April 2023 Rollup | Latest Trends & Developments

Coinbase recently filed a legal request urging the U.S. Securities and Exchange Commission (SEC) to address a previous petition concerning crypto industry regulation. This development underscores the escalating tension between Coinbase and the SEC, which has been intensifying its warnings and enforcement actions against crypto firms.

In July 2022, Coinbase inquired if the SEC would devise rules to oversee digital securities trading. However, the SEC remained silent on the matter. Over 1,700 entities and individuals have since supported Coinbase's call for regulatory clarity.

According to Paul Grewal, Coinbase's Chief Legal Officer, the SEC's public statements and actions in the crypto arena imply that the regulator has already decided to dismiss Coinbase's petition without notifying the public. As the SEC continues to pursue actions against cryptocurrency firms and entrepreneurs, the legal request filed by Coinbase represents the latest instance of pushback against the regulator.

While Coinbase is renowned for its compliance with regulations, the company has struggled to grow and develop new products due to legal uncertainties. Consequently, CEO Brian Armstrong has suggested that relocating the company's headquarters outside the U.S. may be considered if the regulatory approach stays the same.

Grewal emphasized the need for regulatory clarity in the crypto industry and expressed concern over the potential enforcement actions from the SEC, given the lack of clear guidance on how the law applies to businesses like Coinbase.

South Korean prosecutors have formally indicted Shin Hyun-Seung, also known as Daniel Shin, co-founder of Terraform Labs, and nine others on multiple charges, including violations of capital markets law. This development follows a lengthy investigation into the dramatic collapse of the Terra ecosystem last year, which resulted in the loss of tens of billions of dollars in investor wealth.

The ten individuals charged allegedly inflicted massive financial damage on investors, profiting to 463 billion won (approximately $347 million). South Korean authorities have thus far managed to freeze 247 billion won in assets as they continue to track down these illicit gains.

The frozen assets are part of a "restitution" request accepted by the court to compensate victims rather than a "forfeiture" request, which was recently rejected to place the money into the national treasury.

Shin's legal representatives emphasized that he left the Terra project in 2020 and has not been involved in its operations since. They argued that the prosecutor's assertion that Shin persisted with the business despite warnings from financial authorities is inaccurate.

While Shin is not currently in custody, his co-founder Do Kwon was recently detained in Montenegro for attempting to travel with fraudulent documents and has been officially charged. Both South Korea and the U.S. have warrants out for Kwon's arrest. In the U.S., the Securities and Exchange Commission has sued Kwon and Terraform Labs. Kwon's attorneys have requested a U.S. court to dismiss the SEC's charges, partly on the grounds of jurisdictional limitations.

The European Union's recently approved MiCA regulations aim to create a transparent and consistent legal framework for crypto-assets and related services. Passed by the European Parliament on April 20, 2023, the legislation is set to take effect 12 to 18 months following its publication in the bloc's Official Journal.

Overview of the MiCA Regulations

The MiCA regulations encompass three primary types of crypto-assets: utility tokens, asset-referenced tokens, and e-money tokens. Distinct regulatory requirements apply to each token type, including disclosure, authorization, capital, and governance. Additionally, the regulations impose obligations on crypto-asset service providers, such as exchanges, wallet providers, and token issuers. These obligations involve licensing, transparency, investor protection, and anti-money laundering measures.

Addressing Stablecoin Risks

One central objective of the MiCA regulations is to mitigate the risks posed by stablecoins—crypto-assets designed to maintain a stable value by referencing other assets or currencies. The legislation introduces specific rules for asset-referenced tokens and e-money tokens, which are deemed to have a higher potential for systemic impact. These rules encompass holding sufficient reserves, ensuring adequate governance structures, and complying with prudential and supervisory standards.

Implications for the Crypto-Asset Industry in the EU

The MiCA regulations are anticipated to have significant ramifications for the crypto-asset industry within the EU. On one hand, they will provide legal certainty and foster innovation in the sector. Conversely, they will also impose new costs and challenges for crypto-asset businesses that must adapt to the evolving regulatory environment.

Gemini, the popular US-based cryptocurrency exchange co-founded by the Winklevoss twins, has recently introduced a new offshore derivatives platform. The platform, known as the Gemini Foundation, offers perpetual futures contracts on Bitcoin and other cryptocurrencies. Gemini Foundation aims to expand the company's reach globally and appeal to more clients from countries with favorable crypto regulations.

