BitOoda Regulatory Analysis, 4/29/21: Regulatory Landscape Catching Up with Market Advancements

An industry CEO during a recent webinar said that the crypto regulatory landscape was “catching up” with the development of an increasingly sophisticated market infrastructure. We couldn’t agree more. Reviewing regulatory developments in the past month — including statements from U.S. government leaders, a number of key industry hires of former regulators, new guidance from the Financial Action Task Force (FATF), new proposals on the legislative front, and new enforcement precedents — makes us more convinced than ever that regulators’ understanding of the key issues facing the industry, and their willingness and ability to advance policy and legislative proposals to close these gaps, are growing.

For BitOoda, these developments underscore the importance of our ability to enable our clients to engage in the digital asset markets with confidence not only in the expertise of financial service providers like us, but also in their ability to transact compliantly. Increasing institutional adoption, combined with the growing expertise of regulators, demand both fully-compliant products and services, and the highest degree of professionalism from industry participants.

Government Dialogue Confidently Laying Groundwork for Regulatory Advancement

As we continue to watch the new administration for indications of its policy intentions for digital asset regulation, we are gratified to see that SEC Commissioner Peirce’s continued advocacy is being echoed by counterparts at CFTC and on Capitol Hill.

· Peirce updated and reintroduced her token safe harbor proposal, stating “Now, as a new Chairman is coming into the SEC with a new agenda, is the perfect time for the Commission to consider afresh how our rules can be modified to accommodate this new technology in a responsible manner. “

· More strategically, Peirce’s comments to the British Blockchain Association noted that “The disproportionate focus on illicit uses and the underestimation of the protective uses of crypto is one example of how evidence-based rulemaking is not yet the norm in crypto-regulation.” She notes, for example, the SEC’s failure to approve a bitcoin ETF (which was reinforced again this week with the announcement of a delay in the Commission’s decision on the VanEck proposal).

· With Heath Tarbert having departed the CFTC, Commissioner Dawn Stump’s recent speech on innovation and regulation could signal her intent to fill the gap in the CFTC’s crypto leadership. She effectively describes the CFTC’s regulatory and enforcement authority and how it applies to bitcoin and digital assets, before noting the importance of the XRP case to defining the SEC and CFTC’s authorities in the digital asset space.

· Lastly, Congressman Kevin McCarthy — Republican House leader — could emerge as a key driver of real progress on digital asset legislation, based on his comments about the need for the government to address — not ignore — bitcoin and the need for an effective national crypto policy.

Digital Asset Leaders Increasingly Mobile between Public and Private Sectors

We assess the increasingly frequent migration between public and private sectors by crypto-savvy executives signals the growing legitimacy of the digital asset industry in the eyes of regulators, and also a growing level of mutual understanding between regulators and industry of the issues faced by the space as a whole.

· Former Acting Comptroller of the Currency Brian Brooks was recently hired as the new CEO of Binance.US.

· Former Chainalysis Chief Technical Counsel Michael Mosier was announced as Acting Director of FinCEN.

· Former CFTC Chair Heath Tarbert has joined Citadel Securities, one of the largest market makers in the world.

FATF Continues to Push Global Standards

The FATF, which serves as the international AML standard-setting body, continues to issue regular digital asset guidance that increasingly serves as the authoritative voice on global crypto policy. Its most recent update took aim at the basic definition of “Virtual Asset Service Provider” or VASP, and was described by one expert as “the most technical, in-depth crypto native-esque paper … from any government or intergovernmental organization.” While the SEC, CFTC, and FinCEN have been bolstering their expertise here in the U.S., critical coordinating bodies like the FATF have been doing the same on the multinational stage.

New Legislative Proposals Signal Interest in Broad Framework

The still-new 117th Congress is beginning to make some moves that again raise hope Capitol Hill could modernize the crypto legislative foundation. The Eliminate Barriers to Innovation Act passed the House — a rarity for a digital asset bill — and will next head to the Senate. This bill calls for the SEC and CFTC to jointly establish a working group to assess the U.S. legal and regulatory framework for digital assets. As we have written numerous times in the past, we strongly believe a strategic-level legislative solution is needed to address the most vexing crypto regulatory issues, such as the jurisdictions of the various U.S. agencies and token classification guidance (i.e., the eternal security vs. commodity debate).

Enforcement Activity Signaling Greater Confidence by Regulators in Policing the Crypto Space

With Gary Gensler’s confirmation as the next SEC Chair and the growing level of expertise across regulatory agencies, we continue to believe that the pace of enforcement will accelerate in the Biden administration. CFTC’s actions against Coinbase and BitMEX, as well as its ongoing probe of Binance, already signal to us the agency’s growing confidence and willingness to take action against both U.S. and foreign companies. On the SEC side, the commission’s lawsuit against Ripple obviously will represent a critical outcome for the space, following last year’s cases against Telegram and Kik. We at BitOoda continue to welcome smart enforcement that brings clarity to the market and targets those who violate established rules and guidelines.

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