Category: Regulation

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Bitcoin Crypto News Investing Regulation

Ukraine Has Officially Legalised Bitcoin

The Ukrainian Parliament has passed draft legislation to legalise and regulate bitcoin in Europe’s second-largest country after Russia, providing official clarity on the asset.

The bill, first drafted in 2020, passed on September 8 with 276 lawmakers in support and only six against. Its main purpose is to protect those who own and trade in bitcoin. Though never officially illegal, until now Ukrainian law enforcement agencies have treated bitcoin and other virtual currencies as “a scam”. Ukrainians could buy and exchange virtual currencies but local courts had no power to provide protection if something went wrong.

Interestingly, back in April official data showed that 652 officials in the Ukrainian government owned 46,351 bitcoin – among other cryptocurrencies such as XLM, ETH, Monero and ADA – the total value of which was around US$2.7 billion.

Bill Provides Tax Clarity But Signals More Regulation

Ukrainian courts can now properly protect individuals and businesses, since the bill provides tax clarity and officially allows bitcoin businesses to operate in the former Soviet country. It also sets guidelines for how Ukraine may try to regulate bitcoin in the future.

Although virtual assets are now legitimate in Ukraine, citizens cannot use them as a means of payment or exchange for goods or services – only the official national currency, the hryvnia, has this power. The new bill allows citizens to own and trade bitcoin and other cryptocurrencies on exchanges and also provides clarity on wallets and private keys.

Ukraine Hopes To ‘Open the Market’ by the End of the Year

The Ukrainian Parliament is expected to pass and amend its tax and civil codes before the end of the year to officially “open the market” for businesses and investors, according to Mykhailo Fedorov, Ukraine’s Minister of Digital Transformation.

Ukraine President Volodymyr Zelensky. Source: bbc.com

If signed by President Volodymyr Zelensky, the draft law will protect the owners of virtual assets and exchange platforms from fraud. Even so, experts worry that excessive regulation could stifle innovation and place undue pressure on businesses. Some crypto investors could leave the country because they do not trust state initiatives.

Those who opt to stay hope the new legislation will reduce the number of unjustified raids on crypto businesses initiated by Ukraine’s Security Services.

It’s important to note that even though bitcoin is now legal in Ukraine, it does not mean BTC is legal tender, as it officially is now in El Salvador. Another bill entirely will need to be passed for that to happen.

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DeFi Regulation

SEC Begins ‘Actively Investigating’ World’s Largest DEX

The Securities and Exchange Commission (SEC) is reportedly investigating Uniswap Labs, the parent company of the leading decentralised exchange (DEX), Uniswap. 

The SEC Wants to Regulate DeFi

The Wall Street Journal reported the news on September 3, citing “people familiar with the matter” that SEC enforcement attorneys are actively investigating how users interact with the protocol and how the DEX is marketed.

This comes after the regulatory body highlighted its interest in tapping into the crypto and the decentralised finance (DeFi) space by overseeing crypto operations and lending. 

Naturally, the crypto community has rejected the SEC’s intentions to enter what the regulatory body has called “the wild west of finance”. 

Last month, SEC chairman Gary Gensler called on US Congress to give the agency more authority to police the crypto market and oversee DeFi platforms, which, unlike centralised exchanges, are not regulated in the US.

A Uniswap Lab spokesperson told WSJ that the company is “committed to complying with the laws and regulations governing our industry and to provide information to regulators that will assist them with any inquiry”.

Uniswap Removes 100 Tokens – Afraid of Regulatory Pressure

It should be noted that the SEC’s probe into Uniswap comes shortly after the DEX removed 100 tokens – including synthetic tokens, options and indexes – from the main user interface at the end of July, citing “regulatory pressure” as a major influence on the decision, something that had the crypto community questioning Uniswap’s decentralised system.

Uniswap currently accounts for the entire Ethereum-based DEX trade volume, with over US$10 billion in tokens swapped in the past week as per Dune Analytics data.

Requests for information have a high cost, and the SEC is tapping into the DeFi space by gathering information from one of the biggest DEXs. As pointed out by ShapeShift founder and CEO Erik Voorhees:

It should be highlighted that when a regulator ‘gathers information’ it means millions of dollars in legal costs and millions more in lost productivity is incurred by the target. When no wrongdoing is found, the regulator doesn’t reimburse for its transgression, nor even [does it] offer apology.

Erik Voorhees, CEO/founder, ShapeShift [Twitter]

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Crypto News DeFi Regulation

SEC Quietly Signs a Deal to Spy on Crypto DeFi Transactions

Without fanfare, the US Securities and Exchange Commission has contracted a Californian blockchain analytics firm to help monitor and regulate the DeFi industry.

