The rally we observed at the start of 2023 has hit the brakes, with growth slowing as the specter of U.S. regulations and recession fears re-emerge (we highlighted how markets might have run ahead of themselves in last month’s newsletter here). Gary Gensler, Chairman of the U.S. Securities and Exchange Commission (SEC), has been on the warpath (see “Top Stories” below), spearheading the agency’s “regulation by enforcement” campaign against token issuers and platforms, staking services, stablecoins and celebrity promotions. Recent events have set a dangerous precedent for the notion of defining most tokens outside of Bitcoin as securities — in the case against NBA Top Shot NFTs, a rocket ship, upward line-chart and money bag emojis were ruled to objectively mean “a financial return on investment”, among other things.
In contrast, Hong Kong is shaping up to become a regional crypto-hub as it follows through on its comments from FinTech Week 2022, releasing proposed requirements for crypto trading platforms. This was followed by announcements from DBS Bank, Interactive Brokers and Huobi with plans to expand to the country and apply for the necessary licensing to provide crypto services. Some have claimed that China is quietly encouraging the move, using the Special Administrative Region as a testing ground for what safe crypto trading might look like.
The global regulatory landscape is evolving at an increasing pace, as adoption of crypto assets becomes more widespread and its interconnectedness with the financial sector grows. More changes are expected with the International Monetary Fund’s (IMF) release of its policy paper providing guidelines for crypto policies, and the European Parliament is expected to vote on its Markets in Crypto Assets Regulation (MiCA) in April 2023 to provide a unified framework for the EU.
Looking at things in a positive light, the increasing focus of global regulators towards the sector is testament to the growth that we’ve seen, and its greater perceived relevance. Clearer guidelines and frameworks will serve as guardrails enabling legitimate innovation. The industry will continue to navigate the changing landscape — in the meantime, be careful of the emojis that you use.
Senior Research Analyst
Crypto markets are on edge as aggressive regulatory actions take place. In the month of February, the United States Securities and Exchange Commission has:
- Announced a charge against Kraken, along with a $30 million settlement, for failing to register its crypto staking-as-a-service offering
- Charged Do Kwon and Terraform Labs with defrauding investors, adding that “the Terraform ecosystem was neither decentralized, nor finance,” and that UST, LUNA, and wLUNA were securities
- Sent a Wells Notice to Paxos, the issuer of the Binance-branded stablecoin BUSD
- Issued an investor alert warning that retirement account crypto stakes may be classed as unregistered securities
- Directed examiners to focus on how US broker-dealers and investment advisors are pitching cryptocurrencies
- Proposed rules that would narrow the list of companies that can provide crypto custody
In addition to the SEC actions, the International Monetary Fund (IMF) issued a framework, including nine elements of effective policy for crypto assets.
A statement from the White House urges Congress to “step up its efforts” in crypto regulation. It called for an expansion of regulators’ powers, increased transparency and disclosure requirements, stricter penalties, and collaboration with international partners. It also discouraged allowing pension funds to invest in cryptocurrencies to avoid deepening ties to the financial system.
The SEC takes action on staking services. The Securities and Exchange Commission claimed that crypto trading platform Kraken’s staking offering amounted to the sale of unregistered securities. Without admitting or denying the charges, Kraken agreed to pay $30 million in disgorgement and other penalties and to stop offering staking to U.S. investors. On the other hand, Coinbase has no plans to shut down its staking services. But legal executives are concerned that if the SEC had its druthers, it would get rid of so-called crypto staking in the U.S. altogether.
The SEC is planning to sue stablecoin issuer Paxos Trust Co. for violation of investor protection laws in relation to Binance USD. The SEC issued a Wells Notice to Paxos — a letter the regulator uses to tell companies of planned enforcement action. Paxos is the owner and issuer of BUSD, a U.S.-dollar-collateralized stablecoin, which has been around since the firm struck a partnership with crypto exchange Binance in September 2019. It is the third largest stablecoin, with a market cap currently exceeding $16 billion.
The Financial Stability Board (FSB) believes that “many existing stablecoins would not meet” proposed global standards, a letter to G-20 finance ministers and central bank governors shows. Recommendations on the regulation of crypto and stablecoins could be finalized by July 2023.
Singapore’s DBS Bank observed an 80% year-on-year increase in bitcoin traded on its members-only digital asset exchange in 2022. The news comes as crypto companies around the world brace for stricter regulations following the bankruptcies and implosions of FTX, Celsius, and Three Arrows Capital. Fear of contagion and the speculative nature of crypto markets rocked investors and lawmakers, but DDEx is starting to see a positive turn in sentiment.
