This Week in Policy (7/27)
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This week we go back to our weekly coverage of fintech news after taking a two-week break to look closely at TFR and MiCA, the two major EU crypto regulations that were politically approved on June 29 and June 30, respectively. The sky has not fallen over the past two weeks, but so much has happened in cryptoland. To summarize in one word: stablecoins!
The stablecoin rush started with the heated debates that followed the approval of MiCA and the unprecedented restrictions it imposes on stablecoins. Then came a report issued by the Bank of International Settlements (BIS) and the International Organization of Securities Commissions (IOSCO) outlining “final guidance on stablecoin arrangements.” In the parlance of the BIS and other standard-setters, a “stablecoin arrangement” is “[a]n arrangement that combines a range of functions (and the related specific activities) to provide an instrument that purports to be used as a means of payment and/or store of value.” Obviously, such an arrangement goes well beyond the stablecoin itself (i.e., the digital token whose value is pegged to the value of an underlying asset) to the activity, function, governance body, provider, user, validator node, and wallet of such an arrangement. The report is expected to guide the debates over the regulation of stablecoins in the foreseeable future and thus definitely warrants one of our deep dives. For now, it is sufficient to note that the report extends the principle of “same risk, same regulation” to stablecoins. Particularly, it recommends that “systemically important stablecoin arrangements” (i.e., stablecoin arrangements that could pose a risk to the stability of the entire financial system) abide by the international standards for payment, clearing, and settlement systems applicable to financial institutions.
Can you make a connection between MiCA’s characterization of certain stablecoin issuers as “significant” and the “systemically important stablecoin arrangements” in the BIS-IOSCO report?
Within a week, On July 20, news transpired that the House Financial Services Committee Chair Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC) are drafting a bipartisan bill that narrowly focuses on stablecoins. It later became clear that the bill will not be pushed through until September. The delay was partly the result of last-minute changes requested by the U.S. Treasury Department which sought to ensure more protection of consumers’ digital wallets and pressure from banks who expressed concern over the hasty nature of negotiations. While shelving crypto bills has become commonplace in the U.S., what is not is the novel regulatory approach adopted in the Waters-McHenry bill. Apart from the 100%-reserve requirement which we saw in the Lummis-Gillibrand bill, the new bill prohibits stablecoin issuers from lending to customers, empowers banks and non-banks alike to issue stablecoins (remember that non-bank issuers invented the whole stablecoin space), establishes the Federal Reserve as the regulator of non-bank issuers, imposes strict liquidity requirements on the assets backing stablecoins, and bars private firms that are not stablecoin issuers (think of Walmart) from issuing stablecoins.
To what extent do you think the Waters-McHenry bill inducts stablecoins as part of the financial system? Based on your answer, how helpful or accurate are the statements that lump all crypto assets into the same category?
Ready for one more piece of news? This time it is not about stablecoins but Coinbase, the largest crypto exchange in the U.S. by trading volume. On July 21, the U.S. Department of Justice (DOJ) brought criminal charges against a former Coinbase product manager, his brother, and a friend, alleging that the ex-Coinbase employee informed his associates of the tokens that would be listed on Coinbase, allowing them to make over $1.5 million in unlawful trades. As a result, the three are facing charges of “wire fraud.” The drama started with the Securities and Exchange Commission (SEC) also bringing a civil complaint against the three on the same day, alleging that their actions amount to an insider trading scheme, adding further that nine of the 25 crypto assets that the associates traded in were securities. This meant practically that Coinbase was in violation of securities law because seven of the nine crypto assets mentioned in the SEC’s complaints are traded on Coinbase. Coinbase responded that the said assets are not securities and, in a separate petition, called on the SEC to devise clear rules on digital asset securities, insisting that current rules are unsuitable for digital assets. While future action by the SEC against Coinbase remains an open question, what is unusual about this incident is that the SEC’s conclusions were made independently of an enforcement action or a settlement with the issuer—the two typical ways the SEC declares that a certain asset is a security. To make things even more odd, Commissioners Caroline Pham and Kristin Johnson of the Commodity Futures Trading Commission expressed official opinions about the SEC’s action, casting doubt on the SEC’s conclusions that the digital assets are securities.
In your opinion, how can crypto exchanges best deal with the regulatory ambiguities resulting from “regulation by enforcement?”
See you next week!