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Regulatory and Legislative Analysis – January 2024

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Republished by Plato

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Regulatory and Legislative Analysis – January 2024

February 3, 2024

Demetrios Tseas

Regulatory and Legislative Analysis – GLOBAL

Interpol releases analysis of the Metaverse’s key challenges threats and harms

On Jan 18, Interpol released a new white paper titled: “Metaverse, a law enforcement perspective: Use cases, crime, forensics, investigation and governance.” This document provides an in-depth analysis of the Metaverse from a law enforcement perspective. Interpol notes the Metaverse holds opportunities for law enforcement (i.e. advanced simulation and virtual crime scene preservation and immersive training).  However, the document also identifies current and potential Metacrimes such as grooming[1], radicalization[2], cyber-physical attacks against critical infrastructure, theft of 3D virtual/cultural property, trespassing in private virtual spaces and robbery from an avatar[3].  Some of the challenges currently faced by investigators include: the lack of standardization and interoperability; the fact that virtual worlds span across multiple jurisdictions; the added complexity of the Metaverse being accessed across multiple devices and systems.  Police may be faced with virtual crime scenes where there is no physical evidence to be collected – just digital interactions involving virtual assets such as cryptocurrencies and non-fungible tokens (NFTs), which underlines the need to define what constitutes crimes and harms in the Metaverse, from a regulatory and law enforcement perspective.

BIS Innovation Hub announces first six projects for 2024 work programme 

On Jan 23, the BIS Innovation Hub announced the first batch of six new projects in its 2024 Innovation Hub work programme.  Three of these projects involve experimentation in next generation quantum resistance communication channels, CBDCs privacy considerations, and tokenization. Specifically:  Project Leap starts its phase II, aiming to “quantum-proof” payment systems, after successfully establishing a quantum-safe communication channel between the central banks of France and Germany in its first phase.  Project Aurum enters a new phase in which it will study the privacy of payments in retail CBDCs. The goal is to leverage expertise from academia and privacy regulators to advance central banks’ understanding of privacy in the design of CBDC systems. The recently started Project Promissa tests the feasibility of tokenizing promissory notes, financial instruments that help fund multilateral development banks and other international financial institutions.

Regulatory and Legislative Analysis – NAM (United States & Canada)

CFTC Digital Assets and Blockchain Technology Subcommittee releases DeFi report

On Jan 8, the Digital Assets and Blockchain Technology Subcommittee of the Commodity Futures Trading Commission’s (CFTC’s) Technology Advisory Committee, released a report on Decentralized Finance (DeFi).  The report highlights that DeFi presents promising opportunities and complex, significant risks to the U.S. financial system, consumers, and national security.  In the absence of effective regulation, enforcement, and compliance, many of these DeFi projects, enterprises, and ecosystems have been vulnerable to fraud, mismanagement, and serious regulatory violations, in addition to periods of extreme high market volatility, exposing investors, customers, and other stakeholders to significant losses. A central concern relating to DeFi systems is the lack of, and some industry designs to avoid, clear lines of responsibility and accountability.  The central message of this report is that both government and industry should take timely action to work together, across regulatory and other strategic initiatives, to better understand DeFi and advance its responsible and compliant development.

