Tuesday, September 20, 2022

White House Statement On Cryptocurrency Regulation

The White House issued a statement entitled Following the President’s Executive Order, New Reports Outline Recommendations to Protect Consumers, Investors, Businesses, Financial Stability, National Security, and the Environment describing the state of the policy development process to which I contributed twice:
The nine reports submitted to the President to date, consistent with the EO’s deadlines, reflect the input and expertise of diverse stakeholders across government, industry, academia, and civil society. Together, they articulate a clear framework for responsible digital asset development and pave the way for further action at home and abroad. The reports call on agencies to promote innovation by kickstarting private-sector research and development and helping cutting-edge U.S. firms find footholds in global markets. At the same time, they call for measures to mitigate the downside risks, like increased enforcement of existing laws and the creation of commonsense efficiency standards for cryptocurrency mining. Recognizing the potential benefits and risks of a U.S. Central Bank Digital Currency (CBDC), the reports encourage the Federal Reserve to continue its ongoing CBDC research, experimentation, and evaluation and call for the creation of a Treasury-led interagency working group to support the Federal Reserve’s efforts.
Below the fold I describe some of the details of this "framework", which unfortunately continues to use the misleading "digital asset" framing.

The framework addresses seven areas:
  1. Protecting Consumers, Investors, and Businesses. This area involves directing regulatory agencies to "aggressively pursue investigations and enforcement actions against unlawful practices" and consumer protection agencies to "monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices". Alas, it fails to come down against the cryptocurrency lobbyists pushing the CFTC to be the regulator instead of the SEC.
  2. Promoting Access to Safe, Affordable Financial Services. This area recognizes the need to compete with "digital assets" by "adoption of instant payment systems, like FedNow, by supporting the development and use of innovative technologies by payment providers to increase access to instant payments, and using instant payment systems for their own transactions". It is ridiculuous that I can transfer money in the UK in minutes, but in the US it takes many days so the banks can feast on the float.
  3. Fostering Financial Stability. This area directs the Treasury to "work with financial institutions to bolster their capacity to identify and mitigate cyber vulnerabilities" and work internationally to identify systemic risks. Clearly, intrernational cooperation is needed, especially to rein in Binance.
  4. Advancing Responsible Innovation. This area is the inevitable sop to the cryptocurrency industry's peddling of the innovation meme about a system which simply repikcates existing financial products without the necessary regulation.
  5. Reinforcing Our Global Financial Leadership and Competitiveness. This area encourages agencies to work internationally to increase "collaboration with—and assistance to—partner agencies in foreign countries through global enforcement bodies". But, alas, it also directs the Commerce Department to "help cutting-edge U.S. financial technology and digital asset firms find a foothold in global markets for their products". Pro tip: you can't have it both ways.
  6. Fighting Illicit Finance. This area suggests needed legislative actions, and is based upon input from:
    Treasury, DOJ/FBI, DHS, and NSF drafted risk assessments to provide the Administration with a comprehensive view of digital assets’ illicit-finance risks. The CFPB, an independent agency, also voluntarily provided information to the Administration as to risks arising from digital assets. The risks that agencies highlight include, but are not limited to, money laundering; terrorist financing; hacks that result in losses of funds; and fragilities, common practices, and fast-changing technology that may present vulnerabilities for misuse.
    Sanctioning Tornado Cash is a good start, but in the end the miscreants need exchanges to "cash out", so taking action against exchanges that accept coins tainted by Tornado Cash is the next important step.
  7. Exploring a U.S. Central Bank Digital Currency (CBDC). This area directs the Treasury to "lead an interagency working group to consider the potential implications of a U.S. CBDC, leverage cross-government technical expertise, and share information with partners". The US doesn't actually need a CBDC of the kind they're considering. A combination of FedNow and reviving postal banking (dormant since 1967) would do the trick.
Regulation of cryptocurrencies in the US is coming, albeit too slowly. Much of the progress reported here is worthy, especially considering the vast resources lobbying to defeat or water it down.


David. said...

Pentagon launches effort to assess crypto’s threat to national security by Tory Newmyer provides more evidence that the Feds are paying attention:

"The Defense Advanced Research Projects Agency ... has hired crypto intelligence firm Inca Digital to conduct the year-long project. The company will develop tools that give the Pentagon a granular view of crypto markets’ inner workings, in part to help authorities crack down on illicit uses of digital assets.

“The program underway here involves mapping out the cryptocurrency universe in some detail,” Mark Flood, a program manager with the agency, said in an interview with The Washington Post. Beyond fighting illicit finance, the office aims to use the data for insights into dynamics shaping traditional financial markets, where detailed information is harder to gather."

David. said...

