Seeds of Wisdom RV and Economic Updates Sunday Morning 9-1-24
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“SAME RISKS, SAME RULES”: THE SEC’S SELECTIVE APPROACH TO CRYPTO REGULATION
When it comes to cryptocurrency regulation, the SEC views most cryptocurrencies as securities, favoring the concept of ‘same risks, same rules’.
But is it possible it’s not being consistent itself?
The same rules aren’t being followed when it involves the custody of crypto-assets.
The notorious SEC accounting bulletin SAB 121 changes the accounting rules around the custody of crypto-assets, requiring those assets to be disclosed on the balance sheets of listed firms.
That contravenes global accounting norms and has prevented banks from providing cryptocurrency custody. The SEC tries to argue that crypto-assets have elevated cyber risks.
A new heavyweight paper on crypto regulation points out that cyber risks are not new and are well covered by existing regulations. So using the principle of “same risks, same rules”, no additional cyber regulation is necessary for crypto-assets.
Yesterday Steven Schwarcz, Distinguished Professor at Duke University School of Law, published a paper on regulating financial innovation, with a focus on crypto-assets and DeFi.
We’d note that the paper does not directly mention SAB 121, so it is Ledger Insights that’s highlighting the inconsistency. However, the Professor’s cyber risks observation directly follows his discussion of the controversial application of ‘same risks, same rules’ to crypto.
A thought provoking paper on crypto regulation
Most regulations focus on the minutiae, whereas Professor Schwarcz reviews the high level models that can be used in regulating fintech innovation. ‘Same risks, same rules’ is one of six models he explores.
While some may disagree with various suggestions, regulatory clarity is necessary for new industries to flourish.
The Professor selected the salient aspects of the six models to outli The Professor selected the salient aspects of the six models to outline a recommended framework to address fintech innovation in gen ne a recommended framework to address fintech innovation in general. He then applies it to the crypto sector.
Sandboxes, smart contract audits (not just code)
A first step is to provide regulatory sandboxes. The Professor has a pragmatic view, recognizing that sandbox tests with a few customers won’t highlight all the potential risks.
There’s a need for fintech firms to self monitor their risks. However, that’s not likely to be sufficient, so there should be a system of third party expert monitoring.
In the crypto sector, smart contract audits are already widely used to identify bugs and qualify as a type of third party monitoring. But that only addresses one specific risk. A broader range of risks need exploring – risks to the firm and their customers, to other market participants and the public.
Plus, the automated nature of smart contracts can trigger a vicious cycle. We’ve already witnessed multiple crypto crashes and the impact on crypto lending. The liquidation of collateral leads to price declines, sparking a cascade of additional liquidations.
Stopping a crash
In traditional finance (TradFi) these sorts of issues exist in high frequency trading, where suspending trading helps to address the risk. However, the Professor recognizes that would be tricky to enforce in the crypto sector.
Hence, he recommends that businesses identify their counterparties and disclose the risks to them. If a third party monitor finds the firm’s smart contract usage creates significant risk, then “Regulators should have the power to suspend a business’s right to enter into new smart contracts.”
In other words, if you can’t stop a crash by suspending trading, then try to prevent it from happening in the first place. Although both are desirable.
One can imagine that the suggestion would cause the crypto sector to be up in arms, but it has merit, provided it’s not overused and one appropriately defines ‘significant risk’. TradFi has standard approaches to risk management which can be tweaked and ported to the crypto world. The more responsible players already do this.
For example, we’re aware of at least one exchange that saw the Terra Luna collapse unfolding early on, because they had systems in place. Hence, they protected their clients, although arguably their reaction exacerbated the downward spiral.
DeFi regulation
The Professor’s approach to DeFi resembles discussions already taking place about how to identify responsible people, with holders of governance tokens being one avenue.
An alternative option is to require DeFi platforms to be “provided by centrally registered and well capitalized entities.” At the same time, he acknowledges that could nullify DeFi benefits (low costs), so suggests consulting the DeFi industry before taking steps in this direction.
Regarding crypto-assets, he observes that some have proposed the financial equivalent of the FDA. In other words, all fintech innovations would need approval in advance.
He dismisses this as an innovation killer. He wrote that this “reverses the presumption, at least in the context of new financial products, that private-sector freedom of contract produces beneficial societal outcomes”.
In the case of financial stability risks, the Professor notes that fintechs are generally too small to create stability risks. These sorts of risks come from the actions of systemically important institutions. Hence, to address this particular risk, there should be limits on them rather than fintechs.
Surprisingly, he doesn’t mention that this is the approach taken by the Basel Committee for Banking Supervision.
Given the gravitas of this paper, who knows, perhaps he was the one that suggested banks have a maximum crypto exposure of 1% of Tier 1 capital.
@ Newshounds News™
Source:
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BIDEN ADMINISTRATION NOT INTERESTED IN RESOLVING UKRAINE CONFLICT — ECONOMIST
The true causes of the Ukrainian conflict have never been explained to US citizens, Professor Jeffrey Sachs said.
