Crypto Regulation News: US Fed issues paper on benefits and risks of CBDC, Bank of Russia suggests to ban crypto, EU markets regulator calls for ban on PoW crypto mining, Bank of Korea completes 1st phase of CBDC pilot, BIS Innovation Hub to focus on CBDC, and more!

Paradigm

Published in

Paradigm

17 min readJan 25, 2022

Vol. 86, 10th January — 25th January

TL;DR

BIS Innovation Hub to focus on CBDC, DeFi experimentation this year
In long-awaited CBDC white paper, US Fed flags privacy, financial stability risks. While US lawmaker proposes bill aimed at limiting Fed’s ability to issue CBDC
Bank of America says US CBDC would preserve dollar’s status as world’s reserve currency
SEC rejects first trust SkyBridge’s spot bitcoin ETF proposal. The SEC has issued 2.4B in crypto-related penalties since 2013, according to a new report
US lawmakers explore Bitcoin mining efficiency, broader crypto policy issues during Congress hearing
Biden Administration to release executive order on crypto as early as February
EU markets regulator calls for ban on proof-of-work crypto mining
UK Treasury wants to remove blockchain reference from crypto definition. UK financial regulator to limit crypto ads to sophisticated, wealthy investors
Russian central bank proposes blanket ban on crypto mining and trading
Indonesia’s regulator warns financial firms against offering crypto sales. Indonesian Islamic organization issues new fatwa against crypto use
Bank of Korea completes first phase of digital currency pilot. Korean crypto exchange Bithumb will block unregistered wallets
Spanish government will implement new rules for crypto ads
Bulgaria’s finance minister says the country is exploring crypto payment options
Binance didn’t upgrade customer checks, despite promises to regulators
Turkish ruling party holds meeting in metaverse, talks crypto regulation
Mercado Bitcoin operator acquires Portuguese crypto exchange
Thai regulators up to issue guidelines on digital assets payments
Chinese government rejects metaverse trademark. Hong Kong begins discussions to introduce stablecoin regulatory framework
Singapore crypto ATMs shut down after central bank crackdown
A new report from EY highlights the need for a policy change for banks to overcome business uncertainties regarding digital assets
FINRA considering changes to crypto regulations to better protect investors
IMF: Bitcoin matured to ‘an integral part of digital asset revolution’
Brazilian mayor to reportedly invest 1% of city reserves in Bitcoin
India’s crypto industry awaits new budget. Indian INX exchange reportedly plans to list Bitcoin futures ETF
Pakistan’s president calls for more training in blockchain technology
Iran to allow crypto payments for international trade
Uniswap founder’s bank account shut down by JP Morgan Chase, shadow-debanking allegations surface
New York City Mayor was nonchalant about receiving his first Bitcoin paycheck during a 50% drawdown from all-time highs
Georgian citizens made to swear an oath to stop mining crypto
And more!

Reports

BIS Innovation Hub to Focus on CBDC, DeFi Experimentation This Year: CBDCs and payments account for 13 of the 17 active and scheduled projects.

The Bank for International Settlements (BIS), an umbrella group for central banks, is going all out on central bank digital currencies (CBDCs) and decentralized finance (DeFi) research this year. According to a statement published, BIS is planning projects to explore CBDCs, next-generation payments systems, DeFi and green finance through its Innovation Hub in 2022.

“CBDCs and improvements in payments systems continue to be an area of exploratory focus, accounting for 13 out of 17 projects that were active in 2021 or will be launched in 2022,” according to the statement.

At the end of last year, at least 64 central banks were exploring a retail CBDC, according to the CBDC Tracker. Of those, 20 have been launched or tested or were in the very advanced exploration stages. China has been trialing a digital currency, the eCNY, over the past year, running transactions worth around $9.7 billion. Last October, Nigeria’s central bank launched the eNaira, while the European central bank kicked off a two year experiment into a retail CBDC. Last week the U.S. Federal Reserve published a discussion paper on the benefits and risks of a U.S. implementation.

The BIS Innovation Hub has been on a growth streak, setting up research centers in Hong Kong, London, Stockholm, Singapore and Switzerland in the last two years. All of them will be working on at least one project related to CBDCs.

“CBDCs will take years to be rolled out, while stablecoins and crypto assets are already here. This makes it even more urgent to start,” Cœuré said in September.

As for DeFi, details are sparse, but a new project at the Hong Kong center plans to explore whether DeFi technologies including blockchain, tokenization and smart contracts, can “improve financing for small and medium enterprises, a historically underserved market segment.”

