CryptoLaw Newletter #19
Regulators still hold much sway over crypto markets. Financial institutions object to BIS draft rules on capital reserves for crypto. And NFT insider trading isn't insider trading, legally.
Although regulators may worry about how to supervise the booming cross-border industry, it’s clear that they still hold much sway over the industry. The avalanche of regulatory warnings against Binance have made the company cease crypto products in several jurisdictions. Now CZ, its CEO, said the headquarter-less company may need headquarters to appease regulators. Another crypto-exchange, Coinbase, withdrew plans for its crypto-lending products after SEC objections, despite its very public spat with the ‘sketchy’ regulator. Other crypto firms are ramping up efforts to create goodwill from regulators in the hope of avoiding legal trouble.
Binance: regulators aren’t done with it, yet.
Australia – Another week, another Binance product taken off the market. Binance announced it will cease crypto futures, options and leveraged tokens in Australia as from Friday (24 Sept.).
Binance’s CEO said the crypto-exchange needs centralized headquarters to work well with regulators. Binance has been on a regulatory charm-offensive for a number of weeks now, with high profile staff hires (and some equally high-profile departures…), public statements and withdrawal of some of its most controversial crypto products.
The US CFTC is reportedly looking into insider trading and market manipulation at Binance, looking into claims that Binance employees traded on customer orders before executing them. (Bloomberg) The CFTC views bitcoin and some other digital assets as commodities, bringing them within the CFTC’s regulatory perimeter.
US - Coinbase decided to shelve its plans for a crypto lending product, after its pubic spat with the SEC. (The Block) Regulatory warnings on crypto-lending products from BlockFi and Coinbase have also put crypto lender Nexo on high alert. The company is looking into different options to stay out of trouble. One option is to buy a SEC licensed broker through which it can operate. A second option is to partner with a nationally chartered bank. Finally, Nexo could try to obtain an exemption to offer securities-type products to non-accredited investors. (Coindesk)
US – OFAC sanctioned a crypto exchange for the first time. The Office of Foreign Assets Control accused Russia-based SUEX OTC of laundering ransom proceeds. It said ‘over 40% of SUEX’s known transaction history is associated with illicit actors.’
Germany – BaFin approved the first security token offering on the Liquid Network, a side-chain of the Bitcoin blockchain. (Coindesk)
Ukraine – The National Bank of Ukraine (NBU) says bitcoin does not pose any systemic risk until it has higher adoption rates and lower volatility. Its policy agenda for the coming year said the NBU wants ‘understandable’ regulation for ‘fair and efficient’ crypto circulation, but also showed a focus on private stablecoins (no surprise). Earlier this month, the Ukrainian Parliament passed the ‘On Virtual Assets’ law giving legal recognition to digital assets. (Cointelegraph and NBU)
Cuba - A resolution from the Banco Central de Cuba entered into effect, formally recognizing digital assets like Bitcoin. Resolution 215 of 2021 allows crypto-payments for commercial transactions and crypto investments. The new rule makes it easier for Cubans to use crypto for remittances. (Cointelegraph)
Lobbying – Lobbying for or against crypto? In the US, investor groups called for more crypto-regulation from the SEC. They particularly took aim at stablecoins, crypto exchanges and crypto lending. On the other side of the Atlantic, financial trade groups urged the Bank for International Settlements (BIS) not to kill crypto by over-regulation. The group, which includes ISDA, said overly conservative and simplistic proposals would preclude banks from playing any role in the crypto industry. The BIS proposed that banks cover the full value of any crypto they hold with their own capital. The open letter, on the other hand, suggests such a rigid rule fails to distinguish between crypto-assets with very different risk profiles. Instead, it wants capital reserve rules to be linked to a crypto-assets risk. (Coindesk, Decrypt and FT)
US - The US Infrastructure Bill got a lot of attention from the crypto industry for its vague provision targeting crypto-brokers. Now another provision in the 2,700-page bill has been discovered that could affect crypto-users, according to a law professor and Coin Center. Those receiving digital assets (including NFTs) must tell the government who sent it, including reporting social security numbers, when the value of the digital assets is more than $10,000. Not doing so within 15 days constitutes a felony. (Decrypt and Coin Center)
US –Judge Sarah Netburn of the district court for the Southern District of New York rejected Ripple Labs’ request that the SEC would hand over a list of its employees’ crypto transactions.
