Originally published by Finextra
By Mike Castiglione, Director of Regulatory Affairs, Digital Assets
Last year crypto got too big to ignore. This year’s downturn, coupled with several company implosions, is spurring a stronger focus on regulation. New regulations were coming even without the fall in crypto prices. Policymakers globally have put significant time and attention into the still emerging industry. Many crypto companies themselves—along with advocacy associations—are pushing for clearer regulations that give them confidence to build and compete by the same rules.
Here’s our list of the top crypto policy developments of 2022…so far…
#1. The White House Executive Order on Digital Assets. In March, the White House issued a long-awaited Executive Order (EO) that demonstrated that the senior-most policymakers in Washington see crypto as a transformative technology and a new industry that would benefit from U.S. leadership. The Order text highlighted the need to mitigate risks—to protect investors, consumers, the environment, and to deter money laundering—but also called for the “responsible innovation” of digital assets. Treasury Secretary Janet Yellen repeated that theme in a major policy address that stressed the need to apply rules from other asset classes to crypto.
The Executive Order tasked several government agencies to collaborate on a series of reports about crypto. The Department of Justice already published its report and Treasury issued a framework for international engagement on the topic. More reports are due in early September.
#2. European Union Nearing Approval of a Crypto Bill: In June, E.U. Parliament members announced agreement on a comprehensive bill that would require crypto businesses to follow anti-market abuse rules that build on the already-established regulations for other asset classes. This new bill, called the Markets in Crypto Assets (MiCA), would require crypto companies to gain authorization before doing business in the E.U. and would cover a range of topics, including regulations governing–investor protection and custody of assets, environmental disclosures, reserve requirements for “stablecoins,” and mandate the detection and prevention of market manipulation and insider dealing. This wide-ranging crypto bill would be the first for a major economy and would go into effect 18 months after finalized, so probably into 2024.
#3. Debate on “Unhosted” Wallets in the E.U.…and Maybe the U.S., too: Connected to MiCA was another agreement among E.U. policymakers about how to apply the anti-money laundering (AML) Travel Rule toward unhosted crypto wallets, i.e. software that gives a person control of their digital assets rather than relying on an intermediary. In short, the in-principle compromise says the E.U. would not apply the Travel Rule to peer-to-peer wallet transactions but would require due diligence or reporting requirements for transactions between a crypto company and an unhosted wallet.
Separately in June, the U.S. Deputy Treasury Secretary told a crypto conference the U.S. government would reexamine the Travel Rule and the “unique risks” of unhosted wallets. This raised speculation that the Biden administration might end its freeze against the previous administration’s attempt to require companies to report on the senders and receivers of wallet transactions.
#4. The United Arab Emirates and Bahrain Opening Up the Middle East to Crypto: For the first time, major crypto exchanges in 2022 received licenses from regulators in the U.A.E. and Bahrain, counties that are positioning themselves as the region’s next-generation finance hub. These approvals came after the U.A.E.’s Abu Dhabi and Dubai, along with Bahrain, revamped their rules to give the industry clarity by defining digital assets, assigning a single regulator, and marking the bounds for acceptable behavior. Crypto exchanges are required to conduct market surveillance, ensure fair and orderly trading, and uphold AML screening.
The two countries’ regulators—Abu Dhabi Global Markets (ADGM), Dubai’s Virtual Assets Regulatory Authority (VARA) and the Central Bank of Bahrain—say they wish to attract high-tech businesses, streamline licensing, and offer regulatory sandboxes. Binance was the early mover by gaining licenses in March, followed soon by FTX, Kraken, Crypto.com, and OKX.
#5. Singapore Shows Another Path with Stringent Licensing Requirements: Another jurisdiction seeking to remain a financial hub, Singapore this year is emphasizing strict crypto licensing requirements along with limitations on public advertising. The head of the city-state’s regulator, the Monetary Authority of Singapore (MAS), admitted in April that its “licensing process is stringent because we want to be a responsible global crypto hub, with innovative players but also with strong risk management capabilities.” He also said, “retail investors should not be dabbling in cryptocurrencies,” hence MAS’s efforts to restrain the general public’s access to exchanges.
This year, MAS offered provisional approval to Crypto.com, which joins Coinhako and a small group of other firms operating in Singapore under the Payments Services Act. Insolvent projects from 2022’s crypto downturn—Three Arrows Capital, the Luna Foundation Guard, and Vauld—were operating from Singapore but were not licensed or regulated there, and MAS has said it would investigate potential criminal charges.
