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United States Financial Regulators Sign Onto the Global Financial Innovation Network

In a report released by the US Securities and Exchange Commission on 24th October 2019, four US financial watchdogs have joined the Global Financial Innovation Network (GFIN). These regulatory agencies include the Federal Deposit Insurance Corporation (FDIC), the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), and the Office of the Comptroller of the Currency (OCC).

GFIN is an international alliance of government regulators led by the United Kingdom’s Financial Conduct Authority (FCA) proposed in a consultation paper in August 2018 but was formally launched in January 2019 by an international group of financial regulators and related organizations. The creation (GFIN) was built on the FCA in early 2018 proposal to create a global sandbox.

According to the report, US financial watchdogs have in recent years shouldered the responsibility of clarifying regulatory issues, establishing an easy understanding for the stakeholders and also, promoting access to early identification of burgeoning regulatory problems, challenges, opportunities, and risks.

These four regulatory agencies joined 46 other financial authorities, central banks, and international organizations claimed to be members of the GFIN to boost huge cooperation and compliance among monetary authorities on different aspects of innovation discussions, regulatory methods, and lessons.

By participating in the GFIN, the objectives as mentioned above of the US regulatory agencies were broadened. It also enhanced their abilities to promote well-tailored innovation in the financial market within the United States and beyond. It will equally enable the regulators to represent the ambitions and needs of the United States and its financial services stakeholders.

Through the promotion of knowledge-sharing on innovation in rendering financial services, US members of GFIN will be prompted to further the following: financial inclusion, financial stability, market integrity, competition, consumer and investor protection.

Image via Shutterstock

German Authorities Clamps Down on 'Shitcoins club' Bitcoin ATM Operations

Germany’s financial regulator (BaFin) has moved to stop the operations of a popular Bitcoin ATM operator in the country. Known by the name Shitcoins Club, the German financial regulator said that Shitcoins club’s operations are illegal as it operates without either a banking or a proprietary license.

Germany as a whole has about 67 operational bitcoin Automated Teller Machines and Shitcoins Club operates about 17 Bitcoin, Litecoin, and ether ATMs in the country. With this clampdown, a substantial portion of Germany’s crypto ATMs will likely go offline. One of the major concerns according to the sources quoted on the local news site Handelsblatt is the ease with which crimes could be perpetrated using the Bitcoin ATMs.

“If a person with criminal energy wanted to launder money with Bitcoin machines, this would in some cases be entirely possible,” Handelsblatt reported quoting Professor Philip Sandner. In the case of Shitcoins Club, it is mainly as a result of improper Know Your Customer Procedures the organization adopts.

Germany is a crypto-friendly nation that encourages the emergence of blockchain and cryptocurrency service providers. Earlier in the year, the BaFin received more than 40 applications from German banks to provide cryptocurrency custody services. A similar service was unveiled by the German Stock Exchange Subsidiary Blocknox while expectations of more players billed to soar in the coming months as the European giant has the legislative backing.

Bitcoin ATMs Become a Trend

Although every country is trying to adjust its legislation to enable blockchain and cryptocurrencies to thrive, most countries are not slowing down when it comes to the emergence of Bitcoin ATMs. Bitcoin ATMs reign supreme in East and South London as the residents have reportedly overcome their fears of crypto scams.

Asian countries including South Korea also have a surge in Bitcoin and Bitcoin Cash ATM transactions and there is a general belief that the full blockchain adoption and integration will only be realized by the global democratization of digital technologies through crypto ATMs.

Coinbase Reveals Firm Received Around 2000 Subpoenas From Authorities Over Customer's Data

Cryptocurrency exchange Coinbase has revealed in its newly released transparency report that it got served a sum total of 1,914 government requests for customer’s data in the first half of 2020. Per the report, the bulk of the requests which come in the form of a Subpoena were from United States authorities and accounts for 58% (or a total 1,113) of all requests received.

As detailed by Coinbase’s Chief Legal Officer Paul Grewal, the exchange has the obligation to share information about how it handled its customer’s data in line with its mission to continue to protect its customers’ financial privacy. According to Grewal:

“Coinbase believes that trust is built through transparency and honesty. As we continue on our journey to becoming the most trusted venue for anyone to interact with the cryptoeconomy, today we’re releasing a Transparency Report that shares insights into how we handle legitimate government requests for some customer data.”

While the exchange is unable to provide what the requesting government agencies did with the shared data, the exchange needed to cooperate with the government whose core interests revolve around pursuing bad actors and thus keep such platforms as Coinbase’s safe for everyone. Besides the United States, the United Kingdom and Germany complete the top three countries with the highest number of requests at 441 and 176 respectively.

