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Cryptocurrency Regulatory and Legislative Analysis #13

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

SEC freezes assets and charges 18 Utah defendants in $50M fraud

On August 3, the U.S. Securities and Exchange Commission (SEC) secured a temporary asset freeze and restraining order against Digital Licensing Inc. (also known as “DEBT Box”) and its principals. The agency’s complaint alleges an ongoing fraudulent scheme involving the sale of unregistered securities through “node licenses,” where DEBT Box deceived investors by falsely claiming crypto mining activities and revenue generation.

Coinbase moves to dismiss SEC lawsuit

On August 4, Coinbase filed a Memorandum of Law seeking the dismissal of the SEC’s lawsuit, claiming the regulator’s jurisdiction is exceeded and asserting that the transactions on its platform are commodity sales, not investment contracts. The SEC had sued Coinbase for allegedly violating securities laws by operating without registration and naming specific cryptocurrencies as securities.

Paypal launches a US dollar stablecoin

On August 7, payments giant Paypal announced it has launched PayPal USD (PYUSD), a U.S. dollar denominated stablecoin.  PayPal USD is designed to be redeemable 1:1 for U.S. dollars, is issued by Paxos Trust Company and is the only stablecoin supported within the PayPal network.

SEC charges Richard Heart, founder of Hex, Pulsechain and PulseX for offering unregistered crypto assets

The U.S. Securities and Exchange Commission (SEC) charged Richard Heart and three unincorporated entities that he controls, Hex, PulseChain and PulseX, with conducting unregistered offerings of crypto asset securities, that raised more than $1 billion.  The SEC also charged Heart and PulseChain with fraud for misappropriating at least $12 million of offering proceeds to purchase luxury goods including sports cars, watches, and a 555-carat black diamond known as ‘The Enigma’ – reportedly the largest black diamond in the world.

Revolut suspends U.S. crypto platform, allows UK customers to transfer their crypto

Revolut is reportedly closing its U.S. crypto platform, suspending access to cryptocurrencies in the U.S.  citing an “evolving regulatory environment and the uncertainties around the crypto market in the U.S.” Starting September 2, U.S. customers will not be able to buy crypto via Revolut, but can continue to sell for 30 more days before access is fully disabled.   On the flip side, Revolute will reportedly allow its U.K. crypto customers to transfer bitcoin purchased on the platform elsewhere for the first time.

Bitstamp halts trading of seven tokens in the U.S.

On August 8, Luxembourg-based Bitstamp announced that starting from August 29, 2023, it will suspend trading for seven tokens in the U.S. classified by the SEC as securities.  The tokens are: Axie Infinity (AXS), Chiliz (CHZ), Decentraland (MANA), Polygon (MATIC), Near Protocol (NEAR), The Sandbox (SAND) and Solana (SOL).  Bitstamp USA, Inc. is licensed to engage in Virtual Currency Business Activity and is additionally licensed as a Money Transmitter by the New York State Department of Financial Services.

IRS claims staking rewards are taxable once investor receives payout

The U.S. Internal Revenue Service (IRS) has stated that cryptocurrency investors that stake cryptocurrency native to a proof-of-stake blockchain, and receive additional units of cryptocurrency as rewards when validation occurs, must consider these rewards as income in the year they gain control of the tokens.

The FDIC issues its 2023 Risk Review report

On August 14, the Federal Deposit Insurance Corporation (FDIC) issued its 2023 Risk Review Report.  The report presents key risks to banks in five broad categories—credit risk, market risk, operational risk, crypto-asset risk, and climate-related financial risk.  Interestingly, crypto-asset risk represents a new section to the FDIC’s report, compared to previous reports and discusses the FDIC’s approach to understanding and evaluating crypto-asset-related markets and activities. Specifically for crypto-asset risk, the FDIC finds that “Crypto-assets present novel and complex risks that are difficult to fully assess”.  Some of these key crypto-related risks include: fraud, legal uncertainties, misleading or inaccurate representations and disclosures, immature risk management practices lacking robustness, operational risks and possible contagion risk resulting from interconnections among certain crypto-asset participants with banks.  To assess these risks the FDIC has developed processes to engage in robust supervisory discussions with banking organizations regarding proposed and existing crypto-asset-related activities and provide case-specific supervisory feedback”.

