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Cryptocurrency Regulatory and Legislative Analysis #12

Regulatory and Legislative Analysis – September 2023

Regulatory and Legislative Analysis – GLOBAL

BIS claims there could be over 20 active CBDCs by 2030

A July 2023 paper published by the Bank for International Settlements (BIS), reveals that 93% of central banks worldwide are actively researching central bank digital currencies (CBDCs). The survey conducted by BIS predicts that by 2030, there could be up to fifteen retail CBDCs and nine wholesale CBDCs in circulation. Emerging markets and developing economies are taking the lead in CBDC adoption, with a higher percentage of central banks piloting both retail and wholesale CBDC projects compared to advanced economies.

OECD issues paper highlighting democratic values of CBDCs

On July 5, the France-based Organization for Economic Co-operation and Development (OECD), issued a paper “Central Bank Digital Currencies (CBDCs) and democratic values”.  Instead of focusing on the potential risk that CBDCs represent, this paper explores how the design and implementation of CBDCs can help countries mitigate threats to individual liberties and human rights, as well as promote the equitable treatment of citizens (i.e. gender disparities, elderly, people with disabilities or those without a proper ID), the protection of privacy, and citizens’ trust in central banks.

FSB Chair submits letter to G20 Finance Ministers and Central Bank Governors

On July 11, Klaas Knot, Chair of the Financial Stability Board (FSB) send this letter to the G20 Finance Ministers and Central Bank Governors, ahead of the G20’s meeting on 17-18 July.  The letter discusses recent events in the banking sector and the FSB’s workplan to draw lessons, along with associated policy implications, from the episode. The letter includes recommendations for the regulation, supervision and oversight both of crypto-assets and markets and of global stablecoin arrangements; revised recommendations to address vulnerabilities from liquidity mismatch in open-ended funds; a policy toolkit for enhancing third-party risk management and oversight and a progress report on the FSB’s Roadmap to address climate-related financial risks.

BIS releases a report that examines structural flaws in the crypto ecosystem

In July 2023, The Bank for International Settlements (BIS) released a report that examined the cryptocurrency ecosystem and identified a number of its structural flaws.  The report has three key takeaways. First, they note that the crypto ecosystem is subject to a high degree of fragmentation and is characterized by congestion and high fees. Despite an original ethos of decentralization, crypto and DeFi also often feature substantial de facto centralization, which introduces various pain points. Finally, while DeFi mostly replicates services offered by the traditional financial system, it does not finance any activity in the real economy, is highly speculative and amplifies known risks. The report suggests that in sum, crypto’s inherent structural flaws make it unsuitable to play a constructive role in the monetary system.

FSB publishes recommendations on crypto-asset and global stablecoin regulation

On 17 July, the Financial Stability Board (FSB) published its final high-level recommendations on the regulation and supervision of crypto-assets and “global stablecoins”.  Recommendations include: authorities’ readiness to regulate and supervise global stablecoins consistent with international standards; Information sharing and cross-border cooperation; Governance structures and decentralized operations; Effective risk management frameworks; Data storage and access to data frameworks; Recovery and resolution plans; Disclosures; Redemption rights and stabilization; Regulatory, supervisory and oversight conformance before commencing operations.

Regulatory and Legislative Analysis – NAM (United States & Canada)

Nasdaq resubmits updated iShares Bitcoin Trust ETF application

Nasdaq has reportedly refiled an amended application for the iShares Bitcoin Trust ETF, previously known as the BlackRock Spot Bitcoin ETF. Following the SEC’s concerns with the initial filing, the revised version now includes Coinbase in a surveillance-sharing agreement. The CBOE also submitted updated filings for spot bitcoin ETFs, for Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust, WisdomTree Bitcoin Trust, Wise Origin Bitcoin Trust, and ARK 21Shares Bitcoin ETF.

Gemini Sues DCG accusing them of fraudulent activities

On July 7, Gemini filed a lawsuit against Digital Currency Group (DCG) and its founder Barry Silbert, accusing them of fraudulent activities. The lawsuit specifically targets DCG subsidiary Genesis, which held funds for Gemini related to the latter’s Earn program. The legal action aims to retrieve Gemini’s funds from DCG, as stated in a filing submitted to the New York County Supreme Court. Gemini had partnered with Genesis, enabling its customers to earn an annual percentage yield of up to 7.4%. To facilitate this program, Gemini transferred its customers’ funds to Genesis, which, in turn, lent them to entities such as the now-defunct Three Arrows Capital.