FINRA Considering Changes to Crypto Regulations to Better Protect Investors: The self-regulatory body is primarily concerned with rules around advertising and disclosure to customers.

CBDCs and stablecoins: EY advises banks to ‘prepare for what’s coming’: A new report from EY highlights the need for a policy change for banks to overcome business uncertainties regarding digital assets.

IMF: Bitcoin matured to ‘an integral part of digital asset revolution’: Crypto assets are no longer on the fringe of the financial system, which raises financial stability concerns, a new IMF research argues.

Bitcoin mining becomes more sustainable: Mining Council’s Q4 survey”: This quarter we saw the trend continue with dramatic improvements to Bitcoin mining energy efficiency and sustainability,” said the founder and CEO of MicroStrategy Michael Saylor.

Opinions

Decentralized and traditional finance tried to destroy each other but failed: Crypto to prevail over the traditional financial system, instead, competing industries started to adopt each other’s technologies and cooperate.

How should DeFi be regulated? A European approach to decentralization: The question for DeFi regulation: Is there an “owner” of the platform who can be held accountable for complying with the regulations?

NFTs and compliance: Why we need to be having this conversation: With the huge growth in the NFT industry, the time is right to take a look at NFTs from a compliance and regulatory perspective.

Does a Fed digital dollar leave any room for crypto stablecoins? Could stablecoins be undone by a Federal Reserve that takes consumer deposits? Would retail banks be hobbled?

Australia’s plan to create a crypto competitive edge in 12 steps: A recent Senate report on digital asset regulation is a pro-crypto statement of intent from the Australian government that the world can learn from.

Crypto and NFTs meet regulation as Turkey takes on the digital future: Despite unclear — or even lack of — regulation and taxation of cryptocurrencies, Turkey is increasingly using digital assets amid high inflation.

Early birds: U.S. legislators invested in crypto and their digital asset politics: United States lawmakers remain underinvested in crypto, but this is likely to change in 2022.

Bitcoin miners’ resilience to geopolitics: A healthy sign for the network: The phenomenal recovery of the mining hash rate for BTC goes to show how resilient the network and its community are to world events.

2021: A year of mass adoption for cryptocurrencies in Brazil: 2021 was a year of affirmation for the Brazilian crypto market with good news in the national stock market, the promise of a CBDC and Brazilian soccer joining the game.

Volcanos, Bitcoin and remittances: A Tongan lord plans for financial security: A former lawmaker from the island nation wants to use Bitcoin to secure his country’s financial security.

BIS general manager: Central banks generate trust, not big techs or “anonymous ledgers”: According to the boss of the international institution owned by central banks, it is central banks that are best positioned to shape the future of money.

Ad restrictions won’t impact crypto demand, Binance CEO says: Changpeng Zhao said that the majority of crypto demand and user adoption come from word-of-mouth marketing.

A third of Americans to buy Bitcoin by end of 2022, says Ric Edelman: The future’s bright for Bitcoin according to Ric Edelman, founder of financial advisory outfit Edelman Financial Engines.

USA

Bank of America Says US CBDC Would Preserve Dollar’s Status as World’s Reserve Currency: CBDC’s are an inevitable evolution of today’s electronic currencies, the bank’s analysts said.

A U.S. central bank digital currency (CBDC) would differ from the digital money currently available to the public because it would be a liability of the U.S. Federal Reserve, not a commercial bank, and so would have no credit or liquidity risk, Bank of America said in a report. Preserving the dollar’s status as the world’s reserve currency, improving cross-border payments and increasing financial inclusion are all seen as benefits of a U.S. digital currency, analysts led by Alkesh Shah wrote . The Fed published a discussion paper last week on the benefits and risks of a U.S. CBDC.

Potential risks — which could be diminished by CBDC design choices — include “changing the financial sector’s market structure by shifting deposits, increasing the liquidity risk of the financial system if deposits at commercial banks were converted to a CBDC and decreasing the efficacy of monetary policy implementation,” the note said.

Bank of America said key considerations before issuing a CBDC are the need for it to be privacy-protected, intermediated, transferable and identity-verified.

Stablecoins are likely to see an increase in usage in the absence of CBDCs, the bank noted, adding that the two largest by market value, tether and USD coin, had a combined market value of around $121 billion as of Jan. 21. Their use as a means of payment is increasing, particularly for cross-border remittances, the report said, as they are faster and cheaper than using fiat currency.

