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Coin Center and Blockchain Association slam ‘unworkable’ US Senate DeFi bill

Coin Center said the bill was unconstitutional, while the Blockchain Association called it incompatible with blockchain technology.

Crypto industry advocacy bodies have slammed a newly proposed United States Senate bill for what they say is a confused approach to regulating the decentralized finance (DeFi) sector.

On July 20, crypto think tank Coin Center and crypto advocacy group the Blockchain Association released separate statements describing the legislation as a “messy," "unworkable," and "unconstitutional” way of regulating DeFi.

Introduced on July 18, the bipartisan Crypto-Asset National Security Enhancement Act (CANSEE) bill aims to reign in money laundering violations in DeFi.

If passed, the legislation would extend new penalties to anyone who “controls” or “makes available an application designed to facilitate transactions using a digital asset protocol.” They would also be required to adhere to anti-money laundering and financial reporting standards.

The definition of who or what “controls” a DeFi protocol was left to be made by the U.S. Secretary of the Treasury — a move some pundits say will lead to excessive controls being applied to DeFi.

In its July 20 blog post, Coin Center wrote the bill gives “virtually unbounded discretion to the Secretary to decide what it would take to designate one as having ‘control’ of a protocol.”

Additionally, the think tank declared the bill to be unconstitutional as it would crack down on software developers who — as an extension of free speech — have a First Amendment right to publish code.

Coin Center was also concerned with the scope of the legislation and said by design DeFi is decentralized — meaning it could prove legally troublesome to enforce control over a given protocol.

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Kristin Smith, the CEO of the Blockchain Association echoed Coin Center’s concerns and described the new legislation as unworkable.

Smith took aim at the bill for overstating the presence of money laundering in DeFi and crypto more broadly.

“At present, illicit transactions represent a small fraction of total volume: only 0.24% of all digital asset transactions in 2022, far less than in traditional finance.”

Smith said federal law enforcement agencies are already equipped with the tools and expertise to combat this “relatively small but important issue.” Ultimately, Smith denounced the new punitive measures in the bill as redundant.

While crypto organizations have taken aim at the broad scope of the bill, an April 7 U.S. Treasury report found many DeFi protocols are more centralized than claimed, often featuring a high concentration of funds and voting power in the hands of a few token holders.

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Decentralized finance to be examined at inaugural CFTC tech advisory meeting

A panel at an upcoming advisory meeting for the financial regulator will “explore issues in decentralized finance.”

The United States commodities regulator is set to take a close look at the decentralized finance space at an upcoming meeting of its tech committee, where it has also invited crypto industry executives to present.

The Commodities Futures Trading Commission (CFTC) announced on March 1 that the agenda for the March 22 meeting of its Technology Advisory Committee will include a panel on “exploring issues in decentralized finance.”

Other panels will explore responsible Artificial Intelligence (AI) development and possible threats arising from AI along with cybersecurity threats to financial markets.

CFTC commissioner Christy Goldsmith Romero said in a statement the panel has an opportunity “to look past labels and examine the issues presented by DeFi thoughtfully and holistically,” adding:

“A discussion about DeFi, including cyber vulnerabilities, indicators of ‘decentralization,’ digital identity and unhosted wallets, will contribute to ongoing policy discussions in Washington, D.C. and beyond the beltway.”

The panel will include presentations that provide an overview of the DeFi ecosystem and will discuss decentralization issues, digital identity, noncustodial crypto wallets and exploits.

Executives from crypto companies including crypto custody platform Fireblocks, security company Trail Of Bits, venture capital firm Terranet Ventures and blockchain intelligence firms TRM Labs and Metrika are slated to present during the meeting.

The meeting agenda will also include a session that considers a subcommittee on crypto and blockchain technology in another move to help cement its bid to win regulatory jurisdiction over crypto.

The CFTC's DeFi-related panels agenda for the meeting. Source: CFTC

Last month, the CFTC’s Global Markets Advisory Committee discussed digital asset markets at its inaugural meeting.

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Commissioner Caroline Pham, who oversaw the Feb. 13 meeting, said that crypto markets are “truly borderless” and urged policymakers to “understand what is happening” so the policy approach by the U.S. “does not leave Americans behind and playing catch-up.”

The CFTC has been edging for regulatory control of the burgeoning crypto sector from the Securities and Exchange Commission, with CFTC commissioners urging Congress to give the regulator oversight overcrypto.

