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US Markets Regulator Presses Home Bitcoin ETF Rejection Message as Global Jurisdictions Make Headway in Regulation



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In a Wednesday interview with the American Economic Liberties Project, Massachusetts Senator Elizabeth Warren praised SEC Chairman Gary Gensler's handling of the digital assets sector.

So good has been the SEC's work since he assumed office in April 2021 that Warren claimed shady players have been lobbying to bypass long-standing securities laws. The lawmaker praised the SEC's stance against a Bitcoin spot exchange-traded fund (ETF) offering in the US market. She also called on legislators to provide the SEC with the necessary resources to effectively police the crypto space, particularly commending efforts to protect investors from exploitative products.

The SEC once again frowns on ARK Invest and 21Shares' spot Bitcoin ETF filing

News of Cathie Wood's Ark Invest teaming up with ETP issuer 21Shares to seek a spot bitcoin exchange-traded fund (ETF) came out in June 2021. After several delays in delivering an answer, the regulator rejected the application in April 2022, arguing that the BZX lacked the necessary investor protection measures against manipulation and fraud and failed to consider the public interest.

Arguments in the renewed filing rejected

Ark and 21Shares renewed their pursuit for listing on the Chicago Board Options Exchange (Cboe) BZX Exchange in another filing with the SEC in May last year. In the submission, Cboe BZX cited the existence of a “comprehensive surveillance-sharing agreement” with the Chicago Mercantile Exchange (CME) as a means of preventing market manipulation, which therefore ratifies the approval of the ARK 21Shares Bitcoin ETF listing on the exchange. The application highlighted that while many spot markets for currencies and commodities are unregulated, this should not be grounds for rejecting the ETF listing.

The SEC isn't having any of that. In its rejection arguments to the exchange's second application on Thursday (Jan 26), it watered down the suggestion that a surveillance-sharing agreement with the CME can prevent manipulation of spot Bitcoin price. The regulator explained that the surveillance-sharing agreement only applies to Bitcoin futures contracts traded at the CME and not to spot Bitcoin markets.

While the SEC has thus far opposed approving a spot ETF, it has given its blessing to a number of ETFs that track the market for Bitcoin futures contracts. The state securities agency added that while a surveillance sharing agreement is not always required for listing an ETF if such an agreement does not exist, the exchange must demonstrate that other means of preventing fraud and manipulation will be sufficient, which the equities exchange failed to do.

CFTC pushes for coordinated industry standards in crypto regulation

In an interview shared on Bloomberg, CFTC commissioner Caroline Pham said there are ongoing technical discussions in other countries seeking to agree on global regulatory standards for the crypto space. Pham said she had been part of at least 75 meetings exploring topics about crypto regulations. Calling for clearer policies in the US, Pham set forth that crypto financial instruments need to be regulated in the same way as other financial instruments

The CFTC commissioner also argued that regulators should be taking a proactive approach to developing a cohesive global regulatory framework for the space. Meanwhile, as US agencies strive to come up with comprehensive guidance, over in Europe, countries are already pursuing a unified regulatory framework with Markets in Crypto Assets regulation (MiCA).

France allows exchanges more time to gain full authorization

Like its fellows in the EU, France is readying up for the possible arrival of the MiCA that will establish a uniform policy for crypto assets and related activities across the 27-country trading bloc. A draft release for MiCA is set for Apr 17 following a second postponement in the final vote, which was initially planned for last November but delayed until February.

On Tuesday, lawmakers in France favored a lenient regulation strategy before MiCA comes into effect. They passed an amendment proposed by politician Daniel Labaronne allowing crypto firms to continue operating there before they have to be registered and comply with new Europe-wide standards, rather than the Oct 1 deadline proposed by Senate member Hervé Maurey back in December. The French market regulations require that crypto companies must first register as virtual asset service providers. Then they can choose to pursue full authorization (requires extensive disclosures). None of the 60 crypto asset providers in the country has opted for the latter.

The reprieve only stands for a while, as any firm that will enter the France crypto market after Jan 1, 2024, must first acquire a full license – it has additional requirements to safeguard client assets, manage conflicts of interest, and promote fee transparency. According to Labaronne, this approach is the best case for a compromise between full registration and licensing and serves as a precursor to the eventual implementation of MiCA. The MiCA regulations will be put up for a parliamentary vote this year, and if adopted, countries will have a further 18 months to implement the requirements.

Ghosts of the past helped Japan streamline its crypto policy

Earlier this month, Mt Gox's rehabilitation trustee: Nobuaki Kobayashi, communicated a  change in the timeline for distribution of the platform's first payments from Jan 10 to Mar 10 after obtaining permission from the court. The deadline for distribution of the first batch of payments will now be on Sept 30 from an initial date of Jul 31. The trustee said that “various circumstances, such as the progress by rehabilitation creditors in respect of the Selection and Registration”, necessitated the delay. The original January deadline was set in October 2022 to allow former customers to choose a preferred payment system, such as bank transfer, fund transfer service provider, crypto exchange, or custodian.

