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Regulators around the globe assert more control over crypto: Law Decoded

From Hong Kong to Europe and the United States, regulators are pushing for more oversight and control over digital assets.

In the last week, several major financial regulators, both national and international, simultaneously produced new guidelines for decentralized assets. The European Banking Authority and the European Securities and Markets Authority proposed guidelines for assessing the suitability of management members in crypto firms, offering standardized criteria for evaluating their knowledge, expertise, integrity and ability to dedicate adequate time to fulfill their responsibilities.

The Basel Committee on Banking Supervision of the Bank for International Settlements (BIS) proposed to oblige banks to provide both quantitative and qualitative data on exposures to crypto assets and the corresponding capital and liquidity requirements. According to the BIS, using a uniform disclosure format will encourage the application of market discipline and lessen information asymmetry between banks and market participants.

The United States Treasury Department’s Financial Crimes Enforcement Network proposed designating cryptocurrency mixing as an area of “primary money laundering concern” following Hamas’ attack on Israel. It suggests requiring domestic financial institutions and agencies to “implement certain recordkeeping and reporting requirements” for crypto mixers transactions.

The Hong Kong Securities and Futures Commission (SFC) will make certain digital currency products available only to professional investors. The updated requirements consider digital assets “complex products” under the SFC and subject to the same guidelines as similar financial products. The commission mentions crypto exchange-traded funds and products issued outside Hong Kong as complex products.

FTX court updates 

FTX’s former general counsel Can Sun was unaware of the exchange’s comingling of funds with Alameda Research, he told jurors during his testimony in Sam Bankman-Fried’s criminal trial. Sun said he learned from other employees about Alameda’s exemption from the liquidation engine system in August 2022. Typically, the system would liquidate loss-making trades, but Alameda reportedly bypassed the mechanism due to its exception.

Accounting professor Peter Easton provided a breakdown of the alleged commingling of funds between FTX and Alameda Research since 2021. According to Easton’s analysis, Alameda invested in Genesis Capital, K5 Global Holdings, Anthropic PBC, Dave Inc, Modulo Capital and other ventures, partially using funds from FTX customers. In June 2022, Alameda had a negative balance of $11.3 billion with FTX, while the companies’ liquid assets stood at $2.3 billion, meaning a gap of $9 billion between the sister firms. Another critical point from the analysis: Alameda has 57 accounts with FTX that could have negative balances, whereas no other customer could do so. The analysis challenges Bankman-Fried’s defense argument that Alameda had similar privileges as other market makers on FTX.

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Pennsylvania aborts two-year mining moratorium bill 

A Pennsylvania House Representative has cut a two-year crypto mining ban from a bill to regulate the sector’s energy consumption, claiming trade labor unions pressured the change. The committee’s chair and the bill’s sponsor, Democratic Representative Greg Vitali, revealed that Democratic Party leaders pressured him not to run the bill inclusive of the moratorium. Vitali said building trade labor unions had “chronic opposition” to environmental policy and claimed the unions had his Democratic colleagues in their pocket. According to the politician, voting against the unions would risk the Democratic majority in Pennsylvania’s House, and he would rather see the bill pass sans moratorium than not at all.

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Gemini, Genesis, DCG accused of $1 billion fraud

New York’s attorney general has filed a lawsuit against cryptocurrency firms Gemini, Genesis and Digital Currency Group (DCG) for allegedly defrauding investors through the Gemini Earn investment program. An official statement from the office of Attorney General Letitia James outlines the basis of the charges, claiming that the companies defrauded more than 23,000 investors, including 29,000 New York citizens, of more than $1 billion. An investigation carried out by James’ office claims that Gemini lied to investors about its Gemini Earn investment program, which it ran in partnership with Genesis. It argues that while Gemini had assured investors that the program was a low-risk investment, investigations reveal that Genesis’ financials “were risky.”

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BlackRock’s tokenized fund registers over $240 million in inflows within a week

Crypto investor protections won’t take effect in EU until late 2024

Crypto asset service providers may not benefit from full rights and protections afforded to them under MiCA until as late as July 2026, the ESMA said.

Cryptocurrency investors in Europe are not yet protected under European Union cryptocurrency asset market rules, and it will take some time for the protections to take effect.

