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As the story surrounding the dramatic collapse of the FTX crypto exchange entered its second week, regulators and policymakers signaled their intent to step up oversight of the crypto industry.
On November 16, US Treasury Secretary Janet Yellen issued a statement warning that US regulators are poised to intervene more aggressively in crypto markets to address perceived risks.
She said: “The recent failure of a major cryptocurrency exchange and the resulting unfortunate impact on cryptocurrency owners and investors demonstrates the need for more effective oversight of the cryptocurrency market […] hoarding of customer assets, lack of transparency and conflicts of interest have been at the heart of the crypto market stresses seen over the past week. Going forward, it is vital that we do what is necessary to address these risks and act to protect consumers and promote financial stability.”
Yellen made the comments after the political leaders of the Group of Twenty (G20) countries issued a joint statement following their autumn meeting in Bali. In it, they pledged “to ensure that the crypto-asset ecosystem – including so-called stablecoins – is closely monitored and subject to strong regulation, supervision and oversight to mitigate potential risks to financial stability”.
Amid these calls for increased oversight, the Financial Industry Regulatory Authority (FINRA) – the self-regulatory investment brokerage body registered with the US Securities and Exchange Commission (SEC) – has announced steps to increase scrutiny of consumer protection practices in cryptocurrencies.
All registered brokers will have to provide FINRA with details of their communications between July and September 2022 with retail investors about cryptocurrency-related products and services and will need to be able to demonstrate that those communications were formally registered and compliant with FINRA’s consumer. -protection standards. The agency’s research reflects concerns — as Yellen emphasized — that the collapse of FTX exposed significant risks to consumers in the crypto markets.
Meanwhile, reports have surfaced that members of the US House Financial Services Committee plan to hold hearings on the FTX collapse as Congress continues to debate legislation to strengthen the US regulatory framework for cryptocurrencies – including stablecoins. Another congressional committee demanded that FTX turn over documents so lawmakers could investigate the causes of its demise.
Calls for regulatory action have echoed elsewhere around the world. In Great Britain, dr. Lisa Cameron – Member of Parliament and Chair of the All Party Parliamentary Group (APPG) on Crypto and Digital Assets – has called on the UK government to step up regulatory oversight of crypto markets.
She said: “The events surrounding the crypto exchange FTX are concerning and highlight the need for urgent and clear regulation of the crypto sector to ensure that consumers are protected and to guarantee the responsible and proper use of client funds.”
In Australia, securities regulators revoked FTX’s license to provide derivatives trading services on November 16, while regulators in Cyprus also suspended FTX’s local license. In Brussels, EU policymakers indicated they remain on track to vote on a landmark Markets in Crypto-Asset (MiCA) regulatory package in February.
MiCA provides a comprehensive regulatory framework that will require crypto platforms to protect client funds, ensure prudential fitness and avoid conflicts of interest, among other requirements, which some proponents argue would make situations like the collapse of FTX less likely.
In the Bahamas, where FTX maintains a corporate presence, the Securities and Exchange Commission announced on November 17 that it had ordered FTX to transfer assets to regulatory oversight to protect creditors of the Bahamas-registered FTX entity.
The announcement comes after $470 million in funds left FTX’s crypto wallet earlier this week on November 12, leading some observers to speculate that the funds were handed over to the Bahamian regulator. However, some of the $470 million in Ether that was siphoned from FTX is now being transferred through services designed to hide their ownership – suggesting that those funds were stolen, and that the funds obtained by Bahamian regulators are held in separate accounts.
Elliptic’s analysis of the Ethereum blockchain indicates that apparently stolen funds are being laundered through services such as RenBridge. This is a cross-chain bridging service that allows users to transfer funds across the blockchain. By transferring the stolen Ether to the Bitcoin blockchain via RenBridge, the perpetrator likely wants to avoid detection. However, with blockchain analytics capabilities – such as Elliptic’s Holistic Screening capabilities – compliance teams at cryptoasset exchanges can identify assets exchanged through cross-chain services such as bridges and take steps to block and report those assets.
At Elliptic, we will continue to monitor both the regulatory response to the FTX collapse and the flow of stolen exchange funds as they move through the blockchain. You can follow our analysis here.
Canadian regulators issue reminder on crypto risks and liabilities
Financial supervisors in Canada have used the FTX saga as an opportunity to remind the private sector of the importance of ensuring tight compliance with regulatory requirements.
