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Cryptocurrency Regulatory and Legislative Analysis #9

Regulatory and Legislative Analysis – GLOBAL

The IMF publishes a report on CBDC capacity development

 On April 11, the International Monetary Fund (IMF) published a report on Central Bank Digital Currency (CBDC) capacity development, detailing its strategy to support and advise countries exploring CBDCs.  The IMF acknowledges the potential impact of CBDCs on monetary policy, financial stability, and the international monetary system (IMS).  On the flipside, it does not endorse CBDC issuance by any country, while the decision to issue a CBDC remains the responsibility of the individual authorities.   The IMF will launch a CBDC Handbook as a reference for policymakers and central bank experts, covering questions on policy objectives; building blocks (i.e., CBDC design options and technology); how to setup a Proof of Assumptions (PoA), managing a pilot; legal considerations; potential macro-financial impacts of CBDC; etc.

The Digital Currency Monetary Authority introduces a new CBDC

The Digital Currency Monetary Authority (DCMA) announced the launch of the Universal Monetary Unit (UMU), also called Unicoin, at the IMF 2023 Spring Meeting.  UMU claims to strengthen the monetary sovereignty of participating central banks, complies with the recent crypto-assets policy recommendations proposed by the IMF, and adopts a central banking monetary policy framework with minimal price volatility.  The DCMA is a world leader in the advocacy of digital currency and monetary policy innovations for governments and central banks, consisting of sovereign states, central banks, commercial, retail banks, and other financial institutions. UMU’s whitepaper is available here.

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

Paxful peer-to-peer bitcoin exchange suspends marketplace

On Apr 3, 2023, Paxful’s founder and CEO Ray Youssef announced  the suspension of the marketplace, citing staff departures and regulatory challenges, saying they’re not sure if they will come back.  All customer funds are accounted for, while customers are asked to withdraw their funds and migrate to other self-custody options.   U.S.-domiciled peer-to-peer platform Paxful (operated by Paxful Inc.), was founded in 2015, for buying, selling and trading cryptocurrencies.

Texas State regulator stops fraudulent A.I. crypto-investment scheme

On April 4, the Texas State Securities Board joined the Alabama Securities Commission and the Montana Securities Commission in filing enforcement actions to stop a fraudulent artificial intelligence investment scheme.  The actions accuse and Stefan Ciopraga of illegally soliciting investments tied to a decentralized application that purportedly uses quantum artificial intelligence to trade digital assets.  The initial scheme recently collapsed, and the respondents are now allegedly perpetrating a Ponzi scheme by raising capital from new investors to cover withdrawals from previous investors.

Treasury Releases 2023 DeFi Illicit Finance Risk Assessment

On Apr 6, the U.S. Department of the Treasury published the 2023 Decentralized Finance (DeFi) Illicit Finance Risk Assessment, the first illicit finance risk assessment conducted on decentralized finance (DeFi) in the world.  This risk assessment explores how illicit actors including ransomware cybercriminals, thieves, scammers, are abusing DeFi services to launder their illicit proceeds, as well as vulnerabilities unique to DeFi services.  It also includes recommendations for U.S. government actions to mitigate the illicit finance risks associated with DeFi services. These include: Strengthening U.S. AML/CFT regulatory supervision; Considering additional guidance for the private sector on DeFi services’ AML/CFT obligations; and Assessing enhancements to address any AML/CFT regulatory gaps related to DeFi services.

SEC charged crypto trading platform Beaxy for operating an unregistered exchange

The U.S. Securities and Exchange Commission (SEC) charged crypto trading platform Beaxy and its executives for operating an unregistered exchange, brokerage, and clearing agency. The SEC also charged the founder of the platform, Artak Hamazaspyan, and a company he controlled, Beaxy Digital, Ltd., with raising $8 million in an unregistered offering of the Beaxy token (BXY) and alleged that Hamazaspyan misappropriated at least $900,000 for personal use, including gambling.  Via its website, Beaxy announced that it is suspending its services on Beaxy Exchange (operated by Windy Inc. in the U.S.), claiming an uncertain regulatory environment surrounding its business.

