Crypto Regulatory Roundup: September 27 – October 17, 2022
Editor’s note: This is the first installment of a new series, the a16z crypto Global Regulatory Roundup, which highlights the latest regulatory and policy happenings relevant to builders in web3 and crypto, as tracked and curated by the a16z crypto regulatory team. The roundups are based on recent news, the latest updates, new guidance, ongoing legislation, and frameworks released by regulatory agencies/bodies, industry consortia and professional associations, banks, governments, and other entities as they impact the crypto industry (or applications) around the world. We also occasionally include select other resources such as talks, posts, or other commentary – from us or from others – with the updates; see for instance the remarks from DC Fintech Week at bottom.
California Department of Financial Protection and Innovation
- DFPI filed cease-and-desist orders against 11 crypto firms, alleging misappropriation of customer funds and violations of state securities laws.
Commodity Futures Trading Commission
- CFTC Commissioner Caroline Pham explained the CFTC’s current role in regulating the retail public in U.S. markets while speaking at CordaCon 2022. She also proposed ten fundamentals for “responsible” digital asset markets, which the CFTC could use to create a principle-based regulatory framework for the industry.
- In its lawsuit against Ooki DAO, the CFTC requested that the Court allow it to serve process via the DAO’s website’s help chat box (with a contemporaneous notice on the website’s online discussion forum), arguing that no other mechanisms exist for the public to contact Ooki DAO. The Court granted the CFTC’s request.
- At the CFTC’s Market Risk Advisory Committee Meeting, CFTC Commissioner Kristin Johnson discussed recent CFTC enforcement actions and proposed legislation relating to digital assets, and she reiterated that the CFTC “is well-situated” to regulate digital assets. The Committee also voted to create a Future of Finance subcommittee to address digital assets specifically.
- CFTC Chair Rostin Behnam said that “Bitcoin might double in price if there’s a CFTC-regulated market,” and that “incumbent institutions in the crypto space see a massive opportunity for institutional inflows that will only occur if there’s a regulatory structure around these markets” while speaking at NYU Law School.
- The CFTC filed a complaint against Adam Todd, alleging that he operated an illegal digital asset derivatives trading platform through a common enterprise of entities, including Digitex LLC, that he manipulated the price of the Digitex native token, and that Digitex Futures failed to register as a Futures Commission Merchant.
- CFTC Commissioner Summer Mersinger spoke about the CFTC’s enforcement action against Ooki DAO, stating that regulation by enforcement “bypasses [the] kind of  public legislative process [and] public input” and is “not an ideal way to govern” in an interview with CoinDesk TV.
- CFTC Chair Rostin Behnam cautioned industry not to expect a “light touch” if the CFTC is given jurisdiction over crypto spot markets while speaking at a conference held at Georgetown University.
- CFTC Commissioner Christy Goldsmith Romero said that the CFTC needs to redefine how it sets rules for retail investors, including providing a proposal for a new definition of retail investor in an interview with CoinDesk TV.
- Three Republican members of Congress, Senators Pat Toomey (R-Pa.) and Tim Scott (R-S.C.) and House Representative Peter Meijer (R-Mich.), presented a draft bill, the Retirement Savings Modernization Act, that would enable investment managers to offer bitcoin and cryptocurrencies in their 401(k) plans.
- Republican Congressmembers on the House Financial Services Committee sent a letter to U.S. Attorney General Merrick Garland asking him to share the Justice Department’s assessment on whether the Federal Reserve requires express legislative authorization prior to issuing a central bank digital currency (CBDC).
- Seven Democratic lawmakers sent a letter to Pablo Vegas, the CEO of the Electric Reliability Council of Texas (ERCOT), expressing concern about bitcoin mining energy demands in Texas. The Democratic lawmakers are Senators Elizabeth Warren (D-Mass.), Sheldon Whitehouse (D-RI), and Edward J. Markey (D-Mass.), and House Representatives Al Green (D-Tex.), Katie Porter (D-Cal.), Jared Huffman (D-Cal.), and Rashida Tlaib (D-Mich.).
- U.S. Senator John Hickenlooper (D-Colo.) sent a letter to SEC Chair Gary Gensler, urging the SEC to issue regulations for digital asset securities through a transparent notice-and-comment regulatory process.
- The Delaware Department of Justice froze funds from 23 individuals on various crypto exchanges for allegedly containing crypto obtained through “pig-butchering” scams (a crypto romance scam in which swindlers lure unsuspecting investors to send them their crypto holdings).
Department of Justice
- A California man was indicted for allegedly conspiring with others to launder the proceeds of his drug trafficking organization using cryptocurrency. He and his co-conspirators allegedly laundered more than $5.35 million.
- The DOJ and the Federal Trade Commission participated in a G7 Joint Competition Policy Makers & Enforcers Summit that was organized by the German Bundeskartellamt and Ministry for Economic Affairs and Climate Action to explore how G7 governments are approaching competition policy in the digital asset markets.