#6. Crypto’s National Security Implications Get Attention: Crypto policy is often seen through financial stability and investor protection, but this year the technology’s national security implications received more focus. Russia’s invasion of Ukraine in February kicked off debate about crypto and sanctions evasion that ultimately led to a consensus view that digital assets were ill-suited to prop-up the Russian economy. In fact, Ukrainians quickly received humanitarian aid via crypto and want to use blockchain to preserve Ukraine’s heritage.
In addition, a major crypto trade association launched a national security working group and the White House Executive Order, along with other senior officials, argued that leading in digital assets can help preserve the geopolitical benefits from the U.S. dollar’s role as the global reserve currency. Some Congressional bills regarding a Central Bank Digital Currency (CBDC) cite competition with China as a reason for urgent government action.
#7. United Kingdom Shifts Tone to Promote Digital Asset Innovation: In April, the U.K. Economic Secretary announced “the U.K. is open for business—open for crypto business” during a rollout of a new digital assets plan. The plan includes regulating stablecoins to eventually make them a recognized form of payment, creating a financial infrastructure “sandbox” for business innovation, improving government engagement with the crypto industry, and reassessing the U.K. tax system for digital assets. The U.K. Financial Conduct Authority (FCA) hosted a series of public-private sector “crypto sprints” to discuss designing regulations to advance crypto adoption, a potential self-regulatory organization (SRO), and rules about disclosures and custody. Meanwhile, Parliament continues to debate the Financial Services and Markets bill, a priority of the outgoing Prime Minister’s government, that would bring cryptocurrencies under payments regulation.
#8. SEC Seeking to Change the Definition of an “Exchange” and “Dealer”: The U.S. Securities and Exchange Commission (SEC) this year proposed two rules that could extend the agency’s jurisdiction into the crypto trading market. Both proposals received opposition from crypto industry trade associations, along with dissenting opinions from SEC Commissioner Heaster Peirce.
The first rule would add the category “communication protocol systems” as an “exchange” requiring registration with the SEC and adherence to rules designed for traditional finance. Opponents fear “communication protocols” might be interpreted to include crypto software developers or trading platforms, and therefore dissuade innovation. If adopted, this rule could come into force in October. The second rule, which could start in April 2023, would apply new standards to determine whether firms are acting as “dealers” and therefore must register with the SEC. It has the potential to extend the registration requirement to companies not subject to oversight currently, including crypto traders if their digital assets are deemed securities.
#9. Bipartisan Crypto Bill Introduced in Congress: Senators Lummis (R-Wyoming) and Gillibrand (D-New York) teamed up this year to introduce a high-profile, wide-ranging bill generally favored by the crypto industry. The “Responsible Financial Innovation Act” clarifies various categories of digital assets, and covers taxation, consumer protection, and custody. It would also create a new legal category: a “digital asset exchange” regulated by the Commodities Future Trading Commission (CFTC). These spot crypto exchanges would be required to prevent trading manipulation and price distortion through market surveillance. The bill would also require that “stablecoins” be fully backed by high-quality liquid assets–a key focus among policymakers now given the collapse of the “algorithmic stablecoin” Terra/LUNA that did not have sufficient reserves.
The Senators have said they wish to get genuine, productive feedback this year to improve the bill and that they plan to reintroduce it at the start of next Congress in January 2023.
The ranking members of the Senate Agriculture Committee in August introduced another bipartisan crypto bill. Like the Lummis-Gillibrand bill, it would require digital commodity trading facilities to register with the CFTC and monitor trading to protect consumers from market abuse and manipulation.
#10. Public Debate about a New CFTC Derivatives Clearing Model: In March, the CFTC initiated a public comment period for a new derivative clearing model proposed by FTX US, a leading crypto exchange. Since then, robust debates have continued about the implication of the proposed idea that would allow CFTC-registered derivative clearing organizations (DCO) to settle directly with their customers, rather than through a futures commissions merchant (FCM). The House Agriculture Committee held a hearing in May, followed quickly by a roundtable of experts hosted by the CFTC Chairman. The various players have raised foundational issues such as margin and collateral requirements, risk management, fraud and abuse implications, data transparency, and the need for innovation in the derivatives market.
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