U.S. Treasury and IRS release proposed regulations on Sales and Exchanges of Digital Assets by Brokers

On August 25, The Internal Revenue Service (IRS) released a notice of proposed rulemaking and notice of public hearing, containing proposed regulations regarding information reporting, the determination of amount realized and basis, and backup withholding, for certain digital asset sales and exchanges.  The definition of digital currencies is expansive as they continue evolving, and as an example, the IRS specifically mentions NFTs which may be bought and sold, often as speculative investments on digital asset trading platforms.   The buying and selling of NFTs raise tax administration concerns similar to the concerns associated with other types of digital assets that the physical analogues of NFTs do not.  Public comments are due by the end of October and public hearings are scheduled for November 7th.

X (Twitter) obtains license to store, transfer and trade bitcoin and crypto

On August 28, Twitter Payments LLC, the payment branch of X (Twitter) was approved by Rhode Island for a license request to store, transfer and exchange Bitcoin and other digital assets on behalf of its users. The license also includes related service providers, such as wallets, payment processors, and exchanges.

Grayscale wins SEC lawsuit for Bitcoin ETF review

According to August 29 court filings, U.S. Court of Appeals Circuit Judge Neomi Rao, ordered Grayscale’s petition for review to be granted and the Securities and Exchange Commission’s (SEC) order to deny the Grayscale Bitcoin Trust (GBTC) listing application be vacated.  With this decision, crypto asset manager Grayscale Investments, won a major victory against the U.S. SEC in its efforts to convert its over-the-counter (OTC) GBTC into a listed Bitcoin exchange-traded fund (ETF).  The SEC has delayed or rejected similar ETF application in the past including Blackrock, Fidelity, Ark and others.

U.S. Court dismisses class action against Uniswap, declares BTC and ETH as commodities

On August 29, a New York court dismissed a proposed class action lawsuit alleging leading decentralized crypto exchange Uniswap was responsible for causing harm to investors by allowing scam tokens to be issued and traded on the protocol. “[…] in the context of a decentralized protocol’s smart contracts, the Court finds that the smart contracts here were themselves able to be carried out lawfully, as with the exchange of crypto commodities ETH and Bitcoin.”  Citing an absence of relevant regulation whether such tokens constitute securities, commodities or something else, the court concluded that that the investors’ concerns “are better addressed to Congress than to this Court.”

Canada’s FINTRAC clarifies role in overseeing MSB’s

On August 31, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) issued information to consumers about the regulator’s role in overseeing Money Services Businesses (MSBs).  The document offers background into the types of money services businesses in Canada, as well as foreign money services businesses. Among other things, FINTRAC emphasizes that registration of MSBs with FINTRAC does not equate to FINTRAC’s endorsement of the business, thus, customers are warned to conduct their own research before using MSBs.

Regulatory and Legislative Analysis – EMEA

FAFT publishes its third Enhanced Follow Up Report on the UAE

The Financial Action Task Force (FATF) published its third Enhanced Follow Up Report on the United Arab Emirates (UAE). While deciding to keep the country on its Grey List of jurisdictions under increased monitoring, the FATF recognized the efforts made by the UAE to strengthen its AML/CFT frameworks and address any shortcomings. Out of the 40 FATF Recommendations, the UAE is now considered to be “Fully Compliant” with 15, “Largely Compliant” with 24, and “Partially Compliant” with only one.

