united states

For greater good: NY judge allows Celsius to mine, sell Bitcoin

Chief bankruptcy judge Martin Glenn, Southern District of New York, approved Celsius’ request for running BTC mining and selling operations as a means to reinstate financial stability.

Not even 24 hours after revealing a three-month cash flow forecast that threatens total exhaustion of funds, a New York judge allowed crypto lender Celsius Network to mine and sell Bitcoin (BTC) during its bankruptcy.

Since July 2022, Celsius Networks stands at the crosshair of United States officials after reports of bankruptcy surfaced, which risks losing the live savings of numerous crypto investors.

During the second day of the case hearing, chief bankruptcy judge Martin Glenn, Southern District of New York, approved Celsuis’ request for running BTC mining and selling operations as a means to reinstate financial stability.

However, Glenn raised concerns related to the immediate profitability of BTC mining as he rightly pointed out the high upfront investments needed for setting up mining infrastructure.

The recent approval, however, is only limited to mining and selling the mined BTC. The court barred Celsius from selling equity or debt investments in other crypto companies and required the crypto lender to disclose information about the assets beforehand.

The decision to allow a defaulting crypto company to begin crypto mining operations stems from the concerns raised by investors about the unfair outcomes filed by over 250 customers — as shown above.

Despite fears of running out of money by October, the company’s attorney reaffirmed that investing in mining will generate profits for Celsius. The U.S. Department of Justice and the Texas State Securities Board, who previously opposed Celsius’ intent to delve into BTC mining, also withdrew their objection after Celsius clarified that it would only sell the mined Bitcoin for cash.

Celsius also revealed during the hearing that BTC prices have grown by 25% since the company had filed the petition. The final hearing will take place on Sept. 1, which will see the finalization of the plan prior to Celsius’ exit and distribution of funds.

Related: German crypto bank Nuri with 500K users files for insolvency

Singapore-based crypto lending platform Hodlnaut suspended withdrawals and deposits on Aug. 8, citing poor market conditions and lack of liquidity.

Soon after revealing the suspension of services, including token swaps, Hodlnaut announced to have been working on recovery plans, adding:

“We are consulting with Damodara Ong LLC on the feasibility and timelines of our intended execution plan and are strategizing our recovery plan with our users’ best interests in mind.”

Following the service shut down, Hodlnaut suspended all of its social media accounts except for Twitter and Telegram.

Optimism fading? Regulatory discussion on stablecoins postponed until fall

While there is no shortage of legislative initiatives to regulate stablecoins, the idea of the American CBDC remains problematic.

Among a rich range of anxieties both for the crypto industry and the global economy at large, the summer of 2022 will be remembered as the time when stablecoins proved themselves to be not so stable and thus came into the focus of regulators’ attention. 

The shock of the TerraUSD (UST) depegging in May opened a season of heated-up discussions on stablecoins around the world. The top financial officials from the Group of Seven largest advanced industrial economies had to send their private jets to the 40,000-populated German town of Koenigswinter to push the international body of the Financial Stability Board into speeding up the crypto regulation process. The Chinese government signaled its desire for even tighter regulations on cryptocurrencies and stablecoins. Japan played proactively limited stablecoin issuance to banks and trust companies.

In the United States, an immediate reaction came from the Congressional Research Service, which dubbed the UST crash as a “run-like” scenario and emphasized that there is a significant risk of such failure repetitions due to the existing policy lacunas. And though some, like United States Treasury Secretary Janet Yellen, refused to follow such an alarming tone, the American crypto community witnessed several major initiatives to regulate the stablecoins in the following months.

What do the Lummis-Gillibrand and Gottheimer bills suggest?

In the first week of June, Senators Cynthia Lummis and Kirsten Gillibrand finally introduced the long-awaited 69-page Responsible Financial Innovation Act. The act, commonly shortened to a “crypto bill” headline, aspired to become the broad comprehensive framework for crypto at large, dealing with a range of subjects such as banking, the tax treatment of digital assets, principal government agencies’ jurisdictions and interagency coordination.

Among this batch of issues, the bipartisan bill includes a fragment on stablecoin regulations, represented in Sections 601 and 602. As obvious as it may sound, the most important line suggests the Required Payment Stablecoin Assets issuer to hold no less than 100% of the face amount of the liabilities that peg the coins. The backing assets must be held in balances at a Federal Reserve bank (including a segregated balance account), or in the case of foreign reserves, at a foreign central bank, “in a special, custodial or trust account.”

The guidelines also require a pretty standard range of reporting measures, from the public disclosure of a summary description of the assets backing the stablecoin, the value of these assets and their number, to periodic reports to the Federal banking agency or state bank supervisor. Non-depository institutions could issue stablecoins as well.

