FTX, Congress, Stablecoins: What 2023 May Bring for Crypto Regulations
CoinDesk’s policy team predicts the issues and topics that may take center stage over the next 12 months.
Can you believe this year started off with U.S. law enforcement officials arresting two individuals in connection with the 2016 Bitfinex hacked funds? For this week’s newsletter, the 102nd since we first launched in 2021, I asked CoinDesk’s Policy Team what they’re looking out for this upcoming year.
What a year
CoinDesk’s regulation team lays out what we’re looking at this upcoming year.
Why it matters
Crypto’s growing stature in the world will draw increasing amounts of attention from regulators.
Breaking it down
Nikhilesh De (U.S.): This year did not play out quite as expected. While the idea that the bull market would end and a new crypto winter would hit was understood and expected, the sheer scale of this year’s failures seemed to catch a lot of people by surprise.
Next year will not, I suspect, be pretty. Cheyenne Ligon gets into this as well a bit further down, but as the current bankruptcy cases advance and possible new bankruptcies arise, the industry will have to deal more and more with a lot of questions around user privacy and consumer protections.
Whether crypto exchange customers can expect their personal information to remain redacted, should the provider enter bankruptcy, will continue to be a growing question for courts. This year we saw that question arise with companies like Celsius and FTX. Judges initially allowed the companies to file their creditors’ information under seal, but Celsius later released the names and holdings of all of its customers, while FTX is currently going through hearings about the same issue.
The U.S. Securities and Exchange Commission (SEC) may also be gearing up to force exchanges into compliance with existing rules. SEC Chair Gary Gensler has long said he believes his agency has the authority it needs to regulate crypto companies, and that the law is clear in his view that most cryptocurrencies are securities and therefore more crypto exchanges are securities trading platforms. More recently, the SEC has suggested that it may be moving closer to actually doing something about this; Enforcement Director Gurbir Grewal said the runway for crypto companies is getting shorter, and the collapse of FTX has heightened the pressure for regulators to get a hold of this industry before something else falls apart.
I don’t expect too much in the way of legislative activity. While I know we’ll see additional bills introduced, including the highly anticipated stablecoin legislation from the House Financial Services Committee, the bigger question remains whether there will be enough bipartisan support in both the House and the Senate to actually pass anything into law. Jesse Hamilton provides his own view on legislation further down.
That being said, it’s hard to say this year was anything but a black mark for the industry in the eyes of regulators. The collapse of Terra/Luna, the bankruptcies of basically the entire crypto lender sector (minus Nexo, which still ended up leaving the U.S.), the meltdown of FTX (the largest exchange failure in years) – these are all events that will pressure regulators worldwide. The Facebook (now Meta)-led Libra (later Diem) project and the global backlash to it tells us how regulators may respond as well. It may not be a quick response, but years after Facebook first introduced Libra, lawmakers from different nations developed stablecoin regulations to rein in the sector. I suspect we’ll see a similar response in reaction to this year’s events.
Sandali Handagama (EMEA): This past year did not just test the prowess of global crypto companies and markets, but also the relatively new regulatory frameworks designed to govern the space. As high profile entities from Terraform Labs to FTX fell one after the other, the regulators they were linked to, be it in the Bahamas or Singapore, were also put on the spot.
Singapore, which boasted a sophisticated regulatory regime for crypto firms, faced tough questions on how its central bank decided which platforms were safe for investors after it flagged rival exchange Binance but not the now-bankrupt FTX.
In the European Union, lawmakers questioned if their landmark Markets in Crypto Assets (MiCA) framework, hailed as a global standard for crypto regulation, could really prevent an FTX-style collapse, which had over 100 entities operating in multiple jurisdictions while registered in the Bahamas.
The cross-border nature of crypto warrants global cooperation on regulations, international bodies like the International Monetary Fund and the Financial Stability Board have said. The push for global standards for crypto only intensified as the markets went from bad to worse this year. In 2023, we’ll hear more about a global push for oversight and perhaps watch international leaders tackle a tougher question – are regulations enough?
Jesse Hamilton (U.S.): If crypto has a future as a widespread, commonly exchanged asset, that future could be decided this year in Washington, D.C.
The policy work is coming to a head, including with the U.S. Federal Reserve’s eventual decision on whether the government should step into the field with a digital dollar and a number of legislative efforts that could finally set down national rules for stablecoins and crypto trading that will secure a place for digital assets in the U.S. financial system. That comes with a price, of course, and it may be too high for some in the industry.
