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Cryptocurrency Regulatory and Legislative Analysis #8

Regulatory and Legislative Analysis – GLOBAL

The FATF released a report to prevent and address ransomware attacks

On Mar 14, 2023, the Financial Action Task Force (FATF) released a report titled “Countering Ransomware Financing” that aims to improve global understanding of the financial flow linked to ransomware and provide a list of potential risk indicators to help authorities and the private sector detect such financial flows. Among the recommendations are: Accelerate implementation of the “Travel Rule” (FATF 40 recommendation); Criminalize Ransomware; Promote financial investigations and asset recovery efforts; Adopt a multi-disciplinary approach to tackle ransomware; Support partnerships with the private sector; Improve international cooperation.

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

Silicon Valley Bank shut down by regulators, impacts USDC 1:1 dollar peg

At the time of the failure, Silicon Valley Bank (SVP), a commercial bank headquartered in Santa Clara, California, was the 16th largest bank by deposits in Silicon Valley, with 17 branches in California and Massachusetts, approximately $209 billion in total assets and $175 billion in total deposits, as of Dec 31, 2022. On Mar 10, 2023, SVB suffered a bank run and was forced to sell long-duration assets, to meet the deposit redemption demand. This, as a result, created a short-term liquidity crunch, leading the Federal Deposit Insurance Corporation (FDIC) to step in to administer the bank.

The Circle-issued USD Coin (USDC), the world’s second largest stablecoin by market cap, pegged and fully collateralized 1:1 to the US Dollar, held $3.3bn of its reserves with SVB. This caused USDC to lose its 1:1 peg trading at 0.89 at Mar 11th, eventually returning to its 1:1 peg following the Department of the Treasury, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, joint statement saying they will repay all depositors of both banks (Silicon Valley Bank and Signature Bank). Circle highlighted in its update, that USDC is currently collateralized 77% ($32.4B) with US Treasury Bills, and 23% ($9.7B) with cash held at a variety of institutions. Anyone can view the entire liquidity ladder down to the CUSIP number on T-Bills via the USDXX ticker. Following the closure of SVB, the FDIC created Silicon Valley Bridge Bank, National Association. All of the deposits—both insured and uninsured—and substantially all assets of SVB were transferred to the bridge bank. On Mar 27, 2023, FDIC announced that it entered into a purchase and assumption agreement for all deposits and loans of Silicon Valley Bridge Bank, National Association, by First–Citizens Bank & Trust Company, Raleigh, North Carolina. SVB Securities (the investment bank) and SVB Capital (the venture capital and credit investment business) are not in FDIC receivership. SVB Financial Group is reportedly exploring several strategic options for SVB’s nonbank affiliates. Their fates remain uncertain. In a ripple effect, in the UK, the Bank of England sold the UK subsidiary of Silicon Valley Bank (SVPUK) to HSBC for $1.

Crypto-friendly Silvergate bank, voluntarily shuts-down operations

On Mar 01, 2023, Silvergate Capital Corporation, a bank headquartered in California, publicly traded on the NYSE (SI), which provided banking services to crypto businesses, declared in a Securities and Exchange Commission (SEC) filing that it was unable to file its Annual Report for the fiscal year ended Dec 31, 2022, within the prescribed time period. Unlike Swiss crypto banks, Sygnum Bank and SEBA Bank AG – which are effectively custodians with a banking license, Silvergate Bank held clients’ deposits on-balance sheet, appearing as liabilities and with those deposits, the US crypto banks purchase assets, with the objective to earn income.

According to Fidelity 90% of Silvergate’s deposits were from crypto firms. Due to the collapse of FTX (one of Silvergate’s key clients), and the crypto-market downturn, Silvergate suffered a significant flood of crypto withdrawals, over $8 billion in Q4 2022 alone. To repay in full the outstanding advances of $4.3 billion received from the Federal Home Loan Bank of San Francisco, Silvergate was forced to sell $5.2 billion in long-term securities, leading to record losses of $948 million for the year ended in Dec 31, 2022 (unaudited statements), compared to net income $75 million for the previous year ended Dec 31, 2021. Key VASPs, such as Coinbase, Bitstamp, Galaxy, Gemini and stablecoin issuers Paxos and Circle, dropped Silvergate as their banking partner. On Mar 8, 2023, Silvergate announced that the bank planned to voluntarily wind down operations and liquidate to completely repay all deposits. The stock sank from $23 on Jan 3, 2023, to $2.26 on Mar 16, 2023.

New York Department of Financial Services assumes control of Signature Bank

Signature was a New York state-chartered commercial bank and was FDIC-insured, with total assets of approximately $110 billion and total deposits of approximately $88 billion as of Dec 31, 2022. Following the shutdown of Silicon Valley Bank, on Mar 12, 2023, the New York Department of Financial Services (NYDFS) announced that it had taken over Signature Bank, a big lender in the crypto-industry, naming the FDIC as receiver of the bank. This was the second failure of a crypto-focused bank in three days.