Related: Built to fall? As the CBDC sun rises, stablecoins may catch a shadow

The Stablecoin Innovation and Protection Act of 2022, published by Senator Josh Gottheimer’s office, contains nine pages. It introduces the concept of “qualified stablecoin:” redeemable on demand, on a one-to-one four basis for U.S. dollars and issued by an insured depository institution or a nonbank qualified stablecoin issuer. A minor difference from the Lummis-Gillibrand proposition here is a less wide range of the assets to be used as collateral: Only U.S. dollars or federal government securities should be used unless the regulator decides otherwise.

The subtle yet important difference between the two bills is that Gottheimer’s draft specifies the legal status of “qualified stablecoins” as neither securities nor commodities, making them fall under the regulatory authority of the Office of the Comptroller of the Currency, not the Securities Exchange Commission or the Commodity Futures Trading Commission. The latter two will still preserve their control when it comes to other cryptocurrencies.

Both the Responsible Financial Innovation Act and the Stablecoin Innovation and Protection Act of 2022 could be deemed as crypto-friendly, with the second one implying a getaway from the SEC and CFTC scrutiny. In their moderate tone, both bills look promising in contrast to the President’s Working Group on Financial Markets calls to limit stablecoin issuance to banks insured by the Federal Deposit Insurance Corp.

“Healthy discussion” and reasons for optimism

Speaking to Cointelegraph, Denelle Dixon, CEO of Stellar Development Foundation — a backer of the Stellar network — noted that the range of stablecoin legislative initiatives doesn’t limit itself to Lummis-Gillibrand or Gottheimer bills. There is also the bipartisan Digital Commodity Exchange Act of 2022 and Senator Pat Toomey’s Trust Act of 2022. While the first one doesn’t mention the word “stablecoin,” the second one more or less combines the features of the recent bills by privileging the regulatory role of the Office of the Comptroller of the Currency and laying an emphasis on disclosure procedures for stablecoin issuers.

Dixon regarded this legislative variety as a product of “healthy discussion” that provides reasons for optimism among the industry stakeholders. There is, she believes, a general agreement over the fundamental principles of stablecoins, the most basic being that stablecoins should be genuinely stable. This means they shall have audited cash or highly-liquid asset-backed reserves, held in regulated banks and financial institutions and subject to public disclosure requirements:

“With these foundational principles in place, the question is not which bill is best for the U.S. but how do we get this done.”

Budd White, CEO of Tacen, said it was “incredibly encouraging” to see this level of congressional attention on the responsible development of stablecoins in his dialogue with Cointelegraph. In his opinion, the current “piecemeal” regulatory landscape stands in the way of the proper development of private stablecoins. That stands in stark contrast to countries such as Japan, which was recently able to pass a landmark stablecoin legal framework, White notes. But there is another threat on the horizon, a specter of non-private stablecoins:

“Competing bodies across the country are exploring the possibility of state or federal central bank digital currencies that could add yet another layer to this confusion, as private stablecoins also pursue development.”

The specter of CBDC?

Will there be an all-American CBDC soon? That scenario seems not too obvious, especially in comparison with other major markets such as China or the European Union where the experiments with a digital yuan and euro are publicly embraced. Given the cultural and political differences, it is hard to imagine a swift transition to CBDC in a historically pro-market United States with its combative pluralism in policymaking.

As White highlighted, one of the main challenges facing a CBDC in the U.S. is the dynamic between the Federal Reserve and private banks:

“While the Fed would likely be the entity to issue some form of a digital dollar, they currently have no apparatus to interact directly with consumers — and creating CBDC accounts directly with the Fed could have far-reaching consequences on the U.S. financial system.”

Despite that, in reality, the Federal Reserve has been conducting its research on CBDC in the U.S. for a while. Back in 2020, Fed Chair Jerome Powell acknowledged that there are several ongoing experiments involving the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology. No decision had been made, Powell insisted, and there are plenty of risks such a project bears.

The discussion was recently revived when the Federal Reserve Board of Governors released a discussion paper titled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation.” By the end of May, the Fed had received over 2,000 pages of comments from stakeholders. While some influential entities such as the Institute of International Finance held a reserved tone, others expressed skepticism over the idea.

Thus, The Securities Industry and Financial Markets Association pointed out that some key benefits of implementing the CBDC, highlighted by the Fed experts, could be developed using other payment infrastructures “such as stablecoins or settlement tokens.” The Credit Union National Association, famous for its anti-CBDC stance, explicitly criticized the idea:

“Given that the vast majority of US payments are already being conducted through digital channels, the Fed must clearly state what problem(s) it is trying to solve.”

