CryptoLaw Newsletter #18
Ukraine's crypto law; the very public Coinbase - SEC spat; both BIS and ESMA talk about DeFi; Honduras and Guatemala looking into CBDCs; Australian central bank hiring for CBDC research group
Ukraine – The Ukrainian Parliament adopted the ‘On Virtual Assets’ bill, legally recognizing crypto-assets in the country. The new law regulates crypto-exchanges operating in the country and allows banks to open bank accounts for crypto-companies. The new law draws on anti-money laundering rules set by the Financial Action Task Force (FATF) and requires crypto-exchanges to disclose their beneficial ownership structure. Implementation of the new rules will be overseen by Ministry of Digital Transformation. (Cointelegraph) Critics of the law think the new rules may stifle innovation, but proponents argue it will create a sound legal basis for the digital asset industry in the country and shield crypto companies from recurring raids by enforcement agencies.
US - Tension between the regulators and the crypto industry are rising. Coinbase CEO Brian Armstrong took to Twitter to lambast the Securities and Exchange’s “sketchy” behaviour. He accused the regulator of “engaging in intimidation tactics behind closed doors”. The SEC threatened to sue Coinbase if it pursued plans to launch its high-yield crypto-lending project, suitably called LEND. LEND would offer a 4% interest rate for certain stablecoin owners. Coinbase’s Chief Legal Officer Paul Grewal said in a Medium post that the SEC refused to share its analysis on why LEND violates securities laws. (According to this Ledger Insights article, however, the SEC’s reference to the 1990 Reves case shows the agency did reveal its analysis.) Coinbase also criticized the SEC for creating an uneven playing field, with other companies already offering similar products in the US. To some, openly criticizing the SEC in this way is not the smartest move. Others encouraged Coinbase to let themselves be sued by the SEC, to have the SEC’s broad interpretation of ‘securities’ tested in court, rather than relying on ‘regulation by enforcement’ by the agency. A few days after Coinbase’s public spat with the SEC, SEC Chair Gensler suggested that many of the digital assets that can be traded on Coinbase may be securities. (Decrypt) As Decrypt noted:
“If the SEC concludes that dozens of Coinbase's offerings are indeed securities, the company would likely have to delist them and could face a series of fines and investigations. Such a development would amount to a devastating blow for the broader crypto industry, since Coinbase is arguably regarded as the most mainstream crypto firm and has long billed itself as eager to operate within the law.”
US – The the SEC’s move against Uniswap Labs and the recent clash with Coinbase have been interpreted by many as a sign of what’s ahead: increased regulatory scrutiny for the crypto industry and DeFi. New rules regulating stablecoins area also in the cards. The US Treasury met with financial industry representatives to gain insights on stablecoin risks. According to one person present, quoted by Reuters, “Treasury officials appeared to be gathering information and did not share their thinking on how stablecoins should be regulated.” (Reuters)
US – The Internal Revenue Services (IRS) said it will make guidance on tax reporting obligations for crypto-brokers a priority. The topic is one of 193 priority areas, to which the IRS will dedicate extra resources between now and June 2022. The plan is independent of the controversial crypto-broker provision in the Infrastructure Bill. (Coindesk)
US – The SEC settled a case with three companies accused of an unlawful securities offer involving digital assets. The settlement requires the three companies to pay almost US$540 million.
India – The Income Tax department is reportedly considering crypto traders and crypto exchanges. The government plans to release a legislative proposal to clarify which crypto income would be taxable. (Cointelegraph)
El Salvador – The rollout of bitcoin as legal tender did not go as smoothly as planned. On the first day of the controversial new BitcoinLaw entering into force, user patience was tested with Chivo app glitches and long queues at ATMs to convert bitcoin received through a government-backed programme into… US dollars. (Reuters, BBC)
Uzbekistan – The country does not plan to review its 2019 ban on crypto-payments. The deputy chairman of the Central Bank of Uzbekistan, Behzod Khamraev, predicts authorities will “never” accept citizens to use crypto-assets such as Bitcoin as payment. (Cointelegraph)
China – The cyberspace commission in Hebei province will crack down on virtual currency mining and trading, citing concerns over crypto’s environmental impact. (Reuters)
EU - The European Securities and Markets Authority (ESMA) looked at digital assets in its Trends, Risks and Vulnerabilities Report 2021. ESMA mentioned crypto’s environmental impact and price volatility. “Most crypto assets (CAs) are highly volatile in price and operate outside of the existing EU regulatory framework, which raises investor protection issues,” it wrote. It took aim at stablecoins, referring to Tether’s recent reserve breakdown. The report also raised concerns on the “increasing the risks of potential spillover of DeFi risks to the real economy,” pointing to DeFi’s rapid growth.
BIS – The head of the Bank for International Settlemets, Benoit Coeure, asked whether central bank money can replace the widespread use of private stablecoins in DeFi. He referred to the concerns over stablecoin reserves and the contagion risk this could pose . Coeure said DeFi will challenge financial intermediation, and banks in particular. (Ledger Insights)
EU - ESMA’s Trends, Risks and Vulnerabilities Report 2021 mentioned above thinks the risks of DeFi spilling over into the real economy are increasing, pointing to DeFi’s rapid growth and the price correlation with other crypto asset classes. Stablecoins blur the boundaries between centralized and decentralized finance, according to the report. (Coindesk)
Honduras and Guatemala are looking into central bank digital currencies. Honduras central bank president Wilfredo Cerrato said the board of directors approved a study to assess the feasibility of a CBDC. The Central American Monetary Council (Consejo Monetario Centroamericano) is well placed to evaluate CBDC adoption in the region, he said. In Guatemala, the Central Bank’s VP Jose Alfredo Blanco said a committee was formed six months ago to look into its own CBDC, the iQuetzal. (Reuters)
Australia – The Reserve Bank of Australia is shoring up its CBDC research team. A LinkedIn job posting revealed the central bank is creating a new multi-disciplinary team, which will be “responsible for designing, executing and communicating the results from a series of research projects aimed at improving our understanding of the case for, and implications of, issuing a CBDC as well as exploring different technical solutions.”
Digital euro – Chainlink and other collaborators published A Digital Euro: Europe’s Chance to Secure a Role in the Global Internet Economy. The report looks into various design options for a digital euro. One of its policy recommendations is to ‘[t]ailor the Digital Euro to fit the needs and realities of the European startup, scaleup and DeFi ecosystems.’
What impact will blockchain-based smart contracts have on antitrust (competition law)? Thibault Schrepel, associate professor at VU Amsterdam and Faculty affiliate at Stanford, released a 3-minute video on the topic for the OECD. His book Blockchain + Antitrust: The Decentralization Formula will be published soon (we’ll let you know once it is!).
US – CFTC Commissioner Dan Berkovitz is stepping down on October 15. Berkovitz had recently warned that DeFi derivatives may violate federal rules. The CFTC will need to shore up its top ranks: Brian Quintenz left the agency in August and took up a (part-time) advisory role at a16z. Heath Tarbert, former chair, left earlier this year. That leaves only two Commissioners instead of five.
Thanks for reading!