Regulatory Update
Crypto Rules Crackdown Looms for $150 Billion Stablecoin
Market
Bloomberg Tax, August 15, 2022
Lawmakers in the US, the EU, the UK, Japan and others are
considering rules that would overhaul the $150 billion sector.
Several of these proposed restrictions are intended to bring
issuers of the tokens — which are cryptoassets designed to keep a
one-to-one peg with a less volatile currency like the US dollar –
under the same financial regimes as payment providers.
More specifically, regulators want a say over the types of assets
that stablecoin providers can use to fill their coffers, and are
expected to require more detailed disclosures and fully-backed
reserves. The changes could hurt some stablecoins, but already,
providers are starting to adapt.
Stablecoins grew more popular as crypto adoption boomed, acting as
a digital asset safe haven from volatile prices. They’ve
attracted more scrutiny from authorities this year following the
$40 billion collapse of stablecoin pair TerraUSD and Luna in May ,
which prompted concerns around the processes used to back different
stablecoins. “The riskiness of a stablecoin fundamentally
relies on what reserves it’s backed by — in short, the
greater the reserve, the lower the risk,” said Sarah
Kocianski, an independent fintech consultant. “Being able to
accurately assess the riskiness of a stablecoin enables regulators
to create appropriate rules, meaning companies’ transparency
around their reserves is vital.”
Read more here.
US Fed Opens Pathway for Crypto Banks to Tap Central Banking
System
CoinDesk, August 15, 2022
The U.S. Federal Reserve said Monday it is publishing its final
guidance for novel financial institutions to access its
“master accounts,” something these firms need to
participate in the global payment system.
Monday’s announcement would seemingly move the U.S. central
bank one step closer to possibly allowing Wyoming special purpose
depository institutions (SPDI), like Custodia (formerly Avanti) and
Kraken Bank, access to these accounts so they would not need
intermediary banks. The Fed first proposed guidance last year,
opening up a request-for-comment process. Nearly 300 respondents
filed comments, leading to a second public feedback process earlier
this year.
In a statement, Fed Vice Chair Lael Brainard said, “The new
guidelines provide a consistent and transparent process to evaluate
requests for Federal Reserve accounts and access to payment
services in order to support a safe, inclusive, and innovative
payment system.”
Read more here.
Institutional Investors Are Increasingly Using Crypto Options
Trading to Hedge Their Bets in Bear Market
CoinDesk, August 13, 2022
In the current bear market, crypto options trading has been a rare
bright spot, building momentum even as crypto prices have
plunged.
A number of crypto exchanges have noted rising trading volume after
reaching lows earlier this year. Options strategies have figured
prominently among institutional investors and even miners as they
try to weather crypto’s usual volatility and a downturn that
could last for months, or longer, despite recent hopeful
macroeconomic signs.
More recently, traders have been using the crypto options market to
bet on ether (ETH) and hedge positions as the Ethereum
blockchain’s hotly anticipated Merge approaches. Panama-based
derivatives platform Deribit, which is among the world’s
largest exchanges for crypto options trading volume, told CoinDesk
demand is surging ahead of the Merge.
How fast crypto options trading evolves remains uncertain, even as
firms add exposure and pinpoint the products and services that can
help them manage risk. EDG CEO Chris Bae noted that miner and
institutional platforms’ use of derivative strategies remain in
an early stage and that crypto options trading volumes “have
yet to hit their j-curve when it comes to their adoption and
growth.”
Read more here.
Tornado Cash’s Sanctions Show Shift in Crypto Regulatory
Focus
WSJ, August 12, 2022
The U.S. Treasury Department’s decision to crack down on
cryptocurrency platform Tornado Cash for allegedly being used to
launder stolen funds—and the subsequent freezing of millions
of dollars in assets by one of the largest U.S. stablecoins in
compliance with the order—has prompted concerns of excessive
government pressure from many crypto participants, particularly
those in the decentralized finance sector.
The U.S. Treasury Department accused Tornado Cash, a so-called
mixer platform that enables users to exchange cryptocurrencies with
relative anonymity, of laundering billions of dollars in virtual
currency, including $455 million allegedly stolen by North Korean
hackers. The Treasury also identified and blacklisted dozens of
wallet addresses associated with Tornado Cash. The sanctions block
all property held by the platform under U.S. jurisdiction and bar
U.S. companies and individuals from transacting business with
it.
