Global Regulators Tighten Their Grip on Cryptocurrency: Legal Insights

“Numerous significant financial regulatory bodies, both at the national and international levels, have concurrently introduced fresh directives pertaining to decentralized assets.”

In the past week, significant developments in the regulation of decentralized assets have emerged from various national and international financial regulators. Notably, both the European Banking Authority and the European Securities and Markets Authority have introduced proposed guidelines aimed at evaluating the suitability of individuals in leadership roles within cryptocurrency firms. These guidelines offer standardized criteria for assessing their knowledge, expertise, integrity, and their capacity to devote ample time to fulfilling their responsibilities.

Meanwhile, the Basel Committee on Banking Supervision, part of the Bank for International Settlements (BIS), has put forth a proposal obliging banks to furnish both quantitative and qualitative data pertaining to their exposure to crypto assets. Furthermore, the BIS suggests that adopting a uniform disclosure format will promote the application of market discipline and reduce information disparities between banks and market participants.

On the Asian front, the Hong Kong Securities and Futures Commission (SFC) has implemented changes that restrict certain digital currency products to professional investors. The updated regulations categorize digital assets as “complex products” under the SFC’s purview, subjecting them to guidelines akin to those governing other financial products. Notably, this also extends to cryptocurrency exchange-traded funds and products issued beyond Hong Kong.

Turning our attention to the ongoing legal developments concerning FTX, the former general counsel, Can Sun, testified during Sam Bankman-Fried’s criminal trial. Sun expressed his lack of awareness regarding FTX’s commingling of funds with Alameda Research. He revealed that he only became aware of Alameda’s exemption from the liquidation engine system in August 2022. Typically, this system would automatically liquidate losing trades, but Alameda reportedly bypassed this mechanism due to its special status.

Accounting professor Peter Easton provided a detailed analysis of the alleged mingling of funds between FTX and Alameda Research, dating back to 2021. According to Easton’s findings, Alameda made investments in various ventures, including Genesis Capital, K5 Global Holdings, Anthropic PBC, Dave Inc, Modulo Capital, and others, partially utilizing funds from FTX customers. This led to a situation in June 2022 where Alameda had a negative balance of $11.3 billion with FTX, while the combined liquid assets of both companies amounted to $2.3 billion, indicating a substantial gap of $9 billion between them.

Notably, the analysis highlights that Alameda holds 57 accounts with FTX that could potentially have negative balances, a privilege not granted to other customers. These findings challenge Bankman-Fried’s defense argument that Alameda enjoyed similar privileges as other market makers on FTX.

In another regulatory context, a Pennsylvania House Representative has removed a proposed two-year ban on cryptocurrency mining from a bill designed to regulate the sector’s energy consumption. The decision to exclude the mining moratorium from the bill was influenced by pressures from trade labor unions, according to the committee’s chair and the bill’s sponsor, Democratic Representative Greg Vitali. He cited the significant opposition of building trade labor unions to environmental policies and suggested that Democratic Party leaders exerted influence on this decision. Vitali’s rationale was to prioritize the passage of the bill without the mining ban, rather than risk the Democratic majority in Pennsylvania’s House.

Lastly, the attorney general of New York has initiated a lawsuit against cryptocurrency firms Gemini, Genesis, and Digital Currency Group (DCG). The lawsuit alleges that these entities engaged in fraudulent activities related to the Gemini Earn investment program. According to the attorney general’s official statement, the companies defrauded more than 23,000 investors, including 29,000 New York residents, of over $1 billion. The investigation contends that Gemini misled investors regarding the low-risk nature of the Gemini Earn program, which it operated in partnership with Genesis. Contrary to these assurances, the investigation suggests that Genesis’ financials were inherently risky.

These developments underscore the evolving landscape of cryptocurrency regulations and ongoing legal proceedings within the crypto industry, with global and regional authorities actively shaping the framework for decentralized assets.

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