US lawmakers aim for crypto regulatory clarity with proposed bill putting the screws to SEC

June 2, 2023 Coin Telegraph

CFTC

The framework under the bill would allow certain tokens to qualify as digital commodities if they were decentralized and crack down on the SEC's previous approach to crypto.

Lawmakers with the United States House Financial Services Committee and House Agriculture Committee have released a draft discussion offering certain crypto assets a pathway to being labeled digital commodities.

According to a discussion draft published on June 2, lawmakers proposed “establishing a functional framework” aimed at providing regulatory clarity for crypto firms in the United States. The draft bill would prohibit the U.S. Securities and Exchange Commission (SEC) from denying digital asset trading platforms to register as a regulated Alternative Trading System and allow such firms to offer “digital commodities and payment stablecoins.”

Specifically, the proposed legislation cracks down on the approach many in the crypto space have criticized the SEC for taking by not offering clear rules of the road. The framework under the bill would allow certain digital assets to qualify as digital commodities if they were “functional and considered decentralized” and require the SEC to provide a “detailed analysis” of any objections to a classification of a firm as decentralized.

“The Act also requires the SEC to modify its rules to allow broker-dealers to custody digital assets, if they meet certain requirements,” said the draft. “Additionally, the Act would require the SEC to write rules to modernize certain regulations for digital assets.”

NEW: Key House Republicans Unveil Crypto Market Structure Draft Bill

The draft legislation was unveiled today by House Financial Services Committee Chairman @PatrickMcHenry and House Agriculture Committee Chairman @CongressmanGT https://t.co/QTn32ai68B
— Eleanor Terrett (@EleanorTerrett) June 2, 2023

Coinbase's chief legal officer Paul Grewal lauded the draft bill, saying it "lays a strong foundation for regulatory jurisdiction and definitions" but warranted an in-depth review before a formal introduction. The U.S.-based crypto exchange recently launched a pro-adoption ad campaign ahead of a lobbying-focused event in Washington, D.C., scheduled for July.

Introduced by House Financial Services Committee chair Patrick McHenry and House Agriculture Committee chair Glenn Thompson, the legislation lacked input from lawmakers on the other side of the political aisle. Democrats and Republicans have sometimes demonstrated a willingness to have a bipartisan approach to crypto regulation, but it’s unclear how far the proposed legislation could advance in a divided Congress.

At the time of publication, U.S. lawmakers in the House and Senate had passed legislation aimed at stopping the government from going into default by raising the debt ceiling. President Joe Biden is expected to sign the bill into law on June 2.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

CFTC commissioner says proposal to reassess risk management could consider crypto

June 2, 2023 Coin Telegraph

CFTC

Christy Goldsmith Romero pointed to the collapse of FTX, Terra and Celsius in having the CFTC reconsider the way it handled risk management.

Christy Goldsmith Romero, a commissioner with the United States Commodity Futures Trading Commission (CFTC), has commented on a proposal amending the government body’s Risk Management Program with respect to digital assets.

In a June 1 notice, the CFTC said it would be opening a proposed rule change for amendments to its risk management requirements applicable to swap dealers and futures commission merchants. Romero said in a public statement that the proposal could allow the commission to address risks associated with certain crypto investments, citing the failure of Silvergate Bank.

“These technological advancements, with their accompanying risks, necessitate the Commission revisiting our regulatory oversight, including our risk management requirements,” said Romero. “Existing Commission rules require that banks’ and brokers’ risk management programs ‘take into account’ risks related to lines of business. That could include, for example, digital asset markets.”

The CFTC is seeking public comment on the Risk Management Program (RMP) requirements for swap dealers and futures commission merchants. Learn more: https://t.co/Vs1rb9qfey
— CFTC (@CFTC) June 1, 2023

According to the commissioner, the potential interest of brokers in the crypto derivatives market could “carry additional risks.” She pointed to the collapse of crypto exchange FTX as well as Terra and Celsius, along with areas with “rampant fraud and illicit finance.”

