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Leading Crypto Exchange Bites the Dust; UK Votes for Crypto Financial Instruments; MiCA Delayed Again; UBS Launches Bond on SDX and SIX

Thomas Murray Digital Newsletter

FTX founder Sam Bankman-Fried, Cointelegraph, CC BY 3.0, via Wikimedia Commons

In this issue:

  • Leading exchange FTX and its sister hedge fund Alameda Research file for bankruptcy after revelations of a balance sheet black hole and unauthorised lending of customer deposits; further retail-focused crypto exchanges may also be vulnerable.
  • Germany finalises legislation to authorise the issuance of DLT-based securities, adding asset classes including equities and funds to the existing digital bearer bonds.
  • EU delays approval vote on the Markets in Crypto Assets Regulation (MiCA) to February 2023, further pushing back its implementation date.
  • UBS becomes first bank to issue a bond on a regulated digital exchange, with components trading on both SDX and the traditional SIX exchange.

Major Digital Asset Developments

FTX Bites the Dust as It Too Fails to Implement Sound Governance and Financial Risk Management
With major and serious development efforts taking place in the institutional digital assets ecosystem, it is disappointing that the narrative dominating the media is once again the failure of a poorly-governed and now failed exchange (and its related hedge fund) that enabled the retail trading primarily of unbacked cryptocurrencies. This series of failures is due in part to a lack of regulation and oversight, and particularly to the tendency of digital asset firms such as exchanges to operate from jurisdictions (in this latest case, the Bahamas) with weak requirements for firms to implement sound corporate governance and financial risk management. This year has been strewn with stories of bankruptcies, insider trading, and the persistent threat of contagion.
This week FTX, one of the world’s largest digital asset exchanges, filed for bankruptcy – firstly for its non-US trading arm, and then its US entity following an application for Chapter 11 Bankruptcy protection (Finextra).
A leaked balance sheet for FTX founder Sam Bankman-Fried’s trading firm, Alameda Research, was the subject of a CoinDesk article on 2 November. It purported to show that almost a third of Alameda’s USD 14.6 billion was allocated to FTT, the native token of the FTX exchange, and that this represented more than 50% of the token’s total circulating supply.
Binance, the largest cryptocurrency exchange, was an early investor in FTX and had exited its equity position in mid 2021, in return receiving USD 2.1 billion in a combination of BUSD (the native stablecoin of the Binance ecosystem) and FTT. Once news of the weak balance sheet got out, and in apparent retaliation for rumours of FTX briefing the press against Binance, the latter announced the divestment of its remaining FTT tokens, sending their price crashing and causing a run on FTX. Alameda Research might have been able to survive the liquidity squeeze if not for the fact that it had apparently borrowed heavily against FTT and a basket of closely related tokens.
Allegedly, in order to support the value of the token, Alameda received lines of credit from the FTX exchange in the form of user deposits (The Verge), which it then used to bet on other cryptocurrencies as well as misguided attempts to support other embattled ventures like Voyager Digital which filed for Chapter 11 bankruptcy protection (CoinDesk) in July this year. Perversely, Alameda Research actually owed Voyager an estimated USD 200 million for funds it had borrowed in 2021, and by repaying the debt (which it did loudly and proudly) it was able to recoup the collateral it had posted with the firm for the loans it had taken. Ironically, FTX actually won a bankruptcy auction for Voyager Digital’s assets (CNBC) in September.
Despite its size, FTX’s management team comprised a small clique of inexperienced executives, and the group’s entities had no financial audits from large or reputable audit firms, nor any controls environment or IT security certifications. Despite this, even seasoned investors including BlackRock, Ontario Teachers’ Pension Plan, and Sequoia Capital were caught asleep at the wheel.
Given yet another case of signs of serious internal malfeasance and even fraud, serious due diligence and ongoing assessment of digital asset service providers remain paramount. The failures that the industry continues to witness are – as Dan Morehead, CEO of Pantera Capital articulated following the collapse of hedge fund Three Arrows Capital (3AC) earlier this year – down to old-fashioned over-leverage and poor risk management, rather than symptomatic of risks specific to the digital asset sector.
There could be further dominoes to fall in the ranks of exchanges as they scramble to reassure customers of their stability before they too are subject to runs and liquidity crunches. Several have urgently commissioned ‘proof of reserve’ audits to demonstrate that they hold, and have not lent out without customers’ agreement, the assets that they claim to have. Crypto.com, a retail exchange and investment platform that spent profligately on marketing before pulling up the drawbridge (Wall Street Journal) and making major layoffs (Coingeek) earlier this year, is reported to hold 20% of its reserves in Shiba Inu (SHIB), a meme token, although now comprising the fourteenth-largest cryptocurrency by market capitalisation. Its efforts to promote itself as stable and competently run took a hit when it purportedly sent over USD 400 million in Ether tokens to another exchange, Gate.io, by mistake, instead of sending them to its own cold storage wallet. The tokens – representing over 80% of its Ether holdings – were returned a week later. Even Binance, the world’s largest exchange group whose CEO Changpeng “CZ” Zhao has been extremely critical of other exchanges, appears to have 40% of its token reserves in its own-brand stablecoin Binance USD (BUSD) (c.USD 23 billion) and in-house token Binance Coin (c.USD 6.4 billion) (Bloomberg). The stablecoin reserves are, however, fully dollar-backed with third-party monthly attestations, with reserves managed by Paxos Trust Company.
While there continue to be centrally-managed organisations fulfilling essential market-making and custody functions in this growing industry, there also needs to be respect for the rules that exist for traditional non-crypto firms and that have been built up to protect investors over several decades. Blockchain and the use of distributed ledgers do not obviate the need for well governed, transparent and fiscally prudent management of these service providers.

