Crypto Regulatory Roundup: October 18 – November 9, 2022a16z crypto Regulatory Team
Editor’s note: The a16z crypto Global Regulatory Roundup is a series 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.
Additional note: This edition does not cover ongoing developing news related to the crypto exchange FTX. Those updates will appear in a later edition.
For anyone who prefers a shorter recap to the full roundup, we are introducing a TL;DR of the most significant updates up top. This week, we’re spotlighting:
- More than a fifth of the CFTC’s enforcement actions in its most recent fiscal year involved conduct related to digital assets, per the agency’s annual enforcement report,
- A recent cryptocurrency seizure relating to the DOJ’s ongoing Silk Road investigation is among the department’s largest ever, and
- The E.U. made policy recommendations in a recent report on DeFi, – including proposing the creation of a “public observatory” that issues warnings and recommendations based on an analysis of on-chain data.
🌽 Commodity Futures Trading Commission
- The CFTC released its annual enforcement report, which showed the agency brought a total of 18 actions involving conduct related to digital assets in fiscal year 2022, representing more than 20% of all actions it filed.
- CFTC Chair Rostin Behnam stated he believes Ether is a commodity, while speaking at a crypto event held at the law firm Lowenstein Sandler. He also said the CFTC’s “greatest accomplishment” was its track record of crypto-related enforcement actions, and that he gets “very irritated” when people refer to the CFTC as a more “favorable regulator.”
- CFTC Commissioner Christy Goldsmith Romero said the financial stability risk of crypto will increase and could potentially rise to the level of systemic risk, similar to what occurred in the runup to the 2008 global recession, at the New York ISDA conference.
- CFTC Commissioner Christy Goldsmith Romero told CoinDesk TV that regulators should examine established ways of regulating TradFi markets to see whether the same regulations can be applied to digital assets.
- The CFTC settled charges against an individual who participated in a scheme to solicit customers for the alleged managed trading of virtual currencies, falsely claiming he would take advantage of arbitrage opportunities across virtual currency platforms, and that he had developed a “highly advanced arbitrage bot.” He was ordered to pay a $177,000 civil monetary penalty. The Securities and Exchange Commission brought charges against the same individual based on the same facts.
- U.S. House Representative Jim Himes (D-Conn.) said CBDC development is necessary for the United States to remain competitive, in an interview with CoinDesk TV.
- A dozen Democratic senators urged SEC Chair Gary Gensler in a previously unreported letter to provide sufficient time periods for notice and comment requests directed at industry. While the letter does not mention crypto specifically, notice and comment requests regularly deal with crypto-related issues. The letter’s signatories are Senators Jon Tester (D-Mt.), Raphael Warnock (D-Ga.), Kyrsten Sinema (D-Ariz.), Mark Kelly (D-Ariz.), Tom Carper (D-Del.), Chris Coons (D-Del.), Mark Warner (D-Va.), Tim Kaine (D-Va.), Maggie Hasan (D-N.H.), Jacky Rosen (D-Nev.), Gary Peters (D-Mich.), and John Hickenlooper (D-Colo.).
- U.S. House Representative Warren Davidson (R-Ohio) spoke with CoinDesk TV about the role of crypto in the midterm elections, pending legislation in Congress, and his support for a Bitcoin ETF. Notably, Davidson expects a stablecoin bill by Q1 of 2023, and he said that he generally does not believe crypto is a partisan issue.
💲Department of the Treasury
- Secretary of the Treasury Janet Yellen said the administration’s goal is to “realize the potential benefits of digital assets while mitigating and minimizing their risks” in remarks briefly addressing digital assets at the Securities Industry and Financial Markets Association’s (SIFMA) Annual Meeting.
- The Department of the Treasury’s Office of Foreign Assets Control sanctioned individuals and entities accused of acting on behalf of Russia in “capturing and corrupting” Moldova’s political and economic institutions. One of the individuals allegedly facilitated the setup of a payment channel using Tether, likely for funding election influence operations.
⚖️ Department of Justice
- The DOJ charged five Russian nationals and two oil traders with crimes relating to a global procurement, smuggling, and money laundering network. The Defendants allegedly orchestrated a scheme to unlawfully obtain U.S. military technology and Venezuelan sanctioned oil through transactions involving shell companies and crypto.