The contracted firm is AnChain.AI, a San Jose-based blockchain startup that focuses on tracking illicit activity across crypto exchanges, DeFi protocols and traditional financial institutions. The initial value of the contract is US$125,000, with five one-year US$125,000 options totalling US$625,000.

Moving Away From ‘Post-Incident Investigations’ to ‘Preventive’

Apart from monitoring known crypto wallets tied to hackers and bad actors in general, AnChain.AI’s predictive engine claims to identify unknown addresses and transactions that could be suspicious. This allows the firm to warn of impending risks rather than address those after the fact, a feature that dovetails with the SEC’s interests.

The SEC is very keen on understanding what is happening in the world of smart contract-based digital assets … so we are providing them with technology to analyse and trace smart contracts.

Victor Fang, AnChain.AI CEO and co-founder
SEC chairman Gary Gensler. Source: CNBC

The alliance is seen as part of a broader move towards regulating the crypto sector. SEC chairman Gary Gensler has already likened DeFi operators to “promoters” and “sponsors” who are involved in both creating and marketing their projects to the masses.

“There’s still a core group of folks that are not only writing the software, like the open-source software, but they often have governance and fees … There’s some incentive structure for those promoters and sponsors in the middle of this,” Gensler said a month ago.

Around the same time, Gensler let slip that he viewed the crypto field as being filled with “a lot of hype masquerading as reality”, adding that “Nakamoto’s innovation is real”.

Frankly, at this time [the crypto space] is more like the Wild West.

Gary Gensler, SEC chairman

Gensler’s comments are a long way from the ethos of DeFi, whose proponents envision a wholly decentralised, multi-trillion-dollar financial ecosystem where smart contracts handle payments, loans, exchanges, tradings and other services, where no physical or identification barriers exist.

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Crypto News Cryptocurrency Law Cryptocurrency Tax Regulation

Crypto Enthusiasts Purchase Billboard Attacking US Senator

Republican Senator Richard Shelby has a new billboard dedicated to him in his home state of Alabama, though it’s not the kind he might have wanted. Shelby upset the US crypto community regarding his proposed revision to an important infrastructure bill in the House of Representatives earlier this month and has been publicly pilloried as a result.


Senator Richard Shelby. Source: NY Post

Non-profit organisation Fight for the Future, which champions digital rights and ethics, is behind the billboard “crediting” Shelby for his lone vote against revising damaging crypto regulation contained within the new US$1.2 billion infrastructure bill.

Shelby Holds Out on Otherwise Unanimous Vote

The section in the potentially harmful bill required a unanimous vote to be revised, but Shelby’s objection prevented the amendment to the cryptocurrency tax provision.

In a House voting session, Shelby opposed two amendments to the bill, requesting an additional US$50 billion in defence spending before he would endorse it.

Shelby later tweeted that he supported the amendment in principle but chose to prioritise the country’s security over innovation.

Amendments Have Not Been Made

As a result, the infrastructure bill passed the Senate with its original language, which captures the wider industry with its broad definition of the term “broker”. A last effort was made to amend the language, but Democrats in the House delivered another blow to the cryptocurrency community’s lobbying efforts last week by voting not to include any amendments to the legislation.

However, according to a Bloomberg report, the US Treasury is not going to target miners, stakers, software developers and hardware manufacturers.

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Banking Blockchain Crypto News Regulation

Tezos Soars 29% in a Day Amid Adoption by Swiss Banking Giants

The value of open-source blockchain platform Tezos surged 29 percent in 24 hours after it was chosen by a Swiss banking consortium to develop regulatory-compliant digital financial products.

Tezos Price Analysis chart. Source: TradingView

Incore Bank, a business-to-business transaction bank based in Zurich, is collaborating with two other Swiss entities – IT company Inacta and fintech specialist Crypto Finance Group – to power smart contracts for a range of on-chain digital financial products and use cases.

Along with Tezos, the three companies have launched a new standard for tokens called DAR-1, allowing smart contracts to help comply with anti-money laundering regulations, handle governance and support asset management activities.

Assets to be Issued in DAR-1 via Tezos Later This Year

Developed by Inacta, DAR-1 is based on Tezos FA2, a token contract interface for single and multi-token smart contracts. Incore and Inacta intend to begin issuing assets in the DAR-1 tokenisation standard via the Tezos network later this year.

In conjunction with Crypto Finance Group, Incore has announced a new range of services that include institutional-grade storage, staking, and trading services for Tez (XTZ), the native token of the Tezos blockchain.

