Digital Assets Challenged By Banking Turmoil, Regulatory Moves

Our biweekly survey of developments in future of money

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Compiled by the Oliver Wyman Forum

The global banking crisis continued to affect cryptoassets and prompted fresh enforcement actions and warnings from US regulators and policymakers while established financial institutions kept up their efforts to develop digital assets businesses. These are among the significant recent developments in the future of money.

Legal Beat

CFTC Sues Binance For Alleged Violations Of US Rules

The US Commodity Futures Trading Commission on March 27, 2023, sued crypto exchange Binance Holdings and its founder and chief executive, Changpeng Zhao, alleging they violated US laws by evading registration requirements and compliance controls with US-based customers.

The lawsuit against Binance, the world’s largest cryptocurrency exchange, is the latest in a string of US enforcement action against crypto firms.

The lawsuit claims that despite stating publicly that it restricted Americans from using its platform, Binance adopted a “calculated, phased approach to increase its United States presence,” including not requiring customers to provide identity information and communicating with them using messaging apps that enable automatic deletion of messages. The company also ignored US registration and regulatory requirements for soliciting US customers.

The lawsuit, which also names former Binance compliance chief Samuel Lim, seeks restitution and fines as well as a permanent injunction prohibiting Binance from any further violations of US rules.

After the lawsuit was announced, Zhao tweeted the number 4, a reference to a previous tweet in which he said 4 meant “ignore FUD, fake news, attacks, etc.”

Terraforma Labs Founder Arrested On US Fraud Charges

Do Kwon, the South Korean crypto entrepreneur behind the collapsed stablecoin TerraUSD, was arrested in Montenegro on March 24, 2023, while attempting to board a flight to Dubai using forged passports, Interior Minister Filip Adzic announced in a tweet. The US Justice Department said it would seek his extradition to the United States to face fraud charges.

TerraUSD was designed to maintain parity with the US dollar through an algorithmic program that alternately minted and burned the related coin Luna. Both coins collapsed quickly in May 2022 after traders sold large amounts of TerraUSD, breaking its dollar peg. South Korean authorities issued a warrant for his arrest in September 2022 and obtained a so-called red notice from Interpol, putting law authorities around the world on the lookout for him. The US Securities and Exchange Commission sued Kwon for securities fraud in February 2023.

Coinbase Says SEC May Bring Enforcement Action

The US Securities and Exchange Commission (SEC) has informed Coinbase Global that it may take enforcement action against the cryptocurrency exchange, the company said on March 22, 2023.

In a so-called Wells notice, the agency said it was concerned about several aspects of Coinbase’s business, including the assets listed on the exchange and the company’s staking and wallet services. The company’s stock price, which had rallied in line with cryptocurrency prices this year, fell by a little over 20% on March 22 and 23.

Chief Legal Officer Paul Grewal said the firm was prepared for SEC action and confident it would prevail. “If needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.”

Meanwhile, Bloomberg reported on March 17, that Coinbase was considering establishing an overseas trading platform because of a tougher US regulatory climate. And US Supreme Court justices appeared divided at a March 21, hearing over an attempt by Coinbase to halt customer lawsuits in favor of addressing complaints through arbitration. The exchange is appealing against lower court rulings that allowed class-action lawsuits against the company to proceed. The company contends its terms of service require customers to take disputes to arbitration.

SEC Takes Action Against Tron Founder And Celebrity Endorsers

On March 22, 2023, the US Securities and Exchange Commission (SEC) filed civil charges against Tron founder Justin Sun for offering the tokens TRX and BTT, claiming they were unregistered securities offerings. The agency also alleged that Sun violating antifraud and market manipulation rules by directing employees to make wash trades, or offsetting trades, to artificially inflate the market volume of TRX. Sun tweeted that the SEC complaint “lacks merit.”

In a related action, actress Lindsay Lohan, boxer Jake Paul, and six other celebrities agreed to pay a combined $400,000 in forfeited income and penalties to settle claims by the SEC that they violated investor-protection laws by promoting digital assets.

Lohan, who has 8.4 million Twitter followers, was paid $10,000 to post a tweet promoting JST, SUN, and TRX, three crypto tokens on the Tron blockchain. Under the settlement, she must pay the $10,000 to the SEC along with a $30,000 penalty.

Market Developments

UK Banks Pull Back From Crypto Business

The crypto industry is getting a cold shoulder from banks in the United Kingdom, comparable to the pullback by American lenders, the Financial Times  reported on March 24.

Industry lobbyists and crypto-friendly lawmakers worry that new restrictions on transfers from UK banks to crypto asset platforms could drive investor activity offshore and hurt London’s reputation as a financial center. “De-banking the industry could undermine the UK remaining an international hub of fintech,” said Lisa Cameron, a member of Parliament who chairs an all-party parliamentary group for crypto.

