united states

White House’s first crypto framework and missed opportunities — Law Decoded, Sept. 12-19

The industry didn’t take the document well, as the policymakers’ focus on security and enforcement is all too visible.

By the end of last week, the federal agencies presented the results of their six-month-long work on the principal directions for digital assets regulation in the United States. The resulting first-ever crypto framework, published on the White House website, may not contain many surprises or exact details, but, as a part of President Joe Biden’s executive order, it will undoubtedly affect the policymaking decisions to come.

Perhaps the most important section of the framework is dedicated to central bank digital currencies (CBDCs). It revealed that the administration has already developed policy objectives for a U.S. CBDC system, but further research on the possible technological foundation of that system is needed. Still, the intent seems pretty serious as the Treasury will lead an interagency working group with the participation of the Federal Reserve, the National Economic Council, the National Security Council and the Office of Science and Technology Policy.

The industry didn’t take the document well, as the policymakers’ focus on security and enforcement is all too visible. Kristin Smith, executive director of the U.S.-based Blockchain Association, called it “a missed opportunity to cement U.S. crypto leadership,” highlighting its heavy emphasis on risks, not opportunities, and the lack of substantive recommendations on the promotion of the crypto industry. Speaking to Cointelegraph, Sheila Warren of the Crypto Council for Innovation said the policy recommendations seemed to be based on an “outdated and unbalanced understanding” of crypto, which could leave the details to be determined by other lawmakers or the next administration.

The Merge and its regulatory repercussions

Ethereum’s upgrade to proof-of-stake (PoS) may have placed the cryptocurrency back in the crosshairs of the Securities and Exchange Commission. SEC chairman Gary Gensler reportedly said that cryptocurrencies and intermediaries that allow holders to “stake” their crypto may define it as a security under the Howey test. Gensler went on to say that intermediaries offering staking services to their customers “looks very similar — with some changes of labeling — to lending.” The SEC has previously said they didn’t see Ether (ETH) as a security, with both the Commodity Futures Trading Commission (CFTC) and the SEC agreeing that it acted more like a commodity.

18 potential design forms for the American CBDC

The Office of Science and Technology Policy submitted a report analyzing the design choices for 18 central bank digital currency systems for possible implementation in the U.S. The technical analysis of the 18 CBDC design choices was made across six broad categories: participants, governance, security, transactions, data and adjustments. Helping policymakers decide on the ideal US CBDC system, the OSTP report highlighted the implications of including third parties in the two design choices under the “participants” category — transport layer and interoperability. For governance, the report weighed various factors related to permissions, access tiering, identity privacy and remediation.

Thailand prepares to ban crypto lending

The Securities and Exchange Commission (SEC) of Thailand is preparing to take radical measures in the aftermath of crypto lending platforms’ crashes experienced in Summer 2022. The Thai SEC plans to prohibit crypto platforms from providing or supporting digital asset depository services. The planned ban includes several principal points. It will prohibit operators from taking a deposit of digital assets with a promise to pay returns to depositors — even if the returns come not from the growing value of the assets but from the promotion budget. The advertising of lending and depositary services would also be banned.

White House’s first crypto framework and missed opportunities — Law Decoded, Sept. 12–19

The industry didn’t take the document well, as the policymakers’ focus on security and enforcement is all too visible.

The Merge and its regulatory repercussions

18 potential design forms for the American CBDC

Thailand prepares to ban crypto lending

US Treasury plans to ask public if crypto-related regulations are ‘no longer fit for purpose’

The public has until Nov. 3 to submit comments on the Treasury addressing ransomware attacks, the illicit finance risks of cryptocurrency mixers and DeFi, and coordinating AML/CFT policy.

The United States Department of the Treasury will be calling for comments from the public on digital assets, including their views on how regulations may address the illicit uses of crypto.

In a document set to be published in the Federal Register on Tuesday, the U.S. Treasury requested public comment on “digital-asset-related illicit finance and national security risks as well as the publicly released action plan to mitigate the risks” related to President Joe Biden’s executive order on crypto from March. The department invited the public to share their thoughts on the regulatory obligations the U.S. government had imposed that were “no longer fit for purpose as it relates to digital assets” as well as offer suggestions for alternative regulations addressing illicit finance risks and vulnerabilities.

“Illicit activities highlight the need for ongoing scrutiny of the use of digital assets, the extent to which technological innovation may impact such activities, and exploration of opportunities to mitigate these risks through regulation, supervision, public-private engagement, oversight, and law enforcement,” said the Treasury.