CFTC chairman Rostin Behnam has similarly attempted to justify why the regulator should have authority over the space, saying the commission was “well positioned” to address regulatory shortfalls.

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DeFi Pioneer Echoes SBF in Call for Tighter Crypto Regulations

The Yearn Finance founder suggested that several cracks have shown in the crypto sector this year, and that regulation is needed to “reign in irresponsible actors.”

Respected former decentralized finance (DeFi) project founder and developer Andre Cronje has resurfaced after a lengthy hiatus to call for tighter regulations on the crypto sector amid the implosion of multiple firms this year.

The comments echo similar sentiments to that of FTX CEO Sam Bankman-Fried (SBF), who also called for more stringent digital asset industry standards last week, including greater consumer protections, transparency and disclosures.

SBF was met with strong community pushback, however, with many people accusing the CEO of trying to monopolize or censor the DeFi space, among other things.

In an Oct. 25 blog post titled “The Crypto Winter of 2022,” Cronje called for greater regulation of the sector, noting that “the recent decline of the crypto-market has shown the flaws in the system and the need for regulation to reign in irresponsible actors and protect consumers.”

Cronje added that it had been a grim year for the crypto sector as he pointed to the collapse of the Terra ecosystem and several crypto firms — particularly crypto lenders — which has left consumers reeling:

“The resultant issues which appear to be most problematic are where users’ cryptocurrencies are locked in accounts handled by exchanges, or where the management of their funds is left in the hands of others.”

He went on to call for greater consumer protections, especially concerning crypto exchanges and crypto investment service providers, as highlighted the complex case of users getting their funds back from the ongoing Celsius bankruptcy case.

“Remedies under the current regulatory regime are ineffective. Most investors sign away their rights to their crypto in voluminous terms and conditions of crypto-exchanges and many will (at best) rank as unsecured creditors should these exchange services be liquidated,” he wrote.

The former DeFi developer details current solutions used in traditional finance that the crypto sector hasn’t yet introduced, including deposit insurance, prudential supervision and consumer remedies in “being able to approach the relevant prudential authority, or at least using overarching legislation as a framework.”

Regarding deposit insurance, Cronje emphasized the importance of central banks across the globe adhering to mandatory insurance practices to ensure consumer funds are protected.

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Under such practices, it generally means that people have a viable and relatively straightforward route to getting their funds back, unlike in the case of Celsius.

“The safety net of deposit insurance is a remedy available to consumers in traditional banking which is not available to depositors into crypto-exchanges (like Celsius),” he wrote.

Regarding prudential supervision, Cronje said that overarching authorities in the sector could improve confidence in cryptocurrencies, such as the case of central banks supervising private banks on factors such as “capital, asset quality, soundness of management, earnings, liquidity, and sensitivity to risk.”

Cronje is seen as one of the most influential figures in the DeFi movement, due in part to launching Yearn.finance in 2020 and his work on several other DeFi protocols. In March, however, he announced that he was stepping away from working in the industry entirely.

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German BaFin official calls for ‘innovative’ EU-wide DeFi regulation

Highlighting Germany’s crypto license as an example of attractive regulation, Birgit Rodolphe writes that similar frameworks should be the same throughout the EU to “prevent a fragmented market.”

Birgit Rodolphe, an executive director at Germany's Federal Financial Supervisory Authority (BaFin) has called for innovative and uniform regulation of the decentralized finance (DeFi) space throughout the European Union (EU).

BaFin is Germany’s financial regulatory body responsible for regulating banks, insurance firms, and financial institutions including cryptocurrency companies. BaFin is the issuer of “crypto custody licenses,” a permit required for firms wanting to offer cryptocurrency services within Germany.

In an article on BaFin’s website Rodolphe warned of the risks to consumers of the unregulated DeFi space and called for standardized regulatory considerations across EU member countries.

Birgit Rodolphe, Executive Director Processing and Prevention of Money Laundering at BaFin.
“One thing is clear: the clock is ticking. The longer the DeFi market goes unregulated, the greater the risk for consumers, and all the greater is the danger that critical offers that have systemic relevance will establish themselves.”

She cited risks to consumers of “technical issues, hacks, and fraudulent activity” that have seen millions lost and claimed that DeFi isn’t as “democratic and altruistic” as its fans say, and that DeFi products are “difficult for many to grasp.” She concluded that DeFi protocols aren’t at liberty to operate outside of regulations simply because they use new technologies.

“Utopia? Or rather dystopia? Who do I contact if I want to defer my crypto loan? What happens if my crypto assets suddenly disappear altogether? In any case, there is no deposit protection fund for such cases.”

