Matrixport View_Regulation #10

2020 is a wonderful year for Bitcoin. Its price record has been reset several times to finally reach 30K USD. This meteoric rise is partially supported by an increasing interest from the institutional clients. The attention is however not only from the clients’ side, but also from regulators. Following several major events in the regulatory field, SEC filed a suit against Ripple in December, which triggered delisting or suspending of trading of Ripple in several major exchanges. We will certainly see more regulatory events in 2021. Institutions and private clients have to be ready to tackle with the consequences of these events. The best way to prepare oneself is to follow closely news in the policy and regulatory sphere. Now let’s have a look at the big regulatory stories in the last month of December.

Policies and regulations around the globe:


FinCEN is now interested in offshore crypto holdings, proposes new regulation

The United States Financial Crimes Enforcement Network, or FinCEN, issued a brief note at the end of December announcing its intention to propose a change in the Bank Secrecy Act regarding reporting of foreign financial accounts holding digital currency. Currently, digital assets are not covered by the Foreign Bank and Financial Accounts regulations. However, the notice indicates that FinCEN wishes to amend these regulations. This would require U.S. citizens to report cryptocurrency accounts held with foreign institutions if they are more than $10,000 in value. There is no indication of when this proposal to amend the regulations may be published, simply that there is an intention to propose it.

New York authorizes first Yen stablecoin operator in the US

New York has given the first authorization to a stablecoin backed by the Japanese yen to operate in the United States. Per a Tuesday announcement, the New York Department of Financial Services has granted Japanese firm a charter to handle U.S.-dollar and yen-backed stablecoins in New York. Given New York’s status as a global center, the NYDFS is the most prominent state financial regulator in the United States — it is also one of the most aggressive. A pass to operate in New York often opens up the rest of the country. GMO’s charter is as a limited liability trust company rather than a full bank, the principle difference being in authorization to handle deposits. While a stablecoin operator typically needs the ability to hold reserves of the pegged asset, GMO’s charter limits its rights to hold other kinds of deposits not central to its ability “to issue, administer, and redeem” its stablecoins.

The SEC shows some mercy to broker-dealers handling security tokens

The U.S. Securities and Exchange Commission is listening. At least, per a Dec. 23 announcement, the SEC is responding to long-term industry complaints that nobody knows who can handle security token trading. The SEC is both requesting comment on the issue and extending a hand to the crypto industry. Perhaps most notably, the commission’s announcement will keep broker-dealers safe from enforcement for the next five year: “In particular, the Commission’s position, which will expire after a period of five years from the publication date of this statement, is that a broker-dealer operating under the circumstances set forth in Section IV will not be subject to a Commission enforcement action.” The “circumstances” specified basically boil down to keeping security tokens the primary focus of the operation and doing due diligence in terms of cybersecurity and disclosures to clients, including making sure every potential customer is aware that the broker-dealer in question is handling digital asset securities.

US lawmakers seek to make stablecoins illegal without federal approval

A new bill introduced to the United States Congress on Wednesday could enforce blanket regulation on all stablecoins. If passed, any service provided in relation to these types of cryptocurrencies would become illegal without first receiving approval by multiple government bodies: “It shall be unlawful for any person to issue a stablecoin or stablecoin-related product, to provide any stablecoin-related service, or otherwise engage in any stablecoin-related commercial activity, including activity involving stablecoins issued by other persons, without obtaining written approval in advance, and on an ongoing basis, from the appropriate Federal banking agency, the Corporation, and the Board of Governors of the Federal Reserve System.” Dubbed “The Stable Act,” the bill is intended to “protect consumers from the risks posed by emerging digital payment instruments, such as Facebook’s Libra and other Stablecoins.” However, with just a month to go until the end of the 116th Congress, the bill faces an uphill battle to be approved in time.


Authorities shut off electricity to Bitcoin miners in China’s Yunnan province

Local sources report that authorities from the city of Baoshan in the Chinese province of Yunnan are escalating efforts to crack down on Bitcoin miners, ordering electricity producers to cease supplying power to the city’s miners. On Nov. 30, Chinese crypto reporter Colin Wu tweeted that several miners had informed him of the ban, sharing what appear to be scanned copies of official documents issued to power producers. The ban appears to have coincided with a 24-hour drop in global hash rate of roughly 10% from 140 exahashes per second to 125 EX/s, though correlation is far from causation. According to Cambridge University’s Bitcoin Electricity Consumption Index, Yunnan was China’s fourth-largest region by mining hash rate, behind Xinjian, Sichuan and Inner Mongolia as of April 2020. Yunnan then represented 5.42% of global hash rate — ranking it above all countries except for China, the United States, Russia and Kazakhstan.