Sale Of Signature Bank Excludes Crypto-related Assets

The sale of assets from the failed Signature Bank excludes its crypto-related assets and deposits, including its Signet payment system that served as an on- and off-ramp between cryptoasset markets and conventional finance.

On March 20, 2023, the US Federal Deposit Insurance Corp. (FDIC) arranged the sale of most deposits and certain assets of Signature to Flagstar Bank, a subsidiary of New York Community Bancorp. Signature’s approximately $4 billion of deposits related to its digital assets business will be provided directly to customers, the FDIC said. The failure of Signature to the FDIC’s deposit insurance fund is expected to be about $2.5 billion.

Coinbase Pauses Support For Signet Payment Network

Coinbase Global, the largest US cryptocurrency exchange, told clients on March 20, that it won’t support collapsed Signature Bank’s Signet real-time payment network until further notice.

Coinbase users who relied on Signet for U.S. dollar deposits or withdrawals won’t be able to send funds to each other outside of traditional banking hours. Coinbase said it was looking for a new technology provider and waiting for clarification on the outcome for Signet.

“In addition to traditional payment methods, crypto deposits, withdrawals, and conversions from USDC to USD are available 24/7 on Coinbase Exchange,” a spokeswoman for the exchange said. “While not ideal, this shows a need for an updated financial system.”

Nasdaq Aims To Launch Crypto Custody By June

Nasdaq is aiming to launch a crypto custody service by the end of the second quarter, Bloomberg reported on March 24, citing the exchange’s head of digital assets, Ira Auerbach.

The news comes six months after Nasdaq first announced its intention to offer crypto custody services to institutional investors.

Australia’s NAB Makes First Cross-Border Stablecoin Transfer

National Australia Bank, one of the country’s big four lenders, announced on March 14, 2023, that it had carried out the first cross-border stablecoin transfer by a major financial institution on a layer 1 public blockchain. The transaction, which used the bank’s AUDN stablecoin and was conducted on the Ethereum blockchain, enabled the bank to send funds to subsidiaries in six countries.

The bank hopes to support transactions by corporate clients by the end of the year.

US Loses Lead In Blockchain Development

The United States is losing its lead in blockchain developers, with 29% of the world’s more than 23,000 active open-source blockchain developers, according to a report published on March 25, 2023, by Electric Capital.

The declining share threatens US preeminence in finance and technology, the report said. It recommended that American policymakers increase investment in blockchain education and training, provide regulatory clarity to encourage crypto and blockchain innovation, foster public-private collaboration, and engage with other countries and organizations to develop global standards and best practices.

The US share has fallen from 40% in 2017 and puts the country level with Europe, which also has a 29% share. Asia ranks third regionally with 13%. India has tripled its developer share over the lpast five years to 6% in 20017. Within Europe, the UK and Germany have lost share in recent years while Ukraine has increased its share by two percentage points over the past three years, to 5%.

Policy Front

White House Signals More Skeptical Stance On Crypto

The administration of President Joe Biden issued its most critical assessment of the crypto industry, saying that crypto assets were “mostly speculative investment vehicles” that so far have failed to deliver the benefits proponents have touted, such as improved payment systems and greater financial inclusion.

The assessment was contained in the annual Economic Report of the President issued on March 20, 2023. Although the risks it cited of volatility, fraud, and environmental damage were not new, the tone was significantly different from Biden’s 2022 Executive Order on Ensuring Responsible Development of Digital Assets.

“The risks presented by crypto assets stem from excessive speculation, high leverage, run risk, environmental harm from crypto asset mining, and fraudulent activities that harm retail investors and corporations,” the new report said. “Because crypto assets appear to be here to stay, policymakers should consider these risks to avoid a “Minsky moment” caused by crypto assets.”

UAE Launches CBDC Implementation Strategy

The United Arab Emirates will step up its efforts to develop a central bank digital currency (CBDC) by launching an implementation strategy involving three projects over the next 12 to 15 months, the country’s central bank announced on March 23. 

One initiative will build on a 2022 mBridge pilot on cross-border wholesale payments with authorities in Hong Kong, China, Thailand, and the Bank for International Settlements. It will involve the soft launch of mBridge to facilitate cross-border CBDC transactions for international trade settlement. The central bank also will carry out proof-of-concept work for a bilateral CBDC bridge with India, one of the country’s leading trade partners, and a separate proof of concept for domestic CBDC issuance for wholesale and retail use.

The central bank has engaged New York-based digital technology provider R3 and UAE cloud computing firm G42 Cloud as technology partners on its implementation strategy.