Crypto news & regulatory update: February 03, 2023 – February 28, 2023
Editor’s note: The a16z crypto Regulatory Update is a series that 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.
This week we’re spotlighting:
- In the government’s first-ever cryptocurrency insider trading criminal prosecution, a former Coinbase product manager pleaded guilty to two counts of wire fraud in connection with a scheme to help others buy digital tokens based on confidential information about the exchange’s upcoming listings. But the defendant filed a motion to dismiss SEC charges in his parallel civil case, arguing primarily that the digital tokens at issue are not securities.
- Kraken agreed to pay $30 million to settle SEC charges for failing to register the offer and sale of its crypto asset staking-as-a-service program.
- The SEC proposed rule changes for customer assets managed by registered investment advisers that extensively addresses crypto.
🌽 Commodity Futures Trading Commission
- Chair Rostin Behnam said that the CFTC was “working towards another strong year of precedent-setting cases” and would protect the public from illegal offerings of derivatives or leveraged, margined, or financed digital asset products, as well as fraud and manipulation.
- Commissioner Kristin N. Johnson reiterated that the CFTC should consider initiating a rulemaking process to evaluate regulation that would mandate segregating customer funds for spot crypto exchanges that own a U.S. derivatives exchange. She also reiterated that the agency should consider the introduction of financial resource requirements for certain derivatives clearing organizations, among other things.
- The CFTC charged Vista Network Technologies and its CEO for fraudulent solicitation and misappropriation of more than $7 million worth of bitcoin and ether from customers, partially through a Ponzi-like scheme.
- Commissioner Caroline D. Pham told Bloomberg that there is no simmering turf war over regulating crypto between the CFTC and SEC and that both regulators have for decades worked out their respective jurisdictions in the markets.
- Senator Elizabeth Warren (D-Mass.) and seven other Democratic lawmakers called on the Environmental Protection Agency and the Department of Energy to implement a mandatory disclosure regime that would require cryptominers to disclose emissions and energy-use data.
- House Financial Services Committee Chairman Patrick McHenry (R-N.C.) and Bill Huizenga (R-Mich.) demanded that SEC Chair Gary Gensler produce records and communications between the SEC and the Department of Justice regarding the timing of the charges filed against former FTX CEO Sam Bankman-Fried and his subsequent arrest prior to his scheduled testimony before Congress.
- The Senate Banking Housing and Urban Affairs Committee hosted a meeting titled “Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets.”
- Senator Tommy Tuberville (R-Ala.) tweeted that the “effort by federal financial regulators to de-bank legitimate American crypto businesses is shameful, and it needs to stop.”
- House Representative Tom Emmer (R-Minn.) introduced legislation seeking to bar the Federal Reserve from issuing a central bank digital currency (CBDC) to American individuals.
⚖️ Department of Justice
- In the government’s first-ever cryptocurrency insider trading prosecution, a former Coinbase product manager pleaded guilty to two counts of wire fraud in connection with a scheme to help others buy digital tokens based on confidential information about the exchange’s upcoming listings.
- A Russian citizen pleaded guilty to one count of conspiracy to commit money laundering in connection with a scheme to launder the proceeds of ransomware attacks using cryptocurrencies.
- The CEO of cryptocurrency and foreign exchange trading platform EminiFX pleaded guilty to commodities fraud in connection with a scheme in which he solicited more than $248 million in investments from thousands of investors through false representations.
- A federal grand jury returned an indictment charging the founders of Forsage for their roles in a global Ponzi and pyramid scheme that raised approximately $340 million from investors.
- The DOJ added four new criminal charges against Bankman-Fried, accusing him of conspiracy to operate an unlicensed money transmitting business, bank fraud, securities fraud, and fraud in connection with the purchase and sale of a derivative.
- Former FTX engineering director Nishad Singh pleaded guilty to fraud, conspiracy, and campaign finance violations in connection with the FTX scandal. He is now the third cooperator in the criminal case against Bankman-Fried. The SEC and CFTC also filed parallel civil enforcement actions against Singh.
💸 Department of the Treasury
- The U.S. and U.K. issued joint sanctions against seven members of Russian cybercrime group Trickbot. Trickbot had previously raised at least $724 million in crypto.
💵Federal Banking Regulators
- The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency released a joint statement warning banks that crypto poses significant liquidity risks based on market volatility.
🔐 Federal Deposit Insurance Corporation
- The FDIC issued cease-and-desist letters to two entities, CEX.IO Corp. and Zera Financial, and two websites, Captainaltcoin.com and Banklesstimes.com, based on allegedly false and misleading statements about FDIC insurance.
- The FDIC’s Office of Inspector General issued a release on the top management and performance challenges facing the FDIC, which includes supervising risks posed by digital assets.