This [three-way collaboration] is a tangible example of how FA2 on Tezos broadens the potential for tokenisation significantly. The launch of these Tezos use cases for the financial sector make innovative, compliant on-chain financial products a reality today.

Stijn Vander Straeten, CEO of Storage Infrastructure, Crypto Finance Group

Under the deal with Tezos, Incore Bank will also offer staking for its clients’ assets directly via e-banking. The Tezos platform has the necessary security to protect assets and other high-value use cases at the protocol and application layers, ideally suiting it to applications in banking.

This is not the first time Tezos has been targeted by major players in the banking industry. Last year, French bank Société Générale issued its official security token using the Tezos blockchain.

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Crypto News Regulation Ripple

SEC vs Ripple Lawsuit: SEC Accused of Erasing XRP Documents

In a sensational development pertaining to its case against Ripple in the US Federal Court, the Securities and Exchange Commission (SEC) has been accused of “deleting” material relevant to Ripple’s lawsuit.

Ripple’s action is in response to SEC allegations that it raised over US$1 billion from the sale of unregistered digital asset securities including XRP, Ripple’s payment protocol.

Former SEC Corporate Finance Director Warned Ripple to Cease and Desist

The erasure accusation made by Ripple relates to a deposition transcript by William Hinman, SEC’s former corporate finance director, in which Hinman said he met with Ripple representatives and told them he considered Ripple’s sales of XRP to be sales of securities, and that Ripple should stop its unregistered sales.

Lawyers for Ripple claim the transcript seems to indicate that the SEC tried to delete material directly related to Hinman’s testimony. Reid Figel, for Ripple, pointed the finger at SEC Special Counsel Michael Seaman.

“In our review of the metadata, it says ‘deleted by Michael Seaman’,” Figel alleged.

SEC lead counsel Jorge Tenreiro then asked Hinman if he directed Seaman to delete the material, and whether he remembered doing so. Hinman replied: “I don’t recall directing him to do that.”

Much of the deleted portion of the SEC document was Hinman’s answer to the question: “Other than the issues with respect to Ripple, can you identify any other lawyers that came to you … seeking guidance with respect to transactions in digital assets?”

His response was colourful, to say the least:

You call 10 different law firms, they’ll give you 10 different answers, and each of them has their own particular spin. It’s like the white light of your speech went through a prism and came out in 10 different shades of legal advice.

William Hinman, former corporate finance director, SEC

Ripple Refuses to Hand Over Internal Slack Messages

This followed earlier testimony in the case where Ripple explained to Judge Sarah Netburn why it refuses to hand over internal Slack messages and other communications to the SEC.

The SEC’s extraordinary demand calls for an extensive and costly fishing expedition that would likely take months to complete and come at very significant cost. [We’re talking] over one million pages of discovery, including emails, documents, text messages, and responsive Slack messages [involving] 33 custodians.

Ripple’s letter to Judge Sarah Netburn, SEC vs Ripple

The SEC vs Ripple lawsuit is likely to present regular updates throughout the rest of the month up until August 31, the deadline for fact discovery.

Ripple’s legal team continues to insist that it falls outside of the SEC’s charter and that the federal case is “dead wrong”. Whatever the outcome, the market is betting that Ripple will prevail and its management team will press ahead with a public offering to raise its profile and a significant pool of funds. 

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Crypto News Cryptocurrency Tax Regulation

Lawmaker Makes Last-Ditch Attempt to Save Crypto from $1.2 Trillion US Infrastructure Bill

With the massive US$1.2 trillion American infrastructure bill reaching its next stage, a last-ditch effort is being made to change some potentially damaging wording contained within the bill. If the bill is passed as is, it may have some negative ramifications for the American crypto industry.

In a letter to House of Representatives Speaker Nancy Pelosi, Democrat Anna Eshoo calls once again for an amendment to the bipartisan infrastructure bill that aims to implement possibly damaging regulations to the cryptocurrency industry.

The August 12 letter urges Pelosi to amend “the problematic broker definition” in the Senate-passed bill that now faces the lower chamber.

According to a leadership aide, the final language in the infrastructure bill will be reviewed. After the first attempt to amend the language fell short by one vote, Eshoo urged Pelosi to reconsider the wording.

According to the cryptocurrency groups and digital rights groups that combined to lobby for an amendment in the Senate, they will be taking the fight to the House after failing to secure changes in the upper chamber.

Reporting Could Be Used as Financial Surveillance

The infrastructure bill contains a provision that aims to implement additional reporting requirements for the crypto industry to help raise tax revenue for the trillion-dollar infrastructure bill. The requirements could raise US$28 billion over 10 years, according to the Joint Committee on Taxation.