Russian officials must disclose their crypto holdings by June 2021

Russia is the latest country to officially require its government officials to report their cryptocurrency holdings. President Vladimir Putin has signed a decree obliging Russian officials to disclose their crypto investments by June 30, 2021, local news agency TASS reported on Dec. 10. Officially released on Thursday, the decree stipulates new measures related to Russia’s federal crypto law “On Digital and Financial Assets,” or DFA. The form requires officials to disclose data like the name of the digital asset, the date of acquisition, the total amount of held assets, as well as information about the issuer of an asset like the country of registration. Declarations must include information about cryptocurrency and tokens belonging to officials as well as their spouses and minor children. The disclosure process starts on Jan. 1, 2021, the decree reads.


France moves to ban anonymous crypto accounts to prevent money laundering

French financial authorities are strengthening the country’s cryptocurrency regulations in a move to prevent illicit activities like money laundering and terrorism financing. On Dec. 9, several ministries in France jointly introduced an order aiming to prevent anonymous digital asset transactions by banning anonymous crypto accounts. The new regulatory effort is backed by French finance minister Bruno Le Maire, overseas minister Sébastien Lecornu and junior economy minister Olivier Dussopt. The order is pursuant to Article 203 of France’s PACTE law, which stands for the Action Plan for Business Growth and Transformation. In the document, the ministries have admitted that digital assets or cryptocurrencies provide “significant opportunities for the economy,” noting that the French government is fully aware of its importance.


Germany legalizes digitized securities

The German word for securities is wertpapieren, or “papers of worth,” which may soon be as outdated as nocturnal traders saying they’re burning the midnight oil. Per a Reuters report from Wednesday, Merkel’s cabinet had passed a new law that will end the requirement to have a paper certificate for sale of a security, overtly looking to advance blockchain trading within the country. German Finance Minister Olaf Scholtz reportedly said, “The paper certificate may be dear to some for nostalgic reasons, but the future belongs to its electronic version.” The Finance Ministry called the shift to all-electronic securities a component of its broader blockchain strategy.


Two thirds of Estonian crypto businesses lose their licenses

One of the countries lauded as being among the most crypto friendly in the European Union revoked the licenses of more than 1,000 crypto firms in 2020. According to news outlet Postimees, Estonia’s Financial Intelligence Unit, or FIU, has revoked the licenses of roughly 70% of virtual currency companies operating in the country this year. Veiko Tali, the Deputy Secretary General of the Government Committee for the Prevention of Money Laundering and Terrorist Financing, said the remaining crypto firms also required “close attention” given the potential risks: “We need to monitor the development of new technologies and manage the associated money laundering risks.” The media outlet stated that there are 400 crypto-related service providers remaining with the appropriate licenses in Estonia following the purge. The financial watchdog reported that 900 such firms operated in the country last year.

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

Privacy Coins

Following delisting, Dash pushes back against ‘privacy coin’ label

A recent tweet from Dash’s official Twitter account has invited criticism that the cryptocurrency, which once advertised its privacy features, is wilting in the face of possible regulatory scrutiny. On Jan. 1, the US-based Bittrex exchange announced in a tweet that it would be delisting Monero, Zcash, and Dash. The delistings follow a similar Dec. 29 announcement last week that Bittrex would be delisting XRP following a SEC lawsuit against Ripple, prompting speculation that the exchange preemptively delisted the privacy coins in anticipation of a wider regulatory crackdown. In response, Dash announced in a tweet that they had “reached out to @BittrexExchange to request a meeting,” and that referring to DASH as a “privacy coin” is a misnomer.


SEC lawsuit against Ripple set for virtual pretrial conference in February

The United States District Court of the Southern District of New York has fixed Feb. 22, 2021 as the date for the pretrial of the lawsuit filed by the Securities and Exchange Commission against Ripple Labs and its principal actors. According to a court document filed on Tuesday, counsel representing all parties on the matter will hold a telephone pretrial conference. As part of preparations for the preliminary hearing, the parties in the case will submit a joint letter a week before the pretrial date addressing: “(1) a brief description of the case, including the factual and legal basis for the claim(s) and defense(s), (2) any contemplated motions and (3) the prospect for settlement.” Earlier in December, the SEC filed a lawsuit against Ripple, accusing the blockchain firm of selling XRP tokens in violation of securities law. The legal status of XRP as a commodity or a security has long been the subject of debate within and outside the crypto space. Several cryptocurrency exchanges have reacted to the lawsuit by either suspending XRP trading or delisting the token from their platforms altogether. Investment firms like Bitwise Asset Management have also liquidated their XRP holdings in the wake of the SEC enforcement action.



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