The creation of a CBDC would inevitably lead to the movement of funds from banks to the Fed, stated the American Banking Association, estimating that 71% of bank funding could be at risk of moving. Thus, the notable hesitation of the Fed itself has met a range of vocal opposition not only from the crypto industry but from the larger financial lobbyists.

Still, the possibility of CBDC in the U.S. is not unimaginable, Dixon suggested. In fact, she believes a CBDC is “probably inevitable” given the digitalization of the U.S. economy. The good news, though, is that it doesn’t mean stablecoins would be just brushed off on that foundation. “Picking a technology solution today will likely be outdated in five years,” Dixon stated. “Allowing for stablecoins to exist and thrive will only serve the national interest.”

Presumably, the upcoming fall will bring some clarity about the legal status of stablecoins in the U.S., irrespective of the Fed’s CBDC ambitions.

Coin Center may challenge US Treasury’s sanctions on Tornado Cash in court

“By treating autonomous code as a ‘person’ OFAC exceeds its statutory authority,” said Coin Center’s Jerry Brito and Peter Van Valkenburgh.

United States-based crypto policy advocacy group Coin Center said it intended to “pursue administrative relief” for individuals affected by Tornado Cash sanctions imposed by the Treasury Department’s Office of Foreign Asset Control, or OFAC.

In a Monday blog post, Coin Center executive director Jerry Brito and director of research Peter Van Valkenburgh alleged OFAC “overstepped its legal authority” when it named cryptocurrency mixer Tornado Cash and 44 associated wallet addresses to its list of Specially Designated Nationals, or SDNs, on Aug. 8. The directors claimed Treasury’s actions could have potentially violated U.S. residents’ “constitutional rights to due process and free speech” and they were exploring bringing the matter to court.

“By treating autonomous code as a ‘person’ OFAC exceeds its statutory authority,” said Brito and Van Valkenburgh.

According to the pair, Coin Center will first engage with OFAC to discuss the situation in addition to briefing members of Congress. The advocacy group will then help individuals with funds trapped on any of the 44 USD Coin (USDC) and Ether (ETH) addresses connected to Tornado Cash by applying for a license to withdraw their tokens. Following these actions, the organization will begin exploring challenging the sanctions in court.

Brito and Van Valkenburgh claimed that unlike OFAC’s sanctions against cryptocurrency mixer Blender.io in May — “an entity that is ultimately under the control of certain individuals” that better fit the definition of SDNs — “it can’t be said that Tornado Cash is a person subject to sanctions.” According to the Coin Center executives, this was due to the ETH addresses for the mixer smart contract:

“The Tornado Cash Entity, which presumably deployed the Tornado Cash Application, has zero control over the Application today,” said Brito and Van Valkenburgh. “Unlike Blender, the Tornado Cash Entity can’t choose whether the Tornado Cash Application engages in mixing or not, and it can’t choose which ‘customers’ to take and which to reject.”

They added:

“While typical OFAC actions merely limit expressive conduct (e.g. donating money to a particular Islamic charity), this action sends a signal — indeed seems to have been intended to send a signal — that a certain class of tools and software should not be used by Americans even for entirely legitimate purposes. Even if this listing is truly and exclusively aimed at stopping North Korean hackers from using Tornado Cash, and even if the chilling effect on the use of the tool by Americans for legitimate reasons was acceptable to OFAC in a collateral impact analysis, it may not be sufficient to a court.”

Related: Tornado Cash community fund multisignature wallet disbands amid sanctions

Following the announcement of the sanctions against Tornado Cash, individuals associated with the controversial mixer reported being cut off from some centralized platforms amid the controversy. Tornado Cash co-founder Roman Semenov reported developer platform GitHub had suspended his account on Monday, and users of the mixer’s decentralized autonomous organization and Discord channel said the two media also went dark.

In June, Coin Center took the U.S. Treasury to federal court, alleging the government department provisioned an unconstitutional amendment in the infrastructure bill signed into law by President Joe Biden in November 2021. The group claimed that a provision in the law was aimed at gathering information about individuals engaged in crypto transactions.

Coin Center may challenge US Treasury’s sanctions on Tornado Cash in court

“By treating autonomous code as a ‘person’ OFAC exceeds its statutory authority,” said Coin Center’s Jerry Brito and Peter Van Valkenburgh.

United States-based crypto policy advocacy group Coin Center said it intended to “pursue administrative relief” for individuals affected by Tornado Cash sanctions imposed by the Treasury Department’s Office of Foreign Asset Control, or OFAC.

