Bitcoin Regulations News

FCA’s New AML Regime – UK’s Crypto Market Will Have to Adapt in 2020

The Financial Conduct Authority (FCA) is now the United Kingdom’s sole Anti-Money Laundering (AML) authority for the crypto business. After a decade of compliance under a laissez-faire approach to AML legislation, U.K.-based crypto firms now face a significantly more stringent set of rules. With the FCA thrashing U.K. crypto regulation into shape, the consequences upon start-ups, user privacy and adoption will likely be wide-reaching. 

In its early stages, decentralized finance (DeFi) has uncovered a bounty of possibilities within the economic sector. From borderless banking to using blockchain technology, DeFi is leading a comprehensive coup d’état against an entrenched financial industry. Nevertheless, inherent benefits aside, cryptocurrencies aren’t without their pitfalls.

One particular snag arises from one of the fundamental characteristics of cryptocurrencies: anonymity. Within any given transaction, personal information is confined to a pseudonymous string of characters, also known as the public address. 

This singular address provides everything needed to carry out a monetary transfer, without compromising on user privacy. Given this, it’s perhaps unsurprising that money laundering miscreants are forming an affinity with digital assets.

Regulation rising

Last year, tensions surrounding cryptocurrency money laundering were front and center. A report from analytics firm Chainalysis confirmed that $2.8 billion of illicit Bitcoin (BTC) had been laundered via crypto exchanges in 2019. However, rather than condemning the exchanges themselves, the report took aim at the underregulated over-the-counter brokers operating within them.

Speaking to Cointelegraph, Jesse Spiro, head of policy at Chainalysis, believes that “Cryptocurrency’s inherent transparency makes this a solvable problem,” adding that the issue may have an internal solution:

“Money laundering in the fiat world is typically a black box that can often only be opened by getting a search warrant and poring over a suspect’s bank records. Here, the industry and law enforcement can see how these bad actors move money and take steps to shut them down.”

Looking to solve them the dilemma — but refusing to abide by inherent transparency alone —  the Financial Action Task Force (FATF) introduced the Travel Rule — a requirement forcing member nation crypto firms to disclose customer information on transfers over $1,000. 

This resulted in an entirely different set of tensions but from the cryptocurrency community this time. Many propagators of the industry remain diametrically opposed to the Travel Rule, deeming it an invasion of financial privacy. Spiro confirmed that the new rule posed a problem for privacy coins in particular:

“We expect this trend to continue as local regulation around the world begins to align with FATF, and privacy coins such as Zcash emphasize their ability to ‘turn on’ transparency as well.”

Indeed, paying no heed to the zeitgeist of the digital generation, scores of regulators followed the FATF’s suit, bolstering their own crypto-centric AML policies.

Related: New EU AML Compliance Laws Could Disrupt the Crypto Industry

In Europe, the EU released its 5th Anti-Money Laundering Directive (5AMLD). Along with it came a heavy crackdown on money laundering and terrorism financing. The directive upped the ante on the already unforgiving Know Your Customer (KYC) and AML compliance — forcing multiple crypto firms into liquidation. U.K.-based crypto wallet provider Bottle Pay was among the first casualties citing a refusal to disclose user information as the primary basis for its termination.

The FCA’s demands

Things are about to shake up even more for the British-based companies. Last year, in late October, the FCA declared it was taking over as the AML and Counter-Terrorist Financing (CTF) supervisor of the U.K. But what does this mean for U.K. crypto firms and the wider cryptocurrency market?

The FCA is tasked with ensuring that all U.K. crypto firms adhere to the AML/CTF policy. The bulk of this AML compliance is gleaned from a menagerie of legislation, including the EU’s 5AMLD, and the amended Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017.

FCA jurisdiction officially came into effect on Jan. 10, 2020. From here on out, all U.K.-crypto companies are required to register with the agency. Luckily, existing business operations may continue unregistered but are required to sign up for FCA supervision by Jan. 10, 2021 — or terminate all activity.

Nevertheless, FCA supervision will be undertaken regardless of company certification. This supervision will consist of the same approach faced by other organizations within the agency’s regulatory scope. Additionally, businesses exhibiting higher risk will incur a “more intrusive” level of scrutiny than others. 

As part of their supervisory assessments, the FCA requires businesses to provide policies and procedures in mitigating any AML/CTF risks. The agency advises firms to carry out their own evaluation of risk controls to confirm suitability. This also includes appointing a member of the board to ensure adherence to AML/CTF policy.

Persecuting privacy

While these protocols appear fairly typical, probe deeper into their “non-exhaustive” list of compliance orders, and you’ll unearth one stipulation that stands out as potentially problematic.

Nestled into the FCA’s supervisory guidelines is the following requirement, prompting crypto firms to:

“Undertake ongoing monitoring of all customers to ensure that transactions are consistent with the business’s knowledge of the customer, the customer’s business and risk profile.”

It seems the FCA isn’t taking an easy line when it comes to AML/CTF compliance. And while this was expected, the adage of regulation stifling innovation is perhaps applicable. As we’ve observed so far, the inability to provide financial privacy has already backfired for several crypto firms — and will likely impede exchanges and wallet providers more than most.

Anonymity sacrifices aside, the necessity to undertake KYC checks for every patron is sure to cause delays. However, with increased financial responsibilities along and added staffing requirements, the burden on crypto firms is becoming increasingly heavy.

