The Scenius State of Regulation (Issue #6)
Crypto Policy & Regulation: January 2023
Scenius: The intelligence and the intuition of a whole cultural scene. The communal form of the concept of genius.
Welcome to The Scenius State of Regulation — a monthly publication prepared by Ian Corp, a consultant to Scenius Capital.
Our aim with this publication is to provide a snapshot of evolving regulation affecting digital assets globally.
If you find this newsletter valuable, please subscribe and share The Scenius State of Regulation with your network 💪
United States 🇺🇸, Canada 🇨🇦, & Caribbean 🌎
U.S. Regulators Warn Banks That Crypto Is Not 'Safe and Sound'
In a joint statement, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) said banks should be aware of the “significant volatility and vulnerabilities over the past year” the crypto industry experienced this year.
SEC Alleges Gemini, Genesis Sold Unregistered Securities
The investment regulator took aim at Gemini Earn, the troubled yield-bearing product that hundreds of thousands of U.S. investors entrusted with their crypto. Gemini generated yield on billions of dollars in crypto by loaning deposits to Genesis, which loaned them out again. But Genesis’ November closing of lending withdrawals left some 340,000 Gemini Earn customers and about $900 million in crypto in limbo, the SEC said. The regulator accused the popular program of being an unregistered security.
Digital Currency Group's Genesis Global Files for Bankruptcy Protection
Genesis Global Holdco filed for bankruptcy protection late Thursday in U.S. Bankruptcy Court for the Southern District of New York. The news comes after the firm failed in a bid to raise cash for its troubled lending unit and cut 30% of staff in a fresh round of layoffs in early January. To read the DCG Statement on Genesis Capital’s Chapter 11 Bankruptcy Filing click here: https://dcgupdate.com/
Sam Bankman-Fried Pleads Not Guilty to Fraud and Other Financial Crimes
FTX founder Sam Bankman-Fried pleaded not guilty to a series of financial crimes, appearing before a federal court in New York as part of his arraignment. The disgraced crypto mogul faces eight criminal charges, which include wire fraud and money laundering. He is also charged with violating campaign finance law, allegedly making illicit campaign contributions with embezzled customer funds worth tens of millions of dollars.
Coinbase Reaches a $100M Settlement with New York Regulators
The New York Department of Financial Services announced a $100 million settlement with Coinbase for failures in its compliance program, which the regulator said made the crypto exchange vulnerable to criminal conduct ranging from money laundering to narcotics trafficking. Coinbase will pay a $50 million penalty to New York State and has agreed to invest an additional $50 million in compliance.
CFTC Charges Mango Markets Hacker With Fraud
The Commodity Futures Trading Commission filed charges against Avraham Eisenberg on Monday, accusing him of manipulating the Mango Markets decentralized exchange and stealing over $110 million in digital assets. The news comes a week after the Department of Justice charged Eisenberg with the October 11, 2022 hack.
Coinbase Insider Trader Gets 10 Months In Prison
A crypto first sees an insider trader, Nikhil Wahi, who profited on early knowledge of Coinbase listings sentenced to almost a year in the clink. Wahi pleaded guilty to one count of conspiracy to commit wire fraud in front of the U.S. Attorney’s Office Southern District of New York in September last year.
FTX's US Leadership, Bahamas Liquidators Say They've 'Resolved' Most of Their Issues
FTX's U.S. leadership and the company's Bahamas wing's court-appointed liquidators have formed a cooperation agreement addressing how assets may be inventoried and disposed of, among other issues, a press release said. According to the release, the parties will "work together to share information, secure and return property to their estates, coordinate litigation against third parties and explore strategic alternatives for maximizing stakeholder recoveries."
FDIC and Federal Reserve Issue Joint Statement on Crypto-Asset Risks to Banking Organizations
The agencies are continuing to assess whether or how current and proposed crypto-asset-related activities by banking organizations can be conducted in a manner that adequately addresses safety and soundness, consumer protection, legal permissibility, and compliance with applicable laws and regulations, including anti-money laundering and illicit finance statutes and rules.