The bill will be looked at again at the end of the month after the House returns from recess. According to Jake Chervinsky, general counsel for Compound Labs, “the good news is the language doesn’t take effect until 2023. In fact, it doesn’t require any new reporting until after December 31 of 2023, meaning reports filed in 2024 will have to include transactions that are subject to the provision from fiscal year 2023.”

Ultimately, Chervinsky believes the bill might contain some “Fourth Amendment concerns”. With the government being allowed to use such a broad range of private actors to take part in financial reporting of American citizens and companies, there are worries about possible surveillance issues if government were to obtain this information.

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Crypto News Cryptocurrency Law Regulation

US Amendment Has Far-Reaching Implications for the Crypto Industry

A hotly debated US$1 trillion infrastructure bill has been passed by the Senate, which may have some problematic repercussions for the American and wider crypto community.

Cryptocurrency took centre-stage in US Congress on August 10 when the massive infrastructure bill was discussed. One section of the bill aims to generate tax revenue and customer information from cryptocurrency brokers, which in its current definition looks at taxing everyone who plays a part in a crypto transaction.

Advocates for the crypto industry pushed back on the provision, leading to lawmakers introducing amendments in an attempt to modify the language. Republican Senators Pat Toomey and colleagues proposed explicitly defining which types of entities are brokers, while a competing amendment introduced by Senators Rob Portman (Republican) and Democrats Mark Warner and Kyrsten Sinema proposed a more narrow modification that only exempted Proof-of-Work (PoW) miners.

A Problematic Definition

The bill drew controversy due to its plan to collect US$28 billion in tax revenue from the crypto sector. One of the main problems crypto advocates have with the bill is its definition of “broker”, currently defined as anyone who facilitates a transaction.

According to legal experts, this term may be broadened to encompass PoW miners, Proof-of-Stake (PoS) validators, and even protocol creators, affecting nearly everyone in the crypto ecosystem.

Additionally, brokers will be required to go through Know Your Customer (KYC) processes and follow rigorous tax reporting standards under the new laws.

The overly broad definition will hurt blockchain innovation, may possibly cost jobs, and most importantly will endanger the privacy of many American users. Senators have been urged to take a step back and implement incremental regulations, as many of them don’t yet understand what they are trying to regulate.

Banks Don’t Like Crypto

In a failed last effort to get the amendment passed, Republican Senator Richard Shelby objected to the provision after his effort to add a military funding amendment was blocked by Democrat Senator Bernie Sanders. The vote fell short by one.

Following the rejection of the amendment, Charles Hoskinson, founder of Cardano (ADA), stated that “it was a really tense moment, listening to senators speaking [about] how badly this bill can damage the crypto industry. I have no intention of living in a dying empire.”

Senator Shelby also has connections to banks in the US, with Citadel and others showing up as some of the biggest donors to his previous campaigns.

Richard Shelby campaign ‘contributions‘ in 2016

The infrastructure bill represents the first time that crypto has entered the highest echelons of political discourse in the US. Instead of pushing quiet legislation through, this crypto provision gave the industry an unprecedented platform and relevance in the eyes of lawmakers.

The bill now moves to the House for further deliberation, though it is unclear how much room there will be for modifications once it gets there.

The Potential Impact on Australia

Landmark regulatory standards and legislation are very important in the expanding crypto industry. New legislation created by frontrunner countries has the potential to set a precedent that could be followed by other countries also developing their own legislation.

The passing of this bill has various knock-on effects, not only in the legislative environment but for new crypto start-ups and innovators in the US, stifling growth of one of the sector’s major players. If the industry takes a hit like this, it could spell danger for ongoing innovation in the crypto space.

The decision may also hurt the market value of some projects based in the US, in turn having an effect on overseas investors.

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Australia Investing Markets Regulation

What is Delaying the Aussie Crypto ETF?

One of the final pieces of the cryptocurrency ETF puzzle is deciding how the arrangements with custodians will work. To that end, the Australian Securities and Investments Commission (ASIC) is in the final stages of consultation to decide if a crypto ETF will be traded locally.

This year, ASIC is expected to finalise its market consultation on the potential for digital currency ETFs for the Australian market. While it is still in discussion with relevant stakeholders, a few more creases need to be ironed out.

However, earlier in the year, it was reported that the Aussie crypto ETF could launch on the ASX in 2021.

Australian Securities and Investments Commission (ASIC).