Specifically, the U.S. Treasury asked for potential additional steps it might take in regard to addressing ransomware attacks, illicit finance risks of cryptocurrency mixers and DeFi, and how the government could coordinate Anti-Money Laundering and Combating the Financing of Terrorism policy at the state and federal levels. The public has until Nov. 3 to submit comments.

The request for public comment followed the White House releasing a regulatory framework on digital assets on Sept. 16. Many in the space, including crypto advocacy groups, criticized the administration for seemingly focusing on the illicit uses of crypto rather than its potential benefits. As part of the framework’s requirements, the Treasury Department will create an “illicit finance risk assessment on decentralized finance” by February 2023.

The correct regulations will drive technological innovation and preserve crypto’s fundamental value propositions of freedom and empowerment while ensuring the right guardrails are in place for consumer protection and choice. (2/9)

— CZ Binance (@cz_binance) September 16, 2022

Biden’s executive order also had the Treasury Department and Federal Reserve exploring policy objectives and a U.S. central bank digital currency, or CBDC. On Sept. 17, the Office of Science and Technology Policy released a report on 18 different design choices for potentially implementing a digital dollar in the United States.

Crypto market bloodbath leads to $432M in liquidations

The current market downturn is being attributed to a number of macroeconomic factors, such as higher-than-expected CPI data and a possible biggest Fed rate hike in 40 years.

The crypto market turmoil entered the third week of September as most of the cryptocurrencies started the week on a bearish note. The total crypto market cap dipped below $1 trillion again, with several cryptocurrencies recording a double-digit downfall over the past 24 hours.

The ongoing bearish turmoil has led to nearly half a billion in liquidations for the leverage crypto traders over the past 24 hours. Data from Coinglass highlight that 130,087 traders were liquidated with a total liquidations value of $431.51 million. Bitcoin (BTC) leverage traders lost $44.5 million, followed by Ether (ETH) traders with a total liquidation of $8.39 million.

Long traders made a significant chunk of losses on majority of the exchanges with the average difference between the amount of long and short liquidations being 10X.

Liquidations on Different Exchanges Source: Coinglass

The current market turmoil is being attributed to several macroeconomic factors, including the recently released consumer price index (CPI) data released on Sept. 13 that showed inflation is yet to cool off. BTC’s price fell nearly $1,000 within minutes of the CPI data release. Since then, the market showed some will to move up over the weekend but saw another bloodbath earlier on Monday.

US inflation shows persistent US retail inflation w/acceleration at August core. Headline drops less than forecast to 8.3%, while Core CPI rose to 6.3%. pic.twitter.com/ZAhxPUlvjn

— Holger Zschaepitz (@Schuldensuehner) September 13, 2022

The higher CPI data is expected to be followed by a Fed rate hike in the upcoming meeting scheduled for Sept. 21. Market pundits have predicted that the rate hike — a measure to control the soaring inflation — could be the biggest in 40 years.

According to the CME FedWatch Tool, the market has now fully priced in a minimum 75-basis-point hike for the Fed funds rate and is not discounting the chances of 100 basis points. A 100-point increase would be the Fed’s first such action since the early 1980s.

The recently concluded Ethereum Merge was also blamed by many as a “buy the rumor, sell the news” event, where the price of Ether (ETH) rose as high as $2,000 in the run-up to the Merge, but has now declined to $1,300 post Merge.

The majority was right. The #Ethereum Merge was a sell the news event.

— MMCrypto (@MMCrypto) September 15, 2022

With the stock and crypto markets seeing a similar bearish trend, popular trader Clark was quick to point toward the similarities of current market conditions to those of the 1970s.

Also worth noting, leading into this, market behavior is on par with previous years in terms of realized vol.

Nov-December should be good months.

(Past returns not predictive of future results) pic.twitter.com/KKOKEIIvis

— Clark (@CanteringClark) September 18, 2022

In his tweet, Clark noted that the market could turn bullish again toward the end of the year in the months of November and December. Thus, the crypto market could see another bullish rally in tandem with the stock market toward the end of 2022.

White House OSTP department analyzes 18 CBDC design choices for the US

The technical analysis of the 18 CBDC design choices was made across six broad categories — participants, governance, security, transactions, data and adjustments.

As directed by the President of the United States, Joe Biden, the Office of Science and Technology Policy (OSTP) submitted a report analyzing the design choices for 18 central bank digital currency (CBDC) systems for possible implementation in the US.

The technical analysis of the 18 CBDC design choices was made across six broad categories — participants, governance, security, transactions, data and adjustments. The OSTP foresees technical complexities and practical limitations when trying to build a permissionless system governed by a central bank, adding:

“It is possible that the technology underpinning a permissionless approach will improve significantly over time, which might make it more suitable to be used in a CBDC system.”

