Weekly Fintech Focus

  • Congress Members Reintroduce Bill to Define Digital Assets
  • President's Working Group on Financial Markets Meets to Discuss Stablecoins
  • Chairman Gensler Remarks Signal SEC Future Focus on Potential Crypto Regulation Through Security-Based Swaps Authority
  • DraftKings Announces Launch NFT Digital Marketplace
  • Mastercard Announces Enhancements to Digital Currency Card Program
  • European Commission Proposes to Expand Regulations on Cryptocurrency Service Providers
  • Russian Central Bank Urges Stock Exchanges to Avoid Listing Crypto Companies

U.S. Developments 

Legislation

Congress Members Reintroduce Bill to Define Digital Assets

U.S. Representative Tom Emmer (MN-06) re-introduced legislation aimed at defining how regulators should classify and treat cryptocurrencies. Emmer originally introduced the bill (the Securities Clarity Act) in September 2020, with the support of then Representative Michael Conaway (R-Texas); however, the bill did not progress after being referred to the Committee on Financial Services. Emmer has since gained the support of Democratic Representatives Darren Soto (D-Fla.) and Ro Khanna (D-Calif.), who are cosponsors to the bill. As addressed in a previous  post, Representative Emmer also coauthored a letter to then SEC Chairman Jay Clayton requesting that the SEC take action to provide clarity regarding digital securities in the context of broker-dealer custody.

The bill builds off the "investment contract" definition in the Securities Act of 1933, with particular focus on its application to token offerings and underlying assets of the offerings (i.e., accompanying token or coin). Specifically, the bill proposes a new definition for tokens—investment contract assets—which would be treated as commodities, not securities, and therefore could be sold or traded without registration with the Securities and Exchange Commission. Representative Emmer's announcement explains that the legislation "provides a solution for individuals who have complied with existing securities registration requirements, or who have qualified for an exemption but, after meeting these requirements, innovative entrepreneurs may distribute their asset to the public without fear of additional regulatory burdens. These assets are in fact, and always were, commodities."

You can find the text of the bill here. 

Regulation

President's Working Group on Financial Markets Meets to Discuss Stablecoins

On July 19, 2021, the U.S. Department of the Treasury announced that Treasury Secretary Janet Yellen convened the President's Working Group on Financial Markets (the PWG) to discuss stablecoins.

Federal Deposit Insurance Corp. Chairman Jelena McWilliams, Acting Comptroller of the Currency Michael Hsu, Treasury Under Secretary for Domestic Finance J. Nellie Liang and Federal Reserve Vice Chair for Supervision Randal Quarles joined Treasury Secretary Janet Yellen, Federal Reserve Chairman Jerome Powell, Securities and Exchange Commission Chairman Gary Gensler, and Acting Commodity Futures Trading Commission Chairman Rostin Behnam during the meeting.

The meeting covered several topics: the rapid growth of stablecoins, potential uses of stablecoins as a means of payment, and potential risks to end-users, the financial system, and national security.

While Secretary Yellen urged regulators that the government must act quickly, and the announcement noted that the PWG expects to issue recommendations in the coming months, it is unclear when, specifically, the PWG will publish its recommendations.

The topic of stablecoins—and the best manner to address stablecoin issuers and users—has spurred many proposals from regulators and industry participants alike. While giving testimony before Congress, Federal Reserve Chairman Jerome Powell noted that Federal Reserve officials will be broadly examining the digital payments universe—including the plausibility of a central bank digital currency—in a discussion paper that could be released in early September. The discussions regarding stablecoins also extend to the academic space. A research paper titled "Taming Wildcat Stablecoins," which was published in the Social Science Research Network on July 19, 2021, by professor of finance at Yale, Gary Gorton, and U.S. Federal Reserve attorney Jeffery Zhang, argued in support of supervision and regulation of stablecoin issuers in a manner similar to banking regulation. The paper describes stablecoins as privately produced money and compares the current landscape to the 19th century's Free Banking Era. Citing the resulting consequences of privately issued money and "wildcat banking" in the past, the authors suggest plausible means of regulating the industry.

Chairman Gensler Remarks Signal SEC Future Focus on Potential Crypto Regulation Through Security-Based Swaps Authority

On July 21, 2021, SEC Chairman Gary Gensler gave remarks at the American Bar Association Derivatives and Futures Law Committee Virtual Mid-Year Program that outlined the SEC's current agenda regarding security-based swaps (SBS), including reporting, clearing, swap execution facilities trading, and substituted compliance.