Department of the Treasury
- The Financial Stability Oversight Council published its report on digital assets. The report recommends that Congress pass legislation providing federal financial regulators with rulemaking authority over the spot market for digital assets that are not securities, take steps to address regulatory arbitrage, and undertake the study of potential vertical integration by crypto firms. (The FSOC is a U.S. government organization that was formed in response to the 2008 financial crisis, and its role is to make policy recommendations to member agencies where authority already exists, or to Congress where additional authority is needed. FSOC also monitors financial stability and designates nonbank financial companies and financial market utilities as systemic. The FSOC board has 15 members, including 10 voting and 5 non-voting members, and is chaired by the Secretary of the Treasury.)
- The U.S. Department of the Treasury’s Office of Foreign Assets Control and the Financial Crimes Enforcement Network announced settlements for over $24 million and $29 million, respectively, with Bittrex, Inc. This is OFAC’s largest digital currency enforcement action to date, and it represents the first parallel enforcement actions by FinCEN and OFAC in this space.
- Coin Center filed a lawsuit against the Department of the Treasury and the Office of Foreign Assets Control, alleging that the sanctioning of Tornado Cash was unlawful. This is the second lawsuit against the government relating to Tornado Cash.
- Speaking at an annual meeting of the International Monetary Fund, Secretary of the Treasury Janet Yellen reiterated the importance of building a regulatory framework for digital assets.
- Federal Reserve Chairman Jerome Powell said that DeFi has “significant structural” issues with transparency and conflicts of interest while speaking at an event hosted by the Banque of France. He also stated that the DeFi winter has not had “significant effects” on the banking system or broader financial stability, which gives regulators more time to think “carefully and thoughtfully” about the regulation of DeFi.
- Federal Reserve Governor Michelle Bowman discussed large bank regulation, briefly addressing digital assets at the Institute of International Finance. She stated that the federal regulators must improve transparency around supervisory standards for banks engaged in crypto asset-related activities, and limit the role of formal and informal enforcement actions and penalties to “serious issues.”
- The Federal Reserve Bank of New York published a paper, discussing the purported risk of resilient stablecoins increasing the chances of runs on smaller and more vulnerable issuers, among other things.
- Custodia Bank filed a petition in court, arguing that the Federal Reserve demonstrated a double standard by allowing BNY Mellon to engage in crypto custody but not granting Custodia approval for a Federal Reserve master account.
- Federal Reserve Governor Christopher Wallace gave remarks at a Harvard symposium, in which he addressed whether, or the extent to which, a domestic or foreign CBDC or private stablecoin could pose a threat to the international dominance of the U.S. dollar.
Office of the Comptroller of the Currency
- Nexo announced that it had acquired an undisclosed stake in the parent firm of Summit National Bank, a federally-chartered U.S. bank. Nexo is now the third crypto firm to obtain a federal bank charter (after Anchorage Digital and Protego Trust Bank), but the first to do so through an acquisition rather than the application process. It is not clear how the banking regulators will react to Nexo’s purchase.
- Acting Comptroller of the Currency, Michael Hsu, discussed the need to clarify supervisory expectations related to crypto activities and the role of regulators to ensure safety while promoting innovation in remarks at Harvard Law School.
Securities and Exchange Commission
- The SEC announced charges against The Hydrogen Technology Corporation and others for allegedly effectuating the unregistered offers and sales of crypto asset securities called “Hydro” and for manipulating the trading volume and price of those securities, which yielded more than $2 million for Hydrogen.
- The SEC announced charges against Arbitrade Ltd. and others for allegedly perpetrating a pump-and-dump scheme involving a crypto asset called “Dignity” or “DIG.” Arbitrade falsely claimed that it had acquired $10 billion in gold bullion, which it had not, and that it would back each DIG token with $1.00 worth of the gold. Defendants then sold at least $36.8 million of DIG, at prices fraudulently inflated by the public misstatements about the supposed gold acquisition.
- The SEC announced a settlement with Kim Kardashian for allegedly “touting” EthereumMax on social media without disclosing the payment that she received for the promotion. The settlement requires Kardashian to pay $1.26 million.
- Grayscale Investments filed its first legal brief in its action against the SEC, accusing the agency of violating the basic requirements of the Administrative Procedure Act in rejecting its application to convert its Grayscale Bitcoin Trust (GBTC) into a spot bitcoin ETF. The SEC’s response is due on November 9, 2022.
- The SEC denied WisdomTree’s application to list a spot Bitcoin ETF on the grounds of insufficient investor protections.
- SEC Chair Gary Gensler stated that Congress should give the CFTC more powers to police stablecoins to reduce risks to the financial system while speaking at a conference held at Georgetown University.
Bank for International Settlements
- The BIS, also known as the “Bank of Central Banks” is an international financial institution that is owned by 63 central banks — representing countries from around the world that together account for about 95% of world GDP. The BIS provides an institutional space for the sharing of information among central bank governors; earns profit as a wholesale money market bank for central banks; and promotes international monetary and financial cooperation.
- It announced the successful completion of the first CBDC pilot involving four jurisdictions, Hong Kong, Thailand, China, and the United Arab Emirates. The trial was conducted on the mBridge Ledger, a custom-developed DLT platform.