“Evolving technologies like digital assets, artificial intelligence, and cloud services, also have emerged as areas that can carry significant risk.”

The CFTC will leave the proposal open for public comment for 60 days following publication in the Federal Register. After that time, the commission could introduce a formal rule change leading to a vote among its leadership.

Since being sworn into office in March 2022, Commissioner Romero has often acted as a crypto-friendly voice in the CFTC, calling for oversight to ensure investor protection and public trust. In April, she proposed the CFTC reduce the anonymity of certain tokens in order to better manage the risks associated with digital assets.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

US CFTC issues letter on digital asset derivatives, clearing compliance in 3 areas

May 30, 2023 Coin Telegraph

CFTC

The letter is a reminder, but a highly specific one that is reminiscent of the SEC’s recent custody rule proposal in part.

The United States Commodity Futures Trading Commission (CFTC) has issued a staff advisory letter to registered derivatives clearing organizations (DCOs) and DCO applicants, reminding them of the risks associated with expanding the scope of their activities. The letter from the CFTC Division of Clearing and Risk (DCR) specifically addressed digital assets.

Staff advisory letters can remind addressees of their legal obligations or provide clarity on those obligations. The “DCR expects DCOs and applicants to actively identify new, evolving, or unique risks and implement risk mitigation measures,” it said, continuing:

“Over the past several years, DCR has observed increased interest […] in expanding the types of products cleared and business lines, clearing models, and services offered by DCOs, including related to digital assets.”

The DCR said it will emphasize compliance in three areas: system safeguards, conflicts of interest and physical deliveries. Systems safeguards require attention because of the “heightened cyber and other operational risks” associated with digital assets. Potential conflicts of interest were seen in “dependencies on affiliated entities or services (i.e., dual-hatted executives, shared systems and resources, etc.).”

“Physical delivery” is used in the letter in its technical sense to mean the transfer of ownership rights — that is, transferring digital assets from one account or wallet to another. This concern, in part, mirrors the U.S. Securities and Exchange Commission’s reported plans to propose a new rule that would impact crypto firms serving as custodians of their clients’ assets. That proposal brought on harsh criticism in the crypto sector.

Today the CFTC’s Division of Clearing and Risk issued a staff advisory on the risks associated with expanding the reach of Derivatives Clearing Organizations (DCO) to clear digital assets. Learn more: https://t.co/9lEPMVXB1W
— CFTC (@CFTC) May 30, 2023

Alexander Grieve, vice president of the Tiger Hill Partners communications firm, noted in a tweet that Bitnomial has a DCO application before the CFTC. LedgerX, recently purchased by MIAX from FTX, is also a CFTC-regulated clearinghouse.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

Binance.US seeking to cut Changpeng Zhao’s majority stake: Report

May 12, 2023 Coin Telegraph

Binance

Changpeng Zhao is the crypto exchange's founder, majority owner and chair. He is also the CEO and co-founder of the global crypto exchange, Binance.

Crypto exchange Binance US and its founder Changpeng Zhao (CZ) are reportedly looking for ways to reduce his stake in the firm, amid harsh scrutiny from United States federal regulators over the past year.

The crypto executive — Binance US’ majority owner — has reportedly been trying to reduce his stake in the U.S.-based exchange since last summer, according to a report by the Information on May 11 citing people familiar with the matter.

Binance and Changpeng Zhao have seen intense scrutiny from United States federal regulators over the past year.

In March, the Commodity Futures Trading Commission (CFTC) sued Binance and CZ for operating what it alleged was an “illegal” exchange with a “sham” compliance program.

The firm was accused of willfully evading U.S. law, “while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.”

In response to the lawsuit, Binance has claimed regulatory compliance, telling Cointelegraph, “We have implemented a robust ‘three lines of defense’ approach to risk and compliance,” at the time.