However, the analysis assumed there is a central authority and a permissioned CBDC system.

Helping policymakers decide on the ideal US CBDC system, the OSTP report highlighted the implications of including third parties in the two design choices under the ‘participants’ category — transport layer and interoperability. For governance, the report weighed various factors related to permissioning, access tiering, identity privacy and remediation.

Other important factors OSTP wants policymakers to consider include cryptography and secure hardware (for security), signatures, transaction privacy, offline transactions and transaction programmability (for transactions), data model and ledger history (for data) and fungibility, holding limits and adjustments on transactions and balances (for transactions).

The technical evaluation for a US CBDC system highlighted the report’s inclination toward an off-ledger, hardware-protected system. Upon the launch of a US CBDC, the report will eventually highlight the various trade-offs policymakers decided to make when finalizing the design choices.

On Sept. 8, the OSTP recommended monitoring and regulation while weighing the environmental and energy impact of crypto assets in the US.

The related OSTP report highlighted that crypto assets use approximately 50 billion kilowatt-hours of energy per year in the U.S., which is 38% of the global total, while adding:

“Noting direct comparisons are complicated, Visa, MasterCard, and American Express combined […] consumed less than 1% of the electricity that Bitcoin and Ethereum used that same year, despite processing many times the number of on-chain transactions and supporting their broader corporate operations.”

The report further noted the high energy consumption of proof-of-work (PoW) staking in crypto assets.

Blockchain Association calls White House’s crypto framework a ‘missed opportunity’

Critics claimed the Biden administration’s reports focused on environmental concerns over crypto’s energy consumption and illicit uses rather than the technology’s benefits.

Members of the crypto space and advocacy groups reacted to United States President Joe Biden’s administration releasing a regulatory framework on digital assets, with many suggesting the White House focused on the potential negative aspects of crypto.

In a Friday announcement, the White House said that federal agencies and departments had submitted nine reports as required by Biden’s executive order on crypto from March. Among the information in the fact sheet included policy objectives for a U.S. central bank digital currency, ways to mitigate the possible impact of crypto’s energy usage on the climate, regulatory aims for enforcement actions, rules to address risks and consumer protection.

The Biden administration said that the Treasury Department will report on an “illicit finance risk assessment on decentralized finance” by February 2023, adding federal agencies will “continue to expose and disrupt illicit actors and address the abuse of digital assets.” In addition, the White House said it would support payment systems akin to FedNow, which the Federal Reserve planned to launch in 2023.

Crypto analyst Dylan LeClair and MicroStrategy co-founder Michael Saylor both criticized the administration’s stance on Twitter, claiming it was using environmental concerns as a pretext for extending its control over digital assets:

“If you don’t like how someone is using energy, pay a higher price than them […] No amount of hysteric screeching about climate change will stop the next block from being mined.”

“Today’s reports and summaries from the Biden administration’s executive order on digital assets are a missed opportunity to cement U.S. crypto leadership,” said Kristin Smith, executive director of the U.S.-based Blockchain Association. “While intended to be part of a broader government and stakeholder effort to bring better regulation to crypto assets, these reports focus on risks — not opportunities — and omit substantive recommendations on how the United States can promote its burgeoning crypto industry.”

The White House’s proposed framework is a fucking disgrace.

– Clear attack on proof-of-work by implying they will set environmental standards for mining.
– Pushing FedNow over crypto
– Framing everything as a potential scam or threat
– Harping on volatility and consumer risk

— The Wolf Of All Streets (@scottmelker) September 16, 2022

Speaking to Cointelegraph, Sheila Warren of the Crypto Council for Innovation said the policy recommendations seemed to be based on an “outdated and unbalanced understanding” of crypto, which could leave the details to be determined by other lawmakers or the next administration:

“In the hearing yesterday [on regulating crypto], many seemed worried about other countries overtaking the US. Regulation by enforcement is not regulatory clarity. If we regulate by enforcement, it also gives other countries a clear runway to figure out how the tech works for their interests, which may be contrary to the US’.”

The reports on establishing a comprehensive regulatory framework for cryptocurrencies in the U.S. were some of the first required since President Biden announced the order in March, but the work is far from over. The Treasury Department and Fed will continue to research the implications of releasing a digital dollar. The White House said the Financial Stability Oversight Council will publish a report in October on the financial-stability risks of digital assets and related regulatory gaps.

White House publishes ‘first-ever’ comprehensive framework for crypto

The fact sheet sums up the efforts of nine federal agencies’ research over the past six months.