Custody and Post Trade Developments

New German Regulations Enable the Issuance of Securities on Distributed Ledger Technology (Bundesgesetzblatt) (German)
The German government has published in its official journal, Bundesgesetzblatt, regulations and requirements that set out how electronic securities registers (eWpRV) can be used to support the issuance of securities, including equities and funds on a Distributed Ledger. This completes Germany’s approach to securities issuance using DLT, since only digital bearer bonds were supported in law until now.
HSBC to Launch Orion Blockchain Bond Tokenization Platform (Ledger Insights)
HSBC has announced plans to launch a permissioned DLT-based bond tokenisation platform, Orion. The solution is expected to be able to support the issuance and trading of digital bonds as well as the tokenisation of currencies such as GBP, such that assets can benefit from atomic settlement – the simultaneous exchange and instant settlement of assets – or true delivery versus payment (DvP).
Binance Custody Turns to TRM Labs for Institutional Compliance (Finextra)
In an effort to improve its institutional credentials and mitigate its many past regulatory challenges, Binance – the largest digital asset exchange by market capitalisation – is calling upon TRM, a leading blockchain analytics and intelligence firm, to bolster its risk management and compliance frameworks to support its custody activities, which it launched in December 2021. In signs of a maturing industry, the firm has reportedly secured specie insurance, certification under International Organisation for Standardisation (ISO) standards 27001 and 27701, as well as a SOC 2 Type 1 external audit attestation, and is currently pursuing a SOC 2 Type 2. These are standard credentials for traditional institutionally-focused custodians, and increasingly common for digital custodians.

UBS Launches Bond Traded on Blockchain-based Exchange (Finextra)
UBS has become the first banking entity to launch a bond on a regulated digital exchange. The CHF 375 million digital bond is trading on Switzerland’s SIX Digital Exchange (SDX) and also on the traditional SIX Swiss Exchange, in the same way that SIX’s own bond is traded following the launch of the Digital Exchange in November 2021. Utilising SDX’s atomic settlement technology, the bond is able to settle instantaneously within SDX’s distributed ledger-based CSD without the need for clearing via a Central Counterparty (CCP). Meanwhile, the analogue part will settle through traditional means via SIX Swiss Exchange. This Swiss dual digital/traditional model demonstrates a gentle path for other markets to introduce the tokenisation of traditional assets and the listing of digitally native securities.

Other News and Links

EU Delays Vote on MiCA Crypto Legislation Until February (CoinDesk)
Further to our previous newsletter, the EU has decided to delay its vote on the implementation of the Markets in Crypto Assets Regulation (MiCA) until February next year, reportedly due to the complex and technical nature of the text. The delaying of the vote, which was anticipated to take place this December, means that MiCA will most certainly not be published in the Official Journal of the European Union (OJEU) originally slated for Q1 2023, which formally signifies the full applicability of the law. As such, this will likely impact the timing of the implementation of the regulatory and licensing regime which was due to come into effect in 2024, approximately 12 to 18 months after its publication in OJEU.
UK Lawmakers Votes to Recognize Crypto as Regulated Financial Instrument (CryptoSlate)
A proposal introduced to the House of Commons to recognise crypto assets as regulated financial instruments has received approval by the lower house after a second reading on October 25.
The proposal seeks to include crypto assets and the services that support them under the Financial Services and Markets Bill which, if successful, will result in types of crypto assets including stablecoins falling under the same laws as other financial assets. If approved in law, the UK Treasury department would be empowered to enforce regulation over the crypto industry.
 IRS 2022 Tax Guidelines to Treat NFTs as Stablecoins, Cryptocurrencies (Decrypt)
The US’s Internal Revenue Service (IRS) has introduced a draft update to its tax language which now considers a broader definition for digital assets as being “any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology”. As such, NFTs are now considered in scope, alongside virtual currencies such as stablecoins, and cryptocurrencies, all of which are set to be taxed under the same rules. Interestingly, the IRS has decided not to categorise NFTs as collectibles, such as art, which suffer from a the higher 28% rate of taxation, versus traditional equities bonds, and cryptocurrencies which are taxed at 0%, 15%, or 20% depending on the income level.
South African Crypto Platforms Must be Licensed in 2023 – Regulator (Reuters)
South Africa’s Financial Sector Conduct Authority (FCSA) has announced the need for companies that support cryptocurrency activities to apply for a licence in a time window between 1 June and 30 November, 2023, in order to operate legally within the country. NFTs are not covered under the announcement at present, given that they are considered to have characteristics more like traditional works of art. It appears that the licensing regime is being implemented in some part to mitigate the risk of potentially being added to the Financial Action Task Force’s so-called ‘grey list’, which has apparently identified material weaknesses in the country’s AML and CTF regime.
Singapore Lays Down the Law for Crypto Trading and Stablecoins (Finextra)
Japan Greenlights Tougher Anti-Money-Laundering Rules for Crypto (CoinDesk)
UK Law Commission to Review International Laws on Crypto to Consider Legal Reforms (Coin Telegraph)
Coinbase Piles on Support for Grayscale’s EFT by Filing Amicus Brief in Effort to Reverse SEC’s Rejection (CoinDesk)
Canada Announces Crypto, Stablecoin Consultation in New Budget Statement (CoinDesk)
EU Countries Must Be Ready to Block Crypto Mining, Commission Says (CoinDesk)
The European Commission is once again coming after bitcoin and other proof-of-work cryptocurrencies on sustainability grounds, following an announcement in response to concerns over energy security this winter. Mining is fundamental to securing and ensuring the validity of the network, and therefore banning it across the EU would further undermine the decentralised nature of the blockchain which is integral to its security. The majority of bitcoin mining takes place in the US, China, Kazakhstan, Russia and Canada, with the EU’s Germany and Ireland considered key markets representing 4.48% and 4.68% of the hash rate respectively.
HK to Legalize Retail Crypto Trading (Bloomberg Markets and Finance via YouTube)
Stablecoin Issuer Paxos Receives Operating License from Singapore Regulator (CoinDesk)
Fidelity 2022 Institutional Investor Digital Assets Survey: 58% of Institutional Investors Allocate to Digital Assets
DBS Goes Live on SGX Unit’s Crypto Platform; Launches Programmable Money Pilot (Finextra)
Israeli Government to Trial Blockchain Bonds with Stock Exchange TASE (Ledger Insights)
France, Switzerland, Singapore to Test DeFi in Forex Markets (CoinDesk)
Coordinated by the Innovation Hub of the Bank for International Settlements, Central Banks from France, Switzerland, and Singapore are collaborating on Project Mariana, which is designed to test the automation of foreign exchange markets across a decentralised financial infrastructure.
JP Morgan to Launch Blockchain Euro Deposits Soon. Sees NFT Opportunity (Ledger Insights)
Ethereum Records 1st Deflationary Month in History as Circulating Supply Declines (CryptoSlate)
Following Ethereum’s transition to a proof-of-stake blockchain on 15 September 2022 the network has recorded its first deflationary month, in which more ETH was burned (introduced under the EIP-1559 proposal) than produced. As such, the circulating supply has been reducing by approximately 3,318 ETH daily.
Ripple Begins Testing XRP Ledger Sidechain That’s Compatible with Ethereum Smart Contracts (CoinDesk)

