Published Aug 3, 2022
By Qredo Team
Ben’s Regulatory Radar – July Highlights
Ben Whitby
VP Strategic Partnerships and Regulatory Affairs
Ben grew up coding and exploring computers, and went on to build the world’s first interest rate swap trading platform in 2001.
He later led regulatory teams at Accenture and PwC, before spending eight years with HSBC as a Regulatory Conduct and Financial Crime Specialist — a role that involved writing the bank’s first policy on Bitcoin in 2013.
Welcome to the latest edition of the Regulatory Radar!
This month I share some personal insights and commentary on several of the most interesting things going on in crypto regulation & compliance.
Here are my highlights from July activity.
Travel Rule Update
With legislators and regulators steadily increasing their efforts to create frameworks for the cryptoasset industry, more and more companies are turning their attention to the impact of the FATF Travel Rule on their business.
Following recent updates such as the European Union’s Markets in Crypto Assets (MiCA) legislation, heightened focus from US regulators including the Securities and Exchange Commission, and proposed legislation in the UK and elsewhere, the Travel Rule is rapidly becoming the number one crypto regulatory issue.
The good news is that real progress is being made by the industry to tackle the issue, with compliance becoming a key focus for companies across the cryptoasset market.
At Qredo, we are seeing more and more interest from clients wishing to tap our cross-protocol Trave Rule solution to alleviate the compliance burden and free up their teams to focus on what matters most to them.
Check out Qredo’s bespoke Travel Rule Solution for more information about how to prepare your business for these regulatory challenges.
UK Stablecoin Legislation
The UK has massively accelerated its crypto regulatory efforts in 2022, with Rishi Sunak – former Chancellor and candidate to replace Boris Johnson as Prime Minister – setting out the government’s ambition to become a hub for the industry.
That pro-crypto position has persisted under Sunak’s successor as Chancellor Nadhim Zahawi, who, as part of the government’s wide ranging regulatory reform bill, the Financial Services and Markets Bill, plans to introduce specific rules for stablecoins.
In a speech to finance industry participants last month, Zahawai said that the crypto aspects of the bill “reinforces the UK’s position as a leading center for technology as we safely adopt crypto assets.”
While details around the legislation remain to be confirmed, Sunak has previously said the government was open to a central bank digital currency (CBDC) for the UK pound.
And despite a crackdown by the Financial Conduct Authority (FCA) on crypto advertising to consumers, all signs remain positive for the UK digital asset industry, with the Treasury recently issuing a call for evidence on the taxation of decentralized assets.
Hopefully, we can expect some concrete legislation on the table before the end of 2022.
Crypto meets Chapter 11
The recent fall in cryptoasset prices and resulting liquidity crunches among multiple high-profile industry participants have unfortunately led to some firms having to declare bankruptcy.
While these events are obviously unwelcome for the companies, investors and users involved, they do however help to clarify one of the big unknowns in the industry: what happens when a crypto platform goes under?
That question has emerged at the forefront of the recent spate of filings in the US in particular, and, with courts having little to no case law to rely on, some big precedents are about to be set which will set the tone for future legal disputes in the market.
As of yet, there is extremely limited guidance on how cryptoassets are treated in events such as bankruptcy.
That uncertainty has, of course, created a great deal of anxiety for the firms involved, but also for their investors and those who stored crypto on these platforms, particularly CeFi platforms.
But at their heart, CeFi platforms are not all that different from the traditional financial sector, except they operate in a riskier and more volatile marketplace.
And, as an aside, it is interesting to note that DeFi platforms have held up much better in the recent market tumult.
What the industry needs even more though is transparency; transparency from platforms on how they manage, use and ultimately control their users’ assets.
That also includes improvement in areas such as risk management, transparency on DeFi protocols, adequate insurance coverage as a backstop, and access to sophisticated hedging instruments.
These recent issues, where multiple platforms have claimed that users have limited claims over the crypto stored therein, have highlighted why self-custody and control of your assets is so key in the digital asset space.
As we have said before, and will continue to say: #NotYourKeysNotYourCoins.
Japan Regulatory Tussle
Japan has emerged over the past decade as one of the most crypto-friendly jurisdictions, despite early concerns in the country following the collapse of the Mt Gox exchange.
The country has in fact been so accommodating that it has allowed the industry to take the lead on forming a regulatory framework for digital assets, with the Japan Virtual Currency Exchange Association (JVCEA) established in 2018 to represent these interests.
However, it appears that the recent travails of the crypto markets have prompted a change of heart, with the Japanese Financial Services Agency (FSA) publicly criticizing the JVCEA’s approach and threatening to take matters into its own hands if things don’t improve.
Frustrated by reportedly slow review times for new assets and infighting among the 32 licensed members, the FSA has warned the JVCEA that the current situation is untenable, and that a tighter approach to regulation could follow.
The tension between the industry’s desire for setting its own standards and regulators’ need for clarity and control is playing out publicly in Japan, but the issue illustrates the rapidly diverging concerns of those in the sector and those tasked with policing markets.
Elsewhere in the world, that dynamic is playing out more subtly, with expanding lobbying efforts in the US and EU and concurrent criticism from some corners that the industry can’t set its own rules.
But given the novelty of the cryptoasset sector in general and the lack of expertise, there still needs to be dialogue and cooperation from regulators if they want a system that reins in some of the more blatant bad actors in the system, while still retaining the potential for innovation.
MiCA becomes reality
After much back and forth and many changes, the European Union finally formally adopted the Markets in Crypto Assets (MiCA) legislation which harmonizes the regulatory approach to the industry across the bloc on July 1.
The long-awaited legislation finally clarifies the bloc’s stance on a number of issues, including the reserve requirements for stablecoins and, more pertinently for the majority of crypto firms operating in the EU, the responsibilities of Virtual Asset Service Providers (VASPs).
Under the law, which still requires a further vote before coming into force either in 2023 or 2024, VASPs will have to follow the stipulations of the FATF Travel Rule when it comes to collecting customer information.