Digital Asset

ISDA releases standard definitions for digital asset derivatives

The International Swaps and Derivatives Association is working on two papers to address fundamental legal risks in the crypto markets.

The International Swaps and Derivatives Association (ISDA) is working on two papers to address fundamental legal risks in the crypto markets, such as the insolvency of crypto exchange firms, according to a statement released on Jan. 26.

The initiative was motivated by the collapse of crypto exchange FTX and previous bankruptcy cases that “prompted a cascade of liquidity and solvency concerns across the crypto ecosystem.” Along with other things, the papers will offer guidance for market participants regarding crypto ownership and the role of intermediates in the event of bankruptcy.

“The prospect of insolvency of a major market participant requires firms to consider how they manage counterparty credit risk, which intermediated or custodial structures are most appropriate, and whether the tools employed can be reliably enforced in a bankruptcy scenario. Applying existing bankruptcy rules to a new asset class inevitably raises legal characterization and other questions that must be tackled to provide the necessary certainty,” notes the announcement.

In addition, the association said that the oft-repeated principle “not your keys, not your crypto” seems to imply that fundamental questions settled in the traditional markets may still be evolving or may not exist in the crypto industry, such as “what defines the owner of an asset?” or for “a party that is not the direct owner, but holds an asset indirectly via an intermediary, what is the impact of an intermediary’s bankruptcy?” Specifically, the statement says:

“The FTX collapse indicates that such norms are still evolving (or may not yet exist) in the cryptocurrency markets. When these issues are not well understood by market participants or the risks are not properly managed, unanticipated and significant loss of capital can emerge.”

The publications will deliver standards on close-out netting and collateral and address issues relating to customers’ digital assets held with intermediaries and how they may be held and treated in an insolvency scenario. The papers will also inform legal and documentation needed to establish ownership of digital assets and their use as collateral.

The ISDA is a private trade association comprising primarily banks that transact in the over-the-counter derivatives market. As part of its work, the association seeks to identify and reduce risks in the markets.

The USDA’s last annual meeting, held in May 2022, had the presence of Sam Bankman-Fried, former CEO of FTX, representing the crypto industry. Featured keynotes at the event included Gary Gensler, chair of the United States Securities and Exchange Commission, and Rostin Behnam, chair of the Commodity Futures Trading Commission.

White House science office calls for comments on its digital asset research agenda

The office’s request for information is the latest piece in the massive research agenda in President Biden’s executive order on digital asset development.

The administration of United States President Joe Biden is continuing to develop its National Digital Assets Research and Development Agenda. In a request for information (RFI) dated Jan. 26 and previewed by the Federal Register, the White House Office of Science and Technology Policy (OSTP) invites comments to help it identify agenda priorities. Individuals and organizations may submit comments of no more than 10 pages in length by March 23.

The White House announced the creation of the agenda in September, after the unveiling of the “first-ever” Comprehensive Framework for Responsible Development of Digital Assets. The new agenda is part of the spate of crypto-related research activity initiated by the president’s executive order, “Ensuring Responsible Development of Digital Assets,”issued in March.

The RFI said the agenda sought to “shape a whole-of-government effort” to develop digital assets and distributed ledger technology. It was also described as a means to “continue to support research that translates technological breakthroughs into market-ready products” and “kickstart fundamental research.” It stated:

“Research and development (R&D) in this space has often been conducted in a fragmented manner, with limited consideration for the broader implications, applications, and downside risks for the underlying innovations. […] A more comprehensive R&D approach would provide concrete areas of focus towards achieving a holistic vision of a digital assets ecosystem that embodies democratic values and other key priorities.”

A blockchain specialist position was added to the OSTP with the passage of the Chips and Science Act in August. The office has examined and reported on the effects of digital assets on the environment as part of its mandate and prepared a survey of central bank digital currency design options as part of the ongoing and so far inconclusive consideration of a U.S. digital dollar.

1/ A few points of context on the new White House Comprehensive Framework for Responsible Development of Digital Assets that was released this morning. (I'll share more later…) Policymaking is a process. It's complicated, slow, difficult work. But it matters. And it's moving.

— Tomicah Tillemann (@TomicahTD) September 16, 2022

Reaction to Biden’s comprehensive framework ranged from tepid praise to outright disappointment.