Key: Legal/Regulatory             Technology            Ecosystem              Markets 

CBDC Corner

BIS and Four Central Banks Hail Pilot Trials of CBDCs in Cross-border FX Transactions (Finextra)
Singapore’s MAS Starts Wholesale CBDC Project Ubin+ for Cross-border Payments (CoinDesk)
BOK Completes Mock Test on Digital Currency (Bank of Korea)
New York Fed Tests Wholesale CBDC for Cross-border Payments (Finextra)

Thomas Murray Digital

Andrew Wright | Hugo Jack

Tel. +44 (0)20 8057 7100
Email: digital@thomasmurray.com
Web: thomasmurraydigital.com

Whilst reasonable care has been taken in the compilation of this information, neither Thomas Murray Network Management Limited, its affiliates or information contributors shall have any liability for any errors, omissions, delays or inadequacies in the information or for any loss or damage however occasioned (whether arising directly or indirectly), to any person or company relying on this information, or any decision made, action taken or inaction by any party in reliance upon this information (except to the extent permitted by law). Copyright © Thomas Murray Network Management Limited, company no. 03313014. All rights reserved. No reproduction without prior authorisation.

SEC Guidance to Hold Client Cryptoassets on Balance Sheet Meets Resistance and Dampens Bank Plans; Staking Raises Prospect of Ether Being Classified as a Security

Thomas Murray Digital Newsletter

Securities and Exchange Commission Headquarters (SEC)

Reverberations from the SEC’s back-door attempt to move cryptoassets onto banks’ balance sheets – as we reported in May – continue as banks push back while their plans to offer digital asset services in the US falter. And the Ethereum Merge – a major and long-planned upgrade to the most widely used blockchain – passed uneventfully a week ago, shifting its operating model from Proof of Work to Proof of Stake and drastically reducing its energy consumption by an estimated 99.9%. While the change is welcome for environmental reasons, we examine whether the blockchain’s native ether token could be walking into a regulatory trap in which it could be reclassified from a commodity to a security.

Major Digital Asset Developments

      