SEC charged crypto asset trading platform Bittrex for operating an unregistered exchange

On April 14, the Securities and Exchange Commission (SEC) charged crypto asset trading platform Bittrex, Inc. and its co-founder and former CEO William Shihara for operating an unregistered national securities exchange, brokerage, and clearing agency. The SEC also charged Bittrex, Inc.’s foreign affiliate, Bittrex Global GmbH, for failing to register as a national securities exchange in connection with its operation of a single shared order book along with Bittrex.

White House office of Science and Technology Policy publishes the National Objectives for Digital Assets Research and Development

The White House Office of Science and Technology Policy (OSTP) published the National Objectives for Digital Assets Research and Development.  This document lays out national objectives for R&D related to digital assets, as defined in President Biden’s Executive Order (E.O.) on Ensuring the Responsible Use of Digital Assets which will help digital assets developers better reinforce democratic principles and protect consumers by default.

U.S. Texas senators propose bill to create gold-backed state-issued stablecoin

Senators from Texas: Bryan Hughes and Mark Dorazio have introduced two identical Bills (Senate Bill 2334 and House Bill 4903) proposing to create a state-issued, gold-backed stablecoin. Each unit of the digital currency issued will represent a particular fraction of a troy ounce of gold held in trust.

Texas House of Representatives passes “Proof of Reserves” bill

The Texas House of Representatives passes a bill requiring crypto exchanges to maintain reserves sufficient to fulfill obligations to customers and prohibiting the commingling of customer deposits with other accounts. The legislation will also require exchanges to produce an annual report on customer deposits and evidence of assets held by the exchange using encryption or a similar standard.  The bill will pass to the state Senate and, if passed, will come into effect from September 2023.

U.S. SEC is hiring general attorneys for its crypto-enforcement division

The U.S. Securities and Exchange Commission is looking to hire general attorneys, intended to strengthen its crypto enforcement division in New York, Washington, D.C., and San Francisco.

Binance US to delist TRON

Binance US announced that it will delist TRON (TRX), which will no longer be available on the Binance US platform from April 18.  Binance claims that the delisting is part of its periodic review of digital assets listed, to continue to meet its standard of excellence.  TRON has included Zcash-based privacy features, and thus is one of many coins that have added privacy features.

U.S. House of Financial Services Committee released draft stablecoin bill

The U.S. House Financial Services Committee has scheduled a hearing on April 19 to discuss a draft bill on regulating stablecoins.  Among other, the draft bill stipulates that an issuer of stablecoins should be a subsidiary of an insured depository institution that has been approved to issue payment stablecoins or a properly licensed nonbank entity.  Stablecoin reserves (at least 1:1 based) should be comprised of U.S. coins and currency, Treasury Bills with a maturity of 90 days or less, Central bank reserve deposits, etc.  If passed, decentralized non-custodial stablecoins (i.e., DAI), will become illegal in the U.S.  Such stablecoins are managed in a decentralized fashion, operated through smart contracts, with a goal to maintain a pegged value of 1DAI=1 USD and entirely backed up by one or more cryptocurrencies, instead of fiat.  If passed the bill will also allow stablecoins to be collateralized by insured deposits in some cases and will give stablecoin operators direct access to the Federal Reserve.

Canada’s OSFI launches consultation on fiat-referenced crypto-assets and activities

On April 17, Canada’s Office of the Superintendent of Financial Institutions (OSFI) launched an initial consultation on single fiat-referenced crypto-assets (otherwise known as stablecoins) arrangements and activities, with a goal to clarify regulations on digital assets.  OSFI seeks to collect feedback on potential gaps and risks in complying with international recommendations– from the Financial Stability Board (FSB) and asks for suggestions to address them.  The regulator particularly wishes to collect feedback on risk exposures posed by crypto-assets. Inherent risks highlighted include credit and liquidity risks, market concentration risks, run risks, as well as third-party, custodial, and operation risks, among others.  Replies should be submitted by June 16, 2023.