Digital assets inflows reached $433M in 2022: Report

Bitcoin and multi-asset investment products saw inflows amounting to $287 million and $209 million last year, according to a report from CoinShares.

Digital-asset funds saw inflows totaling $433 million during 2022, the lowest level since 2018, when inflows in the crypto industry reached $233 million, according to the cryptocurrency investment firm CoinShares.

Investors’ appetite for digital assets seems not to have been fully affected by the crypto winter, but otherwise encouraged investments in crypto assets in a year marked by a price decline and the collapse of many industry players. James Butterfill, researcher at CoinShares, noted in the weekly report:

“In a year where bitcoin prices fell by 63%, a clear bear market precipitated by irrational exuberance and an overly hawkish FED, it is encouraging to see investors on the whole still choosing to invest.”

The biggest gainers of 2022 were Bitcoin (BTC) and multi-asset investment products, with inflows amounting to $287 million and $209 million, respectively. Last year’s inflows were significantly lower than in 2020 and 2021, both bull market years, when they reached $9.1 billion and $6.6 billion, respectively.

2022 also saw the emergence of short-investment products, according to the report, amounting to inflows of $108 million, representing only 1.1% of total Bitcoin under management. “They remain a niche asset,” stated the researcher.

Canada and Sweden had the largest outflows last year, totaling $436 million and $446 million, respectively.

Among the largest declines by assets, Ether (ETH) saw $402 million in outflows in 2022. “Ethereum had a tumultuous year which we believe was due to investor concerns over a successful transition to proof of stake and continued issues over the timing of un-staking, which we believe will occur in Q2 2023,” noted Butterfill.

The report also indicated that midyear outflows in 2018 exceeded those in 2022, with total weekly outflows reaching 1.8% of total assets under management. Comparatively, the outflows in 2022 reached a weekly peak amounting to just 0.7%.

Russia’s largest bank issued gold-backed digital financial assets

The issuance became the second major operations of the bank with the new class of assets.

Russia’s largest bank Sber — formerly known as Sberbank — reported the first issue of gold-backed digital financial assets (DFAs). The bank considers DFAs to be a “great alternative” to investments amid dedollarization.

On Dec. 26, Sber published the news about its first issue of gold-backed DFAs. A diversified metals seller and manufacturer, Solfer, became the first investor to obtain the issued assets. Gold-backed DFAs represent certifying monetary rights, whose price and volume depend on gold prices.

According to juridical documentation of the issuance, the bank will provide up to 150,000 DFAs for potential investors to buy. The DFAs will be available to acquire until Jul 30, 2023. The document mentions “the high risks” for investors, ingrained in such kind of assets, including “the risk of illiquidity.”

The first deputy chairman of the Executive Board at Sber, Alexander Vedyakhin, claims these kind of DFAs to be an alternative to traditional investments amid the dedollarization, caused by the international financial sanctions, imposed on Russia in the aftermath of its invasion to Ukraine:

“We expect the number of corporate clients on our platform to grow rapidly and plan to expand the product line of digital financial assets.”

While current legislation on the DFA was put in force in 2020, in July 2022 Russian President Vladimir Putin has signed a bill into law prohibiting digital financial assets as payments method.

In June, a subsidiary of another Russia’s state-owned bank, VTB Factoring, reported its first major deal with digital finance assets. As part of the deal, the bank subsidiary acquired a tokenized debt pool of the engineering company Metrowagonmash, issued via the fintech platform Lighthouse. Sber has tested its first deal involving DFAs later in July, issuing the three-month assets valued 1 billion roubles (around $14.5 millions by press time).

French investors sued Binance for over 2.4 million euros in losses

Binance France and Binance Holdings Limited are being sued over alleged misleading commercial practices and fraudulent concealment.

Binance France and its parent company Binance Holdings Limited are being sued by 15 investors in France over alleged misleading commercial practices and fraudulent concealment, according to local media reports.

In a complaint filed on Dec. 14, the plaintiffs claimed that Binance violated French laws by advertising and distributing crypto services before receiving registration from the country’s authorities. As reported by Cointelegraph, France’s financial market regulator, the Autorité des Marchés Financiers, has granted Binance a license as a digital asset provider in May 2022. The license allowed the crypto exchange to offer services such as assets custody and crypto trading.

