Matrixport View_Regulation #8

Two important regulatory affairs broke out in the month of October: BitMex was charged civilly and its founders were charged criminally for AML related issues by the US authorities; OKex’s key person disappeared and the exchange suspended fund withdrawals. While the charges against BitMex and its founders were quite largely reported in the international press, the issues related to OKex remain opaque. All we can say is the crypto companies’ next battlefield is in the regulatory ground: those who can make it right have definitely a competitive advantage over those who cannot. Clients want to have counterparties who can offer reliable services continuously. Regulatory compliance is a guarantee of it! Now let’s have a look at the big regulatory stories in the month of October:

Policies and regulations around the globe:


Tax professional explains the most important thing for US crypto holders

Wendy Walker, solution principal at the tax compliance company Sovos, described reporting as the most important aspect of tax filing that people in the blockchain industry should know about. Here are some important points:

  1. Filing of the 1040 income tax form.
  2. Report details of the transactions
  3. Check the tax guideline published by IRS

US AML Watchdog wants info on all international crypto transactions over $250

The Financial Crimes Enforcement Network (FinCEN) and Federal Reserve are looking to get more information on smaller transactions than ever before. According to a notice of proposed rulemaking published on Friday, the agencies want to lower the $3,000 threshold established in 1995 to $250 for international transactions, meaning that financial institutions would need to exchange client information alongside all transactions greater than $250 that begin or end outside of the United States. Which is to say, the Travel Rule, as it is known, would apply to quite small amounts of money changing hands.The proposed change specifically calls out “convertible virtual currencies,” saying that they would also fall into the category of money for the purposes of this rule. The information that financial institutions need to exchange under the travel rule is: “(a) name and address of the originator or transmittor; (b) the amount of the payment or transmittal order; (c) the execution date of the payment or transmittal order; (d) any payment instructions received from the originator or transmittor with the payment or transmittal order; and (e) the identity of the beneficiary’s bank or recipient’s financial institution.” Which is to say, quite a lot of personal information that a crypto exchange would then need to store alongside a user’s account, posing a major data security threat. Moreover, implicit in this change is a mandate that financial institutions know the geographic origin of every transaction over the $250 threshold.

US Crypto derivatives merchants need to leave customer funds alone, says CFTC

Per guidance released Wednesday evening, the Commodity Futures Trading Commission (CFTC) is advising businesses trading in crypto derivatives to hold customer funds very carefully. The new guidance continues the CFTC’s interest in carving out rules for custodianship of virtual currencies — an area obviously distinct from any other asset class. Per the commission: “Custodians of virtual currencies are typically not subject to a system of comprehensive federal or state regulation and oversight, which includes safeguarding of these novel assets, and this raises potential risks to the protection of customer funds held at such custodians.” The specific provisions of the guidance limit the locations that a “futures commission merchant” (FCM) can deposit customer virtual currency at to “a bank, trust company, or another FCM, or with a clearing organization that clears virtual currency futures.” Moreover, the CFTC warns FCMs that they need to keep any such deposits in accounts clearly marked as customer funds, and will not allow gains in one account to make up for losses in another.

DOJ says use of privacy coins is “indicative of possible criminal conduct”

New report from the U.S. Department of Justice alleges that crypto traders dealing with coins like Monero, Dash, and Zcash are engaging in “high-risk activities.” According to the report by the U.S. Attorney General’s Cyber Digital Task Force called Cryptocurrency: An Enforcement Framework released on Oct. 8, anonymity enhanced cryptocurrencies (AECs) can undermine existing anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations put in place by businesses engaged in virtual asset activities. The task force cited coins including Monero (XMR), Dash (DASH), and Zcash (ZEC). “The Department considers the use of AECs to be a high-risk activity that is indicative of possible criminal conduct,” the report stated. “AECs are often exchanged for other virtual assets like Bitcoin, which may indicate a cross-virtual-asset layering technique for users attempting to conceal criminal behavior.” According to the report, privacy coin holders can obfuscate the origin of their tokens using mixers, tumblers and chain hopping, undermining AML and CFT.