The collapse of Silicon Valley Bank triggered a -some argued irrational- bank run on deposits on Signature bank, since this was neither a big high-tech lender, nor had crypto as their own asset (as Silvergate did), but facilitated two of their business customers who wanted to deal with each other in crypto to do so. Additionally, Signature had large uninsured depositor customers way beyond the FDIC $250K maximum insured threshold, due to the fact that their customer base is made up of major property owners, who panicked and started withdrawing.

The reasoning for the closure of Signature was not due to being under collateralized, (the NYDFS has not said that the bank is insolvent), rather that they posed a systemic risk to the financial system with their banking relationships with crypto firms. Barney Frank, a former congressman and architect of the landmark Dodd-Frank banking regulations, now serving as a board member of Signature Bank suggested that Signature was the victim of a political attack, with the regulators wanting to send a very strong anti-crypto message, even if banks are doing “crypto stuff” responsibly. However, the regulators did identify some underlying concerns: i.e. being investigated by U.S. Department of Justice for work with crypto clients, and pre-existing probes by the DOJ for possible AML and tax violation related to crypto transactions.

Joint Statement by Treasury, Federal Reserve, and FDIC

On Mar 12, 2023, the Department of the Treasury, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, released a joint statement saying they would repay all depositors of both banks (Silicon Valley Bank and Signature Bank) and take other steps to contain the risk of a larger banking crisis.

FED to provide additional funding to banks to meet all of their depositor’s needs.

On Mar 12, 2023, the Federal Reserve Board announced it would make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy.

President Biden Urges Congressional Action to Strengthen Accountability for Senior Bank Executives

Following the collapse of the two banks Silicon Valley and Signature, President Biden urges congressional action to strengthen accountability for Senior Bank Executives. President Biden asked Congress to take action to strengthen the ability of the federal government to hold senior management accountable when their banks fail and enter FDIC receivership because of mismanagement and excessive risk taking, and expand FDIC’s authority to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again.

NYDFS fines BitPay 1M consent order for AML and Cybersecurity Deficiencies

On Mar 16, the New York Department of Financial Services (NYDFS) fined BitPay, a bitcoin payment services provider $1 million, following two examinations and an enforcement investigation for violations of the Virtual Currency and Cybersecurity regulations. Specifically, the NYDFS found that BitPay failed to maintain an effective AML program: applying risk rating processes, policies and procedures governing AML risks, quality assurance and onboarding process. BitPay will also be required to submit to the NYDFS an action plan describing in detail its remediation of the above violations, as well as projected completion dates.

Is ETH a security? NY Attorney General Sues KuCoin for Failing to Registery On Mar 14, 2023, New York Attorney General Letitia James filed a lawsuit against Seychelles based KuCoin for failing to register as a securities and commodities broker-dealer and for operating as a virtual currency trading platform without a license. KuCoin also allegedly sells unregistered securities in the form of KuCoin Earn, while Letitia James also claimed in court that “Ethereum” is a security. If Ether (ETH) is deemed a security by a state court, it could prompt federal regulators to act against a major crypto asset, which could mean that every crypto exchange in the U.S. would need to register as a securities trading platform with the SEC.

11 U.S. banks announced $30 billion in deposits into First Republic Bank

On Mar 16, 2023, 11 U.S. major banks announced $30 billion in deposits into First Republic Bank. As part of the aid package, JPMorgan Chase, Bank of America, Citigroup and Wells Fargo have agreed to each put $5 billion in uninsured deposits into First Republic. Morgan Stanley and Goldman Sachs will deposit $2.5 billion each into the bank. The remaining $5 billion would consist of $1 billion contributions from BNY Mellon, State Street, PNC Bank, Trust and US Bank. In a joint statement by the Department of the Treasury, Federal Reserve, FDIC and OCC, “this show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system”.

Subsidiary of New York Community Bancorp, Inc., to assume deposits of Signature Bridge Bank, N.A., from the FDIC On Mar 19, the FDIC entered into a purchase and assumption agreement for substantially all deposits and certain loan portfolios of Signature Bridge Bank. The 40 former branches of Signature Bank will operate under Flagstar Bank, a wholly owned subsidiary of New York Community Bancorp’s Inc. The branches will open during their normal business hours. Customers of Signature Bridge Bank, N.A., should continue to use their current branch until they receive notice from the assuming institution that full-service banking is available at branches of Flagstar Bank, N.A.