Meanwhile, Coinbase which has been linked with Initial Public Offering listings has continued to witness the exodus of its staff as in relation to the controversial ‘Apolitical’ stance order issued by Chief Executive Officer Brian Armstrong. While the move might have left a temporary dent in Coinbase’s workforce, the company’s transparency reporting is a move to serve its 38 million customers while attracting much more. The move will also help the firm wade off privacy lawsuits as it has been slammed with in the past

Janet Yellen Urges Regulators to Move Fast on Regulating Stablecoin Rules

US Treasury Secretary Janet Yellen told regulators that the US government must move quickly to create and adopt a regulatory framework for stablecoins, a rapidly growing asset of digital currencies.

On Monday, July 19, Yellen has met with the President’s Working Group (PWG) members on financial markets and top regulators in the financial industry to discuss how policymakers should move rapidly to ensure that their regulations keep up with rapid technological changes across crypto assets.

The group also discussed the rapid growth of stablecoins, their potential use as a payment method, and potential risks to consumers, national security and the financial system.

The meeting focused on the significance of regulations for stablecoins, which are crypto-assets that peg their values to traditional currencies like the US dollar.

Meanwhile, a group of US regulators plans to make recommendations in the forthcoming months to fix any regulatory gaps around stablecoins, the Treasury Department stated in a statement.

“The Secretary underscored the need to act quickly to ensure there is an appropriate U.S. regulatory framework in place,” the Treasury Department stated.

Yellen’s comments echoed concerns raised by Federal Reserve Chair Jerome Powell, who told policymakers last week at a congressional hearing that stablecoins are growing incredibly fast but pointed to their lack of appropriate regulations as a matter of concern.

“If we’re going to have something (stablecoins) that looks just like a money market fund or a bank deposit or a narrow bank and it’s growing really fast, we really ought to have appropriate regulation,” Powell told the Senate Banking Committee.

Stablecoin Risks

In the past, Christine Lagarde, the president of the European Central Bank (ECB), also talked about concerns over stablecoins. In December 2020, Lagarde stated that stablecoins would be beneficial only if the risks associated with them are mitigated through effective oversight and regulation.

During that time, Lagarde stated that while stablecoin initiatives could overcome shortcomings in cross-border payments, they would benefit only if the associated risks are addressed.

The ECB president stated that should stablecoin initiatives achieve scale and retail consumers treat stablecoins as an alternative to bank deposits, then a potentially huge amount of retail funds could be transferred from the banking system into non-banks.

Last month, the Bank of England (BoE) also stated that stablecoins and any CBDC (central bank digital currency) should be regulated in the same way the banks handle other payments. The BoE stated that it favours adopting regulations, saying that stablecoins must promise consistency and credibility to be fully interchangeable with existing forms of money.

The three largest stablecoins include Tether, USD Coin, and Binance USD, and their value currently stands at $100 billion, up from about $11 billion a year ago. While service providers responsible for issuing such assets are big players of the traditional capital markets, there are no clear rules on how such assets should be regulated to ensure stability.

US and UK Regulators to Take Action on Stablecoins after Terra’s Collapse

Regulatory agencies in the US and UK have raised their worries concerning stablecoins after the collapse of the controversial stablecoin Terra (UST).

In recent days, stablecoins have led the crypto market to see a significant decline in their prices.

Terra has been the most affected stablecoin after it collapsed and lost almost all of its value.

Meanwhile, Tether stablecoin — which is meant to always be worth $1 — sank as low as 95 cents on Thursday and struggled to climb back to its intended dollar peg.

Tether was trading firmly at $1 again on Friday. However, the collapse of Terra shook crypto investors’ confidence in Tether.

In a congressional hearing on Thursday, U.S. Treasury Secretary Janet Yellen directly addressed the issue of both Terra and Tether “breaking the buck” this week. Although such assets don’t currently pose a systemic risk to financial stability, Yellen suggested they eventually could.

The U.S. Treasury Secretary told lawmakers on Thursday: “I wouldn’t characterize it at this scale as a real threat to financial stability but they’re growing very rapidly. They present the same kind of risks that we have known for centuries in connection with bank runs.”

Yellen encouraged Congress to approve federal regulation of stablecoins by the end of this year.

Meanwhile, the U.K government also made a statement on Friday and noted it stands ready to initiate further action on stablecoins after Terra’s collapse.

A UK government spokesperson said: “The government has been clear that certain stablecoins are not suitable for payment purposes as they share characteristics with unbacked crypto-assets.”