Crypto industry analysts say the sanctioning of
protocols—essentially computer code—has become a key
policy issue for the industry, which is increasingly concerned
about the impact of broadening government intervention on the
potential growth of crypto and the additional burden of compliance
in a sector that sells itself on its privacy and
decentralization.
Read more here.
More Changes Are on the Way for Cryptocurrency Tax
Reporting
Bloomberg Tax, August 12, 2022
Despite the setbacks, crypto is still huge—according to
CoinMarket, the global crypto market cap is $1.1 trillion or more,
depending on the day. That’s about three times as much as the
total amount of US corporate taxes expected to be collected in
2022.
Compared with those numbers, IRS collections from crypto have been
unremarkable. In 2017, as part of an effort to obtain taxpayer
information from Coinbase, US Magistrate Judge Jacqueline Scott
Corley in San Francisco cited IRS claims that “only 800 to 900
taxpayers reported gains related to bitcoin in each of the relevant
years and that more than 14,000 Coinbase users have either bought,
sold, sent or received at least $20,000 worth of bitcoin in a given
year.” Judge Corley wrote that “[t]he IRS has a
legitimate interest in investigating these taxpayers.”
For the 2019 tax year, the agency announced a cryptocurrency
compliance measure for taxpayers with a new question on Form 1040
at the top of Schedule 1: At any time during 2019, did you receive,
sell, send, exchange, or otherwise acquire any financial interest
in any virtual currency?
In 2020, the IRS moved the yes-or-no question to the front page of
Form 1040 where it currently sits—with a tweak. It now reads:
At any time during 2021, did you receive, sell, exchange, or
otherwise dispose of any financial interest in any virtual
currency? That means all taxpayers, even those without adjustments
to income or other investments on Schedule 1, must answer a
question about cryptocurrency use.
More changes are in store. While some platforms already provide
information about gains and losses to taxpayers, the 2021
infrastructure law attempts to standardize reporting for tax
purposes. The intent was to ensure that the IRS gets info and that
crypto investors receive the same tax documents that stock traders
receive. According to a 2021 letter from a group of senators,
increased reporting would make it easier for taxpayers to
“file their taxes more easily and promote higher
compliance.”
Form 1099-DA
While the IRS hasn’t yet released a draft of the proposed form,
we have some details. IRS CI Deputy Chief James Robnett confirmed
this summer at the annual New York University School of
Professional Studies Tax Controversy Forum that the IRS is working
on the form—to be called Form 1099-DA (Digital Asset). The
form will be used to report taxpayer cryptocurrency activity and
will include the kind of information you’d traditionally see on
Form 1099-B, like number and kind of assets, cost basis, fair
market value, and holding period.
Read more here.
What is the Future of Cryptocurrency Regulation?
BetaNews, August 11, 2022
Lawmakers are aiming to find a balance between regulation and
crypto freedom. This is partly because, as it stands now,
cybercriminals can take advantage of some of crypto’s
weaknesses. For example, cybercriminals often demand cryptocurrency
payment when they launch a ransomware attack.
One piece of the infrastructure bill passed by Congress in 2021
requires cryptocurrency exchanges to report their transactions on
1099-B tax forms, just like a traditional broker would have to.
Because this extra paperwork connects crypto transactions to
individuals, the government will be better able to catch criminals
capitalizing on crypto. This provision allows the government to
keep track of what people earn from crypto so they can apprehend
any individual trying to get away with tax evasion. It is set to
take effect in 2023.
Regulation That Could Become Legislation
U.S. SEC Chair Gary Gensler suggests regulating crypto similarly to
how traditional financial institutions are regulated and protected.
Three possible options for crypto regulation that could come to
pass in the future include expansion of the wash-sale rule,
implementation of the de minimis rule, and regulation of
stablecoins.
The Wash-Sale Rule
One way cryptocurrency could expand in the future is via the
current wash-sale rule. The wash-sale rule currently applies to
stocks and securities. It prohibits investors from claiming tax
deductions on assets they claim at a loss, only to buy back the
same securities or purchase substantially identical securities
within 30 days of the deduction. This does not currently apply to
cryptocurrency, meaning investors can claim deductions on
cryptocurrency while holding it.