Hong Kong proposes rules for crypto trading platforms. The new legislation requires platforms to access customer risk profiles and establish concentration limits for reasonable exposure. Only tokens that meet the Securities and Futures Committee’s (SFC) definition of a “large-cap virtual asset” and have security-related smart contract audits will be permitted to be offered. Amidst this more favorable regulatory environment, DBS Bank, Interactive Brokers and Huobi have announced plans to offer cryptocurrency trading in Hong Kong.
The Hong Kong Monetary Authority (HKMA) confirmed its first HK$800m ($102m) tokenized green bond issuance. The one year bond was priced at 4.05% and distributed by a syndicate of four banks: Bank of China (HK), Credit Agricole CIB, HSBC and Goldman Sachs. The issuance will use the Goldman Sachs Digital Asset Platform (GS DAP), which runs on a permissioned blockchain. All future settlement and lifecycle events will use the blockchain, which acts as the record of legal ownership.
Taiwan’s public servants may soon need to declare crypto holdings. All public servants in Taiwan are required to declare ownership of certain assets worth more than NT$1 million ($32,900), including cash, deposits, securities and artworks. The country’s Ministry of Justice is considering adding crypto to this list. If that happens, government staff would need to declare crypto holdings on an annual basis, according to a statement issued in February 2023.
Mastercard partners with Immersve for USDc settlements. The partnership will allow users to make real-time USDC payments at outlets that accept Mastercard online. With a successful transaction, USDC will be converted to fiat before being settled on Mastercard’s own network. Furthermore, Web3 wallets and DeFi protocols could be integrated into Immersve’s API and smart contracts in order to carry out transactions anywhere Mastercard is accepted.
Deutsche Bank successfully completed its proof-of-concept for Project DAMA (Digital Assets Management Access) in collaboration with Memento Blockchain. DAMA will allow asset managers to launch their own digital asset funds using its soulbound token (SBT) with a direct fiat-to-crypto on-ramp for users. Institutional investors holding the SBT would provide the collateral to mint and receive the tokenized shares of the underlying digital investment. The next step will be exploring the use case for the DAMA project in Singapore, where there are currently 1,100 fund managers.
NFT marketplace wars intensify as Blur launched claims for its highly anticipated $BLUR airdrop, a governance token for its marketplace. Following the launch, it also escalated the royalty battle with incumbent OpenSea, releasing a policy that recommends blocking the latter’s platform.
Ordinals launches NFTs on the Bitcoin network, sparking controversy. The protocol facilitates the transfer of individual satoshis, the smallest unit of a Bitcoin, using a process called “inscription” to inscribe data such as video and images to each individual satoshi. Some of Bitcoin’s biggest backers are calling it an affront to Bitcoin principles.
Binance.com temporarily suspends USD bank transfers. A Binance spokesperson noted that just 0.01% of monthly active users use USD bank transfers. Binance.US is not affected by the suspension. The move comes after its onshore banking partner, Signature Bank, increased the minimum USD transaction to $100,000 in late January.
Ethereum testnet processes first ETH staking withdrawals. The upgrade on the Zhejiang testnet was the first of three dress rehearsals for the much anticipated Shanghai hard fork.
- The Biden Administration is quietly trying to ban crypto. Nic Carter explains in this article: Operation Choke Point 2.0 is underway, and crypto is in its crosshairs.
- The Chainalysis 2023 Crypto Crime Report is published, with topics including crypto hacking, sanctions on Hydra, Tornado Cash and the impact on the crypto crime ecosystem, and the latest crypto money laundering tactics used by cybercriminals.
- What happens to Ethereum next? The Shanghai fork (estimated for March 2023) will give individuals the ability to stop running their validators, exit the network and unlock their 32 Ether and any earned rewards. Research brief provided by Cumberland.
- The SEC-Kraken staking enforcement action: Everything you need to know, by Solidus Labs.
- Kaiko Research analyzes Hong Kong’s recent moves in: A Crypto Friendly Asia: What It Will Mean for Markets
- Dual Currency Deposit is an excellent tool for short-term speculators when price volatility is high! Earn enhanced returns on BTC, ETH, and USDT deposits.
- Tokenomy Loan is live! Pledge your crypto assets to borrow IDK in just a few clicks!
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