Weekly Fintech Focus
- U.S. Congress to Hold Oversight Hearing on the Mining of Cryptocurrency
- NY DFS to Hire New Deputy Superintendent
- Recent Federal Regulator Announcements Signal Changes in Senior Leadership at the SEC, CFTC, and FDIC
- CFTC Fines Crypto Betting Service Polymarket $1.4M for Unregistered Swaps
- Australian Open Offers NFT Sales Alongside 2022 Tournament
- ESMA Releases Request for Evidence Regarding Regulation on Distributed Ledger Technology
U.S. Developments
LEGISLATION
U.S. Congress to Hold Oversight Hearing on the Mining of Cryptocurrency
The Oversight and Investigations subcommittee of the House Energy and Commerce Committee is preparing a list of witnesses and intends to hold a hearing to review the impact of virtual currencies on the environment, with an emphasis on bitcoin mining.
The bitcoin blockchain relies on a “proof-of-work” consensus mechanism that leverages computing power to cryptographically prove the validity of transactions broadcast to the bitcoin network. Given the heavy reliance on computing power, this method of consensus, and bitcoin generally, has received criticism for its potential impact on the environment. In December, Senator Elizabeth Warren sent a letter to a company engaged in bitcoin mining operations to gather information on “the impact these operations may be having on climate change, the local environment, and the cost of electricity for retail consumers.” Per The Block, sources have worked to gather witnesses “to account for the energy use of proof-of-work crypto validation, especially the Bitcoin network.” While neither the timing of the hearing nor the witnesses have been confirmed, sources have informed The Block that the hearing could occur as soon as the end of January.
This Congressional hearing will follow many others related to virtual currencies that have occurred within the last several months, exemplifying Congressional interest in the use and operation of virtual currencies.
REGULATION
NY DFS to Hire New Deputy Superintendent
The New York Department of Financial Services (NY DFS) intends to hire Peter Marton as its new Deputy Superintendent of Virtual Currency.
As Deputy Superintendent, Mr. Marton will “provide expertise to support policy decisions and the regulation of emerging and innovative markets, including virtual currencies and virtual currency markets and businesses,” according to a job description for the position posted by NY DFS late last year. Mr. Marton was formerly a Director with the Promontory Financial Group, specializing in digital assets strategy and optimization. In Mr. Marton’s announcement of his new role, he noted, “Crypto supervision should be a marathon not a sprint, and I look forward to continue this effort in earnest.”
The position sits within the NY DFS Research & Innovation Division. The Division was established in July 2019 to “house the Department’s division responsible for licensing and supervising virtual currencies” and to “assess new efforts to use technology to address financial exclusion; identify and protect consumer data rights; and encourage innovations in the financial services marketplace to preserve New York’s competitiveness as a financial innovation hub.” The Division oversees the application process for virtual currency business licenses, known as BitLicenses, and takes a prominent role in the chartering of limited purpose trust companies organized for the purpose of provided services related to virtual currencies.
Recent Federal Regulator Announcements Signal Changes in Senior Leadership at the SEC, CFTC, and FDIC
On December 15, 2021, President Biden announced his intention to nominate Summer Mersinger and Caroline Pham to fill two Republican spots on the Commodity Futures Trading Commission (CFTC). Ms. Mersinger most recently served as the Chief of Staff to CFTC Commissioner Dawn Stump, who stated in early December 2021 that she did not intend to seek another appointment when her current term ends in April 2022. Ms. Pham is a Managing Director at Citi, represents Citi on the Executive Committee of the Chamber of Digital Commerce, and has advised on key global issues such as prudential regulation and systemic risk as well as financial markets, including currencies and commodities, fintech, and digital assets. If confirmed, Ms. Mersinger and Ms. Pham will join Commissioner Rostin Behnam, who was confirmed as Chairman of the CFTC in December 2021, and take the seats held by Commissioner Stump and former SEC Commissioner Brian Quintenz, who stepped down in 2021.