Universal consequences

Cal Evans, a managing associate at Gresham International and a U.K. lawyer, aided the FCA in forging their crypto guidance. Speaking to Cointelegraph, Evans weighed in on the new regime’s potential ramifications on the broader crypto market:

“As we saw with the earlier EU draft of the law, the whole purpose of these measures (across the EU) is to stop the abuse of anonymity being used within the crypto space. These new measures will 100% impact on the privacy of crypto users. They are trying to stamp out the privacy associated with the use of many cryptocurrencies.”

Of course, while several cryptocurrencies can provide a degree of anonymity, none offer the same level of obscurity as the privacy coin. It stands to reason that these cryptocurrencies will cease to exist, at least via U.K.-based exchanges. Evans argues that many will simply migrate off-shore:

“Privacy coin holders will be impacted by this the most (within the U.K. market), however, many will most likely trade these coins privately or through an exchange which does not deploy such high KYC requirements. This means you will see many ‘private chain’ coins move to off-shore exchanges.”

Still, all things considered, regulation remains an innately positive thing. In fact, for the cryptocurrency industry, it’s a blessing — a well-disguised blessing, but one nonetheless.

This much is evident from Chainaylsis’s money laundering report, which concluded that fitting KYC implementation would have stopped the illicit BTC dealings in its tracks. Spiro stands by this, opining that local regulation, if implemented globally, could stamp out illicit activities and bad actors, which, in turn, might be hugely beneficial for mainstream adoption:

“Broader regulatory initiatives (FATF, 5AMLD) have already been initiated, and now local regulation is starting to follow, which is the intended progress for AML/CFT regulation. Additionally, as we see more illicit activity mitigated as the result of regulation, institutional adoption will become a reality, which will be key for future global adoption.”

Indeed, alongside effective regulatory oversight comes further legitimacy. London has always been a pioneering force in the fintech industry. However, with a major U.K. regulator now keeping tabs, the crypto industry will arguably garner further respect from the broader financial sector, possibly encouraging institutional participation within the U.K. Evans conceded that while these new regulations will boost institutional interest, it may end up alienating startups:

“The U.K. has long been a ‘safe heaven’ for companies looking to operate in the crypto market. The ease of incorporation and flexible approach to crypto that the crypto task force had taken to date, often meant that crypto companies could operate within the U.K. with relative ease. The biggest impact we are likely to see is startups avoiding the U.K. altogether and more regulated ‘established’ firms moving there.” 

Startups remain a crucial facet of any economy. These firms not only generate fresh jobs but also instill further dynamism to the market by encouraging innovation and stirring competition.

This isn’t the only issue arising from the FCA’s new regime, according to Ian Taylor, the chair of CryptoUK, a self-regulatory trade association. Speaking to Cointelegraph, Taylor argued that the FCA may have left some sizable holes yet to be patched and that the FCA’s controls lacked clarity on global access to the U.K. market:

“The draft definition of cryptoasset income implies that the fees will apply to U.K. legal entities, which would infer overseas firms might be able to operate either without license or without being required to establish a U.K.-based legal entity.”

Essentially, this creates a loophole that could afford foreign companies leverage over U.K. based businesses. “The FCA should consider clarifying this position to ensure fairness of competition,” Taylor concluded.

As with most regulatory shake-ups, The FCA’s new regime is a double-edged sword. There’s a delicate balance to be struck between smothering innovation and allowing a no-holds-barred marketplace. For the most part, the consensus seems to be that the FCA is slowly reaching an equilibrium.

Source Cointelegraph

Digital Chamber of Commerce Weighs In on Telegram Legal Battle With SEC

The Chamber of Digital Commerce has filed an amicus brief in the ongoing court case between encrypted messenger service Telegram and the United States Securities Exchange Commission (SEC).

Filed on Jan. 21, the document was authored by Lilya Tessler, a partner and the New York head of Sidley Austin LLP, counsel to the Chamber. 

In the amicus brief — a legal document that allows a non-litigant to submit its expertise or opinion in a case — the Chamber makes a number of arguments regarding how the U.S. District Court for the Southern District of New York should consider digital assets. 

The Chamber is a non-profit trade association established in 2014 which aims to promote the adoption of digital assets and blockchain-based technology. As part of its mission, the Chamber established major blockchain and crypto-related advocacy groups including the Blockchain Alliance and the Token Alliance.

Chamber urges for clarity regarding investment contracts 

Given its supportive stance on blockchain technology, the Chamber emphasized that it is not trying to prove whether Telegram’s $1.7 billion Gram token sale was a securities transaction. Instead, the trade association aims to ensure that there is enough clarity around regulations applying to digital assets:

“Although the Chamber does not have a view on whether the offer and sale of Grams is a securities transaction, the Chamber has an interest in ensuring that the legal framework applied to digital assets underlying an investment contract is clear and consistent.”

As such, the Chamber has urged the Court to distinguish the term of digital asset, which is the subject of an investment contract, from the securities transaction associated with it. The association stated that this requires two separate analyses including whether there is an investment contract that is offered in a securities transaction and whether the subject of the investment contract is a commodity that can be sold in a traditional commercial transaction.

The question of whether a token sale constitutes an investment contract — and therefore a securities offering — has been at the heart of the SEC’s case against Telegram. Earlier this month, Telegram stated that Gram does not constitute an investment product and that investors should not expect profits for buying and holding the token. 