🏦 Federal Reserve
- The Federal Reserve Board published a final rule which, among other things, would presumptively prohibit state member banks from holding most crypto-assets, including bitcoin and ether, as principal.
- The Federal Reserve announced that it has denied Custodia Bank’s request for reconsideration of the Board’s decision last month to reject its application for admission to the Federal Reserve system.
🛍️ Federal Trade Commission
- The FTC launched a new Office of Technology to (1) strengthen and support law enforcement investigations and actions, (2) advise and engage with staff and the Commission on policy and research initiatives, and (3) highlight market trends and emerging technologies that impact the FTC’s work.
- The FTC objected to crypto broker Voyager’s third attempt at bankruptcy, arguing that the proposed restructuring plan is a “disguised discharge” and would unlawfully bar the company from being held accountable for fraud, willful misconduct, or gross negligence.
🧾 Internal Revenue Service
- The IRS filed a court petition to enforce a summons against Kraken seeking the production of books and records relating to customer identification data. The IRS requested this information in connection with an investigation to determine the identity and correct federal income tax liability of U.S. persons who transacted in crypto.
- The Montana State Senate passed a bill to protect crypto miners from certain actions by local governments, including moving against at-home mining or using zoning laws to close active mining operations.
🗽 New York
- New York’s Department of Financial Services told Reuters that Paxos did not administer Binance USD in a “safe and sound” manner, and it ordered Paxos to stop issuing the token.
- New York’s Department of Financial Services announced that it had developed a new enhancement to aid its ability to detect fraud and other illegal activity among New York State-regulated entities engaged in virtual currency activity through insider trading and market manipulation risk monitoring tools.
- The New York Attorney General’s Office sued crypto exchange CoinEx for failing to register as a securities broker and commodity broker-dealer and for falsely representing itself as a crypto exchange. The complaint also alleges that Flexa’s AMP, LBRY’s LBC, Terraform Labs’ LUNA, and Rally’s RLY tokens are both securities and commodities.
📈 Securities and Exchange Commission
- Kraken agreed to pay $30 million to settle SEC charges for failing to register the offer and sale of its crypto asset staking-as-a-service program. Kraken also agreed that it would permanently cease offering crypto staking services. Commissioner Hester Peirce dissented, arguing that a “paternalistic and lazy regulator settles on a solution like the one in this settlement” and that the SEC should have issued guidance on staking programs.
- The SEC charged a Las Vegas resident with defrauding members of the Filipino community by allegedly raising over $800,000 from 26 investors to invest in GexCrypto, a purported crypto-trading platform, which had never been built and was never operational.
- The SEC announced its 2023 examination priorities, which include “emerging technologies and crypto-assets.” Exams will focus on the “offer, sale, or recommendation of, advice regarding and trading in crypto or crypto-related assets.”
- SEC Chair Gary Gensler said on Squawk Box that other crypto platforms should “take note” of the Kraken settlement, but he denied that the agency was using all available means to keep crypto out of the mainstream.
- The SEC proposed rule changes for customer assets managed by registered investment advisers. The proposed rule extensively addresses crypto and would require institutions to hold specific charters or certain registrations in order to custody crypto assets. The proposed rule is subject to a 60-day comment period and will likely not be finalized in the near term.
- The SEC charged Terraform CEO Do Kwon with orchestrating a multi-billion dollar crypto asset securities fraud, notably alleging that Terra USD (UST) and LUNA are securities.
- The SEC charged NBA Hall of Famer Paul Pierce for unlawfully touting EMAX tokens on social media without disclosing that he received payment for the promotion, as well as for making false and misleading statements about the tokens. Mr. Pierce agreed to settle the charges and pay $1.409 million in penalties, disgorgement, and interest.
- Wyoming’s House of Representatives passed a bill that would effectively prohibit the compelled disclosure of private crypto keys in any civil, criminal, administrative, legislative, or other proceeding in the state that relates to a digital asset.
- Australia’s Securities and Investments Commission announced that it was looking into Binance’s derivatives arm after Binance announced that it had incorrectly classified a group of Australian consumers as wholesale investors.
💵 Bank for International Settlements
- The BIS said that it will increase its focus on “improving payment systems” in 2023, which will include experiments with stablecoins and CBDCs.
- The BIS published data on recent crypto market volatility and retail losses, in which it assessed that on average, the majority of crypto application users lost money on their bitcoin holdings from August 2015 to the end of 2022.
- BIS General Manager Agustin Carstens stated that the BIS is working on CBDCs at wholesale and retail levels and faster payment systems, as well as experimenting with tokenizing assets. He also stated that the past year’s events have cast “serious doubts on the ability of stablecoins to function as money.”
- The Canadian Securities Administrators (CSA) published a notice to describe new expectations of crypto-asset trading platforms. Notably, the notice states that the CSA does not expect to provide consent for exchanges to list algorithmic stablecoins.
