FTX’s Impact on Web3 Regulation
White Star Capital Digital Asset Fund - newsletter #106
Since the fall of FTX, European and US legislative bodies are accelerating their legal research to create a framework and protect consumers and institutions without restricting innovation. That's why 2023 will start with more dialogue between regulators in the US, Europe, and the UK. You will find below a legal update for each of these geographies about the pain points to solve and the future of crypto regulation.
The U.S. position
Most Americans attracted to bitcoin and other digital tokens have traded through entities outside the U.S., including FTX. The group's new chief executive said in a court filing that FTX had demonstrated a "total failure of corporate controls" and was subject to "defective regulatory oversight overseas." As a result, regulators and investors will be paying closer attention than ever to the headquarters address in order to provide more transparency for consumers and institutions using Centralized Exchanges.
For this reason, there will be more dialogue and transparency on the regulation, not only for Centralized Exchanges but for the whole of crypto-regulation such as Stablecoins. Proof of reserves, transparency, and visibility will be the strong focus in Q1-Q2 2023, which was not the case in 2022.
Then, the New York Department of Financial Services Superintendent Adrienne Harris believes that potential federal legislation on cryptocurrencies must be analyzed through the lens of state regulatory regimes. In her speech, "Digital asset regulation: The state perspective," Harris proposed that Washington lawmakers take a closer look at New York State's regulatory regime. She highlighted the breadth of the registration process in New York, which includes assessing the firm's organizational structure, the suitability of its management, financial statements, and AML/KYC regimes that ensure the financial security of investors.
The Europe position
The European Central Bank’s chief Christine Lagarde has confirmed her willingness to strengthen the legal framework for cryptocurrencies, with the parliament about to pass the regulation on crypto assets markets. This bill will cover crypto parties and service providers and is expected to come into effect in 2024. Lagarde also added that the ECB will provide EU citizens with digital payment alternatives thanks to a central bank’s digital euro. A decision about this eventual implementation will come by September 2023.
After that, a MiCA II regulation would be added to expand provisions on risky connections to traditional finance, as well as to cryptocurrency activities outside the scope of MiCA such as DeFi.
The UK position
BOE's Cunliffe said the inability to control risk could initiate an existential threat to cryptocurrencies. That's why the Bank of England, the Financial Conduct Authority, and HM Treasury are setting up a regulatory sandbox to refine "technologies that have been pioneered and perfected in the crypto-currency world, such as tokenization, encryption, distribution, atomic settlement, and smart contracts" so they can help improve the financial system as a whole.
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