January 13, 2023 Outlook 2023 – Crypto Regulation Gets Serious Rachel Wolcott Thomson Reuters Follow | Profile | More Todd Ehret Thomson Reuters Follow | Profile | More Trond Vagen Thomson Reuters Follow | Profile | More Share After the failures of crypto firms such as FTX, Celsius Network, and TerraLuna, regulation will undoubtedly take center stage for crypto assets in 2023. The European Union is setting the pace, while the UK and United States remain behind; however, international and domestic momentum is likely to fuel more regulation and enforcement this year, write Thomson Reuters' Rachel Wolcott, Todd Ehret and Trond Vagen. There have also been increasing calls for international standardization to ensure against regulatory arbitrage of the sort seen by FTX prior to its collapse, they explain. Regulators and policymakers are picking up speed in their efforts to regulate digital assets after a tumultuous year in which spectacular collapses and frauds wiped out more than $2 trillion in market value. The failures of crypto firms such as FTX, Celsius Network, and TerraLuna have emboldened regulators and policymakers to voice the view that crypto is purely speculative, offers no economic value and facilitates tax evasion and money laundering. Amid the market disruptions, regulatory bodies in several jurisdictions have made significant progress. Policymakers finalized rules and issued guidance for digital assets related to financial crime, money laundering, stablecoins, taxation, consumer protection, and advertising. The European Union is setting the pace, while the UK and United States remain behind; however, international and domestic momentum is likely to fuel more regulation and enforcement this year. There have also been increasing calls for international standardization to ensure against regulatory arbitrage of the sort seen by FTX prior to its collapse. Crypto firms can also expect more regulatory scrutiny this year over their controls against illicit financial transactions, including money laundering and sanctions evasion. Both the crypto and traditional financial services sectors can expect regulators to intensify their oversight to protect investors and guard against risk contagion from digital assets. The international Basel Committee on Banking Supervision in December finalized a standard for banks to monitor and manage exposure to crypto-assets. The standard lacks the force of law, but the committee requests national regulators implement it by January 1, 2025. Europe in the lead The EU looks set to cement its lead in crypto regulation in 2023, with the much-anticipated Markets in Crypto-Assets (MiCA) framework. After passing most legislative hurdles last year, the regulation now only needs to pass legal revision prior to adoption by the European Parliament and the Council, probably in late February. Most of the regulation will begin to apply in late 2024. Provisions on stablecoins will apply earlier, after a 12-month grace period. MiCA is the most comprehensive crypto regulation issued by any jurisdiction so far and is likely to act as a blueprint for other regulators looking to tame the crypto market. MiCA introduces rules including requirements that crypto-asset service providers comply with obligations on market manipulation, protection of customer funds, prudential standards and conflicts of interest. Under MiCA, national supervisors are to license crypto-asset firms, but oversight of the largest firms will be handled by the European Securities and Markets Authority (ESMA), which will also develop standards for crypto firms to disclose information about their environmental footprints. The EU is also clamping down on the avenues for misuse of crypto-assets, with the Transfer of Funds regulation also likely to enter into force in the first quarter of 2023, subject to an 18-month grace period. The regulation requires crypto exchanges to gather personal identification on any crypto-asset transaction passing through them, including those from “unhosted wallets” in the custody of private users. Person-to-person transfers conducted without a provider would not be subject to the requirement. The EU’s approach here goes beyond that of the Financial Action Task Force (FATF), the international standard setter, which recommends exchanges collect customer data for transactions which exceed $1,000. The EU and the UK also have published legislation to implement FATF’s travel rule for virtual asset firms and virtual asset service providers. Implementation is set for 2023 in the UK, and 2023/2024 for the EU. The rule requires financial institutions to send and record information on the originator and beneficiary of a wire transfer, and that the information remains with the transfer or related message throughout the payment chain. The rule is a big ask for crypto firms which already struggle with basic know-your-customer procedures. Technology solutions can aid compliance, but if firms are not using the same solution there could be interoperability challenges, said Sophie Bowler, director of financial crime and forensics at EY in London. “A further challenge is the requirement to conduct risk assessment on the wallets themselves, and associated transactions, to determine the extent of AML measures to be applied in certain circumstances, as well as screening needing to be executed,” Bowler said. These two legislative initiatives have put the EU at the forefront of crypto regulation but are unlikely to sufficiently tame the crypto market. Certain asset classes, such as non-fungible tokens (NFTs) are not covered under MiCA, and there are also concerns over the growth of decentralized finance (DeFi), another digital-asset sector not covered