And Molly White adds to the evidence with CFTC files suit against a DAO:

"The Commodity Futures Trading Commission fined the bZeroX blockchain project and its founders $250,000 for allowing illegal trading of digital assets, engaging in activities only allowed by registered futures commission merchants, and not performing proper KYC. They have also filed a civil suit against Ooki DAO, the successor to bZeroX, for violating the same laws."

And also IRS gets permission for summons to go after taxpayers who didn't report crypto transactions:

"The IRS was granted authorization to issue a "John Doe summons", which will require M.Y. Safra Bank to provide them with information on U.S. customers who may have failed to report taxable cryptocurrency transactions. This summons is specifically aimed at customers who used sFOX, a crypto broker that used M.Y. Safra Bank's services. The IRS was also previously authorized to serve a John Doe summons on sFOX directly."

David. said...

In Is a two-year ban coming to Crypto?, Ignacio de Gregorio discusses the results of a likely stablecoin regulation bill:

"A draft for a U.S. stablecoin bipartisan — supported by both Democrats and Republicans — bill to be presented as early as next week is going to shake the grounds of Crypto to unknown levels.
Basically, any new algorithmic stablecoin that uses a two-coin system like Luna/UST is prohibited in the U.S.

And what happens with already-existing stablecoins that fall in this category?

Stablecoins in that situation will receive a two-year grace period to transition to accepted collateral models.

In other words, you better stop using the two-coin endogenous system."

His account of the Terra/Luna crash is readable.

David. said...

Manish Singh's Fed’s Powell says real need for DeFi regulation because of ‘significant structural issues’ illustrates the continuing push for regulation:

"Federal Reserve Chairman Jerome Powell ramped up his criticism of decentralized finance on Tuesday, saying the monetary policy normalization worldwide has “revealed significant structural issues in the DeFi ecosystem” and exposed “conflict of interest,” as he called for more appropriate regulation."

David. said...

Stacy-Marie Ishmael interviews Molly White, another contributor to the administration's policy development process, for the Bloomberg Crypto podcast.

David. said...

The Financial Stability Oversight Council released a 3-page Fact Sheet describing their Report on Digital Asset
Financial Stability Risks and Regulation
. Some highlights:

"this report identifies three gaps in the regulation of crypto-asset activities in the United States.

• First, the spot markets for crypto-assets that are not securities are subject to limited direct federal regulation. As a result, those markets may not feature robust rules and regulations designed to ensure orderly and transparent trading, prevent conflicts of interest and market manipulation, and protect investors and the economy more broadly.

• Second, crypto-asset businesses do not have a consistent or comprehensive regulatory framework and can engage in regulatory arbitrage. Some crypto-asset businesses may have affiliates or subsidiaries operating under different regulatory frameworks, and no single regulator may have visibility into the risks across the entire business.

• Third, a number of crypto-asset trading platforms have proposed offering retail customers direct access to markets by vertically integrating the services provided by intermediaries such as broker-dealers or futures commission merchants. Financial stability and investor protection implications may arise from retail investors’ exposure to certain practices commonly proposed by vertically integrated trading platforms, such as automated liquidation."

To address the gaps:

"the Council recommends:

• the passage of legislation providing for rulemaking authority for federal financial regulators over the spot market for crypto-assets that are not securities;

• steps to address regulatory arbitrage including coordination, legislation regarding risks posed by stablecoins, legislation relating to regulators’ authorities to have visibility into, and otherwise supervise, the activities of all of the affiliates and subsidiaries of cryptoasset entities, and appropriate service provider regulation; and

• study of potential vertical integration by crypto-asset firms."

David. said...

Reuters illustrates the problem with regulating cryptocurrencies in Former Celsius exec joins JPMorgan as director of crypto regulatory policy:

"Former Celsius executive Aaron Iovine has joined JPMorgan Chase & Co as executive director of digital assets regulatory policy, according to his LinkedIn profile, days after the bank's Chief Executive Jamie Dimon blasted cryptocurrencies as fraud and decentralized ponzi schemes.

Iovine was head of policy and regulatory affairs at bankrupt crypto lender Celsius, which he left in September after an eight-month stint.

Celsius filed for bankruptcy in July, as risk assets including bitcoin were crushed by monetary policy tightening. Crypto markets were also squeezed by the collapse of major tokens TerraUSD and Luna in May."

Celsius isn't just bankrupt, as Amy Castor reports quoting Vermont's filing in the bankruptcy case:

"As of the Petition Date, at least 40 state securities regulators were engaged in a multistate investigation arising from, inter alia, concerns about potential unregistered securities activity, mismanagement, securities fraud, and market manipulation by Celsius and its principals. At least six of those states had taken regulatory enforcement action against Celsius as of the Petition date, and several more states have done so since then."

You would think that a major bank might think twice before hiring a regulatory chief whose last company was being investigated by 40 or the 50 states for "unregistered securities activity, mismanagement, securities fraud, and market manipulation"