NEW YORK, August 30. /TASS/. The administration of US President Joe Biden is not interested in resolving the conflict in Ukraine and refuses to admit that Washington is directly to blame for this crisis, American economist, Director of the Center for Sustainable Development at Columbia University, Professor Jeffrey Sachs said.
"There's nothing really that this administration <...> is going to do. I don't think the president is probably in any mental state to lead anything at this point. So I think we're kind of on autopilot, which is [a] very bad place to be," he said in an interview with US journalist Tucker Carlson.
"This is a war provoked by the US, <…> the US [that] aims for NATO enlargement, and it would take a president who understands the basics of this and why this was so wrong headed," the economist emphasized, adding that Biden is not such a person.
Sachs added that the true causes of the Ukrainian conflict have never been explained to US citizens. The information that Americans can receive on this issue is contrary to reality, he added.
@ Newshounds News™
Source: TASS
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Iraq's Central Bank's Major US Visit | Seeds of Wisdom Team Youtube
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RUSSIA IS ABOUT TO TRY USING CRYPTO TO GET AROUND SANCTIONS
Experts doubt it will work, given the traceability of blockchains and the risk of even tougher sanctions for Russia.
▪️Russia will start its trial of cross-border payments using crypto next week.
▪️Recent statements from senior Russian leaders suggest the law’s purpose is to use crypto to counter sanctions.
▪️The law hands power to Russia’s central bank to oversee an “experimental” regime.
Russia will begin trialing cross-border crypto payments next week in an effort to circumvent international sanctions – but this effort may not work, several policy and legal experts told CoinDesk.
Legislation passed at the end of July and swiftly signed into law by President Vladimir Putin does not lift an existing ban on using cryptocurrencies as legal tender for regular payments within Russia, but instead allows cross-border payments with crypto.
How the law will allow such payments remains unclear because the legislation doesn’t specify rules for such transactions. Instead it hands power to Russia’s central bank to oversee an “experimental” regime, experts said.
Russia's economy has been hit hard by a suite of sanctions imposed by the U.S. and other nations following its invasion of Ukraine.
Since Russia’s invasion of Ukraine in Feb. 2022, it’s faced 16,500 sanctions from the U.S., U.K., European Union, Australia, Canada and Japan.
"The passing of these bills by the Russian government signals a continuation of Russia’s evolving strategy to circumvent Western sanctions," blockchain analytics firm Chainalysis’ director of investigations, Valerie Kennedy, told CoinDesk.
The EU said about half of Russia’s total foreign currency reserves, worth 300 billion euros ($332 billion), including 70% of the assets of the Russian banking system, were frozen. Select Russian banks were disconnected by the interbank messaging system, the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
"It has been difficult for Russia to avoid the U.S. dollar and euro via the SWIFT system, which has created increasing risk of secondary sanctions," she added. Secondary sanctions are penalties designed to prevent any third party from trading with a sanctioned nation.
What the law says
Some details have emerged in the days leading up to the Sept. 1 implementation of the law.
CoinDesk viewed a copy of the law using google translate. It said “during the circulation of digital currency in the Russian federation … special regulation may be established … by the experimental legal regime program.” That regime is still in the works. Before finalizing it, the central bank will consider proposals and suggestions from domestic stakeholders.
“Some players, including us, have already come with our own proposals,” said Anti Danilevski, founder and CEO of Kick Ecosystem, a one stop shop for crypto, who has been closely engaging with regulators.
“The central bank will decide if it fits with their view. They are moving very fast, so it won't take much time.”
Bloomberg reported that Russia is planning to use the National Payment Card System, for swapping between rubles and cryptocurrencies when testing payments.
The system was chosen because it already features infrastructure for functions like interbank settlement and is fully regulated by the central bank. If the trials are successful, Russia may allow the Moscow Exchange and the St. Petersburg Currency Exchange to set up crypto platforms next year, the report added.
Ivan Chuprunov, an associate professor at the Research Centre of Private Law in Moscow, said the regime’s “exact parameters are not clear” because none have been published yet but the “central bank will likely publish some guidance in the coming weeks.”
The law also appears to let the central bank change how it oversees these trials at any time.
The legislation said that the provisions may “exclude or change” parts of the Federal Law in relation to transactions with “digital currency made in the implementation of foreign trade activities through an authorized organization.”
The regime is “more a flexible one” because it’s “just the central bank who will be approving it,” said Chuprunov. “Whether they will have just one exchange, what currencies would be traded, how participants would get trading access, is still a big unknown.”
Nor does the law clearly specify what rules now apply to crypto entities or businesses wanting to deal in crypto, because the central bank will determine which companies will participate in the experiment.
While the law doesn’t specify what its exact purpose is, recent statements from senior Russian leaders pointed toward using crypto to counter sanctions.
On July 17, 2024, in an economic affairs meeting, Putin said Russia should not “miss the moment” and should promptly set up a “legal framework” for crypto, which is “increasingly used in the world as a means of payment in international settlements.”
Then, one of the authors of the bill said Russia views cryptocurrencies “primarily as a tool for circumventing sanctions,” followed by its central bank Governor Elvira Nabiullina saying that’s why we “softened our stance” on crypto at an event in Moscow recently.
@ Newshounds News™
Source: CoinDesk
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