The U.S. SEC approves the first 11 Bitcoin ETFs

On Jan 10, the U.S. Securities and Exchange Commission (SEC) approved the first 11 spot Bitcoin Exchange-Traded Funds (ETFs), introduced by the world’s largest asset managers, approval which from a regulatory standpoint also highlights the evolving nature of cryptocurrency regulation.  The list includes: ARK21 Shares Bitcoin ETF, Bitwise Bitcoin ETF, Blackrock’s iShares Bitcoin Trust, Franklin Bitcoin ETF, Fidelity Wise Origin Bitcoin Trust, Grayscale Bitcoin Trust, Hashdex Bitcoin ETF, Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust, Valkyrie Bitcoin Fund, Wisdom Tree Bitcoin Fund.  There are two types of ETFs: Spot bitcoin ETFs that invest directly in bitcoin as the underlying asset.  The fund’s performance is derived mainly from the appreciation or depreciation in the price of bitcoin the fund holds.  Investors can invest in a spot Bitcoin ETF, without having to purchase, directly hold, or manage the underlying asset, with the actual funds (Bitcoin) actually being held and managed by a third-party custodian. Spot Bitcoin EFTs are listed and traded on NYSE Arca, Cboe BZX and Nasdaq.  Bitcoin Futures ETFs are backed by bitcoin derivatives that derive their value (speculate) from the future price of bitcoin.  Investors may purchase the right – but not the actual underlying asset – to buy or sell bitcoin at some point in the future, for a predetermined price. By purchasing the right to buy or sell, an investor expects to profit from an increase or decrease in the price of the underlying asset.  Similar to spot Bitcoin ETFs, investors can invest in Bitcoin via a Bitcoin Futures ETF without the need to purchase, hold or manage the underlying asset.  Bitcoin futures ETFs, regulated by the Commodity Futures Trading Commission (CFTC), must trade on CFTC-regulated exchanges and have been around for several years.  One day later on Jan 11, U.S. Senator Elizabeth Warren criticized the SEC as being “wrong on the law and wrong on the policy” in approving ETFs, arguing that “If the SEC is going to let crypto burrow even deeper in our financial system, then it’s more urgent than ever that crypto follow basic anti-money laundering rules”.

Genesis Global Trading settles with the NYDFS and will pay $8M

On Jan 12, the New York Department of Financial Services (NYDFS) announced a $8 million penalty against Genesis Global Trading Inc., for compliance failures after an investigation that violated DFS’s virtual currency and cybersecurity regulations and left the company vulnerable to illicit activity and cybersecurity threats. In connection with this settlement, Genesis Global Trading will surrender its New York BitLicense.

Four individuals charged for laundering millions from crypto investment scams

On Dec 14, the U.S. Department of Justice (DoJ) charged four US nationals for exfiltrating nearly $80M as part of a cryptocurrency investment scam. The individuals would open shell companies and bank accounts to launder the money they would extract from the victims lured into the schemes via dating apps, instant messaging platforms and social media. The fraudsters now face up to 20 years in prison.

Donald Trump says he will never allow the creation of a CBDC if reelected

On Jan 16, and during a campaign speech in New Hampshire, former President Donald Trump stated that “To protect Americans from government tyranny, as your President, I will never allow the creation of a central bank digital currency” if reelected. He warned that a CBDC would be a “dangerous threat to freedom” and would give the federal government “absolute control over your money”.  On the flipside the Bank of International Settlements issued a paper back in June 2023, suggesting that there could be 15 retail and 9 wholesale CBDCs publicly circulating in 2030.

U.S. Treasury and IRS announce that businesses do not have to report receipt of digital currencies above $10K as cash, until regulations are issued

On Jan 16, following a revision of the “Infrastructure Investment and Jobs Act” the Treasury Department and the Internal Revenue Service announced that U.S. businesses do not have to report the receipt of digital assets over $10K the same way as they must report the receipt of cash until Treasury and IRS issue regulations.  However, the announcement does not affect the rules in effect before the Infrastructure Investment and Jobs Act for cash received in the course of a trade or business, which must be reported on Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, within 15 days of receiving the cash.

TUSD loses its 1:1 parity, regains parity two days later

On Jan 16, TrustToken’s TrueUSD stablecoin (TUSD) reportedly lost its 1:1 parity with the US dollar, falling to $0.9688 (Jan 26), but gradually regained its parity a few days later.  This coincided with a massive sell-off of the asset on Binance. The TUSD/USDT pair on Binance saw a total sales volume of around $435.4 million in TUSD, representing a net outflow of $66.1 million, over uncertainties regarding its reserves and an instability related to a hacking incident that targeted the cryptocurrency exchange Poloniex.