      		SEC Accounting Guidance Issue Rumbles On
According to an article by Reuters, the US Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SEC), published in March earlier this year, is having a material dampening effect on banks looking to engage with digital assets. While ostensibly more of an expectation for organisations wishing to remain on good terms with the regulator than a rule, the accounting guidance requires public companies including banks to hold clients’ crypto assets as liabilities on their balance sheets, rather than off them as is customary for custodians of traditional client assets. This is problematic for banks which are subject to strict regulatory capital ratio rules.
Many of the largest banks in the US have announced intentions to support digital assets in one way or another, with some services already live, albeit primarily with select or private wealth clients. Nonetheless, the article makes clear that banks’ efforts in this space are undermined by the financial burden the capital requirements place on them, and some have had to ‘cease moving forward with [their] plans’. Both State Street and Bank of New York Mellon are reported to have been disrupted.
Nadine Shakar, head of State Street Digital, previously suggested at a recent Fund Forum panel discussion that this was no great imposition, and hinting that it could be an opportunity for large institutions like State Street to gain market share, saying ‘unless you have larger custodians moving into the space and be the big kids at the table, it’s [digital assets] unlikely to see institutional adoption’. It is now reported that she sees the SEC’s expectations as an issue for the bank, one that does not necessarily prevent them from custodying digital assets but that reduces its economic viability: ‘We do have an issue with the premise of doing that, because these are not our assets. This should not be on our balance sheet.’ (Reuters) U.S. Bancorp has paused onboarding new crypto custody clients, and anecdotally several European banks are pulling back from US advances until the issue is addressed.
Until there is clearer guidance, or changes to the capital impact faced by supporting crypto assets for banks – which seems unlikely in the short term – there may be a decline in ecosystem development, which is perhaps already being reflected in the value of the cryptocurrency market.
The Ethereum Merge and Securities Implications
The Ethereum blockchain successfully merged with the Beacon Chain on 15 September (CoinDesk), transforming it from a proof-of-work (PoW) to a proof-of-stake (PoS) protocol. The transition, which was many years in the making, has been welcomed as Ethereum is expected to consume 99.9% or so less energy as a result of the change (see previous newsletter). This, according to Bank of America (FXStreet), is an opportunity for greater institutional adoption of the blockchain’s native ether token, as those that were prohibited from investing in PoW systems due to ESG considerations may now acquire the cryptocurrency.
Ethereum and the thousands of tokens it supports have now removed themselves from potential moves by jurisdictions such as the EU and the US to ban or de-incentivise PoW: the EU has flip-flopped on including a ban in its pending Markets in Crypto-assets (MiCA) regulation, adding (The Block) then ultimately removing (CoinDesk) such clauses; the State of New York has implemented a moratorium on PoW mining using carbon-based energy sources (CoinDesk); and earlier this month one of the first responses to President Biden’s Executive Order on cryptoassets – from the White House Office of Science and Technology – asked the Environmental Protection Agency and the Department of Energy to consider a ban if the US cannot meet its climate goals through other means (Blockchain News).
However, by transitioning to PoS, with its reliance on the process of staking to secure and validate the network and its transactions, ether may have walked directly into the SEC’s securities oversight purview. In return for delegating ether to network validators (if they do not have enough tokens to qualify them to run staking nodes themselves), token-holders are rewarded in more ether tokens, which according to Chairperson Gensler of the SEC (Decrypt) and other regulatory agencies could constitute an investment contract under the US Howey test: ‘a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party’ (US Supreme Court).
While the SEC has not presented any formal analysis of the issue, it is assumed it does not consider ether to be a security, although the fundamentals are much harder to assess now and there is considerable scope for questions of consistency of approach to arise. Earlier this month, Gensler announced qualified support for Congress to hand more power to the Commodity Futures Trading Commission (CFTC) to regulate non-securities digital assets such as cryptocurrencies (Crypto Slate) so long as the move would not reduce the SEC’s power to regulate securities. He and the SEC have been the subject of notable dissatisfaction from the digital asset community and even the Commissioner of the CFTC due to the SEC’s failure to proactively shape a robust digital asset framework, receiving criticism for frequent cases of ‘regulation by enforcement’. Handing greater responsibility to the CFTC for such assets is seen by the community as a welcome development.
Bolstering the argument that ether and similar tokens should remain classed as commodities, Coin Center, a non-profit research and blockchain advocate, points out that the SEC looks at the economic realities underlying a project, rather than the terms and technologies used to create it, and given that the participation in the consensus mechanism is explicitly designed to be open to anyone, and not reliant solely on the efforts of others (Coin Center), staking, or mining for that matter, should not meet the criteria.

