Crypto Policy Update: April 2023

Written by Zack Shapiro, Camille Stephens, and Patrick Kennedy.

After a turbulent month of banking failures and economic turmoil, the US government has maintained a circumspect approach to the crypto industry, particularly DeFi. However, China seems to be warming up to the industry, and Europe is pressing ahead with MiCA legislation that will bring much-needed regulatory clarity. 

US Regulators and White House Turn Ire Towards Crypto, GOP Pushes Back

It’s been a challenging month for crypto in the US. Various government agencies, through both direct statements and filings, and indirect pressure, have made US operations difficult for Web3 companies. Concerns have mounted that by classifying crypto as a highly risky asset, regulators have made it too expensive for banks to turn a profit by providing services to crypto companies. Over the next few months, it will be crucial for Web3 companies to identify reliable banking partners–a task that may force them to consider options outside the US.

Notably, The White House made mention of crypto for the first time in its annual economic report, devoting over 15% of the report to cryptocurrency. The Biden Administration took an exceptionally cynical view of crypto, reaching the conclusion that many cryptocurrencies “do not have a fundamental value,” and there is no evidence of crypto improving financial infrastructure or increasing financial access. 

The report frequently touted the government’s new FedNow service, set to launch in July. The service will let customers of supported banks quickly send and receive money 24/7, unlike the current system which can’t process transactions on weekends. The service is largely a response to cryptocurrency and recent calls for a US CBDC; the Biden administration leaned on the service heavily to explain why cryptocurrency is unnecessary throughout the economic report. Some see this as a step towards offering a US CBDC, while others argue it will quell the need for such tokens.

In contrast, many more in the GOP have warmed up to the idea of cryptocurrency, with House Republicans announcing their plans to reveal new cryptocurrency regulation designed to bring clarity to the industry. “We’re going to spend March and April in a significant effort on listening to stakeholders in the digital assets arena [and] considering other legislative proposals,” Rep. French Hill, the GOP leader of the digital assets subcommittee, told Politico. 

The House Financial Services Committee, led by crypto-friendly Republican Patrick McHenry, will call Gary Gensler, Chairman of the SEC, to testify on April 18 in a long-awaited Congressional showdown. Gensler’s SEC has launched several recent lawsuits against Web3 companies and has received criticism for its ‘regulation by enforcement’ approach which often creates regulatory ambiguity. The GOP Financial Service Committee indicated questioning might get contentious, tweeting, “Republicans will hold [Gary Gensler] accountable for his flagrant disregard for the law, jurisdiction, and the APA.”

SEC, CFTC Continue Flurry of Enforcement Actions

On March 27, The CFTC filed a complaint against Binance and its co-founder and CEO, Changpeng Zhao – commonly known as CZ. The complaint accused CZ directly of trading violations and alleged that Binance conducted transactions with US customers without proper registration since at least 2019. CZ responded with a statement claiming, “​​ does not trade for profit or ‘manipulate’ the market under any circumstances.”

The SEC made a splash when it charged Justin Sun, the founder of Tron and owner of several other crypto entities, with the unregistered offer and sale of crypto asset securities. The complaint notably charged several celebrities as well, including Lindsay Lohan, Jake Paul, and Soulja Boy. 

The agency also issued a Wells notice to Coinbase, a surprising move given the exchange’s long history of engaging with regulators and firm commitment to compliance. Coinbase noted that it believes the SEC takes issue with the company’s staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet. Coinbase has made it clear that it will fight any action taken against them by the SEC, and has been outspoken in its opposition to the SEC’s position on the matter. The stage is being set for what could be the biggest legal showdown between the SEC and the crypto industry to date.

Kraken reached a settlement in its SEC suit, agreeing to pay $30M in penalties and discontinue its staking-as-a-service program. The settlement allowed Kraken to neither confirm nor deny the SEC’s allegations and thus will not set precedent for future cases.

China Opening Up to Crypto, Through Hong Kong

Despite China’s long history of anti-crypto policies – having previously banned all mining and cryptocurrency trading – cryptocurrency is finally returning to the region, largely through Hong Kong, the international financial hub that has historically served as a gateway to mainland China. 

Hong Kong has been transparent about its intentions to court Web3 companies. “​​In order for Web3 to steadily take the road of innovative development, we will adopt a strategy that emphasizes both ‘proper regulation’ and ‘promoting development,” wrote Hong Kong Financial Secretary Paul Chan in a recent blog post. Hong Kong previously earmarked $6.4M (USD) in its 2023-2024 budget to develop Web3 in the region. With Hong Kong’s track record in financial innovation and tacit approval from the Chinese government, the city shows great promise to become a regional crypto powerhouse, allowing traders to circumvent restrictions placed by the mainland Chinese regulators. Hong Kong’s embrace of the crypto industry stands in stark contrast to the United States’ crackdown, and may inspire Web3 companies to migrate to the region.

Surprisingly, several Chinese companies that include Alibaba and Tencent, both among the largest and most valuable companies in China, have announced high profile crypto partnerships in recent weeks. Given the Chinese Communist Party (CCP) owns golden shares granting them stakes in both companies, it’s easy to interpret the move as the CCP adopting a less adversarial stance towards crypto.

China’s positioning on crypto today seems drastically different than just two years ago, when it went full scorched earth and banished the industry. Time will tell if the trend continues and China becomes a major player in the crypto space, or if it will revert back to its severe anti-crypto stance, which might involve cracking down on partnerships with Chinese companies and attempting to restrict the industry in Hong Kong.

EU Continues Steady MiCA Progress, Heading Towards Final Vote

The EU is barreling ahead with its proposed MiCA legislation, now set for Parliamentary debate on April 19, with a final vote expected shortly after. If approved, the legislation would likely begin to take effect this July, though several major provisions won’t kick in until 12-18 months later. The final vote was pushed back a day due to the introduction of a last-minute amendment, but is still widely expected to pass. MiCA will be the most robust and comprehensive cryptocurrency legislation to date, and many in the industry are thankful for the much-needed clarity it will provide. 

The industry will be watching to see if other jurisdictions around the world duplicate MiCA policies in their own legislation, or take an alternate approach instead. The coming months will be key in defining the global regulatory landscape and dictating whether Web3 companies will enjoy homogeneous policies across jurisdictions, or be forced to navigate a complex web of disparate regional restrictions.

Killer Tech Without a Home

The question on everyone’s mind is whether Web3 companies will migrate to new territory. Regulatory headwinds and a dearth of quality banking partners in the US means America isn’t exactly the ‘land of opportunity’ it once was for emerging tech. China and Hong Kong appear to be making a concerted effort to attract Web3 companies, but China’s anti-crypto past and long history of maintaining tight control over Chinese companies may create uncertainty. Meanwhile, the EU is set to become the first region with comprehensive crypto regulations, which will likely entice some companies and chase others away. The coming months are likely to provide insight into which regulatory environments Web3 companies prefer, as various jurisdictions fall further out of sync.