This regulatory reckoning comes as many U.S. lawmakers and the heads of agencies such as the Securities and Exchange Commission (SEC) are particularly skeptical about the way things are run in crypto world, and the latest crisis with FTX could mean more stringent oversight than what lawmakers contemplated in the first few bills that started the debate. Meanwhile, if the SEC retains the authority to define what makes a token a security (and so far, Chair Gary Gensler says most of them are), that agency will hold token issuers and exchanges to existing securities law, which never foresaw decentralized crypto assets.
The new Congress may take a while to settle in during 2023, so it could be months before the Senate (still controlled by Democrats) and the House of Representatives (newly piloted by Republicans) will find common ground on crypto. The effort that may be farthest along is the House Financial Services Committee’s bipartisan stablecoin regulation bill, so that relatively narrow legislation could test whether crypto is among the limited range of issues that a divided government can move forward on. The two parties, several committees and a lot of crypto-doubting lawmakers have to be brought together before the industry can finally get more comprehensive regulation.
While Congress works on that, U.S. financial agency chiefs who make up the Financial Stability Oversight Council could use that group’s powers to formally declare crypto activities such as stablecoins as systemically important, which could give the Fed or others some regulatory authority there. And apart from the onset of significant enforcement actions likely coming from the SEC in 2023, lesser-known agencies such as the Consumer Financial Protection Bureau could also start imposing their powers over the financial products offered by crypto firms.
Cheyenne Ligon (U.S.): The spectacular downfall of FTX in November – which saw the world’s second-largest crypto exchange reduced to rubble in little more than a week – was certainly the largest and most shocking failure of 2022, but it was far from this year’s only crypto collapse.
The FTX drama has had the secondary effect of drawing attention away from the failures that came before it – including the depegging and subsequent implosion of algorithmic stablecoin issuer Terra, the $10 billion wipeout of hedge fund Three Arrows Capital and a wave of other crypto bankruptcies including Celsius Network and Voyager Digital.
FTX’s collapse – and the fall from grace of its former CEO, Sam Bankman-Fried, who is now facing criminal fraud charges for his role in the alleged scheme – has also overshadowed subsequent bankruptcies (like BlockFi’s) in the wake of its spreading contagion.
The knock-on effects of that contagion has also caused several other major crypto companies including Nexo, Gemini, and Genesis (a sister company of CoinDesk) to wobble while FTX continues to steal the spotlight.
Though 2022 was a major year for crypto bankruptcies, the momentum shows no signs of slowing in 2023. The bankruptcy process is often slow and painstaking, and the bankruptcies that began in 2023 will stretch well into 2023 and perhaps beyond. And, if the dominoes continue to fall (and they almost certainly will), still more crypto companies will join them.
Camomile Shumba (UK): The U.K. was a big story with the political and regulatory turmoil putting into question the crypto hub plans Prime Minister Rishi Sunak set out when he was finance minister. It’s unclear if the political storm has passed with many calling for an early general election which could result in Labour – the current favorite party to win, who may not be as crypto friendly as the current ruling Tory Party – taking charge.
What also is unclear is whether the country’s crypto hub ambitions have any real standing when its financial regulator, the Financial Conduct Authority (FCA), has a strict stance when it comes to crypto. CEO Nikhil Rathi told lawmakers in a meeting that the FCA had turned away 85% of the crypto companies that tried to register with it to operate in the country.
The Financial Services and Markets bill, which is still being debated in Parliament, will give the FCA powers to regulate crypto and how these companies advertise to U.K. clients. The U.K. government’s finance arm, the Treasury, will set out how best to regulate the industry, beginning with a public consultation. How all this unfolds will indicate how crypto friendly the U.K. will be.
Lavender Au (APAC): Regulatory frameworks are starting to firm up in Asia. This year, Hong Kong passed its licensing regime on exchanges and South Korea put together a bill to govern digital assets. 2022 was also a year of adjustments. Japan committed to relaxing tax regulations, which effectively made it impossible to issue tokens in the country. Singapore considered tightening regulations to reduce risk to retail investors.
Strict regulations in the region also mean there’s business in finding ways to dodge them. Investors in Japan use gray OTC channels to avoid high taxes. China’s investors continue to onramp — an estimated 8% of FTX users were based in the country, according to a chart shown at its first bankruptcy hearing.