The Chamber says that not all digital assets should be regulated as securities

In the document, the Chamber also states that not all digital assets should be regulated as securities simply because they are based on blockchain technology:

“We further respectfully request that the Court affirm that a digital asset is not a security solely by virtue of being in digital form or recorded in a blockchain database.”

Additionally, it noted that, while digital asset investors should be afforded full protections of securities laws, disclosures required by the securities laws “serve little purpose with respect to commercial transactions in the digital assets themselves.”

Moreover, the brief also stresses that not all digital asset-related transactions require the protection of securities laws, noting that there are a number of related regulators other than the SEC. The Chamber further requested the Court to consider multiple regulatory regimes while making its decision in SEC vs Telegram case:

“Depending on the relevant activity, other regulatory regimes exist to protect purchasers or counterparties. For example, fraud and market manipulation in certain digital asset transactions (depending on the facts and circumstances) is subject to CFTC enforcement authority. Other activities involving digital assets may also be subject to the Bank Secrecy Act, federal and state consumer protection laws, state money transmitter licensing laws, and state laws specific to virtual currency transactions, such as New York’s Virtual Currency Business Activity law.”

As Cointelegrpah reported, Telegram founder and CEO Pavel Durov recently gave an 18-hour long videotaped deposition for the court in Dubai. Throughout the deposition, SEC official Jorge Tenreiro questioned Durov extensively on the company’s expenses and funding used to set up the firm.

Source Cointelegraph

Australian Financial Regulator Could Oversee Facebook’s Calibra Wallet

The Australian Prudential Regulation Authority (APRA) is seeking to oversee stablecoin projects like Facebook’s controversial stablecoin Libra.

In an official proposal to the Senate published on Jan. 20, APRA submitted a possible regulatory framework dedicated to fintech and regulatory technology (regtech) covering topics ranging from digital wallets to data protection. 

The proposed framework, “is intended not only to be fit for purpose for the current financial system but also be able to accommodate future developments and technological advances, such as proposals for global stablecoin eco-systems that have been the subject of significant attention in recent months.”

Overall, APRA admits that digital wallets are an increasingly important part of the financial system thanks to the growing popularity of mobile applications and online purchases. Still, the regulator sees two distinct types of digital wallets:

“Some, but not all, digital wallets hold stored value on behalf of customers and are pre-paid facilities. Others (such as Apple Pay) hold customers’ credit/debit card details and only facilitate payments from that nominated account.”

In the paper, APRA states that it would oversee digital currency wallets that are widely used for payments and value storage, such as Libra’s corresponding Calibra wallet, while excluding wallets that are mostly used to pass payments through, such as Apple Pay. 

For wallets that actually hold the user’s value, APRA has started developing a new principles-based prudential standard to simplify the regulatory requirements for new types of fintech businesses.

Data-driven regulatory approach

The regulator also claims that its data collection efforts provide opportunities for regtech to support the industry. 

APRA is collaborating with multiple other government agencies to develop a data governance approach. To facilitate this effort, it has set up a standing committee with the Reserve Bank of Australia, Australian Bureau of Statistics, Australian Securities and Investments Commission and Treasury to coordinate data collection activities across different agencies.

APRA’s collected data will be processed through an “end-to-end platform that allows improved analytical ability.” The regulator also set up an Innovation Lab dedicated to developing its data science capabilities using artificial intelligence, machine-learning, network analysis and natural language processing. 

Regulators are slow to soften on Libra 

Lawmakers have responded harshly to the Libra stablecoin’s debut and subsequent efforts to gain approval in different jurisdictions worldwide. As Cointelegraph reported at the end of December, Switzerland’s President Ueli Maurer said that — in its current form — Libra has failed and will not be approved, because central banks will not accept an asset backed by a basket of currencies. 

Still, the parties involved in the Libra are still actively pursuing its development despite regulatory malcontent. Recently, the Libra Association — the governing body of the stablecoin — announced that it has formed a new committee to guide the network’s technical development.

Source Cointelegraph

Thai SEC Grants License to Asia-Pacific Crypto Exchange

Thailand’s securities regulator has granted a coveted digital assets exchange license to Asia-Pacific crypto-fiat trading platform Zipmex.

According to a press release shared with Cointelegraph on Jan. 20, Thailand’s Ministry of Finance and the Thai Securities and Exchange Commission (SEC) approved Zipmex for the license, which places strict regulatory requirements on applicants.

To secure the license, hopefuls must prove they have robust finances — with shareholder equity of at least 50 million baht (~$1.65 million) — and operate at a high standard in their IT and cyber security systems. 

Under Thai law, licensed digital assets operators that are granted a license are classified as financial institutions and must comply with Anti Money Laundering reporting obligations. 

A bid for both retail and institutional investors

As per the press release, roughly 30 crypto exchanges have applied for licenses with the SEC, two of whom have already been rejected on the grounds of insufficient Know Your Customer and security measures.

The license was introduced as part of the country’s regulatory framework for digital assets, which led to the launch of its first legal initial coin offering in October 2019. 

Zipmex counts the former chairman of Stock Exchange Thailand, Dr. Sahit Limpongpan, and Professor Dr. Chaiya Yimwilai, Vice Minister to the Thai Deputy Prime Minister, as members of its advisory board.

