BitOoda Regulatory Analysis, 12/2/20: U.S. market and regulatory landscape remains dynamic, while global push toward CBDCs continues

The U.S. political transition and the economic impact of the pandemic continue to affect both traditional markets and developments in the digital asset space, while we continue to see increasing indications of a broad shift toward compliance within the U.S. landscape and the advancement of CBDCs around the world. There’s a lot going on with that bottom line — let us break it down piece by piece:

As President-elect Biden unveils his economic leadership team (with Janet Yellen as his nominee for Treasury Secretary) and plans a post-inauguration push for a new stimulus bill, the U.S. market continues to react to both election- and pandemic-related news while BTC prices have risen to new highs. At the same time, we are seeing last-minute actions by the Trump administration and the impact of other recent regulatory changes that provide further indications of the market’s broad migration toward increasingly compliant and regulated activity.

· A Tweet by Coinbase CEO Brian Armstrong noted rumors that outgoing Treasury Secretary Mnuchin plans to impose significant new KYC and transaction monitoring requirements on self-hosted crypto wallets, taking the FATF’s travel rule guidance to a new level. Even though the U.S. would not be the first country to govern self-hosted wallets in this manner (Switzerland and the Netherlands already apply this type of oversight), the change would have a significant impact on exchanges and DeFi developers. We note for our clients that the rule — if approved, which we consider unlikely given the time constraint — would affect retail usage and payments more than institutional activity, and that transactions involving regulated digital asset platforms (e.g., MSBs), particularly those involving fiat on and off-ramps, already are subject to recordkeeping and reporting requirements such as the BSA. In our view, the need for this additional oversight is low and it would do little to deter illicit financial activity because bad actors would simply relocate to other platforms/jurisdictions.

· Speaking of Coinbase, the exchange announced the disabling of its margin trading product due to CFTC’s March guidance on what constitutes “actual delivery” of digital assets. Coinbase does not believe it is possible for it to comply with the new guidance because it cannot hold or control digital assets once they have been delivered via a margin contract, and the guidance specifies that “actual delivery” only occurs when the customer controls the purchased cryptocurrency. Coinbase noted the need for “clear, common-sense regulations for margin lending products.” Coinbase’s cancellation of its margin trading reflects the increasing mainstream implementation of regulatory compliance by U.S. market participants; we will be interested to see if other exchanges that offer margin products (such as Kraken) follow suit.

While U.S. regulators and market participants begin to look ahead to digital asset regulation under the Biden administration, other global powers are forging ahead with national and regional plans to issue CBDCs and integrate digital assets into mainstream economic planning.

· ECB President Christine Lagarde continues to make bullish statements regarding a digital euro, while focusing on the risks of private stablecoins. We believe that — like the Digital Dollar — the question regarding the digital euro is not if, but when.

· China’s President Xi Jinping, on the other hand, is sending unambiguous signals about Beijing’s intentions for its digital currency as he called for other regional nations to partner in the creation of a “Digital Silk Road.” In the meantime, the governor of the People’s Bank of China announced that the testing phase of the digital yuan has involved over 4 million transactions to date, indications of China’s continued focus on expanding its already-significant first-mover advantage in developing the infrastructure for the digital economy.

· Australia announced it is joining the list of nations exploring a CBDC for integration into the country’s payment system using an Ethereum-based platform.

We will continue to monitor the impact of new and proposed regulations affecting the digital asset ecosystem during the administration transition and beyond, so you can stay informed of changes to the market and product landscape.

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