She added that lending, borrowing, insurance, and other products outside of the traditional financial system are subject to licensing and supervision where they’re offered, and called on regulators to set rules which will give DeFi providers legal clarity.

Rodolphe highlighted BaFin’s “crypto custody business” license introduced in January 2020 as a regulatory regime that is “attractive” to crypto businesses.

The license permits companies to offer crypto services in Germany. Currently only four providers are approved but many financial institutions have submitted an application. Rodolphe wrote regulatory frameworks should be the same in different European countries:

“Ideally, such requirements would of course be uniform throughout the EU in order to prevent a fragmented market and to leverage Europe's entire innovation potential.”

Related: European watchdog lists crypto next to lawyers, accountants as an AML threat

Germany rose to the top spot as the most “crypto-friendly” country in the first quarter of 2022 due in part to its zero-tax policy on long-term crypto capital gains. A March 2022 report found that almost half of Germans are interested in investing in crypto.

Germany also made many moves related to crypto across its government in 2021 with law reforms to embrace blockchain and the tightening of regulations on crypto businesses. The country’s central bank took a leading role in testing a European central bank digital currency.

Rodolphe concluded that new DeFi regulations can’t be weaker than the standards already in place with traditional financial products as it could make DeFi products more attractive for businesses to pursue from a regulatory point of view.

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Bank of England and regulators assess crypto regulation in raft of new reports

A bundle of interrelated documents remind financial institutions of their responsibilities and look at the state of crypto regulation in the U.K.

The Bank of England Financial Policy Committee and other U.K. regulators are assessing crypto regulation after publishing reports on financial stability relating to cryptoassets and decentralized finance.

The BoE report was released on Thursday, and the Financial Conduct Authority, or FCA, along with the Bank’s Prudential Regulation Authority, or PRA, also released documents simultaneously that all reference one another.

The Bank’s committee, or FPC, stated in its 40-page report that cryptoassets and DeFi pose a “limited” risk to the stability of the UK financial system, but it saw that risk growing “as these assets become more interconnected with the wider financial system.” In response, the FPC promised to assess those risks and make recommendations.

The report found the existing regulatory framework sufficient for mitigating risks where crypto technology served the same purposes as traditional finance. The FPC “welcomed” the Treasury’s proposals for stablecoin regulation, including the proposal to bring the Bank into process, and it expressed support for international efforts to regulate DeFi applications.

The FPC advised financial institutions to “take an especially cautious and prudent approach to any adoption” of cryptoassets or DeFi until the regulatory framework is more robust. It was in that context that PRA Deputy Governor and CEO Sam Woods wrote a “Dear CEO” letter to banks, insurance companies, and designated investment firms on exposure to cryptoassets, explicitly referring back to the FPC report and the FCA notice.

The bulk of the Woods letter is taken up with reminding the addressees of existing policies and regulatory frameworks, in light of their increasing interest. The letter also asks for the completion of a survey on the organizations’ existing crypto exposure and plans for the year, due June 3.

The FCA notice reminded regulated firms of their “existing obligations when they are interacting with or exposed to cryptoassets and related services.” It ran through a list of those obligations, including “being clear with customers” on regulation and risk and prudential and custody considerations.

Related: UK financial watchdog seeks crypto talent amid new crackdown

The FCA gave particular attention to Anti-Money Laundering and registration, pointing out its voluminous list of unregistered cryptoasset businesses. The agency has been investigating a number of those businesses. All unregistered and temporarily registered crypto businesses must complete registration by March 31 or face the possibility of closure in the U.K.

This was not the full extent of crypto-related Bank of England documents released March 24. “Responses to the Bank of England’s Discussion Paper on new forms of digital money” also appeared. It referred back to discussion paper released by the Bank last year on central bank digital currency. The FPC noted that the Bank and Treasury will “launch a consultation” on CBDC this year.

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Mark Cuban Hit by Iron Finance Token Crash, Calls for Defi Regulation

Mark Cuban Hit by Iron Finance Token Crash, Calls for Defi RegulationBillionaire investor and Shark Tank star Mark Cuban has called for cryptocurrency regulation focusing on decentralized finance (defi) and stablecoins after a token he invested in collapsed from $64 to near zero. Cuban Wants Defi and Stablecoin Regulation After Investing in Collapsed Token The billionaire owner of the NBA team Dallas Mavericks, Mark Cuban, invested […]

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