*CZ responds to the CFTC on March 28. Source: Binance.com*

Since then, Binance US bosses have reportedly been seeking ways to reduce CZ’s stake and influence over the company, worried that they may not be able to acquire certain regulatory licenses as long as CZ remains the majority owner.

Cointelegraph reached out to global exchange Binance who did not comment on the matter related to Binance US and CZ as an individual and majority shareholder of the U.S. exchange. Binance US did not respond by the time of publication.

In February, the SEC sued Paxos, the issuer of Binance’s stablecoin BUSD resulting in the end of minting. Meanwhile, the regulator blocked approval of a Binance.US bid for assets belonging to bankrupt crypto lending firm Voyager Digital.

It appears that the Securities and Exchange Commission (SEC) is specifically targeting American-based crypto exchanges to bring them under the same stringent regulations as banks and stock brokerages.

The result has been an exodus from the U.S. with major players including Coinbase, Gemini, Ripple, and Galaxy Digital among those eyeing a move offshore following recent SEC enforcement action.

Other major exchanges such as Kraken and Bittrex have already fully or partially shuttered services in the United States as the war on crypto continues.

Magazine: Does SEC Chair Gary Gensler have the final say?

US lawmakers hold EU and UK as examples of crypto regulation in joint hearing

May 10, 2023 Coin Telegraph

CFTC

With the European Union coming closer to passing the Markets in Crypto Assets framework and Kraken in the process of investing in the United Kingdom, lawmakers are taking notice.

Some members of the United States House of Representatives’ Financial Services and Agriculture Committees pointed to crypto asset frameworks being employed outside the country when discussing regulatory gaps at home.

In a May 10 joint hearing on the future of digital asset regulation, some lawmakers pointed to the European Union’s Markets in Crypto Assets framework and digital asset regulation in the United Kingdom in contrast with the patchwork of requirements in the United States. Responding to questions raised by Oklahoma Representative Frank Lucas, Kraken chief legal officer Marco Santori said the U.S.-based crypto exchange had made plans to invest in the EU and was in the process of investing in the U.K., finding the U.S. regulatory environment difficult to assess.

“Other jurisdictions are indeed pushing ahead — they have been pushing ahead,” said Santori. “These are G20 jurisdictions with sophisticated financial services markets, sophisticated technology industries. The U.S. is significantly behind in that respect.”

House Financial Services Committee ranking member Maxine Waters said there had been some efforts to establish an “entirely new market structure” for crypto in the United States amid the lack of clarity among regulators including the Commodity Futures Trading Commission and the Securities and Exchange Commission. Wisconsin Representative Bryan Steil added the U.S. Congress was ready to provide crypto regulation, but suggested there was “a much more forward thinking approach” in Switzerland and Europe.

“Switzerland provided very early on for a very clear regulatory framework,” said Web3 Foundation chief legal officer Daniel Schoenberger in response to questioning from Steil. “This framework that they provided certainly provided the legal certainty to be headquartered there and to have legal clarity around the classification instantly.”

Steil implied that jurisdictions including the EU with MiCA, Dubai with its Virtual Assets Regulatory Authority, Singapore, and South Korea were “not driving forward through a regulatory approach but putting forward rules and regulations of the road.” Such an approach, the lawmaker suggested, could encourage investment and innovation.

Congress has scheduled several hearings in May to discuss digital asset regulation, the recent failure of major banks, and oversight of federal financial regulators.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

CTFC wins record $3.4B penalty payment in Bitcoin-related fraud case

April 28, 2023 Coin Telegraph

Bitcoin

The CFTC said it's the largest fraudulent Bitcoin scheme charged in any of its cases and the "highest civil monetary penalty ordered in a CFTC case."

A record-breaking $3.4 billion penalty has been handed down by a Judge in a lawsuit brought by a United States financial regulator involving a fraudulent scheme involving Bitcoin (BTC).

