Friday Regulatory Roundup
This week in crypto regulation we get TRUST, Stablecoins, NCET, and Mr. Matolcsy opinion on cryptocurrency
Justice Department Announces First Director of National Cryptocurrency Enforcement Team (justice.gov)
On February 17th, Eun Young Choi was named the inaugural Director of the National Cryptocurrency Enforcement Team (NCET). The NCET is a new division that has a very broad mandate.
The NCET was established to ensure the department meets the challenge posed by the criminal misuse of cryptocurrencies and digital assets, and comprises attorneys from across the department, including prosecutors with backgrounds in cryptocurrency, cybercrime, money laundering and forfeiture. The NCET will identify, investigate, support and pursue the department’s cases involving the criminal use of digital assets, with a particular focus on virtual currency exchanges, mixing and tumbling services, infrastructure providers, and other entities that are enabling the misuse of cryptocurrency and related technologies to commit or facilitate criminal activity.
With recent news that 4% of all crypto whales (those wallets with more than $1M in assets) have at least 10% of their assets from verified illicit transactions and a potential hack that drained IRA accounts at a crypto-friendly IRA trust custodian, the NCET has their work cut out for them. Good luck to Ms. Choi.
Central Bank Chief Nabiullina Digs Heels in Over Russian Plan to Legalize Crypto (Bloomberg)
Last week, I talked about how the Russian government decided to not ban crypto despite a recommendation to do so by the Russian Central Bank. The RCB and the government agreed to try to figure out a regulatory scheme at the urging of President Putin.
Little progress has been made in agreeing on how Russia should regulate crypto, despite Putin calling for a quick solution in January. The Finance Ministry and central bank were supposed to prepare a draft law on the matter by Feb. 18, Kommersant newspaper reported last week.
Instead of presenting a plan, both sides simply presented a formal list of disagreements. The RCB maintains its position that crypto is too risky and “resembles a pyramid scheme”. With $26B of crypto being held by Russians hopefully both sides reach an agreement sooner rather than later.
On Thursday, across the (potentially soon to be heavily contested) border, Ukraine legalized cryptocurrency. This will open the door for a fully functional and legit cryptocurrency market in the Ukraine.
SEC Probes Trading Affiliates of Crypto Giant Binance’s U.S. Arm (Wall Street Journal)
Binance is always making the news -
The Securities and Exchange Commission is examining the relationship between the U.S. arm of Binance, the world’s largest cryptocurrency exchange, and two trading firms with ties to Binance’s founder, people familiar with the probe say.
The two trading firms, Sigma Chain AG and Merit Peak Ltd., act as market makers that trade cryptocurrencies on the Binance.US exchange. One area of focus for regulators is how Binance.US disclosed to customers its links to the trading firms, the people say.
There is an SEC rule that requires trading venues to disclose any affiliates that trade on the platform. In this particular case, Sigma Chain and Merit Peak were affiliated with Changpeng Zhao, the mastermind behind the Binance enterprise. Buried in the Binance.US terms of service, Binance.US says
In order to provide a liquid market and prices for Digital Assets, you acknowledge and agree that third parties, which may include affiliates or related corporations of BAM, may act as market makers and transact on the Platform as your counterparty.
Apparently, that isn’t good enough for the SEC and they are digging into the two affiliates and how they relate back to Binance.US. This may unearth some broader issues that will affect crypto and how much regulatory authority the SEC has.
To bring enforcement action against Binance’s U.S. arm, the SEC would need to show that it has jurisdiction over some cryptocurrencies that Binance.US has offered. The SEC says many digital coins are securities and thus fall under its supervision, while crypto firms say regulators haven’t proven which tokens are securities. Binance has its own digital coin, BNB, which was sold to the public in 2017 and is traded on Binance.US and Binance.
The Binance.US spokesman, Mr. Tindall, declined to comment on BNB. Mr. Milton, the Binance spokesman, said the exchange doesn’t list any securities.
Hungary’s Central Bank Head Calls on EU to Ban Crypto Mining and Trading (CoinDesk)
Adding to the growing list of politicians coming out strongly for crypto or against crypto is the chief of the Hungarian National Bank. György Matolcsy gave his opinion on crypto in response to the Russian Central Bank’s initial call to ban cryptocurrency altogether.
It is clear-cut that cryptocurrencies could service illegal activities and tend to build up financial pyramids. Russia’s central bank is right saying that “the breakneck growth and market value of cryptocurrencies is defined primarily by speculative demand for future growth, which creates bubbles”.
Regulators in Sweden have also made recommendations to ban mining within the EU, because of their environmental and power grid impact.
Coalition of US crypto firms unveils travel rule compliance platform, TRUST (The Block)
In an announcement that elicited some angry responses from the crypto community
A coalition of some of the US's largest crypto firms is rolling out a solution to heightened anti-money laundering standards.
The so-called Travel Rule Universal Solution Technology, or "TRUST," allows crypto firms to securely collect and transmit customer data in accordance with the travel rule.
Back in 2019 the Financial Action Task Force, a global anti-money laundering watchdog, said that virtual asset service providers (VASP) should be subject to the same rules as traditional financial companies. One of the key rules was the “travel rule” which requires collection of information about the sender and receiver in a transaction.
VASPs noted that this would be extremely difficult given how crypto works, but over time they put together a solution that would satisfy the travel rule even as it erodes at some of the privacy benefits crypto is supposed to provide.
VASPs would post to the bulletin board to see who may own an address in a transaction, and when another institution claims the address as part of their transaction, the two can engage in a peer-to-peer sharing of the information.
The TRUST system will be heavily centralized, require a VASP to be admitted into the coalition and agree to compliance audits. The current signatories are Anchorage, Avanti, Bitgo, bitFlyer, Bittrex, BlockFi, Circle, Coinbase, Fidelity Digital AssetsSM, Gemini, Kraken, Paxos, Robinhood, Standard Custody & Trust, Symbridge, Tradestation, Zero Hash and Zodia Custody.
Democratic lawmaker unveils bill that would define boundaries for stablecoin market (CNBC)
In a move that is attempting to balance the need for stablecoins with the need for stablecoins to actually be stable,
New Jersey Rep. Josh Gottheimer on Tuesday unveiled an early draft of legislation aimed at placing definitions around stablecoins, which critics consider susceptible to manipulation, bad actors and collapse [as] the result of insufficient reserve capital.
U.S. Representative Josh Gottheimer (D-N.J.) has introduced a bill that would establish government-backed insurance for stablecoins.
Known as the “Stablecoin Innovation and Protection Act” it would seek to create a class of stablecoins that are qualified. A qualified stablecoin would
Be issued by either a bank or a non-bank qualified stablecoin issuer and have a reserve mix approved by the Office or the Comptroller of the Currency (OCC - US regulatory organization). The stablecoin would also be regulated by the OCC; and
Be considered a bonafide cryptocurrency that is redeemable “on demand” 1:1 coin to dollar.
The best part of this bill though is,
The FDIC will be required to develop a Qualified Stablecoin Insurance Fund to manage the insurance of redemption payments of non-bank issuers.
In the US, a lot of discussions are happening and drafts are being circulated about how to handle stablecoins and crypto, but this is the United States government and we will be waiting awhile for anything to happen proactively.1
Between competing bills, more-urgent domestic priorities and precarious geopolitics, it could be months before lawmakers are able to drum up enough support behind any one bill to send it to President Joe Biden’s desk for signature.
As opposed to the constant litany of reactive regulation by the SEC and CFTC.