Weekly Focus:
- Congress Members Introduce Stablecoin Legislation
- FINRA Grants Securitize Green Light for Broker-Dealer/ATS Acquisition
- SEC Establishes Transition of FinHub to Separate Office
- SIFMA, PwC Publish White Paper on Interplay Between Digital Assets and the Securities Markets
- Bitcoin Development Fund Launches Using Open-Source Funding Model
- Ethereum 2.0 Milestone Reached
- S&P Dow Jones Indices Announces Plan to Launch Cryptocurrency Indexes in 2021
- China-Based Bank Halts Planned Digital Bond Sale Shortly Before Launch
- Ukraine Crypto-Specific Bill Progresses Through Parliament
- German Private Bank Announces Cryptocurrency Fund Launch
U.S. Developments
Legislation
Congress Members Introduce Stablecoin Legislation
On December 2, 2020, Congresswoman Rashida Tlaib (MI-13), Congressmen Jesús “Chuy” García (IL-04) and Chairman of Task Force on Financial Technology Rep. Stephen Lynch (MA-08), announced Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act (the Act), which, among other points, proposes to impose obligations on issuers of stablecoins. For example, the Act would:
- Require prospective stablecoin issuers to obtain a banking charter;
- Require companies offering stablecoin services to follow the appropriate banking regulations under existing regulatory jurisdictions;
- Require company or bank stablecoin issuers to (1) notify and obtain approval from the Federal Reserve (Fed), the Federal Deposit Insurance Corporation (FDIC), and the appropriate banking agency prior to issuing the stablecoin and (2) maintain an ongoing analysis of potential systemic impacts and risks; and
- Require stablecoin issuers to obtain FDIC insurance, or otherwise maintain reserves at the Fed, reflecting the equivalent amount of U.S. dollars so that stablecoins can be readily converted into United States dollars on demand.
As of this writing the bill has been referred to the House Financial Services committee, but no other action has been taken with less than one month remaining in the 116th Congress’ session.
Regulation
FINRA Grants Securitize Green Light for Broker-Dealer/ATS Acquisition
On November 24, 2020, token firm Securitize announced that U.S. regulators have approved its proposed acquisition of Distributed Technology Markets (DTM). The planned acquisition will include DTM and its sister company, Velocity Platform, which runs a money services business with money transmitter licenses in several states. DTM offers Securitize an opportunity to leverage DTM’s approval as a registered alternative trading system (ATS) to facilitate transactions of non-public securities. The newly acquired entity will be renamed Securitize Markets and will offer a range of services from primary issuance through secondary trading.
SEC Establishes Transition of FinHub to Separate Office
On December 3, 2020, the Securities and Exchange Commission (SEC) announced that its Strategic Hub for Innovation and Financial Technology, commonly referred to as FinHub, will become a stand-alone office reporting directly to the Chairman of the SEC. On the move, the SEC explained, “[d]esignating FinHub as a stand-alone office strengthens the SEC’s ability to continue fostering innovation in emerging technologies in our markets consistent with investor protection. The office will continue to lead the agency’s work to identify and analyze emerging financial technologies affecting the future of the securities industry, and engage with market participants, as technologies develop.”
SIFMA, PwC Publish White Paper on Interplay Between Digital Assets and the Securities Markets
The Securities Industry and Financial Markets Association (SIFMA) and PricewaterhouseCoopers, LLP (PwC) published a joint White Paper addressing issues related to distributed ledger technology (DLT), digital assets, and the securities markets. The White Paper, which focuses on security tokens, details the application of each phase of the securities life cycle to security tokens, the impact on retail investors, and also explores how the further development of digital assets can potentially benefit market participants. Among other issues facing DLT and digital assets in the securities markets, the White Paper emphasizes three key questions that are critical to the full development of the market:
- Is DLT sufficiently robust to act as the registrar or to satisfy industry participants’ books and records requirements;
- Can a broker-dealer meet possession or control requirements (e., SEC Rule 15c3-3, “Customer Protection – Reserves and Custody of Securities”) when using DLT based systems; and
- Whether certain parties involved in the clearing and settlement of a transaction require registration as a clearing agency.