An April 27 statement from the Commodity Futures Trading Commission (CFTC) said Texas District Court Judge Lee Yeakel ordered Cornelius Johannes Steynberg to pay the sum for his role in perpetrating a fraudulent commodity pool scheme involving foreign currency transactions and Bitcoin.

Steynberg, a South African national and CEO of Mirror Trading International Proprietary Limited (MTI), a purported trading and networking company, was ordered to pay $1.73 billion in restitution to defrauded victims and an additional $1.73 billion civil monetary penalty.

The CFTC said it is the "highest civil monetary penalty ordered in any CFTC case" and also "the largest fraudulent scheme involving Bitcoin charged in any CFTC case."

Today, a federal court ordered a South African CEO to pay more than $3.4 billion for forex fraud, making this the CFTC’s largest fraud scheme case involving bitcoin. Learn more: https://t.co/X2vmHIRLkh
— CFTC (@CFTC) April 27, 2023

The order explained that as the head of MTI, Steynberg “engaged in an international fraudulent multilevel marketing scheme to solicit Bitcoin from members of the public for participation in an unregistered commodity pool,” the value of which totaled more than $1.7 billion as of March 2021.

From May 2018 to March 2021, the CFTC claimed he accepted at least 29,421 BTC valued at more than $1.7 billion at the time — but currently worth approximately $867 million — from 23,000 individuals in the U.S. and even more globally.

“Either directly or indirectly, the defendants misappropriated all of the Bitcoin they accepted from pool participants,” the CFTC wrote.

According to the April 27 order, Steynberg was found liable for fraud in connection with retail foreign currency transactions, fraud by an associated person of a commodity pool operator (CPO), registration violations and failure to comply with CPO regulations.

Additionally, Steynberg is permanently prohibited from engaging in conduct that violates the Commodity Exchange Act (CEA). He is also permanently banned from registering with the CFTC or trading in any CFTC-regulated markets.

On June 30, 2022, the CFTC announced that it had filed a civil enforcement action in federal court for fraud and registration violations against Steynberg.

Initially, Steynberg fled from South African law enforcement and is currently a fugitive but has been detained in Brazil on an INTERPOL arrest warrant since December 2021.

Magazine: Bitcoin in Senegal: Why is this African country using BTC?

Binance Scraps Agreement To Purchase Embattled Crypto Lender Voyager, Cites ‘Hostile’ Regulatory Climate

April 27, 2023 The Daily Hodl

Anonymity in Crypto Must End, Says Top US Regulator at CFTC – Here’s Why

April 25, 2023 The Daily Hodl

CFTC proposes reducing anonymity to manage risks

April 25, 2023 Coin Telegraph

CFTC

Commodity Futures Trading Commission Commissioner Christy Goldsmith Romero has urged crypto companies to verify the digital identity of users, saying that Congress is considering new laws addressing anonymity and digital identity.

A commissioner of the United States Commodity Futures Trading Commission (CFTC), Christy Goldsmith Romero, has proposed reducing the anonymity of cryptocurrencies as a means of managing the risks associated with digital assets. The statement was made during the keynote speech on Illicit Finance and Other Key Risks of Digital Finance at City Week 2023 in London on April 25.

Romero stresses the need for governments and the industry to tackle the primary feature that makes cryptocurrencies appealing to illicit finance — anonymity. In her speech, Romero said that the risks associated with digital assets must be managed, as market integrity, national security and financial stability are crucial and cannot be compromised.

Reducing illicit finance risks in the cryptocurrency market requires addressing the challenge of identity verification, Romero said. Although the public blockchain offers some transparency and traceability, the use of mixers and anonymity-enhancing technology increases the potential for substantial risk, she added. In her words:

“It is possible for all crypto companies to distance themselves from mixers and anonymity-enhanced technology, while still appropriately providing financial privacy for customers.”

