Autor Cointelegraph By Kirill Bryanov

Law Decoded: Crypto risks, imaginary and real, and creative ways of addressing them, April 4–11

Last week, there was a lot of regulatory talk about crypto-related risks. While this is very common in itself, some angles and proposed solutions to such risks came across as novel. In the United States, the Federal Deposit Insurance Corporation (FDIC) issued a letter to commercial and savings banks under its purview, or all federally chartered banks, asking financial institutions to notify the FDIC about all ongoing and planned crypto-related activities. Apparently, standardized guidance for all banks would not fit the bill since the risks seem to be unique in each case.In Singapore, the local monetary authority became concerned about the “reputational risks” that virtual asset service providers that have originated in the city-state but operate overseas can pose. The proposed solution is bringing such firms under the Singaporean licensing regime that, until now, applied only to firms with domestic operations. Finally, the U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler — one of the most vigilant guardians of the nation’s investor folk – spoke about how retail crypto investors must be protected. Embedded within the usual talking points that were previously unheard of calls for the SEC staff to explore ways of regulating platforms that facilitate the trading of both securities and non-securities, including closer coordination with the Commodity Futures Trading Commission (CFTC). At the same time, other crypto-related fears have begun to dissipate, best exemplified by the “Russia sanctions evasion” narrative taking a major hit.Crypto for real peopleU.S. Treasury Secretary Janet Yellen testified before the House Financial Services Committee last week and fielded numerous questions about the relationship between digital assets and national security, including several on the potential threats that crypto could pose to the robustness of the international financial sanctions regime. Yellen reassured representatives that using blockchains to circumvent sanctions is difficult and that her agency hasn’t seen any significant crypto-aided sanctions evasion in practice. It is fair to say that regular Russians, rather than the wealthy corrupt elites, rely on digital assets as they flee the country or get stranded abroad, as evidenced by their firsthand accounts. According to the government’s latest estimate, Russian citizens could be holding as much as $130 billion in cryptocurrency.Stablecoins in crosshairsEmerging regulatory frameworks around stablecoins continue to be one of the hottest areas of crypto policy. Speaking at another event last week, Secretary Yellen said that the Treasury was hard at work helping Congress draft legislation that would ensure the stablecoin sector’s risk resilience. Another related piece of legislation dropped on April 7, introduced by Senator Pat Toomey called the Stablecoin Transparency of Reserves and Uniform Safe Transactions (TRUST) Act. To Toomey, the main risk associated with stablecoins is that such assets could be categorized as securities. Thus, the bill proposes that convertible “payment stablecoins” should be exempt from securities regulations. Stablecoin offerings used as a means of payment are also the major focus of the United Kingdom regulators, where Her Majesty’s Treasury announced plans to amend the legislation around payments accordingly. This is just one of the assortment of measures that the U.K.’s financial authorities announced against a background of crypto-bullish rhetoric from Economic Secretary of the Treasury John Glen and Chancellor of the Exchequer Rishi Sunak.More futures before spotDays after rejecting yet another application of a Bitcoin (BTC) spot exchange-traded fund (ETF), the U.S. Securities and Exchange Commission greenlighted the fourth futures-based BTC ETF. Teucrium Bitcoin Futures Fund has joined the ranks of similar offerings by ProShares, Valkyrie and VanEck. Inevitably, the development has triggered a new round of the conversation on whether a spot-based Bitcoin product is on the way. Bloomberg ETF analyst Eric Balchunas opined that the approval is a “good sign” for a prospective spot BTC offering. Meanwhile, Grayscale CEO Michael Sonnenshein, whose company is working on converting its GBTC fund into a BTC spot ETF, has found language in the text of the SEC’s Teucrium approval that strengthens the case for a spot approval. Meanwhile, ProShares, the firm behind the first regulated Bitcoin futures ETF, filed a registration statement for an exchange-traded product that will allow investors to short Bitcoin futures contracts.

