This Week in Policy (1/9)

This Week in Policy (1/9)

Hello Fintech Friends,

Happy New Year!

At the turn of a very tough year for crypto, the implosion of FTX continues to be at the forefront of crypto policy debates. However, the developments over the last week suggest that most of 2023 might see a brief hiatus of FTX legal proceedings.

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1.       FTX

On January 3, ex-CEO of FTX, Sam Bankman-Fried (SBF), made his second appearancebefore the District Court for the Southern District of New York. In his first appearance, SBF was released on a secured bail bond (a commitment to pay a certain amount—$250M in SBF’s case—in case of failure to appear before court). As expected, SBF pleaded not guilty to his eight criminal charges. The Court setOctober 2, 2023, as the start date of the trial, which is why attention may shift to other crypto issues in 2023 in the meantime. The ‘not guilty’ plea does not preclude SBF from potentially changing course and entering into a plea agreement with prosecutors in the coming months, which is not unusual in such complex cases. Meanwhile, SBF’s defense team asked the Court to not publicize the identities of the two co-signers, other than SBF’s parents, of his $250M bail bond—the largest in the history of white-collar crimes.

In bankruptcy news, the biggest challenge seems to be securing the funds that would go into FTX’s estate, which would be divided among creditors. On December 27, the Department of Justice (DoJ) announced that it is launching an investigation into how $372M vanished in a hack of FTX’s platform immediately after FTX filed for bankruptcy. While the investigation of the DoJ is separate from the bankruptcy proceedings, creditors hope that restoring these assets would help make them whole. Two days after the DoJ’s announcement, the Bahamian Securities Commission released a statement indicating that the Commission took custody of $3.5B of FTX’s digital assets based on a determination that “there was a significant risk of imminent dissipation as to the digital assets under the custody or control of [FTX] to the prejudice of its customers and creditors.” FTX disputed the value of assets recovered by Bahamian authorities, asserting that they were no more than $296M.

Regardless, FTX’s customers insist that these funds and others are customer assets that should be directly returned to FTX’s customers and not to FTX’s estate. Sounds reasonable but might not necessarily be true. Why? Remember what Coinbase, the largest crypto exchange in the U.S. by trading volume, said last summer? “Because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings, and such customers could be treated as our general unsecured creditors.”

2.   CBDCs

On December 22, the Federal Reserve Bank (Fed) of Boston and Massachusetts Institute of Technology announcedthe conclusion of Project Hamilton, a two-year project that developed a platform for a hypothetical U.S. central bank digital currency (CBDC). The closure of the project, which focused on a retail CBDC (i.e., a CBDC that the Fed directly offers to individuals), may reaffirm of the Fed’s disfavor of a retail CBDC. This would be especially true if we take into account that the Fed of New York, which is currently exploring a wholesale CBDC (i.e., a CBDC intermediated by financial institutions rather than directly offered by the Fed), has recently started to experiment with a blockchain-based multi-asset payment system.

In China, Xie Ping, a former research director at People's Bank of China (China’s central bank), revealedthat two years after the launch of China’s CBDC, the digital yuan, “usage has been low, highly inactive.” Since its adoption, China’s CBDC has been strugglingto gain a foothold in the massive Chinese e-payments market currently dominated by private companies such as Alipay and Tencent’s Wechat Pay.

Nonetheless, the pains of the digital yuan are not slowing down CBDC experimentation. The Bank of England is taking a big step in its experimentation with a CBDC by inviting companies to apply for a £200,000 contract to develop a CBDC wallet proof-of-concept. The Bank noted that “[it] will not develop a user wallet itself, [but] it may develop payment scheme rules & user experience guidelines etc for the private-sector wallet providers, in addition to supporting core CBDC functionality via its ledger and API.”

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See you next week!