Category Archives: Blockchain, Crypto, Digital Assets Regulations

US Crypto: 2020 Year in Review

HSE | Sarah H. Brennan | Jan 9, 2021

crypto US regulation 2020 in review - US Crypto:  2020 Year in Review

2020 US Summary

If we put the last quarter of 2020 aside, this year could be marked by the sheer number of SEC enforcement actions and settlements in the crypto space, with more rumored to be in the works. However, the U.S. ended 2020 with a bang in the form of a flurry of proposed crypto regulations in Q4 with varying degrees of controversiality. Notably, the proposed STABLE Act and Mnuchin's midnight rulemaking on self-custody have caused a bit of an uproar, which we touch on in more depth below.

See:  Vitalik’s 2020 Year End Thoughts from Singapore

Absent these recent rulemakings, there has been an unevenness in the Trump administration’s approach to the space and the last four years at the federal level haven’t been marked with any significant level of regulatory coordination or cohesive policy at the federal level.

However, to pick upon some themes that we will talk about in this year-end review, regulators have vacillated between: (i) a focus on enforcement vs. prescriptive guidance, (ii) a tech specific vs. tech agnostic approach, (iii) aggressive views of jurisdictional reach vs. deference, and (iv) state, federal, and global coordination and cooperation vs. a more insular agency-specific approach.

These last minute rulemakings marked the last acts of an administration with what could be characterized as an ambivalent view of the crypto space, neither friendly nor particularly enabling. Although the IRS 2014 guidance (Notice 2014-2) classifying cryptocurrency as property was pivotal in pushing the predominant use case (use case follows tax treatment) for Bitcoin and other currency-like crypto assets toward a commodity-like store of value as opposed to a medium of exchange (think gold bar as opposed to dollar bill), other U.S. regulators have doubled down on labeling, and regulating, crypto as a currency-like instrument, among other things.

With Bitcoin crossing $34,000 to hit an all-time high (“ATH”) in early January, Ethereum's native cryptocurrency, Ether (“ETH”), trending close to its ATH from 2018  and the  proliferation of stablecoin projects, the U.S. government may now be rethinking previous pronouncements that crypto does not pose a significant threat to the U.S.’s fiat hegemony worthy of addressing.

See:  The Decade in Blockchain — 2010 to 2020 in Review

The most activity on this front is taking place at the U.S. Department of the Treasury, and the Financial Crimes Enforcement Network of the U.S. Treasury (“FinCEN”) (see proposed rulemakings here and as discussed below)  as well as Department of Justice (“DOJ”) (see the DOJ Enforcement Framework released in October 2020), as U.S. authorities continue to bring anti-money laundering (“AML”) compliance, sanctions compliance, and terrorist financing concerns to the forefront.

We have also seen significant enforcement actions against BitMEX as discussed below, John McAfee’s arrest for tax evasion related in part to his activities in crypto and the recently announced settlement between the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) and BitGo, Inc. for violations of sanctions programs.

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NCFA Jan 2018 resize - US Crypto:  2020 Year in Review The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Hester Peirce Says SEC Enforcement is Not the Way to Provide Crypto Clarity

Forkast | Michelle Lim | Jan 9, 2020

Hester Peirce SEC Commissioner - Hester Peirce Says SEC Enforcement is Not the Way to Provide Crypto ClarityIn her first public remarks since the SEC’s lawsuit against Ripple and exclusive interview with Forkast.News Editor-in-Chief Angie Lau, SEC commissioner and “Crypto Mom” Hester Peirce says the SEC can do better on clarity and that enforcement isn’t always the best way to provide guidance

U.S. Securities and Exchange Commission (SEC) Commissioner Hester Peirce said the SEC could do better on clarity on regulation and that enforcement isn’t always the best way to provide guidance. Peirce made her first public remarks since the SEC’s lawsuit against Ripple in an exclusive interview with Forkast.News Editor-in-Chief Angie Lau.

In December last year, the SEC filed a lawsuit against cryptocurrency platform Ripple Labs Inc., its CEO Brad Garlinghouse and Chairman Chris Larsen for allegedly raising over US$1.3 billion through the sale of digital assets known as XRP in an unregistered securities offering. The lawsuit also said that Larsen and Garlinghouse “effected personal unregistered sales of XRP totaling approximately US$600 million.”

See:  Ripple CEO Warns SEC May Sue Over XRP Sale

“I don’t want to speak to any particular cryptocurrency, whether it’s in litigation with us or not in litigation with us. But I think everyone has to look at the facts and circumstances,” said Peirce.

Peirce declined to comment specifically on the Ripple lawsuit given the ongoing litigation, and expressed that her views were her own and not necessarily those of the SEC or her fellow commissioners.