The complaint reportedly contains screenshots showing Binance’s social media activity prior to its license, including a Telegram channel dubbed “Binance French.” The plaintiffs also claim to have lost over 2.4 million euros following the TerraUSD (UST) collapse, while Binance advertised the token as United States dollar-backed.

In a blog post, Binance France responded to questions about the case. According to it, the company did not conduct any promotional communications in France during the period in question and noted that “Telegram groups are global community forums,” thus allowing users to create and join channels voluntarily.

Binance also addressed questions regarding Terra stablecoin advertisement in the country. The company noted that its communication presents staking with Binance as “safe, and not the underlying tokens.” The exchange also noted that it always includes market risk warnings for crypto products, and has further strengthened its descriptions.

As reported by Cointelegraph, a series of dramatic events in May 2022 resulted in an unprecedented decline in the price of the LUNA token and its associated stablecoin TerraUSD (UST), which was designed to maintain algorithmic parity with the United States dollar, but lost its peg and plunged to below $0.30.

Central Banks to set standards on banks’ crypto exposure – BIS

The new standard limits crypto reserves among banks to 2% by 2025, and goes into effect on January 1, 2025.

A global standard for banks’ exposure to crypto assets has been endorsed by the Group of Central Bank Governors and Heads of Supervision (GHOS) of the Bank for International Settlements (BIS). The standard, which sets a limit of 2% on crypto reserves among banks, must be implemented on January 1, 2025, according to an official announcement on Dec. 16.

The report, dubbed “Prudential treatment of cryptoasset exposures”, introduces the final standard structure for banks regarding exposure to digital assets, including tonenized traditional assets, stablecoins and unbacked cryptocurrencies, as well as feedback from stakeholders collected in a consultation launched in June. The Basel Committee on Banking Supervision noted the report will soon be incorporated as a new chapter into the consolidated Basel Framework.

BIS’s announcement highlights that the global banking system’s direct exposure to digital assets remains relatively low, but recent developments have outlined “the importance of having a strong minimum framework for internationally active banks to mitigate risks.” It also stated:

“Unbacked cryptoassets and stablecoins with ineffective stabilisation mechanisms will be subject to a conservative prudential treatment. The standard will provide a robust and prudent global regulatory framework for internationally active banks’ exposures to cryptoassets that promotes responsible innovation while preserving financial stability.”

Pablo Hernández de Cos, chair of the Basel Committee and Governor of the Bank of Spain, noted about the standard:

“The Committee’s standard on cryptoasset is a further example of our commitment, willingness and ability to act in a globally coordinated way to mitigate emerging financial stability risks. The Committee’s work programme for 2023–24 endorsed by GHOS today seeks to further strengthen the regulation, supervision and practices of banks worldwide. In particular, it focuses on emerging risks, digitalisation, climate-related financial risks and monitoring and implementing Basel III.”

The BIS disclosed in September the results of its multi-jurisdictional central bank digital currency (CBDC) pilot, following a month-long testing phase that enabled cross-border transactions worth $22 million. The pilot program involved the central banks of Hong Kong, Thailand, China, and the United Arab Emirates, as well as 20 commercial banks from those regions. According to a report by the BIS published in June, around 90% of central banks are considering the adoption of CBDCs.

Central Banks to set standards on banks’ crypto exposure: BIS

The new standard limits crypto reserves among banks to 2% by 2025, and goes into effect on January 1, 2025.

A global standard for banks’ exposure to crypto assets has been endorsed by the Group of Central Bank Governors and Heads of Supervision (GHOS) of the Bank for International Settlements (BIS). The standard, which sets a limit of 2% on crypto reserves among banks, must be implemented on Jan. 1, 2025, according to an official announcement on Dec. 16.

The report, dubbed “Prudential treatment of cryptoasset exposures,” introduces the final standard structure for banks regarding exposure to digital assets, including tokenized traditional assets, stablecoins and unbacked cryptocurrencies, as well as feedback from stakeholders collected in a consultation launched in June. The Basel Committee on Banking Supervision noted the report will soon be incorporated as a new chapter into the consolidated Basel Framework.