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Law Decoded: ‘Unhosted’ wallets are just ‘wallets,’ March 28–April 4

The European Parliament continued to keep crypto users and advocates at the edge of their seats last week as yet another piece of potentially harmful legislation — this time, a set of demanding data disclosure requirements for digital asset service providers — was rushed to a vote mere days after anear miss on banning proof-of-work-based cryptocurrencies. Unlike the relatively happy resolution of the Markets in Crypto Assets framework situation, the EU’s new Anti-Money Laundering rules retained all the crypto-hostile language as they are going into the next round of consideration, the so-called trialogue negotiations. If the rules are enacted as they are, compliant crypto exchanges could be forced to halt transactions involving “unhosted” or self-custodied crypto wallets.The tax reporting deadline is nearing across the Atlantic, and the Biden administration has revealed its plan to reduce the budget deficit by almost $5 billion by streamlining the reporting rules and collection of digital asset taxes in the upcoming fiscal year. On the monetary policy front, the White House seems to have secured the passage of its four Federal Reserve nominees to the full Senate vote. Something that would be considered a formality back in the day, the Fed nomination process has become yet another partisan battlefield amid the increasing politicization of monetary policy.Self-hosted doesn’t mean “unhosted”The origins of regulators’ habit of framing a crypto wallet that is not custodied on a centralized platform as “unhosted” — a term that already conveys a certain air of neglect — can be traced back to at least December 2020, when the United States Treasury first attempted to impose financial monitoring requirements on crypto exchanges that facilitate transactions to such wallets. Using this language creates an impression that the only acceptable format of a “lawful” crypto wallet is being “hosted” by some centralized third party — an idea that is absurd for most people in the crypto space.Armed with this rhetorical weapon and with the spirit of the Financial Action Task Force’s “Travel Rule,” the EU lawmakers went above and beyond what the international group’s guidance holds. While the FATF recommends that the reporting of transacting parties’ personal data be triggered by transactions between exchanges and personal wallets worth more than $1,000, the proposed EU rules extend this to any such transactions, regardless of their value. Additionally, users sending funds from a wallet to an exchange would be required to report to the platform the identity of the “unhosted” wallet’s beneficial owner, and exchanges would have to verify this information. Clearly, such requirements will put a heavy burden on compliant virtual asset service providers.A digital dollar without surveillance?Stephen Lynch, a member of the U.S. House of Representatives from Massachusetts, has introduced a legislative initiative proposing a form of digital cash that seeks to maximize consumer protection and data privacy. The proposal is apparently designed to address privacy and financial surveillance concerns around a potential U.S. central bank digital currency (CBDC) that several members of Congress have expressed in the past few months. For one, the prospective e-cash would not even formally qualify as a central bank currency, since the Treasury would be tasked with developing the pilot. At the same time, the bill explicitly states that the proposed Treasury money is not supposed to preclude or replace a prospective Federal Reserve-issued CBDC. Meanwhile, the movement to block the Fed’s ability to issue a retail-focused digital currency has gotten a second wind this week, with U.S. Senator Ted Cruz sponsoring a companion bill to Representative Tom Emmer’s earlier legislation aiming at just that.All quiet on the BTC ETF frontAnother spot Bitcoin exchange-traded fund application bites the dust: This week, the U.S. Securities and Exchange Commission has turned down the proposed rule change to allow ARK 21Shares Bitcoin ETF to trade on the Chicago Board Options Exchange. The justification cited the familiar mantra that the proposed product failed to meet the requirements of the Exchange Act in that it lacked “a comprehensive surveillance-sharing agreement with a regulated market of significant size” related to the underlying asset. Another contender for the distinction of sponsoring the first regulated spot Bitcoin ETF in the United States, Grayscale, is apparently preparing for a legal battle in case the regulator turns down its bid. The deadline for the SEC to render a decision on Grayscale’s product is July 7 of this year.

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Law Decoded: Crypto taxes and taxes on crypto, March 21–28.