- China’s Ministry of Science and Technology approved the construction of its National Blockchain Technology Innovation Centre, which will research how blockchain could be used for industrial applications, and how it can be applied in the national economy.
🇪🇺 European Union
- The European Commission launched the “European Regulatory Sandbox for Blockchain” where companies can test products and services while engaging with regulators. The Sandbox will run from 2023 to 2026 and support 20 projects annually.
- The European Central Bank lauded the Basel Committee on Banking Supervision’s finalization of a standard on the prudential treatment of banks’ crypto-asset exposures, and it urged the European Union to include the Basel standards in its forthcoming legislation.
- A European Commission official said that Europe will need to consider nondiscrimination, user safety, and data privacy when developing policy for virtual worlds.
- The European Central Bank published a slideshow discussing a potential rollout approach for releasing the digital euro and inviting feedback from stakeholders on its proposed approach.
🌐 Financial Action Task Force
- The FATF agreed on a roadmap “to strengthen implementation of FATF Standards on virtual assets and virtual asset service providers.” The FATF will publish a report next year regarding the steps that its members have taken to regulate and supervise virtual asset service providers.
💸 Financial Stability Board
- The FSB published a report that examines financial stability risks of decentralized finance, which include the “actual degree of decentralization,” the danger of crypto bridges, and bugs in smart contracts, among other things.
- The French police department tweeted that they had arrested two people who are allegedly behind the attack on DeFi protocol Platypus.
🇭🇰 Hong Kong
- Hong Kong announced that it had successfully issued its first tokenized green bond of 800 million Hong Kong dollars.
- Hong Kong’s Securities and Futures Commission released a public consultation on proposed requirements for licensed operators of virtual asset platform providers.
- Hong Kong’s Financial Secretary Paul Chan called web3 a “golden opportunity” and said that he would establish and lead a task force on virtual asset development that will provide recommendations on “sustainable and responsible development of the sector.”
- India’s Finance Minister Nirmala Sitharaman said that the G20 was exploring ways to potentially regulate cryptocurrencies in a collective manner.
💸 International Monetary Fund
- The IMF recommended that potential risks associated with El Salvador’s use of bitcoin be addressed, but acknowledged that thus far no risks had materialized.
- The IMF published a nine-point action plan for how countries should treat crypto assets, with a top recommendation of not granting crypto assets “official currency or legal tender status.”
- The Bank of Israel published principles for regulating stablecoin activity, which includes a recommendation for stablecoin issuers to maintain reserves matching the amount of crypto in circulation, among other things.
- Italian Central Bank Governor Ignazio Visco said that Italian regulators had already begun the process for authorization and supervision activities envisioned in the Markets in Crypto-Assets (MiCA) regulation in anticipation of the legislation’s passage.
- Kazakhstan’s President Kassym-Jomart Tokayev signed legislation that will limit energy usage of domestic crypto miners.
- The Norwegian authorities seized 60 million krone (approximately $5.9 million) that was stolen from Axie Infinity last year, in the largest crypto seizure ever made by Norwegian police.
🇸🇦 Saudi Arabia
- The Saudi Arabia Digital Government Authority signed a memorandum of understanding with The Sandbox to explore opportunities in the metaverse.
🇰🇷 South Korea
- South Korea’s Financial Services Commission published guidelines that describe the types of blockchain-based security tokens that will be regulated under the country’s current capital markets rules.
- The South Korean government blacklisted four individuals and seven institutions linked to North Korea that allegedly financed “nuclear and missile development” based on the proceeds of crypto theft and other cyber activities.
🇦🇪 United Arab Emirates
- The UAE’s Virtual Assets Regulatory Authority published a new set of rulebooks that set forth various requirements for crypto firms, including authorization and licensing rules, compliance and risk-management standards, and cybersecurity norms. Notably, the rules prohibit the issuance of and activities relating to privacy-enhancing cryptocurrencies.
🇬🇧 United Kingdom
- The U.K.’s Financial Conduct Authority warned crypto-asset firms that they will soon need to comply with a new financial promotions regime and that the firms should begin preparing for this regime now.
- The Bank of England and U.K. Treasury officials issued a consultation paper that suggested potential limitations on U.K. citizens holding more than 10,000 British pounds each in a new digital pound. The consultation paper invites public comment on CBDCs and other related issues.
- The U.K.’s Financial Conduct Authority and local authorities sent cease-and-desist letters to operators of crypto ATMs, none of which are authorized to provide ATM services in the U.K.
🇺🇳 United Nations
- A United Nations report found that North Korea stole a record amount of cryptocurrency last year.
- Zambia’s Technology and Science Minister Felix Mutati announced that the Bank of Zambia and the country’s securities regulator are “testing technology to enable regulation of cryptocurrency in the country.”
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