The SEC’s enforcement action over Ripple has led to heightened concerns in the crypto industry over the lack of regulatory clarity, with Ripple’s CEO saying, “We’ve moved from lack of regulatory clarity to regulatory chaos in the U.S.” in a Twitter thread on some of the questions surrounding the SEC lawsuit.

Is XRP a security or not?

A central question has been whether XRP is a currency or security. XRP was determined to be currency by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) as a digital currency in 2015, but the SEC’s lawsuit is at odds with that definition.

On the apparent misalignment among U.S. agencies causing confusion in the industry, Peirce said that each agency had its own rulebook to follow.

“I think that’s not only a problem with respect to digital assets, it’s actually a broader problem because we have this very open-ended category called an ‘investment contract’,” said Peirce.

An investment contract is defined by the SEC under the Howey Test  as an investment of money in a common enterprise with a reasonable expectation of profits to be made through the work of others. According to Peirce, it is designed to capture anything that looks like a security and acts like a security, but might not be called a stock or a bond. “So something might be characterized as one thing by another agency, yet still be a security under our rules, and that can be frustrating for people,” said Peirce.

“That’s why I have called for more clarity, because I actually think it can be difficult to determine whether something fits within the security bucket or not, and we could do more to provide some guideposts for what that would be,” she added.

Guidance through clarity on guidelines instead of enforcement

On the direction of crypto regulations in 2021, Peirce said, “a lot is going to depend on who the chairman is under President Biden, and that will help determine the direction that the Commission goes on a lot of issues, but cryptocurrency being one of them.”

See:  The four contenders to be Joe Biden’s SEC chair

Acknowledging that “the SEC hasn’t done a fantastic job in getting out in front and setting clear lines for crypto and other countries have been much faster to do that,” Peirce highlighted that the SEC was taking steps to provide greater regulatory clarity, such as the recent call for feedback on the custody of digital asset securities by broker-dealers.

“Enforcement actions can indeed provide clarity, but it’s not the right way to do it from my perspective,” she said. “We want to provide people clear guidelines ahead of time and then they can figure out how they can do something so that it is legal.”

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NCFA Jan 2018 resize - Hester Peirce Says SEC Enforcement is Not the Way to Provide Crypto Clarity The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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UK Consultation (Mar 21, 2021): Regulatory Approach to Cryptoassets and Stablecoins

HM Treasury (UK) | Jan 7, 2021

UK regulatory approach cryptoassets and stablecoins 1 - UK Consultation (Mar 21, 2021):  Regulatory Approach to Cryptoassets and Stablecoins

Consultation description

This document represents the first stage in the government’s consultative process with industry and stakeholders on the broader regulatory approach to cryptoassets and stablecoins. It seeks views on how the UK can ensure its regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, while mitigating risks to consumers and stability. Additionally, this document includes a call for evidence on investment and wholesale uses of cryptoassets, and the broader use of DLT in financial markets. The government invites views from a wide range of stakeholders, and particularly firms engaged in cryptoasset or DLT activities. Please submit your responses to cryptoasset.consultation@hmtreasury.gov.uk

A consultation on the government’s approach to cryptoasset regulation, with a focus on stablecoins; and call for evidence on investment and wholesale uses.

This consultation closes at

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NCFA Jan 2018 resize - UK Consultation (Mar 21, 2021):  Regulatory Approach to Cryptoassets and Stablecoins The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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OCC says Federally regulated banks can use stablecoins to conduct payments and other activities

Coindesk | Nikhilesh De | Jan 4, 2021

Brian Brooks OCC - OCC says Federally regulated banks can use stablecoins to conduct payments and other activitiesThe federal banking regulator published an interpretive letter addressing whether national banks and federal savings associations could participate in independent node verification networks (INVNs, otherwise known as blockchain networks) or use stablecoins. The letter said that these financial institutions can participate as nodes on a blockchain and store or validate payments.

Any banks that do participate in an INVN must be aware of the operational, compliance or fraud risks when doing so, an OCC press release warned.

Still, the OCC said INVNs “may be more resilient than other payment networks” due to the large number of nodes needed to verify transactions, which can in turn limit tampering.

See:  Stablecoins: Experience the Stability

Kristin Smith, executive director of the Blockchain Association, said on Twitter that

“the letter states that blockchains have the same status as other global financial networks, such as SWIFT, ACH, and FedWire.”

Brian Brooks, the Acting Comptroller of the Currency, said in a statement that while other nations have built real-time payments systems, the U.S. “has relied on” the private sector to create such technologies, seemingly endorsing the use of cryptocurrencies – specifically stablecoins – as an alternative to other real-time payment systems.

