the case for a central bank digital currency with the Bank of England…consulting on pioneering reforms to support the safe adoption of cryptoassets and stablecoins…and watching closely the key debates in finance and tech, like the opportunities of distributed ledger technology in capital markets. But while I believe in the power of new technology, we also need to manage its impact on our economy and society.’ This message reinforces that of the Kalifa Review, which urged the UK to adopt a more competitive legal framework as compared to the EU’s draft MiCA rules.

  • US – A subcommittee of the US House Committee on Financial Services dedicated a hearing to crypto-assets. Although the hearing’s title (America on ‘FIRE’: Will the Crypto Frenzy Lead to Financial Independence and Early Retirement or Financial Ruin?) may have suggested a round of crypto-bashing, it wasn’t. There was the odd all-out-negative intervention by Rep. Sherman (California) who simply wants a crypto ban. Many other members of Congress raised questions about consumer protection, market manipulation and financial inclusion – valid questions to raise. Rep. Loudermilk suggested the fear-factor of an unfamiliar technology may too easily lead to a rejection of something that could be valuable. The witnesses asked to testify covered a balanced spectrum of viewpoints. Some witnesses raised concerns over specific aspects of the crypto-markets, such as the lack of data on hedge fund involvement or the concentration of token-ownership in the hands of venture capitalists. The most pro-crypto witness statement came from Peter Van Valkenburgh, a long-time crypto-proponent. Van Valkenburgh rejected the idea that the US needs new regulations: current tools (such as the SEC’s enforcement powers over unlawful securities’ sales or the successful seizure of ransomware servers and proceeds) have shown to be sufficient, he said. Rep. Emmer also reiterated there was enough regulation, but a lack of clarity on how those rules are applied. The hearing’s memorandum mentioned DeFi and one of the witnesses (Christine Parker of Reed Smith LLP) noted on DeFi: ‘our current regulatory regime centers around regulated intermediaries, not regulated activities. I expect it will be a significant challenge for regulators to understand the deployment of smart contracts in the blockchain to enable financial transactions such as trading and lending.’

  • US – FinCEN included virtual currencies on its government-wide list of AML/CFT priorities. ‘Treasury is particularly concerned about cyber-enabled financial crime, ransomware attacks, and the misuse of virtual assets that exploits and undermines their innovative potential, including through laundering of illicit proceeds.’ It said the US was ‘committed to working with like-minded partners around the world to disrupt and deter’ ransomware linked to crypto, including by ‘enabling rapid tracing and interdiction of virtual currency proceeds’. FinCEN acknowledges that virtual currencies are a ‘substantial financial innovation’ but added that ‘convertible virtual currencies (CVCs) also have grown as the currency of preference in a wide variety of online illicit activity.’ It expressed concerns over so-called tumblers and mixers to obfuscate the origin of virtual currencies. ‘CVCs have been used by some of the highest-priority threat actors to advance their illegal activities and nuclear weapons ambitions,’ pointing to North Korea-linked crypto crime that used crypto-proceeds to finance ‘weapons of mass destruction and ballistic missile programs.’ The focus on crypto in AML priority lists should not come as a surprise. The Biden administration made it no secret that it takes crypto-related ransomware seriously, after the recent attack on Colonial Pipeline.

  • Germany – A new German law entered into force that will facilitate crypto investments by institutional investors. The Funds Location Act allows so-called Spezialfunds, favoured by institutional investors, to invest up to 20% of their assets in crypto. (Decrypt)

  • South Africa – After a number of scams, South Africa’s regulator is moving ahead with plans to tighten oversight. The Prudential Authority wants to finalize a stricter regulatory framework for crypto in three to six months. (Bloomberg)

  • Kazakhstan adopted a new law that will impose an additional tax on crypto-miners. (Decrypt)

  • FATF – A report by the Financial Action Task Force links funding of extreme-right terrorism to digital assets, including bitcoin and so-called privacy coins. ‘There has been plenty of interest in [Virtual Assets] from different ERW groups and individuals looking for anonymity, especially after being removed from mainstream payment platforms.’ However, FATF’s report acknowledged ‘there is limited information on the volume of funds being transferred in this way’. The report cited the example of an extreme-right group in South Africa that created its own digital asset on par with the local currency to fund its activities. It also pointed out that the shooter in the Christchurch (Australia) shooting transferred digital assets to extreme right groups overseas.

