Welcome to another edition of Veriscope Regulatory Recap! This week, we have covered the Biden administration's push for tougher crypto regulations to the US Treasury red flagging abuse of crypto mixing services by malicious actors. So, without further ado, let’s dive straight into it.
In the aftermath of the much-debated FTX collapse, US President Joe Biden's administration has underlined the need for stronger regulatory controls over crypto.
Recently, White House Press Secretary Karine Jean-Pierre highlighted the risks of the lack of crypto asset regulation.
She said, "without proper oversight, crypto risks harming everyday Americans, so this is something that we see as an important issue, but the most recent issues further underscore and prove why prudent oversight of cryptocurrencies is indeed needed."
The statement comes just after the recently concluded G20 Summit in Bali, Indonesia, where leadership called for proactive regulation of digital assets. They also called for enhancing public awareness of risks, reinforcing regulatory results, and ensuring a fair playing field while leveraging innovation advantages, per the G20 leaders' statement released on the White House website.
The leaders of the G20 member nations have also welcomed FSB's approach of creating a comprehensive global framework for regulating crypto based on the 'same activity, same risk, same regulation' principle.
The ongoing turmoil in the crypto market is a much-needed catalyst for the Financial Stability Board (FSB). As such, it is giving "all the more reason" to the Financial Stability Board (FSB) to develop a globally consistent regulatory framework, said Steven Maijoor, head of the agency's working group on crypto assets.
The unbelievable growth of cryptocurrencies, coupled with a lack of regulations and structural vulnerabilities, means these nascent ascent class will "soon reach a point where they represent a threat to the stability of the global financial system," said Maijoor at the Institutional Digital Assets and Crypto Regulation Symposium last week in London.
He further said that such a high level of information asymmetry is very-much in characteristics of cryptocurrencies, so it "cannot simply be considered a fad."
Moreover, the cross-border nature of crypto assets is particularly a "challenge for national supervisors," requiring a coordinated cross-border response, which is "exactly what the FSB is working on," Maijoor said.
"Crypto activities in many ways resemble the activities of traditional finance," and as such, these activities should be regulated on the "same activity, same risk" principle, he said.
The ISDA (International Swaps and Derivatives Association) chief executive says they are planning to publish its standardized documentation for the OTC crypto market by the end of the year.
"The recent extreme volatility in this asset class has brought some important questions to the fore," said ISDA chief Scott O'Malia at the Japan Derivatives Forum. "Among the most important is what rights investors have in the event of a bankruptcy of a crypto exchange or wallet provider. At the moment, the answer is not always entirely clear."
O'Malia wants to have the same legal certainty in the OTC crypto derivatives asset class that exists in other derivatives markets. The new standards, according to him, "will reflect the specific characteristics of the crypto market."
O'Malia said at the event that they are not only focusing on legal and documentation issues but also a risk-appropriate capital framework.
ISDA will also consider developing collateral documentation for OTC crypto derivatives markets along with standard contracts for swaps and physically-settled transactions.
"I recognize that (the crypto) industry has unique insight into illicit finance threats," remarked Elizabeth Rosenberg, Treasury Assistant Secretary, on the feedback received from crypto market participants on the Biden Administration's Executive Order on Digital Assets.
Stronger two-way dialogue, according to her, can "strengthen the US government's understanding of technological innovations and changes, as well as create greater opportunities for industry to identify areas where these innovations may result in regulatory uncertainty."
Public blockchains can be used to support AML/CFT compliance, said Rosenberg while acknowledging that crypto users may prefer privacy while engaging in crypto transactions.
While the White House wants to ensure that "safeguards are in place to promote the responsible development of virtual assets to maintain privacy and shield against arbitrary or unlawful surveillance," the challenge is with mixers that illicit actors abuse to launder funds, Rosenberg said.
To prevent this, the White House needs the crypto industry to take clear steps aligned with AML regulations and sanctions obligations, she added.
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