- The BIS also announced the commencement of “Project Icebreaker,” where it will work with the central banks of Israel, Norway, and Sweden to explore how CBDCs can be used for international retail and remittance payments.
- The Brazilian Securities and Exchange Commission requested that crypto exchange Mercado Bitcoin provide it with information regarding the fixed-income tokens that the exchange had issued in the past two years.
- The Investment Industry Regulatory Organization of Canada (IIROC) granted membership to Coinsquare, a Toronto-based crypto exchange; and announced that Coinsquare is now registered as an investment dealer. Coinsquare is the first crypto-native platform to join IIROC. (IIROC is a non-profit, national self-regulatory organization that oversees and regulates Canadian investment dealers and trading activity on debt and equity markets in Canada. It also holds enforcement hearings and has the power to suspend, fine, and expel members and registered representatives.)
- The European Securities and Markets Authority published a report, titled “Crypto-assets and their risks for financial stability.” The report states that use of crypto assets remains small and that interlinkages to the traditional markets are limited, but continuous monitoring of the market is required to take into account future developments.
Financial Stability Board
- The FSB published a proposed framework for the international regulation of crypto-assets. The core components of the framework include: (1) recommendations that promote the consistency of regulatory approaches to crypto and strengthen international cooperation and information sharing; and (2) revised high-level recommendations for the regulation of “global stablecoin” arrangements.
- Banque de France Governor, Francois Villeroy de Galhau warned EU regulators against “adopting diverging or contradictory regulations, or regulating too late,” and that doing so could “create an uneven playing field, risking arbitrage and cherry picking” at a conference on digital finance.
- France’s Autorité des Marchés Financiers approved the registration of Societe Generale’s crypto division, SG Forge, to offer buying, selling, trading, and custody of digital assets.
- France’s Finance Minister Bruno Le Maire said that he wants “France to be the European hub of the crypto asset ecosystem” in an interview with BFM TV.
International Organization of Securities Commissions
- IOSCO released a report stating that securities regulators should have the power to demand foreign crypto sites be taken down “upon request” if the foreign regulator “has ascertained a violation.”
- Japanese Prime Minister Fumio Kishida stated that Japan plans to invest in NFTs and metaverse services in a policy speech.
Organisation for Economic Co-operation and Development
- The OECD released a new tax reporting framework, also known as the “Crypto-Asset Reporting Framework.”
- Thailand’s SEC sued five entities for allegedly creating artificial volume on crypto exchanges Bitkub and Satang Corp.
- The Deputy Governor of the Bank of England, Jon Cunliffe, warned that, “Regulators need to begin extending existing standards and regulatory regimes to crypto before not after it  becomes systemically important” at the AFME Conference.
- The Financial Conduct Authority has appointed Binu Paul as its new head of digital assets. Paul was previously the fintech specialist lead at New Zealand’s Financial Markets Authority.
- Uzbekistan will require licensed cryptocurrency companies in the country to pay monthly fees that will go to the state budget, as well as the treasury of the National Agency of Prospective Projects of the Republic of Uzbekistan.
Select resources/ commentary
DC FinTech Week
- Commodity Futures Trading Commission: CFTC Chair Rostin Behnam reiterated his position that the CFTC should have jurisdiction over the spot digital asset commodities markets, and discussed the recent Ooki DAO enforcement action, calling the DAO “hardly decentralized” and an “egregious” case.
- Department of Justice: The Director of the Department of Justice’s National Cryptocurrency Enforcement Team, Eun Young Choi, provided background on her team and described the challenges that the team faces, including the international aspects of illicit crypto activities and the use of mixers.
- European Union: The European Commission’s Commissioner for Financial Stability, Financial Services, and the Capital Markets Union, Mairead McGuinness, discussed crypto regulatory advancements in Europe — including the E.U.’s new Markets in Crypto-Assets Regulation — and noted that energy, anti-money laundering, and investor protection are the European regulators’ greatest concerns.
- Federal Housing Finance Agency: FHFA Director, Sandra L. Thompson, discussed the agency’s new Office of Financial Technology and its initiative to use technology to increase efficiencies in the mortgage market. She welcomed comments from industry about how the FHFA can integrate blockchain technology as well.
- Federal Reserve: Vice Chair for Supervision of the Federal Reserve, Michael S. Barr, discussed the need for appropriately timed crypto regulations, and he indicated that the Federal Reserve is not currently contemplating a CBDC.
- Office of the Comptroller of the Currency: Acting Comptroller of the Currency, Michael Hsu, discussed the importance of identifying and monitoring crypto risks to protect consumers and the financial system.
- U.S. House of Representatives: U.S. House Representative Maxine Waters (D-Cal.) discussed crypto legislative efforts and her priorities of protecting investors, increasing diversity and financial inclusion, and narrowing the racial wealth gap.
- U.S. House of Representatives: U.S. House Representative Patrick McHenry (R-N.C.) discussed the stablecoin bill that he is working on with House Representative Maxine Waters (D-Cal.). McHenry also said that he would make crypto regulation a priority if he becomes chair of the House Financial Services committee after the election.
- U.S. House of Representatives: U.S. House Representative Ro Khanna spoke on a panel about democratizing innovation for the American public.