The operator has cemented a partnership with AEC Securities Public Company in Thailand, which specializes in securities, brokerage and investment banking, in a bid to draw in both retail and institutional investors in the country.

With the license, the exchange expects to start operating in Thailand early this year, having previously launched country-centric platforms in Australia, Singapore and Indonesia.

It also closed a $3 million capital raise led by Infinity Blockchain Holdings in 2018. In a statement for the release, Dr. Limpongpan said:

“Digital currencies and securities are emerging asset classes for both the banked and unbanked. It is an interesting time in our financial history, and I’m glad Thai regulators are working with exchanges to build regulatory frameworks for these new technologies to operate within.”

A more conducive regulatory apparatus

Though they initially attempted to impose a ban on Bitcoin (BTC) back in 2013, Thai authorities came to adopt a more proactive and pragmatic approach to the crypto sector over the past year.

As reported, the Thai SEC granted licenses to four cryptocurrency firms in January of last year: Bitcoin Exchange Co., Bitkub Online Co. and Satang Corporation, as well as digital currency broker-dealer Coins TH.

The approvals were followed by an amendment to the country’s Securities and Exchange Act in February 2019, which legitimized the issuance of tokenized securities via blockchain technology.

Source Cointelegraph

Crypto Fights for Freedom in India’s Supreme Court, Critics Cite Risk

Following the session that took place last August, a three-judge panel from India’s Supreme Court reconvened once again this week to discuss the much-hyped Crypto v. RBI case. During the last hearing, the Supreme Court had asked the Reserve Bank of India (RBI) to clarify its position as to why exactly it enforced a nationwide banking ban on the country’s crypto market, as well as to discuss the seemingly unconstitutional nature of its aforementioned move. 

Ever since the RBI decided to go ahead and issue its controversial prohibition order, a number of public and industry-led petitions have been filed by prominent members of the Indian crypto community contending that the RBI’s decision was not only unjust but also in clear violation of the law. 

As part of its reply, the RBI’s legal counsel pointed out that the institution has complete authority to operate India’s currency and credit system and to protect the nation’s overall financial stability — if it feels the need to do so.

In this regard, the ongoing petition that is currently being heard in front of the Supreme Court has been brought forth by the Internet And Mobile Association of India (IAMAI), a not-for-profit industry body that seeks to expand and enhance India’s online and mobile value-added services sectors.

Latest developments

When the aforementioned case was reopened earlier this week, Ashim Sood, the counsel for the IAMAI, started off by reviewing the arguments that had previously been discussed in court last August. For starters, he once again explained to the judges some of the basics underlying cryptocurrency and blockchain technology and also read out the guidelines issued by the Financial Action Task Force last year. 

Additionally, after explaining how countries like Australia, Malta and Japan had been largely successful in regulating their local crypto markets, he emphasized the need for conventional banking avenues to be made available to blockchain/crypto business owners. Under such favorable regulations, investors, as well as casual altcoin enthusiasts, could gain access to digital currencies in a streamlined, transparent manner.

Cointelegraph spoke to Sumit Gupta, the CEO of DCX, an Indian cryptocurrency exchange, and he believes that Sood has proffered some good arguments on the matter of how the technology works, and how it can be used, given that the right regulation is in place:

“On the question of anonymity with virtual currencies, he explained the strong KYC process practiced by various exchanges. He argued that, although the industry follows strict self-regulation, it cannot enforce them beyond a point, and hence highlighted the importance of positive regulation. He discussed that every new technology will have a grey side, however, positive regulations that curb the negatives are the need of the hour.”

As part of its defense scheme, the RBI alluded to incidents, such as the Binance KYC breach of 2019, as being clear examples of why the crypto industry at large is still in its infancy, and thus, poses a massive cybersecurity threat to the economy of any nation where it is allowed to foster and grow. 

However, Sood told the judges that such cyber attacks were exactly the reason why positive regulatory measures were needed in India — so that the sector as a whole could be better equipped to face such challenges.

He then alluded to a couple of previous judgments passed by the Supreme Court, which clearly stated that legal activities can be only be shut down if a definitive risk has first been identified by the Indian parliament and not by an administrative body like the RBI. In regards to the matter, Gupta added:

“RBI’s arguments may sound inadequate, however, that is something for the judges to decide. Our judicial processes are strong enough and we have complete trust in them.”

Lastly, Kashif Raza, founder of Crypto Kanoon, an Indian crypto news platform that has been covering the ongoing hearing live via its Twitter channel, told Cointelegraph that the main goal of IAMAI’s legal counsel is to establish the fact that the Indian crypto community is not trying to push digital assets as being currencies but rather as alternative investment options. He further added:

“The IAMAI drew the focus of the court on the fact that nowhere in the FATF’s guidelines is it mentioned that cryptocurrencies should be banned completely. India is a member of the FATF, and most of the agency’s guidelines demand for KYC and better cooperation between members when it comes to controlling the cross border movement of crypto-assets.”

Indian Judges seem to have an open mind

Indian judges, who are currently presiding over the hearing, seem to be eager to learn about crypto-based technologies and the immense economic possibilities that they represent. For example, they have requested the legal counsel for the IAMAI to explain how cryptocurrencies were being regulated in countries like Australia, Italy, Malta and Japan, and whether or not instances of money laundering or tax evasion had increased following the implementation of these measures. 