On Oct. 17, Europe’s securities regulator, the European Securities and Markets Authority (ESMA), issued a statement about the transition to the European crypto regulations known as the Markets in Crypto-Assets Regulation (MiCA).

The ESMA emphasized that MiCA-based crypto investor protections will not come into effect until at least December 2024, meaning that investors must be prepared to lose all the money they plan to invest in crypto. The authority added:

“Holders of crypto-assets and clients of crypto-asset service providers will not benefit during that period from any EU-level regulatory and supervisory safeguards [...] such as the ability to file formal complaints with their NCAs [National Competent Authorities] against crypto-asset service providers.”

Even after December 2024, there is no guarantee investors will be fully protected by MiCA up to 2026. After MiCA becomes applicable to crypto asset service providers in late 2024, member states still have the option of granting crypto service providers an additional 18-month “transitional period” allowing them to operate without a license, which is also referred to as a “grandfathering clause.”

“This means that holders of crypto-assets and clients of crypto-asset service providers may not benefit from full rights and protections afforded to them under MiCA until as late as July 1, 2026,” the ESMA wrote. Most NCAs will have limited powers to supervise those who benefit from the transitional period, depending on local laws.

“In most cases, these powers are confined to those available under existing anti-money laundering regimes, which are far less comprehensive than MiCA,” the ESMA added.

Retail investors must be aware that there will be no such thing as a safe crypto asset even once MiCA is implemented, the authority stressed, adding:

“ESMA reminds holders of crypto-assets and clients of crypto-asset service providers that MiCA does not address all of the various risks associated with these products. Many crypto-assets are by nature highly speculative.”

The latest warnings from the ESMA come shortly after the regulator released a second consultative paper on MiCA on Oct. 5 after enforcing the regulations in June 2023.

Related: EU mulls more restrictive regulations for large AI models: Report

During the implementation phase of MiCA, the ESMA and other related authorities are responsible for consulting with the public on a range of technical standards that are expected to be published sequentially in three packages.

MiCA implementation timeline. Source: ESMA

Officially introduced in 2020, MiCA aims to provide legislation to regulate crypto assets in Europe by amending existing laws, specifically Directive 2019/1937. The groundwork of MiCA was initiated in 2018 due to the growing public interest in investing in cryptocurrencies.

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BlackRock’s tokenized fund registers over $240 million in inflows within a week

The explosive revelations of Caroline Ellison: Law Decoded

SBF’s former girlfriend admits to fraud during her time as CEO of Alameda Research.

Last week, the FTX court saga had elements of a TV drama, with Sam “SBF” Bankman-Fried’s former business associate and girlfriend, Caroline Ellison, sharing some shocking stories about SBF’s rule over the company. Ellison admitted to fraud during her time as CEO at Alameda under Bankman-Fried’s direction. However, she blamed the misuse of FTX user funds directly on SBF, claiming he “set up the systems” that led to Alameda taking roughly $14 billion from the exchange.

Ellison revealed that Alameda’s bad loans created market panic around FTX, causing users to withdraw their funds. FTX then paused withdrawals to contain the situation, and the exchange came crashing down within days. When one of the employees attending the meeting asked Ellison how FTX intended to pay back its customers, she said the crypto exchange was planning to raise further funds to fill the gap.

She also told the court about the SBF’s ambitions to become the president of the United States, his willingness to “flip a coin and destroy the world,” and his plans to attract investment from Saudi Crown Prince Mohammed bin Salman.

Meanwhile, former FTX chief technology officer Gary Wang, who’s also been giving his testimony in court, pleaded guilty to four charges, including conspiracy.

IRS must implement crypto reporting requirements before 2026

Seven members of the United States Senate have called on the Treasury Department and Internal Revenue Service (IRS) to advance a rule imposing certain tax reporting requirements for crypto brokers “as swiftly as possible.” A group of U.S. senators, including Elizabeth Warren and Bernie Sanders, criticized a two-year delay in implementing crypto tax reporting requirements, which are scheduled to go into effect in 2026 for transactions in 2025. The lawmakers claimed delaying implementation of the rules could cause the IRS to lose roughly $50 billion in annual tax revenue and continue policies allowing bad actors to avoid paying taxes.