Other News and Links

White House Releases Inaugural Framework for Crypto Regulation (Crypto Slate)
Following President Biden’s Executive Order in March this year (described previously in our newsletter here), The White House has released a framework which offers a number of recommendations including how to approach the regulation of crypto assets, ways in which to mitigate fraud perpetrated using digital assets, and how to improve standards across the financial industry more broadly. The framework pays particular attention to fraud and fighting illicit finance, and suggests the President may call upon Congress to amend the Bank Secrecy Act so that digital asset exchanges and non-fungible token (NFT) platforms would explicitly fall subject to it.
US Banks Must Maintain Cautious Approach to Crypto, Says Acting OCC Head (Crypto Slate)
Michael Hsu, Acting Head of the Office of the Comptroller of the Currency (OCC), believes that US banks should remain caution when considering digital assets. The OCC was the first to green-light the provision of crypto custody services by national banks and federal savings associations when it issued its Interpretive Letter #1170 in July 2020, which in all likelihood contributed to the crypto bull market. That said, in his speech at the TCH + BPI Annual Conference Hsu made clear that he is much more cautious than the previous head of the OCC, and sees ‘red flags in crypto’s rapid growth’. As such, the agency has reportedly tightened its criteria for acceptance, indicating that these institutions can only engage in certain crypto activities so long as they can demonstrate the activities can be performed in a ‘safe, sound and fair manner.’
Crypto Oversight Should Resemble Traditional Bank Rules, Fed Official Says (CoinDesk)
In his first speech since taking office, Fed Vice Chair for Supervision, Michael Barr, articulated the need for greater regulatory oversight, particularly in how banks engage in crypto activities. He reiterated the need to regulate based on the “same activity, same risk” approach cited by multiple regulators and commentators over the preceding months.
UK Introduces Law to Seize, Freeze and Recover Crypto (CoinDesk)
The Economic Crime and Corporate Transparency bill supplements the Economic Crime (Transparency and Enforcement) Act used to impose sanctions against Russia and freeze UK-held assets – both traditional and digital – and is ostensibly designed to prevent sanctioned Russians from using crypto to evade those measures, as well as aid in combatting criminal activities.
Crypto Exchanges in UK Required to Report Sanction Breaches (Finextra)
The UK has updated its guidance towards sanctions reporting, which now brings crypto exchanges into scope for reporting violations and freezing assets. The guidelines were implemented by the Treasury’s Office of Financial Sanctions Implementation (OFSI) to combat potential breaches conducted with the use of cryptocurrencies.
New French Bill Could Give Authorities Powers to Seize Crypto Assets (CoinDesk)
In line with other countries around the world, such as the UK’s Economic Crime Bill, the French state is attempting to make it easier to freeze and seize the digital assets of suspected criminals. The proposal is due to be discussed next week by France’s Constitutional Law Committee.
Korea to Launch Security Token Guidelines, Pilots This Year (Ledger Insights)
SEC, CFTC Propose Amendments for Large Hedge Fund Crypto Reporting (Crypto Slate)
First announced earlier this month, the Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC) look set to introduce rules that will require hedge funds to report investments more accurately in digital assets. In particular, the Proposed Rule (Federal Register) will seek to distinguish between assets that have similar characteristics such as digital assets and cash and cash equivalents, and establish a new sub-asset class which will help regulators to more easily monitor systemic risks and economic stability.
Russia to Consider Possible Legalization of Cryptos for Cross-border Payments (AMBCrypto)
Due to the impact of financial sanctions on Russia, its Ministry of Finance is considering using cryptocurrencies as a means to support cross-border payments. This comes after Putin signed an order effectively banning the use of crypto-based assets for domestic payments in July earlier this year. Views are said to be softening in light of the ongoing financial situation, with Prime Minister Mikhail Mishustin suggesting the country needs to look to digital assets as a ‘safe alternative’ to support cross-border commerce. The Central Bank has tried to limit the use of crypto assets in the country as it looks to develop its own digital ruble, and once rolled out, may try to impose another ban on cryptocurrencies.
Australian Senator Releases Draft Bill to Push for Crypto Regulation (Crypto Slate)
Australian Senator Andrew Bragg has released a draft Digital Assets (Market Regulation) Bill 2022 (Andrew Bragg). It seeks to apply pressure to the Australian regulatory system in order to push forward with the regulation and oversight of the digital asset market and its constituent components. At a high level, the bill proposes to provide a framework for digital asset exchanges, digital asset custody, issuance of stablecoins, and the protection of consumers while promoting investment in Australia. Interestingly, another objective of the bill is to provide for the reporting of information from banks that facilitate the use or availability of China’s digital yuan in Australia. Consultation on the bill is being received until October 31, 2022.
Colorado Enables Crypto Payment for Taxes (Crypto Slate)
House Stablecoin Bill Would Put Two-Year Ban on Terra-Like Coins (Bloomberg)
Nigeria Plans to Create a Virtual Free Zone with Binance Crypto Exchange (CoinDesk)
Nigeria’s Export Processing Zones Authority (NEPZA) is looking to create a digital city to support the growing digital asset economy. It is reportedly looking to partner with Binance, the largest cryptocurrency exchange by volume, which signed an agreement to assist Dubai with the establishment of a similar industry hub for digital assets in December 2021.
Binance Secures Licence in Dubai to Offer More Crypto Services (CoinDesk)
Coinbase Is Helping Sue the US Treasury Over Tornado Cash Sanctions (Bloomberg UK)
Coinbase is challenging the authority of the US Treasury Department after it publicly declared its intention to pay the legal costs of a lawsuit brought by six individuals who are contesting the legality of the Treasury’s sanction of Tornado Cash. The plaintiffs argue that the move by the US Treasury’s Office of Foreign Assets Control (OFAC) to sanction wallets associated with the application, as well as the smart contract code itself, was unprecedented, as neutral technologies and tools are reportedly out of the scope of sanctions law. Brian Armstrong, CEO of Coinbase, stated that the Treasury issued a blanket-wide sanction rather than targeting the wallets of those known to have committed an offence, further suggesting that it was used by many law-abiding citizens looking for increased privacy, who now have funds trapped on the platform. Crypto Investment firm Paradigm strongly agrees with the action brought by the lawsuit, as it too stated in a legal argument (Paradigm) that blockchain infrastructures and the providers that support them should not be subject to US Treasury sanctions, as monitoring or censoring Specially Designated Nationals and Blocked Persons (SDN List) would jeopardise the neutrality of base blockchain layers and compromise their integrity and core functionality.
Coinbase Gains Regulatory Approval in the Netherlands (Coinbase)
Deutsche Börse to Issue Digital Securities on DLT-ready D7 Platform (Ledger Insights)
Societe Generale Securities Services Extends Its Offer to Funds Investing in Digital Assets (Societe Generale)
SGSS now offers asset managers to act as a fund custodian, valuator and liability manager, and has onboarded its first client, Arquant Capital.
Hong Kong’s HashKey Receives Approval to Manage 100% Crypto Portfolio (CoinDesk)
HashKey, a Hong Kong based asset manager, has received a Type 9 (Asset Management) Licence (Offshorelicense) from the Securities and Futures Commission (SFC) of Hong Kong, permitting it – alongside a growing number of virtual asset managers – to manage portfolios that are 100% invested in digital assets.
Nasdaq Launches Crypto Custody Service (Nasdaq)
Nasdaq is moving into the digital asset business, citing growing institutional demand from its financial institution clients. It is set to launch a digital asset custody offering which, following regulatory approval, will incorporate liquidity and execution services, effectively creating a full-service solution that may take a lead from Switzerland’s SDX.
Royal Family of Dubai Company Seed Group Partners with Coincorner to Facilitate Bitcoin Transactions in the UAE (Bitcoin Magazine)
Brazil Exceeds 1M Registered Crypto Users in July for First Time as Number Grows 68% in a Month (CoinDesk)
Abra Launching First US Regulated Crypto Bank (Blockworks)
Abra, a crypto exchange and lending platform, has successfully acquired a licence to become the first US regulated crypto bank. With the licence comes an ability to offer clients regulated interest-bearing crypto accounts, an activity that some providers have had to discontinue. For example, BlockFi was sued successfully by the SEC for USD 100 million (The Verge) as its offering was considered an unregistered security and the firm was not registered as an investment company. Abra is due to launch in the US in Q1/2 2023.
Tokenization of Illiquid Assets to Reach $16T by 2030: Report (Cointelegraph)
A report by Boston Consulting Group (BCG) and ADDX, a digital asset exchange, estimates that illiquid assets such as pre-IPO stock, real estate, art, and private debt will become a USD 16.1 trillion tokenised market by 2030.
Singapore’s Financial Authority Grants License to SBI’s Digital Asset Arm (Cointelegraph)
The Monetary Authority of Singapore (MAS) has granted Japan-based SBI Holdings a Capital Markets Services licence for its digital subsidiary SBI Digital Markets. In-principal approval was granted in May this year, however the full licence will now permit the firm to offer digital asset custody, capital markets products, and financial advisory services in Singapore as a regulated business.
Singapore’s Largest Bank DBS to Offer Crypto Services to 300,000 Investors (Crypto Slate)
Fidelity to Launch Bitcoin Retail Trading in November (Crypto Slate)
ErisX Introduces Settlement Service for OTC Crypto Transactions (Finextra)
ErisX, a leading digital asset exchange, has launched a new settlement service for OTC transactions that is designed to eliminate counterparty risk by routing orders through a US-licensed crypto spot exchange, thus reducing the risk and operational burden associated with OTC transactions.
Broadridge Integrates with Coinbase (Finextra)
Broadridge, a leading provider of shareholder services, has partnered with Coinbase’s Prime offering, enabling enhanced liquidity and the ability for Broadridge’s clients to route orders to Coinbase Prime via its NYFIX order-routing network.
Crypto Custody Specialist Anchorage Digital Offers Japanese Yen Stablecoin (CoinDesk)
Gunvor, Total Execute First Physical Oil Trade Confirmation using VAKT Blockchain (Ledger Insights)
VAKT, a post-trade blockchain startup backed by oil majors including BP, Saudi Aramco, Shell, Total and Chevron, has launched an electronic trade confirmation solution which is designed to replace manual processing of oil contracts, which according to VAKT’s own analysis is responsible for a 15% error rate.
Major Fund Administrator Apex Offers Blockchain-based Valuation Data for Private Assets (Ledger Insights)
SWIFT Runs Blockchain Pilot for Corporate Actions Data (Finextra)
The banking infrastructure provider is trialling a new blockchain system for corporate actions with the aid of Symbiont, a private technology platform, as well as seven securities market participants. Corporate actions are seen as one of a number of key areas in which post-trade can be better served by blockchain technology, with SWIFT estimating as much as 30% of the costs associated with processing corporate actions are related to manual processing.
CME Group Launches Ether Options (Finextra)

