CFTC Issues Digital Assets Derivatives Advisory; Treasury Researchers On Digital Assets

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CFTC advisory

In a “staff advisory” to Derivatives Clearing Organization (DCO) registrants and applicants, the Commodity Futures Trading Commission (CFTC) issued a reminder of the risks it said were inherent with digital assets derivatives including cyber, conflict of interest and physical delivery. Read the advisory (PDF). And, see the abbreviated press release.

This advisory rings as similar in tone to the advisory to banks in January by the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC): beware of the unregulated that lurks beneath. CoinDesk’s Jesse Hamilton suggests “sanctions” may be ahead for some companies if history is any indication. Read that one.

CFTC advisory – rulemaking

CFTC Commissioner Kristin Johnson will not be denied. In a follow up to the CFTC digital assets advisory to DCOs yesterday, she issued a lengthy statement of her own saying that it was finally time for rulemaking (adding that she has tried in the past, but to no avail.)  Read the statement.

Johnson says that rules should address 4 areas: “(1) Conflicts of interest arising from vertical integration of activities and functions; (2) Custody and client asset protection; (3) Operational and technological risk, specifically cyber-risks; and (4) Market manipulation and fraud.”

This would also appear to be the domain of Congressional legislation. But, the Commissioner is feeling urgency here – as outlined in her statement– and the CFTC’s mission is clear: “… promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.”

“Now is the time..” concludes Johnson. Rulemaking proposal with comment period to come?

was markup, now hearing

On June 13, House Financial Services (HFS) Committee with have a digital assets hearing with crypto “but is not scheduled to have a markup on crypto bills that Chair Patrick McHenry (R, NC) is trying to advance this summer,” reports Politico. Many of the big names across financial regulators (Yellen, Powell, Chopra) will be appearing in June in front of HFS. Read more.

Digital Chamber’s Cody Carbone lays out the June HFS schedule in a tweet here. The June 7 National Security Subcommittee “Dollar Global Dominance” hearing looks intriguing.

Treasury on digital assets

In a research paper published on the U.S. Treasury’s Office of Financial Research (OFR) website titled, “An Early Look into Digital-Assets Regulatory Data,” by OFR economist Francisco Ilabaca and OFR analyst Vy Nguyen finds a high degree of concentration among digital asset intermediaries.  Data for the study is pulled from the “Nationwide Multistate Licensing System & Registry (NMLS) Money Services Businesses (MSB) Call Report data,” according to the researchers. Read a blog post on OFR’s website.

Download the paper (PDF).

Ilabaca and Nguyen write in the brief, “We find a high degree of market concentration, with major intermediaries not only accounting for the majority of transaction volumes but also holding the largest amounts of customers’ digital assets. Finally, we identify significant data gaps that remain with respect to the oversight of these digital-asset intermediaries and the financial-stability risks that may emerge from them.”

Another way of looking at this (not the authors’ POV) could be: if the regulated financial system was able to easily hold/buy/sell digital assets, the data gaps might be reduced or eliminated.

Rep. Soto’s timetable

Appearing on the Thinking Crypto podcast, Rep. Darren Soto (D, FL), a pro-digital assets Democrat, discussed a range of topics including expectations for passage of comprehensive digital assets legislation that protects consumers and promotes innovation. Rep. Soto offers, “My hope is that we can at least get some regulatory clarity in some of these ‘singles’ and ‘doubles’ type bills – like the Securities Clarity Act  – in the next 2-4 years.” Hear more on Apple Podcasts.

Soto co-sponsored Majority Whip Rep. Tom Emmer’s (R, MN) re-introduction of the Securities Clarity Act two weeks ago.

PayPal and stablecoins

Jose Fernandez da Ponte, head of payment company PayPal’s blockchain team, tells Axios that his company wants to be a conduit between the and the “fiat and web3 world.” Furthermore, he believes stablecoins will have their place in this calculus but need to think more about settlement rather than just payment. Fernandez da Ponte offers as an example, “I bought something from you, but it’s not what I asked for – a merchant needs to be able to reconcile that and to connect that to [their] financial systems.” Read more.

anything but rubles

The Wall Street Journal says that Russian nationals have been trying to get their money out of Russia and beyond the reach of growing, global sanctions brought on by the country’s invasion of Ukraine. “Cryptocurrencies, which operate mostly outside the regulated banking system, have also emerged as a method of capital flight. Gregory Shevchenko, a marketing entrepreneur in Moscow, needed to pay for a business license in the United Arab Emirates. He paid the equivalent of $8,000 in rubles to lawyers in Moscow, who said they used crypto to make the cross-border payments,” says The WSJ. Read more.

get compliant

U.S. companies recently registered by the Securities and Exchange Commission (SEC) continue to charge that Coinbase is in the wrong and needs to get registered, too.

On the Unchained podcast, Laura Shin tweeted yesterday about a recent podcast, “After securing key approvals to trade digital asset securities, [Prometheum] and [Bosonic Digital] say big players like Coinbase should quit carping in the court of public opinion and ‘get compliant.'” Hear “These 2 Crypto Trading Platforms Agree With SEC Chair Gary Gensler”.

On its Twitter profile, Prometheum describes itself as “Building the world’s first SEC And FINRA registered, full-service market for digital asset securities – issuance, trading, clearing, settlement and custody.” On Crunchbase, listed investors include those from Hong Kong and China.

Bosonic Digital describes itself as “Eliminating counterparty credit & settlement risk w/ custodian and liquidity agnostic infrastructure for institutions & fiduciaries trading Digital Assets” on its Twitter profile. On Crunchbase, investors include Canada-based DMG Blockchain Solutions.

more tips:

This appears to be a bare-knuckle version of “regulatory arbitrage” where compliant companies try to win away the business of incumbents running afoul of local regulators.

insider trading settlement

The SEC announced that former Coinbase manager, Ishan Wahi, and his brother, Nikhil Wahi,  agreed to settle their insider trading charges where they traded “ahead of multiple announcements regarding at least nine crypto asset securities that would be made available for trading on the Coinbase platform.”

Ishan Wahi was sentenced to 2 years in prison and ordered to “forfeit 10.97 ether  (< $21,000 USD) and 9,440 Tether ($9,440 USD) , and Nikhil was sentenced to 10 months in prison and ordered to forfeit $892,500.” Read the release.

Ishan Wahi also agreed to help the SEC with future investigations. Read more in The Block.

more tips:

In a Twitter thread, Paradigm counsel Rodrigo Seira said of the Wahi decision, “…the SEC completely folded when faced with a spirited defense pushing back on their claims that tokens trading in secondary markets were securities.”

still more tips

Winklevoss Twins Attempt Pivot After Gemini Loses Money and Employees – Bloomberg

Opinion: Don’t Count the Metaverse Out – The Information

Sam Bankman-Fried Could Have Some Charges Dropped if Bahamas Objects – The Wall Street Journal

European fintechs among top “founder factories” in the region – Axios

Sources: Binance discusses letting institutional clients use bank deposits as collateral for margin trading and reducing counterparty risk – Bloomberg

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