Following President Joe Biden’s executive order on Ensuring Responsible Development of Digital Assets, federal agencies came up with a joint fact sheet on six principal directions for crypto regulation in the United States. It sums up the content of nine separate reports, which have been submitted to the president to “articulate a clear framework for responsible digital asset development and pave the way for further action at home and abroad.”

The fact sheet was published on the White House official website on Sept. 16, and consists of 7 sections: (1) Protecting Consumers, Investors, and Businesses; (2) Promoting Access to Safe, Affordable Financial Services; (3) Fostering Financial Stability; (4) Advancing Responsible Innovation; (5) Reinforcing Our Global Financial Leadership and Competitiveness; (6) Fighting Illicit Finance and (7) Exploring a U.S. Central Bank Digital Currency (CBDC).

Some of the sections don’t contain any particularly new information, emphasizing one more time the principles and policies to which the present administration has been sticking. For example, to protect consumers and investors, the reports urge regulators — the Securities and Exchange Commission and Commodity Futures Trading Commission — to “aggressively pursue investigations and enforcement actions against unlawful practices in the digital assets space.” At the same time, they don’t say anything about the segregation of regulators’ duties, which remains one of the country’s main regulatory problems.

To promote access to financial services, federal agencies recommend creating a federal framework for nonbank payment providers and encouraging the adoption of instant payment systems like FedNow, the launch of which is planned by the Federal Reserve in 2023.

As a part of advancing responsible innovation efforts, the Office of Science and Technology Policy (OSTP), which has recently published a critical report on the climate impacts of crypto mining, will develop a Digital Assets Research and Development Agenda to help mitigate the negative climate impacts. With the same goal, the Department of Energy, the Environmental Protection Agency, and other agencies will consider further tracking digital assets’ environmental impacts.

While the fact sheet claims that the U.S. agencies will “leverage U.S. positions in international organizations to message U.S. values” related to digital assets, it doesn’t specify how exactly these values differ from the swiftly emerging European regulatory approach.

The security strategy implicates the amendments to the Bank Secrecy Act, anti-tip-off statutes and laws against unlicensed money transmitting to apply explicitly to digital asset service providers, including exchanges and nonfungible token platforms.

The last, but perhaps the most important section of the fact sheet is dedicated to the U.S. CBDC. It reveals that the administration has already developed policy objectives for a U.S. CBDC system, but further research on the possible technological foundation of that system is needed. Still, the intent seems pretty serious as the Treasury will lead an interagency working group with the participation of the Federal Reserve, the National Economic Council, the National Security Council and the OSTP.

US Treasury sanctions 5 crypto addresses connected to Russian neo-Nazi paramilitary group

According to the Treasury Department, members of the sanctioned group fought alongside Russia’s military, including near territory Ukrainian forces reclaimed on Monday.

The United States Department of the Treasury added five cryptocurrency addresses tied to a neo-Nazi group involved in Russia’s war on Ukraine to list of entities sanctioned by the Office of Foreign Asset Control.

In a Thursday notice, the U.S. Treasury designated 22 individuals and two entities, including many the government department claimed had furthered the Russian government’s objectives in Ukraine, to its list of Specially Designated Nationals, effectively barring U.S. persons and companies from dealing with them. Included in the sanctions of one of the entities — a neo-Nazi paramilitary group called Task Force Rusich — were two cryptocurrency addresses for Bitcoin (BTC), two for Ether (ETH) and one for Tether (USDT).

Treasury Secretary Janet Yellen said the sanctions were imposed as part of the government’s efforts “to hold Russia accountable for its war crimes, atrocities and aggression,” financially isolate Russian President Vladimir Putin, and prevent the country from financing its military. On Monday, Ukraine’s military took back a section of the territory east of the city of Kharkiv that had been occupied by Russian forces for months.

According to the Treasury Department, Task Force Rusich fought alongside Russia’s military in Ukraine, including near the recently reclaimed territory, and had mercenaries accused of “committing atrocities against deceased and captured Ukrainian soldiers” in 2015 during the conflict in the Donbas region. The department claimed the neo-Nazi group was responsible or complicit in actions that “undermine the peace, security, political stability, or territorial integrity of the United States, its allies, or its partners” for the benefit of the Russian government.

Since Russia’s military started its invasion of Ukraine in February, the U.S. government and many officials in Europe have imposed sanctions aimed at weakening the country’s economy and penalizing wealthy individuals. On Wednesday, the Treasury Department also announced that it had sanctioned seven BTC addresses allegedly connected to wto Iranian nationals who were part of a ransomware group.

Merge is ‘a step in the right direction’ to address crypto’s energy usage — Rostin Behnam

The CFTC chair said that the Ethereum blockchain’s transition to proof-of-stake, despite reducing energy usage by more than 99%, may not go far enough in resolving the problem.

