Friday, June 10 2022

In a speech given this week at Columbia University by Fabio Panetta, a member of the executive board of the European Central Bank (ECB), he denounced the whole “crypto bet”, considering crypto-assets as “bringing instability and insecurity – the exact opposed to what they promised” and calling for stricter regulation in the EU (and coordination with international partners) to limit the financial and associated risks associated with crypto-assets.

Panetta’s speech (entitled “For a Few More Cryptos: The Wild West of Crypto Finance”) referred to remarks made by SEC Chairman Gary Gensler in August 2021 that called crypto the “Wild West” and called on Congress to give the Commission more authority “to write rules and tie lifeguards to crypto trading and lending” that would boost consumer confidence and allow the industry to thrive. Panetta’s scathing campaign was launched against what he sees as the riskier and more devious side of crypto – speculative fervor and greed, the high volatility of crypto markets, the facilitation of criminal financial activity, lack of adequate disclosures, unregulated or “insufficiently “supervised” cryptocurrency miners and service providers, and other unregulated or under-regulated aspects of the “crypto bubble” which, if ignored, could pose risks to financial stability (citing the subprime mortgage market that sparked the last global financial crisis.) Although the tone is far more strident than President Biden’s March 2022 Executive DecreePanetta’s speech articulated in the same way a high-level strategy to regulate and foster innovation in the burgeoning digital asset space and pushed central banks to move faster to develop central bank digital currencies (CBDCs) and “meet people’s growing demand for digital assets and digital currency by adapting sovereign currency for the digital age” or sit well as the private sector responds to this demand.

From a broad perspective, Fabio Panetta’s remarks, coupled with the multiple crypto-related regulatory developments underway in the EU and the US, suggest that some changes are afoot for the crypto industry. While there has been industry-friendly legislation at the state level in recent years to encourage innovation, at the federal level it appears that the honeymoon period of light or no regulation (or largely, regulation by agency enforcement) for the crypto industry is complete. Innovation in this space continues apace as regulators slowly gain experience and expertise on public policy and the risks to investors related to crypto-assets. Thus, vendors should expect more scrutiny and additional compliance hurdles in the future, as several regulators have stated that the sustainable innovations and societal benefits of cryptocurrencies and DeFi applications can only happen. with responsible regulation. Panetta said it won’t be easy to put in place such responsible oversight, as there will be “complex trade-offs, balancing the goals of promoting innovation, preserving financial stability and protecting consumers.” .

Panetta’s speech highlighted several areas where he believed cryptoassets were “speculative and high-risk investments” that could eventually become a risk to the financial system, prompting calls for more regulation:

  • Public policy concerns: Panetta argued that unbacked crypto assets, due to their volatility, cannot perform the basic functions of money and “in the absence of adequate controls” these assets are now largely driven by speculation, FOMO (fear of missing out) and expectations of quick returns. . Panetta noted that these cryptoassets are bought by those who likely don’t understand the risks of what they’re buying and do so with little to no backstops or protections. He then commented on the detrimental environmental consequences of cryptocurrencies running on proof-of-work blockchains and the use of crypto by criminal enterprises in ransomware and other systems. Similar to ongoing discussions in Congress around stablecoinsPanetta also argued that stablecoins, which are digital currencies backed by fiat currency or tied to other safe assets, “can be low-risk but not risk-free” and present their own systemic financial concerns.

  • Regulation of crypto-assets: Panetta said regulation should “balance risk and reward so as not to stifle innovation that could drive payment efficiency and broader applications” of blockchain technologies. He outlined four main areas of focus: (1) holding cryptoassets to the same standards as the traditional financial system, particularly in the area of ​​anti-money laundering and sanctions compliance; (2) ensuring fair taxation of crypto-assets, including a suggestion that proof-of-work-based crypto be taxed at higher rates; (3) implement enhanced reporting and transparency requirements for stablecoins; (4) adopt consumer protection measures to protect inexperienced crypto investors. According to him, the EU must act as soon as possible: “We must move faster if we want to ensure that crypto-assets do not trigger a frenzy of anarchic risk taking”.

Panetta’s speech referenced several proposals that European lawmakers are currently working on. Indeed, the branches of government in the EU are currently in trilogue discussions on the regulation of crypto-asset markets or “Micawhich is a sweeping proposal to enable and regulate digital finance (and which recently made news regarding a rejected provision that would have restricted the use of proof-of-work cryptocurrencies). EU Lawmakers Also Complete Negotiations on Crypto-Related AML Regulations, as well as Debate on Proposal Regulation on information accompanying transfers of funds and certain crypto-assets (“FCTR”), which would require, among other things, that crypto-asset transfers including at least one virtual asset service provider be traced and suspicious transactions blocked.

Proposals relating to crypto-assets are also percolating in the United States, as evidenced by: the SEC Efforts to Regulate the Next Generation of Blockchain-Based Decentralized Finance (DeFi) Applications; SEC Chairman Gensler recent statement that the agency will consider whether and how the protections afforded to other investors on exchanges with which retail investors interact should apply to crypto platforms; the Treasury Department’s Office of Foreign Assets Control (OFAC) Releases 2021 Sanctions Compliance Guide for Virtual Currency Industry; a recent statement by Acting Chief of the U.S. Office of the Comptroller of the Currency (OCC), Michael Hsu, saying standards should be developed around stablecoins, similar to the early days of the internet, to ensure stablecoins are open and inclusive ; Ongoing Congressional Debate Over Stablecoin Regulation and sweeping regulation of digital assets (e.g., HR4741); and President Biden Executive Order on Digital Assets which, among other things, directed the Federal Reserve and others to intensify the study of CBDCs.

So, as Panetta said, the growth of crypto asset markets “reveals society’s growing demand for digital assets and instant payments,” which is driving vendors to create innovative crypto-related products and applications. . As a result, global regulators and central banks must now take into account a host of new public policies and systemic financial issues.

Jonathan Mollod contributed to this article.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 119


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