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Cryptocurrency Regulatory and Legislative Analysis #14

Regulatory and Legislative Analysis – GLOBAL

IOSCO Issues Policy Recommendations for DeFi; proposes DeFi be regulated consistent with the “Same activity, same risk, same regulatory outcome” principal

On Sept. 7, the International Organization of Securities Commissions (IOSCO), issued a Policy Recommendations for Decentralized Finance (DeFi) Consultation Report.  This consultation report analyzes DeFi and proposes nine policy recommendations that IOSCO plans to finalize by the end of 2023, to address market integrity and investor protection concerns.  Among other, IOSCO recommends that regulators should:

  • Analyze DeFi products and services, and apply the principle of “same activity, same risk, same regulatory outcome”
  • Aim to identify the natural persons and entities of a purported DeFi arrangement or activity that could be subject to its applicable regulatory framework (i.e., those exercising control or sufficient influence over a DeFi arrangement or activity)
  • Identify and address material risks (i.e., operational and technology risks), which should be effectively managed and mitigated;
  • Require clear, accurate and comprehensive disclosures to users and investors regarding the DeFi products and services offered, to ensure that users are fully aware of the associated risks of the products or services they are interacting
  • Enforce applicable laws, promote cross-border cooperation and understand interconnections of DeFi with traditional financial markets.

IOSCO welcomes input from all stakeholders as part of this consultation process until 19 Oct., 2023.

IMF-FSB publishes Synthesis Paper: Policies for Crypto-Assets

On Sept. 7, the International Monetary Fund (IMF) and the Financial Stability Board (FSB) published their joint report on crypto-assets, to identify and respond to macroeconomic and financial stability risks associated with crypto-assets.  The paper highlights that crypto-assets have been in existence for more than a decade and have displayed significant volatility and have grown in complexity. So far, direct connections between crypto-assets and systemically important financial institutions, core financial markets, and market infrastructures have been limited. Nevertheless, they have the potential to emerge as a source of systemic risk in specific jurisdictions if they gain traction for payments or retail investments. The IMF has outlined key elements of an appropriate policy response including macroeconomic, legal and financial integrity considerations and implications for monetary and fiscal policies. In parallel, the FSB and standard-setting bodies (SSBs) have published regulatory and supervisory recommendations and standards to address financial stability, financial integrity, market integrity, investor protection, prudential and other risks derived from crypto-assets.

G20 New Delhi Leaders’ Declaration regarding crypto-assets and CBDCs

The leaders of the G20, met in New Delhi on 9-10 Sept, under the theme ‘Vasudhaiva Kutumbakam’, a Sanskrit phrase found in Hindu texts which means “The World Is One Family“. Among other topics the G20 New Delhi Leaders’ Declaration referred to crypto-assets and Central Bank Digital Currencies (CBDCs). Regarding cryptoassets the declaration highlighted that “We endorse the Financial Stability Board’s (FSB’s) high-level recommendations for the regulation, supervision and oversight of crypto-assets activities and markets and of global stablecoin arrangements”. Regarding Central Bank Digital Currency, the declaration says: “We welcome discussions on the potential macro-financial implications arising from the introduction and adoption of Central Bank Digital Currencies (CBDCs), notably on cross-border payments as well as on the international monetary and financial system”.

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

CFTC Issues Orders Against Operators of Three DeFi Protocols for Offering Illegal Digital Asset Derivatives Trading

On Sept 7, the Commodity Futures Trading Commission (CFTC) issued orders simultaneously filing and settling charges against three Decentralized Finance Protocols: Opyn Inc.: a Delaware-registered company based in California; ZeroEx, Inc.: a Delaware company based in California; and Deridex, Inc.: a Delaware company based in North Carolina.  Deridex and Opyn are charged with failing to register as a swap execution facility (SEF) or designated contract market (DCM), failing to register as a futures commission merchant (FCM), and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program, as required of FCMs.  ZeroEx, Opyn and Deridex are also charged with illegally offering leveraged and margined retail commodity transactions in digital assets.  The orders require that Opyn, ZeroEx, and Deridex pay civil monetary penalties of $250,000, $200,000, and $100,000, respectively, and cease and desist from violating the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

