Regulatory and Legislative Analysis #5
Regulatory and Legislative Analysis – United States
Various reports issued in response to the March 2022 Executive Order of responsible development of digital assets on September 16th (various links within text)
US Department of Treasury issued Action plan to address illicit financing risks of digital assets. This report discussed threats (i.e., money laundering and terrorist and proliferation financing) and vulnerabilities and risks (i.e., anonymity enhancing technologies, variance in country regulation, virtual asset service provider (What is a Virtual Asset Service Provider (VASP)? A Virtual A... More) compliance and registration, etc.) related to virtual asset activities and separates them from central bank digital currencies (CBDCs). Following the discussion of threats, vulnerabilities, and risks posed by virtual assets, seven priority actions were outlined, which included: 1) monitoring emerging risk; 2) improving global Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) regulation/enforcement; 3) updating Bank Secrecy Act BSA regulations; 4) strengthening US AML/CFT supervision over virtual assets; 5) holding illicit actors and cyber criminals accountable; 6) engaging with private sector; and 7) supporting US leadership in financial/payments technology. Each of these action plans have underlying supporting actions and US Department of Treasury has outlined future engagements.
The US Attorney General issued the Role of law enforcement in detecting, investigating, and prosecuting criminal activity related to digital assets. This publication notes the importance of mitigating illicit uses of digital assets for criminal activities such as cybercrime, ransomware, human trafficking, narcotics trafficking, etc. The report details criminal exploitation of digital assets, including examples, and also focuses on decentralized finance and non-fungible tokens. The report outlines a number of actions that could disrupt illicit activities and hold illicit actors accountable, which focus predominantly on legislative and regulatory actions (i.e., applicability of the BSA, travel rule, sentencing guidelines, statute of limitations, etc.).
US Department of Treasury issued The future of money and payments. This provides extensive background on money and payments topic, but it culminates in four recommendations to improve the US system of money and payments to best achieve an applicable range policy goals. Recommendations include: 1) advance work on a possible US CBDC; 2) encourage use of instant payments systems; 3) establish a federal framework for payments regulation to protect users and the financial system; and 4) prioritize effort to improve cross-border payments balancing payment system efficiency and national security needs.
US Department of Treasury issued Crypto-Assets: implications for consumers, investors, and businesses. The report discusses market integrity, operational, and intermediation risks, and touches on the importance of transparency for consumers, businesses, and investors. It also notes that cryptoasset activities could have negative impacts on disparate populations, though, evidence is limited. This report culminates in three recommendations all with the emphasis to protect consumers, investors, and businesses: 1) regulatory and law enforcement should monitor crypto-asset for unlawful activity and continue to bring civil/criminal action to enforce existing laws; 2) regulatory agencies should continue to use existing authorities to issue guidance/rules as needed; and 3) authorities should work individually through Financial Literacy and Education Commission to ensure trustworthy consumers, investors, and businesses have access to trustworthy crypto-asset information.
The US Department of Commerce issued Responsible advancement of US competitiveness in digital assets. The report focuses on four framework actions that could advance the competitiveness of digital asset use by the US. These actions include: 1) ensuring effective regulatory approaches and addressing gaps; 2) international engagement and trade promotion; 3) meaningful public engagement; and 4) ongoing US leadership in technology research and development.
On September 13th, OFAC released four FAQs (#s 1076-1079) pertaining to the August 8th designation of tornado cash. The FAQs provided a summary of what is prohibited (#1076) and confirmed US persons could not engage in transactions involving tornado cash without OFAC authorization (#1077). It also provided additional detail for how to handle transactions prior to the designation date (#1079) and touched upon a lack of enforcement emphasis for dusting transactions with no other sanctions nexus (#1078).
On August 15th, the Federal Reserve Board announced it has issued final guidelines “that establish a transparent, risk-based, and consistent set of factors for Reserve Banks to use in reviewing requests to access Federal Reserve accounts and payment services”. There is minimal change to prior drafts shared in May 2021 and March 2022 with six guiding principles: 1) Eligibility under Federal Reserve Act; 2) Should not present undue credit, operational, settlement, cyber, or other risks to the Reserve Bank; 3) Should not present undue credit, liquidity, operational, settlement, cyber, or other risks to the overall payment system; 4) Should not create undue risk to the stability of the US payment system; 5) Should not present undue risk to the overall economy due to money laundering, terrorist financing, or other illicit activities; 6) Should not adversely affect Federal Reserve monetary policy implementation.
