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It’s not often that the crypto industry and the traditional financial (TradFi) space are fully aligned on matters of regulatory policy, but opposition to a proposed rule by the US Securities and Exchange Commission (SEC) has recently made friends with cryptocurrencies and TradFi firms. .
In February 2023, the SEC issued a proposed rule that would impose additional requirements on investment advisers to safeguard client funds under the control of qualified custodians. Under the proposed changes, the SEC would require that all cryptoassets that an investment adviser maintains for its clients be managed by a qualified custodian – even when those cryptoassets do not necessarily qualify as securities.
Last week, crypto firms and financial institutions – the latter of which already adhere to existing rules related to the custody of client assets – submitted their responses to the SEC’s proposal, with the general consensus being that the rule is extremely flawed and needs to be refined.
In comments submitted on May 8, crypto exchange Coinbase welcomed the SEC’s use of rulemaking to address consumer protection issues, but expressed its view that the regulator should “make substantive changes to the Proposal.”
For example, Coinbase recommends that the proposed rule be amended to allow sophisticated investors to negotiate the terms of their custodial arrangements. It added that the measures should allow investors to trade smaller crypto-assets and tokens that, for various reasons, cannot be maintained qualified, creating market inefficiencies without providing any significant protection to the market.
The rule was also rejected by industry body Blockchain Association, which argued in a letter that the SEC lacked the authority to extend custody requirements to cryptoassets other than securities.
In addition to criticism from the crypto industry, the SEC’s proposal has also met with opposition from the TradFi world. One came from banking giant JPMorgan, which offered its own response to the rule.
While JPMorgan is not opposed to expanding the rules to cryptoassets, the bank is concerned that by merging efforts to improve protections in crypto markets with protections in traditional financial services markets, the SEC threatens to “fundamentally change long-standing traditional custody practices for securities and cash, and has taken too broad a approach to extend fiduciary obligations to financial transactions where this construction is not appropriate and in a way that extends the concept of fiduciary to markets where these requirements cannot be met”.
Similarly, the Securities Industry and Financial Markets Association (SIFMA), an industry body representing banks and asset management companies, responded to the SEC, expressing concern that the measures would reduce the number of qualified custodians able to provide quality custodian services to investors and would limit approaching investors with new products and services in ways it believes are disproportionate to the risks.
SIFMA’s response agrees with the Blockchain Association’s assessment that the proposed rule exceeds the SEC’s authority and calls on the SEC to provide greater flexibility for banks and other qualified custodians to offer cryptoasset services to their clients.
In particular, SIFMA calls on the SEC to amend a previous notice issued by SEC staff known as SAB 121, which states that regulatory staff expects qualified custodians to treat any cryptoassets they hold for clients as liabilities—a standard that many financial institutions see as disincentive to get involved in keeping cryptoassets. According to SIFMA, by looking so strictly at the obligations of digital asset custodians, the SEC risks discouraging banks and other qualified custodians from offering crypto custody services, which would only harm consumers.
While it remains to be seen whether the SEC will amend its proposed rule to reflect these concerns, the unique position of the crypto and TradFi sectors in calling for major rule changes shows that companies across the cryptocurrency and existing landscape believe overly restrictive regulation is harmful to both innovation and for the interests of investors.
Singapore proposes amendments to the AML/CFT requirements
The Monetary Authority of Singapore (MAS) has issued a consultation on updates regarding its anti-money laundering and counter-terrorism financing (AML/CFT) measures for crypto firms.
On May 8, MAS published its consultations related to the planned changes to the Law on Payment Transactions. The updated measures will require a wider range of digital payment token (DPT) platform operators to comply with the country’s AML/CFT laws.
From January 2020, crypto exchanges and custodians face anti-money laundering and counter-terrorism financing requirements in Singapore, but under the new measures, other types of firms, such as those involved in the transfer of cryptoassets, will have to comply with AML/CFT measures. BPFT – including compliance with the Travel Rule.
Under the PSA, DPT platform operators with a presence in multiple jurisdictions will face requirements to maintain group-wide AML/CFT policies that ensure compliance with Singapore requirements. MAS will also begin collecting data on the use of regulated firms exposed to anonymity-enhancing technologies such as mixers and privacy coins.
UK’s Bitcoin ATM Dragnet Continues
UK regulators and law enforcement have taken yet another crackdown on unregistered Bitcoin ATMs. On May 5, the UK’s Financial Conduct Authority (FCA) announced that it was working with the police to identify and inspect sites suspected of being holistically unauthorized crypto kiosks in the cities of Exeter, Sheffield and Nottingham.
The action is part of a campaign launched by the FCA since last March to detect unregistered Bitcoin ATMs. According to the FCA, no crypto kiosk has been approved to operate under the UK’s AML/CFT regime, meaning that all kiosks established in the country are operating illegally. The FCA and UK police have said that dismantling these unregistered kiosks is essential to combating fraud and money laundering.
The UK also plans to increase the capacity of tax authorities to seize cryptocurrencies
The UK also wants to tighten oversight and enforcement of crypto activities when it comes to taxation. May 10, The Telegraph reported that the UK’s tax authority, HM Revenue and Customs (HMRC), plans to issue a consultation that will include the agency using expanded powers to be able to seize crypto-assets from businesses with outstanding tax debts.
Estonia cracks down on crypto firms with weak compliance
Regulators in Estonia are putting pressure on virtual asset service providers (VASPs) operating with weak AML/CFT standards.
In a statement issued on May 8, the Estonian Financial Intelligence Unit (FIU) stated that in the past two years, approximately 400 VASPs have had their authorization to work in Estonia expire. According to it, approximately 200 VASPs withdrew from Estonia in response to the tightening of requirements under the revisions to the country’s AML/CFT laws passed in March 2022. The FIU also stated that it revoked the authorization of another 200 VASPs with weak AML / CFT standards.
Estonia has not completely closed the door on cryptocurrencies; according to the FIJ, there are still 100 VASPs with active authorizations to work in the country. However, this marks a reduction of more than 80% compared to the original number of 650 VASPs that used to work in Estonia.
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