by the EU proposals. EU policymakers have already called for talks on a more comprehensive “MiCA 2”, although for now the wheels have not been set in motion on any new proposals. U.S. faces new pressure to act, regulators step up scrutiny After the FTX collapse, U.S. lawmakers and regulators are fielding urgent calls for regulation of the new digital asset marketplace. So far, the regulatory effort has focused on applying existing financial regulations to the new sector and using enforcement policy to set regulatory boundaries. In 2023, the priorities likely to face lawmakers and regulators include ensuring financial stability, protecting consumers, and combating illicit activity. Many see three possible legislative and regulatory scenarios: an outright ban on cryptos, comprehensive legislation and rulemaking along lines the EU’s framework or doing little but cleaning up the mess after the fact through enforcement crackdowns on fraud and other illicit activity. Partisan gridlock is set to intensify in Congress this year, after Republicans gained control of the House of Representatives, but there have been some bipartisan efforts on crypto. The most likely scenario could be a prioritization of legislation and rulemaking in key areas such as stablecoins — asset-backed cryptocurrencies — and oversight of centralized exchanges. With stablecoins, efforts may focus on ensuring the soundness of reserves backing the currencies, and auditing. The FTX collapse highlighted the important role of exchanges. Likely tasks before regulators and policymakers would be requiring exchanges to have safeguards associated with segregation and holding of assets, developing rules for market making and trading activity, and the management of conflicts of interest and disclosures. Despite the uncertain prospects for new legislation, regulators are signaling their intention to tighten their scrutiny of the digital-asset sector and act when they see it threatening to spread risks into traditional financial services. Federal banking regulators in January jointly warned that banks should pay more attention to risks from the crypto sector. Banks issuing or holding crypto tokens stored on public, decentralized networks are “highly likely” to be inconsistent with safe and sound banking practices, the regulators said. The regulators also said they are carefully reviewing bank proposals to engage in crypto activities. The warnings could slow bank efforts to enter the crypto sector with services for their customers of issuing stablecoins. U.S. enforcement authorities are also likely to crack down further in 2023. Even in the absence of legislation specific to the sector, the U.S. Justice Department and financial regulators have made clear they plan use existing laws to charge crypto firms with violations such as securities fraud or anti-money laundering violations. UK lawmakers and regulators views on crypto differ UK lawmakers remain enthusiastic about crypto as a means to boost economic growth and shore up the UK’s post-Brexit financial services sector. This enthusiasm clashes with UK regulators’ cautious approach, which they believe has been vindicated by market tumult. Tensions between government and regulators may increase once the Financial Conduct Authority (FCA) gains an anticipated secondary objective aimed at stimulating Britain’s financial services industry. “By making this country a hospitable place for crypto we can attract investment, generate swathes of new jobs, and create a wave of ground-breaking new products and services. We’re on the cusp of something important,” said John Glen, now chief secretary to the Treasury, in an April 2022 speech announcing UK policy. The FCA, on the other hand, calls crypto assets “very high risk, speculative purchases” and warns investors these firms may not be regulated, leaving them without government recourse. “If you buy crypto assets, you should be prepared to lose all your money,” the FCA has warned. The FCA is facing pressure for its stance. Some 85% of licence applications from crypto trading firms have either been rejected or withdrawn, said Nikhil Rathi, chief executive, in November. FTX and Binance are among the large players the UK regulator rejected. “We have taken quite a bit of heat from people saying we are allowing this innovative activity to move to other jurisdictions, and that other jurisdictions are stealing a march,” Rathi said. The FCA also closed a loophole in the Money Laundering Regulations 2017 that potentially allowed crypto asset firms to bypass the UK’s registration gateway by acquiring a UK-registered crypto business. It is a move both Binance and Austria’s Bitpanda tried in 2022. Political turmoil contributed to the UK government’s slow progress on crypto regulation in 2022, and future progress will probably be slow. No UK new plans, including a Royal Mint-issued NFT have yet come to fruition. The government promised a Crypto-Asset Engagement Group, but that was downgraded to a series of roundtables. Efforts to regulate stablecoins and bring crypto assets and their promotion inside the regulatory perimeter have stalled in parliament. Crypto regulation is unlikely to be complete this year, Andrew Griffith, economic secretary to the Treasury, told MPs on January 10. HM Treasury will consult on an approach to regulating a wider set of crypto-asset activities, a department spokesperson said. The statutory instrument giving effect to the crypto-asset financial promotions measure will be introduced when parliamentary time allows. Crypto businesses seeking to operate in Britain should be aware of other new laws affecting them. The Economic Crime and Corporate Transparency Bill, now working its way through