It was relatively quiet in the digital asset policy department last week, as regulators and lawmakers in most key jurisdictions retreated to their offices to do the necessary homework. In the U.S., federal agencies got on with the various reports that President Joe Biden’s recent executive orders directed them to produce. Over in the United Kingdom, both the central bank and the Financial Conduct Authority also dropped position papers on crypto-related issues. After thorough deliberation, Thailand’s financial authorities spoke out against using crypto as a means of payment, while rumors of potential legal tender adoption of crypto emerged and died in Honduras.One theme that has been conspicuous throughout the week is the relationship between digital assets and taxation. Few would argue that cities and even states offering Bitcoin tax payment options to their constituents are doing the Lord’s work that is instrumental in widening the adoption of crypto. On the flip side, digital assets are subject to taxation themselves, a position that does not necessarily advance crypto’s legitimization. Contrary to what one might have thought, India’s approach demonstrated that it is possible to levy heavy taxes on cryptocurrency transactions while maintaining ambiguity around the asset class’s legal status.Crypto city lifeAs bulky national legislatures and executive agencies take their time to come up with comprehensive crypto policies, city councils in the U.S. and beyond are filling the void. Austin, the capital of Texas, has taken a bullish stance on crypto as it passed two resolutions designed to facilitate blockchain-powered innovation. The word on the street is that the city could soon get its CityCoin, joining the likes of Miami and New York. The mayor of Portsmouth, New Hampshire is pushing for allowing city residents to pay for municipal services in Bitcoin and other cryptocurrencies. Over in Brazil, Rio de Janeiro is poised to start accepting BTC payments for real estate taxes as early as 2023 — a fairly short timeline for a city that’s home to almost 7 million residents.Taxes vs. digital assetsIndia has been moving fast on the path of introducing new taxation rules on cryptocurrency transactions. Despite some serious pushback from industry stakeholders — who voiced a wide range of reasons why imposing draconian taxes on crypto could be a suboptimal policy choice — the nation’s crypto community will face a 30% tax burden starting from April 1. Finance Minister Nirmala Sitharaman, who introduced the framework, has previously spoken to the effect that levying a tax on something does not mean that this thing has a legal status. Essentially, one of the world’s major crypto markets is getting rules that treat digital assets similarly to gambling profits and lottery wins. The details on how the law will be enforced in relation to decentralized finance activity are so far scarce as well.Not today, partisan politicsEnough has been said about how important it is to stop crypto from becoming an issue with firmly entrenched divides along party lines as they are drawn in the United States’ polarized political system. It has been going pretty well so far, with crypto allies found on both the Republican and Democratic sides of the aisle. An unlikely alliance between Republican Senator Cynthia Lummis and Kirsten Gillibrand, her Democrat peer, has further cemented the spirit of bipartisanship as the two revealed a joint effort to create a comprehensive bill that would categorize digital assets and draw clear boundaries of regulatory agencies’ mandates.

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Law Decoded: Arab States of the Gulf open up to digital asset services, March 14–21

Last week got off to an antsy start as the clause that many interpreted as a direct route to ban proof-of-work-(PoW)-based cryptocurrencies made a sudden comeback to the draft of the European Union’s key directive on digital assets. Many in the crypto policy space got immediate flashbacks to other instances of harmful last-minute additions to must-pass legislation days and hours before the vote. It all ended well, though, as the Committee on Economic and Monetary Affairs voted against the draft that contained the hostile language. Over in the United States, monetary policy kept growing more political, as evidenced by Sarah Bloom Raskin, President Joe Biden’s pick for the Federal Reserve’s vice chair for supervision, being forced to withdraw her nomination due to a Senate gridlock. Ukrainian President Volodymyr Zelenskyy took time off urgent matters of national defense to sign a bill granting digital assets legal status into law. Other big narratives of the week included crypto platforms’ expansion into the Gulf region, a slew of crypto-related statements and actions by members of the U.S. Congress and some favorable policy developments in Australia.The Gulf of cryptoSeveral Middle Eastern jurisdictions have welcomed major players of the global crypto industry on their soil last week. The streak kicked off with Binance, the world’s largest crypto exchange by volume, securing authorization from the Central Bank of Bahrain on March 14. The license covers services such as trading, custody and portfolio management. Less than one day later in a historic first, crypto exchange FTX landed a license from the newly established Dubai Virtual Asset Regulatory Authority. Binance, however, was hot on FTX’s heels, announcing that it had obtained a Dubai virtual asset exchange license on March 16. With crypto powerhouses lining up to set shop in Dubai, the emirate looks poised to become the region’s cryptocurrency hub thanks to its leadership’s far-sighted policy initiatives.Much ado on the Capitol HillDigital assets remain high on many U.S. federal legislators’ agendas with yet anotherCongressional hearing, this time with national security and illicit finance angle, taking place at the Senate Committee on Banking, Housing, and Urban Affairs. Hot-button issues like sanctions, compliance and ransomware facilitation inevitably received much spotlight. Yet, industry representatives were also able to carve out some time to call for Congress to ramp up its work on providing regulatory clarity to U.S.-based crypto businesses. Meanwhile, crypto allies and adversaries in Washington, D.C., kept doing their respective business. A bipartisan group of congresspeople, led by Minnesota Representative Tom Emmer, have called out the Securities Exchange Commission boss Gary Gensler for subjecting cryptocurrency companies to unnecessary scrutiny. Crypto’s eternal critics: Representative Brad Sherman and Senator Elizabeth Warren, in turn, announced bills that would authorize the U.S. government to limit digital asset service providers’ ability to deal with Russia-based persons and entities.Big news from down underAustralian Senator Andrew Bragg, the crypto industry’s longtime champion, has announced a wide-ranging legislative package called the Digital Services Act. In addition to familiar themes such as laying down rules for service provider licensing, custody, and taxation, the initiative emphasizes the need to regulate decentralized autonomous organizations, or DAOs. Bragg argues that such entities represent a “threat to the tax base” and thus must be recognized and regulated urgently. The New South Wales Senator unveiled the proposed framework at a blockchain conference. The document is yet to be formally introduced to the Australian legislature.