In response, Sood proceeded to take the judges through a detailed comparative table related to different countries, their regime nature and how they were handling crypto-related matters within their respective jurisdictions. Furthermore, he also cited the example of Mt. Gox, and how its collapse led to the creation of an efficient regulatory framework by the Japanese government.

Related: India’s Income Tax Department Is Secretly Training Its Officials to Investigate Cryptocurrencies

The Judges further requested a detailed explanation regarding how current crypto-crypto and peer-to-peer exchange models work as well as how digital currency trading actually takes place. Sood, in response, explained to the panel the various laws that are currently being employed in South Africa, the United Kingdom and certain states of the United States that allow people to trade digital assets in a fully legal and taxable manner.

Lastly, the Supreme Court questioned the IAMAI about various suspicious services, like Silk Road, the dark web, Tor and onion routing, and how such avenues have been used by bad actors to abuse digital currencies in the past. However, the judges did concede that crypto, like any other technology, was not bad in itself and could be used for nefarious reasons when in the hands of the wrong people. 

To elaborate on the subject, Varun Sethi, CEO of Blockchain Lawyer, told Cointelegraph that “The RBI’s argument that crypto’s anonymous nature poses a threat to national security cannot be totally ruled out.” He added that, indeed, crypto can freely flow between international borders, while the cybersecurity risks are hard to deny. He went on to say:

“However, such arguments are similar to challenges faced by other regulators also. The court would surely take cognizance of similar facts and how it was dealt with in other countries.”

Some key concerns put forth by the Supreme Court

Even though the Supreme Court seems to be finally understanding the potential that crypto and blockchain technologies possess in regards to transforming a multitude of local industrial domains, it did express concerns regarding the use of digital assets for money laundering and tax evasion purposes. 

Digging deeper into this argument, Tabassum Naiz, founder of Bit2Buzz, an Indian crypto hub that presents users with a host of educational content, pointed out to Cointelegraph that recently, a number of established Indian financial/banking entities suffered heavy losses due to a host of different cybersecurity breaches and threats. Naiz alluded to banks like HDFC, ICICI, the State Bank of India, Axis and Punjab National Bank as having been embroiled in massive scandals related to money laundering and data breaches. 

While local cryptocurrency exchanges do make use of KYC protocols to minimize the occurrence of such issues, their measures are largely self-designed and, therefore, need to be validated by a central regulatory agency. On the issue, Sethi highlighted:

“If an exchange’s KYC processes are stringent and also validated by a government regulator, then the argument that all crypto transactions are used only for anonymous trading won’t hold valid. That’s where government policy is needed.”

Gupta, too, reiterated Sethi’s sentiments and claimed that self-regulation has its limits and that a government devised regulatory framework will actually strengthen the Indian crypto ecosystem — a point that has been sufficiently argued by Sood and his team this past week.

Lastly, a World Bank report regarding mining-based electricity consumption was also read in court to highlight the potential negative impact of the crypto industry on India’s power sector. However, the judges proceeded to spell out the various advantages of cryptocurrencies and how they have the potential to serve the under/unbanked, as well as fill out the many deficiencies that currently exist within the Indian payments market.

Supreme Court grills the RBI

As aforementioned, the RBI has claimed that the reason it restricted crypto activities in India was because of a lack of clear regulations, especially in regards to things like financial anonymity, money laundering, etc. However, in the opinion of the judges, it was the responsibility of the RBI — and not the local crypto exchanges — to devise a regulatory system that incorporates crypto into India’s general financial framework. Essentially, the Supreme Court labeled the RBI’s ban as being a burden-shifting ploy that was unjust.

Similarly, when the RBI stated that digital currencies were only being used by people who wanted to mask their identities, Sood told the judges that this information was factually incorrect and that many people merely viewed cryptocurrencies as being alternative investment options to conventional stocks and bonds.

What may the verdict look like?

As things stand, it might be a little early to definitively claim to which side the verdict will swing, especially since the RBI has yet to present its complete argument in front of the judiciary. However, Gupta is confident that the IAMAI’s case is strong, and that the judges will see merit in the arguments put forth by the independent agency, “We are of the firm belief that the judges will see reason in our arguments and provide a judgment, which is fair and favorable.”

It is expected that on Tuesday, Jan. 21, the RBI will submit all of its remaining statements regarding its concerns about cryptocurrencies.

Source Cointelegraph

SEC’s CryptoMom Wants US to Learn From Chinese Digital Innovation

The United States could learn from China’s innovations in digital currency, says Securities and Exchange commissioner Hester Peirce. 

Fielding questions via webcam at this week’s Crypto Finance Conference in Switzerland, the public sector leader known as CryptoMom, called for the U.S. to: 

“Learn from what other countries are doing and take the best of what they’re doing and reject the worst of what they’re doing.” 

China outpacing U.S. on digital currency

Last fall, Mark Zuckerberg’s congressional testimony on Facebook’s Libra leaned heavily on the idea of U.S. innovation falling behind. Now, China’s central bank, which just printed a second-edition manual on digital currencies for Chinese officials, will soon launch a state-backed cryptocurrency that has public sector leaders like Peirce taking notice: 

“A lot of innovation is happening in China. I think that the government recognizing the potential is something we should learn from.”