“Unbacked cryptoassets and stablecoins with ineffective stabilisation mechanisms will be subject to a conservative prudential treatment. The standard will provide a robust and prudent global regulatory framework for internationally active banks’ exposures to cryptoassets that promotes responsible innovation while preserving financial stability.”

Pablo Hernández de Cos, chair of the Basel Committee and Governor of the Bank of Spain, noted about the standard:

“The Committee’s standard on cryptoasset is a further example of our commitment, willingness and ability to act in a globally coordinated way to mitigate emerging financial stability risks. The Committee’s work programme for 2023–24 endorsed by GHOS today seeks to further strengthen the regulation, supervision and practices of banks worldwide. In particular, it focuses on emerging risks, digitalisation, climate-related financial risks and monitoring and implementing Basel III.”

The BIS disclosed in September the results of its multi-jurisdictional central bank digital currency (CBDC) pilot, following a month-long testing phase that enabled cross-border transactions worth $22 million. The pilot program involved the central banks of Hong Kong, Thailand, China and the United Arab Emirates, as well as 20 commercial banks from those regions. According to a report by the BIS published in June, around 90% of central banks are considering the adoption of CBDCs.

Yuga Labs, Moonpay faces lawsuit over celebrities NFT promotion

Over 40 people and companies are named as defendants in the lawsuit, including Paris Hilton, Snoop Dog, Jimmy Fallon, Justin Bieber, Madonna.

Yuga Labs, creators of Bored Ape Yacht Club (BAYC) and crypto fintech Moonpay are facing a class-action lawsuit for allegedly using celebrities to misleadingly promote and sell nonfungible tokens (NFTs).

Over 40 people and companies are named as defendants in the lawsuit, including Paris Hilton, Snoop Dog, Jimmy Fallon, Justin Bieber, Madonna, Serena Williams, Post Malone, and Diplo. The class-action was filed on Dec. 8 by John T. Jasnoch of Scott+Scott Attorneys at Law LLP in the Central District of California and claims the crypto companies used its Hollywood network to promote the digital assets without complying with disclosure requirements. The document states:

“This case epitomizes these concerns as it involves a vast scheme between a blockchain start-up company, Yuga Labs, Inc. (‘Yuga’), a highly connected Hollywood talent agent (Defendant Guy Oseary), and a front operation (MoonPay), who all united for the purpose of promoting and selling a suite of digital assets.”

According to the lawsuit, executives at Yuga Labs and Oseary created a plan to leverage a vast network of A-list musicians, athletes, and celebrity clients, aiming to bring to investors the perception of “joining the club” through Yuga’s flagship NFT collection.

“The exclusiveness of BAYC membership was entirely based on the inclusion and endorsements of highly influential celebrities. But this purported interest in, and endorsement of, the BAYC NFTs by high-profile taste makers was entirely manufactured by Oseary at the behest of the Executive Defendants,” alleges the suit.

The two plaintiffs in the case Adonis Real and Adam Titcher purchased Yuga Labs NFTs collections between April 2021 to the present. The class-action also refers to a previously United States Securities and Exchange Commission (SEC) statement about celebrity’s endorsements, claiming “these endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement.”

A spokesperson for Yuga Labs told Cointelegraph that the “claims are opportunistic and parasitic. We strongly believe that they are without merit, and look forward to proving as much.”

As reported by Cointelegraph, the class-action was first proposed in July, when the law firm Scott+Scott claimed Yuga Labs used celebrity endorsements to “inflate the price“ of the BAYC NFTs and the APE (APE) token, attempting to identify harmed investors.

Yuga Labs is also part of a wider investigation into the NFT market by U.S. regulators. Reports show the SEC is investigating Yuga Labs over whether certain NFTs are “more akin to stocks” and whether their sale violates federal laws.

Moonpay did not immediately respond to Cointelegraphs’ requests for comments.

Decentralization index from Cardano builder, U of Edinburgh will help users understand assets

In an industry first, Input Output Global and the Scottish university will provide continuous tracking of digital assets by a methodology that has yet to be determined.

The University of Edinburgh and Input Output Global (IOG), the builder of the Cardano network, have teamed up to create a blockchain decentralization index, IOG announced on its blog. The new service is the first of its kind and will use a “research-based” methodology developed at the university.

