CryptoLaw Newsletter #35
Is Diem dead? OECD on DeFi; Reuters deep-dive into Binance; US Fed consults on digital dollar; Russian president wants central bank and finance ministry to find consensus on crypto.
The OECD published a lengthy report on DeFi; the US Fed releases its digital dollar consultation document, while the SEC rejected Microstrategy’s bitcoin accounting; Indonesia’s financial regulator reminds financial institutions they cannot market or facilitate crypto transactions; the IMF wants El Salvador to repeal the legal tender status of bitcoin; Bolivia formalizes crypto ban; and Russian president Putin calls on the central bank and the finance ministry to find common ground on crypto regulation - here are the legal highlights of the week:
Russia – The Bank of Russia released a report reiterating calls for a de facto crypto-ban. Although the central bank does not intend to clamp down on individual ownership of crypto assets, it wants a ban on crypto-related activities such as mining or trading. Crypto assets are „widely used in illegal activities“, according to the report, and existing financial infrastructure should not be used for crypto activities. It's not the first time we hear very critical official statements on crypto, but that has not prevented billions of dollars worth of crypto exchanging hands in Russia last year, according to the Bank of Russia's own estimates. The Ministry of Finance doesn't agree. President Putin asked for both to come to a consensus and to weigh crypto's risks against its competitive advantage. (Reuters, Coindesk and Coindesk)
UK – As the EU continues to discuss its Markets in Crypto Assets (MiCA) draft regulation, some UK parliamentarians want to make sure the UK doesn't miss out on crypto entrepreneurship. A cross-partisan parliamentary working group on Crypto and Digital Assets was established recently to push for more crypto-friendly rules. It's „unacceptable“ for the UK to fall behind on crypto innovation, said the group's chair, MP Dr. Lisa Cameron. She called for a clear regulatory framework on crypto-assets „to remain competitive as a place for crypto businesses and not lose out to other more favorable regimes overseas.” (Coindesk)
US – The White House could release a government-wide plan on crypto assets as soon as February, Bloomberg reported, and call on federal agencies to report on their risks and benefits. /// Congress held another crypto-hearing, this time on energy consumption. The meeting, organized by a subcommittee of the House's Energy and Commerce committee, was partly taken up by explaining basic concepts such as the difference between proof-of-work (PoW) and proof-of stake (PoS). Witnesses, including Cornell's Ari Juels and former acting Comptroller of the Currency Brian Brooks, discussed energy consumption and the role of renewables in crypto mining. Juels's key message was a simple one: “bitcoin does not equal blockchain”. He also acknowledged that PoS, although less energy-intensive, risks making the rich richer. (US Congress and Coindesk) /// Crypto exchanges will face more scrutiny from the SEC, its Chair Gary Gensler said. He added he had “asked staff to look at every way to get these platforms inside the investor protection remit”. (Bloomberg) /// And more SEC crypto action. The agency rejected MicroStrategy's bitcoin accounting. In a letter from December that was made public only recently, the SEC wrote it “objected” to the way in which MicroStrategy accounted for the decline in value of the bitcoins held on its books (impairment charges, in the accounting jargon). The company has bought a large amount of bitcoin, which means its reported value could fluctuate heavily as bitcoin prices make sharp moves upwards and downwards. (SEC and Decrypt)
Indonesia – Financial service institutions are not allowed to use, market or in any way facilitate crypto asset trading, said the Financial Services Authority (OJK). Crypo trading has surged to 859 trillion rupiah (over $59 billion) according to some reports. (Reuters) OJK's announcement comes on the heels of three Islamic groups denouncing crypto as haram. (Cointelegraph) Last week, we mentioned the crackdown on crypto advertisements targeting retail investors in a number of jurisdictions, such as Singapore, the UK and Spain. The OJK'statement does not go as far, but still puts financial institutions on notice that they shouldn't market crypto assets.
Canada – A Canadian consumer advocacy group warned of “exploding” crypto scams. (Decrypt)
Germany – An overview of crypto and blockchain-related legal rules and proposals as per Cointelegraph.