Other issues before the SEC

The SEC is working on its “accredited investor” designation. The protection measure limits who enters the digital marketplace. Peirce said:

“If you’re an accredited investor you’re able to invest in certain things other people can’t invest in. So that has been a barrier in this space to some people getting involved in projects […] for legal reasons people are restricting purchases to accredited investors. And so recently we put out a proposal to expand what an accredited investor is..”

Peirce also expressed interest in promoting “safe harbors,” a designation to protect taxpayers from penalties against forked assets, saying: 

“I’m hoping we can come up with some kind of a framework, a safe harbor framework that would allow people to get their token projects off the ground, to actually launch their networks.”

Later, Peirce added, “I think, again, we have lessons to learn.”

Source Cointelegraph

Three Days From Hearings Before India’s Supreme Court on Crypto Ban

The Supreme Court of India has wrapped up the first three days in a hearing on a landmark case brought against the country’s central bank against its ban on banks’ dealings with cryptocurrency-related businesses.

From Jan. 14 through 16, proceedings were focused on arguments presented by Ashim Sood, the legal counsel for the the Internet & Mobile Association of India (IAMAI).

IAMAI is a not-for-profit industry body whose mandate is to appeal to governments on behalf of internet industry consumers, shareholders and investors. Members include Yahoo! India, Apple, eBay, Unocoin and Etsy.

On the heels of both public and industry-led petitions, the IAMAI is levelling a case against RBI’s controversial imposition of a blanket ban on banks’ dealings with crypto businesses back in April 2018, which came into effect in July of that year. 

The ban has taken a heavy toll on the local industry, leading major crypto exchanges such as WazirX to overhaul their business models so as to avoid in-house crypto-fiat conversion; other platforms, like Coindelta, have been forced to terminate their services altogether.

This article draws on the extensive live reporting of Indian crypto regulatory news and analysis platform Crypto Kanoon (CK) via Twitter and private correspondence with CK founders Kashif Raza and Mahmood Darwish. Embedded quotations are drawn from CK’s live summary of the court proceedings, and may therefore not be verbatim.

Jan. 14

Sood’s preliminary presentation detailed the effects of RBI’s ban thus far and gave a brief overview on the nature of cryptocurrencies, as well as outlining the potential for distributed ledger technology to enhance data integrity and throughput and efficiency in financial services. 

Already in this first presentation, Sood argued that cryptocurrencies should not be classified as currencies, as they can oscillate between serving as a commodity or store of value and as a medium of exchange. 

On the last day of the hearing, Sood and the Judge would revisit this point, the latter proposing that in its function as a medium of exchange, cryptocurrency falls under the central bank’s regulatory purview, and, moreover, that it has no utility as a commodity. To this Sood responded that no individual is obliged to pay in cryptocurrency (as legal tender). He used the analogy of a casino to illustrate his point:

“Some people would find value in it and some people would exchange it. It is a technology which should be given a free play. Casino chips are useful to the people who are inside the casino […] When I come out of [a] casino, its use ceases to exist but then some people may exchange it and it holds a value for the interested people. So likewise there is no obligation to use VCs [virtual currencies] as medium of exchange.”

Jan. 15

The second day of the hearing kicked off with Sood’s take of the global context and the judgement of other governments, in which he emphasized that the majority do not recognize cryptocurrency as a form of legal tender. 

He then addressed two milestones in the history of cryptocurrency legislation in India: a draft bill that could lead to a blanket prohibition on cryptocurrency use per se, recommended to the Indian government in July 2019, and the RBI banking ban circular from April 2018, which forms the heart of the IAMAI representation.

Tackling the circular, Sood argued that RBI has overstepped its bounds as a regulator, straying into areas that should strictly fall under the regulatory purview of the Securities and Exchange Board of India (SEBI). 

The central bank’s focus on concerns regarding volatility and investment risks are, he argued, the remit of SEBI, not the central bank. 

The central bank has no power to regulate how a commodity is traded, he said, and its reference to consumer interest — mirroring similar statements by SEBI — is “arbitrary.” 

Sood further argued that it is incumbent upon the government and regulators to gather and conduct their own material to analyze in order to support and justify action & intervention. This, he claimed, RBI failed to do before deciding to take action:

“Opinion cannot be formed on imaginary grounds. There must be active application of mind.”

At several points in the hearing, Sood went on to cite evidence that ostensibly points to the fact that SEBI, RBI and the government have relied on third-party analyses of the sector, rather than their own studies. 

Referencing conflicting statements from the RBI on the interaction between cryptocurrency use and payments systems, Sood noted that there have been no findings that indicate that payments systems are adversely impacted by the use of cryptocurrencies. RBI has, moreover, contended that it cannot regulate the cryptocurrency sector as it is not itself a payment system, Sood claimed.

At the close of the second day, the counsel argued that the central bank is not authorized to devise a form of prohibition where there is no law to support it:

“The crux of the judgement is that when [the] Legislature doesn’t find a reason to stop/prohibit any economic activity, then the authority doesn’t have power to devise a new form to prohibit such economic activity. Such prohibition violates my right to freedom of trade.”

Jan. 16

Day three opened with Sood’s argument that prior legal activities may only be restricted by a specific policy. In connection with this, where there are deemed to be risks it is strictly the role of parliament, not an administrative authority like RBI, to identify those risks before deliberating on possible intervention.

