Europe Trip
Posted on by John Ebbert

Congressional Staff To Research EU Digital Asset Regs; Terraform Labs Charged

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regulation is global – EU trip

Politico reports a bipartisan delegation including staffers from the offices of congressional committee leaders Rep. Patrick McHenry (R, NC), Sen. John Boozman (R, AR) and Sen. Sherrod Brown’s (D, OH) will be heading to Brussels and Paris for digital asset regulation consultations with European Commission “bigwigs and industry representatives.” Read more (subscription).

Understanding how the EU put together its recent digital assets legislation such as MiCA will likely be on the list. Unspoken is the tension of the US maintaining the Dollar as the world’s reserve currency while the EU is moving ahead with digital asset benefits that hopefully accrue to the Euro.

Politico’s Bjarke Smith-Meyer tweets that European Union’s ambassador in DC “helped organize the trip, as they have done before, which usually focuses on specific policy issues. This time it’s all about [crypto] (and a crash course in how the [EU] legislative machine works)”.

Tip: Bipartisanship is back? Having representatives of House Financial Services Chair McHenry (R) and Senate Banking Chair Brown (D) together on the same trip is a step in the direction of bicameral possibilities.

enforcement is global – Terraform Labs

In spite of the fact the company controlling the algorithmic stablecoin TerraUSD was based outside of the United States, yesterday the Securities and Exchange Commission (SEC) charged Singapore-based Terraform Labs PTE Ltd and its founder Do Kwon with “orchestrating a multi-billion dollar crypto asset securities fraud involving an algorithmic stablecoin and other crypto asset securities.” Read the release.

The TerraUSD stablecoin once had a market cap of over $18 billion and then imploded in May 2022 sending rippling effects throughout the digital asset ecosystem. Terra Forma had been rumored to be under investigation by the SEC since at least last June.

SEC Chair Gary Gensler breaks down the charges in two parts in the release:

    • “Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for LUNA and Terra USD,”
    • “They committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”

stablecoins are a security?

It’s notable that Chair Gensler is identifying the TerraUSD stablecoin as a “security.” This echoes his September 2022 comments that stablecoins fall under his agency’s jurisdiction. Gensler said at the time, “Stablecoins have features similar to, and potentially competing with, money market funds, other securities, and bank deposits, and raise important policy issues.” He added, “Other stablecoins, so-called algorithmic stablecoins, are not backed fully by fiat moneys and bear heightened risks related to whatever mechanisms are used purportedly to maintain a stable value.”

Tip: What is a stablecoin?

regulation is global – DeFi

The Financial Stability Board, an international body, has released a new report on DeFi (decentralized finance) in advance of the G20 summit of finance ministers in India. The findings appear to be a mixed bag, “(While) the processes to provide services are in many cases novel, DeFi does not differ substantially from traditional finance in the functions it performs or the vulnerabilities to which it is exposed. (…) The fact that crypto-assets underpinning much of DeFi lack inherent value and are highly volatile magnifies the impact of these vulnerabilities when they materialise, as recent incidents demonstrate.” Read the release. And then, download the 49-page report (PDF).

The FSB said that it expects to publish its final “crypto-asset regulatory framework” in July 2023. The proposal from last October is here.

Tip: What is DeFi?

regulation is global – industry

Global Blockchain Business Council (GBBC) announced that it has joined The International Organization of Securities Commissions (IOSCO) as an affiliate member. Lawrence Wintermeyer of GBBC Digital Finance says, “We will work with IOSCO to best engage our members in 2023 in providing any assistance we can to the two IOSCO Crypto-Asset Roadmap working groups, Crypto and Digital Assets (CDA) and Decentralised Finance (DeFi).” Read the release. CoinDesk notes that IOSCO has been increasing its digital assets focus. Read that one.

Other affiliates of the international body for securities regulators include FINRA, National Futures Association and Securities Investor Protection Corporation. See affiliate list.

SEC custody rule change – Republicans

Republicans expressed their displeasure with yesterday’s proposed custody rule change by the SEC.  House Financial Services Chair Patrick McHenry (R, NC) tweeted, “Yesterday’s [SEC] action on qualified custodians is clearly part of the Biden Administration’s attack on the digital asset ecosystem. Let me be clear: the future of the digital assets is a major political and economic question that must be decided by Congress.” 

The Twitter account for GOP’s House Financial Services was active, too, saying in part: “Once again, [SEC Chair Gary Gensler] is attempting to unilaterally expand the SEC’s authority beyond that granted to the Commission by Congress.” Read the thread which linked to Republican SEC Commissioner Hester Peirce’s dissenting opinion.

SEC custody rule change – reasonable

CEO Caitlin Long of Custodia Bank, a Wyoming-based digital assets bank that has been battling with the Federal Reserve about membership, chimes in on Wednesday’s custody rule change announcement by the SEC: “It’s generally a good outcome for investors–qualified custodians must not only be able to segregate customer assets, but also to ensure those assets remain segregated in the event of insolvency. This is a reasonable policy goal & the SEC is not wrong to pursue it.” Read the nuanced thread on Twitter.

legislation in the states

Like some states, Wyoming is not waiting for federal digital assets regulation.  The latest Wyoming legislation prevents a person’s private keys from being divulged (see it – “Disclosure of private cryptographic keys“). It’s passed the state’s House and Senate. Next stop is the Governor.

There is also the “Wyoming digital asset registration act” awaiting passage according to the Wyoming Blockchan Coalition which says the bill enables registration of digital assets in the state.

long memory of the regulator

Yesterday, the Commodity Futures Trading Commission (CFTC) announced an enforcement action against Vista Network Technologies, a California-based company, and CEO Armen Temurian for alleged “fraudulent solicitation and misappropriation of customers’ digital asset commodities” five years ago.

“[From] approximately September 2017 through January 2018, the defendants falsely advertised to customers that Vista would trade their digital assets and earn a 2.5% daily return or ‘double in just 80 days.'” Read the CFTC release. And, here is the complaint (PDF).

CFTC Commissioner Kristin Johnson let it be known that she agreed with the action in a statement of her own.

opinion – the human regulator

A former Paxos executive and current Columbia Business School professor, Austin Campbell, chides the crypto throngs for lacking awareness of the predicament of the human who is the regulator. “Regulators have virtually no personal upside for allowing innovation, for championing transformation and the improvement of financial systems in terms of access, quality, and reliability (so long as the baseline system functions already, even if poorly), and certainly don’t get bonus points for making hard decisions in the face of pressure that yield long-term benefits.” Also -any discussion with a regulator begins with a consumer protection “hat” on. Also –there’s much, much more.

Krakendown

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