Crypto insolvency lawyers working overtime. Triple ECB report: stablecoins, DeFi and climate impact. BIS-IOSCO on DeFi. Singapore to tighten rules. Where's Binance again?
CryptoLaw Newsletter #58
Crypto repeat of 2008? Retail users bear brunt of losses in crypto insolvencies
ECB suggests banks holding energy-intensive crypto should be penalized with additional capital requirements.
ECB also warns of stablecoin holding concentration: 80-90% held by large investors, only 3% by retail users. DeFi’s UNI circulating supply held by team, early and large investors.
Russia bans all crypto payments. Singapore to tighten crypto rules.
Binance to reveal HQ choice ‘in due course’
Important stablecoins should follow existing rules on settlement & credit, liquidity risk, says BIS-IOSCO.
Crypto bankruptcies: a repeat of 2008? Retail investors will likely bear the brunt of insolvent crypto lending firm Celsius. Lawyers for the insolvent crypto lender claim users gave up title to the crypto they deposited into Earn and Borrow accounts, according to the firm’s lawyers.11) Celsius says that anyone in the EARN program has no crypto that belongs to them (i.e., stop thinking of it as *your* crypto). Celsius is the owner of the crypto assets. Most of the assets in Celsius came in through the EARN program and is part of the estate.
Interest-bearing lending accounts have attracted regulatory scrutiny, with California’s regulator stating it is investigating multiple crypto interest account providers and Celsius facing investigations by at least 6 US states. The insolvencies Celsius or Voyager Digital show we need clearer bankruptcy guidelines to protect crypto holders as creditors, some bankruptcy experts warned. Law firm Debevois explains the open insolvency law questions. Why did these insolvent entities repay money owed to DeFi applications? Bankless explains why automatic smart contract execution makes DeFi apps “the most senior lender” in practice: “DeFi apps never needed to take 3AC or Celsius to court to receive their capital back. They have first dibs on the collateral, and they also have custody of that collateral. The agreement is bound by smart contracts.”
Singapore’s MAS wants to expand crypto regulations to a broader set of activities. It may tighten retail access to crypto even more.
Russia expands its crypto payment prohibition: security tokens, utility tokens and NFTs cannot be used as forms of payment. Previously, only payment tokens were covered by the ban. Meanwhile, a palladium-backed stablecoin was issued by a government-backed company.
ECB on stablecoins, DeFi and crypto climate impact.
Climate impact: It’s “difficult to see how authorities could opt to ban petrol cars over a transition period but turn a blind eye” to energy-intensive crypto assets. Government intervention is likely, the ECB said, and crypto investors aren’t correctly pricing in this risk. Moreover, crypto holdings can’t be part of an ESG investment strategy, the ECB warned. The Basel Committee could consider penalizing crypto holdings by banks, by imposing additional capital requirements for crypto with high energy requirements, the ECB suggested. Banks beware.
Stablecoins should be brought into the regulatory perimeter with urgency. The ECB is concerned about redemption restrictions for stablecoin users and the concentration of stablecoin holdings among large investors: more than 80-90% of the top stablecoin supply (Tether, USDC and Dai on Ethereum) is held by large investors, and only 3% or less is held by retail investors, it found.
DeFi, like traditional finance, suffers from excessive leverage and risk taking, liquidity mismatches and interconnectedness, according to the ECB. Anonymity and the lack of centralised entry points make regulating and policing DeFi difficult. However, we need to carefully disentangle actual regulatory gaps from lack of enforcement, the ECB said. The report also repeated concerns on centralized control over DeFi protols: “80% of the total supply in circulation of [decentralized exchange] Uniswap’s governance token UNI is held by the Uniswap team, early investors and token holders with balances of over 1 million UNI”. Holders of governance tokens, decentralised autonomous organisation and platform developers could be brought into the regulatory perimeter, the ECB suggested.