He honed in on an apparent contradiction in RBI’s stance, arguing that while no international jurisdiction has concluded that it is impossible to regulate crypto, RBI has decided it is impossible and so has moved to ban it.

Picking up on whether RBI’s actions amount to a restriction or an effective ban, Sood argued that while RBI may contend that it is trying to ring-fence the sector, legislation must be evaluated on the basis of its impact. The infringement of rights can be a direct or indirect effect of a given law, he said.

Moreover, Sood argued, a doctrine of proportionality must be applied to any action, asking the judge to consider whether:

“RBI is clouded with the factors which are outside its domain. Whether it is invoking the risks with which it has no connection with being a sectoral regulator.”

The counsel argued that specific areas of concern such as capital outflows and cross-border transactions should be tackled directly, and that restricting the use of cryptocurrencies, in lieu of regulating them, only loosens the authorities’ grip on tracking them and intervening where desired.

As regards money laundering and terrorism financing, Sood noted that countries globally are availing themselves of cybersecurity requirements, licensing rules, capital requirements and other measures to regulate entities in the crypto sector under existing laws. 

He pointed to the existence of the Financial Action Task Force (FATF) guidelines, which have provided a basis for the actions of other countries worldwide.  

Rather than imposing a ban, cryptocurrencies should, therefore, be regulated like other technologies, which can be alternatively beneficial or risky. When it comes to such concerns — notably anonymity and the facilitation of illicit activities — the burden should not be on the exchanges to regulate on behalf of regulators.

In an argument that drew on many of these contentions, Sood said that where the state’s reluctance to devise regulation does not therefore confer on it the right to simply ban an activity.

A further state clampdown?

As the Court proceeds to hear the rest of the proceedings in the RBI case, the legal and regulatory climate in India remains uncertain. 

As Sood noted in his presentation, in fall 2019 the Indian government opted to delay the introduction of a draft bill on a potential cryptocurrency ban to parliament in the 2019 winter session.

The bill — entitled “Banning of Cryptocurrency & Regulation of Official Digital Currencies” — reportedly intends not only to impose a complete ban on the use of crypto in India but also to establish the foundations for a state-backed “Digital Rupee” issued by the Reserve Bank of India.

Source Cointelegraph

Telegram CEO’s 18-Hour Deposition Transcript Is Published Online

Telegram CEO Pavel Durov gave a deposition regarding the company’s alleged violation of United States securities law by conducting $1.7 billion Gram token sale in 2018.

In line with a relevant court order, the deposition was held on Jan. 7 and Jan. 8 before a court reporter designated by the court reporting service engaged by plaintiff represented by the United States Securities and Exchange Commission (SEC).

SEC uses the 18-hour deposition to continue grill Telegram on how it spent $1.7 billion

According to the official transcript document, the deposition was held in Dubai and involved Telegram lawyer Alexander Drylewski and SEC official Jorge Tenreiro. The first part of the deposition on Jan. 7 started at 11:21 AM to end at 10:00 PM, while the second one on Jan. 8 was a bit shorter, beginning at 10:23 AM and ending at 06:09 PM, local time.

The deposition was videotaped, while the available official transcript record is fragmented, with significant parts of the deposition having been omitted supposedly for the sake of confidentiality.

During the deposition, which combined took around 18 hours with breaks, the SEC questioned Telegram extensively on the company’s expenses and funding used to set up the firm. Responding to one such question, Durov answered that the company plans to continue to spend funds in a way similar to budgets from previous years:

“My expectation is that we will continue to spend funds in a manner similar to which took place last year or this year — or, yeah, last year and the beginning of this year. So we don’t anticipate big changes up until the launch of TON when we expect that certain expenses might go down due to the fact that we will no longer be spending resources on developing and testing TON.”

Telegram will distribute some Grams among its devs

Tenreiro further asked the defendants on what percentage of Grams out of the 5 billion tokens in circulation will be held by Telegram’s employees upon the launch. In response, Durov reconfirmed that Telegram will not hold any Grams after the launch of the Telegram Open Network (TON). Telegram CEO added that the firm plans to distribute 4% of Grams among its developers, noting that they are still “evaluating” exact figures:

“I can reconfirm that Telegram will not hold any Grams post launch. We mentioned in the offering materials that we plan to distribute 4 percent of Grams, which should be around 200 million Grams, I believe, among the development team, and we are still evaluating, under the circumstances, whether we would proceed with that initial plan of distributing all or some of those 200 million Grams among the developers that worked on TON.”

The SEC also did not miss the chance to ask Telegram about incentives for its developers, regarding which Durov mentioned Telegram’s smart contracts contest announced in September 2019. The executive added that the prize budget is “is still there” and the firm continues accepting and rewarding individuals within the program.

Durov funded Telegram between 2012 and 2018 through money from the sale of VKontakte

According to a deposition transcript acquired by Russian publication The Bell, Durov financed Telegram from his personal expenditure coming from the sale of VKontakte (VK) in 2014. Durov, who founded the Facebook-like Russian social media website back in 2006, claimed that he used his funds from VK from 2013 up until 2018.

Additionally, Durov said that Telegram’s staff count has not changed much since 2017, accounting for 25 employees who “write programming code.” The firm has also involved “hundreds of independent contractors” though, Durov added.

