You are reading an excerpt from our free but shortened abridged report! While still packed with incredible research and data, for just $20/month you can upgrade to our FULL library of 50+ reports (including this one) and complete industry-leading analysis on the top crypto assets. 

Becoming a Premium member means enjoying all the perks of a Basic membership PLUS:

• Full-length CORE Reports: More technical, in-depth research, actionable insights, and potential market alpha for serious crypto users
• Early access to future CORE ratings: Being early is sometimes just as important as being right!
• Premium Member CORE+ Reports: Coverage on the top issues pertaining to crypto users like bridge security, layer two solutions, DeFi plays, and more
• CORE report Audio playback: Don’t want to read? No problem! Listen on the go.

Regulation

In a pivotal move for the cryptocurrency industry, Europe and Hong Kong have recently made defining statements on the nature and regulation of crypto assets. The European Union's unprecedented law, "Markets in Crypto Assets" (MiCA), is set to be enacted in the forthcoming year, and has sparked optimism among the crypto community. In a parallel move, Hong Kong has taken a decisive stance, classifying crypto assets as digital properties - an interpretation that carries significant weight in the global context.

MiCA

The passage of MiCA has been met with broad acclaim from cryptocurrency enthusiasts, particularly following the legislative body's decision to abandon the divisive provision proposing a ban on proof-of-work mining. This legislation provides a comprehensive regulatory framework aimed at ensuring the stability and security of the cryptocurrency industry across the 27 member states. The law is structured to prevent a repeat of significant market disruptions, such as those experienced by Terra Luna and FTX.

Hong Kong, on the other hand, has followed a different path by categorizing crypto assets as digital properties. This decision carries greater implications compared to similar determinations in other jurisdictions. This dynamic reveals a fragmented global perspective on crypto assets, with the U.S. still debating whether to classify them as commodities or securities.

Never-ending Regulatory Battles

Crypto exchanges have persistently sought clear regulations while diligently adhering to existing rules. A notable case involves Kraken, the world's third-largest crypto exchange, which has recently removed a substantial portion of its staked Ethereum (ETH) in settlement negotiations with the U.S. Securities and Exchange Commission (SEC). This move came as a response to the SEC's demand to halt its staking-as-a-service program earlier this year.

Interestingly, one day before the EU parliament endorsed the MiCA legislation, the Central Bank of Ireland granted Kraken authorization to operate as a virtual asset service provider (VASP). This development followed closely on the heels of Kraken's pre-registration filing with the Ontario Securities Commission, aiming to secure a Restricted Dealer status across Canada, despite the region's stringent regulations.

Coinbase, another prominent player wrestling with the SEC, has obtained a license from Bermuda and is now contemplating the launch of an offshore derivatives exchange. The U.S.-based exchange has initiated a narrow legal action in the U.S. Circuit Court, seeking a definitive response from the SEC to a rulemaking petition they filed the previous year. This petition requested specific regulatory guidance for the cryptocurrency industry.

In navigating these regulatory waters, Coinbase has effectively spearheaded the commodity versus security debate on behalf of the entire industry. At 21shares, we endorse this approach and believe it will lead to well-structured, unambiguous regulations that not only safeguard investors but also foster innovation in the crypto industry.

Gary’s Hearing

On April 18, the US House Committee on Financial Services (HCFS) organized an oversight hearing that focused on the Securities and Exchange Commission (SEC) and its approach to cryptocurrency regulation. Chairman Gary Gensler, representing the SEC, found himself in the hot seat, answering a spectrum of questions predominantly focused on the regulatory landscape of the digital asset sector.

The hearing was marked by a notable exchange where Gensler, when probed about whether he considered Ethereum (ETH) a security, abstained from a conclusive response. Furthermore, he offered no insights into the SEC's ongoing investigations, including the inquiry into the FTX collapse and the recent Wells Notice to Coinbase. Gensler's steadfast stance in justifying the SEC's methods, including prioritizing enforcement over regulatory transparency, didn't sit well with some members of the Committee.

Members expressed discontent over the existing regulatory framework, arguing that the rules designed for traditional markets may not be a perfect fit for the dynamic, constantly evolving crypto industry. The SEC's recent proposal to modify the definition of "exchange" to include "communication protocol systems" was met with criticism, as it could potentially augment the SEC's authority over Decentralized Exchanges (DEXes).

The SEC hearing brought to light the detrimental impact of the SEC's approach to cryptocurrency regulation on the industry. Concerns have been raised about Gensler's credibility following the FTX collapse, which raised fears of selective enforcement. Further, the SEC's history of promoting certain projects only to later classify the related token as a security has led to allegations of inconsistent regulation.

Stablecoin Legislation: A Promising Draft Bill and an Urgent Need for Regulation

On April 19, the HCFS subcommittee on digital assets convened to deliberate on stablecoins and the urgency for legislation. This follows the publication of a draft stablecoin bill earlier in the week. The draft bill proposes a number of key regulatory measures, including:

• Regulation of insured depository stablecoin issuers by existing federal banking agencies, such as the OCC, the Federal Reserve, FDIC, and NCUA.
• Implementation of reserve standards and oversight requirements that encompass aspects such as collateralization, types of collateral, custodial arrangements, and redeemability of the stablecoin.
• A proposed 2-year ban on algorithmic stablecoins, while the Treasury conducts an in-depth study on "endogenously collateralized stablecoins".
• A mandate for the Federal Reserve to study the potential impact of a Central Bank Digital Currency (CBDC).

The hearing featured testimonials from a range of industry figures, including Adrienne Harris from the New York Department of Financial Services (NYDFS), Dante Disparte from Circle, Austin Campbell, an adjunct professor at Columbia University, Jake Chervinsky from the Blockchain Association, and Delicia Hand from Consumer Reports.

The discussion underscored the importance of stablecoins, their practical benefits for consumers and financial inclusion, and the potential risks associated with the technology, including its potential misuse for criminal activities and the possible ripple effects on the broader US banking system. The panel was largely in agreement on the necessity for robust consumer protections, proper disclosures, surveillance tools, and restrictions on certain activities.

The stablecoin hearing provided an excellent platform for discussions on the potential and the need for the proper regulation of stablecoin technology. Despite some criticisms, constructive discussions led to a shared understanding of the importance of finding common ground. The draft bill’s provision allowing non-banks to compete, albeit under Federal regulation, is a progressive move. However, the practical viability of this path remains questionable.

Check out our latest CORE report on the stablecoin, USDC.