  • BIS – The Bank for International Settlement’s Working Paper series added another paper on crypto research. Distrust or Speculation? The  socioeconomic drivers of US cryptocurrency investments by Raphael Auer and David Tercero-Lucas analyses data on knowledge and ownership of crypto-assets in the US. A key conclusion? Crypto investment is not about distrust in cash or traditional finance. Instead, ‘crypto-assets ‘are a niche digital speculation object.’  The policy recommendation? ‘[A]s the goals of investors are the same as those for other asset classes, so should be the regulation.’ Read more in the Spotlight section below or on our blog.


Central Bank Digital Currency

  • BIS – The Bank for International Settlement’s Head of Research, Hyun Song Shin, says ‘CBDCs are an idea whose time has come’. His speech lays out different CBDC options and offers some thoughts on challenges such as privacy.

  • China – Fares on the Beijing subway can now be paid in digital yuan, at least for users of the Industrial and Commercial Bank of China’s mobile app. (Coindesk)

  • Ukraine – Ukraine’s Governing Body passed a payments law that lists its planned e-hryvnia on par with cash, bank accounts and electronic money. The National Bank of Ukraine will be in charge of the CBDC. (Coindesk)

  • ECB  – Banque de France’s Governor says digital yuan is a key risk to euro. Francois Villeroy de Galhau warned against an erosion of monetary sovereignty, saying that preserving the role of the euro is a ‘geopolitical concern’. (Bloomberg)

  • France – Banque de France carries out its fifth experiment with CBDC, together with BNP Paris and Euroclear. This time, the French central bank wants to test the integration of issuance and settlement activities. (Coindesk)

  • Japan – Bank of Japan plans to test how a potential digital yen could impact financial institutions in a second phase of its CBDC experimentation. The head of the ruling party’s panel on digital currencies, Hideki Murai, said Japan’s plans on a CBDC should be clearer by the end of 2022. Murai also commented on the geopolitical impacts of a domestic CBDC: ‘If a digital yuan becomes so convenient it’s frequently used by tourists or becomes a main settlement means for trade, the relationship between the yen and yuan could change and erode the yen’s status as a safe-haven currency,’ he stated. (Reuters)

  • Vietnam’s Prime Minister asked the central bank, State Bank of Vietnam, to pilot a potential CBDC from this year to 2023. (Coindesk)


Smart contracts

  • US – The Federal Reserve published research on programmable money. The note discussed the possibilities and tradeoffs of programmable money  – for example tradeoffs between account-based versus unspent-transaction-output systems to verify value held by any user; or between transaction-scripting (digital cash) and the virtual machine (smart contracts) approach to enable programmability. More important than the technical approach ‘is the guarantee that the system will in fact cohere into a unitary product offering, rather than a service offering associated with an otherwise independent non-programmable digital money.’ A set of linked instructions on the use of the programmable money should be executed as one (coherence guarantee), which requires economic, legal, reputational or other incentives in addition to technological programmability, the research note finds.

DAOs

  • The US state of Wyoming has formally incorporated its first DAO LLC, CryptoFed DAO, after the state amended its limited liability company rules to provide for a DAO-specific LLC regime. (Cointelegraph)


Spotlight: BIS paper on socio-economic drivers of crypto: speculation, not distrust

Is crypto ownership driven by distrust in fiat currency and traditional finance, as is often claimed? According to a new working paper, it isn’t: crypto is simply a digital speculative asset. And you’re more likely to own crypto-assets if you are a US male with a higher level of income and education, the researchers find.

Distrust or Speculation? The Socioeconomic Drivers of U.S. Cryptocurrency Investments, authored by the BIS’ Raphael Auer and UAB’s David Tercero-Lucas, was published in the Working Paper series of the Bank for International Settlements.

The researchers take aim at the common narrative, or the ‘purported motivation’ as they call it, that crypto was designed as an alternative to fiat money and traditional financial services that would be resistant to censorship and debasement. That narrative, they authors say, ‘does not always square with reality.’

The authors ‘disprove the hypothesis that cryptocurrency investors are motivated by distrust in fiat currencies or regulated finance.’ Instead, crypto-assets ‘are a niche digital speculation object.’

They find that ‘that cryptocurrency investors tend to be educated, young and digital natives’.

Read more on our blog

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