Canadian judge rules freezing of trucker’s bank account unconstitutional 

On Jan 23, a Canadian federal judge ruled that the emergency law invoked by Prime Minister Justin Trudeau’s government to freeze funds, including cryptocurrencies, donated to protesting truckers was unreasonable and unconstitutional. The court found that there was no national emergency justifying the use of the Emergencies Act in response to the “Freedom Convoy” protests against COVID-19 restrictions, where truckers blocked streets in Ottawa.

Bitwise becomes the first Bitcoin ETF to publish its wallet address for anyone to verify fund balances

On Jan 24, Bitwise Asset Management published the bitcoin address of its spot Bitcoin ETF (BITB) holdings, 1CKVszDdUp4ymGceAZpGzYEFr4RPNHYqaM.  In doing so it became the first bitcoin ETF provider to do so in the US as it allows anyone to verify the fund’s balance, by using any publicly available bitcoin explorer.

Ether Spot ETF applications decisions delayed by the SEC

Following the approval of 11 spot Bitcoin Exchange-Traded Funds (ETFs) by the Securities and Exchange Commission (SEC) earlier in January, companies are moving to bring spot Ethereum (ETH) ETFs to the market. BlackRock, Grayscale, Fidelity, Invesco and VanEck are among the companies that have filed for a spot ETH ETF.  On Jan 25, the SEC announced that it is extending the 45 days period stipulated by the law, to determine its decision on BlackRock’s proposal for an Ether (ETH) spot exchange-traded fund EFT claiming the need for more time to review its decision.

Regulators in Alaska and Florida ask Binance US to discontinue its operations 

On Jan 25, the Wall Street Journal reported that regulators in Florida and Alaska have asked Binance.US to discontinue its operations and no longer serve their native residents, following former CEO Changpeng Zhao’s guilty plea.  Reportedly the Alaska Division of Banking and Securities has declined to renew Binance U.S. license. When checked (29 Jan 2024) in Alaska’s MSB licensee listing, BAM Trading Services Inc. (doing business as Binance US) license nr. 012960 appears as: “Approved Conditional”. Additionally, Florida’s Office of Financial Regulation took action by issuing an emergency suspension order against Binance US.  When checked, the Binance US website indicates that its license in Florida nr. FT230000290 expires April 30, 2024.

CFTC issues warning on AI crypto investment schemes 

On Jan 25, the Commodity Futures Trading Commission’s (CFTC) Office of Customer Education and Outreach issued a customer advisory, warning the public about Artificial Intelligence (AI) scams.  The CFTC warns against AI scams promising unrealistic returns on investments like bots and crypto schemes. Scammers exploit the hype around AI to lure victims with guaranteed profits, often through social media. To avoid falling prey, research platforms and personnel, seek trusted advice, understand risks, and be wary of online promotions. The advisory reminds all that AI can’t predict the future and high-return promises are likely red flags.

U.S. Justice Dept charges three individuals for $1.89B cryptocurrency fraud scheme

On Jan 29, the U.S. Justice Department announced charges against two individuals and the guilty plea of a third individual for orchestrating a $1.89 billion cryptocurrency scheme, for allegedly co-founding HyperFund, also known as HyperTech, HyperCapital, HyperVerse, and HyperNation.  The defendants are being charged for promising investors substantial returns paid from cryptocurrency mining operations, which did not in fact exist.

Regulatory and Legislative Analysis – EMEA

Spain’s Central Bank partners with three companies to test CBDC

 On Jan 3, Banco de España, Spain’s Central Bank, published a resolution announcing its partnership with Cecabank, Abanca, and Adhara Blockchain., to test a wholesale central bank digital currency (CBDC).  The testing of the wholesale CBDC will involve simulating the processing and settlement of interbank payments using a single tokenized wholesale CBDC and multiple wholesale CBDCs issued by different central banks, while in another part of the experiment, the wholesale CBDC will be used to settle a simulated tokenized bond.