On December 20, 2021, Elad Roisman, one of two Republicans on the U.S. Securities and Exchange Commission (SEC), released a statement noting that he intends to step down from his position as SEC Commissioner by the end of January. Commissioner Roisman was appointed by President Trump and sworn into office in 2018. Prior to his role at the SEC, Commissioner Roisman served as Chief Counsel to the U.S. Senate Committee on Banking, Housing, and Urban Affairs and as Counsel to SEC Commissioner Daniel M. Gallagher, focusing on enforcement and policy relating to the U.S. equity and fixed income markets, the asset management industry, and international regulation of capital markets. His departure will leave SEC Commissioner Hester Peirce as the only Republican SEC commissioner.
On December 30, 2021, the SEC announced new appointments to SEC Chairman Gary Gensler’s executive staff. Among those appointed was Corey Frayer, who will advise Chair Gensler on SEC policymaking and interagency work relating to the oversight of crypto assets, and Jorge Tenreiro, who will serve as Enforcement Counsel and advise Chair Gensler on matters involving the SEC’s Division of Enforcement. Prior to joining the SEC, Mr. Frayer served as Senior Professional Staff on the U.S. Senate Committee on Banking, Housing, and Urban Affairs for Chairman Sherrod Brown, where his work included advising on cryptocurrency policy. Mr. Tenreiro joined the SEC in 2013 as a staff attorney in the New York Regional Office and later served as Senior Trial Counsel, working on notable cryptocurrency-related enforcement cases.
On December 31, 2021, Federal Deposit Insurance Corporation (FDIC) Chair Jelena McWilliams announced that she intends to resign her position as of February 4, 2022. Chair McWilliams was appointed in June 2018. FDIC board member Martin Gruenberg will become acting chair once Chair McWilliams’ resignation is effective.
LITIGATION
CFTC Fines Crypto Betting Service Polymarket $1.4M for Unregistered Swaps
The CFTC has fined Blockratize, Inc. (d/b/a Polymarket) $1.4 million for offering “off-exchange event-based binary options contracts” and for its “failure to obtain designation as a designated contract market (DCM) or registration as a swap execution facility (SEF).”
In addition to the fine, Polymarket must wind down all markets on its website that do not comply with the Commodity Exchange Act (CEA) and CFTC regulations. Polymarket is further required to “cease and desist from violating the CEA and CFTC regulations, as charged.”
Polymarket’s product is commonly referred to as an “event market,” where customers can purchase and sell binary options related to future events. For example, Polymarket’s social media promoted binary options relating to whether “more than 2.5 million people [will] travel through a TSA checkpoint on any day on or before December 31” or whether “J.Lo and Ben Affleck [will] get engaged by Thanksgiving.” The CFTC noted that Polymarket offered over 900 separate events since its inception, leveraging smart contracts hosted on a blockchain to operate each event. The CFTC determined that the “event market contracts, each of which is composed of a pair of binary options, constitute swaps under the CFTC’s jurisdiction, and therefore can only be offered on a registered exchange in accordance with the CEA and CFTC regulations.”
In the press release announcing the penalty, Acting Director of Enforcement Vincent McGonagle emphasized that “[a]ll derivatives markets must operate within the bounds of the law regardless of the technology used, and particularly including those in the so-called decentralized finance or ‘DeFi’ space.”
INDUSTRY
Australian Open Offers NFT Sales Alongside 2022 Tournament
The Australian Open, which is set to take place beginning on January 17, 2022, announced that it will be releasing a series of non-fungible tokens (NFTs) corresponding to matches taking place at the tournament. Each NFT’s metadata will be linked to a plot of a tennis court surface in the real-life tournament. If the winning shot from a match in the Australian Open lands on that plot, the NFT metadata will be updated in real time to reflect the match’s outcomes.
The Australian Open is also operating a virtual reality metaverse world called AO Decentraland, where the event will be streamed live in 3D.
International Developments
ESMA Releases Request for Evidence Regarding Regulation on Distributed Ledger Technology
On January 4, 2022, the European Union’s securities markets regulator, the European Securities and Markets Authority (ESMA), announced a request for feedback from market participants regarding the use of distributed ledger technology (DLT) in the settlement and trading of tokenized securities. Specifically, ESMA seeks feedback on whether current pre- and post-trade transparency and data reporting requirements need to be amended in order to be effectively applied to securities issued, traded, and recorded on DLT.
Stakeholders are invited to provide comments by March 4, 2022. ESMA noted that it will consider industry feedback in considering whether amendments to the regulation are necessary.
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