Regulatory and Legislative Analysis – EMEA
Abu Dhabi Global Market (ADGM) Financial Services Regulatory Authority (FSRA) published Guiding Principles on its approach to virtual asset regulation and supervision. The guiding principles are:
- A Robust and Transparent Risk-Based Regulatory Framework
- High Standards for Authorization
- Preventing Money Laundering and Other Financial Crime
- Risk-Sensitive Supervision
- Commitment to Enforce on Regulatory Breaches
- International Cooperation
EUBOF announced the release of an updated report on the State of the European A blockchain—the technology underlying bitcoin and other c... More Ecosystem, which analyses regulatory and market maturity in 31 countries. In 2020 EUBOF analyzed 29 countries (27 EU member states, Switzerland and the UK), while the current report is a follow-up study on how the ecosystem has evolved since. Liechtenstein and Norway are new additions to this report.
Saudi Arabia’s banking regulator recently appointed Mohsen AlZahrani to lead its virtual assets and central bank digital currency program in a sign of the Gulf state’s potential crypto ambitions. Saudi Arabia has until now taken a more cautious approach on virtual assets, with officials raising concerns about their speculative nature. The Saudi government has been collaborating for several years with the UAE on a potential joint digital currency.
Nigeria and Binance in talks for a Digital City similar to the Dubai virtual free zone, that will help entrepreneurs fast track blockchain technology in the West African nation. This initial engagement was noted in a social media post by the Nigerian Export Processing Zones Authority (NEPZA). The direct of NEPZA noted that this could be designed to provide laws, tax structures, and regulation that are friendly to crypto.
Regulatory and Legislative Analysis – APAC
ASIC’s plan published in 2021 focused on reducing risk to consumers based on poor product design and governance and cyber/operational resiliency. This year’s plan broadens the focus on digitally enabled misconduct to include crypto-assets and digital scams. A few of ASIC’s planned actions will include developing an effective regulatory framework, using enforcement to protect consumers, and raising public awareness in crypto-assets and decentralized finance.
Thailand’s Securities and Exchange Commission (SEC) has announced new guidelines for advertising by A cryptocurrency (or crypto currency) is a digital asset des... More businesses, which should include a balanced view of potential risks and returns. Thai cryptocurrency businesses actively promote their products on social media and may even employ influencers and/or bloggers.
Thailand public hearings on two proposed rules applicable to digital asset business operators (links within text)
Thailand’s SEC has also issued two public consultations, one on the proposed rule to obligate the digital asset business operators to provide risk information to users and set minimum purchase value per transaction at 5,000 Thai Baht ($133). The other is on the proposed rule to prohibit the digital asset business operators to provide or involve with crypto saving (deposit taking) and lending services (lend, invest, stake) with the payment of regular interest to the customers. The proposed rules intend to increase customer protection and reduce risks. Both public consultations end on 17 Oct 2022.
Japan’s Financial Services Agency (JFSA) issues regulatory framework for cryptoassets and stablecoins. Core Concept of Stablecoins maybe privately issued cryptocurrency or algorit... More regulations cover issuers and intermediaries (buying, selling, exchanging, custody) of digital assets and stablecoins.
South Korea has started confiscating crypto for non-payment of taxes, after having enacted government regulations earlier in July 2022, which allowed the direct seizure and sale of cryptoassets at market value, for payment or delinquent taxes. The new revisions would force crypto exchanges to transfer crypto assets to the tax authorities immediately upon formal request.
Regulatory and Legislative Analysis – LATAM
In September, the executive branch has submitted a bill that would differentiate virtual asset service providers as a new type of company. It would also name the Central Bank of Uruguay as the oversight body to regulate virtual assets. Lastly, it notes that digital assets would be noted as book-entry securities. This bill would need to be approved by Chamber of Deputies and the Senate to be enacted as law within Uruguay.
The legislature previously passed a bill around crypto mining in 2022 and on August 31st, the President vetoed the bill. Per the official decree, it was noted that the primary reason in doing so was due to high energy usage by crypto mining with limited employment benefits.