UK has plans to bring stablecoins within the framework of electronic payments regulation, which could see Stablecoin issuers like Circle and Tether become subject to supervision by the nation’s markets regulator.

Separate proposals in the European Union also seek to bring stablecoins under strict regulations.

Algorithmic Stablecoins on Spot

Terra stablecoin erased much of its value this week after a stunning run on the bank that saw billions of dollars suddenly wiped from its market value.

Tether, the world’s biggest stablecoin, also declined below its intended $1 for several hours on Thursday. The fall fueled fears of a possible effect from the fallout of Terra’s plunge.

Asset-backed stablecoins like Tether are nominally safer because the companies that run them hold reserves that back them.

However, Terra does not work like that, as it relies on an algorithm that swaps the cryptocurrency for another called Luna, which is designed to keep the prices stable.

Recently investors turned against Luna, and so the system, which keeps the price stable, broke down. The markets weakened and so did confidence in the cryptocurrency that underpinned the so-called stablecoin. As a result, both prices and the system intended to keep the stablecoin pegged to the US dollar crashed.

CME Group Proposes Direct Crypto Derivatives Trading to Regulators

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CME Group, a US-based financial derivatives exchange, has proposed to regulators its plan to offer derivatives trading directly to retail customers.

According to The Wall Street Journal’s report on Saturday, CME Group filed paperwork to register as a so-called futures commission merchant (FCM).

Retail investors typically trade derivatives through third-party brokers such as TDAmeritrade. If regulators approve the CME’s plans, then individual consumers would be able to trade derivatives directly through CME rather than through brokerages.

Market participants talked about the new development. “This is notable and comes as no surprise. The CME Group has desired direct relationships with clients for as long as I can remember,” said CoinFund president Christopher Perkins, who commented on the Journal’s reporting via LinkedIn social media.

Joseph Guinan, CEO of the FCM Advantage futures, also stated if CME’s application is approved. Its entry into the futures brokerage space would be not only a game changer but also a dramatic concern for all FCMs (Futures Commission Merchants) should CME sets fees lower than such brokers.

A CME spokesperson also commented that the company’s commitment to the FCM model and the significant risk management remains an unwavering benefit to all industry participants.

CME’s move is a turnaround plan which follows a similar service offering proposal launched by FTX.US in April. CME’s plan is similar to FTX.US’s proposal to allow consumers to post margins and trade crypto derivatives directly on its platform.

In May, the Commodity Futures Trading Commission (CFTC) sought public comment on a request from FTX.US to modify its derivatives clearing organization (DCO) license to offer a new type of crypto margin trading to U.S. retail customers.

CME Group and ICE both opposed FTX.US’ proposal to offer central clearing of margin products directly to retail customers, which was defended by the crypto industry and the FIA (Futures Industry Association) – a global industry organization for the futures, options, and listed derivatives markets – in a Congressional hearing. FTX US’s proposal was considered deficient and poses a significant risk to market stability and market participants.

In May’s hearing before the House Agricultural Committee, U.S. lawmakers were sceptical of the FTX’s proposal for an automated collateral system to be used for crypto and other digital assets in futures markets.

Cryptocurrency derivatives trading on centralized exchanges rose to $3.12 trillion in July, a 13% monthly increase, as crypto prices maintain efforts to gain recovery from the recent market crash. The crypto market plunged in May and June as worries about Federal Reserve interest rate hikes and high inflation prompted investors to ditch risky assets.

As of July, the derivatives market made up 69% of total crypto volumes, up from 66% in June, and helped push overall crypto volumes on exchanges to $4.51 trillion in July. The rise in derivatives trading volume indicates an increase in speculative activity as traders believe there is room for further upside in the crypto rally.

IOSCO Proposes Measures To Probe Digital Marketing Risks

Concerning the rapid increase of risks in digital marketing, The International Organization of Securities Commissions, (IOSCO), has proposed some measures for its member countries to consider when deciding their policy and imposition approaches to retail online offerings and marketing.

These proposed measures were written in a report published on Oct 12. The report centers on the use of behavioral and gamification techniques and influencers who participate in crypto marketing, calling them “finfluencers.”

Another area the report focused on is the “digital veil.” According to the IOSCO secretary general, Martin Moloney, “Digital fraudsters can hide behind a ‘digital veil’ that makes it difficult for regulators to locate, identify and take action against them.”

IOSCO, in the report, obliges regulators on both national and international levels to take risks co-existing with online marketing seriously, especially with the recent challenges that arise with the proliferation of crypto assets.

