India clarifies crypto tax rules, EU adopts new KYC rule for crypto, Singapore won’t tolerate bad crypto behaviour, CBDCs may not lead to smooth payments

CryptoLaw Newsletter #56

Hello everyone,

TLDR:

• India‘s tax regulator attempts to clarify crypto tax rules

• EU lawmakers finalize crypto KYC/AML rules, not yet MiCA rulebook

• Singapore will be “brutal and unrelentingly hard” on bad crypto behaviour

• Why CBDCs won’t necessarily lead to smoother payments

• Should we reform existing rules rather than extend them to crypto?

Top-5 this week:

1. India clarifies crypto taxes, as trading volumes crater (Blockworks). India’s tax authority attempted to clarify the 1% tax deducted at source (TDS) rule for crypto transactions, which enters into force on 1 July. Crypto exchanges will need to deduct the tax for each transaction exceeding a (relatively low) threshold. If one crypto asset is exchanged for another, then both parties are considered buyers who have to pay the tax – an outcome that may puzzle crypto traders. There are still open questions that require further clarification, such as whether foreign crypto exchanges are also required to deduct the tax. The 1% TDS comes on top of a 30% capital gains tax for crypto profits. When that rule was first announced, trading volumes on Indian exchanges reportedly plummeted by an estimated 70%.

2. EU lawmakers water down controversial KYC proposal on unhosted wallets. While EU officials are trying to finalize MiCA, the EU’s comprehensive crypto rulebook, lawmakers passed new KYC rules that will affect crypto transactions. The Transfer of Funds Regulation (TFR) initially proposed stringent KYC/AML rules for all crypto transfers, regardless of size. The final text would require identity verification for all transactions, regardless of size, between two regulated crypto providers (Coindesk). However, most transactions involving unhosted wallets are excluded from the TFR’s scope.

   Blockchain for Europe @BlockchainforEU

   Update on TFR (Travel Rule): There is a political agreement! The key takeaways below: - The €1000 threshold is back - No #verifications for transactions below €1000 - Solely adequate information for transactions from #CASPs to “self-owned wallets” More details soon.

   Negotiations on MiCA continue. The next attempt to polish off the details will take place tomorrow 30 June. That’s also the last day that France holds the 6-month rotating presidence of the European Council.

   Patrick Hansen @paddi_hansen

   1/ The two most important EU crypto regulations to date, MiCA ("PoW-ban") & TFR ("unhosted wallets"), are about to be finalized by the end of June. They have huge implications for the crypto market in the EU and beyond. Here is a quick update thread on both regulations 👇

3. Singapore’s financial regulator will be “brutal and unrelentingly hard” for any “bad behaviour” in the crypto space, said the chief fintech officer of the Monetary Authority of Singapore. For a short while, crypto companies flocked to Singapore, viewing it as a crypto-friendly jurisdiction. It soon became clear that the city state wasn’t going to lower its standards, as this latest statement confirms.

4. CBDCs won’t necessarily lead to smoother payments. “[C]ountries won’t necessarily ‘play nicely’ with each other, making interoperability – or the way CBDCs interact with other payment systems – complex and layered,” warned the Swedish central bank’s deputy governor. Will we need private stablecoins after all?

5. Can existing rules achieve regulatory goals? If not, why apply them to tokens rather than reform them? That was a key question that Iris Chiu raised in her presentation on ICO regulation to the Digital Asset Project meeting in Oxford today. That’s an important question: do our current rules (for example, financial regulation) achieve their goals (such as mitigation information asymmetry and agency costs, ensure funding for worthwhile projects, allow informed decision-making)? I was asked if token offerings offer greater fairness to retail investors than traditional corporate finance, where early-stage investment opportunities (and associated rewards) are typically limited to VCs and other large private investors. There’s certainly an argument to be made there.

Want to read more crypto & law insights? Check out Around the Blockchain by Christopher Foreman and Kyler Wandler. Their awesome compilation of legal crypto news in the US and around the world is available for free, every Monday. This week they cover Yuga Labs’ lawsuit against Bored Ape Yacht Club NFT ‘copycats’, 3AC’s reported hiring of legal and financial advisors as it itches closer to bankruptcy, NYU Law’s Max Raskin on bitcoin’s durability, the WEF’s DAO guide, crypto super PACs bankrolling US electoral campaigns and more. Have an interesting topic to share? Are you a student looking for an opportunity to publish? Contact Kyler (@KylerW56) or Chris (@CryptlessInSEA)! 

And also…

• There‘s only one digital asset he’s willing to publicly call a commodity, said US SEC chair Gensler: bitcoin. Unlike previous SEC officials, Gensler is unwilling to label ether or any other coin a commodity.

• The chair of China’s Blockchain Service Network, on the other hand, called bitcoin and other private crypto’s a ponzi scheme.

• Crypto hedge fund Three Arrows Capital collapsed due to reckless and excessive leverage, implementing “an ‘old-fashioned Madoff-style Ponzi scheme’ wrapped in a trade that was similar to the positions that sunk Long Term Capital Management (LTCM),” according to research firm FSInsight. 3AC was heavily exposed to the Terra/Luna network, which unravelled weeks ago.

• A gold-backed stablecoin issued by Russia could avoid US sanctions, say researchers of Russian bank VEB.

• The US Treasury and IRS reportedly plan to delay the much-discussed reporting rule for crypto brokers in the Infrastructure Act.

  Ally Versprille @allyversprille

  SCOOP on @TheTerminal now. IRS and Treasury are likely to delay new reporting rules for crypto brokers, according to people familiar who asked not to be named because a final decision hasn’t been made. Move would push back efforts to collect billions in taxes from traders.

• The UK Financial Conduct Authority held a crypto policy sprint last month. It has just published some key themes on crypto regulation discussed by participants and their high-level views on the regulation of crypto issuance and disclosure, custody and regulatory hooks.

• US SEC Chair Gensler is working on a memorandum of understanding with the CFTC to avoid gaps in crypto regulation.

• Australia may follow the UK path to crack down on misleading crypto ads, warned Chainalysis‘ Caroline Malcolm.

• Dutch users of crypto exchange Coinbase are facing greater KYC obligations when moving assets to wallets not linked to the exchange: they will need to provide the recipient‘s full name, the purpose of the transfer and the recipient‘s complete residential address.

• In Canada, the Ontario Securities Commission imposed penalties against KuCoin and Bybit for violation of securities laws and operating trading platforms. Unlike Bybit, which cooperated with authorities and promised to work towards full compliance in a settlement agreement, KuCoin was hit with much harsher penalties, including a permanent ban from participating in Ontario’s capital markets.

_gabrielShapir0 @lex_node

So, there is an unexplored space of how can we *mechanize* minority protection mechanisms, and I believe this is crucial to addressing the "regulatory threat" to DAOs as well as making them actually objectively better than traditional governance structures.

Grant Gulovsen, Esq. @gulovsen

Condit v. Celsius Network LLC filed June 28, 2022 in SDNY

Thanks for reading!