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Office of the Comptroller of the Currency| Release | Jan 4, 2020

stablecoins for payments - OCC says Federally regulated banks can use stablecoins to conduct payments and other activitiesFederally Chartered Banks and Thrifts May Participate in Independent Node Verification Networks and Use Stablecoins for Payment Activities

WASHINGTON—The Office of the Comptroller of the Currency (OCC) today published a letter clarifying national banks’ and federal savings associations’ authority to participate in independent node verification networks (INVN) and use stablecoins to conduct payment activities and other bank-permissible functions.

“While governments in other countries have built real-time payments systems, the United States has relied on our innovation sector to deliver real-time payments technologies. Some of those technologies are built and managed by bank consortia and some are based on independent node verification networks such as blockchains,” said Acting Comptroller of the Currency Brian P. Brooks.

“The President’s Working Group on Financial Markets recently articulated a strong framework for ushering in an era of stablecoin-based financial infrastructure, identifying important risks while allowing those risks to be managed in a technology-agnostic way. Our letter removes any legal uncertainty about the authority of banks to connect to blockchains as validator nodes and thereby transact stablecoin payments on behalf of customers who are increasingly demanding the speed, efficiency, interoperability, and low cost associated with these products.”

The agency letter concludes a national bank or federal savings association may validate, store, and record payments transactions by serving as a node on an INVN. Likewise, a bank may use INVNs and related stablecoins to carry out other permissible payment activities. In deploying these technologies, a bank must comply with applicable law and safe, sound, and fair banking practices.

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Engaging in INVN within the federal banking system may enhance the efficiency, effectiveness, and stability of payments activities and achieve the benefits of real-time payments already enjoyed in other countries. For example, such activities may be more resilient than other payment networks because of the decentralized nature of INVNs, which allows a comparatively large number of nodes to verify transactions in a trusted manner. An INVN also limits tampering or adding inaccurate information to the database because information is only added to the network after consensus is reached among the nodes validating the information.

Banks must also be aware of potential risks when conducting INVN-related activities, including operational risks, compliance risk, and fraud. New technologies require enough technological expertise to ensure banks can manage these risks in a safe and sound manner. Banks have experience with managing such risks, which are similar to those of other electronic activities expressly permitted for banks, including providing electronic custody services, acting as a digital certification authority, and providing data processing services. Among the compliance risks, banks should guard against potential money laundering activities and terrorist financing by adapting and expanding their compliance programs to ensure compliance with the reporting and recordkeeping requirements of the Bank Secrecy Act and to address the particular risks of cryptocurrency transactions.

Banks should develop and implement new activities consistently with sound risk management practices and should align with banks’ overall business plans and strategies.

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NCFA Jan 2018 resize - OCC says Federally regulated banks can use stablecoins to conduct payments and other activities The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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LabCFTC Releases Primer on Digital Assets

LabCFTC | Release | Dec 17, 2020

— The Commodity Futures Trading Commission today released a Digital Assets Primer to provide updated information to the public about emerging concepts in digital assets. The primer is part of a series issued by the CFTC’s innovation office, LabCFTC, and is the second to delve into issues surrounding digital assets.

“This Digital Asset Primer builds on LabCFTC’s 2017 Primer on Virtual Currencies, which focused on virtual currencies like bitcoin. The focus of this Digital Asset Primer is broader to include not only virtual currency, but also smart contracts and other digitized representations of value or ownership,” said Brian Trackman, LabCFTC Senior Counsel and lead author of the primer.

See:  3 Ways Digital Assets Will Reshape The World

Digital assets have a varied set of features and applications that touch a range of regulatory domains, including that of the CFTC. The Digital Asset Primer identifies areas and topics for further consideration, including the governance of digital assets and the appropriate role of regulatory authorities like the CFTC.

“The Digital Asset Primer is the latest educational tool from LabCFTC. Issuing primers is core to LabCFTC’s mission to inform policymakers and industry stakeholders on new technologies and innovations”

LabCFTC Director

“This primer acknowledges the ongoing development in this space and highlights the need for regulatory coordination in this evolving market.”

Chief Innovation Officer Melissa Netram

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NCFA Jan 2018 resize - LabCFTC Releases Primer on Digital Assets The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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FCA Issues Temporary Registration Ahead of Crypto Ban to Retail Investors

FN | Bérengère Sim | Jan 4, 2020

Crypto assets in the UK - FCA Issues Temporary Registration Ahead of Crypto Ban to Retail InvestorsOn 6 October, the City regulator had banned the sale of crypto products to retail investors in the UK, saying that the “extreme volatility” of cryptocurrencies made them “ill-suited” for retail customers, as well as the prevalence of market abuse and financial crime in the secondary market. The ban will come into effect on 6 January 2021.

[Until then] the Financial Conduct Authority has established a temporary registration regime to allow cryptoasset firms to continue trading – after it was unable to process firms’ applications by their original deadline due to a pandemic backlog.