In 2021, President Biden proposed expanding the wash-sale rule to
include cryptocurrency as part of his Build Back Better plan. The
plan failed to pass the Senate, but not because of the proposed
expansion of the wash-sale rule. It will likely continue to show up
in legislation again – and possibly get passed.
De Minimis Tax Rule
Another possible area for regulation is the implementation of the
de minimis tax rule. Under this rule, investors do not have to
report their crypto transactions or pay taxes on crypto under a
certain dollar amount.
Stablecoin Regulation
An entirely possible solution that could take place in the near
future is the regulation of stablecoins. Stablecoins are easy to
trade because each one has a value of $1. However, because
cryptocurrency and stablecoin are not regulated, it is difficult to
guarantee their stability. For example, in May 2022, the stablecoin
Terra Luna dropped from its $1 amount, resulting in a crash of its
cryptocurrency, Luna. Crashes like these encourage federal
regulators to continue pushing for crypto regulation. They believe
investors and the public could benefit from added stability in the
cryptocurrency industry, citing different benefits.
Read more here.
Tornado Cash Crackdown Shows Limits of Regulating
Cryptocurrency Services
WSJ, August 11, 2022
The U.S. sanctioning of a prominent cryptocurrency platform this
week exposed technical gaps in the government’s ability to
prevent criminals, national adversaries and extremist groups from
using the services to launder money and finance their operations,
analysts said.
Among the central challenges: Cryptocurrency platforms are
increasingly run by computer code distributed across computers
around the world, rather than by individuals facilitating
transactions, analysts said.
The Treasury Department on Monday imposed sanctions against Tornado
Cash, a popular cryptocurrency platform known as a mixer because it
blends funds from different users and redistributes them, obscuring
their origin. The Treasury Department accused Tornado Cash of
laundering billions of dollars in virtual currency, including $455
million allegedly stolen by North Korean hackers. As part of the
penalties, officials blocked all property held by the exchange
under U.S. jurisdiction and barred U.S. companies and individuals
from transacting with it.
Read more here.
Issues Crypto Should Watch For in the Tornado Cash
Sanctions
CoinDesk (Opinion), August 11, 2022
OFAC sanctioning Tornado Cash presents fascinating new questions
about crypto’s role in nuclear weapons proliferation. Tornado
Cash got sanctioned, hedge funds might soon have to report their
crypto holdings and we haven’t even had a chance to look at the
latest push to give the CFTC spot market oversight.
Something I’ve been hearing a lot recently from lawyers and
regulatory-adjacent folks is that the Treasury Department’s
Office of Foreign Asset Control (OFAC) is one of the few federal
agencies you absolutely do not want to mess with. Whereas anyone
can fight a Securities and Exchange Commission lawsuit or duke it
out in court against the Department of Justice, OFAC can go
hard.
Tornado Cash developer Roman Semenov told Bloomberg News in March
that it would be “technically impossible” to enforce
sanctions against decentralized protocols like the privacy mixer he
helped build. The fallout was swift: Circle immediately froze about
$70,000 worth of its USDC stablecoin on Tornado, crypto exchange
dYdX blocked accounts that may have once interacted with Tornado,
GitHub suspended not only Tornado’s account but also
Semenov’s and now everyone’s trying to determine what
constitutes an interaction with a sanctioned address.
Tornado Cash is a protocol, one that was open source to boot and
built on a decentralized framework. Unlike when OFAC sanctioned
Blender.io, another mixer, Tornado doesn’t exactly have a
business to shut down. It has a governance token. The token holders
are responsible for voting to accept or reject various possible
forks and whatnot. If those holders are not beholden to U.S.
sanctions (i.e., they’re not U.S. persons or they feel really
really confident in their privacy setup) they may feel more
comfortable continuing to operate business as usual.
Read more here.
The Future of Crypto Regulation: Highlights from the Brookings
Event
The Brookings Institution, August 11, 2022
Brookings’s Center on Regulation and Markets and the Hutchins
Center on Fiscal and Monetary Policy recently hosted “The future of crypto regulation,”
keynoted by Commodity Futures Trading Commission (CFTC) Chairman
Rostin Behnam. Benham’s keynote was followed by a discussion
with experts representing an array of perspectives, including that
of regulatory agencies, academia, and industry. Here are five
takeaways from the event, which you can watch in its entirety here.