Central Bank of Nigeria approves the launch of a Nigerian Naira stablecoin

The Africa Stablecoin Consortium (ASC), a consortium of Nigerian financial institutions, FinTech’s and blockchain experts, is set to launch a compliant Nigeria Naira (cNGN) stablecoin on February 27, 2024.  cNGN is a stablecoin pegged 1:1 to the Nigerian Naira (1 cNGN=1NGN), backed 100% by ASC’s reserves and can move easily across the blockchain.  ASC states via its website that cNGN is compliant with the regulatory requirements and standards set by the Central Bank of Nigeria (CBN), the Securities and Exchange Commission (SEC), the Nigerian Financial Intelligence Unit (NFIU), and engages with them to ensure compliance, consumer protection, and transparency.

Coinbase partners with stablecoin exchange Yellow Card to expand in Africa

On Jan 11, Coinbase announced that they are expanding access to their products in Africa, starting with 20 countries across the continent.  Coinbase’s new partnership with leading African stablecoin exchange Yellow Card will help millions of users gain access to USDC on Coinbase’s layer-2 blockchain called “Base”. Yellow Card proclaims itself as the largest and first licensed stablecoin on/off ramp in the African continent.  Operating across 20 countries, Yellow Card provide access to USDT, USDC and PYUSD via their local currency directly and through their API.  Coinbase wallet users will be able to easily send USDC without fees on any platform where they can share a link, including WhatsApp, iMessage, Telegram, popular social media apps etc.

EBA issues guidance to crypto-asset service providers to effectively manage their exposure to ML/FT risks

On Jan 16, the European Banking Authority (EBA) extended its Guidelines on Money Laundering (ML) and Terrorist Financing (TF) risk factors to crypto-asset service providers (CASPs). The new Guidelines highlight ML/TF risk factors and mitigating measures that CASPs need to consider, representing an important step forward in the EU’s fight against financial crime.  Sector specific guidance is provided on the factors that CASPs should consider when assessing ML/TF risks including transfers from/to self-hosted addresses, decentralized platforms, transfers to CASPs that are not authorized, the use of anonymity enhanced (privacy) coins, links to high-risk jurisdictions etc.  By extending the scope of the ML/TF Risk Factors Guidelines, the EBA harmonizes the approach that CASPs across the EU should adopt when implementing the risk-based approach to AML/CFT as part of their business.  The extended Guidelines will apply from 30 December 2024.

German authorities seize bitcoins worth $2B in a biggest to-date seizure in Germany

On Jan 30, the German Police announced it has seized 50,000 bitcoins, with a value of approximately $2 billion in the Eastern state of Saxony.  The Saxon State Criminal Police Office said that this may by the biggest to-date seizure of its kind in Germany.  Police said they were investigating two men, suspected of running a piracy website until the end of 2013. An investigation is still underway and no charges have yet been filed.

Regulatory and Legislative Analysis – APAC

South Korea regulator proposes ban on credit card payments for crypto

On Jan 4, Korea’s Financial Services Commission (FSC) announced its intension to partially amend its “Enforcement Decree of the Credit-Specialized Financial Business Act”.  Based on this draft, the FSC is recommending that credit card payments for crypto be prohibited, due to concerns about illegal outflow of domestic funds overseas due to card payments on overseas virtual asset exchanges, money laundering, speculation, and encouragement of speculative activities. Organizations, or individuals who wish to provide feedback on this amendment, may submit their opinions until Feb 13.

Huobi Korea will be shutting down its services on Jan 29

Huobi Korea announced it will be shutting down its services on January 29, 2024, citing a difficult “business environment” as the reason for the closure and following shut down of other South Korean exchanges such as Cashierest and Coinbit in November.