US Lawmakers Create 'Congress' First Ever' Digital Assets Subcommittee
The U.S. House Committee on Financial Services has created a subcommittee on “Digital Assets, Financial Technology and Inclusion.” The tasks of the new subcommittee include “Providing clear rules of the road among federal regulators for the digital asset ecosystem, developing policies that promote financial technology to reach underserved communities, [and] identifying best practices and policies that continue to strengthen diversity and inclusion in the digital asset ecosystem,” the House Financial Services Committee explained.
White House Blames Congress for Failure to Enact Crypto Regulations
The White House pointed the finger at Congress for stalling on a comprehensive, national crypto regulatory framework, outlining numerous actions lawmakers could take to reign-in fraud and bad actors in the crypto sector. Congress “needs to step up its efforts,” four of President Biden’s senior advisors wrote in a White House blog post on crypto policy.
Sens. Warren and Wyden criticize PCAOB over its handling of crypto audits
Democratic Sens. Elizabeth Warren of Massachusetts and Ron Wyden of Oregon are raising concerns over a government audit-overseer's credibility following the fallout from failed cryptocurrency exchange FTX. Warren and Wyden criticized the Public Company Accounting Oversight Board, saying it must act to “maintain its rigorous standards for audit firms.”
3AC Execs Served Subpoena Via Twitter Due To Whereabouts Unknown
Liquidators representing the bankrupt asset manager’s creditors have accused the firm’s co-founders of refusing to cooperate. The subpoenas are related to the ongoing bankruptcy of Three Arrows, whose over-leveraged implosion last year sent shock waves throughout digital asset markets. In an unusual move, the subpoenas — one in the US, one in Singapore — appear to have been served, at least in part, via Twitter.
Nexo sues Cayman Islands regulator over rejected license
Crypto lending platform Nexo is suing the Cayman Islands regulator for denying the firm a virtual asset license. Nexo, which only last week saw its office in Bulgaria raided by 300 police and has been the recipient of cease and desist orders from various U.S. regulators, hopes to have the decision reversed, according to the lawsuit filed Jan. 13.
Crypto Custodians Must Separate Customer, Corporate Assets: NY Regulator
As bankruptcies continue plaguing the crypto segment, New York’s Department of Financial Services (NYDFS) is urging crypto custodians to separate corporate and customer assets, among other measures. New guidance from NYDFS Superintendent Adrienne Harris published Monday states that custodians of digital aassets should “separately account for, and segregate” a customer’s assets from those owned by the company both on-chain and on the custodian’s internal ledger accounts.
New York Hit With Lawsuit After Crypto Mining Facility Approval
In New York’s latest crypto mining setback, an environmentalist collective moved to block the conversion of a long-time power plant to a proof-of-work cryptocurrency mining facility.
Oregon Weighing Crypto Miner Carbon Crackdown
Cryptocurrency miners and related entities could soon be required to adhere to an uncommonly stringent set of restrictions around their energy usage.
The measures — largely an outlier in the US — stem from a bill submitted to Oregon’s legislature on Wednesday. Sponsored by Rep. Pam Marsh, Sen. Michael Dembrow and Rep. Mark Gamba, House Bill 2816 aims to curb the carbon output of such “high energy use” facilities — with the goal of tamping down emissions by 60% below their baseline current levels by 2027.
US Charges Crypto Exchange Bitzlato With Laundering $700M
Bitzlato, a Hong Kong-based platform, has been effectively shut down, and founder Anatoly Legkodymov was taken into U.S. custody, moves that will stop Bitzlato from catering to criminals tied to Russia, Deputy Attorney General Lisa Monaco said at the press conference. She outlined the coordinated enforcement actions, which also included the Federal Bureau of Investigation, French authorities and the U.S. Treasury Department, saying they disrupted "a busy corner of this criminal ecosystem."