Issues Still to be Finalised

Custodianship is an issue. According to Caroline Bowler, CEO of digital currency exchange BTC Markets, “The trend is for ETFs to physically hold the underlying digital currencies they reference. This raises the question of how custody of these assets would be managed.”

As it stands, there isn’t a suitable onshore custodial solution. So that’s something that needs to be worked out with custodial providers.

Caroline Bowler, BTC Markets

The current lack of relevant regulation and standards for custodians and exchanges is casting a shadow of uncertainty. Standards still need to be set and a regulatory body chosen to ensure the protection of investors.

The composition of crypto ETFs and their benchmark reference are also issues to be considered before local crypto ETFs can be traded.

But as ASIC recently noted as part of its consultation on crypto-asset-based ETPs and other investment products, there is real risk of harm to consumers if these products are not developed and operated properly, given the unique features and risks associated with them.

Alex Vynokur, CEO, BetaShares

It remains to be decided which method of ETF will work the best for the market, considering the needs of investors and their security and safety. With many Australian millennials planning on retiring at 50 with the help of crypto and ETFs, it’s obvious that there is a demand.

Different Kinds of ETFs

Depending on which products investors prefer, both active and passively managed ETFs could be traded.

A passive ETF is an investment that replicates the performance of the asset it references, and the portfolio is updated regularly (generally quarterly) to reflect changes in the reference index – for instance, the S&P/ASX 200.

On the other hand, actively managed ETFs invest in assets that are bought and sold by a portfolio manager on a more dynamic basis, depending on the manager’s view of the market and investment thesis.

Another model might be for an ETF to hold not just digital currencies but also companies whose products are built on distributed ledger technology, digital currency exchanges, and other listed and unlisted firms that are exposed to blockchain through their operations. This could be similar to a basket investment like ‘FAANG’, where investors can invest in a basket of industry leaders.

To successfully launch a crypto ETF in Australia, an issuer will need to show evidence that the underlying crypto asset has robust liquidity, transparency and price discovery, which we believe will only apply to a small subset of crypto assets.

Alex Vynokur, BetaShares

ETFs Provide Safety for Investors

Some of the risks associated with investing in the digital asset class may be mitigated by accessing digital currencies through an ETF, traded through a highly regulated environment such as a national stock market.

Fund managers who seek to offer such investment products should be required to demonstrate a track record of risk management and organisational competency in managing retail investment products.

Alex Vynokur, BetaShares
Categories
Crypto News DeFi Regulation

No Moons for Traders As DeFi Company “DMM DAO” is Shut Down By SEC

The operators of DeFi Money Market (DMM) have consented to a cease and desist order by the US Securities and Exchange Commission (SEC). They were charged by the SEC for misleading investors and also issuing US$30 million worth of unregistered securities through the decentralised platform. This is the first time the SEC has charged an entity for securities fraud involving DeFi technology. 

DMM Execs Sold $30 Million in Unregistered Securities

The two DMM executives – Gregory Keough and Derek Acree – and their company Blockchain Credit Partners were alleged to have misled investors about the operations and profitability of DeFi Money Market. 

Between February 2020 and February 2021, the three entities sold about US$30 million worth of unregistered securities to investors. Using smart contract technology, they issued the so-called mTokens and DMG tokens, which also served as the governance token of the protocol. 

The executives claimed they would use investors’ assets exchanged for mTokens to invest in real-world assets such as car loans. As such, the investors were promised a 6.25 percent return on their assets. However, DMM couldn’t deliver on this promise due to the volatility of the digital assets exchanged for the DMM tokens.

The price volatility of the digital assets used to purchase the tokens created risk that the income [raised] through income-generating assets would be insufficient to cover appreciation of investors’ principal.

SEC statement

SEC Orders DMM Executives to Disgorge Over $12 Million

Besides presenting false “car loans” to the investors, the DMM execs used their personal funds and those of Blockchain Credit Partners to pay interest to the investors. 

Full and honest disclosure remains the cornerstone of our securities laws – no matter what technologies are used to offer and sell those securities. This allows investors to make informed decisions and prevents issuers from misleading the public about business operations.

Gurbir S. Grewal, director, SEC enforcement division 

Without admitting or denying the SEC’s order, the execs agreed to cease and desist from continuing DMM business. Although DMM investors can redeem their mTokens, the SEC also ordered Keough and Acree to disgorge US$12,849,354 and imposed penalties of US$125,000 each. 

The DeFi industry has had little or no regulatory attention until now. However, over recent days, people have assumed it would come following recent changes and frequent cases of rugpulls. As recently as June 21, billionaire Mark Cuban called for the regulation of the DeFi space following the crash of the TITAN token.