Key: Legal/Regulatory             Technology            Ecosystem              Markets 

CBDC Corner

HKMA’s Policy Stance on e-HKD (Hong Kong Monetary Authority)
HKMA has concluded several consultations under its ‘Fintech 2025’ strategy and will take steps to prepare for a possible future retail CBDC based on broad support by working on technical and legal foundations while exploring application, implementation, and design issues.
IMF Says Crypto and Central Banks Could Set the Stage for Rich and Diverse Monetary Ecosystem – Here’s How (DailyHodl)
Crypto’s Adaptability, Openness Key to Ideal Monetary System, Say BIS Execs (Cointelegraph)
India’s Central Bank Plans CBDC Launch in 2022 with Help from Fintechs, Public Banks (Crypto Slate)
Digital Dollar Project Launches Sandbox Programme (Finextra)
Brazil, India Join CDBC Race: Will Start Pilot Projects in 2022 (The Tokenist)
Norwegian Central Bank Taps Ethereum for CBDC Work (Finextra)
ECB Taps CaixaBank and Amazon for Digital Euro Prototypes (Finextra)
China to Extend CBDC Trial to Most Populous Province, Guangdong, Three Others: Report (CoinDesk)
Iran to Start Testing a Digital Rial This Week (CoinDesk)

Thomas Murray Digital

Andrew Wright | Hugo Jack

Tel. +44 (0)20 8057 7100
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Asset Managers Move Into Digital Assets; CBDCs Could Be ‘Holy Grail’ of Cross-border Payments

Thomas Murray Digital Newsletter

CBDCs: A Holy Grail for Cross-Border Payments? (Public Domain)

BlackRock, Charles Schwab and Abrdn have joined the likes of Fidelity and Schroders in moving into the digital asset sector through tie-ups with Coinbase and Archax, and the launch of a new crypto thematic index and associated exchange-traded fund. Meanwhile, the European Central Bank believes that CBDCs could solve the centuries-old challenge of establishing a cross-border payment system that is ‘cheap, universal, and settled in a secure settlement medium’.