Rostin Behnam, chair of the United States Commodity Futures Trading Commission, or CFTC, said the Ethereum blockchain’s transition to proof-of-stake may help reduce crypto’s energy usage, but hinted legislation would likely still be needed to address the problem.

Speaking at a Thursday hearing before the Senate Agriculture Committee, Behnam addressed a question from Minnesota Senator Amy Klobuchar, who brought up the environmental impact of the “significant energy” required of mining cryptocurrencies. Without mentioning the Merge by name, the CFTC chair said the crypto bill currently being considered by lawmakers would require a report on energy usage that could lead to future policy discussion and “incentives to move away from carbon-intensive energy sources.”

“We’ve all heard the statistics about the amazing amount of energy used to mine coins,” said Behnam. “I would say that an event occurred last night with Ethereum which is going to reduce energy consumption — a step in the right direction, but certainly not resolving the problem.”

*CFTC chair Rostin Behnam addressing the Senate Agriculture Committee on Thursday*

In his written testimony, Behnam said he was in favor of passing the Digital Commodities Consumer Protection Act, legislation aimed at expanding the CFTC’s authority over the crypto market, adding the regulatory body had the “expertise and experience” to be the “regulator for the digital asset commodity market.” According to the CFTC chair, many of the criticisms around the crypto space — focusing on fraud and scams — could be addressed by giving the agency “a lens into the trading platform” rather than relying on users to bring enforcement cases.

“[The bill] would provide the authority to the CFTC to regulate markets. This volatility, the fraud, the manipulation — much of it would probably go away because we now have a regulator, a cop on the beat, and this would deter activity by bad actors.”

The Ethereum Merge took place on Thursday, marking the blockchain’s transition from proof-of-work to proof-of-stake and effectively cutting the network’s energy consumption by an estimated 99.95%. The price of Ether (ETH) fell under $1,500 in the hours following the event, with Cointelegraph reporting many crypto-minted nonfungible tokens with a Merge theme.

Crypto bill a ‘pivotal step’, but needs clarification on ‘digital commodity’ — Sheila Warren

CCI CEO Sheila Warren said that there was “a very tight window” to pass the crypto bill, given the possible change in leadership following the 2022 midterm elections.

Sheila Warren, CEO of the Crypto Council for Innovation, said the Digital Commodities Consumer Protection Act currently being considered by U.S. lawmakers was a “pivotal step” towards achieving regulatory clarity, but recommended changes to determine the role authorities will take on digital assets.

In written testimony for a Wednesday hearing on the bill with the Senate Agriculture Committee, Warren said she generally approved of the proposed legislation “pav[ing] the way for innovation” in the United States, but added it needed to better define a “digital commodity” and security rather than leaving the matter to regulatory agencies or courts. According to the Crypto Council CEO, the Digital Commodities Consumer Protection Act fell short of clarifying what trading activity was allowed based on its language. Warren said that it will permit trading in digital assets “not readily susceptible to manipulation,” making it possible that the Commodity Futures Trading Commission, or CFTC, could have its own interpretation in contrast with that of the Securities and Exchange Commission, or SEC.

“The bill leaves it to the agencies and the Courts to determine whether a digital asset, other than Bitcoin and Ether, is a security or not,” said the Crypto Council CEO. “To date, this approach has not worked well, with significant implications for consumers, and is why the industry has made numerous calls for proactive regulation, rather than regulation by enforcement.”

Speaking to Cointelegraph, Warren said the bill, if passed, would grant the CFTC broad authority over the crypto spot market. She said that additional legislation and regulatory processes would likely be required to clarify the SEC’s role — a sentiment recently echoed by SEC Chair Gary Gensler — adding there was “a very tight window” to pass such laws given the possible change in leadership following the 2022 midterm elections. Warren continued:

“We very strongly feel that any crypto legislation should be bipartisan in nature.”

Warren added in her written statement that the CCI supported provisions within the bill aimed at establishing consumer protection standards such as transparency requirements for financial tools and products in the crypto and blockchain space. The legislation also requires a report on underserved communities involved with digital assets.

As the former head of data, blockchain and digital assets at the World Economic Forum, Warren explored central bank digital currencies and promoted the adoption of blockchain technology, leaving in February to become the Crypto Council for Innovation’s CEO. Formed in April 2021, the CCI’s supporters include Coinbase, Gemini, Fidelity Digital Assets, Paradigm, Ribbit Capital, Andreessen Horowitz and Block. The organization has focused on supporting issues related to using cryptocurrencies and harmonizing related regulations in the United States and Europe.