In a report published earlier in the month, Bank of America challenged the Bank of England’s assertion that a U.K. CBDC would act just as a form of digital cash. It said CBDCs are likely to replace checking accounts as the way in which consumers hold the majority of their funds.

Bank of America Says UK CBDC Would Be More Than a Digital Form of Cash: BoA says it’s likely a BOE digital currency would also replace checking accounts as the way in which consumers hold the majority of their funds.

Biden Administration to Release Executive Order on Crypto as Early as February: The directive will ask federal agencies to determine the risks and opportunities posed by digital assets.

In Long-Awaited CBDC White Paper, Fed Flags Privacy, Financial Stability Risks: The Fed does not commit to launching (or not launching) a CBDC in the long-anticipated document.

SEC Rejects First Trust SkyBridge’s Spot Bitcoin ETF Proposal: The rejection filed Thursday comes as no surprise given the precedent set by the SEC for a preference for ETFs that track the bitcoin futures market.

SEC’s Gensler Wants Greater Scrutiny for Crypto Exchanges: “I’ve asked staff to look at every way to get these platforms inside the investor protection remit,” he said.

President Biden taps economists for Fed governors’ seats, Sarah Bloom Raskin as vice chair for supervision: According to the U.S. President, the three nominees have the “experience, judgment and integrity to lead the Federal Reserve and to help build our economy back better for working families.”

Witnesses Debate Crypto Mining’s Efficiency in Congressional Hearing on Environment: Lawmaker questions ranged from basics on blockchain to queries about different energy sources.

Lawmakers explore Bitcoin mining efficiency, broader crypto policy issues during Congress hearing: While we are unlikely to see immediate policy effects of the exchange, legislators got educated on a wide array of blockchain-related concepts and issues.

The House Looks Into Crypto’s Energy Impact: It’s the latest hearing by lawmakers into a previously not-very-deeply discussed aspect of the crypto ecosystem.

US lawmaker proposes bill aimed at limiting Fed’s ability to issue CBDC: Having the Fed require users to open accounts to access the benefits of a digital dollar would put it “on an insidious path akin to China’s digital authoritarianism,” according to Tom Emmer.

The SEC has issued $2.4B in crypto-related penalties since 2013: According to a new report, the SEC has launched a total of 97 actions against crypto players since 2013, 20 of which happened in 2021 alone.

Coinbase Taps SEC Counsel Thaya Knight to Manage Public Policy Team: Knight’s move follows Commissioner Elad Roisman’s departure last week.

SEC Advisory Committee member calls agency to open for public comment on crypto regulation: “This open call for comment is the only way to appropriately crowdsource this issue and appropriately develop a digital asset regulation Genesis Block,” said J.W. Verret.

Polymarket Introduces New Information Markets After CFTC Fine, but Not for US Traders: The decentralized predictions marketplace received a $1.4 million fine from the Commodity Futures Trading Commission.

No regrets for NYC mayor receiving his first Bitcoin paycheck during dip: New York City Mayor Adams was nonchalant about receiving his first Bitcoin paycheck during a 50% drawdown from all-time highs.

Europe & UK

EU Markets Regulator Calls for Ban on Proof-of-Work Crypto Mining: Erik Thedéen said that EU regulators should nudge the crypto industry towards the less energy-intensive proof-of-stake mining.

Proof-of-work crypto mining should be banned in the European Union (EU), according to the vice chair of the European Securities and Markets Authority (ESMA). Erik Thedéen said EU regulators should nudge the crypto industry towards the less energy-intensive proof-of-stake mining, in an interview with the Financial Times.

“The solution is to ban proof-of-work,” he said. “Proof-of-stake has a significantly lower energy profile.”

The proof-of-work model involves miners using scores of powerful computers to solve complex mathematical problems in order to record transactions on the blockchain an be rewarded with new coins. The world’s largest two cryptocurrencies — bitcoin and ether — both use this model. Proof-of-stake mining is less energy intensive in that users win the right to record transactions based on how much investment — or “stake” — they have in the network. Ether has plans to migrate to a proof-of-stake model later this year.

The EU does not currently account for a particularly significant share of the proof-of-work mining industry. Bitcoin mining is currently dominated by the U.S. (share of 35.4%), Kazakhstan (18.1%) and Russia (11.23%), according to the Cambridge Centre for Alternative Finance. However, with mining banned last year in the previously dominant China, there may be concerns among EU administrators that its previously small share of the mining industry could naturally grow as miners search for new homes.

UK Financial Regulator to Limit Crypto Ads to Sophisticated, Wealthy Investors: The FCA also intends to ban incentives such as refer-a-friend and new-joiner rewards.