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Law Decoded: Joe Biden’s executive order is finally upon us, and it doesn’t look too dreadful, March 7–14.

As Russia’s self-styled “special operation” against Ukraine continues, crippling economic sanctions remain the Western powers’ primary weapon to counter Russia’s military actions without triggering an even more dramatic escalation. As NATO and allies’ financial offensive unfolds, ensuring that the collective West presents a united front remains political leaders’ chief concern. The global crypto industry keeps getting suspicious looks as some agents of state power are seemingly entrenched in their beliefs that digital assets could be the weak spot undermining the efficiency of the sanctions push. Despite ample evidence to the contrary — including the FBI director’s Congress testimony — there are signs of increased regulatory pressure on the crypto industry participants, as well as policy initiatives that clearly capitalize on the situation to tighten state control of digital assets’ circulation.Few of those who follow the developments in the crypto policy space were surprised to learn that United States Senator Elizabeth Warren was hard at work draftinga bill that would impose additional disclosure requirements on crypto exchanges. According to some observers, the military conflict could also have contributed to U.S. President Joe Biden finally authorizing the long-anticipated executive order on digital currencies.Whole-of-government effort orderedThere are two mutually exclusive views on the relationship between the timing of Biden’s executive order’s issuance and the war in Ukraine. One is that the directive had been ready to drop in mid to late February and that the administration’s preoccupation with the conflict pushed the release several weeks back. Another is that concerns over the enforcement of anti-Russia sanctions triggered an earlier release of the document that could have otherwise sat on the president’s desk for even longer. At any rate, the hotly anticipated EO descended on the crypto industry to an overall favorable reception. Many of the sector’s stakeholders and advocates were left generally content with the lack of restrictive language or superfluous emphasis on crypto-related risks. The key theme of the order is the consolidation of the government’s efforts to address the new financial reality within the scope of each agency’s jurisdiction. At least 14 separate reports looking into crypto-related matters from various agencies will be ordered, with most of them expected to be delivered within 90 to 180 days. Overall, the executive order will likely pave the way for a more focused and coordinated federal oversight of the digital asset domain.EU wobbles on proof-of-workOn March 14, the European Parliament is slated to vote on a key piece of crypto legislation: The Markets in Crypto Assets, or MiCA, regulatory framework. One of the biggest points of contention present in the latest draft has been the provision that many observers interpreted as a route for banning proof-of-work (PoW) mining on environmental grounds. It seemed as if the threat had blown over as German member of parliament Stefan Berger announced last week that the final draft would not include the gnawing clause. Mere hours before the vote, however, it emerged that the language of crypto mining’s required “minimum environmental sustainability” has made it back to the bill’s text. The worst-case scenario appears to be on the table as some European regulators seem bent on going all the way in their crusade against PoW mining.Crypto breaks the tie in KoreaIn a tight race that has been reportedly decided by a margin of less than 1% of the vote, crypto-friendly candidate Yoon Suk-yeol has been elected to serve as the next president of South Korea. The candidates’ stances on digital asset regulation could very well have been the tiebreaker. With crypto being a hot political topic throughout the past year, both Yoon and his opponent, Lee Jae-myung, have articulated crypto-friendly stances on the campaign trail. Yoon’s promises to deregulate the digital asset industry and facilitate the fintech sector’s development into a regional powerhouse might have resonated with the younger South Korean voters more powerfully than Lee’s platform.

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