This Week in Policy (10/24)
Hej fintech vänner!
Trying to guess the language? Think of the country that is not only the first issuer of banknotes in Europe but also the current world leader in phasing them out and going cashless. Not sure yet? Think the Nobel Prizes.
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We continue to see very little action on the Hill as we move closer to the midterm elections. This allows us to more closely follow the exciting developments in crypto policy outside of the U.S. Let’s look at some of these developments from last week:
1. Crypto Regulation
The EU is mulling a new legislation that will develop an energy efficiency label in an attempt to limit the energy consumption associated with proof-of-work cryptocurrencies like Bitcoin. The idea is to come up with a grading system that rewards more energy-efficient cryptocurrencies, which validate transactions through proof of stake. The European Commission, the executive arm of the EU, will work with partners to develop this new grading system. This move comes at a time when Europe is facing an energy crunch caused by the Russian invasion of Ukraine.
Also last week, the Law Commission of England and Wales launched a project titled “Digital Assets: Which Law, Which Court?” which aims to address the private-international-law challenges raised by novel technologies, such as digital assets, non-fungible tokens (NFTs), and e-trade. The project gives the following example of the problems it will try to address: “when a digital asset is hosted on a decentralized, distributed ledger – such as a blockchain – where is it located? And if transferred or misappropriated, where has it moved from, and where has it moved to?” How does private international law address these questions, and why do they matter? Private international law helps enforcement authorities determine which law should apply in a certain case and which court should hear that case. By clarifying these rules, the UK is taking another step towards its strategic goal of becoming a global crypto hub with a very enabling regulatory environment. Can you see the difference between how crypto policy is made in the U.S. versus the UK? Which one is more politicized, and which one is more technocratic? Which one do you think is more suitable for regulating digital assets?
Our last update about crypto regulation is about the U.S. Internal Revenue Service (IRS), which published an updated draft of the instructions for filing form 1040. The main goal of the update is to include NFTs in the scope of “digital assets” that have to be reported to the IRS.
On October 20, United States Federal Deposit Insurance Corporation Acting Chairman Martin Gruenberg spoke at the Brookings Center on Regulation and Markets about stablecoins and the future of the banking system. Gruenberg insisted that “there has been no demonstration so far of [stablecoins’] value in terms of the broader payments system.” However, he also argued that “there may be merit in continuing to examine the potential benefits associated with payment stablecoins.” Gruenberg added that payment stablecoins could “fundamentally alter the landscape of banking,” referring to the risk of disintermediation (i.e., stablecoins making depositors rely less on banks as financial intermediaries). Therefore, he concluded that “[a]ll payment stablecoin issuers should – just like banks, whether Federal or state chartered, be subject to prudential regulation and oversight.”
But if stablecoins were to be well regulated, can they still coexist with central bank digital currencies (CBDCs)? The answer came from Hong Kong, which is currently running an experiment called Aurum in collaboration with the Bank for International Settlements. The experiment tested out a two-tier currency system in which individuals do not transact in CBDCs but in stablecoins, which will be backed by CBDCs that will be held only by stablecoin issuers. This is very similar to the current financial system in which only financial institutions have access to “public money” (i.e., the central bank’s liquidity), while individuals only have access to “private money” (i.e., money made available through financial institutions).
3. Blockchain Technology Applications
The UK parliament is currently deliberating a new legislation that would recognize electronic international trade documents, such as bills of lading and cargo insurance certificates, which will be stored using blockchain technology. The goal of the new legislation is to completely end the need for paper-based trading documents.
In the same vein, the Israeli Ministry of Finance launched Project Eden whose goal is to test out issuing and trading digital bonds on a blockchain platform.
See you next week!