White House’s Economic Report of the President remains critical regarding the benefits of Digital Assets On Mar 20, 2023 the White House released the Economic Report of the President, together with the annual report of the Council of Economic Advisers. Chapter 8 is titled “Digital Assets: Relearning Economic Principles”, with the first section of chapter 8 titled “The Perceived Appeal of Crypto Assets”. The report remains critical of crypto stating: “Crypto assets to date do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient; instead, their innovation has been mostly about creating artificial scarcity in order to support crypto assets’ prices—and many of them have no fundamental value”. The report did not provide recommendations for regulatory actions to address any of the cited concerns, but it also remains optimistic with regard to the uses of the underlying technology: “Even so, as companies and governments experiment with DLT, it is conceivable that some of their potential benefits may be realized in the future”.

U.S. FED releases a report detailing reasons for denying Custodia Banks application The United States Federal Reserve released an 86-page report detailing the reasons for denying Custodia Bank’s application for membership in January, including the bank’s involvement in the crypto space. The Board has determined that approval of Custodia’s application for membership in the Federal Reserve System would be inconsistent with the managerial, financial, and corporate powers factors that the Board is required to consider under the 12 U.S. Code § 322- Determination on application. These concerns were further elevated due to Custodia being an uninsured depository institution and may impact how other policymakers will consider approving further projects. As of the time of the pre-membership examination, the Board assessed that Custodia had not yet developed a sufficient risk-management framework for its proposed cryptoasset-related activities, nor had it addressed the highly correlated risks associated with its undiversified business model, nor had it demonstrated that it could satisfactorily manage the significant ML/TF and Sanctions risks presented by its proposed business plan.

CFTC sues Binance On Mar 27, 2023, the Commodity Futures Trading Commission (CFTC) filed a civil complaint, against various Binance entities: Binance Holdings Limited, Binance Holdings (IE) Limited, Binance (Services) Holdings Limited, and against Changpeng Zhao (Chief Executive Officer) and Samuel Lim (former Chief Compliance Officer). Gretchen Lowe, the Chief Counsel and Principal Deputy Director of the CFTC’s Enforcement Division, asserted that the crux of the Commission’s complaint against Binance centers around the defendants’ purported intentional evasion of U.S. laws. The CFTC’s enforcement action against Binance showcases the agency’s determination to pursue digital asset platforms. Binance’s CZ responded via a Binance blog that same day: “Today, the CFTC filed an unexpected and disappointing civil complaint, despite our working cooperatively with the CFTC for over two years.” CZ and Binance claim that the compliant has incomplete facts.

Vietnamese Operator of ChipMixer Charged with Money Laundering, ransomware attacks, Darknet Markets, Fraudsters, and State-Sponsored crypto-heists

On Mar 15, 2023, the U.S. Justice Department announced a coordinated international takedown of ChipMixer, a Darknet cryptocurrency mixer that processed over $3 billion of unlawful transactions between 2017 and the present, and has fueled ransomware attacks, state-sponsored crypto-heists and darknet purchases across the globe. The operation involved U.S. federal law enforcement’s court-authorized seizure of two domains that directed users to the ChipMixer service and one Github account, as well as the German Federal Criminal Police’s (the Bundeskriminalamt) seizure of the ChipMixer back-end servers and more than $46 million in cryptocurrency. Alongside this closure, Minh Quoc Nguyen, 49, of Hanoi, Vietnam, was charged today in Philadelphia with money laundering, operating an unlicensed money transmitting business and identity theft, connected to the operation of ChipMixer. to sunset its USD deposits and withdrawals informed its U.S. customers that as a proactive measure, it would be sunsetting its USD deposit and withdrawal features. This decision was made in light of current uncertainty surrounding the U.S. banking system and until the banking environment

crystalizes with certainty. Starting April 3, 2023, customers will no longer be able to maintain balances in USD, but will still be able to use USD to instantly buy digital assets. Earlier in Feb 2023, the FDIC issued a cease-and-desist letter to demanding that they stop claiming that U.S. dollars held in’s fiat currency wallets were FDIC insured, and to take immediate corrective actions to address these false and misleading statements.

Bittrex to close its US operations

After nine years of operations, U.S. domiciled Bittrex announced that it will be closing its U.S. operations, effective April 30, 2023, claiming viability reasons to continue operating in the current unclear U.S. regulatory and economic environment. Bittrex highlighted that all customer funds remained safe and could be fully withdrawn immediately, and that this decision did not impact non-U.S. customers using Bittrex Global.

Regulatory and Legislative Analysis – EMEA

Project Icebreaker explores how a retail CBDC can be used in cross-border payments

On Mar 6, 2023, the central banks of Israel, Norway and Sweden and the BIS Innovation Hub shared the results of Icebreaker, a project to explore the potential benefits and challenges of using retail CBDC in cross-border payments. It tested the technical feasibility of interlinking retail CBDCs, to conduct cross-border/cross-currency transactions between different DLT-based CBDC proofs of concept. The project was a collaboration between the Bank of Israel, Norges Bank, Sveriges Riksbank and the BIS Innovation Hub.

