Digital assets research
Posted on by John Ebbert

Congressional Research Releases Digital Asset Overviews; Japan Evolves CBDC

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research #1 – crypto

Congress’ on-demand research team, Congressional Research Service (CRS), released two new papers on the digital assets industry last week. In “Cryptocurrency: Selected Policy Issues (PDF),” the 33-page tome written by Paul Tierno, a former member of the San Francisco Federal Reserve Bank (according to LinkedIn), provides extensive definitions and even-handed coverage of where policy stands today specifically on cryptocurrency.

CRS writes on page 23, “The regulation of cryptocurrency is unsettled and evolving. Currently, there is not a comprehensive framework for regulating the range of cryptocurrencies, other digital assets, and trading platforms that parallels regulation of securities or commodities. Neither Congress nor federal regulators have created new comprehensive rules specific to crypto.” Everyone on Capitol Hill may end up reading this research. It’s a good one.

You’ll also want “Crypto and Banking (PDF)” released by CRS earlier in February.

research #2 – digital assets

CRS also released a broader version of the crypto reports above called “Capital Markets: Overview and Selected Policy Issues in the 118th Congress (PDF)” with a 14-page discussion on digital assets beginning on page 41.  Topics include… “Stablecoins resemble certain investment funds. Stablecoins often have reserve asset portfolios that hold assets backing the coins’ values. Many industry observers and some regulators believe that the general mechanisms involved in creating, distributing, and redeeming stablecoins – and the means by which stablecoins aim to maintain their pegs with a reference asset – resemble similar mechanisms employed by MMFs and ETFs, which are regulated by the SEC. Some commentators have thus argued that stablecoins should be regulated as investment companies by the SEC.”

CBDC – Japan

The Bank of Japan announced on Friday that the it plans to launch a Central Bank Digital Currency pilot program in two months (April). According to analyst firm Fundstrat, “The program’s two goals are to test the technical feasibility of a digital currency and to utilize the experience of existing industry leaders for expertise in designing and implementing the potential new currency.” This is actually the third phase of a series of proof of concepts (PoCs) the Bank has undertaken since 2020.

According to the Bank of Japan, it is moving ahead cautiously, “At present, we do not assume any actual transactions to take place among retailers and consumers; only simulated transactions will be settled in the test environment. We will continue to communicate externally, with high transparency, in sharing topics including the specifics of the pilot program and updates on progress made.” Read the English-language press release.

CBDC – US

Bank of Japan’s announcement brings up the debate around a government CBDC in the U.S. versus (or including) private stablecoins such as Tether’s UST and Circle’s USDC. The primacy of the US Dollar is ultimately at stake. The Federal Reserve’s Project Hamilton CBDC project continues to test and learn on CBDCs. Other ideas involving short-term treasuries are percolating. Where to, Congress? Or, should the Federal Reserve move ahead with policy on its own?

SEC enforcement – EMAX again

Touting his NBA Hall of Fame status in the SEC press release, the Securities and Exchange Commission announced last Friday that former professional basketball player Paul Pierce can unfortunately add SEC enforcement action to his career achievements. Pierce is alleged to have touted the same token – EMAX – that got Kim Kardashian in trouble with the SEC back in October. 

According to the Commission, Pierce was caught “tweeting a screenshot of an account showing large holdings and profits without disclosing that his own personal holdings were in fact much lower than those in the screenshot” among other accusations. Pierce’s monetary penalty compares similarly to Kardashian’s: $1.4 million vs. $1.2 million for Kardashian. Read Pierce’s 9-page charge.

Apparently looking to make another example of those who make false claims in crypto, SEC Chair Gary Gensler created one of his “Office Hours” videos warning investors about some celebrities’ incentives. See it.

SEC – Peirce speaks

In an hour-long podcast with The Block’s Frank Chaparro, Republican SEC Commissioner Hester Peirce speaks across a range of pain points between the industry, the SEC and cryptocurrency regulation in the U.S. today – especially given the agenda being pursued by Chair Gary Gensler. Hear it.

    • On stablecoins – Peirce seems to tip more toward a banking regulator’s involvement rather than SEC and adds, “Congress should figure out what they want – that would be the best approach.”
    • On the risk of crypto companies not being able to work with U.S. banks – “I have a concern that if you send the message that you think that crypto is too risky to engage with, you end up concentrating activity instead of having it spread across the banking system. (…) I look at something like Staff Accounting Bulletin 121 which seemed designed, to me, to make it more difficult  got publicly listed entities to custody crypto. Why would we want to take trusted custody options off the table?”
    • On new custody rule change as it relates to crypto – “Mechanically, I don’t know how this is going to work. (…) One of the pieces that I didn’t like about the proposal is it took this stand – which the Commission has been taking – that all crypto tokens are investment securities and sort of implied what advisors are doing now is wrong. And that’s not what you’re supposed to do with a proposed rule.”

most unworkable law

Illinois is the latest state to have a new blockchain bill introduced by its state legislature. “[SB 1887] The Digital Property Protection and Law Enforcement Act” was quietly introduced on February 9 and “Provides that upon a valid request from the Attorney General or a State’s Attorney, made pursuant to the substantive or procedural laws of the State, a court may order any appropriate blockchain transaction for digital property or for the execution of a smart contract.” Huh?

Drew Hinkes, an NYU law professor, discusses the new bill on Twitter saying, “As a preface, this is a stunning reverse course for a state that was previously pro -innovation. Instead we now get possibly the most unworkable state law related to crypto and blockchain I’ve ever seen.” Read the thread.

EU crypto leverage

Industry organization DeFi Education Fund sheds light on a European Parliament draft law published on February 9 that “confirms stringent capital requirements for banks holding crypto assets. The proposed rules would mandate banks hold euro capital on par with their crypto holdings until December 30, 2024.” Bad idea? No, says DeFi Fund: “This is probably a good idea for the time being” – keep the leverage out of the financial system for the volatile asset. Read more here and here.

Krakendowns

NFT machinations

The world of collectible non-fungible tokens (NFTs) is seeing some changes as NFT incumbent marketplace OpenSea collides with up and coming Blur (geared toward traders). Fees and margins are dropping away as a result. CoinTelegraph covers the news.

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