The Edinburgh Decentralization Index (EDI) has been in development for several months and was introduced in Edinburgh on Nov. 18, but it is not yet operational, according to IOG:

“The first step for the tracker is the creation of research papers detailing decentralization metrics and a considered methodology for compiling them into an index, created by researchers at the University of Edinburgh. It will then operate in the same way as other industry indexes.”

When launched, the EDI will provide live tracking of assets “underpinned by a continuously calculated and reviewed methodology.”

There are currently no standards for the decentralization of digital assets. “What we’re currently missing is universally accepted industry standards which define to what extent projects are decentralized. The EDI will allow us to ensure that users have full transparency around what they are participating in,” IOG CEO Charles Hoskinson said in the blog post. Hoskinson was alluding to the fact that users currently have no way to judge to what extent digital assets are decentralized.

Presentation of the Edinburgh Decentralization Index by @sol3gga et al.

It measures decentralization of blockchain networks beyond counting the number of validators and their power (weight) over the system (consensus protocol).

This is a major leap forward for our industry pic.twitter.com/SJBe5OGpF3

— Romain Pellerin (@rom1_pellerin) November 18, 2022

Although decentralization by itself is no guarantee of quality, the dismal performance of centralized crypto asset platforms in recent months has kindled new concern about it. “The establishment wants controlled crypto,” tweeted Balaji Srivasan, former executive at Coinbase and Andreesen Horowitz. “Had FTX won, they’d control through centralization. With FTX lost, they want control through regulation. At no point was the goal consumer protection.”

Kadena CEO Stuart Popejoy had a similar but more moderate outlook. “CeFi is a ‘necessary evil’ today, and maybe it will always have its role in crypto,” he tweeted. “The answer is to return to the roots of #blockchain: decentralization & transparency. And while DeFi might look like the obvious solution, it still can’t replace CeFi, for reasons obvious and not-so-obvious. The core problem is scalability.”

In addition, decentralization is central to the determination of whether a crypto asset is a security, at least in the United States, where the question is central to the future development of regulation.

Russian bill would legalize crypto mining, sales under ‘experimental legal regime’

The bill provides a legal definition of mining and mining pools and would create a domestic cryptocurrency market in Russia’s latest step to integrate digital assets into its economy.

A bill was introduced into the Russian State Duma, the lower house of parliament, on Nov. 17 that would legalize cryptocurrency mining and the sale of the cryptocurrency mined. Cryptocurrency cannot currently be used for settlements in Russia.

The proposed law reads, “Digital currency obtained as a result of mining can be disposed of by the person who carried out the mining of this digital currency on the condition that Russian information infrastructure is not used in conducting transactions with it, with the exception of cases of transactions carried out in accordance with the established experimental legal regime,” as quoted by Interfax.

Chairman of the Duma Financial Markets Committee Anatoly Aksakov told the local press that he expected the bill to pass all three parliamentary readings in December to come into force on Feb. 1. Other sources said the bill would become law on Jan. 1. Aksakov said:

“Passage of the law will bring this activity into the legal field, and make it possible to form a law enforcement practice on issues related to the issuance and circulation of digital currencies.”

The experimental sales regime is made possible by the law on digital innovation passed in 2020. The bill provides definitions of cryptocurrency mining and mining pools. It also bans the advertising of cryptocurrency in Russia.

A Russian platform for cryptocurrency sales will be set up if the law is passed, and Russian miners will be able to use foreign platforms. In the latter case, Russian currency controls and regulations would not apply to the transactions, but they would have to be reported to the Russian tax service. There is currently no legislation on the taxation of mining activities, although crypto mining is widespread in Russia.

A report issued by the Central Bank of Russia on Nov. 7 indicated that the country was preparing for the introduction of digital assets onto its markets. The Moscow Exchange drafted a bill on behalf of the Central Bank to allow trading in digital financial assets in September. Izvestia newspaper reported on Nov. 18 that major Russian brokerages and the exchange were preparing for the entry of retail investors onto the market.

A Russian policy on the use of crypto in cross-border payments was formulated in September. In addition to national legislation, Russian crypto miners and other users also have to navigate international sanctions.