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DeFi doesn’t represent a “significant risk” to financial stability in Europe yet

The European Securities and Markets Authority (ESMA) — the European Union’s financial markets supervisory authority — released an article on decentralized finance (DeFi) and the risks it poses to the EU market. In a 22-page report, the ESMA admits the promised benefits of DeFi, such as greater financial inclusion, the development of innovative financial products, and the enhancement of financial transactions’ speed, security and costs.

Warning about the risks of the technology, the regulator concludes that currently, DeFi and crypto, in general, do not represent “meaningful risks” to financial stability. That is because of their relatively small size and limited interconnectedness between crypto and traditional financial markets.

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Malaysia approves its fifth digital exchange

The Malaysia-based Hata has received in-principle approval from the Securities Commission Malaysia to register as a Recognized Market Operator as a digital asset exchange and digital broker. The approval means Hata could launch its services in six to nine months. Hata will become the fifth regulated digital asset exchange in Malaysia and the first legal entity to receive approval as a digital broker, allowing it to display trade orders from other regulated exchanges.

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BlackRock’s tokenized fund registers over $240 million in inflows within a week

French regulator sees DeFi as ‘disintermediated,’ not ‘decentralized’

The Autorité de Contrôle Prudentiel et de Résolution concluded its consultation on the regulation of DeFi.

On Oct. 12, the Autorité de Contrôle Prudentiel et de Résolution (ACPR), part of the French Central Bank, published a summary of its public consultation on a regulatory framework for decentralized finance (DeFi).

The public consultation lasted two months, from April to May 2023, in response to the initial paper discussing possible regulations for DeFi in the country. External contributions nudged the ACPR to surprising revelations, especially regarding the structural persistence of centralization patterns:

“The ACPR therefore believes that the term ‘disintermediated’ finance is more appropriate than that of ‘decentralized’ finance.”

The operational risk of this “paradoxical high degree of concentration” in DeFi concerns the physical infrastructure hosting blockchain nodes, in which cloud service providers play a central role.

Related: CBDC lays foundation for new global monetary system: French central bank

According to the summary, the “vast majority” of respondents advocate that DeFi should continue to be deployed on public blockchains rather than on private or permissioned ones. However, they admit that these blockchains need to be audited on a regular basis. Proposals to regulate intermediaries and certify smart contracts were also met with broad consensus.

In conclusion, the ACPR finds it “advisable” to draw up rules for the certification of smart contracts, define governance that would protect DeFi customers, and lay down measures supporting DeFi’s blockchain infrastructures.

On Oct. 11, the European Securities and Markets Authority (ESMA) also weighed in on the discussion on DeFi. In a 22-page report, the ESMA admitted the promised benefits of DeFi, such as greater financial inclusion, the development of innovative financial products and the enhancement of financial transactions’ speed, security and costs, while also highlighting its “significant risks.”

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BlackRock’s tokenized fund registers over $240 million in inflows within a week

Decentralized finance yet to pose ‘meaningful risk’ to stability — EU regulator

The European Securities and Markets Authority argued that DeFi was still too small to pose any sizeable risks to overall financial stability, but should be monitored.

Decentralized finance (DeFi) is yet to pose a meaningful risk to overall financial stability but does require monitoring, according to the European Union’s financial markets and securities regulator.

On Oct. 11, the European Securities and Markets Authority (ESMA) released a report titled Decentralized Finance in the EU: Developments and Risks. Aside from discussing the nascent ecosystem's benefits and risks, the regulator concluded it is yet to pose a sizeable risk to financial stability.

“Crypto-assets markets, including DeFi, do not represent meaningful risks to financial stability at this point, mainly because of their relatively small size and limited contagion channels between crypto and traditional financial markets.”

The total crypto market capitalization is just over $1 trillion, and DeFi total value locked is a mere $40 billion, according to DefiLlama. Comparatively, the total assets of financial institutions in the EU amounted to around $90 trillion in 2021, according to the European Commission.

DeFi TVL by protocol type. Source: ESMA

The report said that the total crypto market is about the same size as the EU’s twelfth largest bank or 3.2% of the total assets held by EU banks.

The ESMA also looked into several crypto contagions of 2022, including the collapse of the Terra ecosystem and FTX, noting that this crypto “Lehman moment” still had “no meaningful impact on traditional markets.”

Nevertheless, the regulator observed that DeFi has similar traits and vulnerabilities to traditional finance, such as liquidity and maturity mismatches, leverage, and interconnectedness.

