Compiled by the Oliver Wyman Forum
The US government puts consumer protection and enforcement at the center of its new digital asset strategy, big Wall Street firms move to capture institutional flows into digital assets, and emerging markets lead the way in the adoption of cryptocurrency. These initiatives feature in our latest review of significant developments in the future of money.
White House Unveils its Digital Assets Framework
The administration of President Joe Biden on Sept. 16, issued eight reports and an overview document, providing a high-level view of its framework for responsible development of digital assets that suggest a ratcheting up of enforcement of the sector but with little on specific regulations or a clear decision on whether to launch a central bank digital currency (CBDC).
A Department of the Treasury report on The Future of Money and Payments recommends consideration of a federal framework for regulating non-bank payments providers, while a separate Treasury report on the implications of crypto-assets calls on regulators and law enforcement to vigilantly monitor the sector for unlawful activity and to continue bringing civil and criminal actions to enforce existing laws. That may provide cover for agencies, particularly the Securities and Exchange Commission, to step up enforcement. There is also a call for the Consumer Financial Protection Bureau and the Federal Trade Commission to step up their enforcement activities.
The reports assign the Treasury to lead inter-agency working groups on a CBDC and call on the Federal Reserve to continue its research on a possible digital dollar, all while encouraging continued work on instant payment systems like the FedNow Service, which is scheduled to go live in 2023.
Reports from the White House Office of Science and Technology Policy outlined 17 policy objectives for a CBDC, including promoting growth while mitigating risks, advancing financial inclusion, protecting national security and promoting the global role of the dollar, ensuring the privacy of sensitive data, and making any CBDC system environmentally sustainable.
The most-important policy issues, such as which digital assets are securities, will require legislation. The reports will help shape debate, but legislation appears unlikely in the near term given a lack of consensus in Congress and the very limited number of legislative days left this year.
SEC Chief Hints at Closer Scrutiny of Ethereum
The Ethereum blockchain’s just-completed merge could open it to closer regulatory scrutiny, SEC Chairman Gary Gensler said on Sept. 15.
Cryptocurrencies that allow holders to stake their coins, which involves locking them up in a protocol in exchange for a return, may meet the test of whether an asset is a security and thus subject to SEC regulation, Gensler told reporters after a Congressional hearing. Under the so-called Howey test, investors who put money into an asset in expectation of making a profit on the efforts of others are buying a security.
Gensler did not mention Ethereum specifically, but he spoke on the same day that the blockchain transitioned from a “proof of work” consensus mechanism to a “proof of stake” approach, which would involve staking.
CBDC Efforts Advance in China and Hong Kong
The People’s Bank of China plans to expand the trial of its digital yuan to four major provinces, Deputy Governor Fan Yifei said on Sept. 19. The provinces of Guangdong, Jiangsu, Hebei, and Sichuan have a combined population of over 360 million people. The central bank has been testing the e-CNY, as the CBDC is known, in the cities of Shenzhen, Suzhou, Xiiongan, and Chengdu since 2020.
Separately, the Hong Kong Monetary Authority announced on Sept. 20, that it would start trials of its own CBDC, the e-HKD, in the fourth quarter.
Wall Street Firms Launch Digital Asset Businesses
Several leading US financial institutions have launched new business ventures in digital assets, a sign that a crypto winter hasn’t diminished their view of the sector’s long-term potential.
A consortium of established financial institutions announced on Sept. 13, the launch of a digital assets exchange it said would bring trading services with institutional-grade compliance and security standards to the cryptocurrency market.
The new EDX Markets will be “a trading platform designed for and used by leading financial institutions,” the venture’s board of directors said in a statement. It will aggregate liquidity from multiple market makers to offer tighter trading spreads and greater transparency than existing cryptocurrency exchange, the consortium said. The exchange will be an independent entity backed by founding firms that include Charles Schwab, Citadel Securities, Fidelity Digital Assets, Paradigm, Sequoia Capital, and Virtu Financial.
Earlier, Nasdaq announced on Sept. 20, that it would launch a new business, Nasdaq Digital Assets, to provide “trusted and institutional-grade solutions, focused on enhanced custody, liquidity and integrity.” The unit will start with a custody offering that will “bring together the best attributes of hot and cold crypto wallets,” it said.