FBI Confirms North Korea Behind $100 Million Harmony Hack
The North Korea-linked cyber group had long been suspected of being behind the attack, but their involvement hadn’t been confirmed by authorities until now. According to a Jan. 23 statement, the FBI noted that “through our investigation, we were able to confirm that the Lazarus Group and APT38, cyber actors associated with the DPRK, are responsible for the theft of $100 million of virtual currency from Harmony’s Horizon bridge.” The Harmony Bridge hack in 2022 was the result of security holes in Harmony’s Horizon Ethereum bridge which allowed the cyber attackers to swipe a number of assets stored in the bridge via 11 transactions.
U.S. Securities Regulator Probes Investment Advisers Over Crypto Custody
The U.S. Securities and Exchange Commission is probing registered investment advisers over whether they are meeting rules around custody of client crypto assets. The SEC has been questioning advisers' efforts to follow the agency's rules around custody of clients' digital assets for several months, but the probe has gathered pace in the wake of the blow-up of crypto exchange FTX.
Nexo Pays $45 Million to Settle SEC and State Charges for Failing to Register Lending Product
Nexo agreed to pay $45 million to federal and state agencies after being charged by the Securities and Exchange Commission for failing to register the offer and sale of its retail crypto asset lending product, called the Earn Interest Product. The lender will pay $22.5 million in penalties and agreed to cease the sale of the Earn Interest Product to U.S. investors, the agency said in a statement. Nexo also agreed to pay an additional $22.5 million to settle similar charges made by state regulatory authorities.
US Senators Press Crypto Bank Silvergate on Ties to FTX
A bipartisan group of U.S. senators is pushing Silvergate Capital to provide more details about what it knew about FTX’s alleged misuse of customer funds, according to a report in Bloomberg.
Bankruptcy judge approves BlockFi’s employee retention program
Failed crypto lender BlockFi can offer bonuses to top staff, after a bankruptcy court judge approved an employee retention program. BlockFi has lost 11 employees, nearly 10% of its remaining workforce, in a “war for talent” since filing for bankruptcy protection.
Sam Bankman-Fried Seeks Right to Transfer FTX's Crypto
Lawyers for Sam Bankman-Fried have argued he should be allowed access to assets and crypto held by his former company, FTX, saying there's no evidence he's responsible for previous alleged unauthorized transactions.
Law firm Sullivan & Cromwell can represent FTX debtors, judge rules
White shoe law firm Sullivan & Cromwell can represent FTX debtors in the troubled exchange’s bankruptcy case, a Delaware bankruptcy court judge ruled, after finding no evidence of an “actual conflict.” The firm faced objections in court for its work with FTX before the crypto behemoth filed for bankruptcy in November.
Judge Rules Identities of 2 Parties Who Backed Sam Bankman-Fried’s $250M Bond Can Be Revealed
U.S. District Judge Lewis Kaplan ruled on Monday that the names of the two currently unidentified people who co-signed Sam Bankman-Fried’s $250 million bail bond can be made public. It's already known that the FTX founder's parents also co-signed, but the other names were kept private.
SEC bats down ARK's and 21Shares' second bitcoin ETF proposal
The Securities and Exchange Commission has rejected a spot bitcoin exchange-traded fund proposed by ARK Investment Management and 21Shares. The decision marks the second time ARK and 21Shares have attempted to get the Cboe BZX Exchange off the ground, only to be denied by the commission. The SEC rejected the initial proposal from the companies to establish a bitcoin ETF last April. The SEC’s statement echoed prior rulings.
Highlights from the court report detailing Celsius' Ponzi-like downfall
Highlights include that the crypto lender, which is in the middle of the bankruptcy process, spent at least $558 million purchasing its own token, CEL. That it blew past its own credit limits, including billions in loans to Tether. That Co-founder and former CEO Alex Mashinsky misled about sales of his own holdings in the company’s token. And finally that the failed lender also owes millions in back taxes.
FTX-linked Alameda Research sues Voyager Digital for over $445M
Troubled crypto trading firm Alameda Research is suing failed crypto lender Voyager Digital for more than $445 million, seeking to recover loan repayments that it made after Voyager filed for bankruptcy protection. The new court filing claims Voyager and other crypto lenders “either knowingly or recklessly” fueled the alleged misconduct that took place at Alameda Research.
