This Week in Policy (10/10)

This Week in Policy (10/10)

Ya'at'eeh … Our greeting is abbreviated this week in observance of Indigenous Peoples' Day in the U.S. Wondering about the language? Think of the largest indigenous group in the U.S. as per the 2020 U.S. Census. And you can learn how to pronounce it here.

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Our coverage for the week spans various crypto policy areas in the U.S. as well as India and the EU. Let’s dive in!

1.       Crypto Regulation

On October 3, 2022, the Financial Stability Oversight Council (FSOC) released its long-awaited Report on Digital Asset Financial Stability Risks and Regulation. The report is the ninth report that the Biden administration has issued pursuant to President Biden’s March 9th executive order. The FSOC, which is led by Treasury Secretary, brings together the heads of financial agencies, including the Chairs of the Federal Reserve (Fed), the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC). The FSOC’s report reviewed the specific financial stability risks and regulatory gaps posed by digital assets. It reiterated that the crypto industry does not yet pose systemic risk, although this could change rapidly due to interconnections that are currently being developed with the traditional financial system. The report also emphasized that the current vulnerabilities in the industry can be attributed to the failure of market participants to implement appropriate risk controls or governance schemes.

With respect to regulatory gaps, the report identified three problematic areas: (1) the lack of a regulatory framework for spot markets of crypto-assets that are not securities (because such assets fall outside the scope of the SEC’s jurisdiction as well as that of the CFTC, unless they can be considered “derivatives”), (2) the regulatory arbitrage crypto firms may engage in due to the absence of a consistent or comprehensive regulatory framework, and (3) how crypto firms may give retail (i.e., individual) investors direct access to markets in which they have insufficient protection through vertical integration with trading platforms. Consequently, the report recommends (1) granting new rulemaking authority to federal financial regulators over the spot markets for crypto-assets that are not securities, (2) ramping up legislation in certain areas, such as stablecoins, and improving legislative coordination to prevent regulatory arbitrage, and (3) studying the implications of vertical integration by crypto-asset firms.

2.       Enforcement

Last week, crypto land was hyped about the SEC’s announcement that reality TV star Kim Kardashian had been charged with touting an EthereumMax crypto asset for her followers on Instagram, which the SEC found to be a security. The charges came as a result of Kardashian’s failure to disclose that she was paid $250,000 to publish the post. To settle the charges, Kardashian agreed last Monday to pay $1.26 million, including $260,000, which represents her promotional payment plus interest. In an unusual move, SEC’s Chair Gary Gensler published a video warning investors not to base their investment decisions solely on the endorsement of celebrities or influencers since some of the endorsed opportunities might not be suitable for all investors. Critics of the SEC pointed out that the SEC does not ask media outlets to disclose the payments they receive to advertise digital assets and argued that influencers should not be treated differently.

3.       DAOs

Remember last week’s story about the involvement of decentralized autonomous organizations (DAOs) in legal proceedings? Last Monday, the District Court for the Northern District of California ruled that the CFTC appropriately served Ooki DAO by posting on an online forum the holders of Ooki Tokens use to discuss governance issues and via the “Ooki Help Chat function.” The lawsuit is crucially important not only because of this ruling but also because the CFTC is trying to hold the founders of Ooki DAO personally liable. This practically means that the CFTC wants to “pierce the veil of the DOA,” which would not be possible if the DAO was organized as a corporation. So, decentralization through DAOs might not shield individuals from legal liability, unless it is done in accordance with the strict guidelines set by the SEC, which are currently met by almost no DAO.

What is even more surprising is that it may turn out that the CFTC, the regulator favored by the vast majority of the crypto industry, may also be in favor of the widely criticized “enforcement by regulation” approach, which is usually attributed to the CFTC’s sister, the SEC.

4.       CBDCs

A group of Republican members of the House Financial Services Committee requested the Department of Justice to share its assessment on whether the Fed has the legal authority to launch a U.S. central bank digital currency (CBDC). Meanwhile, last Friday, the Reserve Bank of India released a concept note on the planned features, including banking, monetary, and financial implications, of the future Indian CBDC, the Digital Rupee.

5.       Blockchain Technology Applications

Europe is continuing to lead the experimentation with blockchain technology applications. Last Tuesday, the European Parliament adopted a non-binding resolution that calls for exploring how blockchain technology could be leveraged to” automate tax collection, limit corruption and better identify ownership.”

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See you next week!