Ooki Brief Accepted; FSB International Rulebook; MiCA Update; SWIFT and CBDCs

DEF Weekly Roundup - October 14, 2022

ICYMI: Ooki vs CFTC Judge Accepts Brief and Motion to Reconsider

On Wednesday, U.S. District Judge William Orrick, of the Northern District of California, accepted our amicus brief on the Ooki DAO matter and ordered the CFTC to respond to our motion to reconsider the judge's ruling that the CFTC's service was valid.

The CFTC now has until November 7th to respond to our arguments. Judge Orrick also set a hearing date on the issue for November 30th.

Financial Stability Board Pushes for International Rulebook 

What happened?

As a result of a G20 mandate, the Financial Stability Board (FSB) published a framework on Tuesday proposing international regulation on crypto-asset activities and markets.

As an international body for monitoring and making recommendations for the global financial system, the FSB set its eyes on crypto-assets as a whole, homing in on stablecoins in particular.

The recommendations were predicated on the assumption that crypto-assets and intermediaries “perform an equivalent economic function” as TradFi and should be held to the same standards, while recognizing their “novel features and risks.”

The first set of nine recommendations proposed aim to promote a consistent international standard for “regulatory, supervisory, and oversight approaches to crypto-asset activities and markets” with the intention of “strengthening international cooperation, coordination and information sharing.”

These recommendations include: international cooperation and coordination, requiring data storage and access, etc. Most notably, the FSB shared their concern with DeFi protocols’ ability to “obfuscate the identification of a governance body,” recommending authorities require issuers and service providers to disclose “direct and clear lines of responsibility and accountability for the functions and activities they are conducting.”

The FSB also added ten recommendations “to promote consistent and effective regulation, supervision and oversight of [stablecoins] across jurisdictions” as protective measures against their potential financial stability risks.

What does this mean?

With respect to DeFi, the report is (unsurprisingly) hostile. A “negative reading” of the DeFi portions would suggest that the FSB’s overarching view of DeFi is that there is no such thing as DeFi.

We’ll be responding to the FSB’s report (responses are due 12/15/22), and so long as the recommendations do not mean to suggest that DeFi protocols are problematic due to their inherent peer-to-peer, decentralized nature, we’ll be okay. 

EU Parliament Committee Approves MiCA Crypto Law

What happened?

On Monday, the European Parliament Committee on Economic and Monetary Affairs (ECON) approved the Markets in Crypto Assets (MiCA) law in a 28-1 vote, pushing the law a step closer to adoption.

The law is meant to establish a uniform EU legal framework to protect consumers, combat market manipulation and financial crime, and instill environmental safeguards. ECON was tasked with voting in the European Parliament and agreed upon certain provisions.

Consumer protection provisions agreed upon by the committee cover transparency, disclosure, authorization, and supervision of transactions for crypto-asset issuers and traders. This includes a legal framework regulating public offers of crypto-assets.

Concerning NFTs, ECON suggested the possibility of their reclassification to either a financial instrument or a crypto-asset subject to MiCA depending on their development.

Lastly, ECON focused on reducing “the high carbon footprint of crypto-currency” from transaction validations by requiring service providers to disclose their energy consumption. The law does not go so far as to ban Proof-of-Work (PoW). 

MiCA will now head to European Parliament for final approval.

What does this mean?

MiCA’s implementation—warts and all—will undoubtedly influence the course of global crypto regulation. The ECON committee’s vote is the next step toward its eventual enforcement, which we expect to be a long, drawn out, and complicated process. Many critical details remain outstanding.

From a high overview, it's encouraging to see the EU take a step back from a de facto ban on PoW and settle on environmental disclosure requirements. Although Ethereum recently transitioned to a Proof-of-Stake validation mechanism, PoW remains prevalent. 

SWIFT and CBDCs

What happened?

Last Wednesday, SWIFT published phase two of their Central Bank Digital Currencies (CBDCs) experiment, claiming to demonstrate how to successfully transact between different CBDC blockchains networks as well as with traditional payment networks.

As a backgrounder, SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication and connects banks around the world. SWIFT came to fruition in 1979 when 239 banks from fifteen countries came together to form a cross-border payments network.

Fast forward to today, SWIFT has now brought together its platform simulator with a Connector Gateway to link different CBDC and traditional payment networks with the aim of establishing network interoperability. SWIFT says their “experiments were able to demonstrate transactions flowing across the networks as expected” and have now deployed the infrastructure into a CBDC sandbox with fourteen major banks.

What does this mean?

The CBDC-maxis are having a moment. According to the Atlantic Council’s CBDC Tracker, over 100 countries are exploring CBDCs, with fifty countries in an advanced phase of exploration as of May 2022.

On Wednesday, US Treasury Secretary Janet Yellen suggested CBDC’s are “certainly worth getting involved in developing,” reaffirming federal government support. According to the CBDC tracker, the US currently remains in a research phase.

Accelerating CBDC adoption is concerning, as the technology can threaten privacy and the freedom to exchange by enabling greater financial surveillance and censorship through its centralized infrastructure.

CBDCs hand over “absolute control” (to borrow Agustin Carstens’—the head of the central bank for central banks—characterization of them) of financial transactions to central banks, enabling easy access to both buyers and sellers’ information and transactions, the ability to confiscate funds, etc.

Interested in learning more about the current status of stablecoin legislation in Congress?

Join us next Wednesday at 3pm EST for a Twitter Space on the topic.