UK Treasury wants to remove blockchain reference from crypto definition: The new set of crypto regulatory proposals in the U.K. aims to bring DeFi under the scope of the law on a case-to-case basis.

UK Economic Affairs Committee unconvinced by prospect of retail CBDC: new report highlights private-sector innovation and greater financial inclusion with CBDCs, but raises concerns around the descending hegemony of the U.S. Dollar.

Spanish government will implement new rules for crypto ads: The CNMV will require advertisers to report ten days before running ads targeting 100,000 people or more.

Bulgaria’s finance minister says the country is exploring crypto payment options: The government official added that he thought Bulgaria was unlikely to become a major hub for crypto miners, many of whom many are reportedly considering leaving Kazakhstan.

Turkish ruling party holds meeting in metaverse, talks crypto regulation: Turkey’s governing political party has discussed the upcoming crypto regulation in its first metaverse meeting.

Mercado Bitcoin operator acquires Portuguese crypto exchange: After raising over $250 million from firms such as SoftBank last year, Brazil’s 2TM Group is expanding into Europe.

Asia

Bank of Korea completes first phase of digital currency pilot: The second phase of the CBDC mock testing is expected to be completed by June this year.

The Bank of Korea has successfully completed the first phase of its central bank digital currency (CBDC) mock testing, which started in August 2021.

The South Korean central bank said that the first phase of its CBDC mock testing was completed in December while the second phase is currently underway, reported YNA news. The first phase of the mock test involved some of the basic functions of the sovereign digital currency such as distribution and issuance. The second phase of the CBDC pilot would test real-world functionalities such as cross-border remittance, retail payments and offline payments. The bank stated:

“We will confirm the possibility of operating various functions, such as offline settlements, and the application of new technologies, such as one intended to strengthen privacy protection during the second phase of the test.”

Bank of Korea (BOK) is also looking to onboard financial institutions for the second phase, quite similar to what China is currently doing with its digital yuan. However, unlike China, BOK-issued digital currency would also focus on user privacy. The second phase is expected to complete by June 2022, after which the central bank plans to chalk out an official launch and commercialization plans.

South Korea has thus joined the select group of nations that have either started or completed the pilot phase of their CBDC testing. Currently, 91 nations are working on their sovereign digital currency and only 14 nations have reached the pilot phase, as per data from the Atlantic Council.

World CBDC Development Tracker Source: Atlantic Council

South Korea has become one of the leading crypto-compliant nations over the past few years and recently revealed its plans to become a world leader in the metaverse as well. While China is currently at the forefront of the CBDC game, many European and Asian counterparts have accelerated their development plans to catch up with its pace.

South Korean Crypto Exchange Bithumb Will Block Unregistered Wallets: The exchange was reportedly pressured from its partner bank to change its mind.

Thai Authorities Plan to Regulate Crypto as Means of Payment: The Thai SEC has also proposed a set of guidelines to limit the use of digital assets for payments.

Binance eyes Thailand for latest crypto exchange expansion: Binance has locked in an agreement as Thai government officials expedite crypto regulations, which could pave the way for the firm to open a branch in the Kingdom.

Chinese Government Rejects Metaverse Trademark Applications: Those rejected include applications by NetEase, iQiyi and Xiaohongshu.

Hong Kong begins discussions to introduce stablecoin regulatory framework: The Hong Kong Monetary Authority shared a list of eight questions to seek policy-related recommendations citing five possible regulatory outcomes — no action, opt-in regime, risk-based regime, catch-all regime and blanket ban.

Singapore crypto ATMs shut down after central bank crackdown: The move is part of a broader effort by the Singaporean watchdog to regulate advertising cryptocurrency to the public.

Singapore bars crypto service providers from advertising in public spaces: The new regulations only allow advertisements on native websites and mobile apps for DPT companies.

Rest of the World

Bank of Russia Calls for Full Ban on Crypto: Russia’s central bank suggests making crypto trading, mining and usage illegal. Owning crypto would be allowed.

Russia must ban cryptocurrencies, the country’s central bank said in a report . The report, “Cryptocurrencies: trends, risks, measures,” was presented during an online press conference with Elizaveta Danilova, the director of the Bank of Russia’s Financial Stability Department. The report says cryptocurrencies are volatile and widely used in illegal activities such as fraud. By offering an outlet for people to take their money out of the national economy, they risk undermining it and making the regulator’s job of maintaining optimal monetary policies harder, the report said. The bank, therefore, said Russia needs new laws and regulations to effectively ban crypto-related activities. The bank is not suggesting banning ownership of crypto by private citizens, Danilova said.