Industry
Bitcoin Development Fund Launches Using Open-Source Funding Model
On November 24, 2020, Bitcoin developers launched Brink, an independent organization focused on funding Bitcoin’s open-source developer community. Brink is stated to “support and mentor new contributors to open source Bitcoin development through [its] fellowship program, and support the work of established Bitcoin protocol engineers through [its] grants program.” Brink follows a number of other organizations that announced new grants for open-source Bitcoin contributors. Brink, however, takes a different funding approach by accepting donations from diverse sources. As a component of this structure, Brink is seeking to apply for charitable 501(c)(3) designation in the U.S. so taxpayers can make tax-exempt donations to the developers funded by Brink.
Ethereum 2.0 Milestone Reached
On December 1, 2020, the Ethereum blockchain successfully implemented the first stage of its proof-of-stake (PoS) network transition, also known as “Ethereum 2.0.” Although this development is only the first of many steps that must occur before Ethereum fully transitions to PoS (along with various other planned network improvements that are also part of Ethereum 2.0), it is significant because it marks the beginning of PoS transaction validation on Ethereum.
As a practical matter, the launch of PoS is unlikely to have much near-term impact on the various businesses operating and utilizing Ethereum. Specifically, the PoS transaction validation process is currently compartmentalized within smart contacts on Ethereum, which function as a so called “beaconchain” in parallel with Ethereum’s mainnet. However, in the future, the beaconchain will eventually replace Ethereum’s proof-of-work consensus mechanism and become the primary method by which Ethereum network validators order transactions and create new blocks on the network.
The timeline for when PoS is fully implemented, along with the various other upgrades in Ethereum 2.0, remain open to debate. However, the Ethereum development team has released a helpful graphic that shows the various updates to be made to the network that is available here.
S&P Dow Jones Indices Announces Plan to Launch Cryptocurrency Indexes in 2021
S&P Dow Jones Indices is planning to offer cryptocurrency indexes. S&P Dow Jones Indices, a division of financial data provider S&P Global Inc, said that it estimates a launch in 2021. S&P Dow Jones Indices intends to use data from virtual currency software & data solutions company Lukka on more than 550 of the top traded coins.
International Developments
China-Based Bank Halts Planned Digital Bond Sale Shortly Before Launch
China Construction Bank Corp. (CCBC), one of China’s largest banks, declined to move forward with its sale of a digital bond on a foreign exchange. As stated by CCBC executives, the sale would have been the “first publicly listed debt security on a blockchain.” As initially planned, the bond would have been arranged by CCBC’s Labuan, Malaysia branch and listed on the Fusang Exchange, an exchange that also facilitates cryptocurrency trading. Investors located outside of China would have been able to buy the bond for as little as $100, in cash or bitcoin. The bond would have rolled over every three months and paid annualized interest of Libor plus 50 basis points (approximately 0.75%). Though the listing was intended for a non-Chinese market, CCBC’s withdrawal of the listing follows Chinese authorities banning bitcoin exchanges and cryptocurrency fundraising such as ICOs.
Ukraine Crypto-Specific Bill Progresses Through Parliament
The Draft Bill on Virtual Assets, a crypto-specific bill, passed the first stage of the legislative process, receiving 229 “yes” votes out of a total of 340 possible votes, and has two more hearings before it can become law. The bill reflects Ukraine’s legislative approach of addressing cryptocurrency specifically, including provisions such as definitions for virtual assets and ownership of virtual assets and identifying Ukraine’s Ministry of the Digital Transformation as the primary regulator for virtual assets. The bill would also impose registration and compliance requirements on cryptocurrency service providers. This follows Chainalysis naming Ukraine as one of the top three countries for cryptocurrency adoption in its Global Cryptocurrency Adoption Index in September 2020.
German Private Bank Announces Cryptocurrency Fund Launch
On December 3, 2020, German bank Hauck & Aufhäuser announced that it intends to launch a cryptocurrency fund in January 2021.
The cryptocurrency fund, the HAIC Digital Asset Fund, will be one of the first funds launched by a private bank for high-net-worth individuals and institutional investors and will hold a number of cryptocurrencies such as bitcoin, ether and stellar. Hauck & Aufhäuser will partner with Berlin-based fintech company Kapilendo, which will manage the secure storage of the crypto assets in the fund.
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