Read more here.
BlackRock Launches a Private Trust to Give Clients Exposure to
Spot Bitcoin
CNBC, August 11, 2022
BlackRock has launched a private trust offering
institutional clients in the U.S. direct exposure to bitcoin.
The largest asset manager in the world revealed the new product in
a blog post Thursday, though it was light on
detail.
“Despite the steep downturn in the digital asset market, we
are still seeing substantial interest from some institutional
clients in how to efficiently and cost-effectively access these
assets using our technology and product capabilities,” the
company said in the post. “Bitcoin is the oldest, largest, and
most liquid cryptoasset, and is currently the primary subject of
interest from our clients within the cryptoasset space,” the
post continued.
Thursday’s news is the latest in BlackRock’s foray into
crypto. The company, which has about $8.5 trillion in assets under
management, announced recently a partnership with Coinbase that
allows its institutional clients to buy crypto, beginning with
bitcoin. This also comes amid frustration by new institutional
investors in the market keen to see the Securities and Exchange
Commission approve a spot bitcoin exchange-traded fund. So far,
only bitcoin futures ETFs have been approved.
Read more here.
Regulators Weigh Asking Hedge Funds to Report Crypto
Exposure
WSJ, August 10, 2022
The Securities and Exchange Commission issued a proposal Wednesday
that would require large hedge funds to report their cryptocurrency
exposure through a confidential filing known as Form PF.
Created after the 2008 financial crisis, Form PF was designed to
help regulators spot bubbles and other potential stability risks in
the otherwise opaque ecosystem of private funds that manage money
for wealthy individuals and institutions.
The rule proposed Wednesday would add “digital assets” as
a new asset class on Form PF and define the term. It requests
comments on whether funds should report detailed information about
the cryptocurrencies they hold, such as identifying them by name or
describing their characteristics.
In the proposal, SEC staff noted that many hedge funds have been
formed recently to invest in crypto, while some existing hedge
funds have begun adding it to their portfolios.
Read more here.
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Shiba Inu, Dogecoin Jump as Risk-On Behavior Returns to Crypto
Markets
CoinDesk, August 15, 2022
Meme tokens shiba inu (SHIB) and dogecoin (DOGE) gained over 15% in
the past 24 hours as risk-on behavior returned to crypto
markets.
The rally came as ether (ETH) broke the $2,000 level on Sunday
night ahead of the network’s Merge event expected in September.
Bitcoin (BTC) rose to over $25,000 for the first time since
June.
SHIB rose as much as 30%, while DOGE gained 15%, before a price
reversal in European morning hours as investors took profits. DOGE
entered the top ten cryptocurrencies by market capitalization with
a total valuation of just over $10 billion, ahead of Polkadot’s
DOT token.
Read more here.
Applying Anti-Money Laundering Practices To NFT Market
Law360, August 15, 2022
The current “crypto winter” and related collapse of
certain fintech projects and digital assets has resulted in
widespread losses and has exposed risks and vulnerabilities within
the digital asset landscape.
A number of recent controversies in the NFT space have led some to
draw comparisons between NFTs that are digital collectibles and the
high-value art market, which has historically been fraught with
issues of money laundering and other illicit activities.
The sheer speed at which NFT sales are transacted, paired with the
purported anonymity of the digital marketplace, renders the NFT
space ripe for illicit activity. Bad actors can purchase an NFT
from themselves and sell it at a loss to another account under
their control to avoid paying taxes on the sale. Criminals can make
laundered funds appear as legitimate funds generated from an NFT
sale.
Read more here.
Crypto Lender Celsius On Pace to Run Out of Cash by
October
CoinDesk, August 15, 2022
Celsius Network, the crypto lender that filed for bankruptcy in
July, appears to be in even worse financial straits than previously
signaled.
A new court filing Monday from Kirkland & Ellis, a law firm the
crypto lender hired to lead its restructuring efforts, included
financial projections that Celsius will run out of cash by
October.
The filing, submitted to the U.S. Bankruptcy Court for the Southern
District of New York in advance of an upcoming hearing, also stated
that the crypto lender holds $2.8 billion less in crypto than it
owes to depositors.