FinCEN Issues Alert on Preventing “Pig Butchering” crypto investment scams

On Sept 8, the Financial Crimes Enforcement Network (FinCEN) issued an alert to highlight a prominent virtual currency investment scam known as “pig butchering.”  Victims invest in supposedly legitimate virtual currency investment opportunities before they are conned out of their money.  Scammers refer to victims as “pigs,” and may leverage fictitious identities, the guise of potential relationships, and elaborate storylines to “fatten up” the victim into believing they are in trusted partnerships before they defraud the victims of their assets—the “butchering.” Multiple U.S. law enforcement sources estimate victims in the United States have lost billions of dollars to these scams and other virtual currency investment frauds.  FinCEN’s alert explains the scam’s methodology; provides behavioral, financial, and technical red flags to help financial institutions identify and report related suspicious activity; and reminds financial institutions of their reporting requirements under the Bank Secrecy Act.

FDIC Releases Report Detailing Supervision of California’s former First Republic Bank

On Sept 8, the Federal Deposit Insurance Corporation (FDIC) released FDIC’s Supervision of First Republic Bank, an internal review evaluating the agency’s supervision of San Francisco’s First Republic Bank from 2018 until its failure in May 2023.  First Republic Bank was closed on May 1, 2023, and appointed the FDIC as receiver. The FDIC entered into a purchase and assumption agreement with JPMorgan Chase Bank to assume all of the deposits and substantially all of its assets.   The report provides information on the causes of First Republic Bank’s failure and evaluates the FDIC’s supervision of the bank.

SEC Charges Creator of Stoner Cats Web Series for Unregistered Offering of NFTs

On Sept 13, 2023, the Securities and Exchange Commission (SEC) charged Stoner Cats 2 LLC (SC2) with conducting an unregistered offering of crypto asset securities in the form of purported non-fungible tokens (NFTs) that raised approximately $8 million from investors to finance an animated web series called Stoner Cats.  According to the SEC order, SC2 offered and sold to investors more than 10,000 NFTs for approximately $800 each, selling out in 35 minutes. The order finds that both before and after Stoner Cats NFTs were sold to the public, SC2’s marketing campaign highlighted specific benefits of owning them, including the option for owners to resell their NFTs on the secondary market, plus the expectation of profit, thus considering them as securities which fall under the SEC and need to be registered.  Without admitting or denying the SEC’s findings, SC2 agreed to a cease-and-desist order and to pay a civil penalty of $1 million.

U.S. lawmakers advance legislation blocking the digital dollar

On Sept 20, the House Financial Services Committee marked up two bills about a potential digital dollar, according to an announcement from chairman Patrick McHenry.  Markups are sessions in which lawmakers discuss the details of a bill, before legislation moves to the House floor.  One of the bills is the Digital Dollar Pilot Prevention Act, or H.R. 3712, which prohibits the Federal Reserve from initiating pilot programs to test CBDCs without approval from Congress.  The second legislation is an amendment to the Federal Reserve Act prohibiting Fed banks from offering certain products or services directly to an individual, along with prohibiting the use of CBDCs for monetary policy and for other purposes.

House Financial Services Committee grilled SEC’s Chairman Gary Gensler on crypto topics

On Sept 27, SEC’s chair Gary Gensler reportedly defended the SEC’s approach to crypto regulation, to the House Financial Services Committee (HFSC).  Committee chair Patrick McHenry called the SEC’s inaction in recent months “disgraceful,” referring to the SEC failing to act to address bipartisan concerns related to the agency’s actions against companies within the digital asset ecosystem.

SEC further delays decision on four Bitcoin ETF filings

On Sept 28, the U.S. Securities and Exchange Commission (SEC) has once again reportedly delayed its decision on four Bitcoin exchange-traded fund (ETF) filings. The SEC announced separate extensions for BlackRock, Bitwise, Invesco Galaxy Digital, and Valkyrie. This is the second round of delays for these ETF applications in a month.  This delay adds to the growing number of ETF applications that have faced postponements from the SEC this year.