Kraken founder Jesse Powel under investigation

On July 7, Kraken co-founder Jesse Powel was reportedly a subject of a federal investigation, due to allegations of involvement in hacking and cyberstalking activities targeting a non-profit organization he assisted in establishing, known as Verge Center for the Arts’. Verge claims that Powell impeded business operations and limited access to company emails. FBI agents conducted a search at Powell’s residence in California, where they seized multiple electronic devices. Powell was not charged with any crimes, while a lawyer for Powel said he’s done “nothing wrong” and that the matter is unrelated to “Mr. Powell’s employment or his conduct in the cryptocurrency arena.”

U.S. Attorney announces the first-ever criminal case involving an attack on a smart contract operated by a decentralized crypto-exchange

On July 11, U.S. Attorney Damian Williams announced the first-ever criminal case involving an attack on a smart contract operated by a decentralized cryptocurrency exchange, on the recent $9 million Solana exploit litigation. This signifies the DOJ’s will to pursue criminal charges if a person intentionally uses a protocol in a way that it was not intended to be used.  “We also allege that he then laundered the stolen funds through a series of complex transfers on the blockchain, where he swapped cryptocurrencies, hopped across different blockchains, and used overseas crypto exchanges. But none of the actions covered the defendants tracks or fooled law enforcement. And they certainly didn’t stop my office or our law enforcement partners from following the money.

Federal court rules Ripple’s XRP token is a security for institutional sales, but not for public sales

In December 2020, the Securities and Exchange Commission (SEC) brought this action against Ripple Labs Inc. and two of its senior leaders, Bradley Garlinghouse and Christian A. Larsen, claiming that they allegedly engaged in the unlawful offer and sale of securities.  On July 13, Judge Analisa Torres from the U.S. District Court of the Southern District of New York, ruled that XRP, the token itself, is not an investment contract and thus not in and of itself a security.  Ripple’s XRP is not a security when it’s sold to the broader public and thus Ripple did not violate securities law in this instance. However, she did rule that the sale of XRP did constitute an investment contract when used for institutional sales.

Coinbase temporarily halts retail staking service in four US states

On July 14, Coinbase announced that it has temporarily halted its retail staking service in California, New Jersey, South Carolina, and Wisconsin due to regulatory demands in those states. Following the SEC’s lawsuit against Coinbase earlier in June, a total of ten US states initiated their own proceedings related to Coinbase’s retail staking services.  The four mentioned states have required Coinbase to prevent retail customers from staking additional assets while their proceeding go forward. Coinbase announced that it will comply with the preliminary state orders, but will vigorously defend its staking services in those proceedings, strongly disagreeing that their staking services are securities.

Federal Reserve System Board of Governors publish 109th annual report

In July 2023, the Federal Reserve System Board of Governors published the 109th Annual Report.   Highlights regarding CBDCs: The Federal Reserve is engaged in research into central bank digital currency (CBDC), however, its work does not indicate a decision to issue a CBDC; The research focuses on how a CBDC could improve on an already safe, effective, dynamic, and efficient domestic payments system and recognizes that the implications must be thought through very carefully in order to consider important monetary policy, financial stability, consumer protection, cybersecurity, legal and privacy considerations.

SEC files charges against Quantstamp

On July 21, the U.S. Securities and Exchange Commission (SEC) filed charges against San Francisco headquartered Quantstamp, a blockchain security firm, for conducting an unregistered Initial Coin Offering (ICO) of crypto asset securities.  Via the ICO, Quantstamp raised over $28 million from about 5,000 investors.  Without admitting or denying the SEC’s findings, Quantstamp agreed to return the funds to its investors, agreed to a cease-and-desist order and to pay disgorgement of $1,979,201, prejudgment interest of $494,314, and a civil penalty of $1 million.

