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EU AML Legislation; Capitol Hill Hearings; CFTC Sues Binance; G-7 on Crypto Regulation
EU AML Legislation Draft Limits Self-Hosted Crypto Payments in DeFi
On Tuesday, March 29th, European Union (EU) lawmakers from the Economic and Monetary Affairs and Civil Liberties, Justice, and Home Affairs committees voted in favor of new measures intended to target money laundering and terrorist financing.
The new rules restrict “persons providing goods or services” from accepting crypto transfers above 1,000 euros— equivalent to $1,084—and apply when the payer cannot be identified, effectively introducing a cap on payments made via self-hosted wallets.
Additionally, as Coindesk reports that the legislation could subject DeFi protocols to anti-money laundering (AML) requirements:
“[DeFi and the decentralized autonomous organizations (DAO) that govern it] should also be subject to Union [anti-money laundering/counter-terrorist financing] rules where they are controlled directly or indirectly, including through smart contracts or voting protocols, by natural and legal persons,” said the text seen by Coindesk.
After being voted out of the committees, the new rules must receive a vote of approval from the EU Parliament and subsequently be confirmed by the European Council.
What does this mean?
Keep in mind that many details remain unclear, but if the reporting proves accurate, this proposal is concerning and should be reconsidered. Self-hosted wallets empower individuals with direct ownership of their digital assets. How one chooses to spend their money effectively illustrates their personal beliefs, associations, and lifestyle. Fundamental rights such as freedom of speech and association are consequently downstream from financial privacy. The proposed rules to limit self-hosted payments will significantly restrict individuals' freedom and privacy. The EU should consider other means to meet their objectives without undermining people’s rights.
We will be following this closely, so stay tuned.
Capitol Hill Hearings
On Tuesday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing over the recent bank failures with US Treasury Department Under Secretary for Domestic Finance Nellie Liang, Federal Deposit Insurance Corporation (FDIC) Chair Martin Gruenberg, and Federal Reserve Vice Chair of Supervision Michael Barr as witnesses.
The Committee did not explicitly cite digital asset exposure as a key element in the collapse of Silicon Valley Bank and Signature Bank, instead pointing to the mismanagement of the banks
Vice Chair Barr testified that though the “Federal Reserve had recently decided to establish a dedicated novel activity supervisory group, with a team of experts focused on risks of novel activities,” Silicon Valley Bank’s failure was not a direct function of these “novel” activities. Instead, its collapse was “brought on by mismanagement of interest rate risk and liquidity risks, which are well-known risks in banking.” Similarly, when asked explicitly about whether crypto played a direct role in the crisis, Under Secretary Liang stated, “I don’t believe that crypto played a direct role in either of the failures.”
On Wednesday, the same three witnesses also testified before the House Financial Services Committee (HFSC) on the same topic.
During the course of the HSFC hearing, members addressed the FDIC’s “handling of Signature Bank’s digital-asset related business.” In response to questions concerning Flagstar Bank’s purchasing agreement of Signature Bank and the exclusion of digital asset deposits in the sale, Chair Gruenberg insisted that the decision to exclude them stemmed from Flagstar and not the FDIC—the digital asset deposits amounted to $4 billion and will be returned to customers next week per Chair Gruenberg’s remarks.
Chair Gruenberg also denied that the FDIC “ever communicated implicitly or explicitly to any banks that their supervision [would] be more onerous in any way if they [took] on new or maintain[ed] existing digital asset clients” when asked by House Majority Whip Tom Emmer (R-MN).
What is more, on Wednesday, Gary Gensler, the Chair of the Securities and Exchange Commission (SEC), testified before the House Appropriations Committee. During the hearing, he told lawmakers that existing securities laws already regulate crypto. After the hearing, he reiterated this claim to reporters, saying that securities regulations “cover most of the activity that's happening in the crypto markets.”
What does this mean?
On the bright side, it is important to hear officials reiterate that crypto was not the cause of these collapses. However, the hearings didn’t sufficiently explore the alleged effort to block crypto companies from the banking system, as laid out in detail in a white paper by law firm Cooper & Kirk. Congress should look into the accuracy of these claims, especially after former Congressman Barney Frank’s comments last week.
Regarding Gensler’s comments, as our CEO Miller Whitehouse-Levine noted, his recent remarks contradict his stance from two years ago. “We need additional Congressional authorities to prevent transactions, products, and platforms from falling between regulatory cracks,” said Gensler In August 2021 at the Aspen Security Forum. This conflicting messaging by the SEC Chair is causing significant confusion in the cryptocurrency market.
CFTC Sues Binance
On Monday, the Commodity Futures Trading Commission (CFTC) filed a lawsuit against Binance, its CEO Changpeng Zhao (CZ), and a number of the company’s other executives. In its complaint, the CFTC alleged that the exchange knowingly sold unregistered crypto derivatives products in violation of numerous federal laws and regulations.
The complaint outlines a long list of claims, including that Binance violated futures transactions laws, provided illegal off-exchange commodity options, failed to register as a futures commission merchant, designated contract market, or swap execution facility, failed to implement know-your-customer or anti-money laundering policies and procedures, and failed to implement proper business supervision standards.
Further, the CFTC alleged that the company was deliberately structured “to obscure ownership, control, and location of the Binance platform.” The CFTC Chief Counsel Gretchen Lowe described the timeline of the company’s actions as a “willful evasion of U.S. laws.” The CFTC substantiated these allegations by showing internal communications between executives suggesting the use of “creative means” to access the U.S. market like encouraging the use of VPNs.
The most relevant legal aspect of the complaint was its classification of bitcoin, ether, tether, litecoin, and BinanceUSD as commodities. Prior to this filing, the CFTC had not offered its opinion on the status of litecoin, tether, or BinanceUSD; however, Chair Rostin Behnam has suggested he believes stablecoins are commodities.
What does this mean?
The jurisdictional circus continues. Is legislative clarity needed? It depends on which day you ask Chair Gensler. Is an asset a security or commodity? It depends on which top regulator you listen to. If the United States’ top regulatory authorities cannot decipher the “extremely clear” divide, as Chair Gensler is fond of claiming, how can we expect market participants to be able to?
If it was not already clear, the “regulation by enforcement” approach to determine agency jurisdictions is an ill-suited approach to a question that must be determined by Congress. It undermines the rule of law, diminishes faith in regulatory agencies, stifles innovation, and must be put to rest.
G-7 Reportedly Plans to Collaborate on Crypto Regulation
The International Group of Seven (G-7) is reportedly planning to collaborate on tighter crypto regulation in advance of the G-7 Summit to be held in May. According to Kyodo News, the discussions will include a meeting of the member nations’ finance ministers and central bankers in the days leading up to the summit. The stated focus of this collaboration is to increase business transparency and consumer protection as part of a broader effort to formulate global standards for crypto regulation.
What does this mean?
While the implementation of stricter crypto regulations by the G-7 could have significant implications, calls for a consistent and comprehensive regulatory framework—including from the G-7 itself—are not new. Other international bodies, including the Financial Stability Board (FSB), the International Monetary Fund (IMF), the Bank for International Settlements, and the G-20, have also advocated for global standards. As of yet, no such standards have emerged.
Ultimately, the adoption of a unified regulatory framework is not categorically good or bad. DeFi (and crypto more broadly), may well benefit from clear, thoughtful, and consistent regulations that are proportionate to the relevant risks. Whether such is intended by the G-7 remains to be seen.