In a Monday blog post, Coin Center executive director Jerry Brito and director of research Peter Van Valkenburgh alleged OFAC “overstepped its legal authority” when it named cryptocurrency mixer Tornado Cash and 44 associated wallet addresses to its list of Specially Designated Nationals, or SDNs, on Aug. 8. The directors claimed Treasury’s actions could have potentially violated U.S. residents’ “constitutional rights to due process and free speech” and they were exploring bringing the matter to court.

“By treating autonomous code as a ‘person’ OFAC exceeds its statutory authority,” said Brito and Van Valkenburgh.

According to the pair, Coin Center will first engage with OFAC to discuss the situation in addition to briefing members of Congress. The advocacy group will then help individuals with funds trapped on any of the 44 USD Coin (USDC) and Ether (ETH) addresses connected to Tornado Cash by applying for a license to withdraw their tokens. Following these actions, the organization will begin exploring challenging the sanctions in court.

Brito and Van Valkenburgh claimed that unlike OFAC’s sanctions against cryptocurrency mixer Blender.io in May — “an entity that is ultimately under the control of certain individuals” that better fit the definition of SDNs — “it can’t be said that Tornado Cash is a person subject to sanctions.” According to the Coin Center executives, this was due to the ETH addresses for the mixer smart contract.

“The Tornado Cash Entity, which presumably deployed the Tornado Cash Application, has zero control over the Application today,” said Brito and Van Valkenburgh. “Unlike Blender, the Tornado Cash Entity can’t choose whether the Tornado Cash Application engages in mixing or not, and it can’t choose which ‘customers’ to take and which to reject.”

They added:

“While typical OFAC actions merely limit expressive conduct (e.g. donating money to a particular Islamic charity), this action sends a signal — indeed seems to have been intended to send a signal — that a certain class of tools and software should not be used by Americans even for entirely legitimate purposes. Even if this listing is truly and exclusively aimed at stopping North Korean hackers from using Tornado Cash, and even if the chilling effect on the use of the tool by Americans for legitimate reasons was acceptable to OFAC in a collateral impact analysis, it may not be sufficient to a court.”

Related: Tornado Cash community fund multisignature wallet disbands amid sanctions

Following the announcement of the sanctions against Tornado Cash, individuals associated with the controversial mixer reported being cut off from some centralized platforms amid the controversy. Tornado Cash co-founder Roman Semenov reported developer platform GitHub had suspended his account on Monday, and users of the mixer’s decentralized autonomous organization and Discord channel said the two media also went dark.

In June, Coin Center took the U.S. Treasury to federal court, alleging the government department provisioned an unconstitutional amendment in the infrastructure bill signed into law by President Joe Biden in November 2021. The group claimed that a provision in the law was aimed at gathering information about individuals engaged in crypto transactions.

Built to fall? As the CBDC sun rises, stablecoins may catch a shadow

Will central banks allow stablecoins to survive? Can they peacefully co-exist with central bank digital currency as a financial instrument for the unbanked?

There’s a ferment brewing with regard to central bank digital currencies (CBDCs), and most people really don’t know what to expect. Varied effects seem to be bubbling up in different parts of the world. 

Consider this: China’s e-CNY, or digital yuan, has already been used by 200 million-plus of its citizens, and a full rollout could happen as early as February — but will a digital yuan gain traction internationally? Europe’s central bank has been exploring a digital euro for several years, and the European Union could introduce a digital euro bill in 2023. But will it come with limitations, such as a ceiling on digital euros that can be held by a single party? A United States digital dollar could be the most awaited government digital currency given that the dollar is the world’s reserve currency, but when will it appear, if ever? Implementation could be at least five years away.

Amid all this uncertainty, one question has persisted, at least in the cryptoverse: What impact will large-economy digital currencies have on stablecoins? Would it leave them any oxygen to breathe?

On the positive side, some believe that most large-scale CBDCs will go the wholesale route — i.e., allowing direct access to digital money by a limited number of large financial institutions. If so, could this leave a “retail piece” for stablecoins in the payments sector?

“Their wallets or accounts might be held by intermediaries like commercial banks, who then have claims on the central bank. But effectively, most CBDCs will be used for retail payments,” Gerard DiPippo, senior fellow at the Center for Strategic & International Studies, told Cointelegraph: “This includes China’s e-CNY, which many believe will be the first large-economy CBDC to be rolled out at scale.”

“While it’s still early to make a call, I would expect that CBDCs will be accessible by both retail and wholesale parties,” Arvin Abraham, a United Kingdom-based partner at law firm McDermott Will and Emery, told Cointelegraph, adding that:

“Governments have a competitive imperative to allow for retail use of CBDCs to keep their currencies relevant in a world with stablecoins and other cryptocurrencies that are increasingly being accepted as means of payment.”