Latvijas Banka 2023 financial stability report finds payments in crypto declining

On August 2, the Central Bank of Latvia (Latvijas Banka) issued is Financial Stability Report.  Latvijas Banka covers crypto in section 5: Development and risks of the non-bank financial sector and finds that: “The number of the people purchasing crypto-assets as well as making payments with payment cards to invest in crypto-assets in Latvia declines.  This can be explained by global developments such as the negative sentiment of investors, detected cases of fraud and cases of insolvency of large crypto-asset market.  In 2022, payments made by individuals with payment cards issued by Latvian credit institutions to holders of crypto-asset wallets reached 51.8 million euro (10.7 million euro in the first three months of 2023).  The main risks attributable to the crypto-asset market are related to unwise investments by consumers in risky and fraudulent assets, the increasing link of crypto-asset companies to the supervised financial sector participants, as well as involvement in money laundering and other illegal activities”.

Sultanate of Oman invites public input on new VA and VASP regulatory framework

The Capital Market Authority, the supervising regulatory authority of the Sultanate of Oman (CMA), issued a public consultation paper, planning to establish the new regulatory framework for Virtual Assets (VA) and Virtual Asset Service Providers (VASP). Stakeholders, including financial institutions, legal firms, and consumer groups, were invited to provide comments by 17 August 2023.

Ireland’s Department of Finance issues consultation paper on MiCAR transposition

On August 9, 2023, the Department of Finance, Government of Ireland, issued a Markets in Crypto Assets Regulation (MiCAR) Public Consultation paper, which seeks to obtain submissions on the transposition of national discretions included within MiCAR (EU 2023/11141).   MiCAR is the first European-level legislation introducing a harmonized and comprehensive framework for crypto-assets, covering issues from the offering to the public of crypto-assets to preventing market abuse in crypto-asset markets. The legislation provides a set of prescriptive rules that will shape the functioning of the European markets in crypto-assets, including transparency rules, authorization requirements, customer protection rules and an anti-market abuse framework. As a Regulation MiCAR has direct effect. However, there are a number of provisions in the Regulation to which full harmonization does not apply and Member States are given discretion as to whether and how to apply these provisions. The four national discretions this consultation seeks feedback on include: Article 88 (1): Public disclosure of inside information; Article 111 (2): Administrative penalties and other administrative measures; Article 143 (2): MiCAR transition period; and Article 143 (6): Simplified authorization procedure.  The consultation period will run from 9 August to 15 September 2023.

Jacobi Asset Management lists first Spot Bitcoin ETF in Europe

On 15 August 2023, Jacobi Asset Management reportedly listed Europe’s first spot Bitcoin ETF on Euronext Amsterdam. The Jacobi FT Wilshire Bitcoin ETF represents the first digital asset fund compliant with SFDR Article 8 through its decarbonisation strategy. Jacobi has implemented a verifiable built-in Renewable Energy Certificate (REC) solution which allows institutional investors to access the benefits of Bitcoin whilst also meeting ESG goals.  The ETF, regulated by the Guernsey Financial Services Commission (GFSC), trades under the ticker BCOIN. Custodial services are provided by Fidelity Digital Assets, with Flow Traders operating as market makers and Jane Street and DRW as Authorized Participants. Fund benchmark, the FT Wilshire Bitcoin Blended Price Index, is provided by Wilshire Indexes with the REC solution created in collaboration with digital asset platform, Zumo. 

UK’s Travel Rule comes into effect on Sept 1.

UK’s Financial Conduct Authority (FCA) reminds that as of 1 September 2023, UK’s “Travel Rule” comes into effect.  As a result, Virtual Asset Service Providers (VASPs) are required to share specific sender and receiver information for cross border cryptocurrency transactions over a threshold, with a goal to prevent crime such a money laundering.