Issuance and trading using the country’s financial infrastructure, which could pose a risk to Russia’s financial stability, however, should be stopped. The bank said in November that Russians conduct over $5 billion worth of crypto transactions in a year, and that level did not pose a risk. An existing ban on using crypto for payments should be reinforced, and punishment should be introduced for buying or selling goods, services and labor by Russian individuals and businesses, the report suggests.

Russian institutional investors should not be allowed to invest in crypto assets and no Russian financial organizations or infrastructure should be used for cryptocurrency transactions. The Bank of Russia has already barred mutual funds from investing in cryptocurrencies. Now, it is suggesting introducing penalties for breaking the ban.

Cryptocurrency mining, which has flourished in Russia over the past few years and even earned some nods of approval from the country’s parliament last year, also came under fire. Mining creates fresh supply of cryptocurrencies, so it stimulates the demand for other crypto services such as exchanges and “creates a non-productive electricity expenditure, which undermines the energy supply of residential buildings, social infrastructure and industrial objects, as well as the environmental agenda of the Russian Federation,” the report said. The “optimal solution” would be to ban crypto mining in Russia, the regulator said in the report.

Miners said the stance was not a surprise. The report is a reiteration of the bank’s existing position, and final policy is likely to include input from other stakeholders.

The central bank plans to monitor cryptocurrency transactions by Russian residents and coordinate with the countries where cryptocurrency exchanges are registered to get information on transactions by Russian users, the report says. The regulator said it believes that in the future, enhancing the current banking infrastructure, as well as introducing the digital ruble, a central bank digital currency (CBDC) currently in the works by the Bank of Russia, will satisfy the need of Russians for fast and cheap digital payment options, effectively giving them advantages of crypto without crypto. As for the investment appeal of crypto assets, that can be replaced by the digital assets, which will be issued in Russia under the law on the digital assets, in effect since the summer 2020, the Bank of Russia said.

The bank said financial market participants have until March 1 to comment on the report.

Russian Authorities Say They’ve Dismantled REvil Ransomware Group at US Request: The FSB raided 25 residences, seizing approximately $6.8 million in various currencies including cryptocurrencies.

Russian tech and political executives denounce crypto ban proposal: Telegram CEO Pavel Durov wrote that the proposed ban on crypto would “destroy a number of sectors of the high-tech economy” in a recent post on his massaging platform.

Owner of Russian bank Tinkoff acquires Swiss digital asset firm: Russian banks have been increasingly moving into the digital asset market despite the Bank of Russia’s hostility toward crypto.

Brazilian mayor to reportedly invest 1% of city reserves in Bitcoin: Rio de Janeiro mayor Eduardo Paes talked about Bitcoin with Miami mayor and BTC bull Francis Suarez at Rio Innovation Week.

India’s Crypto Industry Awaits New Budget: The challenge of regulating cryptocurrencies may mean the industry won’t even be mentioned in the budget speech on Feb. 1.

Indian INX exchange reportedly plans to list Bitcoin futures ETF: The India International Exchange is reportedly looking to explore digital asset-based products despite local uncertainty.

Pakistan’s president calls for more training in blockchain technology: Among the panel of experts that met with President Arif Alvi was Bitcoin Association founding president and Bitcoin SV advocate Jimmy Nguyen.

Iran to allow crypto payments for international trade: Iran is reportedly looking to unlock opportunities for importers and exporters to use crypto in international deals.

Indonesia’s Regulator Warns Financial Firms Against Offering Crypto Sales: Financial institutions are strictly prohibited from “using, marketing, and/or facilitating crypto asset trading.”

Indonesian Islamic organization issues new fatwa against crypto use: The fatwa points toward two critical issues with cryptocurrencies that make them illegal as an investment tool and a medium of exchange.

Georgian citizens made to swear an oath to stop mining crypto: A holy oath was taken to try to ensure the region’s power grid would work at its most efficient level, as crypto miners are blamed for drawing off too much juice.

MISC

Binance Didn’t Upgrade Customer Checks, Despite Promises to Regulators: A Reuters investigation found Binance has not been as keen on regulation as it has publicly professed to be.

Uniswap founder’s bank account shut down by JP Morgan Chase, shadow-debanking allegations surface: Banks do not need to provide an explanation to shut down accounts owned by clients deemed “too risky,” according to former CFTC commissioner Brian Quintenz.