This Week in Policy (12/20)

Fintech Friends … Hola and Salut!

Whether you rooted for Argentina or France, you would probably agree that the two teams gave the world perhaps the best World Cup final in history on Sunday. Congratulations France for exemplary resilience, and congratulations Argentina for the third World Cup title!

Last week was very busy in crypto land, with significant developments happening in crypto regulation in response to FTX’s implosion last month. It is very likely that developments related to FTX’s bankruptcy and the regulatory responses to this debacle will be at the center of crypto debates for a while.

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1.       FTX

Last week, we mentioned that the charges made against Sam Bankman-Fried (SBF), the former CEO of FTX, are important because they will give us a better idea about the extent to which U.S. markets were impacted by FTX’s violations. On December 13, U.S. Attorney Damian Williams, the lead prosecutor for the Southern District of New York, announced eight criminal charges against SBF, which included fraud against investors and lenders, money laundering, and violations of campaign finance law. Despite FTX being a Bahamian company, the violations it committed clearly impacted not only U.S. markets but also, and more importantly, U.S. politics. On the same day, the U.S. Securities and Exchange Commission filed a civil complaint against SBF, accusing him of violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Commodity Futures Trading Commission followed suit and accused SBF of fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce.

In Delaware, the bankruptcy proceedings are slowly progressing. Last week, the judge overseeing the proceedings approved a request by media outlets to intervene in the case to plead for FTX to publish a full list of the company’s customers (who are also the company’s creditors). Also, non-U.S. FTX customers who had holdings with FTX of about $1.6B intend to form a committee that will be tasked with arguing that customers’ funds are not the property of FTX and, thus, should not be part of FTX’s estate that will be divided among creditors.

2.       Crypto Regulation

On the regulation front, Sen. Elizabeth Warren (D-MA) and Sen. Roger Marshall (R- KS) introduced a new bill titled the “Digital Asset Anti-Money Laundering Act of 2022” on December 14. Developing the bill took about a week (do you think this is sufficient time to produce a legislation in a complex area like crypto?) The bill mandates U.S. persons to file a report if they transact more than $10,000 in digital assets outside of the U.S. Additionally, it imposes know-your-customer requirements on digital asset wallet providers, miners, and validators; designates these actors, and others, as money service businesses; and subjects them all to the jurisdiction the Financial Crimes Enforcement Network (FinCEN). The bill also subjects the transactions conducted via unhosted wallets (i.e., digital wallets that allow users to hold their digital assets outside of an exchange) to customer-verification, counterparty-identification, and record-keeping obligations. Moreover, the bill proposes that financial institutions (which will include wallet providers, miners, and validators) be prohibited from using or transacting with digital asset mixers and from handling any assets that have been anonymized using such technology. In short, the bill views crypto only as a security threat, ends the crypto dream (or fantasy) of decentralization and anonymity (or, more accurately, pseudonymity), does not address any other aspect of crypto, and offers no vision whatsoever for how blockchain technology can contribute to a digitalized financial and monetary systems in the future.

The lack of comprehensiveness in crypto regulation, exemplified by the Digital Asset Anti-Money Laundering Act, was highlighted by the annual report of the Financial Stability Oversight Council (FSOC) as one of the main problems facing the industry. The report of FSOC, whose membership includes the chairs of U.S. financial regulators and is headed by the Secretary of the Treasury, underscored, perhaps for the first time ever, one of the major unintended consequences of partial crypto regulation. According to the report, the enforcement actions taken by U.S. financial regulators under incomplete or inexistent rules give “customers the impression that they are protected by the government safety net when that protection does not exist.” To overcome this false sense of safety, and to provide regulators with the powers needed to establish comprehensive rules that cover all aspects of crypto, the report emphasized that action should come from…Congress!

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See you next week!