On November 16, the Office of the Superintendent of Financial Institutions (OSFI) – Canada’s federal banking supervisor charged with ensuring the stability of its financial sector – issued a statement in tandem with other consumer and bank protection supervisors. It notes that: “Crypto-related services and crypto-asset activities […] they can represent opportunities for the financial system, but they can also represent significant risks for consumer protection, as well as the stability, integrity, privacy and security of the financial system.”
OSFI’s notice reminds federally regulated institutions in Canada that they must comply with all applicable financial services regulations when offering cryptocurrency-related services and must be able to manage the risks of those services. This includes adhering to liquidity and capital requirements when offering cryptocurrency-related services, as well as ensuring compliance with consumer protection laws.
The New York regulator is promoting the BitLicense as a model framework
New York State’s cryptocurrency regulatory framework – known as the BitLicense regime – has always drawn mixed reactions from the crypto industry, with many criticizing it as overly harsh and hostile to innovation. However, regulators in New York are now pointing to the strict nature of the BitLicense framework as a feature – not a bug – following the fall of FTX.
In a panel discussion hosted by the Brookings Institution on November 15, New York Department of Financial Services (NYDFS) Superintendent Adrienne Harris stated that: “We would love to have a national framework that looks like what New York has, because I think it’s proving as a very robust and sustainable regime.”
The BitLicense framework is known for demanding high registration standards for applicants, contains a token listing framework and an approval framework for licensed crypto exchanges, and expects crypto exchanges to implement robust compliance controls, including blockchain analytics. While likely to remain controversial within the industry, the BitLicense is indeed likely to serve as a model for regulators looking to globally tighten standards in crypto markets.
See our previous analysis of the NYDFS regulatory framework here and here.
South Korea plans crypto audit rules
On November 18, South Korea’s Financial Supervisory Service (FSS) indicated that it plans to introduce enhanced auditing standards for the crypto industry that would require crypto-businesses to disclose their token holdings when filing financial statements.
While relevant to the FTX situation, the FSS’s review plans stem from its response to the collapse of the Terra/UST stablecoin earlier this year – an event that helped trigger the contagion that led to FTX’s downfall and fueled concerns among regulators about risks in crypto markets. . The plan for improved auditing standards in South Korea comes after a court there ordered the freezing of more than $100 million in assets belonging to one of Terra’s co-founders.
Swiss regulators focus on DeFi risks
The Swiss Financial Market Supervisory Authority (FINMA) has highlighted decentralized finance (DeFi) as a new area of risk.
In its Risk Monitor 2022 report, the Swiss regulator notes that the growth in the use of DeFi services could pose a challenge to its supervisory efforts given the complexity of trying to regulate disintermediated services. FINMA is concerned that retail investors may face risks of losing funds due to market fluctuations in DeFi, as well as hacks, fraud or exploitation of the DeFi protocol.
FINMA also notes that if financial institutions start to interact more with DeFi, then there will be increased risks of instability spillover from the DeFi market to the financial system. The report states that FINMA plans to monitor the development of DeFi, and in particular examine where FINMA-regulated entities can engage with DeFi services.
To learn more about the financial crime risks associated with DeFi and approaches to address them, download Elliptic’s State of Cross-Chain Crime report.
The SEC is taking action to stop the sale of DAO tokens
Speaking of DeFi, the US SEC has turned its attention to Decentralized Autonomous Organizations (DAOs) – blockchain-based governance arrangements that allow dispersed parties to engage in joint ventures. On November 18, the SEC announced that it had begun proceedings to prevent US-based CryptoFed DAO LLC from registering the sale of two tokens it had offered.
The SEC alleges that CryptoFed DAO – which was established in Wyoming under the DAO law there and aims to establish a new model of monetary policy in the US – attempted to register a token sale with the SEC last year but failed. disclose adequate information about himself and the tokens he has issued.
The SEC is concerned that CryptoFed may be providing investors with inaccurate information about the regulatory status of its tokens, so it aims to halt their registration to prevent CryptoFed from using its tokens’ registration with the SEC as an indicator of legitimacy.
This is the second regulatory action US regulators have taken against The DAO this year – the second enforcement action announced by the Commodity Futures Trading Commission (CFTC) against Ooki DAO in September.
These cases show that US regulators are intent on ensuring that DAOs play by the same rules as other entities. In our 2023 Regulatory Outlook Report, Elliptic predicts that next year, global regulators will significantly increase scrutiny of The DAO. Watch this space for our report, due out in December.
DeFi Law Enforcement Regulation