Gemini boasts that the Gemini Foundation will provide traders from more than 25 countries, including Bermuda, Singapore, India, and Hong Kong, with the ability to trade spot and derivatives products with up to 100x leverage. The platform's inaugural product is a BTC/GUSD perpetual contract, where GUSD is Gemini's proprietary stablecoin linked to the U.S. dollar. Gemini intends to add additional products in the future, such as an ETH/GUSD perpetual contract.

The Gemini Foundation is part of the company's strategy to broaden its offerings and compete with other cryptocurrency exchanges already established offshore derivatives platforms, such as Binance, FTX, and BitMEX. In addition, Gemini claims its platform will provide users with high security, liquidity, and transparency while complying with local laws and regulations.

U.S. lawmakers from both the House and Senate are collaborating on a bill aimed at establishing new market structure regulations for digital assets. This move follows the Biden administration's agenda released last year, which included enforcement actions by the Commodities Futures Trading Commission and the Securities and Exchange Commission, along with top-level recommendations for new crypto laws.

In a parallel effort, a bipartisan framework for stablecoins is also being advanced. The Republican-led crypto market initiative is still under negotiation, with plans to introduce it in spring or early summer. The goal is for the crypto market and stablecoins bills to achieve bipartisan consensus in Congress and receive President Joe Biden's approval.

House Financial Services Committee Chair Patrick McHenry (R-N.C.) and House Agriculture Committee Chair Glenn Thompson (R-Pa.) lead the market structure effort. The two agreed on principles for new legislation governing crypto markets earlier this year. The Financial Services Committee holds the majority of jurisdiction on the subject, having the power to rewrite securities laws central to crypto market regulation.

The legislative effort gained traction when House Republicans started coordinating with Senators Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.), authors of a comprehensive crypto policy bill from the previous Congress. The coordination is mutually beneficial, providing more weight to the legislation.

However, Senate Banking Committee Chair Sherrod Brown (D-Ohio) and the Treasury Department will also play significant roles in any bills becoming law. Brown has not yet expressed enthusiasm for legislating around digital assets, deferring to Securities and Exchange Commission Chair Gary Gensler, who considers cryptocurrencies as securities subject to securities laws.

New York's leading banking authority, Superintendent Adrienne Harris, provided testimony before the House Financial Services Committee, contending that the collapse of Signature Bank cannot be attributed to its involvement with the cryptocurrency sector. Instead, Harris articulated that the bank's failure was precipitated by a bank run after the collapse of Silicon Valley Bank rather than any direct connection to cryptocurrencies.

In Harris's account, 20% of Signature's deposits were withdrawn on the night of Silicon Valley Bank's collapse, but a mere 20% of those withdrawals were associated with cryptocurrency-related deposits. Instead, the majority of withdrawals originated from commercial clients possessing uninsured deposits.

The closure of Signature Bank was initiated by the New York regulator two days after Silicon Valley Bank's failure, which led to the intervention of the Federal Deposit Insurance Corp., a federal bank regulator, to ensure the continuity of operations.

Ethereum Shanghai Hard Fork is a significant upgrade to the Ethereum network on April 12, 2023, at block number 13,000,000. The upgrade introduced several changes to improve the security, scalability, and usability of Ethereum, such as:

• Enabling withdrawals for users who have staked their ether (ETH) on the Beacon Chain, which is the first phase of Ethereum 2.0, a transition to a proof-of-stake (PoS) consensus mechanism.
• Implementing EIP-1559, a proposal that changes the fee market of Ethereum by introducing a burned base fee and a priority fee that goes to miners.
• Reducing the block reward from 2 ETH to 1.5 ETH per block to reduce inflation and align with the PoS issuance schedule.
• Increasing the gas limit from 15 million to 30 million per block to allow more transactions and smart contracts to be executed.

The Shanghai Hard Fork is also known as "Shapella," a combination of Shanghai and Capella, the names of two stars in the constellation Auriga. The upgrade is part of a series of hard forks that aim to prepare Ethereum for the full launch of Ethereum 2.0, which is expected to happen by the end of 2023.

The Ethereum community has widely welcomed the Shanghai Hard Fork, and has resulted in a positive impact on the price and adoption of ETH.

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