A competition for users?

Assuming, then, a retail contest arises between stablecoins and CBDCs, which is likely to prevail?

“The obvious advantage of stablecoins is that they exist or are at least further along than most CBDCs. This is especially true in the U.S. context,” said DiPippo. “I think a U.S. CBDC would take many years to deploy even if authorized by Congress today.”

On the other hand, others believe that CBDCs, if and when they appear, will make stablecoins redundant. Consider that the two leading stablecoins, Tether (USDT) and USD Coin (USDC), are both linked to the U.S dollar and both aim for a 1:1 peg.

“In a world with a U.S. dollar CDBC, the need for these coins goes away, as there will be a crypto native alternative that is always backed 1:1 by the dollar and is effectively interchangeable with its fiat equivalent,” said Abraham.

But maybe the outcome isn’t binary, a choice of one or the other. Perhaps they can peacefully coexist, a possibility that has been put forth by no less of an authority as the U.S. central bank’s second-highest-ranking official.

“If private monies — in the form of either stablecoins or cryptocurrencies — were to become widespread, we could see fragmentation of the U.S. payment system into so-called walled gardens,” Federal Reserve Vice Chair Lael Brainard testified in a May congressional hearing, adding that: “CBDC could coexist with and be complementary to stablecoins and commercial bank money by providing a safe central bank liability in the digital financial ecosystem.”

Can stablecoins and CBDCs exist side by side?

Is this harmonious scenario realistic? “I see no reason why stablecoins and CBDCs cannot coexist,” DiPippo told Cointelegraph. “In practice, their degree of coexistence will depend in part on regulations, specifically whether some governments even allow stablecoins for payments — especially in the cross-border context.”

Much will depend on the user experiences, cost advantages, and general usability of each instrument, DiPippo added. “In general, I have more confidence in the private sector to succeed in these respects. I’m not so much worried about stablecoins being ‘crowded out’ as I am worried about them being banned.”

Cryptocurrency exchange Coinbase not only believes in cohabitation but says CBDCs may even boost stablecoins, according to a July white paper. “We strongly believe CBDCs will complement and encourage robust, inclusive, and safe innovation for stablecoins and the broader digital asset economy.”

Stablecoins are in a better position to innovate than CBDCs, Coinbase adds. “In addition to having a first-mover advantage, stablecoins are expected to continue to rapidly evolve and innovate over the coming years, experimenting in ways CBDCs may not be able to due to differences in size and scope.”

Related: Metaverse visionary Neal Stephenson is building a blockchain to uplift creators

CBDCs, too, may come freighted with certain constraints from which stablecoins could be exempt. In its quest for a digital euro, the European Central Bank is “exploring a 3,000 euro limitation on the amount of digital euro that can be held by one party, based on various policy considerations,” the white paper notes. If that were to happen, stablecoins would arguably be able to serve those “needing a larger holdings of a digital fiat currency equivalent.” Stablecoins might also offer higher interest rates than CBDCs, the paper suggests.

“There could still be a role for stablecoins alongside CBDCs, although it would be more limited than today,” acknowledged Abraham. Stablecoins could have utility in providing a convenient means to have an interest in a basket of stocks, commodities and others. That is, “Their function would be more akin to tracker funds where value is pegged to several assets.”

Then, too, a U.S. CBDC may not be ready for a full rollout for another five years, wrote Thomas Cowan, part of the team at the Boston Fed that in February released a technical research paper on potential CBDC designs in a recent blog:

“By the time a U.S. CBDC is issued, regulated stablecoins could provide solutions that a CBDC may have been designed for — such as boosting financial inclusion, cutting transaction costs and settlement time, increasing access to USD, and even expanding the dollar’s role as the global reserve currency.”

MiCA darkens stablecoin prospects in Europe

In Europe, though, the outlook for stablecoins — or “so-called ‘stablecoins,’” as some EU officials call them — could be more problematic. The Markets in Crypto-Assets (MiCA) regulation, expected to take effect in 2024, presents “a number of challenges for stablecoins,” said Abraham, most notably a ban on the paying of interest by stablecoin issuers.

Such a prohibition would “deprive European citizens of an attractive investment option, particularly considering that financial stimuli instruments adopted to limit the economic impact of lockdowns are expected to result in historically high inflation rates,” noted Firat Cenzig, a senior lecturer in law at the University of Liverpool. Meanwhile, Nicolaes Tollenaar, partner at the Dutch law firm Resor, suggested in a Financial Times opinion piece in early August that such a ban “would force issuers to adopt a business model that is only sustainable with near-zero interest rates,” which are unlikely in the near future.