Bankrupt Voyager’s $1B deal with Binance US gets the green light from FED, but was eventually canceled by Binance

On April 20, Binance announced that Voyager Digital Holdings, a defunct crypto lender which filed for bankruptcy last July, has reached an agreement with the U.S. federal government that allows it to transfer its assets to Binance’s U.S. subsidiary for $1 billion. The approval comes three weeks after District Judge Jennifer Rearden temporarily halted the $1 billion agreement.  However, several days later, on April 26, Binance announced its decision to cancel the deal, saying “the hostile and uncertain regulatory climate in the United States has introduced an unpredictable operating environment impacting the entire American business community.”

Coinbase files lawsuit against the SEC to compel response and petition for crypto clarity

Coinbase has filed a lawsuit against the Securities and Exchange Commission (SEC) to respond to a petition submitted in July 2022, requesting clarity for the crypto industry.

CFTC Commissioner: All crypto companies should distance themselves from mixers and anonymity-enhanced technology

The Commodity Futures Trading Commissioner Christy Goldsmith Romero spoke in London on April 25.  Among other things, she highlighted that: digital asset technologies pose a significant risk of customer loss through cybercrime; fraud has become a hallmark of digital asset markets, the human toll of which may be overlooked; Digital assets pose non-bank financial stability risk. The CFTF Commissioner also highlighted two specific areas that contribute to financial stability risk: first, the fact that customers of crypto exchanges often do not have control of their assets (exchanges do), or bankruptcy priority, and second, conflicts of interest including vertical integration.  Thus, an exchange may also be a market maker, clearinghouse, lender, and/or custodian.  Finally, she stated that legally compliant crypto companies should distance themselves from mixers and anonymity-enhanced technology.  Financial privacy is different from anonymity, and the digital asset industry should verify digital identity.

Regulatory and Legislative Analysis – EMEA

Europol: Unprecedented law enforcement operation takes down Genesis Market.

An unprecedented law enforcement operation involving 17 countries has resulted in the takedown of Genesis Market on April 4, one of the biggest and most dangerous marketplaces, selling stolen account credentials to hackers worldwide.  Europol notes that the coordination action was led by the FBI and the Dutch National Police, while law enforcement authorities took part from: Australia, Canada, Denmark, Estonia, Finland,  France, Germany, Italy, Netherlands, New Zealand, Poland, Romania, Spain, Sweden, Switzerland, United Kingdom, United States.

The Banque de France publishes a discussion paper on DeFi

The Banque de France (BoF) published a detailed discussion paper on decentralized finance (DeFi).  It provides a brief description of the DeFi ecosystem, its main use cases, its promises but also its limitations and risks. In fact, the Banque de France prefers using the more suitable term “disintermediated finance” instead of the term “decentralized finance”.   The BoF believes that instead of fitting DeFi to the existing regulations, regulations must take into account the specific features of DeFi.  The paper explores two main potential organizational arrangements. In the first one, the infrastructure would continue to rely on public blockchains. However, these would need to be “certified” before use according to minimum security standards (i.e.  certification of computer code, minimum number of validators, cap on validation capacity concentration, certification of smart contracts etc. which will prohibit the interaction with non-certified smart contracts). In the second arrangement, financial functions would be transferred to private blockchains, in order to guarantee appropriate governance and security levels. These functions would then be managed by trusted private or public players, although this could limit the innovation capabilities of disintermediated finance. It also highlights the need to assign a legal status to “decentralized autonomous organizations” (DAOs), which would allow proper supervision, alongside supervision of intermediaries facilitating users’ access to DeFi services.   It also highlights the need to make DeFi services contingent on the level of financial literacy and risk appetite of the customer, both of which should be objectively assessed.

Société General introduces EURCV, a Euro stablecoin on Ethereum

Paris-based Société General-FORGE, a fully integrated and regulated subsidiary of Société General group dedicated to digital assets, announced it is launching the EUR CoinVertible (EURCV), a euro-denominated stablecoin on the Ethereum blockchain.  The EURCV white paper can be found here.

