Cryptoregulatory affairs: US lawmakers learn more about cryptoassets in hearing with cryptocurrency executives

🇺🇸 US lawmakers learn more about cryptoassets at a hearing with cryptocurrency executives

December 8, 2021 US House Financial Services Committee held a hearing on “Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States.” This was the first congressional hearing devoted exclusively to cryptoassets. Executives of major crypto companies are invited to testify and answer the panel’s questions on this topic.

In his opening remarks, ranking board member Patrick McHenry said “today’s goal is to listen, learn and ask questions.” Indeed, throughout his statement, the congressman emphasized the importance of policymakers learning more about cryptoassets before making hasty and ill-informed legislative decisions. During the hearing, most lawmakers agreed that a balance must be struck between innovation and regulation to drive U.S. progress in the industry.

Committee members asked questions on a range of topics that could inform future policy initiatives such as:

• Regulatory clarity: industry executives invited to the hearing were asked whether the industry needed regulatory clarity. Most of the participants reiterated that the industry is already regulated and that many requirements are applied to them, contrary to the beliefs of certain congressmen. Nonetheless, they agreed that the market would benefit from regulatory clarity, particularly on definitions that would, for example, determine the scope of regulations by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). This would establish much-needed regulatory parity between crypto-asset businesses and traditional financial institutions.

• Regulatory structure: witnesses also gave suggestions on the regulatory structure. They pushed for the establishment of a cryptoasset regulator that would act as a single point of contact and watchdog for the industry. Executives were concerned about the inability of regulators to keep up with the speed of development in the industry.

• Financial inclusion: using cryptoassets as a tool for financial inclusion and ensuring it reaches underserved communities. Industry participants shared that cryptoasset users in the US tend to be younger and more diverse than for most traditional financial services. Lawmakers asked the panel to follow up with more data on the issue.

• Environmental protection: Committee members discussed the impact of cryptoassets on the environment and the differences in the energy intensity of different blockchain protocols. The witnesses agreed that the industry should work on solutions that could make the ecosystem sustainable.

• Dollar Dominance: the hearing also covered the decline of the dollar’s dominance against China. Lawmakers learned more about the potential of “Internet-enabled dollars” to help strengthen the dollar’s position. The discussion shifted to potential regulation of stablecoins in terms of disclosure and liquidity requirements.

• Financial stability: Board members also discussed the need to investigate risks to the financial stability of cryptoassets.

• Anti-money laundering: the discussion covered the exploitation of cryptoassets by malicious actors. May 2021 Colonial Pipeline hack was cited as an example of how the industry cooperated with law enforcement agencies forfeited income of this ransomware attack. Elliptic was cited by Denelle Dixon, executive director of the Stellar Development Foundation, as a company that helps protect the industry.

A full recording of this hearing is available here. Elliptic supports efforts by legislators to engage with industry to shape regulation that supports innovation.

🔭 BIS highlights DeFi centralization and scope of regulatory oversight

Bank for International Settlements (BIS) published a report on Decentralized Finance (DeFi) December 8, 2021 A report claims that the blockchain-powered smart contracts that underpin DeFi are not as decentralized as they claim to be. The authors argue that there is a certain level of centralization that revolves around those who write the protocol and set strategic priorities. These actors “are natural entry points for policymakers” looking to regulate the DeFi space. Furthermore, the report highlights some regulatory gaps for these protocols, such as the lack of deposit insurance for investors. It also highlights the issue of high leverage, trading mismatch and liquidity mismatch in DeFi which are strictly regulated in traditional finance. The authors argue that “the basic principle of ‘same risks, same rules’ should apply” to the DeFi space as those covering banks and other financial institutions. On top of that, the lack of know-your-customer and anti-money laundering regulations can make it easier for malicious actors to exploit DeFi. The report pressures the authorities to focus on passing laws to regulate these protocols so that the authorities gain an understanding of DeFi governance arrangements.

Read Elliptic’s DeFi Report to learn more about these services, criminal activity in DeFi (what Elliptic calls DeCrime), and considerations for policymakers and compliance teams.

🇺🇸 OCC lists cryptoasset in its semi-annual risk outlook

The US Office of the National Comptroller of the Currency (OCC) has released its Semi-annual risk perspective. It examines the key issues facing banks with a focus on financial stability and regulatory compliance. The OCC reiterated that it approaches banking provision of crypto services with “a high degree of caution and expects its supervised institutions to do the same.” It recognizes the opportunities presented by cryptoassets, but expects financial institutions to “conduct due diligence and risk management as with other new, modified and expanded services.” The report summarizes some of the key deals that US authorities have been working on in relation to cryptoassets that Elliptic has covered, such as Digital Assets Policy Initiative and Report of the Presidential Task Force on Stablecoins. Overall, the section of the OCC report covering cryptoassets is high-profile, and there is no quantitative evidence to support the agency’s current position that banks should not engage in cryptoasset-related services. Greater regulatory clarity is needed for US banks and crypto-asset businesses to maximize opportunities.

To learn more about how your bank can mitigate cryptoasset risks and update its compliance program watch Elliptic’s on-demand webinar.

🇹🇭 Thailand wants to keep banks away from crypto assets

Bank of Thailand (BoT) Senior Director Chayawadee Chai-Anant, said that the BoT he didn’t want banks to be “directly involved” in crypto-asset trading. The senior director cited instability, cybercrime and money laundering as justification for the BoT’s position. Elliptic believes that de-risking measures such as those proposed by the BoT limit access to financial services for crypto-asset businesses and may push entities into unregulated channels. Elliptic favors implementing a risk-based approach to effective AML/CFT compliance that maximizes economic opportunities. A few days earlier, another BoT official was concerned that increasing the use of crypto-assets for payments would hamper its ability to oversee the economy. However, the central bank said it is working on a regulatory framework for cryptoassets.

To learn more about how your bank can limit its risk exposure while launching secure and compliant cryptoasset services, schedule a demo.

🇯🇵 Japan is expected to tighten its regulation of stablecoins

Reports suggest that Japan will place restrictions on the issuance of stablecoins. Japan’s Financial Services Agency would limit the issuance of stablecoins to a small number of institutions such as banks and wire transfer companies. Issuers are expected to be subject to oversight ranging from liquidity, disclosure and anti-money laundering requirements. In turn, the Bank of Japan claims that this will limit financial risks and increase consumer protection. This approach would reflect the recommendations of the stable currency report US President’s Task Force on Financial Markets that only licensed banks should be able to undertake stablecoin activities.

Contact us to learn more about how your business can handle or launch stablecoins while complying with anti-money laundering regulations.

Please note: Next week’s weekly update on crypto regulatory affairs will be the last for 2021. We’ll be back the week of January 10, 2022 to provide a full summary of key developments over the holiday period.