Chasing the hottest trends in crypto, the EU works to rein in stablecoins and DeFi

The proposed EU crypto market regulation will raise many compliance obstacles for the next Libra-like project seeking to operate in Europe. In cryptoland, the fall tends to be regulators’ open season. As unprecedented as it’s been, 2020 is no exception to this trend. Tensions are high on both sides of the Atlantic: As markets were still processing the news of the United States Commodity Futures Trading Commission cracking down on derivatives exchange platform BitMEX, the Financial Conduct Authority, the British financial watchdog, moved to ban retail investors from using cryptocurrency derivatives altogether. The densely packed news cycle has somewhat muffled the impact of another regulatory bomb that dropped a week earlier and is bound to have major lasting effects on the global financial system: The European Union’s proposed legislation for crypto-asset markets. The far-reaching framework, designed to bestow regulatory clarity upon digital finance businesses serving residents of the European Economic Area, is bound to be especially consequential for two interconnected domains of the crypto industry that have dominated the narrative throughout much of 2020: stablecoins and decentralized finance applications.

Understanding the EU’s 6AMLD and the risk to your business

The changes brought about by 6AMLD will affect a lot of businesses, but there is still time to prepare for new rules. In January 2020, the European Union released its Fifth Anti-Money Laundering Directive to increase transparency while tackling fraud, money laundering and cybercrimes. The 5AMLD extended the scope of customer due diligence checks, introduced domestic and politically exposed persons, extended the creation of central registrars of beneficial ownership, and extended Anti-Money Laundering checks to majority-owned subsidiaries outside the European Union. Here are some key highlights:

  1. It will provide clearer definitions of crime and their penalties.
  2. It will extend criminal liability to legal persons and companies, with tougher punishments.
  3. Businesses will be required to cooperate with one another in the prosecution of money laundering-related crimes.
  4. They will be required to protect customers from cybercrime and tackle terrorism finance.
  5. Fighting cybercrime to root out money laundering.
  6. Virtual currencies present new risks and challenges for combating money laundering.

EU removes this crypto hotspot from tax haven blacklist, clearing path for further adoption

The EU decided to remove Cayman Islands from its blacklist of tax heavens on Tuesday. The Cayman Islands is a popular jurisdiction for crypto businesses. It was added to the EU’s blacklist in February of this year, so it has spent fewer than six months on the list. In 2019, the six exchanges domiciled there were responsible for over $1.5 billion in international Bitcoin (BTC) transactions. Though these numbers pale in comparison to the global leader — the Seychelles, whose 12 exchanges were responsible for $36 billion, the Seychelles remain on the blacklist and are categorized as a nation that “does not cooperate with the EU or has not fully implemented its commitments.” One of the major exchanges based on the Seychelles is BitMex, which recently ended up in the hot water with the U.S. government.


China’s central bank lays regulatory foundation for CBDC

The new draft law legitimizes digital yuan and may criminalize the issuance of yuan-backed stablecoins by third parties. hina’s central bank, the People’s Bank of China (PBOC), published a draft law this Friday that aims to provide regulatory framework and legitimacy for a forthcoming central bank digital currency (CBDC), the digital yuan. The draft law states that the yuan is the official currency of the People’s Republic of China whether in physical or digital form. The draft law also appears to take aim at third-party efforts at yuan-backed digital currencies, stating that individuals and institutions are prohibited from making and issuing a currency designed to “replace” digital yuan circulation. This move would presumably criminalize all non-state-sanctioned yuan-backed stablecoins. The punitive measures against violators of this proposed law are harsh: most notably confiscating all profits, destroying all tokens, and imposing a fine of not less than five times the illegal amount created, in addition to the possibility of criminal prosecution and imprisonment. The People’s Bank of China clarified that the draft of the new law is on the table for public consultation until November 23, 2020.


“The cryptoruble is the future” says Russian policymaker

The parliament member claimed that there are no anti-blockchain voices in the Russian government. Anatoly Aksakov, the head of the Russian parliament’s Financial Markets committee, had some good news for blockchain fans in Russia. According to Aksakov, there are “no anti-blockchain voices” in the government and he believes that a digital ruble pilot will start in 2021. During a panel held on October 21 as part of the Blockchain Life 2021 conference, the policymaker said that the central bank had already started consultations on the feasibility of launching ‘cryptoruble’ pilots. He considers it “the future of all our money circulation.” Local media reports have pointed out the possibility of seeing a digital ruble in circulation in late 2021, which could be used on DLT platforms, and businesses could be able to leverage it to track goods and payments.

