publisher’s Note
Ladies and gentlemen, it is bittersweet to welcome you to the final issue of Law Decoded, at least if you are really at the forefront. Although someone may pick up this newsletter at some point, there are currently no plans to do so.
I’m going to use the rose-colored glasses or maybe the graduation glasses that go with this last newsletter and shake up the format. Since Law Decoded focused on some longstanding stories in crypto last week, I wanted to get thematic this week.
Since I’m no longer going to walk you through the weekly changes to the crypto law, I wanted to give you an idea of how the overall situation is developing. There are many important laws on the move and courts in session, but I’ll zoom back on these to introduce you to the three topics I find to be mindful of in crypto law. These are also predictions and opinions. So remember, they are mine and not Cointelegraph’s as a whole. And as always in the future, I could very well be wrong.
Security and Collateral
Forecast: The role of securities regulators, particularly the US Securities and Exchange, will continue to determine the fate of the issuance of new tokens. And it may take a while, but the SEC and other securities regulators will sit back on some, but not all, DeFi projects once they can figure out how.
Situation: Top-class legal actions against companies like Telegram, block.one and Ripple have displaced many potential token issuers from the market. Less dramatic than these defeats were the quiet preliminary successes. Developers like the Filecoin Foundation and Blockstack seem to have found ways not only to raise money for the development of tokens under SEC exceptions, but also to decentralize these tokens to such an extent that the SEC did not intervene any more for the time being than these companies did Registration have set instructions for these tokens.
Formalizing the process of token decentralization will help new developers tremendously, be it by classifying tokens into the law or introducing a safe haven à la Hester Peirce. Probably incumbent chairman Gary Gensler will not indulge in issuing securities masquerading as decentralized tokens. We won’t see another 2017. Optimistically, however, Gensler is clearly interested in formalizing the market, which means clear road rules.
In the meantime, listed companies like Square, Tesla and Microstrategy are increasingly turning into weird means for stock market investors to face the price movements of Bitcoin. BTC ETFs in Canada and huge market interest in the US mean it is only a matter of time before the SEC gives the US the green light. The tokenization of securities continues slowly but surely.
As for DeFi? The Commission will thwart this for years. With little confidence and hope to be wrong, I assume that there will be attempts to legally hold programmers accountable for DeFi code.
The wealth of CBDCs
Forecast: The central bank’s digital currencies will continue to develop. Some start up faster, but those that actually matter as peer-to-peer payment mechanisms will take significantly more time, if they ever occur at all. Distributed ledger technology needs serious updates if it is to play a role in this transformation. I am not sure if this will be the case.
Situation: CBDCs have been largely behind for some time. For crypto advocates, they were a hypothetical use case. To the monetary authorities: unnecessary techie hocus-pocus. Interest increased and decreased in various places, with tech giants’ involvement in digital payments putting brief pressure on central banks to update legacy systems. But those moments would fade.
However, the COVID-19 pandemic exposed the weakness of existing payment rails in a way that anyone could see. The need to get money into the hands of citizens, as well as the sudden fear of spreading disease through face-to-face contact, and particularly contamination with cash, have put the CBDC concept high on the agenda for many of the world’s largest central banks.
CBDC development will remain a critical topic of conversation and development for the foreseeable future. However, it is full of misunderstandings and unconfirmed assumptions. None of the five major currency powers – the issuers of the dollar, the euro, the yen, the yuan and the pound – have committed themselves to certain features of their prospective digitization, nor whether they will even start. Will CBDCs be delivery vehicles? How anonymous will you be? Where does the transaction data go? Will they be accessible to banks, corporations, citizens or the world? Will you be using distributed ledger technology?
People are sensitive to changes in their money. If a true self-billing currency ever hits the market, it will be slow to come. Of these five major currencies, the Chinese yuan has seen the greatest “digitization” that has caught the attention of the crypto world. But apparently this currency does not bear any of the hallmarks of what the crypto world claims to see. The digital yuan appears to be just another third party payment app, except that the Chinese government is that third party.
CBDCs will be an interesting trend in the years to come. But don’t hold your breath. The public reminder not to have received checks in months will fade as the pandemic subsides. This is accompanied by broad political pressure.
Everything about AML
Prediction: Smart anti-money laundering rules are good for the world. AML’s next few years may not be good for crypto. The largest economies have either tried to ban crypto entirely or have made great strides in representing fiat gateways – namely, in exchanges. The crypto industry has largely accepted this. But upcoming rules will be more intrusive.
Situation: In its often repeated history, Bitcoin appeared when the global financial system dissolved. Satoshi’s timing to oust a means of shifting power from monetary authorities and financiers alike was perfect.
On the other hand, the following decade saw a surge in attention to all of the diabolical ways in which the powerful and corrupt used financial instruments to eliminate illegal profits around the world. The 2010s saw successive waves of mass dirty finance leaks and offshoring – and this came after the US “war on terror” increased the authority to track financial flows in the name of combating the financing of terrorism.
In response to the Panama Papers, for example, the public rightly reacted with outrage. Policy makers have rightly set out to curb money laundering between jurisdictions. And crypto was included in these massive political changes and legislative packages, although UBS, Mossack Fonseca or Vancouver’s real estate market never came close as a means of laundering money.
While it is not fair to use Bitcoin as a money laundering mechanism, it is evident that the lack of KYC has been extremely lucrative for a number of not good players in the crypto world. This is especially true for exchanges. It was the Paradise Papers that revealed that BitFinex and Tether are run by the same people, a fact they clearly would have preferred to hide. It was only when Malta tried to bring its business register in line with EU expectations that it outperformed Binance for lying about its registration on the island. Not even to mention how inconsiderate the executives at BitMEX have been.
When the EU introduces AMLD5 and the US begins to demand owner names for anonymously registered companies, the crypto world has already shifted its party line. Fewer and fewer voices in the industry are in favor of a completely non-lawful Bitcoin, probably because many of these big players and in particular the exchange of profits by imitating the sins of traditional finance. Generally speaking, the consensus has been to focus legal responsibilities like getting to know your customer on Fiat gateways. The Financial Action Task Force is already asking for this. In a way, this only accepts the inevitable.
Further efforts have been made as governments become more familiar with the management of the exchanges. Best known is the US Treasury Department’s attempt to obtain information about transactions between exchanges and self-hosted wallets. These rules are still in the works and some will remain pessimistic.
I do not assume that governments have the ability to conduct peer-to-peer transactions, for example on the Bitcoin network, unless the holder of the wallet has made a serious operating error. But pessimistically, I can imagine a world of whitelists and blacklists in which it is becoming increasingly difficult to switch between fiat and crypto without revealing all kinds of personal identification information. It’s not what I would probably call it, at least not for a few years, but it’s not impossible.