“The FCA was not able to assess and register all firms that have applied for registration, due to the complexity and standard of the applications received, and the pandemic restricting the FCA’s ability to visit firms as planned,” the regulator said in the 16 December statement.

See:

Firms were required to register from 10 January 2020 with the deadline being 10 January 2021. If approved, they would have featured on the watchdog's registered cryptoasset firms list.

However, the regulator has now released a list of firms with temporary registration, alongside its 16 December statement, features around 90 firms, including asset manager Fidelity Digital Assets.

This temporary list is for existing cryptoasset businesses which applied for registration before 15 December but had not yet had their application reviewed by the regulator; the firms will be allowed to continue to trade until 9 July 2021, pending the FCA’s approval.

Firms that did not apply for registration by 15 December will not be eligible for the temporary registration regime and will need to return cryptoassets to customers, the FCA said. They must stop trading by 10 January 2021.

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NCFA Jan 2018 resize - FCA Issues Temporary Registration Ahead of Crypto Ban to Retail Investors The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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It’s instant – I get a message, and it’s received: Central bankers comb for crypto clues as Bahamas launches ‘Sand Dollar’

Reuters | Tom Wilson | Dec 21, 2020

Digital sand dollar in circulation - It’s instant - I get a message, and it’s received: Central bankers comb for crypto clues as Bahamas launches 'Sand Dollar'

A botanical green smoothie and a snapper fish burger, it was. In a Bahamas health-food cafe.

But future generations might look back at this as a pivotal moment - the first national launch of a technology that could upend commercial banking and even shake the U.S. dollar’s status as the world’s de facto currency.

The refreshments were among the first items bought using the Sand Dollar, a digital currency issued by the Bahamian central bank for use across the country via an app.

“It’s instant - I get a message, and it’s received,” said Dawn Sands, owner of NRG, the cafe in the capital Nassau, showing Reuters via video how sales work.

“Once people get comfortable and educated, I think it’s going to be big.”

While this experiment in the archipelago nation of around 390,000 people is modest in itself, it is likely being closely watched by major central banks across the world, from the U.S. Federal Reserve and European Central Bank to the People’s Bank of China and Bank of England.

See:  The Good, the Bad and the Ugly of Central Bank Digital Coins (CBDCs)

They have been looking at issuing their own digital coins, having found themselves in a tricky position as the use of physical cash dwindles.

They are wary of a blockchain-based technology like bitcoin conceived to banish central banks, but reluctant to miss the boat on a potential game-changer and cede the field to Big Tech offerings like the Facebook-backed Diem, formerly Libra.

Smaller nations such as Cambodia have also, meanwhile, forged ahead with their own projects in digital currencies, which promise to extend financial services to people currently lacking access to banking, especially in the developing world.

The Bahamian scheme offers clues for other economies on how central bank digital currencies (CBDCs) can be introduced and work in practice - from getting users on board to helping businesses avoid costly payments fees.

“Everybody is interested in it - I think it’s arguably the first step,” said Philip Middleton, deputy chairman of the OMFIF central banking think-tank in London.

“If I’m looking for lessons learned for the big boys, it’s the whole education piece - if this is successful, how have you persuaded the population to use this?”

CBDCs around the world - It’s instant - I get a message, and it’s received: Central bankers comb for crypto clues as Bahamas launches 'Sand Dollar'

EARLY SIGNS POSITIVE

The Sand Dollar was launched in October, with users coming aboard in the subsequent weeks.

One of its core aims is to boost access to financial services to people in the archipelago, whose complex geography of 700 islands and remote keys throws up challenges in securely distributing cash. Payments are also a key area.

At the NRG cafe, Sands said the technology would help smaller business avoid fees charged by credit card companies. She said she was charged around 4% on credit and debit card sales of omelettes, panini and the like: “For a small business, 4% is a very big hit.”

The virtual coin is issued by the Central Bank of The Bahamas to digital wallets held by an initial tranche of six licensed money-transfer and payment firms. Through them, people and businesses can then access, hold and spend coin via an app.

See: 

Three other companies, including a commercial bank, are undergoing checks for entry to the scheme, the central bank said, without giving further details.

The early signs are positive, though there are only $130,000-worth of Sand Dollars in circulation at present, central bank data shows, compared with $508 million-worth of traditional Bahamas dollars.

Interviews with the Central Bank of The Bahamas, Sand Dollar users and three of the financial firms offering the tech suggest that, so far, it is functioning as a way to pay.

“We have merchants right now that have come on board in terms of integrating it into their system for persons to be able to purchase products for them,” said Deirdre Andrews of Omni Financial Group, a money transfer firm.

“The start of it is the movement of money back and forth.”

 

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NCFA Jan 2018 resize - It’s instant - I get a message, and it’s received: Central bankers comb for crypto clues as Bahamas launches 'Sand Dollar' The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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