Mt. Gox repayment registration deadline moved to March 2023
Mt. Gox creditors will have more time to decide on which repayment method they want to be paid in and register their payee information at the defunct crypto exchange. In an announcement dated Jan. 6, Mt. Gox trustee Nobuaki Kobayashi stated that the previously announced deadline for repayment selection which was on Jan. 10, has now been moved to March 10.
Latin America 🌎
El Salvador Passes Legal Framework for Non-Bitcoin Digital Assets
The law will apply to all digital assets except for Bitcoin. The law will also pave the way for issuing volcano bonds.
El Salvador one step closer to bitcoin bonds after law passage
El Salvador’s Legislative Assembly approved a law on the issuance of digital assets, paving the way for bitcoin bonds championed by President Nayib Bukele.
Middle East & Africa 🌍
Iran and Russia Want to Issue New Stablecoin Backed by Gold
According to the Russian news agency Vedomosti, Iran is working with Russia to create a “token of the Persian Gulf region” that would serve as a payment method in foreign trade. The token is projected to be issued in the form of a stablecoin backed by gold, according to Alexander Brazhnikov, executive director of the Russian Association of Crypto Industry and Blockchain.
Central African Republic working to integrate Sango coin into its economy
The Central African Republic (CAR) has set up a task force to explore modalities for integrating its national crypto, called the Sango coin, into the country’s economy, according to a statement from the government on Tuesday.
Former Komainu president Orser named CEO of Dubai’s crypto regulator
Henson Orser, a Nomura veteran who spent two years as president of the Japanese bank’s crypto project, Komainu, is now leading Dubai’s dedicated virtual assets regulator. The so-called Virtual Assets Regulatory Authority (VARA) was set up in March 2022 and is responsible for granting licenses to crypto operators and regulating the sector in the Emirate of Dubai.
Europe 🌍
Italian Lawmakers Approve 26% Capital Gains Tax on Crypto
Italy's Parliament has approved a 26% capital gains tax on crypto. The tax, in the works since early 2022, will be levied on profits in excess of 2,000 euros.
Turkey to Use Blockchain-based Digital Identity for Online Public Services
Turkey plans to use blockchain technology during the login process for online public services. E-Devlet, Turkey’s digital government portal used to access a wide range of public services, will use a blockchain-based digital identity to verify Turkish citizens during login.
French Central Banker Pushes Mandatory Crypto Firm Licensing
Bank of France Governor François Villeroy de Galhau is looking to tighten the country’s grip on companies providing crypto services this year — ahead of EU-wide regulation expected to roll out in 2024. “The disruption seen in 2022 is nourishing one basic conviction: France should switch as soon as possible to the compulsory authorization of DASPs (digital asset service providers) rather than simply requiring their registration,” Villeroy said.
French senators vote to ease crypto licensing regulation
The French National Assembly voted in favor of rules that will ease licensing requirements for crypto firms, offering a sigh of relief for the industry. Lawmakers opted for an amendment proposed by Sen. Daniel Labaronne that allows crypto firms to register with the financial regulator following requirements already covered by the European Union’s comprehensive regulation for crypto assets which will enforce licensing. The vote passed with a tally of 61 in favor and 33 against.
Nexo Office Raided by Bulgarian Police in Wide Investigation
Crypto lender Nexo’s office in Sofia was raided by Bulgarian police as part of an investigation into suspected money laundering and tax crimes.
Binance Obtains Swedish Regulatory Approval
Binance, one of the largest cryptocurrency exchanges, has an established presence across the globe. According to the details of a press release, the global cryptocurrency exchange has been granted regulatory approval by the Swedish Financial Supervisory Authority (FSA).
EU's Final Vote on MiCA Regulation Postponed until April
The European Union’s landmark crypto regulation, Markets in Crypto Assets (MiCA), won’t see a final vote in the European Parliament until April, stalling the process for the new rules to be enforced. The delay is “technical” and most likely caused by issues in translating the almost 400-page file into the 24 official languages of the bloc.
Europe’s big bet on crypto regulation
As governments scramble to figure out how to regulate crypto markets, the European Union has produced one of the most comprehensive crypto frameworks to date.