Russian officials must now declare crypto holdings

Russia’s public officials will be mandated to declare all private crypto assets holdings from New Year’s Day, 2021. The requirements were announced on Oct. 20 by the office of Russian prosecutor general, Igor Krasnov, following a meeting with 15 fellow prosecutor generals representing member states of the Shanghai Cooperation Organization (SCO). “Starting next year, civil servants will be required to declare [virtual] currencies on an equal basis with other assets,” Krasnov said. In 2018, Russia’s labor ministry announced that public officials would not need to declare virtual asset holdings in their tax reports due to the unregulated status of crypto. As such, concerns have lingered that crypto assets may be the financial instrument of choice for bribery and corruptions. Over the past three years, the Prosecutor General’s Office claims to have confiscated more than $440 million worth of undisclosed, non-crypto assets from public officials. The new requirements follow new laws signed by President Vladimir Putin in July that will classify crypto assets as akin to physical commodities from 2021 — recognizing virtual currencies in the country for the first time. While the laws do not recognize cryptocurrencies as legal tender, they will legitimize crypto-related activities across Russia.

Unqualified investors can buy up to $8K of crypto, says Bank of Russia

The central bank of Russia proposed to set limits on annual cryptocurrency investments by non-professional investors. The Bank of Russia suggested that unqualified investors in Russia should not be allowed to invest more than 600,000 Russian rubles ($7,800) in digital assets per year. The authority laid out the new proposal in an explanatory note referring to Russia’s newly passed crypto law, “On Digital Financial Assets,” or DFA. The official statement stipulates that the new regulatory restriction will involve not only digital financial assets but also “other digital rights”: “Individuals representing unqualified investors will have a limit on the amount of digital financial assets for annual purchase at a total of 600 thousand rubles. The limit for the acquisition of digital rights for unqualified investors who hold both digital financial assets and other digital rights is set at 600 thousand rubles for digital financial assets and 600 thousand rubles for other digital rights.”


Malaysian Securities Commission issues revised digital asset guidelines

The Securities Commission Malaysia has issued revised guidelines governing digital assets, effective as of Oct. 28. These are intended to regulate initial exchange offerings, or IEOs, and digital asset custodians. According to the SCM, the rules aim to promote “responsible innovation in the digital asset space, while at the same time managing emerging risks and safeguarding the interests of issuers and investors.” As Cointelegraph reported, the SCM first published a regulatory guide for IEOs back in January. This laid out rules which enabled companies to raise funds via token issuance only through an approved and registered digital asset exchange, but was not due to come into force until late 2020. The issuance of these revised guidelines coincides with their enforcement and adds a requirement for IEO platforms to conduct due diligence on the issuer. This includes a responsibility to assess the issuer’s ability to comply with local guidelines on preventing money laundering and the funding of terrorism. The guidelines also cover rules for companies wishing to provide custody services for digital assets. Applications for registration as either an IEO provider or a DAC are now being accepted.


Spain’s new bill proposal complicates crypto for citizens

Spain’s new anti-tax fraud bill includes crypto implications. Awaiting parliamentary approval in Spain, a fresh bill draft intends to cut out illegal tax dealings, as first reported by Cointelegraph’s Spanish branch. This could mean smaller business transactions as well as mandatory crypto-asset reporting, even for assets held or transacted internationally. The “Draft Law on Measures to Prevent and Combat Tax Fraud” recently received the green light from the Spanish Council of Ministers, Spain’s central governing entity, according to an Oct. 13 briefing from the country’s minister of finance, María Jesús Montero. When cryptocurrency began to take more of a global spotlight in 2017, some countries began to step up their tax overwatch measures in an attempt to corral their share of any relevant profits made via the industry. Spain’s fresh bill draft requires the nation’s citizens to report any digital asset usage or holdings, even if such usage includes assets held or transacted outside of Spain.

Updates and news on the most important players/topics in the industry:


G7 will oppose Libra launch until regulations in place

Countries representing the world’s largest economies said in a draft of a statement that they would initially oppose the launch of Facebook’s Libra project. According to an Oct. 12 report from Reuters, central bankers and finance ministers from the United States, Canada, Japan, Germany, France, Italy, and the U.K (also known as the Group of Seven, or G7), said it would halt global stablecoin projects pending appropriate regulatory oversight. The draft stated: “The G7 continues to maintain that no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards.”


BitMex has bled 45K Bitcoin since US gov charges, allowing other exchanges to benefit

Gemini, Binance, OKEx and Huobi appear to be the biggest gainers of the BitMex fallout. Over 45,000 Bitcoin has been withdrawn from BitMEX since the U.S. government levied charges against the exchange and its leadership. October 1 brought two devastating blows to BitMEX. First, the CFTC and DOJ brought charges against the exchange. Shortly thereafter, its founders (including CEO Arthur Hayes), were indicted by the U.S. government. The market reacted to the news with a sharp decline across many of Blockchain’s biggest assets.



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