Among the areas discussed, Chairman Gensler addressed the "intersection of [SBS] and financial technology," including as to crypto-assets, therein explaining that "[t]here are initiatives by a number of platforms to offer crypto tokens or other products that are priced off of the value of securities and operate like derivatives." Chairman Gensler cautioned that any platform that provides exposure to a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities is implicated by the securities regime, irrespective of whether the platform is in the decentralized or centralized finance space.

More importantly, Chairman Gensler suggested that these products could fall within the definition of "security-based swap" and, therefore, become subject to the security-based swap rule regime, including offering registration requirements to retail customers. Chairman Gensler noted that the SEC has already initiated enforcement actions involving retail offerings of security-based swaps and intends to continue to rely on its regulatory and enforcement authority.

A page on the SEC site summarizes the SEC's actions to date.

Industry

DraftKings Announces Launch NFT Digital Marketplace

On July 20, 2021, fantasy sports and sports wagering company DraftKings announced plans to launch a non-fungible token (NFT) marketplace featuring content that will be provided through new partnerships with entertainment company Lionsgate and NFT platform Autograph.

The marketplace will provide access to curated NFT releases in the entertainment and sports realms and facilitate secondary market transactions. Through its partnership with Lionsgate, the marketplace will create digital-collectible content based on its flagship entertainment properties such as action franchise John Wick, the Hunger Games and Twilight Saga franchises, and TV series Mad Men and Dirty Dancing.

Autograph, an NFT platform cofounded by Tom Brady, will provide sports-related, officially licensed Autograph NFT exclusively on the marketplace.

Mastercard Announces Enhancements to Digital Currency Card Program

On July 20, 2021, Mastercard announced plans to enhance its card program for cryptocurrency wallets and exchanges in order to better facilitate conversions between traditional fiat currency and cryptocurrency. Mastercard plans to partner with Evolve Bank & Trust and Paxos Trust Company, the leading blockchain infrastructure and regulated stablecoin issuance platform, and Circle, a global financial technology firm and the principal operator of the USD Coin, a dollar digital currency or stablecoin. The anticipated partnerships with Paxos and Circle will allow the platforms to facilitate converting currencies through fiat-backed stablecoins.

International Developments

European Commission Proposes to Expand Regulations on Cryptocurrency Service Providers

On July 20, 2021, the European Commission announced a package of legislative proposals to strengthen the European Union's (EU) anti-money laundering and countering terrorism financing (AML/CFT) rules, which propose to extend EU regulations to the cryptocurrency industry. The announcement noted that the purpose of the package "is to improve the detection of suspicious transactions and activities, and to close loopholes used by criminals to launder illicit proceeds or finance terrorist activities through the financial system."

The legislative package is composed of four proposals, including amendments to the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU). If adopted, the EU AML/CFT rules—which currently apply to certain categories of crypto-asset service providers only—will apply to the entire cryptocurrency industry, thereby requiring all cryptocurrency service providers to conduct due diligence on their customers. The proposal also would extend the "travel rule" to crypto, which the Financial Action Task Force already applies to wire transfers. If adopted, the rule would require cryptocurrency service providers to collect specific data to allow for prevention and detection of the possible use of cryptocurrency transfers in money laundering or terrorism financing. Extending these requirements to cryptocurrency transfers would prohibit anonymous crypto-asset wallets.

The legislative package is under review by the European Parliament and Council.

You can find our September 21, 2020, post  here for additional background.

You can find the European Commission Fact Sheet here.

You can find the legislative package proposal here.

Russian Central Bank Urges Stock Exchanges to Avoid Listing Crypto Companies

The Bank of Russia issued an information letter on July 19, asking Russian stock exchanges to stay away from listings of foreign and local companies involved in a broad range of crypto services.

Explaining, in part, that digital assets are characterized by high volatility, lack of transparency in pricing, low liquidity, and technological, regulatory, and other specific risks, the Bank of Russia recommended that Russian exchanges not permit listings of companies (domestic or foreign) whose business relies on crypto market prices, including digital financial assets or crypto derivatives and crypto funds. The Bank of Russia also recommended that asset managers exclude these instruments in mutual funds.

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