IOSCO proposed in the report that management for crypto products should apply “appropriate filtering mechanisms” for financial consumer onboarding as well as take responsibility for the precision of the information delivered to potential investors on social media platforms.

It also suggested to national regulators that regulatory channels report prospect complaints for misleading illegal promotions. Other measures proposed include crypto companies having qualifications and licensing mandates for their online marketing staff.

In addition, IOSCO reflected on third-country regulations stating that while crypto companies are providing their services to foreign clients, they should check if there’s any license they need to have acquired to be able to provide their service in the client’s respective country.

The International Organization of Securities Commissions is an association regulating the world’s securities and futures markets. In March, it published a report prompting regulators to understand the risks involved in decentralized finance (DeFi) developments and their jurisdictions.

FTX to Have Its European Operating License Suspended

Following its turmoil, the FTX’s European license is now said to be soon suspended by Cyprus regulators, according to a report.

The finalization of the suspension would happen on Friday, said Bloomberg, citing people with knowledge of the matter. Meanwhile, on Nov 9, CySEC requested FTX Europe to “suspend its operations and to proceed immediately with a number of actions for the protection of the investors”

About two months ago, crypto exchange FTX announced it had acquired an EU license that enables it to operate across Europe. FTX was granted the license by the Cyprus Securities and Exchange Commission. The exchange had to meet some requirements outlined in the European Union’s MiFID II directive. Some of the conditions included the segregation and protection of client funds, business transparency, and capital adequacy.

Meanwhile, months after obtaining the license, FTX was investigated when a balance sheet relating to its sister company Alameda Research was leaked. The balance sheet revealed crucial liabilities and holdings of FTT – FTX’s exchange token.

Following that, Binance CEO Changpeng Zhao (CZ) announced it would be liquidating all of its holdings of FTT. According to Binance Co-founder Yi He, the company’s decision to sell its FTT holdings was based solely on a pure investment-related exit decision.

However, some believed there was more to it, causing investors to panic and the FTT token to crumble, affecting the crypto market and the exchange’s reputation. As reported by Blockchain.News, FTX’s fall might hurt the crypto regulation lobby.

Chairman of the Securities and Exchange Commission (SEC) Gary Gensler, in an interview with CNBC, said since the exchange has a huge influence in the space with many top-profile celebrities as its ambassadors, it gives it a massive sway over investors.

According to Gensler, investors and the public can fall prey to celebrity promotions – a trait that showed up as very prominent over the past year. Gensler added, “I think that investors need better protection in this space. It’s a field that’s significantly non-compliant, but it’s got regulation.”

Yellen Works with Regulators to Address Silicon Valley Bank Collapse

On March 10, 2023, California’s financial watchdog shut down Silicon Valley Bank (SVB) following an announcement of a significant sale of assets and stocks to raise $2.25 billion in capital to shore up operations. As a result, the Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver to protect insured deposits. While the FDIC only insures up to $250,000 per depositor, per institution, and per ownership category, concerns are mounting about the impact of the collapse of SVB, particularly on small businesses that employ people across the country.

In response to the situation, United States Treasury Secretary Janet Yellen is working with regulators to address the collapse of SVB. In a recent interview with CBS News, Yellen stated that they are designing “appropriate policies to address the situation” at the bank. She also noted that they are not considering a major bailout, citing the reforms that have been put in place since the financial crisis. However, Yellen emphasized that they are focused on protecting depositors and are working with regulators to address their concerns.

One of the challenges facing depositors is the fact that most accounts at SVB are unsecured. Yellen acknowledged this issue and stated that regulators are “very aware of the problems that depositors will have.” She also expressed concern about the possibility of contagion to other regional American banks, stating that “the goal always is supervision and regulation is to make sure that contagion can’t- can’t occur.”

SVB is one of the top 20 largest banks in the United States and provides banking services to many crypto-friendly venture firms. According to a Castle Hill report, assets from Web3 venture capitalists totaled more than $6 billion at the bank, including $2.85 billion from Andreessen Horowitz, $1.72 billion from Paradigm, and $560 million from Pantera Capital. Yellen’s comments indicate that regulators are well aware of the significance of the collapse of SVB and are working to mitigate its impact.

Regarding the options available to the FDIC, Yellen noted that they are considering “a wide range of available options,” including acquisitions from foreign banks. She also emphasized that they are working to address the situation in a timely way.

In conclusion, Yellen’s remarks highlight the seriousness with which regulators are approaching the collapse of SVB. While a major bailout is off the table, protecting depositors, particularly small businesses, is a top priority. Regulators are exploring a range of options, including acquisitions from foreign banks, to address the situation and prevent contagion to other regional American banks.