Digital Asset Developments

      

      		Asset Managers Move into Crypto in Numbers
Prominent asset management firms including BlackRock, Abrdn and Charles Schwab have moved en masse in recent days with tie-ups and new services that extend access to cryptoassets to more institutional and retail investors. These names join the likes of Fidelity and Schroders in entering the digital asset space.
  • Last week, Coinbase announced that it has been selected by BlackRock to enable its clients to access crypto trading and custody via Coinbase Prime (Coinbase). Clients will be able to access cryptoassets through Aladdin, Blackrock’s investment management platform, starting with bitcoin. Clients of the USD 21.6 trillion investment platform will be able to manage their exposure to digital assets directly from their existing accounts, with a holistic ‘portfolio view of risk across asset classes.’ BlackRock has also now launched a bitcoin private trust for institutional investors (BlackRock), designed to track the price of the oldest cryptoasset.

CPMI Consults on Increasing PvP for FX, Supported by DLT Solutions
The Bank for International Settlements’ Committee on Payments and Market Infrastructures (BIS CMPI) has launched a consultation (Ledger Insights) on ways to lower global financial stability risks arising from FX transactions by increasing payment-versus-payment (PvP) settlement. The FX market has the largest turnover, and bank exposures to FX risks in some countries such as the UK, Hong Kong and Singapore exceed their regulatory capital requirements. The aim is to reverse the decrease in FX transactions with PvP protection arising from increased trade with emerging markets that lack PvP abilities. Four of the ten proposed solutions are based on DLT, and one is Citi’s Regulated Liability Network concept (Citigroup).
Santander Brazil Launching Retail Crypto Offering and Tokenising Traditional Assets
Santander Brazil is to launch a retail crypto offering (Ledger Insights), citing significant client demand for the asset class. CEO Mário Leão added in the bank’s quarterly earnings call last week that it intends to use blockchain to tokenise traditional assets such as debt securities. This announcement comes a month after Latin America’s largest bank, Itaú Unibanco, launched its tokenisation platform and digital asset custody solution. The solution is part of a new unit, Itaú Digital Assets (Coindesk) and will be available to institutional clients first, with a retail version expected towards the end of 2022.
US Treasury Sanctions Cryptocurrency Mixer Tornado Cash; Dutch Authorities Arrest Developer
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has sanctioned Tornado Cash (US Department of the Treasury), a protocol used to ‘mix’ crypto transactions to provide transaction anonymity. OFAC asserts that Tornado has been used to launder over USD 7 billion of stolen cryptocurrencies. The move raises the long-standing question of the liability of platform operators for the uses to which their services are put, just as regulators continue to debate the responsibility of other services such as Facebook or YouTube. Ethereum founder Vitalik Buterin has stated that he used Tornado Cash to donate funds to Ukraine (Forkast) in order to protect the recipients. In a development that has implications for the free speech rights of software publishers, Dutch authorities have today arrested the developer of the open source software behind Tornado Cash (Cointelegraph) on suspicion of money laundering.

Reserve Bank Innovation Hub: Interoperable DLT POC Closure Report
The Reserve Bank of India’s Innovation Hub (RBIH) has reported on the results of a proof-of-concept exercise (Reserve Bank of India) to move domestic trade finance processes – revolving around Inland Letters of Credit (LCs) – onto a distributed ledger platform. RBIH worked with a consortium of 11 banks and other fintech startups on the test, which was conducted using technology from IBM Hyperledger, R3 Corda, and Billon’s FIS. Following successful results, it now plans to facilitate the adoption of DLT ‘at scale’.

Crypto Takes a New Hit as Thousands of Solana Wallets Hacked
Security flaws in wallet software used to store assets for the Solana ecosystem were exploited to steal over USD 5.2 million of value from more than 7,900 wallets. Security researchers suggested that the Slope wallet was storing users’ seed phrases – used to create their private keys – in plain text (The Block) on a centralised server that was compromised. This follows an exploit of the Nomad ‘bridge protocol’ (Bloomberg) that transfers cryptoassets between blockchains that led to assets worth almost USD 200 million being lost. These stories, on top of several other hacks of similar cross-ledger bridge services that have led to estimated losses totalling over USD 2 billion this year (Chainalysis), highlight both the complexity of securing DeFi protocols and the dangers of relying on untrusted centralised services rather than regulated custodians.