NFT marketplace provider OpenSea said its head of product might have engaged in insider trading on its platform. The issue was first exposed by a Twitter user, which accused OpenSea employee Nate Chastain of owning a few secret wallets that appeared to buy front-page NFT drops before they were listed on OpenSea, only to sell them shortly after the listing. OpenSea later published a blog post with the unassuming title ‘Employee information use at OpenSea’. The post acknowledged the behaviour and also introduced new employee policies targeting transactions of listed items by employees or employee use of confidential information for NFT transactions on OpenSea or elsewhere. Perhaps slightly surprising that it took this long to implement such policies. (Coindesk)
On a legal note: can there be insider trading for NFTs? The answer is: no. At least not for NFTs that are not financial instruments (and most wouldn’t). ‘Insider trading’ in most jurisdictions is limited to market abuse involving financial instruments or otherwise affecting financial markets. NFTs that are not financial instruments are not normally covered by insider trading rules. For example, in the EU, market abuse rules (including insider trading rules) still have a relatively narrow focus, notwithstanding a recent expansion of the scope of the UE’s Market Abuse Regulation. The EU’s draft MiCAR foresees a tailored set of market abuse rules for all crypto-assets that are not financial instruments. So, OpenSea’s CEO is correct that technically speaking, there was no insider trading on its platform. But he’s also correct that, regardless, the actions by its former employee were unacceptable, regardless of legal wrongdoing. As many in the crypto community have pointed out: any such unethical behaviour only reinvigorates calls for further regulation of this ‘Wild West’. This type of behaviour grabs the headlines for all the wrong reasons.
US – OpenLaw is rebranding as Tribute Labs. The ConsenSys-backed company previously focused on the interplay between code/smart contracts and law. It aimed to bridge the world of code and legal agreements: it worked on “legal contracts that work with Ethereum”, offering smart contract tools to be used within legal agreements. The company even announced Word-compatibility of its smart contract library. Now the company will pivot towards becoming a DAO incubator: it wants to help DAOs navigate the US legal framework. OpenLaw is co-founded by Cardozo Law School’s Aaron Wright. (Decrypt)
US – The Boston Blockchain Association in cooperation with the Chamber of Digital Commerce released the Massachusetts Legislators’ Toolkit for Blockchain Technology. It follows the template of the State Legislators’ Toolkit for Blockchain Technology published three years ago by the Chamber of Digital Commerce. The Toolkit recommends that the Massachusetts lawmakers: (i) establish a state blockchain working group, (ii) create a blockchain sandbox, (iii) clearly define virtual currencies (following the definition adopted in Texas: ‘digital representations of value that function as a medium of exchange, unit of account, and/or store of value, often secured using blockchain technology’), (iv) standardise tax obligations and (v) develop blockchain-pilot projects in the state such as blockchain-based municipal bonds or digital identity.
The CBDC Tracker tool was updated to reflect the latest announcements on central bank digital currency projects around the world. And, as the Tracker shows, there are now lots of governments piloting, assessing or exploring CBDCs. The CBDC Tracker website has several contributing partners, including BCG and the Digital Euro Association. Another useful CBDC tracking resource is the one developed by the Atlantic Council.
We’re exploring new content. From regulatory overviews for key jurisdictions to short interviews and more in-depth topical blogs. Suggestions or requests? Let us know! a s c c 2 [at] c a m [dot] a c [dot] uk.
Thanks for reading!