Crypto industry supports US and European regulatory changes

Crypto regulation has been a major topic of discussion over the past two years, with various jurisdictions rapidly developing oversight structures. Recently, this nascent industry has come under severe pressure due to a severe crackdown by the US government, which some crypto-natives have labeled Operation Choke Point 2.0.

So, what has actually happened in the crypto regulatory landscape? In terms of events, there appears to be a coordinated effort by regulators, particularly in the US, to implement stricter crypto-related policies:

• U.S. banks serving crypto clients are being pressured to cut back or exit the business, with Signature Bank (NASDAQ:SBNY) halving deposits attributed to crypto clients and Metropolitan Commercial Bank closing its crypto-asset-related vertical.

• Kraken, a leading crypto exchange, had to agree to a $30 million settlement with the SEC for offering its staking-as-a-service program for crypto assets.

• Paxos, a regulated blockchain infrastructure provider, is currently under investigation for its BUSD stablecoin for violating investor protection laws.

• Recent regulatory pronouncements by the SEC have also strongly discouraged banks from holding cryptoassets or issuing stablecoins.

h2 2022: The year crypto insolvencies tipped the scales/t2

Looking back at the events that unfolded in 2022, it was almost obvious that regulators would take a serious stance on crypto activities sooner rather than later. The year was marked by many unprecedented events, starting with the collapse of Terra’s algorithmic stablecoin UST, which led to the implosion of a $60 billion DeFi ecosystem.

But it was the contagion effect that caught the attention of regulators; several established crypto firms that had close ties to Terra went under during this fiasco.

Three Arrows Capital, which managed over $10 billion before Luna’s collapse, was one of the first victims. The now-insolvent hedge fund tagged some of its biggest creditors at the time, including Genesis Asia Pacific Pte (a subsidiary of Digital Currency Group) and crypto lender Voyager Digital.

However, the biggest blow came towards the end of the year after the collapse of FTX. Even at the time of writing, the effects are still being felt across the industry, especially on the regulatory front.

h2 American and European regulators are taking a firm stance/t2

After a successful run in 2020 and 2021, regulators in the US and Europe seem to have found the right moment to strike back against the crypto industry. This time it’s not just the typical crypto market FUD; there are some serious considerations on how to effectively regulate the digital asset ecosystem.

Get the news you want

Read exciting news in the market with a personal feed of stocks you care about.

Get the app

In the US, House lawmakers led by Representative Patrick McHenry, the top Republican on the House Financial Services Committee, called the collapse of FTX a “dumpster fire, users left out to dry”. Treasury Secretary Janet Yellen also called for “more effective oversight of crypto markets” to avoid a situation where broader financial markets would be affected by such events.

Meanwhile, European Commission Deputy Director Alexandra Jour-Schroeder said the upcoming Markets in Crypto Assets (MiCA) regulation would have protected consumers to some extent.

“No company providing cryptoassets in the EU would have been allowed to be organized, [or] perhaps it is better to say, disorganized, as FTX allegedly was.”

That said, let’s dive deep into some of the regulatory developments taking place in these two jurisdictions.

h2 MiCA Bill and other historic bills in Europe /t2

MiCA (Markets in Crypto-Assets) is a proposed EU (European Union) regulatory framework that aims to establish a unified set of rules for the supervision and oversight of crypto-assets and their underlying infrastructure. The framework is being developed by the European Securities and Markets Authority (ESMA), the EU’s financial supervisory body.

The purpose of MiCA is to provide a clear and consistent regulatory framework for the European crypto-asset industry, which has grown rapidly in recent years but remains fragmented in terms of regulation. The framework is intended to ensure the safety and integrity of cryptoasset markets, protect consumers and promote market efficiency and innovation.

It defines different types of cryptoassets and sets out the requirements for firms wishing to engage in activities such as trading, custody and issuance. MiCA also includes rules of conduct to ensure transparency and fair treatment of customers, and market infrastructure rules for exchanges, clearing houses and trading platforms. For investor protection, MiCA provides information requirements and investor education.

After years of back and forth, the MiCA framework is now in its final stages and is set for a final vote in April.

Apart from MiCA, there have been other regulatory actions related to crypto in Europe:

• The Fifth Anti-Money Laundering Directive (5AMLD), which was adopted in May 2018 and entered into force in January 2020, requires cryptocurrency exchanges and custodian providers to register with national competent authorities and use customer due diligence controls.

• The EU’s Digital Finance Strategy, which was published in March 2020, aims to promote the development of digital finance in the EU and includes a focus on crypto-assets and distributed ledger technology.

• In France, the PACTE law, which came into force in 2019, introduced a framework for initial coin offerings (ICOs) and created a new legal category for “digital assets”, which includes cryptocurrencies.

• In Germany, the German Financial Supervisory Authority (BaFin) has issued guidelines on the regulatory treatment of cryptocurrencies, among other things with the aim of combating money laundering and the financing of terrorism.

• In the UK, the Financial Conduct Authority (FCA) has issued guidance on the regulatory treatment of cryptocurrencies and has taken enforcement action against firms that have engaged in unauthorized activities related to cryptocurrencies.

h2 The SEC Classification Debate: Are Most Crypto Assets Securities?/t2

Despite being a trendsetter in the global financial market scene, the US continues to lag in its approach to formulating a regulatory framework for crypto. Currently, there is no federal law governing the digital asset ecosystem; instead, the SEC uses three laws to regulate cryptocurrency activities in the United States: the Securities Act of 1933, The Securities Exchange Act of 1934, and The Investment Company Act and Investment Advisers Act of 1940.

Under these laws, most crypto-assets, except for BTC, are considered securities, meaning that stakeholders must comply with the same laws that govern US securities.

At the time of writing, the SEC is currently involved in a case against Ripple, suing the latter for raising over $1 billion through the sale of XRP tokens since 2013. According to the regulator, Ripple’s XRP token was sold to the public as an unregistered Safety. The decision in this case is likely to have far-reaching effects on how cryptoassets will be classified in the United States

President Biden’s White House has also recently released its first-ever proposed crypto regulatory framework following an executive order issued back in March 2022. US government agencies were tasked with exploring the opportunities and risks posed by the crypto ecosystem. Here are some highlights from this framework:

• Cryptocurrency’s role in illicit finance

The White House’s new crypto regulatory framework has a section dedicated to eliminating illegal activity in the industry, with proposed measures deemed effective.

“The President will consider whether to urge Congress to amend the Bank Secrecy Act, anti-tipping statutes and anti-unlicensed money transmission laws to apply explicitly to providers of digital assets – including digital asset exchanges and nonfungible token (NFT) platforms.” that in a fact sheet from the White House.

The potential for “significant benefits” from a digital US central bank currency (CBDC) was also outlined in the framework. According to the report, a digital form of the US dollar could create a more efficient payment system, facilitate faster cross-border transactions and provide a platform for technological innovation. In addition, it can promote financial inclusion and equity by making it available to a wide range of consumers and being more environmentally sustainable.

• Finding a balance with traditional markets

The White House fact sheet highlights the growing interconnection between digital assets and mainstream financial systems, noting the potential for the turmoil to have ripple effects. It warns that stablecoins could cause disruptive runs if not regulated, and suggests that the Treasury should work with financial institutions to identify and mitigate cyber vulnerabilities, and with other agencies to identify and track strategic risks.

Written by:
Ulrik Lykke