FSB Proposes Crypto Rules Framework While SEC Takes A Hit

New global approach embraces “same risk, same regulation" principle; Ripple judgment deals a setback to SEC’s enforcement efforts

A picture of the SEC building SEC headquarters in Washington, DC. Image: Flickr/Scott S

Compiled by the Oliver Wyman Forum

Fundamental tensions in the world of digital assets are making headlines. The Financial Services Board proposed comprehensive regulation of cryptoasset activities, part of a series of moves by global oversight bodies, while crypto firm Ripple Labs won a partial victory in its legal fight with the US Securities and Exchange Commission, a ruling that could weaken the agency’s efforts to regulate the wider crypto economy. These are among the latest developments in future of money.

Policy Front

FSB Proposes Global Regulatory Framework For Crypto

The Financial Stability Board (FSB) on July 17 issued detailed recommendations for a comprehensive and consistent global framework for the regulation and supervision of cryptoasset activities and stablecoins based on the principle of “same activity, same risk, same regulation.”

The recommendations call for authorities to have and use the appropriate powers, tools, and resources to effectively oversee cryptoassets and markets, and to regulate those activities on a functional basis proportionate to the risks they pose to wider financial stability. The recommendations are intended to be easily implementable and adaptable to an evolving market while also being technology neutral. 

The recommendations are the product of a more than year-long process of market assessment and public consultations. The FSB said it strengthened its recommendations on safeguarding of client assets, conflicts of interest, and cross-border cooperation in response to events including the 2022 collapses of the Terra/Luna stablecoin system, crypto lender Celsius Network, and exchange group FTX.

The FSB will deliver a report with the International Monetary Fund to the leaders of the G20 in September 2023, and conduct a review of the implementation of their recommendations by the end of 2025.

Crypto’s “Structural Flaws” Make it Unsuitable, Says BIS

The cryptocurrency ecosystem has failed to harness innovation for the benefit of society and its “inherent structural flaws make in unsuitable to play a significant role in the monetary system,” according to a report released on July 11 by the Bank for International Settlements (BIS).

The report, prepared for presentation to a meeting of finance ministers and central bank governors from the Group of 20 nations on July 17-18, identified three main takeaways for policymakers:

-             Permissionless blockchains lead to congestion and high fees because of the need to maintain incentives for validators who record ownership and transactions

-             Despite an original ethos of decentralization, crypto markets often rely on centralized entities like the failed exchange FTX and concentrated governance power

-             DeFi is driven by speculative inflows from users hoping for high returns and doesn’t finance activity in the real economy.

The BIS recommended that governments pursue tighter regulation of cryptoasset activities and closer cooperation to contain risks. It also said authorities could encourage innovation within the traditional financial system or through the use of central bank digital currencies.

Most Central Banks Now Working On CBDCs, BIS Says

Over 90% of central banks surveyed are engaged in some form of work on a central bank digital currency, or CBDC, which suggests there could be 15 retail and nine wholesale CBDCs publicly circulating by 2030, the Bank for International Settlements (BIS) said in a report released on July 10.

The report, based on a late 2022 survey of 86 central banks whose jurisdictions account for 94% of global economic output, said 93% of those banks were doing some work on a CBDC, with more than half conducting experiments or working on pilot projects. Most of those banks see a role for the private sector in onboarding consumers, providing wallets, and conducting know-your-customer and anti-money laundering/combatting the financing of terrorism checks.

On July 11, the BIS Innovation Hub released a report submitted to the G20 on lessons learned from its 12 CBDC projects conducted with various national central banks. The report found that:

-             Wholesale CBDCs will be driven by the public and private sector's quest to shape the future of trading and settlement.

-             For retail CBDCs, the most promising model is a two-tier approach involving public-private partnership, the most fundamental feature is privacy, and the greatest challenge is cybersecurity.

-             Cross-border CBDC arrangements are novel territory and more complicated than their domestic counterparts, but central banks can leverage new technologies to provide solutions to "old" operational challenges and policy questions.

ECB Considers Compensation Model For Digital Euro

A digital euro should be free for basic use by private individuals but payment service providers (PSPs) should be compensated for providing value-added services, the European Central Bank (ECB) said in its latest progress report on the proposed currency, published on July 14.

The principle of not charging for basic services such as opening and closing accounts and initiating and receiving payments would be consistent with existing arrangements around cash. Compensation for value-added services such as providing extra payments cards would provide incentives for PSPs to distribute a digital euro. The report also called for legislative safeguards to prevent merchants from being overcharged by intermediaries. 

The report proposed a staggered roll-out of a digital euro, starting with its use for person-to-person payments and e-commerce and later allowing its use in stores, to mitigate execution risks. The ECB expects to decide in the autumn whether to begin development of a CBDC.