Speculations from the crypto community suggested that the extension could have been linked to Kraken's decision to exit the Japanese market. Mt. Gox was one of the leading Bitcoin exchanges before its collapse early in 2014, losing approximately 850,000 Bitcoin, worth around $500 million at the time, to hackers. Reports have in the past indicated that only 150,000 of the stolen Bitcoin was recovered. Barely five years after the Mt Gox incident, Tokyo-based exchange, Coincheck, got hacked for more than $500 million in 2018. The incident spooked potential crypto businesses looking to set shop in the country.

Japan has since bounced back by enforcing strict consumer protection measures. Evidence of this is that customers of the Japanese subsidiary of the defunct exchange FTX are getting their money back while users in other countries wallow in losses.

Aiming for the reigns of Web3

With a pro-Web3 Prime Minister in Fumio Kishida, Japan has been aggressively developing regulations for crypto, aiming to take the reins of Web3 into its hands. A December 2022 proposal by Japan's ruling Liberal Democratic Party (LDP) Web3 project team said the country “is positioned to play a unique role in the crypto industry.” First, the LDP's tax committee in December approved the Web3 project team's proposal of a tax change that would see crypto startups issuing their native tokens exempted from the 35% tax rate on unrealized gains on any token they would list on the active market.

The Japanese Financial Services Agency (FSA) is additionally in the process of lifting the ban on the distribution of stablecoins by June this year. It plans to introduce regulations allowing domestic investors to trade certain foreign-issued stablecoins. The FSA will, however, not be giving stablecoins free rein. They will be thoroughly evaluated before being authorized, and the regulator will only authorize stablecoins that pass through individual assessments to ensure that they protect the user.

FSA blames loose governance and lax internal controls for the FTX downfall

Japanese financial regulators on Jan 16  called for global counterparts to treat crypto in the same strict manner as traditional banks. Deputy director general at the Strategy Development and Management Bureau of the Financial Services Agency (FSA) Mamoru Yanase noted that crypto had grown massively and the sector must be held to the same standards as traditional financial institutions if regulation is to be effective.

While demanding consumer protection measures from crypto exchanges, Yanase pointed to gaps in global regulations in the crypto space for enabling the massive scale of loss seen when FTX capitulated rather than crypto technology itself. He also observed that this space is plagued with “loose governance, lax internal controls, and the absence of regulation and supervision.” Yanase said that Japan is already using its place on the Board to urge regulators in US and Europe to supervise exchanges as they do for banks and brokerages.

Following severe financial breakdowns last year, calls for more onerous regulations have been unceasing. In its December meeting, the Financial Stability Board (FSB) concluded a need to closely monitor crypto assets and the risk-concentrated crypto trading firms. The FSB intends to lay out steps for crypto regulation steps early this year, and Japan is already using its place on the Board to urge regulators in Europe and the US to treat crypto exchanges like banks.

Ireland's Central Bank governor struggles to shake off the fretfulness about crypto

Back in Europe, Ireland's central bank governor Gabriel Makhlouf recently showed his distaste for digital assets. In a Wednesday parliamentary session, Makhlouf, who previously advised crypto investors to be prepared to lose all their money, told legislators attending that the asset class has no social value whatsoever. The Central Bank governor minced no words stating that unbacked cryptocurrencies, which constitute a significant portion of the market, are Ponzi schemes, and those who invest in such assets are “essentially gambling.”

Makhlouf also emphasized the need for greater regulatory guardrails to protect retail investors, particularly young adults, from the potential risks associated with investing in these unbacked crypto assets. To mitigate the inherent risks, he proposed a ban on advertising cryptocurrencies to young adults if lawmakers can find a viable way. This is not the first time the Central Bank of Ireland has raised concerns about crypto advertising. Last year, it cautioned against prevalent misleading ads promoting crypto investments, mainly promoted by social media influencers.

In the UK, the Financial Conduct Authority conveyed in a Jan 19 letter that it flagged some crypto companies seeking compliance due to their links to organized crime. This week, the markets regulator noted in a Jan 25 feedback report it had received 300 applications from firms looking to register and operate in the country under its anti-money laundering regime, with only 41 of them winning approval. It has to be noted that the FCA still doesn't have official regulatory authority over the digital assets sector rather, it is focused on ensuring crypto-related entities comply with anti-money laundering. The Financial Services and Markets Bill, under consideration, intends to change that as it will identify crypto assets as regulated financial instruments bringing them under the purview of the former and Payments Systems Regulator.

Sam is a financial content specialist with a keen interest in the blockchain space. He has worked with several firms and media outlets in the Finance and Cybersecurity fields.