Thailand – A joint regulatory committee will re-assess rules on cryptocurrencies used as payment tools. The Thai Securities and Exchange Commission, Bank of Thailand and the Ministry of Finance joined forces to assess the risks posed by crypto payments, including volatility, technology and compliance risk. (Cointelegraph)
El Salvador- The International Monetary Fund expresse concern, once again, on using bitcoin as legal tender. According to an IMF report, El Salvador's „adoption of a cryptocurrency as legal tender … entails large risks for financial and market integrity, financial stability, and consumer protection. It also can create contingent liabilities.“ The country should narrow its Bitcoin Law. by removing bitcoin’s legal tender status. The report also „expressed concern over the risks associated with issuing Bitcoin-backed bonds“.(Coindesk)
Bolivia formally ratified a crypto ban earlier this month, more than a year after the central bank issued its first crypto prohibition resolution. (Cointelegraph)
Bulgaria – The government is exploring crypto payments in the short or medium term in discussion with the country's national bank and industry, said Minister of Finance Assen Vassilev. (Bloomberg)
Are crypto-VCs dumping altcoins on Coinbase? „If coins, especially VC-backed coins, consistently underperformed Bitcoin/Ethereum after listing on Coinbase, that says to me that insiders were waiting for a big, dollar-based exchange to list so they could sell - VCs taking profits at the expense of retail,“ wrote Fais Khan. His analysis showed a difference between tokens listed on Coinbase and those that the crypto-exchange considered listing but never did. Most Coinbase-listed coins underperformed and venture capital-backed coins did worst of all, Khan found. The coins that never made it to a Coinbase-listing performed better than those that were listed. Interestingly, VC-backed coins that never made the Coinbase-listing cut did not underperform, as opposed to VC coins that were listed on the exchange. He calls for stricter (de)listing rules on crypto exchanges: "Coinbase has no rules currently around minimum market cap, minimum number of shareholders, or minimum trades per day. ...The NYSE and NASDAQ have many such rules, which is why they have the best reputations in the world. These also include rules about how much stock can be controlled by the management team.“ Khan mentioned the relationship between Coinbase and one of its investors, well-known crypto-investment firm a16z, which has a large portfolio of crypto-companies it invested in, some of which have tokens listed on Coinbase. Soon after Khan's post, Coinbase's Chief Legal Officer detailed how the company decides on which tokens get listed.
Global – Binance publicly„welcomed government oversight. At the same time, the firm was withholding information from regulators, maintaining weak checks on customers and acting against its own compliance department’s recommendations, according to a Reuters investigation. (Reuters) The crypto exchange has run into trouble with regulators worldwide and this story will not help it make its cause.
Global – Academic: “A global overview of the legal status of cryptoassets“, published in the Journal of International Banking Law and Regulation, discusses case law on cryptoasset classification in various jurisdictions, including the UK, Singapore, Canada, New Zealand, the EU and the US. J.I.B.L.R. 2022, 37(2), 77-80
The Meta-backed stablecoin Diem (formerly known as Libra) may be throw into the trash can. The stablecoin had faced intense regulatory scrutiny as soon as it was first announced, now years ago. Although Diem's backers had said that Silvergate bank would issue the coin, the bank found itself unable to do so as the Fed reportedly refused to give the project the green light. (Bloomberg)
OECD – Why Decentralised Finance (DeFi) Matters and Policy Implications was published by the OECD. The „ growing application of DeFi and its increasing interconnectedness with traditional markets presents an urgent challenge for policy makers seeking to maximise DeFi’s potential efficiencies for financial markets, while managing risks ,„ according to the report. Risks identified include „excess volatility, unregulated leverage and other forms of regulatory arbitrage, governance-related risks, market manipulation, risk of illicit finance or outright fraud.“ It lists the key distinguishing features of DeFi as: (1) non-custodial, (2) self-governed and community-driven and (3) composable.
US – Florida's Office of Financial Regulation issued a warning on DeFi: the market is still new, highly volatile and driven by psychological factors rather than fundamentals, the regulator wrote. (Coindesk)
US Law firm analysis – Latham & Watkins analyses a 30-year old court case that was mentioned by SEC officials and might affect how the regulator looks at decentralized Web3 platforms.
US - The Federal Reserve released its long-awaited consultation paper on a potential digital dollar. Without taking a position on whether a CBDC should be issued, the Fed made clear it is not a fan of a retail CBDC. “The Federal Reserve’s initial analysis suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified.” The consultation lasts 120 days. The Fed made clear that the ultimate decision on whether to adopt a digital dollar lies with Congress. That means a digital dollar, if ever one is adopted, likely is years away.
Korea – The Bank of Korea completed the first phase of its digital currency test. The second phase is set to finish in June. (Cointelegraph)
Thanks for reading!