SEC Updates 2022 Agenda; UK Treasury Scales Back Wallet Requirements; Rep. Himes' CBDC Report
DEF Weekly Roundup - June 23, 2022
SEC Updates 2022 Agenda
The Securities and Exchange (SEC) has released its updated semiannual regulatory agenda (to be published in the Federal Register), and it includes two rulemakings for finalization that are relevant to DeFi. According to the agenda, the SEC will move to finalize:
its proposal to expand the definition of a securities “exchange” to include persons who “make available” “communication protocol systems” through which people may express an interest in trading a security. Finalization is listed for this Fall (see our first and second comment letters on this proposal).
its proposal to expand the definition of a “dealer” to capture additional registrants (see our comment on this proposal here). Finalization for this proposal is listed for next April.
But the SEC itself isn’t in agreement about this agenda. SEC Commissioner Hester Peirce released a statement on the agenda, arguing that it “devotes the agency’s limited resources to rulemaking proposals disconnected from [the SEC’s] core mission” and “breaks with the Commission’s longstanding tradition of deliberative rulemaking that facilitates broad participation by affected market participants.”
Commissioner Peirce specifically mentions DeFi and crypto issues a few times, including:
“Although the Agenda includes rules that might regulate crypto protocols or platforms through an unmarked backdoor, it does not appear to include any rules primarily intended to grapple with the main regulatory questions that have arisen around these assets.” (The “backdoor” citation references the exchange rulemaking, and Peirce notes “numerous commenters have responded to this rulemaking with questions about it application to crypto.”)
Also citing the exchange rulemaking, Peirce says the SEC’s proposals “contemplate far-reaching changes to our regulatory regime, the breadth of which is hard to glean from merely reading their titles.” She argues that the exchange rulemaking “could draw in numerous communication protocol systems from both the traditional and decentralized finance worlds.”
Why does this matter?
We won’t bore you by rehashing all the potential implications of the “exchange” rulemaking for DeFi developers in the United States. Needless to say, it’s concerning that the SEC appears committed to finalizing this misguided rulemaking and to do so hastily.
In particular, we think it's noteworthy (and disheartening) that the SEC released this agenda — signaling its intent to finalize the exchange rulemaking this year — before the public comment period on the proposal had even closed.
It seems to us that the SEC has made up its mind on its recent and controversial proposed rulemakings. For the DeFi community, that means one thing: cast away illusions, prepare for struggle. Should the SEC finalize its proposed rulemakings without major substantive changes and a proper notice and comment process, we believe the DeFi community will have no choice but to seek judicial recourse. We intend to lead that effort.
UK Treasury Clarifies “Travel Rule”
This week, the United Kingdom’s Treasury published a response to comments on its proposed implementation of the “Travel Rule” in crypto markets. For context, depending on how it’s implemented, the “Travel Rule” could require financial institutions to KYC their customers’ and other individuals' wallets. It’s a regulatory issue that has come up several times before, e.g. in Europe earlier this year and in the US at the end of 2020.
The UK Treasury plans to take a measured approach to Travel Rule implementation. It intends to “[make it] clear that the Travel Rule only applied to intermediaries that are crypto asset exchange providers or custodian wallet providers and will not capture others, like software providers.”
Moreover, the Treasury also reversed course on its proposal to require crypto intermediaries to “KYC” wallets with which their customers transact. The response says, “Instead of requiring the collection of beneficiary and originator information for all unhosted wallet transfers, crypto asset businesses will only be expected to collect this information for transactions identified as posing an elevated risk of illicit finance.”
Moreover, the Treasury remarks that the UK government “does not agree that unhosted wallet transactions should automatically be viewed as higher risk” because “there is not good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.”
What does this mean?
It means there’s hope!
The UK government has not only explicitly rejected the widely-held misconception that self-custody and peer-to-peer transactions pose a heightened risk for money laundering and terrorist financing (ML/TF); it also explicitly affirmed the benefits of self-custody for crypto asset holders. The UK Treasury has officially taken a quite different stance from the Financial Action Task Force, for example, which views self-custody with suspicion.
Rep. Himes’ CBDC Policy Recommendations
Representative Jim Himes released policy recommendations for a potential retail U.S. central bank digital currency (CBDC). The paper presents a list of three potential benefits from a retail CBDC. The list reads as follows:
“1) a U.S. CBDC, by exclusively leveraging the full faith and credit of the U.S. government, could be a uniquely secure and trusted platform for innovation; 2) as the digital equivalent to a physical U.S. dollar, a CBDC is a likely vehicle for preserving or even buttressing the dollar’s position as the global reserve currency of choice, and 3) a CBDC might have trust and cost advantages that encourage the unbanked and underbanked to participate more comprehensively in the financial system.”
Himes further recommends that a U.S. retail CBDC system “be intermediated,” “[limit] the amount of digital currency that could be maintained in a CBDC wallet,” “[pay] no interest on CBDC deposits,” and “be deployed using a permissioned semi-distributed architecture.”
What does this mean?
Himes’ policy recommendations provide ample evidence that the concept of a “CBDC” is meaningless without additional elaboration. A CBDC could be constructed to truly replicate the privacy and access benefits of cash, or it could be constructed to be the greatest surveillance panopticon ever created.
The question we have to ask is: would the Himes’ framework really be a “digital equivalent to a physical U.S. dollar,” as the report says?
Using the key characteristics of cash developed by our friends at Coin Center, we can compare the features of cash, commercial bank money, and the Himes proposal:
As you can see, the Himes CBDC hardly comes close to replicating the features of physical cash; in fact, it replicates none of them.