Regulatory and Legislative Analysis – APAC

New Zealand publishes a report on the nature, impact and risks of cryptocurrencies

The New Zealand (NZ) House of Representatives’ Finance and Expenditure Committee published a report on its inquiry into the nature, impact and risks of cryptocurrencies.  The report makes 22 recommendations regarding digital currencies that the Government should consider. obtains major payment institution license in Singapore

Cryptocurrency platform announced it obtained a payment license in Singapore on August 1, 2023, which will allow the exchange to provide regulated digital payment token services to its global institutional and accredited investor customers.  Singapore’s regulator granted the platform a preliminary approval in October 2022.

Singapore finalizes the country’s stablecoin regulatory framework

On August 15, 2023, the Monetary Authority of Singapore (MAS) officially announced the finalization of the country’s stablecoin regulatory framework, which took shape after a public consultation which opened in October 2022. The regulatory framework in Singapore focuses on single-currency stablecoins (SCS) pegged to the Singapore Dollar or any G10 currency issued in Singapore.   The MAS noted in its response that other types of stablecoins “will not be prohibited from being issued, used or circulated within Singapore.” However, such assets will be subject to the already-existing Digital Payment Token (DPT) regulatory regime under the Payment Services Act 2019 (PSA 2019).  The final regulatory framework is composed of four key pillars:

  • Value Stability: reserve assets must be held by eligible custodians, in segregated accounts, in low-risk and highly liquid assets that are at all times valued at 100% or more of outstanding SCS in circulation. Overseas-based custodians are permitted, so long as they maintain a minimum credit rating of Ai and have an MAS-regulated branch in Singapore.
  • Capital/Prudential Requirements: Issuers must maintain base capital of $1 million or 50% of annual operating expenses and demonstrate solvency by maintaining more than 50% of annual operating expenses in liquid assets (cash, cash equivalents, Certificate of Deposits, Money Market Funds, etc.). MAS also put certain business restrictions on issuers such as trading digital payment tokens, extending loans to other companies or staking digital assets.
  • Redemption: Issuers are required to return the par value to SCS holders within five business days from a redemption request. Redemption conditions must be reasonable and disclosed at the outset.
  • Disclosure: Issuers must publish the SCS whitepaper online and disclose the value stability mechanism of the SCS, holder rights and audit results of reserve assets.

Stablecoins that fulfill all requirements can apply to have their stablecoin labeled as a “MAS-regulated stablecoin.” The labeling system is used to give use the ability to readily distinguish between those approved by the Monetary Authority. Misrepresentations will be placed on the MAS’ Investor Alert List and persons responsible will be subject to penalties.

For SCS issuers that are banks, the MAS has currently excluded tokenized bank liabilities from the framework, highlighting the potential for unnecessary barriers for banks looking to enter the stablecoin space. However, they indicated that they may impose additional requirements on tokenized bank liabilities in the future. Non-bank issuers will not be subject to the framework so long as their issued SCS does not exceed S$5 million in circulation.

For SCS issued in multiple jurisdictions, MAS decided to not allow multi-jurisdictional issuance at this time and will require issuance solely out of Singapore if issuers wish to be recognized as MAS-regulated. They cited the nascent state of global stablecoin regulations and technical standards not yet allowing tracing of the issuance origin as the primary reasons for their decision here.

SEBA (Hong Kong) Ltd awarded an Approval-in-Principal from the SFC in Hong Kong

On August 30, Swiss-based SEBA Bank, announced that an Approval-In-Principle (AIP) from the Securities and Futures Commission (SFC) in Hong Kong has been issued to its regional subsidiary, SEBA (Hong Kong) Limited, to operate regulated activities in virtual assets, when this license is issued.

Regulatory and Legislative Analysis – LAC

Drex, the new Brazilian CBDC

On August 10, the Banco Central do Brazil (BCB), announced that the Brazilian digital currency project (CBDC), created and operated by BCB, has been renamed “Drex” and has a new logo. Previously referred to as Real Digital, it will provide a secure and regulated environment for developing new businesses and more democratic access to the benefits of the economy’s digitalization, both for individuals and entrepreneurs.

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