parliament, would increase the powers of law enforcement to seize and recover crypto assets, which are the proceeds of crime, or associated with illicit activity such as money laundering, fraud, terrorist financing, and ransomware attacks. Focus on digital assets in Asia In Asia, the Singaporean government will continue to show its support for digital assets and blockchain technology, despite the city-state having to deal with the local fallout from the collapse of TerraLuna and Three Arrows Capital. It will continue however to discourage speculation in cryptocurrencies. “We encourage and support innovation in digital assets because we see potential for new technologies to transform cross-border payments, trade and settlement, as well as capital market activities,” said Lawrence Wong, deputy prime minister and minister for finance. The Hong Kong Special Administrative Region of China takes a similar supportive stance towards digital assets, and is planning to make its regulatory regime crypto-friendly. Hong Kong’s Securities and Futures Commission intends to propose a subset of crypto tokens it would allow for retail investors’ trading, Chief Executive Julia Leung said in January. The SFC intends to start accepting licences for a new virtual asset service provider (VSAP) regime in mid-2024, she said. Financial Secretary Paul Chan also reaffirmed Hong Kong’s commitment to becoming a regional virtual asset hub, saying that regulatory compliance and greater transparency are needed in the sector. The situation in mainland China differs considerably from Hong Kong. The Chinese government has banned banks from handling crypto transactions since 2013, while crypto initial coin offerings have been forbidden since 2017. This ” zero-tolerance” attitude toward crypto-assets will prevail in the years to come, according to David Dong, deputy chief executive of China Universal Asset Management in Hong Kong. With additional contributions from Yixiang Zeng in Singapore This article, “Outlook 2023 – Crypto Regulation Gets Serious,” first appeared in Thomson Reuters Regulatory Intelligence on January 12, 2023. Photo Credit: “cryptocurrency” by stockcatalog is licensed under CC BY 2.0. • • • • Rachel Wolcott is a Senior Editor at Thomson Reuters. Todd Ehret is a Senior Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence. He has more nearly 25 years’ experience in the financial industry where he held key positions in trading, operations, accounting, audit, and compliance for broker-dealers, asset managers, private equity, and hedge funds. Trond Vagen is a European correspondent for Thomson Reuters Regulatory Intelligence, based in Oslo, Norway. He focuses on regulatory developments in the European Union and issues around technology, AML, and data protection in the EU and Nordics. TabbFORUM is an open community that provides a platform for capital markets professionals to share their ideas and thought leadership with their peers. The views and opinions expressed are solely those of the author(s). They do not necessarily reflect the opinions of TABB Group, its analysts, TabbFORUM and its editors, or their employees, affiliates and partners.
I guess regulation "getting serious" simply means trying to stop crypto bros from claiming they are FDIC insured. FDIC demands CEX.io stop claiming it's FDIC-insured https://web3isgoinggreat.com/single/fdic-demands-cexio-stop-claiming-its-fdic-insured The FDIC is continuing its recent crackdown on exchanges claiming they're protected by FDIC insurance, issuing a cease-and-desist to CEX.io. CEX.io, like several other crypto companies including Voyager, FTX US, and Gemini, made claims referring to FDIC insurance that suggested that customer funds might be protected from issues at the company in a similar way that banking customers are protected from bank failures. Many of these companies have taken the (true) statement that the company's insured depository accounts at various banking institutions are FDIC insured and presented it to customers in a misleading way, and the FDIC wants them to cut it out. The FDIC also demanded websites who published statements like "Is CEX.io Safe? Yes, Cex.io is a safe crypto exchange. Actually, one of the safest on the market since they are FDIC insured..." take them down. CEX.io is a London-based cryptocurrency exchange with comparatively low trading volume compared to its larger competitors like Binance or Coinbase. "FDIC Demands Four Entities Cease Making False or Misleading Representations about Deposit Insurance", Federal Deposit Insurance Corporation
I was looking at my IBKR account yesterday on the high yield I've been getting for them loaning out my crypto ETFs. They specifically mentioned that I am still FDIC insured if anything goes bad during the loan. Interestingly enough, I've been approaching to even up over 35% interest for share-loans on certain crypto equities like O'Leary's endorsed WonderFi. I'm not sure what happened there, I can only assume they are getting hard-to-borrow lately. Too many people trying to directly short the shares because purchasing PUT options are unavailable for the stock? That may not be a good sign for the longs, but I did only purchase them during the fire-sale
Crypto regulation needs to evolve to establish even a minimum level of safety and protection against fraud in the market. Some folks are saying the U.S. should emulate European crypto regulation proposals. Europe’s Crypto Regulations Can Be a 'Model' for Rules in US, Says Hester Peirce The outspoken SEC Commissioner said Europe’s new regulations could attract crypto firms across the Atlantic. https://decrypt.co/139558/europes-crypto-regulations-can-be-model-rules-us-says-hester-peirce