EU Parliament passes MiCA and new rules for crypto-assets transferring in the EU

On April 20, the EU parliament voted in favour of the first piece of EU legislation for tracing transfers of crypto-assets like bitcoins and electronic money tokens.  The so-called “travel rule”, already used in traditional finance, will in future cover transfers of crypto assets. Information on the source of the asset and its beneficiary will have to “travel” with the transaction and be stored on both sides of the transfer.  The law would also cover transactions above €1,000 from self-hosted wallets, when they interact with hosted wallets managed by crypto-assets service providers. The rules do not apply to person-to-person transfers conducted without a provider or among providers acting on their own behalf.

The Plenary also gave its final green light, to new common rules on the supervision, consumer protection and environmental safeguards of crypto-assets, including crypto-currencies (MiCA).  MiCA requires CASPs (crypto-asset service providers) to register and obtain approval from regulatory authorities in an EU country.  Once approved according to EU regulations, a CASP can “passport” its license to other EU countries, without having to obtain additional licenses. It also includes safeguards against market manipulation and financial crime. The European Securities and Markets Authority (ESMA) as well as the European Banking Authority (EBA) will oversee compliance of crypto firms.  The estimated timeline for application of the regulation is June/July 2024 for the stablecoin provisions and end-2024/early 2025 for the remaining provisions.

The UK Government publishes a discussion paper on tax treatment of DeFi lending and staking

The UK government has published a consultation paper, exploring a legislative change to the tax treatment of DeFi lending and staking.  The consultation will run for eight weeks from 27 April 2023 to 22 June 2023.

The Reserve Bank of Zimbabwe plans to introduce a gold-back digital currency as legal tender 

Cointelegraph reported that the Reserve Bank of Zimbabwe plans to introduce a gold-backed digital currency as legal tender in an effort to stabilize the country’s currency against continued depreciation against the US dollar.

Regulatory and Legislative Analysis – APAC

Dubai regulators ask Binance to provide info on ownership and governance

Bloomberg reports that Dubai’s Virtual Asset Regulatory Authority (VARA) has asked Binance to provide information regarding its ownership structure, governance and auditing procedures.

Binance’s Australia derivatives license canceled by Australia’s ASIC

On April 6, the Australian Securities and Investments Commission (ASIC) cancelled the Australian financial services (AFS) license held by “Oztures Trading Pty Ltd” trading as Binance Australia Derivatives (Binance). The license cancellation was effected in response to a request to cancel received from Binance.  Following the cancellation: with effect from 14 April 2023, clients will not be able to increase derivatives positions or open new positions with Binance. Binance will require clients to close any existing derivative positions before 21 April, 2023, after which Binance will close any remaining open positions.

Japan’s FSA adds four new crypto exchanges to its blacklist for operating without registration

Japan’s Financial Services Agency (FSA) added four new cryptocurrency exchanges have to its black list  of VASPs operating without a license, namely: Bitget, MEXC Global, Bybit and BitForex.

South Korean authorities seize $160 million in assets tied to Terra employees

The Seoul Southern District Prosecutor’s Office has reportedly confiscated roughly $160 million worth of assets (mainly real estate property), to recover the undue gains of eight people connected to the collapse of Terraform Labs, including co-founder Daniel Shin.

Luno shuts down its operations in Singapore

Global cryptocurrency company Luno announced that it will shut down its operations in Singapore claiming “regular evaluation of its global strategy and presence”.  As a result of this decision Luno has informed the Monetary Authority of Singapore of its intention to withdrawn its license application, and clarified that its operations in other regions are not impacted by this decision.  Users are instructed to withdraw all their cryptocurrency or SGD from their Luno wallet by June 19, 2023, while all Luno accounts belonging to Singapore customers will be closed by June 20, 2023.  The news come from Luno’s Co-founder Marcus Swanepoel, who will be stepping down as CEO and moving into a new role as Executive Chairman. Swanepoel is succeeded by James Lanigan, who was formerly the Chief Operating Officer.

Hong Kong court declares that cryptocurrencies are property

A Hong Kong court has declared that cryptocurrencies are property and capable of being held on trust for the first time, as reported by law firm Hogan Lovells.  The ruling was related to the March 2019 winding up of Gatecoin, which suffered a hack in 2016 and lost around $2mn in digital assets. The decision puts Hong Kong squarely in line with multiple other common law jurisdictions in recognizing the proprietary nature of digital assets.

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