US GAO finds regulatory gaps in spot markets that are not securities and stablecoins

On July 22, the United States Government Accountability Office (GAO) issued a report titled “Blockchain in Finance – Legislative and Regulatory Actions Are Needed to Ensure Comprehensive Oversight of Crypto Assets,” as a result of congressional requests.  GAO highlights that although blockchain has the potential to produce cost savings, faster transactions, and other benefits over their traditional counterparts, these benefits have not been fully realized. Furthermore, significant risks have been realized (i.e. price volatility) and negatively affected consumers and investors. The FTX bankruptcy led to the discovery that a substantial portion of the platform’s assets might be missing or stolen.  GAO finds that no federal financial regulator has the authority to regulate spot markets for crypto assets that are not securities.  It also finds gaps in regulatory authority in the oversight of stablecoins. No uniform standards exist for reserve levels and risks or for public disclosure of reserves. These gaps could pose risks for financial stability, consumers and investors, that Congress should address.

Canadian regulator announces new rules for institutions that custody crypto

On July 26, Canada’s Office of the Superintendent of Financial Institutions (OFSI) announced new rules for institutions that custody crypto.  Canadian regulators have proposed capital plans for banks and insurers dealing with crypto assets, aligning their proposals with the Basel Committee’s recommendations. The plans offer institutions a choice between a comprehensive formula that assesses crypto based on risk or a simpler but less precise option, aiming to provide clarity on how to handle crypto-asset exposures concerning capital and liquidity.

SEC orders crypto firms to disclose security breaches

On July 26, the U.S. Securities and Exchange Commission (SEC) mandated that all listed companies, including crypto firms, must annually publish reports on their “cybersecurity risk management, strategy, and governance.” Additionally, the new rule enforces the disclosure of any “material” cybersecurity incidents within four business days. The aim is to enhance investor trust in public companies by providing prompt and comprehensive information on the cyberattacks’ potential impact and a detailed report of the incident and its timing.

US Senate passes military spending bill including crypto AML language

The U.S. Senate passed the National Defense Authorization Act for fiscal year 2024, which includes a provision for stricter oversight on financial institutions involved in crypto trading and addressing anonymity-enhancing crypto assets. The bill, with bipartisan support, requires the Treasury Secretary to set examination standards for crypto assets to assess risk and compliance with anti-money laundering and sanctions laws, alongside a study on combating anonymous crypto transactions. The bill awaits negotiation and passage in both chambers.

Regulatory and Legislative Analysis – EMEA

BitOasis license suspended by Dubai’s VARA due to post-licensing conditions delays

On July 10,  Dubai’s Virtual Assets Regulatory Authority (VARA) issued a market alert and enforcement actions against BitOassis.  Due to delays in fulfilling post-licensing conditions, VARA suspended BitOassis’ Minimal Viable Product (MVP) license, now holding BitOasis’ license status as not operational.  BitOasis became the first trading platform to have received an operational MVP license in April 2023, and is now reportedly working with VARA to fulfill the post-license conditions.

UK’s Bank of England Governor’s speech: new prospects for money

On July 10, Andrew Bailey, Governor, Bank of England gave a speech:  “New prospects for money”. Andrew Bailey describes the work the Bank is doing to explore innovation in money while satisfying two important foundations. The first is that wherever we hold our money, we can be confident of its value (referred to as the singleness of money). The second is that when we use money to pay for something, we can be confident the payment will settle (referred to as finality of settlement). Other highlights: “Cryptos have no intrinsic value, are highly volatile, and best treated as extremely speculative investments”. “Stablecoins used as the settlement asset for transactions in the crypto world, are not robust and, as currently organized, do not meet the standards we expect of safe money in the financial system. In particular, both fail the basic tests of singleness and settlement finality. They are not money.” Governor Bailey remains more optimistic about the prospect of enhanced forms of digital money such as programmable money using smart contracts.

UK’s FCA continues crackdown on unregistered crypto ATMs

In a July 11 press release, UK’s Financial Conduct Authority (FCA) continues its crackdown on unregistered crypto ATM’s.  Since the start of 2023, the FCA has visited and inspected 34 locations across the UK suspected of hosting crypto ATMs and has disrupted 26 ATMs operating unlawfully across the country.

Kuwait bans crypto and Virtual Asset transactions

On July 18, Kuwait’s Capital Market Authority (CMA) issued a circular in which it emphasized that the use of Virtual Assets as an investment medium and cryptocurrency mining are absolutely prohibited in the country.   Securities regulated by the Central Bank of Kuwait  and other securities and financial instruments regulated by the CMA are exempted from this prohibition.