It also highlighted that although investors’ exposure to DeFi remains small, there are still serious risks to investor protection due to the "highly speculative nature of many DeFi arrangements, important operational and security vulnerabilities, and the lack of a clearly identified responsible party."

It cautioned that this could “translate into systemic risks if the phenomenon were to gain significant traction and/or if interconnections with traditional financial markets were to become material.”

Related: EU’s new crypto law: How MiCA can make Europe a digital asset hub

Furthermore, the report identified a “concentration risk” associated with DeFi activities.

“DeFi activities are concentrated in a small number of protocols,” it noted adding that the three largest ones represent 30% of the TVL.

Top ten DeFi protocols by TVL. Source: ESMA

“The failure of any of these large protocols or blockchains could reverberate across the whole system,” it said.

The regulator is paying much closer attention to DeFi and crypto markets following the publication of its second consultative paper on the Markets in Crypto Assets (MiCA) regulations earlier this month.

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BlackRock’s tokenized fund registers over $240 million in inflows within a week

European regulator: DeFi comes with significant risks as well as benefits

The European Securities and Markets Authority released an article on decentralized finance and its risks for the EU market.

The European Securities and Markets Authority (ESMA) — the European Union’s financial markets supervisory authority — released an article on decentralized finance (DeFi) and the risks it poses to the EU market on Oct. 11. 

In a 22-page report, the ESMA admits the promised benefits of DeFi, such as greater financial inclusion, the development of innovative financial products, and the enhancement of financial transactions’ speed, security and costs.

However, the paper also highlights the “significant risks” of DeFi. According to the ESMA, the first is liquidity risk tied to the highly speculative and volatile nature of many crypto assets. The authority compares the 30-day volatility of Bitcoin (BTC) and Ether (ETH) with the Euro Stoxx 50 index, with the cryptocurrencies being, on average, 3.6 and 4.7 times higher than the stock index.

The ESMA doesn’t believe that DeFi manages to avoid counterparty risk, even if, in theory, it should be lower or even nonexistent due to smart contracts and atomicity. However, smart contracts are not immune to errors or flaws.

Related: EU mulls more restrictive regulations for large AI models: Report

DeFi is especially vulnerable to scams and illicit activities as it lacks Know Your Customer (KYC) protocols, according to the ESMA. Another important source of risk for DeFi users, as specified in the report, is the lack of an identifiable responsible party and the absence of a recourse mechanism.

However, currently, DeFi and crypto, in general, do not represent “meaningful risks” to financial stability, the report concludes. That is because of their relatively small size and limited interconnectedness between crypto and traditional financial markets.

The ESMA pays close attention to the crypto market, releasing its second consultative paper on the Markets in Crypto-Assets regulations on Oct. 5. In the 307-page document, the regulator suggested allowing crypto asset providers to store transaction data in “the format they consider most appropriate,” if they can convert it into a specified format should the authorities request it.

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BlackRock’s tokenized fund registers over $240 million in inflows within a week

European regulator publishes second consultation on MiCA

The regulator will publish a final report based on feedback received and submit the draft technical standards to the European Commission by June 2024.

The European Securities and Markets Authority (ESMA), the European Union’s markets regulator, released a second consultative paper on Markets in Crypto-Assets (MiCA) mandates on Oct. 5. 

In the 307-page document, the ESMA seeks stakeholders’ input on five areas of MiCA, including sustainability indicators for distributed ledgers, disclosures of inside information, technical requirements for white papers, trade transparency measures and record-keeping for crypto-asset service providers (CASPs).

Among the sustainability indicators, the Authority counts quantitative metrics on the consumption of energy, greenhouse gas emissions and the production of waste, together with a qualitative statement on the impact of the use of equipment by blockchain network nodes on natural resources.

As for post-trade transparency, the ESMA proposes requiring CASPs to report trading and publication date and time, identification of the crypto-asset, pricing information, quantity, venue of execution and transaction ID. 

Related: European Banking Authority calls for early adoption of stablecoin standards

The ESMA also suggests allowing CASPs to store transaction data in “the format they consider most appropriate,” provided they are able to convert it into a specified format should the authorities request it. 

The regulator will publish a final report based on feedback received and submit the draft technical standards to the European Commission by June 30 2024. However, before that, it will also publish a third consultation package in Q1 2024.

