CryptoLaw Newsletter #23

US dominates bitcoin mining; France tests blockchain-bonds; antitrust + blockchain event; Bank of England speech on stablecoins; bitcoin is owned by the rich; Tether is fined (again); DAO-companies?

Hello Cryptolawyers,

China’s bitcoin mining crackdown benefited the US, which now controls 35% of the hashrate. A long Bank of England speech on cryptoassets. Shares of public companies worth trillions of dollars may be exposed to crypto-assets. France tests blockchain-bonds. Bitcoin is mostly owned by the rich. Should MakerDAO become a US company? Another week full of interesting events in the crypto world!

Interested in antitrust and blockchain? Join the online panel on Antitrust + Blockchain on 27 Oct. at 5.30pm London time. Dr. Thibault Schrepel (VU Amsterdam and Stanford) will present his new book. Cambridge’s Dr. Okeoghene Odudu will comment, followed by Q&A. Register here.

Here are the key highlights of the week:

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Digital assets

  • UK – A long speech on digital assets from a Bank of England official zoomed in on stablecoins and a bit of decentralised finance (DeFi). Jon Cunliffe, Deputy Governor at the BoE tried to strike a balanced tone. His conclusion? “Crypto technologies offer a prospect of radical improvements in financial services. However, while the financial stability risks are still limited, their current applications are now a financial stability concern for a number of reasons.” For a summary, see our blog post here.

  • UK – Over £146 million has been lost due to cryptocurrency fraud in the UK, according to a police report. This is 30% more than in 2020. The average loss per victim was just over £20,500. 18 to 25 year olds accounted for the highest percentage of cryptocurrency fraud reports (11%) and over half (52%) of victims were aged 18 to 45 years old.

  • Russia – Crypto has “the right to exist” and can be used as a means of payment, said president Putin to CNBC.  However, cryptocurrency is not supported by anything at present, he added. “Asked whether crypto could be used as an alternative to the greenback, President Vladimir Putin said it was “too early to say”.”(Bloomberg)

  • US – The Department of Justice is now also jumping on crypto-assets. Earlier this month, the DoJ announced a new National Cryptocurrency Enforcement Team (NCET). It’s clear the DoJ is serious about cleaning ship: NCET will “tackle complex investigations and prosecutions of criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors.” Cointelegraph tries to understand what this might mean for crypto.

  • US – OFAC (the Office of Foreign Asset Control) published its Sanctions Compliance Guidance for the Virtual Currency Industry, describing compliance requirements, consequences of non-compliance and best practices. Chainalysis explains what it means here. The effectiveness of US sanctions, which have exploded in volume in recent years, is under pressure due to digital assets and adversaries turning away from US dollars in favour of other currencies, the report finds.

  • US – Two crypto regulatory proposals from crypto-exposed companies: centralised crypto-exchange Coinbase and Andreessen Horowitz (a16z), which is one of Coinbase’s investors. Although the tone of both proposals is slightly different, their key propositions shouldn’t come as a surprise. Read our summary here. Coinbase repeats an often-heard call to create a single regulator to oversee digital assets. The US would  lag even further “behind”, Coinbase warned, if it does not come up with an appropriate legal framework. The “unified approach” to digital assets in the UK, European Union and Singapore, can serve as a source of inspiration, according to the proposal.  A16z’s proposal is broader: it is a vision on Web3 in general.

  • Australia – De-banking was a serious obstacle for many crypto companies in the early days of the crypto boom (and still is, in many places): banks would refuse to open bank accounts for crypto-exposed companies due to compliance concerns. One crypto trader sued a bank for de-banking him due to his crypto trading activities. ANZ (the Australia and New Zealand Banking Group) settled the case. The trader is pursuing separate claims against WestPac, another bank that de-banked him due to his crypto trading activities. (Cointelegraph)

  • Nigeria – Despite official disapproval, Nigerians continue to rely on crypto-assets. “"Crypto just allows me to transact freely and within minutes we are done with our transactions," said one art dealer. (Reuters)

  • Global – Shares of public companies worth trillions of dollars may be exposed to crypto-assets, MSCI research found. According to the report, 52 publicly listed companies covered by MSCI ESG research may have “creeping” crypto exposure. Risks of such exposure are not limited to known ESG risks, but also risks such as governance of crypto projects. Many of the board members of those publicly listed companies likely aren’t very familiar with crypto, which means they probably don’t fully understand what the crypto exposure means for their companies. (MSCI and Decrypt)

  • Global – A ransomware summit organised by the US called for greater international coordination on ransomware incidents. The summit included representatives from the EU, Japan, US and several other countries. (WSJ)

  • Global – Who uses and mines bitcoin? We’re (very) short on empirical studies in the crypto industry, but two researchers from MIT and LSE published an article that gives us some more data to work with. Their key findings: (1) 80% of Bitcoin volume in an average week can be traced to exchanges; (2) illegal activity is a small fraction (3%) of what actually goes on in the Bitcoin blockchain; and (3) prior to China’s most recent (and most serious) crypto crackdown, bitcoin miners were hugely concentrated, with around 60% – 70% located in China (but that we knew already – and it has changed recently, as we discuss below). It also finds that bitcoin ownership is concentrated among the rich. This confirms earlier (limited) empirical data we have on crypto-ownership.