US Study Supports Potential Of Shared Ledger For Payments

A registered liability network (RLN) using a shared distributed ledger could serve as an interoperable network for conducting domestic interbank payments and cross-border payments using tokenized bank deposits and a wholesale central bank digital currency, major US financial institutions and the New York Innovation Center of the Federal Reserve Bank of New York announced on July 6.

A proof of concept study, conducted by those organizations in a test environment with simulated data, found that an RLN could provide global, 24/7 payments in near-real time, enable efficient liquidity management with smart contracts, and would be compatible with existing legal frameworks.

Legal Briefs

Ripple Court Ruling Deals Potential Blow To SEC

A US District Court judge ruled that roughly half of Ripple Lab’s sales of its XRP token did not constitute a securities offering, and that the token itself is not a security, potentially undermining part of the Securities and Exchange Commission’s (SEC) enforcement case against Ripple and legal actions against other cryptoasset firms.

The SEC sued Ripple and two of its executives in 2020, contending that they violated securities laws by failing to register the sale of $1.4 billion of XRP with the agency.

On July 13, Judge Analisa Torres of the US District Court for the Southern District of New York ruled that more than $700 million of Ripple’s offering did amount to an illegal sale of securities because they were bought by institutional investors who knew the seller was Ripple and relied on the company to make their tokens appreciate. But the remainder of the tokens did not constitute a securities offering because they were bought on crypto exchanges by people who didn’t know the seller was Ripple.

Many crypto executives welcomed the ruling. Cameron Winklevoss, co-founder of exchange firm Gemini, said in a tweet that the judgement “means the sales of all cryptos on exchanges are not securities.” The price of XRP rose by more than 70% immediately after the ruling. Coinbase, which has been sued by the SEC for allegedly violating securities laws by listing unregistered tokens, said it would enable the resumption of trading in XRP on its platform. The company’s shares jumped 25% immediately after the ruling.

Former Celsius CEO Arrested For Fraud Over Lender’s Collapse

Alexander Mashinsky, founder and former chief executive of failed crypto lender Celsius Network, was arrested on July 13 and charged with defrauding customers and manipulating the market price of the firm’s CEL token. He pleaded not guilty and was released on a $40 million bond secured by his Manhattan residence.

The US Attorney’s Office for the Southern District of New York alleged that Mashinsky and former Chief Revenue Officer Roni Cohen-Pavon falsely portrayed Celsius as a safe and secure institution and used customer deposits to support the CEL price. Celsius was among a number of firms that failed in the wake of the collapse of the Terra-Luna stablecoin system in May 2022. Celsius halted withdrawals in June 2022, trapping $4.7 billion in customer assets, and filed for bankruptcy the following month.

Gemini Sues Digital Currency Group For Alleged Fraud

Gemini Trust, a cryptoassets firm owned by Tyler and Cameron Winklevoss, on July 7 sued Digital Currency Group (DCG) and its founder, Barry Silbert, accusing them of fraudulently masking massive losses incurred in the collapse of crypto hedge fund Three Arrows Capital in 2022, harming Gemini customers.

The suit alleges that DCG’s crypto lending subsidiary, Genesis, suffered a $1.2 billion loss when Three Arrows, one of its major borrowers, filed for bankruptcy in July 2022, and that DCG falsely claimed to have absorbed that loss. Genesis halted withdrawals in November 2022 and filed for bankruptcy in January. That trapped more than $900 million in funds owned by customers of Gemini, which used Genesis for its crypto lending product.  

Business Developments

Binance Said To Cut Staff And Employee Benefits

Cryptocurrency exchange Binance has cut more than a thousand employees in recent weeks, and CEO Changpeng Zhao warned at an employee meeting on July 14 that further layoffs could follow every three to six months, the Wall Street Journal reported on July 17.

The exchange also told employees it would stop offering benefits including reimbursement for mobile phone, fitness, and work-from-home expenses because of declining profit, the newspaper reported, citing former employees and internal messages at the firm. Several senior executives reportedly have left the firm recently, including Chief Strategy Officer Patrick Hillmann, who announced his departure in a tweet on July 6.

The US Securities and Exchange Commssion and Commodity Futures Trading Commission have sued Binance for allegedly operating illegally in the United States, while regulators in several European countries have blocked the firm’s efforts to expand in the region.

Withdrawals Drain Funds From Multichain Bridge Network

Multichain, a provider of bridge services that enable crypto investors to transfer funds between different blockchains, indefinitely halted services after discovering the movement of large numbers of tokens to an unidentified address, Blockworks reported on July 7. 

Analytics firm Chainalysis said the withdrawals may have been a hack or an exploit by insiders. Multichain disclosed on May 31 that it was unable to contact its chief executive, known by the name Zhaojin, and couldn’t perform necessary technical maintenance on its platform.