Systematically important stablecoins should follow the same settlement rules as traditional finance, according to final guidance issued by the BIS and IOSCO. The existing Principles for Financial Market Infrastructures (PFMI) apply to such stablecoins.
👉A systemically important stablecoin arrangement should:
💡 provide clear and certain final settlement, regardless of the operational settlement method used,
💡 should have little or no credit or liquidity risk for stablecoin used for money settlements.
Rankings like this are catchy, but not particularly helpful. What’s ‘crypto friendly’ depends on what you’re looking for. I’ve spoken to many crypto start-ups and they may have very different reasons to choose one jurisdiction over another.
Binance. Where is crypto giant Binance headquartered? We’ll know ‘in due time’. The crypto exchange was fined €3.3m by the Dutch Central Bank for continuing to serve Dutch customers without registration. Meanwhile, the exchange continued to process a number of trades by Iranian users despite US sanctions.
India’s central bank wants to ban cryptocurrencies, according to the Minister of Finance.
Crypto threatens monetary sovereignty of developing countries, according to a United Nations policy brief. The UN suggests strict crypto rules, such as a ban on crypto ads.
Insolvency proceedings of crypto hedge fund 3AC reveal multiple ties with other crypto companies.
South Africa’s Reserve Bank will regulate digital assets as financial assets. New crypto rules will be introduced in the coming year.
Dubai unveils its metaverse strategy. Shanghai earlier included the metaverse, NFTs and web3 in its 5-year plan.
Japan relied on crypto self-regulation… but it isn’t going very well.
The US and UK to deepen ties on crypto regulation:
What do sanctions mean for DeFi?
US. The CFTC cracks down on crypto pump & dump scheme by late McAfee associate. Seven bitcoin mining companies use nearly the same amount of electricity required to power all residences in Houston, Texas, according to US lawmakers. The US Treasury released a framework for international engagement on digital assets. Stablecoin Bill Won’t Force All Issuers to Be Banks, Congressman Says. An ex-Ripple advisor was confirmed as US Fed Vice Chair for supervision.
US SEC – Ripple litigation. A US judge refused to grant attorney-client privilege to the now-famous Hinman speech, in which former SEC official William Hinman said Ether was not a security. “The hypocrisy in arguing to the Court, on the one hand, that the Speech is not relevant to the market’s understanding of how or whether the SEC will regulate cryptocurrency, and on the other hand, that Hinman sought and obtained legal advice from SEC counsel in drafting his Speech, suggests that the SEC is adopting its litigation positions to further its desired goal, and not out of a faithful allegiance to the law,” the judge ruled in the SEC’s ongoing legal battle with Ripple.
Brazil’s parliament postponed a vote on a draft crypto law until after the presidential elections in October.
Privately issued digital assets, if properly regulated, can be better than CBDCs, says chief of Australian central bank.
"Despite the Terra-Luna incident I think crypto and DeFi won't disappear - though they might be held back - because the technology and the business innovation behind these developments are likely to be important for our future financial system," Hong Kong Monetary Authority CEO Yue said.
Paraguay’s parliament approves a draft law on crypto mining tax and regulatory framework.
Licensing & approvals. Crypto exchange Coinbase gained regulatory approval in Italy. Singapore-based Fintopia obtained a (provisional) virtual asset license in Dubai. So did OKX.
MetaGov research on DAO constitutions:
IP issues for NFTs.
US sales tax on NFT purchases.
Academic corner: What are NFTs and why are they so controversial? (CLS Blue Sky Blog)
The UK Parliament’s Treasury Committee released a public consultation on the role of crypto and blockchain technology. The Committee wants to hear views about the potential impact of stablecoins and a CBDC, the effectiveness of the current legal regime and lessons that can be learned from other countries’ crypto rulebook. Written submissions can be made until 12 September.
The Belgian financial regulator FSMA is asking for feedback on its communication on the classification of crypto assets. Submissions can be sent until 31 July.
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