As recently reported by Cointelegraph, Telegram will have to provide its redacted bank records to the court until Feb. 26. While the legal battle between the SEC and Telegram has been hitting up, some software makers have continued to work on block explorers designed for the TON blockchain.

Source Cointelegraph

Binance CEO Says Compliance Is Key for New Strategic Partnership in Japan

Binance, one of the top cryptocurrency exchanges globally, has started discussions regarding a  strategic partnership with two Japanese firms.

According to a press release on Jan. 17, Binance has begun negotiations with Z Corporation, a subsidiary of Z Holdings formerly known as Yahoo Japan and TaoTao, a Japanese licensed cryptocurrency exchange. 

The exact details of the partnership have not been revealed as of this moment, but Binance said Z Corporation and TaoTao would “continue discussions and deliberations with Binance and begin preparation to launch trading services for users in Japan”. 

Binance CEO Changpeng Zhao (CZ) commented to Cointelegraph on the partnerships:

“We are looking forward to our joint efforts with Z Corporation/TaoTao in bringing our services to Japan. Foremost, we want to ensure that we work in full compliance with Japanese laws and regulations where local and global standards function as a key role in establishing sustainable development industry-wide and greater public adoption.” 

FSA maintains a tight grip on crypto regulation

On Jan. 14th, the Financial Services Agency, or FSA, proposed lowering the leverage rate limit of cryptocurrency margin trading from 4x to 2x. Moreover, the revised versions of the Payment Services Act and the Financial Instruments and Exchange Act, which some see as strict and vague, will be enforced in April. 

Binance noted that all parties in the partnership would work with the agency, stating, “Through licensing Binance’s cutting-edge technologies, Z Corp and TaoTao will collaborate with the Financial Service Agency to ensure full regulatory compliance in the Japanese market.” 

Just yesterday, Binance announced that will gradually restrict access to residents of Japan. Cointelegraph has asked Binance why it rolled back services in the country, but has not received a response at press time. Currently, Japanese traders still have full access to the platform.

Last September, Binance restricted residents of the United States from accessing and instead launched Binance.US in a partnership with BAM Trading Services, a U.S. money services business. Back then, CZ talked about the importance of being “fully compliant” with U.S. regulations.

Source Cointelegraph

Coinbase-Backed Crypto Ratings Council Adds eToro, OKCoin

The Coinbase-backed Crypto Ratings Council (CRC), a group of major United States’ cryptocurrency firms seeking regulatory clarity, has welcomed new members.

Established in late 2019, the CRC has expanded to include members like trading platform eToro, crypto exchange OKCoin and Radar, the startup behind decentralized exchange Radar Relay. Coinbase announced the news in a press release shared with Cointelegraph on Jan. 16.

CRC now counts 11 members including Goldman Sachs-backed crypto finance firm Circle

As the new participants join eight other industry leaders in the council, the CRC now counts eleven companies that strive for more clarity from U.S. securities law on cryptocurrencies.

Other CRC members include Kraken exchange, Goldman Sachs-backed crypto finance firm Circle, Bittrex, Genesis Global Trading, Grayscale Investments, Anchor Labs, DRW Holdings’ Cumberland unit, and Coinbase itself.

Officially launched on Sept. 30, 2019, the CRC aims to jointly determine which digital assets should be considered securities and thus fall under the jurisdiction of the U.S. Securities and Exchange Commission (SEC). As part of the effort, the CRC has been publishing online ratings for digital assets on a scale from 1.00 to 5.00, where the highest score means that a token is likely to be considered as a security and cannot be sold by unregulated firms.

Five new digital assets on CRC’s online ratings

In conjunction with announcing the new members, the CRC has also announced five new digital assets joining its public online ratings. According to the press release, the CRC securities Framework Asset Ratings added popular cryptocurrencies like Dash (DASH), Ethereum Classic (ETC), Cosmos (ATOM), as well as lesser known altcoins like Horizen (ZEN) and Livepeer (LPT).

According to the ratings, Dash is one of six cryptocurrencies that are ranked 1.00 as of press time and considered by the CRC to not represent a security alongside Bitcoin (BTC), Litecoin (LTC), privacy-oriented altcoin Monero (XMR), Dai (DAI) and Horizen.

Meanwhile, Ethereum Classic is ranked 2.00 together with its predecessor Ether (ETH), which means that these cryptocurrencies are more likely to be securities to date.

In the press release shared with Cointelegraph, Coinbase said that the CRC’s analysis is “its own and is not endorsed by developer teams, regulators, or any other third party.”

XRP is ranked 4.00

XRP is an example of a token that requires classification. Commodity Futures Trading Commission (CFTC) chairman Heath Tarbert recently said that it remains unclear whether XRP falls under the CFTC or SEC’s jurisdiction. According to the CRC’s ratings, XRP is likely to be a security as it has one of the highest ranks among all analyzed digital assets, ranked 4.00 at press time.

As reported by Cointelegraph, the regulatory status of XRP has been unclear, especially after the token’s issuer Ripple faced a class-action lawsuit alleging that it violated the securities law by selling its tokens. The firm subsequently filed a motion to dismiss the lawsuit in early December 2019, claiming that the case is contradictory and “self-defeating.”

Contacted by Cointelegraph on Jan. 14 regarding its stance towards the CFTC chairman’s statements on XRP’s unclear regulatory status, Ripple has still not replied.

Source Cointelegraph