- Two men were sentenced for a nationwide scheme to steal social media accounts and cryptocurrency. They were convicted for targeting at least 10 identified victims around the country and stealing approximately $330,000 in cryptocurrency.
- The DOJ charged two intelligence officers from the People’s Republic of China with attempting to obstruct a criminal prosecution in the Eastern District of New York. The officers allegedly orchestrated a scheme to steal files and other information from the U.S. Attorney’s Office by paying approximately $61,000 in bitcoin bribes to a U.S. government employee who they believed had been recruited to work for the PRC, but who was in fact acting as a double agent for the FBI.
- The DOJ announced an individual pled guilty to committing wire fraud for stealing more than 50,000 bitcoins from the Silk Road marketplace in September 2012. This is among the largest cryptocurrency seizures to date.
🏦 Federal Deposit Insurance Corporation
- Acting Chairman of the FDIC, Martin J. Gruenberg, said stablecoins could “fundamentally alter the landscape of banking,” and that he expects the FDIC and other federal banking agencies will provide broader industry guidance on an interagency basis as they develop a better collective understanding of the risks associated with crypto.
- The FDIC released the results of a national survey on unbanked and underbanked households in the United States, estimating that nearly 96% of U.S. households were banked in 2021. Key findings include: (1) the national unbanked rate dropped to a record low; (2) the national underbanked rate and use of nonbank financial products and services declined; and (3) unbanked and underbanked rates remain higher among minorities.
💵 Federal Reserve
- The Federal Reserve released a Financial Stability Report for 2022 that reflects the Fed’s assessment of the stability of the U.S. financial system. The report notes that stablecoins remain vulnerable to runs and that “speculation and risk appetite appear to be the primary driving forces of crypto-asset prices,” but that the downturn in the crypto markets has not had “notable effects” on the traditional financial system.
🏦 New York Fed
- The New York Fed concluded that foreign exchange transactions could drop from a two-day process to under 15 seconds if CBDCs were involved, based on a recent experiment.
💸 Office of the Comptroller of the Currency
- The OCC announced it will establish an Office of Financial Technology early next year “to bolster the agency’s expertise and ability to adapt to a rapidly changing banking landscape.”
📈 Securities and Exchange Commission
- SEC Chair Gary Gensler discussed competition and centralization in the financial markets, noting that the regulators have “even seen centralization in the crypto market, which was founded on the idea of decentralization,” at the annual SIFMA meeting.
- SEC Commissioner Hester Peirce told Decrypt the SEC has provided “very little clarity” with respect to NFTs, calling it “not the ideal state” for regulation.
- SEC Chair Gary Gensler noted the SEC focuses on the “economic realities” of a financial instrument to determine whether it is a security, notably mentioning the BlockFi crypto lending product as an example, at a Practicing Law Institute (PLI) Conference.
- The SEC charged four individuals for their roles in a fraudulent crypto Ponzi scheme that raised more than 82,000 bitcoins ($295 million at the time) from more than 100,000 investors worldwide.
- A New Hampshire district court judge ruled that crypto startup LBRY violated securities laws by selling its native LBC tokens without registering with the SEC.
🇺🇸 State Securities Regulators
- Alabama, Kentucky, and Texas securities regulators filed cease-and-desist orders against Slotie NFT, alleging that it illegally and fraudulently sold NFTs to raise capital for online and metaverse casinos.
- Argentina’s tax collection agency, the Federal Administration of Public Revenues, and the Ministry of Security of Buenos Aires dismantled a clandestine cryptocurrency mining operation and arrested 40 people, in an operation that consisted of 70 raids.
- The Australian Securities and Investments Commission brought a legal action against BPS Financial Pty Ltd (BPS) for allegedly making false representations and engaging in unlicensed conduct in relation to a non-cash payment facility involving the cryptocurrency Qoin.
- Canada released a Fall Economic Statement that includes a section on the “digitalization of money” and launches a consultation on “cryptocurrencies, stablecoins, and central bank digital currencies.”
- China’s Central Bank Governor Yi Gang said privacy protection is a “top” issue with respect to the use of a Chinese CBDC, at Hong Kong FinTech Week.