Read more here.
Crypto Org Eyes Legal Challenge To Tornado Cash Sanctions
Law360, August 15, 2022
The U.S. Department of the Treasury overstepped by sanctioning
certain addresses associated with cryptocurrency mixing service
Tornado Cash, a cryptocurrency policy group argued Monday, warning
that it may pursue an administrative or legal challenge.
The Treasury’s Office of Foreign Assets Control wrongly
sanctioned several cryptocurrency addresses that aren’t
individuals or entities, but rather house computer code, advocacy
group Coin Center said. Coin Center argued that the move creates
due process concerns and implicates First Amendment rights.
“How can it be proper to add to the sanctions list not a
person, or a person’s property, but instead an automated
protocol not under anyone’s control?” the statement
said.
The group said it’s seeking to “engage” OFAC and is
exploring a court challenge to the designation.
Read more here.
Public Pension Systems Join Those Stung by Crypto Crash
WSJ, August 14, 2022
Among the investors who bet on cryptocurrency over the past year
are pension funds that manage public workers’ retirement
savings. Now those funds are navigating the crash.
A Quebec pension fund made a $150 million equity investment in
Celsius Network LLC last fall. In July, the cryptocurrency lender
filed for bankruptcy protection.
A $5 billion retirement fund serving Houston firefighters said last
October it had put $25 million into bitcoin and ether. Since that
announcement, both cryptocurrencies have fallen by more than
50%.
“Of course we would have preferred otherwise,” Houston
Firefighters’ Relief and Retirement Fund investment chief Ajit
Singh said in an email. But “volatility and large swings are
expected.”
Read more here.
Crypto Insurance Policies ‘Popping Up’ to Meet Frenetic
Demand
Bloomberg Tax, August 12, 2022
Companies this year are scrambling to obtain cryptocurrency
insurance as a hedge against catastrophic losses, paying dearly for
relatively limited protection as they venture into the world of
high-risk, high-reward digital assets.
“We’re seeing crypto risk and coverage inquiries from all
kinds of companies,” said Jackie Quintal, a director at
insurance broker Marsh McLennan. “Crypto is popping up all
across financial services, tech, fintech, and other parts of the
economy.”
Demand now far outstrips supply—less than 2% of
crypto-related risks are currently insured, said Edin Imsirovic,
associate director at insurance credit rating agency AM
Best—so those willing to sell policies can command rates
several times those of traditional coverage.
Read more here.
Ethereum Just Pulled Off Its Final Test Run Ahead of One of the
Most Important Events in Crypto
CNBC, August 10, 2022
Ethereum, the second-largest cryptocurrency by market value, just
ran a final dress rehearsal ahead of a years-awaited upgrade
that’s been billed as one of the most important events in the
history of crypto.
Since its creation almost a decade ago, ethereum has been mined
through a so-called proof-of-work model. It involves complex math
equations that massive numbers of machines race to solve, and it
requires an abundance of energy. Bitcoin mining follows a similar
process.
Ethereum has been working to shift to a new model for securing the
network called proof of stake. Rather than relying on
energy-intensive mining, the new method requires users to leverage
their existing cache of ether as a means to verify transactions and
mint tokens. It uses far less power and is expected to translate
into faster transactions.
Read more here.
FTC Probes BitMart Breach, Marking First Crypto Case
(Correct)
Bloomberg Tax, August 10, 2022
The Federal Trade Commission is investigating the operators of the
BitMart cryptocurrency exchange over a December 2021 hack that led
to consumer losses between $150 million and $200 million — marking
the agency’s first known probe into crypto markets.
The investigation was disclosed Wednesday in an FTC order denying a
bid by BitMart operators Bachi.Tech Corporation and Spread
Technologies LLC to block the agency’s efforts to compel them
to turn over information. The companies had argued that the
FTC’s document request was overly broad and that some of the
information was located overseas.
The FTC also said it was investigating whether the BitMart
operators were complying with another federal law that requires
financial institutions to safeguard sensitive customer data.
If the agency finds that the companies misled users about its
cybersecurity protections or didn’t comply with
financial-services laws, it can impose fines and put them under a
consent decree ordering them to change their practices.
Read more here.
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