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French regulators are exploring the implications of decentralized finance (DeFi) and other oversight challenges posed by cryptoassets, as the country struggles to become a leader in crypto innovation.
On June 19, the Autorité des Marchés Financiers (AMF) – France’s market watchdog – released a report on DeFi that examines the challenges French regulators will face when dealing with this fast-growing component of the crypto ecosystem.
While the report does not provide an official position on how regulators in France can address DeFi, it is clear that French regulators see DeFi as a growing priority and are thinking about how to address the risks they perceive. The paper argues that events in the crypto markets during 2022 – particularly the collapse of the Terra USD stablecoin – show that DeFi markets remain immature and pose stability risks that will ultimately need to be addressed through regulatory intervention.
The report also points out that DeFi poses a financial crime risk because the protocols generally do not include the application of anti-money laundering (AML) measures, and argues that regulation should address these risks. In addition, the AMF calls in the report for global standard-setting bodies to ensure that countries address DeFi risks in a coordinated manner, given the global nature of DeFi technology.
The AMF’s report on DeFi comes just two months after the US Treasury released its own assessment of the risks of illicit DeFi financing, in which it highlighted the risks of cross-laundering money through the DeFi ecosystem. It also complements a separate consultation underway by France’s Authority for Prudential Supervision and Resolution (ACPR) which proposes to extend regulatory oversight to those exercising control over DeFi services.
As the AMF pondered the implications of DeFi, Francois Villeroy de Galhau, governor of the Banque de France – the country’s central bank – highlighted the challenges regulators face in overseeing the global crypto industry.
According to Bloomberg, Villeroy spoke at an event in Paris on June 16 and argued that regulators face a huge challenge in regulating crypto firms that operate in multiple jurisdictions – making it difficult for regulators to exercise jurisdiction over what Villeroy described as “crypto conglomerates.” In his remarks, Villeroy suggested that EU policymakers may need to continue to further update regulatory requirements to keep pace with changing developments in the industry.
The AMF and Banque de France’s deliberations on cryptocurrency challenges come as French policymakers seek to promote the country as a center for crypto innovation. In particular, France presents itself as a promising home for crypto companies looking to operate within the EU under the bloc’s Market in Crypto Assets (MiCA) Regulation.
MiCA has recently become EU law and will come into force from mid-2024 onwards. It provides the EU with a comprehensive regulatory framework for cryptoasset service providers and stablecoin issuers.
France – which has already licensed more than 80 crypto firms under its existing regulatory regime – believes it can be a welcome base for crypto innovators looking to serve the EU market under the upcoming new MiCA rules. A number of crypto firms have said that France offers an attractive base as they seek further growth, with a senior AMF official recently commenting that the country would welcome crypto firms feeling pressure from the US crackdown on crypto firms.
In a sign that France’s bid to become the EU’s crypto hub may be paying off, on June 20 CACEIS – the asset servicing arm of French bank Crédit Agricole – received approval from the AMF to operate a cryptocurrency custody service.
To learn more about the country’s regulatory regime for cryptoassets, read our guide to France.
Hong Kong will regulate stablecoins by 2024
Hong Kong’s growing reputation as a potentially promising crypto hub received another boost last week. In remarks made on June 20 at a conference he hosted South China Morning Post, Christopher Hui Ching-yu – Hong Kong’s Secretary of Financial Services and Treasury – stated that Hong Kong will aim to finalize the regulatory regime for stablecoins by 2024.
While it was already known that the Hong Kong Monetary Authority (HKMA) was consulting on a regulatory regime for issuing stablecoins, this served as confirmation from a senior policymaker that Hong Kong is committed to incorporating a comprehensive regulatory framework for cryptoassets in the near future. .
On June 1, Hong Kong’s Securities and Futures Commission (SFC) launched a new licensing regime for virtual asset trading platforms (VATPs), requiring exchanges and other services to meet strict requirements regarding consumer protection, conduct on market and prevention of financial crime.
Importantly, the new regime will allow VAPTs to offer certain retail services – a major development for a financial center that has until now barred retail access to crypto services. This new and proactive regulatory stance has led to a number of major crypto firms touting Hong Kong as an emerging crypto hub, given the relative lack of regulatory clarity in other jurisdictions.
If the HKMA does succeed in introducing comprehensive rules for issuing stablecoins by next year, it would further strengthen Hong Kong’s status as an emerging crypto hub.
To learn more about regulatory developments, be sure to register for our upcoming webinar with the SFC’s Director of Licensing and Head of Finance, Elizabeth Wong.
US law enforcement agencies form task force to combat crypto crime
Several US law enforcement agencies are working together to strengthen their ability to identify and disrupt crimes involving cryptoassets.
On June 20, the US Department of Homeland Security announced the formation of the Darknet Marketplace and Digital Currency Task Force. This interagency effort will involve the participation of five federal agencies: Homeland Security Investigations (HSI), the US Department of Justice (DoJ), the Internal Revenue Service (IRS), the Drug Enforcement Administration (DEA), and the US Postal Inspection Service.
Acknowledging that criminals are becoming increasingly sophisticated in their use of crypto-assets in money laundering and other crimes, in announcing the Task Force the agencies indicated that it is increasingly important for US law enforcement agencies to pool resources to ensure they can continue to identify and disrupt this illegal activity. According to the announcement, the Task Force will “ensure increased cooperation, improve resources, and disrupt and dismantle criminal organizations that use these new and emerging technologies.”
To learn more about evolving criminal behavior involving cryptoassets and the techniques law enforcement agencies can use to identify them, be sure to grab a copy of Elliptic’s recently released 2023 Typologies for Law Enforcement Report.
Canadian regulator warns against misleading crypto claims
Some crypto firms are brandishing fake regulatory seals of approval, according to Canada’s top securities regulator.
On June 20, the Canadian Securities Administrators (CSA) issued a warning to investors about crypto firms “claiming to be authorized or affiliated with fictitious regulatory or dispute resolution organizations”.
According to the warning, some crypto trading platforms – in an effort to appear legitimate in the eyes of investors – are putting information on their websites to suggest they are certified by Canadian regulatory agencies that do not actually exist. Some of the bogus regulatory agency names used on crypto firm websites include the Financial Standards Commission FSC Canada, the International Financial Market Supervisory Authority and the Cryptocurrency Authority.
In a warning, the CSA reminds investors to independently verify that any cryptocurrency trading platforms they use are overseen by legitimate Canadian regulatory agencies.
Deutsche Bank is seeking a license to hold cryptocurrencies in Germany
Germany’s largest bank is seeking a license to hold cryptocurrencies from the country’s regulators.
On June 20, Bloomberg reported that a Deutsche Bank official indicated in remarks at a conference that the German banking giant is applying for a license to hold cryptocurrencies with Germany’s Federal Financial Supervisory Authority (BaFin). Since January 2020, BaFin has administered the crypto custodian licensing framework, which requires crypto custodians to comply with anti-money laundering (AML) and other regulatory requirements.
This news that Deutsche Bank is laying the groundwork to enter the crypto space with the approval of German regulators is an indication that France could face competition from Germany in the race to become the EU’s primary hub for regulated crypto businesses.
DeFi Regulatory Compliance