Wherefore China?

Elsewhere, China’s e-CNY has already been used by an estimated 250 million, and it remains a key part of any global CBDC discussion. What would a digital yuan mean for not only stablecoins but also the U.S. dollar?

In March, a Hoover Institution study noted that “Over time, the spread of the e-CNY might diminish the role of the dollar as the world’s reserve currency and undermine the ability of the United States to deploy financial sanctions against rogue international actors.”

DiPippo, for one, doesn’t see much threat from an e-CNY on the international stage, however. “The e-CNY is unlikely to resolve the broader problems with renminbi internationalization, including China’s capital controls and geopolitical concerns.” The primary use of the e-CNY is for domestic retail transactions, though “experiments are underway to make the e-CNY usable across borders and interoperable with some regional CBDCs,” he added.

It is unlikely to do much to dent the dollar’s standing as a reserve currency per se, primarily because it is designed as a digital cash substitute that does not pay interest. “Central banks would not move a substantial share of their international reserves into a cash substitute with no yield; they’ll continue to hold bonds. The e-CNY will not change that,” DiPippo told Cointelegraph.

What about financial inclusion?

All in all, there are good reasons why CBDCs and stablecoins might be seen to be locked in a zero-sum game. They have the same design purpose — i.e., moving money more effectively — and a large-economy CBDC is not likely to be blockchain-based either because that would make it too slow, according to Cowan.

Elsewhere, Eswar Prasad, professor of economics at Cornell University and author of the book The Future of Money, told Cointelegraph earlier this year: “A widely and easily accessible digital dollar would undercut the case for privately issued stablecoins,” though stablecoins issued by major corporations “could still have traction, particularly within those corporations’ own commercial or financial ecosystems.”

Related: Decentralized finance faces multiple barriers to mainstream adoption

In the end, consumers may determine which instrument carries the day. In terms of market adoption, “the user experience will be key,” added DiPippo. “So, in that regard, I do not see stablecoins having an inherent advantage over CBDCs.”

There is the matter, too, of financial inclusion, a goal to which both CBDC designers and stablecoin issuers pay lip service. “Everyday people like you and me are unlikely to go to the Fed to get our CBDCs to transact with on a daily basis,” wrote Cowan. That is, customers will still get their digital dollars from commercial banks, just as they get cash today from local banks. That might not help those who don’t have bank accounts. According to Cowan:

“Regulated stablecoins could be better positioned to improve financial inclusion. This is because stablecoins are on numerous public chains and can be stored and moved easily without the need for a central party — just like cash today.”

Cowan sees room for both financial instruments: “However value is stored and exchanged in the future, both stablecoins and CBDCs are likely to have a leading role in the upcoming transformation of finance.”

dYdX confirms blocking (and unblocking) some accounts flagged in Tornado Cash controversy

The platform said it has used compliance vendors to scan for and flag accounts potentially associated with illicit activities, including sanctions lists for many countries.

Cryptocurrency derivatives trading platform dYdX said it blocked some users’ accounts with funds linked to Tornado Cash, including mistakenly suspending some that never directly engaged with the controversial mixer.

In a Wednesday blog post, dYdX said it had “unbanned certain accounts” that the derivatives platform had blocked in response to the Office of Foreign Assets Control of the United States Treasury Department adding Tornado Cash to its list of Specially Designated Nationals, or SDNs. According to dYdX, its compliance provider flagged many accounts believed to be linked to Tornado Cash, which the platform subsequently blocked — despite the fact some had never dealt with the crypto mixer. The platform said it has used compliance vendors to scan for and flag accounts potentially associated with illicit activities, including sanctions lists for many countries.

“This sudden influx of flags affected many account holders that never directly engaged with Tornado Cash, and often such users do not realize the origin of the funds transferred to them during various transactions prior to interacting with our platform, but we must nevertheless maintain certain restrictions,” said dYdX.

According to dYdX, banning the users did not amount to seizing funds, which they said would always be available for withdrawals. However, the platform can place accounts in “close-only mode.”

Many crypto trading platforms have blocked access to Tornado Cash following the U.S. Treasury adding the controversial mixer to its sanctions list on Aug. 8. As an SDN, “U.S. persons are generally prohibited from dealing with them,” and firms and individuals listed have their assets blocked — this would include 44 USD Coin (USDC) and Ether (ETH) addresses connected to Tornado Cash.

Following the sanctions announcement, stablecoin issuer Circle froze more than 75,000 USDC worth of funds on addresses listed by Treasury officials. However, actions against individuals associated with the crypto mixer extend beyond centralized exchanges based in the United States. Tornado Cash co-founder Roman Semenov reported developer platform GitHub had suspended his account. On Tuesday, Web3 development platform Alchemy and Infura.io followed by blocking remote procedure call requests to the mixer.