Stablecoins

  • EU – European Central Bank- Fabio Panetta, member of the ECB’s Executive Board, delivered a speech on the intersection between stablecoins and big tech. The confluence “of these two dynamics means that stablecoins, which have limited take-up and use cases so far, could expand rapidly at the global level by relying on the large existing users’ base of big techs. These developments warrant careful monitoring, as the risks brought about by such structural changes may be abrupt and potentially disruptive. If we want to build a future-proof regulatory framework at the global level, we should address the three main challenges that the confluence of big techs and global stablecoins create.” The 3 main challenges, in his view are: (i) altering the structure of financial intermediation (such as Amazon’s lending business), (ii) influencing developments in global financial markets (vast holdings of liquid assets by Big Tech) and (iii) altering the process of money and credit creation (e.g., if stablecoin issuers amass large amounts of highly liquid assets that banks also want to purchase, “banks’ funding conditions could become more expensive and volatile”.

  • US –  Tether was hit with another fine: this time by the CFTC. The regulator fined Tether and Bitfinex for US$42.5 million in total. Tether, the company behind the world’s largest stablecoin, was fined $41 million for making untrue or misleading statements and omissions about its reserves. According to the CFTC, “Tether held sufficient fiat reserves in its accounts to back USDT tether tokens in circulation for only 27.6% of the days” in a 26-month sample period. It also said that Tether “relied upon unregulated entities and certain third-parties” to hold the reserves, “comingled reserve funds with Bitfinex’s operational and customer funds; and held reserves in non-fiat financial products.” The CFTC also mentioned undocumented arrangements with third parties to hold reserve assets. Moreover, the CFTC repeated a by now familiar story: “Tether transferred Tether reserve funds to Bitfinex, including when Bitfinex needed help responding to a “liquidity crisis”.”  . Bitfinex was fined $1.5 million for engaging in “illegal, off-exchange retail commodity transactions in digital assets with U.S persons” and operating without the required registration. The trading platform thereby violated an earlier order from 2016, the CFTC said. (CFTC and Coindesk)


DeFi

  • “The highly decentralised and global structure of the DeFi sector along with the difficulty to trace end users provide a unique set of challenges for regulators,” said a Bank of England official in a long speech on cryptoassets. See our summary of the speech here.

  • (De)centralised? MakerDAO has had an intriguing journey oscillating between centralisation and decentralisation. It is one of the few examples of a fully decentralised DAO. Now some are publicly wondering whether MakerDAO should incorporate as a company in the US (or another jurisdiction), pay its taxes and avoid being classified legally as a partnership, with all the legal consequences that entails for the ‘partner’-users. The discussion was brought up by a governance token holder, who’s the largest governance delegate in the Maker network. Perhaps the governance tokenholder got cold feet: if MakerDAO is classified as a partnership in the US, would this tokenholder (with all the voting clout he holds) be one of the first to face liability as a ‘partner’? The Defiant did a deep dive.


Blockchain

  • France – A 10-month trial tested the use of blockchain for French government bonds. The trial involved IBM and Euroclear, in addition to several big banks. The bonds were tokenized on-chain and roughly 500 “instructions” took place in the trial, using central bank issued digital assets for payment. (FT)

  • Global – The US became the new number 1 jurisdiction in terms of hashing power (mining activity) on the Bitcoin blockchain. After China’s most recent (and most serious) crypto crackdown, miners left the country in droves. The US benefited the most and now controls 35% of hashing power, followed by Kazakhstan with 18.1% (up from 8.2%) and Russia with 11% (up from 6.8%), according to the latest update from the Cambridge Centre for Alternative Finance. For a summary, see our blog post here.


DAOs

The “code is law” mantra is becoming old (and is factually just incorrect), but can we say that “code is normative” in that it signals what is acceptable and what isn’t? Even if code does not signal social norms that’s no free pass for unethical behaviour, according to the tweet below. The key point: law signals and encodes values and norms. Law serves as a signpost of behaviour that it deems acceptable or desirable. Can (and should) code achieve the same? Or do we need to rely on users’ sense of ethics to make sure input/output software does not derail into unacceptable behaviour? As Vitalik Buterin suggested in a post on decentralized governance: the tightly knit communities we currently see in many decentralized networks may not survive very long. In that scenario, peer pressure may no longer be sufficient to tackle unethical behaviour. Can social expectations be encoded in the software?


CBDC

  • Japan – Bank of Japan wants a “simple” digital yen that can seamlessly be integrated into private payment tools. (Reuters)

  • Ghana – Ghana wants to make its CBDC available off-line, using smart cards. Kwame Oppong, head of fintech and innovation at the Bank of Ghana (BoG), said the e-cedi could overcome connectivity issues for users without reliable internet access. If payments with the Ghanaian CBDC would not require users to be online, this offers much better prospects for financial inclusion for the country’s population, only half of which has internet access. (Bloomberg)

  • What’s happening with CBDC research in Asia? “Major Asian banks have shown great interest in CBDCs as reports show collaborative efforts by Thailand’s, Hong Kong’s and China’s central banks to create a digital ledger technology (DLT) for a CBDC prototype designed to bridge cross-border gaps,” writes Cointelegraph. The article gives an update on the CBDC R&D  in these jurisdictions, as well as the Philippines, Singapore, Cambodia, Japan, Thailand and Vietnam.


Academic corner

  • Antritrust + Blockchain: Dr. Thibault Schrepel (VU Amsterdam and Stanford CodeX Center) published his book Antitrust + Blockchain. The book offers a legal, economic, and technical analysis of antitrust and blockchain, explores the anticompetitive practices that may arise, covers enforcement issues and offers different ways of creating effective regulations and enforcement mechanisms. The book is freely available on Edward Elgar’s site.

  • Sovereign Digital Currencies: Parachute Pants or the Continuing Evolution of Money,” by Kimberly Houser and Colleen Baker, is available on SSRN (forthcoming in NYU Journal of Law & Business)

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Thanks for reading and stay tuned for more news on crypto & law next week!