Published Jun 10, 2022
By Qredo Team
Ben’s Regulatory Radar- May 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 May activity:
1) US Senate Crypto Bill
After months of speculation and regulatory to and fro, US lawmakers finally tabled a bill to the Senate which outlines a far-reaching framework for crypto regulation.
The Responsible Financial Innovation Act, introduced by Senators Kirsten Gillibrand and Cynthia Lummis, contains a number of key proposals.
These are aimed at finally clarifying crypto’s legal status in the country for everything from tax purposes, to which regulator has purview of the market.
Among the key takeaways are:
The Commodity Futures Trading Commission should be the primary regulator of cryptoassets
Transactions with a value of less than $200 will not be subject to taxation
Clarification over the definition of a crypto broker
Disclosure and 100% reserving requirements for stablecoin providers
The bill offers a largely positive view of crypto’s role in the US economy, with the proposal to exempt small purchases from tax, smoothing a path for digital assets to be used in daily transactions without fear of a hefty invoice from the IRS down the line.
For the institutional market, perhaps the biggest takeaway from the draft is the definition of most major cryptoassets as commodities, and handing a large portion of control over the market to the CFTC.
The lack of regulatory clarity has led to clashing proposals from the CFTC, SEC and other agencies in the US, but with these proposals many cryptoassets would not fall under current securities laws.
In the midst of the Terra stablecoin issues, calls to tighten regulation over stablecoins have grown even stronger, and this bill gives a clear indication of where lawmakers feel the major problems with these assets have developed.
At this point, the bill remains a draft and is likely to be broken into smaller pieces and delayed before anything makes its way formally into statute.
However, this is still a major step forward for the crypto market in the US after years of regulatory uncertainty.
2) FTX targets clearing changes
Sam Bankman-Fried’s FTX exchange has drawn significant attention from both lawmakers and the TradFi trading industry, with the firm’s proposal to provide centralized clearing of trades for retail users.
Currently, trades are cleared through third-party clearing houses and futures commission merchants, which act as intermediaries for exchanges to help settle trades.
The FTX proposal would cut out that level of the post-trade process for crypto, and – with the exchange’s stated ambition to enter TradFi markets – the concept has attracted the attention of brokers and lawmakers.
In a Senate hearing on the issue, Terrence Duffy, chairman and chief executive of CME Group, said the proposal presented risks to the market structure and could undermine the safety baked into the status quo.
“FTX US’s proposal is glaringly deficient and poses significant risk to market stability and market participants,” he said.
However, Bankman-Fried pushed back against the perspective, saying that FTX’s proposal “is tested, safer and more conservative than what is normally seen in US derivatives markets for a number of reasons.”
Whether the CFTC allows the plan to move forward remains to be seen, and a consultation is currently underway, but the concept could have widespread consequences for trade settlement in crypto moving forward.
3) White House crypto environment report
The issue of the crypto industry’s energy consumption continues to be top of mind for regulators around the globe.
After a proposal to ban proof-of-work assets was only removed from the EU’s Markets in Crypto Assets (MiCA) legislation following substantial industry opposition, other jurisdictions have started to release their own plans.
The Biden administration is now floating their own proposals, and the US Energy Department is drafting a report expected to be released in August which will set out the federal government’s position on the matter.
The detail of those proposals remains unclear, but what is probable is that the government will follow the lead of other jurisdictions in putting crypto’s environmental impact at the top of their regulatory agenda.
“It’s important, if this is going to be part of our financial system in any meaningful way, that it’s developed responsibly and minimizes total emissions,” Costa Samaras, principal assistant director for energy for the White House Office of Science and Technology Policy, told Bloomberg Law.
4) New York bans crypto mining
While the US federal authorities mull the environmental impact of crypto, New York state lawmakers voted in favor of a bill to suspend all bitcoin mining.
The legislation imposes a two-year moratorium on all proof-of-work mining in the state which is powered by carbon-based energy.
However, existing mining firms and those undergoing the permit renewal process will still be allowed to continue operations.
The bill, sponsored by Democratic state senator Kevin Parker, passed the Senate by a slim majority of 32-27, but is yet to be signed formally into law by Governor Kathy Hochul.
New York City Mayor Eric Adams has thrown his support behind the industry, which has struggled to gain traction in the state and decamped to more friendly locales with fewer perceived regulatory difficulties.
However, despite Adams taking his paycheck in crypto, the regulatory environment in New York remains challenging, and the industry has voiced its strong opposition to the mining moratorium.
Whether it is extended or eventually becomes a permanent ban remains to be seen, but the move will do little to help the Empire State’s reputation as a welcoming jurisdiction for crypto.
5) SEC rejects another ETF application
What will it take for the SEC to approve a spot crypto ETF?
The One River Carbon Neutral Bitcoin Trust first came in front of the regulator last May, but the proposal to list on the NYSE Arca exchange was amended to include the purchase of carbon credits to make the fund more environmentally neutral.
However, the changes proved insufficient for the SEC, which once again denied the application on the grounds of investor protections – the same reason used to deny previous attempts by other providers.
“The Commission emphasizes that its disapproval of this proposed rule change does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment,” the SEC said in a statement explaining its rationale for the denial.
“Rather, the Commission is disapproving this proposed rule change because… NYSE Arca has not met its burden to demonstrate that its proposal is consistent with the requirements of Exchange Act Section 6(b)(5).”
⚖️ Elsewhere, the Lithuanian government approved amendments to AML laws aimed at increasing the transparency of crypto wallets, the UK Financial Conduct Authority held its first ‘Crypto Sprint’ event with industry representatives, and the Portuguese parliament dismissed two bills which would have imposed taxes on cryptoassets in the country.