Société Générale’s crypto unit Forge obtains first license in France

On July 19, Société Générale reportedly became the first bank in France to obtain a license for crypto services, via its crypto unit Forge.  Via the AMF license No. A2023-001 Forge can now offer services including: digital assets custody, purchase/sale of digital assets for legal tender (crypto/fiat), trading of digital assets against other digital assets (crypto/crypto), receipt and transmission of third-party orders for digital assets. trading crypto custody, trading and sales.

UK Government rejects Treasury Committee proposal to classify crypto trading as gambling

On July 20, the United Kingdom’s HM Treasury rejected a House of Commons Treasury Committee recommendation submitted earlier in May 2023, to classify crypto trading as gambling.  UK’s HM Treasury says it “firmly disagrees” with it and that classifying crypto asset trading as gambling would create a misalignment with global standards and approaches from other major jurisdictions including the EU, and potentially create unclear and overlapping mandates between financial regulators and the UK Gambling Commission.

Israeli government is enquiring about DAOs to identify appropriate regulations

On July 26, the Israeli government issued a consultation to enquire about Decentralized Autonomous Organizations (DAOs) and to identify the appropriate regulation.  The consultation is open until September 3, 2023

Nigeria’s SEC issues warning that Binance activity in the country is illegal

On July 28, Nigeria’s Securities and Exchange Commission (SEC) issued a warning highlighting that Binance activities in the country are illegal, as Binance is neither registered nor regulated in Nigeria.  The SEC urges the investing public to be wary of investing in crypto assets and other products offered by entities not registered or regulated by the SEC. secures registration approval in the Netherlands

On July 28, announced it has received approval from the Dutch central bank to operate as a cryptocurrency service provider in the Netherlands, after meeting Anti-Money Laundering and counter financing of terrorism requirements, joining 36 other registered cryptocurrency businesses in the country.

Regulatory and Legislative Analysis – APAC

Circle considers issuing stablecoin in Japan under new rules

Circle is reportedly considering issuing a stablecoin in Japan.  Under Japan’s revised Payment Services Act now in effect, stablecoin issuers will have to abide by strict rules, while stablecoins must be pegged to the Yen and guarantee that holders can redeem them at face value.   Only licensed financial institutions will be able to issue stablecoins.

Binance reenters Japan after acquiring regulated Sakura Exchange Bitcoin

After being absent from Japan for five years, Binance announced earlier in November 2022 that it had acquired 100% of Sakura Exchange Bitcoin (SEBC), an exchange regulated by the Japan Financial Services Agency (JFSA). SEBC will cease its services by May 31, 2023 and reopen as Binance Japan. Users in Japan will need to register with the new entity (pass through a new identity KYC verification process), and a migration process will be available starting from August 1, 2023 until November 30, 2023.

Regulatory and Legislative Analysis – LAC

U.S. authorities confiscate funds from Bahamian crypto friendly bank Deltec amid fraud investigation

U.S. authorities confiscated roughly $58 million of funds belonging to Deltec Bank and Trust, a Bahamian crypto friendly bank earlier in June, amid money laundering and fraud investigation as per relative federal document filed on July 17, 2023.

Bahamian fintech Island Pay launches crypto remittance platform for region

The Bahamas-based fintech company Island Pay launched “CiNKO,” a digital wallet powered by Circle’s USDC stablecoin. The platform aims to provide transaction capabilities across 30 countries and is designed to cater to both banked and unbanked populations. Reports state that there are potential cost savings of up to 80% as compared to traditional remittance methods. Island Pay is reported to seek to onboard around 100,000 by next year.

Crypto startup Ramp Network begins Latin American expansion in Brazil

Ramp Network, a startup under fintech company Ramp that offers payment infrastructure to connect crypto and traditional finance, recently opened a local entity in Brazil in a move to expand into the region. Ramp Network will offer its software development kit (SDK) for its clients, enabling their users to buy crypto via an end-to-end, non-custodial on-ramp, as well as offering a crypto to fiat off-ramp. The company cited regulatory clarity following Brazil’s December 2022 virtual service provider licensing regime as one of the reasons for choosing the jurisdiction.

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