FCA investigates illegal operation of crypto ATMs On Mar 8, 2023, the U.K. Financial Conduct Authority (FCA) announced that it conducted a joint operation with the Metropolitan Police to inspect various locations in East London as part of a broader crackdown on the illegal operating of crypto ATMs.

EU Parliament passes draft smart contract regulation under Data Act Smart contracts fall under Article 30 of the Data Act, on “essential requirements regarding smart contracts for data sharing.” Smart contract developers may need to design reset possibilities to allow termination or interruption of transactions. The legislation, and its provisions on smart contracts, is not explicitly aimed at the crypto industry, but focuses on data from connected devices, or the Internet of Things. However, some worry that if not clearly defined, the Data Act may have far reaching

effects on crypto i.e. smart contracts used in DeFi. The legislation will now travel into trialogue negotiations, where each EU institution will defend its position.

Luxembourg law supports DLT securities as collateral

On 9 March 2023, the Luxembourg Parliament adopted the Bill of Law 8055, amending the Luxembourg Act dated 5 August 2005 on financial collateral arrangements, that recognizes DLT-based securities as collateral. It also expands the definition of financial instruments to include those issued under the EU’s DLT Pilot Regime, which comes into force later this month.

UBS to buy Credit Suisse for more than $3 billion to end crisis

UBS to pay more than $3 billion to buy Credit Suisse in government brokered deal. This is more than Swiss Franc 0.50 per share in its own stock, up from an earlier bid of Swiss Franc 0.25, however, the mover was made by preventing a UBS shareholder vote. The Swiss National Bank has agreed to offer a $100bn liquidity line to UBS as part of the deal. Credit Suisse total assets are $578 billion roughly twice compared to Silicon Valley Bank ($209 billion), while Credit Suisse major stakeholders include Saudi National Bank (9.9%), Qatar Holding LLC (5%), Olayan Group (4.9%), BlackRock Inc,. (4%), Black and many others fall below 3 per cent.

Eight Russian exchanges use Telegram and money couriers to deliver cash in London

Transparency International Russia released a report highlighting that at least eight Russia-based crypto exchanges, privately offered USDT transfers, eventually delivered as cash in London via Russian speaking money couriers. No ID was required when making the exchange, while none of the eight cryptocurrency exchanges were registered for anti-money laundering purposes in the U.K. Instead, a photo of any banknote with a serial number is being used, which must be shown to the money courier upon delivery. Most common way to communicate with the crypto exchange is Telegram chat or a live chat on its website. The eight exchanges are: Pridechange, Bitokk,, Finex24, Mychange, 24ExPay, Suex, Trust-exchange.

German Banks to offer bitcoin trading

German Dwpbank to will offer bitcoin trading to 1,200 affiliate banks via a new platform, wpNex, that will offer bitcoin to all of its affiliates’ retail customers in the second half of this year. The service will feature crypto accounts alongside bank customers’ other accounts and will not require additional Know Your Customer procedures. Wallet-as-a-service provider Tangany and Bankhaus Scheich’s Tradias digital asset trading service will also participate in the new offering. Retail customers will not hold private keys. The bank plans on offering other cryptocurrencies, digital assets and tokenized securities in the future.

Regulatory and Legislative Analysis – APAC

India’s Ministry of Finance brings crypto assets under its existing Prevention of Money Laundering Act (PMLA).

On March 7, 2023, the government issued a notification to bring transactions involving crypto assets under the Prevention of Money Laundering Act. It laid out the nature of transactions to be covered under PMLA to include: fiat-to-crypto, crypto-to-crypto exchanges, transfers and safekeeping. The measure is expected to aid investigative agencies in carrying out action against crypto firms. The Enforcement Directorate and Income Tax Department have either probed or are probing several cases of companies running cryptocurrency exchanges and transactions.

RBI and UAE Central Bank sign MoU on CBDC collaboration On Mar 15, 2023, the Reserve Bank of India (RBI) announced its entry into a memorandum of understanding (MoU) with its counterpart in the United Arab Emirates (UAE), to enable collaboration on emerging areas of banking, including financial technology and research into central bank digital currencies (CBDCs).

Regulatory and Legislative Analysis – LATAM On March 17, 2023, Venezuelan President Nicolás Maduro announced the reorganization of the National Superintendency of Crypto Assets (Sunacrip) – the country’s top cryptocurrency regulatory authority. The administration claims that the move aims to shield Venezuelan citizens from the adverse impacts of economic sanctions, among other reasons.

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