A crypto mixer is a service that blends the cryptocurrencies of many users together to confuse the origins and owners of the funds. Because Bitcoin, Ethereum, and most other public blockchains are transparent, this level of privacy is otherwise hard to achieve.

While talking about the need for identity verification, Romero highlighted that two mixers — Blender and Tornado Cash — were recently sanctioned by the United States Treasury Department. According to her, Tornado Cash was allegedly involved in laundering $7 billion, including millions of dollars stolen by Lazarus Group, a North Korean state-sponsored hacking group that has been involved in cyberattacks to aid illicit nuclear and ballistic missile programs.

Romero expressed that crypto companies can maintain financial privacy for their customers without relying on mixers and anonymity-enhancing technology. She continued by stating there is a distinction between financial privacy and anonymity. Traditional finance (TradFi) ensures financial privacy by verifying the customer’s identity through Know Your Customer (KYC), Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) measures, without relying on anonymity-enhancing technology.

Romero encouraged the verification of digital identity, urging exchanges as well as decentralized finance (DeFi) platforms to verify the digital identity of users. She pointed out that, more often than not, DeFi services are not fully decentralized but instead maintained by central parties who could verify identities and may be held accountable for doing so.

According to the commissioner, there are existing technologies to provide digital identity and more are being developed. Congress is also considering new laws addressing anonymity and digital identity. The U.S. government will continue to prioritize preventing crypto’s use for illicit finance.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

Speakers prepare to tell US House Financial Services Committee about stablecoins

April 18, 2023 Coin Telegraph

CFTC

Five experts will testify at a hearing titled “Understanding Stablecoins’ Role in Payments and the Need for Legislation,” with two of them releasing their scripts in advance.

The United States House of Representatives Committee on Financial Services will hold a hearing on stablecoin regulation on April 19. The hearing follows the announcement of a new draft bill in the House to provide a framework for stablecoins regulation. Some of the speakers invited have released advance transcripts of their planned testimony.

Stablecoins “look a lot like pretty basic cash instruments. […] Stablecoins are actually mundane,” Austin Campbell, a managing partner at Zero Knowledge Consulting and adjunct professor at Columbia Business School, will tell the committee. Campbell is convinced that stablecoins will expand the reach of the U.S. dollar and increase financial inclusion if legislation does not derail their progress.

According to Campbell, the United States has a lot to lose from driving stablecoin issuers away:

“The biggest winner of the US regulatory actions and legislative inaction over the past year has been Tether, an offshore stablecoin that provides very little in the way of transparency or consumer protection.”

Blockchain Association chief policy officer Jake Chervinsky will call stablecoin “a revolutionary upgrade” of the traditional payment systems. Like Campbell, Chervinsky touts dollar-denominated stablecoins as increasing financial inclusion and preserving the dollar’s role in the international economy.

Neither the Securities and Exchange Commission (SEC) nor the Commodity Futures Trading Commission (CFTC) currently have the regulatory authority necessary to regulate stablecoin, Chervinsky argued. It is hard to construe stablecoin as a security, Chervinsky said, and the CFTC lacks the jurisdiction to oversee spot markets.

Absolutely sensational testimony from @CampbellJAustin who will be testifying in the House hearing on stablecoins tomorrow. Probably the single best document I've read that makes the case for stablecoins as favorable to US interests https://t.co/kuQcTR9sCk
— nic c4rter (@nic__carter) April 18, 2023

Legislation of stablecoin should follow eliminate competition between regulatory agencies, Chervinsky said:

“At the federal level, stablecoins should be overseen by a prudential regulator such as the Fed or the OCC. […] Stablecoins should also be exempt from overlapping federal regulation by the SEC or the CFTC, so as to provide regulatory clarity and clear delineation of responsibility between agencies.”

New York State Department of Financial Services Superintendent Adrienne A. Harris, Circle chief strategy officer and global policy head Dante Disparte and Consumer Reports director of financial fairness Delicia Reynolds Hand will also testify before the hearing.

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

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