Governments Seek Regulation And Innovation In Crypto

Our biweekly survey of recent developments in the future of money

UK, London, blurred motion of incidental business people walking to work with view of the financial district behind

Compiled by the Oliver Wyman Forum

The British government put the accent on innovation in a long-awaited policy document on cryptoasset regulation, Hong Kong announced plans to require licensing of stablecoin issuers, and a Swiss private bank tokenized its shares. These were among the notable recent developments in the future of money.

Policy Front

UK Emphasizes Innovation In Paper On Crypto Regulation

The UK government aims to design a regulatory framework for cryptoassets that will enable firms “to innovate at pace, while maintaining financial stability and clear regulatory standards,” Andrew Griffith, Economic Secretary to the Treasury, wrote in a consultation paper paper published on Feb. 1, 2023.

While crypto technologies “can have a profound impact across financial services,” recent market turbulence and the collapse of firms including the FTX exchange highlighted the accompanying risks, Griffith said. The report proposes extending financial regulation to centralized crypto exchanges as well as custody and lending activities, under the principle that similar risks should have similar regulatory outcomes regardless of the technology employed. Policymakers should avoid imposing “overly burdensome regulation” and be “agile and flexible” to accommodate evolving markets and products.

Industry representatives generally welcomed the paper as a positive step that would improve regulatory clarity.

Fed Denies Membership To Wyoming Crypto Bank

The Federal Reserve Board on Jan. 27 announced it had denied an application for membership of the Federal Reserve System from Wyoming’s Custodia Bank, saying its risk management “was insufficient to address concerns regarding the heightened risks associated with its proposed crypto activities, including its ability to mitigate money laundering and terrorism financing risks.”

In parallel with the Custodia decision, the central bank also issued a policy statement saying that all Fed-supervised banks, including those like Custodia that do not have federal deposit insurance, are subject to the same limitations on activities, including crypto-related business. All banks need to have risk-management controls and information systems that are “appropriate to the nature, scope, and risks of its activities,” it said.

Caitlin Long, Custodia’s chief executive, said the bank was surprised and disappointed by the decision but would “continue to litigate” the issue.  The bank sued the Fed in June 2022, claiming an unlawful delay in the handling of its application.

China Urged To Reconsider Its Ban On Cryptocurrencies

Beijing should reconsider its ban on cryptocurrency trading because the country risks missing out on opportunities in related areas like blockchain technology, according to Huang Yiping, a former member of the monetary policy committee of the People’s Bank of China.

The government should consider whether the ban is sustainable in the long run given that technologies like blockchain are “very valuable” to regulated financial systems, Huang, now an economics professor at Peking University’s National School of Development, said in a December speech, a transcript of which was published on Jan. 28, 2023, the South China Morning Post reported. The newspaper noted that use of China’s digital yuan has slowed, with transactions in pilot cities totaling 180 million yuan ($27 million) over the latest Lunar New Year holiday compared with a weekly average of more than 700 million yuan between December 2019 and August 2022.

Chinese entities and investors were quick to embrace cryptocurrencies a decade ago, but the authorities banned cryptocurrency exchanges from operating inside the country in 2017 and then outlawed all crypto transactions in 2021, citing risks to financial order and crypto’s role in criminal activity. Some analysts have suggested that crypto also helped facilitate capital flight from China.

Hong Kong Plans To Require Licensing Of Stablecoin Issuers

The Hong Kong Monetary Authority plans to adopt mandatory licensing for stablecoin issuers and prohibit algorithmic stablecoins, the central bank announced on Jan. 31, following a public consultation.

The monetary authority will supervise the governance, issuance, and stabilization of fiat-backed stablecoins, and require issuers to maintain reserves that match the amount of coins in circulation. It expects to implement the new regulations this year or next, HKMA Chief Executive Eddie Yue said.

Korea Seeks To Crack Down On Crypto Money Laundering

South Korea’s Ministry of Justice plans to start monitoring cryptocurrency transactions to crack down on money laundering, it announced on Jan. 31. The ministry will start by using third-party software to monitor transactions and aims to develop its own system by the second half of this year.

Market Developments

Swiss Private Bank Tokenizes Its Shares

Cite Gestion has tokenized its shares on the Ethereum blockchain, according to digital asset technology company Taurus, which provided the platform for the tokenization. The private bank wanted to enable clients to take advantage of “the huge potential of rationalization and efficiency gains that the distributed ledger technology offers,” Deputy CEO Christophe Utelli said.

Finnish Company Launches Euro Stablecoin

Finland’s Membrane Finance launched a reserve-backed euro stablecoin, EUROe, the company announced on Feb. 2, 2023. The stablecoin, issued on the Ethereum blockchain, will be backed at least one to one by reserves held in a European financial institution, it said.

EUROe has obtained an Electronic Money Institution license from Finland’s Financial Supervision Authority.

Crypto M&A Deal Volume Rises, Value Falls

The number of mergers and acquisitions of crypto ventures rose 13% in 2022 but the value of transactions declined by 64%, according to advisory firm Architect Partners.

Binance And Mastercard Launch Bitcoin Rewards Card In Brazil

Binance has partnered with Mastercard to introduce a prepaid rewards card in Brazil that will enable the exchange’s users to make purchases and pay bills with Bitcoin, Ether, and a dozen other cryptocurrencies, Decrypt reported on Jan. 30, 2023.

Like a similar card introduced in Argentina last year, the Brazilian card will convert a holder’s crypto into fiat currency at the time of purchase. It also will offer up to 8% cashback on eligible purchases.

England’s Premier League Strikes NFT Deal

The Premier League has agreed to allow fantasy sports marketplace Sorare to mint and offer non-fungible tokens cards, or NFTs, of every player in the 20-team English football league, according to City AM. The NFTs can be used and traded by fans participating in Sorare’s fantasy football league. Sorare will pay 30 million pounds ($36 million) a year in the four-year deal.

Bankruptcy Beat

Celsius Used Customer Funds To Meet Some Withdrawals

Celsius Network misled customers about the risks it was taking with their funds and used customer assets to prop up the price of its CEL token, according to an independent examiner for the US Bankruptcy Court in the Southern District of New York.

Celsius marketing said the firm made low-risk and fully collateralized loans to generate the yields it offered, but by June 2021 one third of its institutional loan portfolio was wholly unsecured and more than half was under-collateralized, the examiner’s report said. It also said Celsius concealed the extent to which it was driving the market for its own token, CEL, and that it briefly used new deposits to meet withdrawal requests from existing customers in 2022.

“In every key respect – from how Celsius described its contract with its customers to the risks it took with their crypto assets –  how Celsius ran its business differed significantly from what Celsius told its customers,” examiner Shoba Pillay wrote in his report, released on Jan. 31, 2023

Legal Briefs

Prosecutors Seek To Limit Bankman-Fried’s Contact With Ex-FTX Staff

US prosecutors have asked a judge to prohibit Sam Bankman-Fried from communicating with current or former employees of FTX and using encrypted means of communication, saying his recent email and Signal messages to former general counsel of the failed cryptocurrency exchange suggested a possible witness tampering attempt.

Judge Lewis Kaplan approved those restrictions temporarily on Feb. 1, 2023, pending a hearing.

US Blames North Korea For $100 Million Hack Of Horizon Bridge

The Federal Bureau of Investigation said the Lazarus Group, a state-backed North Korean group, was responsible for a $100 million theft of cryptocurrency from Harmony’s Horizon bridge in June 2022. The FBI said it froze a portion of those funds in coordination with virtual asset service providers when the group used a privacy protocol to launder $60 million worth of Ether on Jan. 13, 2023.