Israeli Crypto Exchange Wins Market License
Bits of Gold, an Israel-based cryptocurrency exchange, became the first crypto firm in the country to obtain a license from the Capital Markets Authority. The license will enable the firm to store digital currencies on its wallet and provide digital asset services to banks and other financial institutions.
DeFi Market Maker Hit by $160 million Hack
Cryptocurrency market maker Wintermute lost $160 million through a hack of the wallet used for its proprietary trading in decentralized finance (DeFi) , founder and CEO Evgeny Gaevoy disclosed in a tweet thread. The firm’s centralized finance and over-the-counter operations weren’t affected by the hack.
Gaevoy attributed the loss to human error while the firm was transitioning to a more-secure method of generating private keys because of a vulnerability in an app it had been using. The firm remained solvent and would double down on its DeFi strategy, he said. “Investing into processes to minimize human impact is something we continuously invest into, both internally and with the help of external security advice,” Gaevoy wrote.
Korea Seeks Red Notice for Arrest of Do Kwan
Prosecutors in South Korea have asked Interpol to issue a so-called red notice to help them find and extradite Do Kwan, the co-founder of collapsed cryptocurrency firm Terraform Labs, the Financial Times reported on Sept. 19.
Korean authorities said Kwan was presumed to be “on the run” after refusing to cooperate with their investigation into the $40 billion collapse of the Luna token and its related stablecoin, TerraUSD. Those failures triggered a wider selloff in the global crypto market in May.
In a tweet thread, Kwan said he was not hiding but was “in the process of defending ourselves in multiple jurisdictions” and looking forward to clarifying the truth.
CFTC Move Against DeFi Protocol Draws Criticism
The CFTC on Sept. 22 fined and sanctioned a DeFi protocol for violating commodity trading regulations, and filed a separate lawsuit seeking to impose similar penalties against a decentralized autonomous organization, or DAO, that took control of the protocol last year.
The regulator said bZeroX offered leveraged and margined retail commodity transactions in digital assets, activities only registered futures commissions merchants can perform, and failed to implement a customer identification program required by federal law. It imposed a $250,000 fine against bZeroX and its co-founders.
The CFTC also filed a federal lawsuit seeking to impose similar penalties on Ooki DAO, an organization that took control of the DeFi protocol from bZeroX last year. That move was opposed by one of the CFTC’s five commissioners, Summer Mersinger, who said there is no existing law that makes DAO token holders liable for violations. An executive at the Blockchain Association called the lawsuit “the most egregious example of regulation by enforcement in the history of crypto.”
UK Regulator Warns Consumers About FTX
The UK’s Financial Conduct Authority on Sept. 16, issued a public warning about FTX, saying the cryptocurrency exchange was targeting people in the UK even though it was not authorized to do so.
Consumers “should be wary of dealing with this unauthorized firm,” the regulator said in a statement. They would not have access to the UK’s Financial Ombudsman Service or compensation scheme and would be unlikely to get their money back if anything went wrong.
On Sept. 19, the exchange’s CEO, Sam Bankman-Fried, said a scammer had been impersonating FTX by phone in the UK. He urged consumers to access the exchange only via its website.
Emerging Markets Set the Pace for Crypto Adoption
Emerging markets are leading the way in adopting the use of cryptocurrencies while the United States and China also show increases in adoption, according to the latest annual survey by blockchain data provider Chainalysis. The survey data indicated that adoption has declined over the last year but remains well above pre-pandemic levels.
Vietnam tops the firm’s adoption ranking followed by the Philippines, Ukraine, and India. The rankings are based on overall and retail transaction values on both centralized and decentralized exchanges, as well as peer-to-peer trade volume on exchanges. Trading volumes are weighted by each country’s purchasing power parity.
The US ranked fifth overall, with high rankings for centralized and DeFi transactions offsetting a lowly 111 ranking for peer-to-peer transactions. The numbers suggest Americans mostly invest in crypto rather than using it for routine transactions. China meanwhile rose three places to No. 10 in the ranking, suggesting that the country’s formal ban on crypto trading has either been ineffective or loosely enforced.