New Bill aims to require crypto-service providers to report all off-chain transactions

On Sept 29, U.S. Democrat Representative Don Beyer introduced the Off-Chain Digital Commodity Transaction Reporting Act, legislation that would protect participants in the digital asset market by requiring trading platforms to report all off-chain transactions within 24 hours, to a repository registered with the Commodity Futures Trading Commission (CFTC).

Regulatory and Legislative Analysis – EMEA

UK’s FCA sets new rules for disclosures and crypto marketing rules 

On Sept 7, UK’s Financial Conduct Authority (FCA) set the expectations regarding the implementation of new tougher rules.  These rules are designed to make the marketing of crypto-asset products clearer, more accurate, labelled with prominent risk warnings, which must not inappropriately incentivize people to invest (i.e. incentives like ‘refer a friend’ bonuses will be banned).  These new rules will come into force on 8 Oct, however, firms could be given until 8 Jan, 2024 to introduce features that require greater technical development, with the core rules still coming into effect from 8 Oct, 2023.

Europol Releases Spotlight Report, examines Trends in Cybercrime Activities

Following the Internet Organised Crime Assessment (IOCTA) 2023, on Sept 15, 2023, Europol published the spotlight report “Cyber Attacks: The Apex of Crime-as-a-Service”. It examines developments in cyber-attacks, discussing new methodologies and threats as observed by Europol’s operational analysts. The report also outlines the types of criminal structures that are behind cyber-attacks, and how these increasingly professionalized groups are exploiting changes in geopolitics as part of their modus operandi.

Germany’s BaFin calls for global rules to also govern niche finance centers

On Sept 18, Rupert Schaefer, Executive Director for Strategy, Policy and Control for BaFin, Germany’s Federal Financial Supervisory Authority, published a post, focused on what the regulator can learn from the “turbulence” in the crypto markets.   “Some crypto assets and decentralized finance projects certainly resemble unidentifiable flying objects. It would be negligent to simply ignore them.” Schaefer compared the need for crypto regulation to flight rules, arguing that passengers are at risk if there isn’t “orderly air traffic” and highlighted that “As financial regulators, we are sitting in the tower. We must know their characteristics, understand them, know their route and intervene if necessary. This is the only way we can ensure safe and orderly air traffic. Market participants can then also benefit from distributed ledger technology (DLT) in the long term.”

Bybit is suspending services in the UK

On Sept 22, Bybit announced that it will be proactively suspending their services in the U.K., in view of the new rules introduced by UK’s Financial Conduct Authority regarding marketing and communications by crypto businesses (Policy Statement PS23/6).  In the U.K. Bybit Fintech Limited is registered under company number 14804337. Effective Oct 1, 2023 Bybit will no longer accept new account opening applications by any identified U.K. resident or national. Effective Oct 8, 2023, existing U.K. customers will no longer be able to make any new deposits, create new contracts, or increase any of their existing positions for all products and services.  They can reduce and close their positions, and withdraw their funds from our platform.

Regulatory and Legislative Analysis – APAC

MAS Issues Nine-Year Prohibition Orders Against Three Arrows Capital Pte. Ltd., Founders

On Sept. 14, 2023, the Monetary Authority of Singapore (MAS) issued nine-year prohibition orders against Zhu Su (Chief Executive Officer) and Kyle Livingston Davies (Chairman and Director) of hedge funds Three Arrows Capital, Pte. Ltd., for contraventions of the Securities and Futures Regulation, and for failing to place appropriate risk management framework, among other violations.

Japan to Ease Crypto Regulations – to Allow Startups raise funds via digital assets

According to a Sept 16, report by Nikkei, Japan is reportedly preparing to allow startups to raise fresh funding from venture capital firms through the sale of digital assets.  Japan presently restricts limited partnerships to conventional assets such as shares, stock options, and security tokens defined by Japanese securities law. The new rule would add other tokens and crypto assets to that list, expanding an area of investment that has been relatively underdeveloped in the country.  The government plans to submit the necessary legal revisions to the parliament as early as 2024.

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