The ESMA released the previous consultation paper in July. In it, the ESMA proposed to require the crypto companies, who would be registered under MiCA, to still provide additional information in the form of notifications to the national competent authorities (NCAs) of the country they would be registered in.

BlackRock’s tokenized fund registers over $240 million in inflows within a week

European regulator releases consultative paper on MiCA standards for crypto asset service providers

The European Securities and Markets Authority will release three consultations as it fulfills its mandate under MiCA regulations.

The European Securities and Markets Authority (ESMA), the European Union’s markets regulator, released a consultative paper on Markets in Crypto-Assets (MiCA) mandates on July 12. It was the first of three consultative packages the agency expects to publish and concerns technical specifications for crypto asset service providers (CASPs).

Entities that are already licensed are presumed under MiCA to be “generally capable of providing crypto-asset services,” but they will be required to provide additional information in the form of notifications to the national competent authorities (NCAs) of the country they are registered in. The paper sought feedback on regulatory technical standards and implementing technical standards for notifications from CASPs.

ESMA also sought feedback on regulatory and technical standards for CASP authorization applications, handling complaints, and managing and preventing conflicts of interest. Finally, comments are open on the ESMA regulator’s technical standards for disclosures to NCAs by entities planning to acquire shares in a CASP.

Related: EU’s new crypto law: How MiCA can make Europe a digital asset hub

Responses to the paper are due by Sept. 20. A draft of the finalized standards will be submitted to the European Commission by June 30, 2024, as mandated by MiCA. The second consultative package will be released in October and the third in the first quarter of 2024, timed to meet the deadlines set for ESMA in MiCA.

In addition to feedback, ESMA posed four more general questions to respondents. It explained:

“ESMA aims to gather more insight on respondents’ current and planned activities, as a fact-finding exercise to better understand the EU crypto-asset markets and their future development.”

The questions concerned such things as expected turnover, the number of white papers respondents plan to publish and their use of on-chain and off-chain trading.

MiCA was approved by the European Parliament on April 20. It will come into force in three levels in 2024 and 2025.

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BlackRock’s tokenized fund registers over $240 million in inflows within a week

EU crypto community has two weeks to join conversation on crypto data

The ESMA is looking for “crypto off-chain data,” or data from spot and derivatives trades at centralized exchanges or OTC crypto trading platforms.

The European Union’s securities regulator continues to strengthen its focus on cryptocurrency regulation, initiating a move to implement increased scrutiny of crypto transactions.

The European Securities and Markets Authority (ESMA) on Tuesday issued a public tender document aiming to collect additional information about trading data on crypto transactions.

The regulator is specifically looking for “crypto off-chain data” or crypto-related transactions that do not originate from a blockchain. According to ESMA, such transactions include spot and derivatives trade at centralized exchanges or over-the-counter trading platforms.

“The coverage should encompass all major exchanges and crypto assets so that it provides a fair representation of the crypto market landscape,” the document reads. The ESMA pointed out that crypto data providers should update their data on a daily basis, stating:

“Data should be available with daily frequency and include access to order books where to see spreads and liquidity across exchanges and trading pairs — in fiat and crypto.”

The contract ceiling is 100,000 euros ($102,000), corresponding to the maximum duration of the four-year framework contract, the ESMA noted. The regulator invited natural and legal persons to participate in the tender by Aug. 17.

Related: EU agrees on MiCA regulation to crack down on crypto and stablecoins

The news comes shortly after the European Council reached an agreement to create a separate Anti-Money Laundering (AML) authority to supervise certain crypto asset service providers in late June 2022. The new regulator is expected to monitor “high-risk and cross-border financial entities” including crypto firms in order to “put an end to the wild west of unregulated crypto.”

BlackRock’s tokenized fund registers over $240 million in inflows within a week

EU Designates ESMA as Crypto Regulator of the Region in Latest MiCA Draft

EU Designates ESMA as Crypto Regulator of the Region in Latest MiCA DraftThe Parliament of the EU has designated ESMA, the European Securities and Markets Authority, the top cryptocurrency regulator of the region in the latest draft of MiCA, the Markets in Crypto Assets regulation. The European organization would have the task of licensing crypto-related institutions and exchanges, putting national regulators under its authority. ESMA Gets Crypto […]

BlackRock’s tokenized fund registers over $240 million in inflows within a week