Related: TORN price sinks 45% after U.S. Treasury sanctions Tornado Cash — Rebound ahead?

Some critics of the Treasury’s decision to add Tornado Cash to its list of SDNs have said the crypto mixer is a “neutral tool” that can be used by anyone, rather than a platform aiming to use it for illicit purposes. In a Tuesday statement, Lia Holland of tech advocacy group Fight for the Future called the Treasury’s actions “clumsy” by using sanctions against bad actors like North Korean hacking group Lazarus that also affected users with “legitimate reasons to seek anonymity in financial transactions.”

“Tornado.cash is code, and rather than identify those who were aiding and abetting criminals the Treasury simply sanctioned that code,” said Holland.

SBI Group reports investee getting CFTC approval for OTC derivatives trading in US

Under the U.S. Commodity Exchange Act and CFTC regulations, derivatives exchanges must have approval to operate as a Designated Contract Market or a Swap Execution Facility.

The United States subsidiary of electronic trading platform developer Clear Markets has reportedly received approval from the Commodity Futures Trading Commission, or CFTC, to offer over-the-counter crypto derivatives products with physical settlement.

In a Tuesday notice, SBI Holdings — a stakeholder of Clear Markets — said the CFTC had approved the U.S. subsidiary operating a Swap Execution Facility, in which it plans to offer derivatives trading for U.S. dollar and Bitcoin (BTC) pairs. The Japan-based financial services company said its market maker planned to expand its trading partners in the United States following pilot transactions on Clear Markets.

SBI Holdings announced it had acquired a 12% stake in Clear Markets in August 2018, which it planned to increase in the future. At the time, the Japanese firm said the investment was aimed at creating a crypto derivatives trading platform catered toward institutional investors.

Under the Commodity Exchange Act and related CFTC regulations, derivatives exchanges — whether dealing with crypto or other assets — must have approval to operate as a Designated Contract Market or a Swap Execution Facility in the United States. According to the Fiscal Year 2023 budget request released in March, the CFTC was considering expanding its authority over financial products using crypto.

Related: What really goes on at a crypto OTC desk?

In May, a federal court ordered three co-founders of BitMEX to pay $30 million in civil monetary penalties for allegedly violating the CFTC’s conditions. Major investment bank Goldman Sachs has also reportedly been looking into breaking into crypto derivatives products through the U.S. subsidiary of cryptocurrency exchange FTX.

Cointelegraph reached out to the CFTC and Clear Markets, but did not receive a response at the time of publication.

CFTC and SEC propose amending reporting rules for large hedge funds on crypto exposure

The two U.S. financial regulators cited the growth in the hedge fund industry as the reason for the proposed change, due in part to digital asset investments becoming more common.

The United States Securities and Exchange Commission, or SEC, and the Commodity Futures Trading Commission, or CFTC, has proposed requiring large advisers to certain hedge funds to report any exposure to digital assets.

In a Wednesday notice, the SEC and CFTC proposed amending their confidential reporting form for certain investment advisers to private funds of at least $500 million. The Form PR would require qualifying hedge funds to not include exposure to cryptocurrencies when reporting “cash and cash equivalents,” but rather add them under a different category “to report digital asset strategies accurately.”

The two U.S. financial regulators cited the growth in the hedge fund industry as the reason for the proposed change, due in part to digital asset investments becoming more common since Form PR was introduced in 2008. According to the SEC and CFTC, having investment advisers provide more detailed information on strategies and exposure to certain assets would allow the Financial Stability Oversight Council to better assess potential risks to the U.S. economy.

“In the decade since the SEC and CFTC jointly adopted Form PF, regulators have gained vital insight with respect to private funds,” said SEC chair Gary Gensler. “Since then, though, the private fund industry has grown in gross asset value by nearly 150 percent and evolved in terms of its business practices, complexity […] If adopted, [this proposal] would improve the quality of the information we receive from all Form PF filers, with a particular focus on large hedge fund advisers.”

A fact sheet on the proposal released on Wednesday showed the number of private funds has increased by roughly 55% between 2008 and the third quarter of 2021. According to data from market research firm IBISWorld, there were 3,841 U.S.-based hedge funds as of 2022.

Related: Within five years, US hedge funds expect to hold 10.6% of assets in crypto

PricewaterhouseCoopers reported in June that roughly one-third of the traditional hedge funds it surveyed globally were invested in crypto, but more than half had less than 1% exposure to digital assets out of their total assets under management. According to the firm, respondents cited “regulatory and tax uncertainty” as the greatest barrier to investing in crypto.