🇪🇺 European Union
- The E.U. published a report on DeFi that makes policy recommendations for industry, including regulating traditional finance entities and oracles that engage in DeFi, incentivizing voluntary regulatory compliance among DeFi protocols, and creating a “public observatory” that issues warnings and recommendations based on an analysis of on-chain data.
- The European Commission released an action plan stating that E.U. member states must “be ready to stop crypto-assets mining” if there is a need for “load shedding in the electricity systems.” The purpose of the action plan is to lay the framework for a “digitalised, green and resilient energy system.”
- Two officials from the E.U.’s antitrust authority published a blog post expressing concern that metaverse companies could grow to dominate the market in an anti-competitive manner.
- The E.U.’s financial services chief, Mairead McGuiness, urged U.S. politicians to publish new rules to govern the crypto industry, noting that any regulation of the crypto industry needs to be global.
- E.U. Commissioner Paolo Gentiloni said international agreements may be required to prevent CBDCs from infringing on other countries’ sovereignty.
- The Head of Distributed Ledger Technology and Markets at the Gibraltar Financial Services Commission, William Gracia, said “Gibraltar needs to be at the forefront” of consumer protection to “ensure the continued success story of the DLT framework.” He also noted the agency wants to bring DeFi and stablecoins into “sharp focus.”
- India’s Minister of Home Affairs, Amit Shah, said drug smuggling and terrorism financing through the darknet and cryptocurrencies has increased, at a high-level regional meeting on drug trafficking and national security.
- Indian officials, including the Chief Economic Adviser to the government, V. Anantha Nageswaran, and Finance Minister, Nirmala Sitharaman, said crypto asset regulations should be an international priority and an important topic of discussion at next year’s G-20 summit.
🚨 International Criminal Police Organization
- Interpol announced the launch of the first metaverse specifically designed for law enforcement agencies around the world. The metaverse allows registered users to visit a virtual version of the Interpol General Secretariat headquarters in Lyon, interact with other agents via avatars, and undergo immersive training.
🌍 International Monetary Fund
- The Deputy Director of monetary and capital markets at the IMF, Dong He, encouraged industry to work with regulators and stated that “regulation is good for your future.” He also said regulation is particularly important because of the international implications of crypto.
- The Digital Agency of Japan announced it established a DAO in an effort to explore the “functions and roles” of DAOs.
🇭🇰 Hong Kong
- The Hong Kong Monetary Authority, Hong Kong’s central bank, in partnership with the Bank of International Settlements’ Innovation Hub Hong Kong Centre, produced a prototype of Hong Kong’s upcoming digital currency.
- The Central Bank of Russia released a report on digital assets focusing on how to integrate them into the financial system, including appropriate taxation and regulating digital asset issuance.
- The Monetary Authority of Singapore announced a program to test the use of wholesale CBDCs for cross-border foreign exchange settlement.
🇰🇷 South Korea
- South Korea’s financial regulator, Financial Services Commission (FSC), issued a report stating that the financial authorities consider stablecoins to be highly susceptible to money laundering and that they intend to look into the proportion of stablecoins being used on crypto exchanges. (FSC drafts and amends financial laws and regulations, issues regulatory licenses to financial institutions, and oversees cross-border matters such as supervising foreign exchange transactions conducted by financial institutions.)
- The Bank of Korea completed the second phase of its retail CBDC simulations and found that overall performance of the Ethereum blockchain was insufficient because of scaling and technology issues.
🇿🇦 South Africa
- South Africa’s Financial Sector Conduct Authority declared crypto assets to be financial products in a notice and said it would require companies that trade in crypto to obtain a license starting next summer.
- Switzerland’s Financial Market Supervisory Authority announced new crypto regulations relating to anti-money laundering. More specifically, Swiss citizens will need to confirm their identity when conducting crypto transfers of over 1000 Swiss Francs.
🌐 United Nations
- A senior legal officer at the United Nations Counter-Terrorism Committee Executive Directorate, Svetlana Martynova, said up to 20% of terrorist attacks may be crypto-financed or linked to digital assets, which is up from an estimated 5% a few years ago, at a United Nations Security Council.
- Vietnamese Prime Minister Pham Minh Chinh called for new rules to regulate the crypto sector, saying he was “impatient” that people continue to trade cryptoassets without recognition from the regulators.
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