News Links

SEC’s Gensler Wants Crypto Exchanges to Segregate Market Making, Custody (Ledger Insights)
Gary Gensler, Chair of the SEC, has proposed that crypto exchanges should segregate market making from custody activities, as is the requirement for traditional securities markets. He argues that clients are not expected to hand their assets to the New York Stock Exchange, and given that private keys are a proxy for ownership it would be more appropriate for the assets to be kept with a third party digital asset custodian.
Joint Statement on the UK-U.S. Financial Regulatory Working Group (US Department of the Treasury)
On 21 July, the UK-US Financial Regulatory Working Group convened and reconfirmed their commitment to addressing the cryptoasset market, with a focus on broadening their collaboration – and in particular strengthening the ‘regulatory outcomes for stablecoins across jurisdictions.’
UK Proposes Changes to Personal Property Laws Around Digital Assets (Ledger Insights)
The UK’s Law Commission of England and Wales has published a consultation paper suggesting that the law needs to be updated to account for the unique characteristics associated with cryptocurrencies, NFTs, and the metaverse more broadly. The objective would be to introduce the right legal foundation, in order to limit the potential impact of imposing existing structures on these new forms of assets that might stifle their development.
UK Legal Taskforce Probes Rules Underpinning Securities Issuance on Blockchain (Finextra)
More regulatory consultation in the UK, where the UK Jurisdiction Taskforce (UKJT) is examining support in English law for digital securities models in an effort to address concerns that the legal basis for digital securities in the UK is less supportive than that in other countries.
Crypto Inquiry 2022 (CryptoUK)
The UK’s Crypto & Digital Assets All-Party Parliamentary Group (APPG) has announced details of its assessment of the UK’s crypto and digital assets sector. It seeks feedback from the wider community on current approaches to regulation, the UK government’s plan for the country to become a crypto hub, the role of regulators, CBDCs, and investor protection.
Celsius Facing Legal Action by Aggrieved Custody Customers over $180M Deposit (Cryptoslate)
Bankrupt crypto lender Celsius is facing a lawsuit from a group of 400 customers of its custody service – distinct from its Earn programme, under which customers relinquished title to their crypto – whose assets remain stuck in the network. Celsius’s lawyers are resisting requests for refunds and claiming that even title ownership of deposited assets may not assure recoverability of funds in Celsius’s bankruptcy case. This is a further chapter in the debate on the status of crypto following the SEC’s guidance that custodians should move client assets on-balance sheet pending clarification of this issue in law (Thomas Murray Digital).
SEC/CFTC Proposed Amendments to Form PF (Securities and Exchange Commission)
In a joint proposal by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), there are to be New Crypto Reporting Rules for Large Hedge Funds (The Block) that would oblige qualifying hedge funds – reported to be those with more than USD 500 million of net assets – to provide information to the regulators that pertain to the hedge funds’ investment strategies, counterparty exposures, and trading and clearing mechanisms.
Over 70k XRP Holders Join Class Action Lawsuit Against SEC (Cryptoslate)
Tens of thousands of holders of Ripple’s token from all around the globe have now joined the challenge to the SEC’s assertion that XRP represents an unlicensed security token, in an alleged expansion of the principles of the Howey Test.
   EBA Warns Talent Shortage Will Hamstring Crypto Regulation (Finextra)
The European Banking Association (EBA) has warned that difficulties in attracting and retaining talent will limit regulators’ ability to supervise the digital asset sector. This follows a multitude of high-profile exits of leading regulators and industry experts into the clutches of the cryptoasset industry.
   Zodia Custody Gets Approval to Provide Cryptoasset Custodian Services in Ireland (Irish Times)
Zodia Custody has received approval from the Irish regulator to provide cryptoasset custody in the country, making it one of the first licensed Virtual Asset Service Providers (VASPs) there and the first dedicated custodian. As CEO Maxime de Guillebon articulated in a LinkedIn post, this will mean that Irish authorised Alternative Investment Funds will now be able to take advantage of institutional-grade safekeeping.
   Binance US Delists Token After SEC Labels It a Security (Blockworks)
Following the SEC’s categorisation of several crypto projects as securities, Binance US has delisted one, Flexa Network’s Amp token, that it previously supported on its exchange.
   Pando Asset Lists First Crypto ETP on SIX Swiss Exchange (Coin Speaker)
The Pando Asset Crypto 6 ETP offers investors the opportunity to participate in the performance of a basket of digital assets consisting of the largest cryptoassets by market capitalisation.
Ripple Casts Eye Over Bankrupt Crypto Lender Celsius (Finextra)
In other Ripple news, the firm has registered an interest with the bankruptcy court in acquiring assets from failed crypto lender Celsius.
Major Insurers Pull the Plug on B3i Insurance Blockchain Consortium (Ledger Insights)
Swiss insurer B3i is to close after its consortium of over twenty insurers and reinsurers failed to commit sufficient funds to its latest investment round, triggering its insolvency.
Bitcoin Fanatic Michael Saylor Steps Down as MicroStrategy CEO (Decrypt)
Saylor takes on Executive Chairman role in order to devote exclusive attention to the firm’s crypto activities, leaving management of the original software business to former company president Phong Le, who assumes the CEO role.
Virginia Pension Fund Invests in Crypto Lending in Bid to Boost Returns (Financial Times)
Virginia’s Fairfax County Retirement Systems Pension Fund is reportedly investing in crypto lending markets following earlier investments in cryptocurrencies, made alongside the Fairfax County Police Officers Retirement System. Its new venture into ‘yield farming’ entails lending assets in return for a fixed stream of payments, akin to securities lending. Katherine Molnar, CIO of the police retirement fund, cited the recent bankruptcy or withdrawal of other lenders as a factor that makes returns from the activity attractive.