Tornado Cash co-founder reports being kicked off GitHub as industry reacts to sanctions

OFAC issued a statement implying prohibited transactions with Specially Designated Nationals could include “downloading a software patch from a sanctioned entity.”

Roman Semenov, one of the co-founders of Tornado Cash, has reported his account was suspended at the developer platform, GitHub, following the United States Treasury Department’s sanctioning of the privacy protocol.

In a Monday tweet, Semenov said that despite not being individually named as a Specially Designated National, or SDN, of Treasury’s Office of Foreign Asset Control, he seemed to be facing repercussions from the Treasury alleging Tornado Cash had laundered more than $7 billion worth of cryptocurrency. As SDNs, identified firms and individuals have their assets blocked and “U.S. persons are generally prohibited from dealing with them.”

Being identified as an SDN would seemingly include any contact for business purposes, which could extend to associations on GitHub. According to a joint statement from the Federal Financial Institutions Examination Council and Office of Foreign Asset Control, prohibited transactions could be interpreted to include “downloading a software patch from a sanctioned entity.”

Semenov called the move to suspend his account “a bit illogical.” However, U.S. residents have been effectively barred from using the crypto mixer, given its alleged failure “to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks,” according to Brian Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence.

Some pro-crypto advocates have posited that the Treasury’s actions against Tornado Cash were the sanctioning of a “neutral tool” rather than the targeting of individuals responsible for using it for illicit means. Jake Chervinsky, head of policy at the Blockchain Association, claimed the U.S. Treasury Department’s decision may have “crosse[d] a line” between penalizing bad actors and those who dethe tools and technology they might use.

“It is not any specific bad actor who is being sanctioned, but instead it is all Americans who may wish to use this automated tool in order to protect their own privacy while transacting online who are having their liberty curtailed without the benefit of any due process,” said Jerry Brito, executive director of Coin Center.

A crypto mixer, Tornado Cash can be used to hide the trail of transactions for privacy reasons. The protocol was at the center of some major hacks and exploits in decentralized finance, including a $375-million attack on Wormhole in February and a $100-million hack on Horizon Bridge in June. The company announced in April that it was using oracle contracts from Chainalysis to block wallet addresses sanctioned by the Office of Foreign Assets Control following the Treasury Department alleging the North Korean hacking group Lazarus was behind a $600-million exploit of Ronin Bridge.

Cointelegraph reached out to Tornado Cash, but did not receive a response at the time of publication.

US Treasury sanctions USDC and ETH addresses connected to Tornado Cash

The protocol was at the center of some recent hacks and exploits in decentralized finance, including the alleged theft of $455 million by the North Korea-affiliated Lazarus Group.

The United States Treasury Department has added more than 40 cryptocurrency addresses allegedly connected to controversial mixer Tornado Cash to the Specially Designated Nationals list of the Office of Foreign Asset Control, or OFAC.

In a Monday announcement, OFAC effectively barred U.S. residents from using Tornado Cash and placed 44 USD Coin (USDC) and Ether (ETH) addresses connected to the mixer on its list of Specially Designated Nationals. The department alleged that individuals and groups had used the mixer to launder more than $7 billion worth of crypto since 2019, including the $455 million stolen by the North Korea-affiliated Lazarus Group. The protocol was also at the center of some recent hacks and exploits in decentralized finance, including a $375-million attack on Wormhole in February and a $100-million hack on Horizon Bridge in June. 

“Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks,” said Brian Nelson, Under Secretary of the Treasury for Terrorism and Financial Intelligence. “Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”

In a tweet on Monday, Secretary of State Antony Blinken falsely claimed Tornado Cash was a “U.S.-sanctioned, DPRK state-sponsored hacking group, used by the DPRK to launder money.” He later deleted the post and tweeted the crypto mixer “has been used to launder money for a U.S.-sanctioned DPRK state-sponsored cyber hacking group.”

The Treasury Department took similar steps against cryptocurrency mixer Blender.io in May. According to OFAC, the mixer allegedly processed $20.5 million out of approximately $620 million stolen from the play-to-earn game Axie Infinity’s Ronin Bridge — roughly 173,600 ETH and 25.5 million USDC. Under OFAC sanctions, firms and individuals have their assets blocked and “U.S. persons are generally prohibited from dealing with them.”

Related: US Treasury Dept sanctions 3 Ethereum addresses allegedly linked to North Korea

Tornado Cash announced in July that it had fully open-sourced its user interface code as part of its goals toward complete decentralization and transparency. The mixer’s website included a compliance tool that allowed users to show the source of any transaction.