As in other regions, the collapses of Luna and FTX added urgency to regulatory efforts. Next year, Asian regulators will issue regulatory frameworks on stablecoins. Soft consultations in Hong Kong will continue on requirements for allowing retail to invest. Both Japan and Singapore have indicated that they are looking into regulating DeFi.
This year, to enter local markets, exchanges with a global presence have snapped up smaller local regulated exchanges (see Binance’s acquisition of Sakura in Japan and Tokocrypto in Indonesia). More mergers and acquisitions are likely in 2023, as larger players look to snap up more local players.
Jack Schickler (EU): The Markets in Crypto Assets law made the European Union the first major jurisdiction with a legal framework for the sector. As various shocks hit in 2022, EU regulators vaunted their new consumer protection and financial stability rules – which, they said, ensure stablecoins have decent reserves (side-eye to terraUSD) and that crypto exchanges are properly governed (I’m looking at you, FTX).
2023 presents a fork in the road for crypto companies. Register with authorities under MiCA, and you get legitimacy: the right to advertise within the bloc, official approval to persuade people you aren’t the next FTX, connections to traditional finance that helps onramp new clients.
But if an exchange or wallet provider doesn’t want to jump through all those regulatory hoops, it can still sell crypto in the EU by a loophole known as reverse solicitation. Offshore providers could also offer less scrupulous clients tempting extra features, like not reporting their holdings to EU tax authorities.
Lately the trend seemed to be in favor of increasing regulatory compliance; Binance, which once boasted that it had no headquarters, has now set up entities in Cyprus, France, Spain and Italy as it prepares for MiCA to take effect in 2024. But crypto companies will all be looking over their shoulders as they take decisions: no company wants its competitors to be getting an unfair advantage. Which way will they jump?
Amitoj Singh (India): In 2023, Indian crypto enthusiasts will have their eyes on three major events.
First, the annual budget announcement, which could see India change its crypto taxation policy. A 30% tax on crypto profits and a 1% tax deducted at source (TDS) on all transactions, among other macroeconomic factors, had a brutal impact on trading in India. The industry has asked the government to reconsider these rules.
Second, India will host the Group of 20 (G-20) nations in September 2023 in New Delhi. When India assumed the G-20 presidency in Dec. 2022, it stated that framing globally coordinated crypto rules would be a priority. Deliberations between the G-20 nations have begun and will culminate during the summit with the expectation that the world’s largest economies settle on a globally acceptable crypto regulation framework.
Third, the nation’s central bank hopes to launch its CBDC on a full scale by the end of 2023. Currently, the Reserve Bank of India (RBI) has commenced its pilot in four cities with the participation of four major cities. The pilot’s progress will determine the future of India’s digital rupee and potentially contribute to the globally acceptable standards around the use cases of CBDCs.
A year ago, I asked my team – then the newly created regulatory team at CoinDesk – what everyone would monitor over the course of 2022.
Sandali Handagama highlighted the European Union’s Markets in Crypto Assets framework, which lawmakers advanced this year. Elsewhere, a digital euro is still under discussion but is still a ways from realization.
Cheyenne Ligon said she expected to see “an uptick in the number of criminal probes” tied to crypto, alongside other court cases such as the sentencing of Ethereum developer Virgil Griffith. We did indeed see a rise in the profiles of SEC and CFTC enforcement actions, including the SEC explicitly calling several cryptocurrencies securities in an enforcement action against a former Coinbase employee and the CFTC going so far as to sue an entire DAO in an ongoing matter.
Lavender Au said South Korea’s presidential election could lead to a change in how the country approaches digital assets. Japan is similarly advancing its efforts to better understand and legislate cryptocurrencies, like stablecoins, while Hong Kong’s government is seeking to draw in new crypto businesses.
Amitoj Singh said he would watch for how India tried to mitigate crypto risks and tax rules, just ahead of India implementing a fairly strict tax regime that appears to have actually impacted the entire industry within India.
Last year I said I was looking at stablecoin regulation and the bipartisan infrastructure law, as well as whether regulators would act decisively.
We heard about bipartisan stablecoin legislation that seems almost certain to be debated and discussed in the new Congress, even as it fell short of introduction this year.
I also wrote, “Will one of these agencies issue guidance for startups trying to launch in the U.S.? Or will 2022 be a repeat of 2021 and 2020 and 2019 and so on where we hear speeches and see enforcement actions but not much more.”
I guess we have our answer.
Changing of the guard
By Nikhilesh De
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