UNODC issues report finds casinos, junkets and cryptocurrency to have emerged as a critical ML piece in East and Southeast Asia

On Jan 15, The United Nations Office on Drugs and Crime (UNODC) issued a report titled: ‘Casinos, Money Laundering, Underground Banking, and Transnational Organized Crime in East and Southeast Asia: A Hidden, Accelerating Threat’.  The report highlights that illegal online casinos, e-junkets, alongside illegal or underregulated cryptocurrency exchanges have proliferated in recent years and have emerged as a critical piece of the underground banking and money laundering infrastructure in East and Southeast Asia, fueling transnational organized crime in the region.  “It’s clear that the gap between organized crime and enforcement authorities is widening quickly. If the region fails to address this criminal landscape the consequences will be seen in Southeast Asia and beyond as criminals look to reinvest profits and innovate operations,” stated Benedikt Hofmann, UNODC Deputy Regional Representative. “We trust the report will prove as a useful reference for deeper engagement between countries in Southeast Asia, UNODC, and international partners,” Hofmann said. “At this point, we are just scratching the surface.”

OKX granted VASP license by Dubai’s VARA

On Jan 16, OKX announced that is Dubai subsidiary OKX Middle East Fintech FZE was granted VASP license by the Virtual Assets Regulatory Authority (VARA) in Dubai.  The license is non-operational and remains subject to the fulfilment of specific conditions and qualifications for operational approval. Once operational, the VASP license will allow OKX Middle East to extend its approved suite of duly regulated virtual assets activities and to provide spot services and spot-pairs, to institutional and qualified retail customers via the OKX App and OKX.com exchange.

Binance Thailand now open to all eligible users

On Jan 16, Binance announced that having secured licenses to operate as a digital exchange and broker in Thailand, Gulf Binance is launching full operations of it digital asset exchange and brokerage platform, Binance TH by Gulf Binance, to all eligible users.

Hong Kong’s SFC reportedly receives it first spot Bitcoin ETF application

On Jan 26, Hong Kong’s Securities and Futures Commission (SFC) reportedly received its first spot Bitcoin ETF application by Harvest Hong Kong — one of China’s largest fund managers.

Regulatory and Legislative Analysis – LATAM

In a first of its kind, landlord and tenant sign BTC rental contract in Argentina

On Jan 15 and in a first of its kind agreement, landlord and tenant reportedly signed a BTC rental contract in Rosaria, the third most populated city in Argentina.  The monthly payment under the signed contract will be equal to $100 in Bitcoin.  Both the landlord and the tenant are presumed experienced crypto users, and will transfer the funds monthly via Fiwind a local crypto platform.

Venezuela terminates controversial Petro cryptocurrency after 5 years

On Jan 15, Venezuela reportedly ended its controversial Petro cryptocurrency.  Announced in December 2017, the Petro was a central bank digital currency created by Venezuela using blockchain technology and was supposed to be backed by the country’s oil and mineral reserves.  It was intended to supplement Venezuela’s plummeting hard bolivar currency as a means of circumventing U.S. sanctions. On August 2018, the sovereign bolivar was introduced, with the government stating it would be linked to the Petro coin.

[1] Cyber grooming is when someone (often an adult) befriends a child online and builds and emotional connection with future intentions of sexual abuse, sexual exploitation of trafficking.  Perpetrators often take on fake identities of a child of teen and approach their victims in child-friendly websites, leaving children vulnerable and unaware of the fact that they have been approached for purposes of cyber grooming.  Source: https://www.csa.gov.gh/cyber_grooming.php   In Virtual Reality, it is easy for cyber groomers to disguise their true identity and age using avatars. It is a new form of sexual harassment. 

[2] Radicalization is defined as the action or process of making someone become more radical (=extreme) in their political or religious beliefs.  Source: https://dictionary.cambridge.org/us/dictionary/english/radicalization

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