EU policymakers designed the Markets in Crypto-Assets laws to be a “global standard-setter,” with the hope that greater regulatory certainty will act as a magnet for the digital asset industry. The bill awaits a final vote in the European Parliament in April.
European cross-border crypto fraud network dismantled
European law enforcement agencies have dismantled a crypto fraud network across Serbia, Germany, Cyprus and Bulgaria. The cross-border operation allegedly used call centers to defraud international victims out of tens of millions of euros. The European Union Agency for Criminal Justice Cooperation and Europol arrested 14 people in Serbia and one in Germany after the online scam investigation launched in 2021.
UK Denies Crypto Companies the US Lets Operate
Crypto companies with US operations — including Wirex and B2C2 — withdrew their applications to register with a United Kingdom financial watchdog in recent months after the standards for acceptance were raised. The vast majority of crypto firms that have attempted to register with the UK’s Financial Conduct Authority (FCA) have been denied, the agency reported this week.
ECB says it will leave digital euro privacy decisions to EU lawmakers
The European Central Bank leaves the decision on the level of privacy a digital euro will offer users up to legislators. Policymakers will need to balance public and private interest, said ECB executive Fabio Panetta.
Digital pound won't track retail transactions, UK minister says
A digital pound platform would give authorities visibility into banks and not users, a treasury minister said in a Parliament meeting. A consultation paper on a UK central bank digital currency will be published by the government in the coming weeks, in cooperation with the Bank of England.
Montenegro’s central bank teams up with Ripple on digital currency pilot project
Montenegro’s prime minister announced a central bank “digital currency or stablecoin” project with Ripple; the Balkan country currently uses the euro instead of its own national currency.
Asia 🌏
India’s Reserve Bank Governor Believes Crypto is ‘Nothing but Gamble’
Reserve Bank governor Shaktikanta Das on Friday reiterated his call for an outright ban on cryptocurrencies, saying these are "nothing but gambling" and their perceived "value is nothing but make-believe."
China Counts CBDC in Monetary Base Supply for First Time
For the first time ever, the People’s Bank of China (PBOC) has included its central bank digital currency (CBDC) in official cash reports. China’s digital yuan, otherwise known as e-CNY, amounted to 13.61 billion yuan (roughly $2 billion) by the end of December, per official figures reviewed by the South China Morning Post. That reportedly converts to 0.13% of China’s outstanding monetary base supply. Unlike bitcoin and ether, the digital yuan does not run on a blockchain or distributed ledger, and should not be considered anything similar to decentralized cryptocurrency, or even stablecoins such as tether and USDC.
Shuttered Crypto Exchange Bitzlato Says It Plans to Resume Operations
The co-founder of Hong Kong-based crypto exchange Bitzlato, which had been charged with money laundering and had its servers seized in a major international operation earlier this month, said the company plans to resume operating and allow partial withdrawals of user funds. The previously little-known exchange was charged in mid-January with laundering over $700 million in funds tied to criminals in Russia. Legkodymov is a Russian citizen and majority owner of Bitzlato who was living in China and was arrested in Miami.
Thai regulator investigating Zipmex over potentially unauthorized earn program
The Securities and Exchange Commission of Thailand is investigating the local unit of troubled crypto exchange Zipmex over its earn program because of concerns that appear to include how the company represented the interest payments it made.
Bithumb probed by South Korean tax officials: Yonhap News Agency
The National Tax Service (NTS) of South Korea has reportedly launched a "special tax investigation" into Bithumb Korea and Bithumb Holdings. On Jan. 10, tax agents raided Bithumb's headquarters in Gangnam-gu, Seoul to investigate if Bithumb complied with tax regulations on cryptocurrency activity
Australia 🇦🇺
National Australia Bank to Launch Stablecoin on Ethereum, Algorand
National Australia Bank (NAB) will become the second of the country’s major financial institutions to launch a stablecoin. The coin, dubbed AUDN, will launch on the Ethereum and Algorand blockchains later this year.
Thank you for reading the Scenius State of Regulation. Please subscribe and share this newsletter with your network.