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Binance delists Zcash and others; OFR report; ESRB report; Wahi settlement

Binance's Decision to Delist Zcash, Other Privacy Tokens

What Happened?

On Wednesday, Binance, the world's largest cryptocurrency exchange by trading volume, announced the removal of 12 privacy-enabling cryptocurrencies, including Zcash (ZEC), from its markets in Spain, France, Poland, and Italy. Starting June 26, 2023, users in these countries will no longer be able to purchase or trade these tokens on Binance's platform. This decision is believed to be a response to regulatory pressure in the EU, particularly with the formal signing of the Markets in Crypto Assets (MiCA) regulation.

The Electric Coin Company (ECC), the organization behind Zcash, expressed its disappointment with Binance's decision on Twitter. ECC views this move as a direct threat to individual privacy. They argue that while Zcash complies with all other laws and regulations in the EU—including the so-called Travel Rule and the Fifth Anti-Money Laundering Directive—the vague language of MiCA could be interpreted to apply to a wide range of companies, decentralized organizations, cryptocurrencies, and applications.

What Does This Mean?

Binance's decision to delist privacy-focused cryptocurrency highlights the ongoing tension between privacy-focused technology and regulatory bodies. From a legal perspective, this move raises questions about the interpretation and application of regulatory frameworks like MiCA to privacy tokens. The vague language of MiCA, as pointed out by ECC, could potentially lead to broad application and regulatory overreach. This could stifle innovation and limit the potential of privacy-focused cryptocurrencies and the DeFi space more broadly.

With ongoing tension, it's worth reiterating the value of financial privacy. Privacy is not solely for those involved in illicit activity, it is fundamental for any person's security and dignity. A person's data illustrate their political, social, and religious beliefs, as well as their associations and how they spend their time. Personal data that’s public—including financial transactions—exposes individuals to racial profiling, political targeting, and discrimination based on religion, nationality, sexual orientation, etc., by both corporations and governments (foreign and domestic). Therefore, it's perfectly reasonable for a person to want and need financial privacy—privacy is normal.

Office of Financial Research Warns of Digital-Asset Market Concentration Risk—While Leaving Out DeFi Entirely

What happened?

On Tuesday, the Office of Financial Research (OFR) published An Early Look into Digital-Assets Regulatory Data, analyzing data on digital-asset intermediaries conducting virtual-currency transaction volume.

Based on data acquired from domestic centralized intermediaries, the OFR suggests there is risk in the digital-asset ecosystem based on “a high degree of market concentration, with major intermediaries not only accounting for the majority of transaction volumes but also holding the largest amounts of customers’ digital assets.”

To be clear: OFR’s warnings apply only to CeFi intermediaries, not to DeFi. The data on digital-asset transactions collected that is later described by the OFR to “exhibit a high degree of concentration among the top few intermediaries” represents only domestic centralized intermediaries, leaving out DeFi entirely.

What does this mean?

Data is valuable, but results must be accurately conveyed for it to be meaningful and avoid misleading readers about the picture it captures. Considering the OFR’s report solely focuses on centralized intermediaries, its findings on digital-asset transactions are limited in scope. In fact, the MSB Call Report data that OFR leverages to generate this analysis captures “less than 4% of total transaction volume in digital-asset markets.”

EU Financial Stability Watchdog Flags Crypto Conglomerates and DeFi as Potential Risk Factors

What happened?

The European Systemic Risk Board (ESRB) published a report investigating crypto-assets and the decentralized finance (DeFi) sector.

The report asserts that systemic implications have yet to materialize in the crypto and DeFi markets. Moreover, it claims minimal interactions between crypto-assets and traditional finance. As the EU prepares to implement the Markets in Crypto Assets regulation (MiCA) in 2024, the report warns of potential risks within crypto markets & suggests that new regulation might be required due to DeFi's potential systemic risk to the economic framework.

What does it mean?

In essence, the ESRB report displays a problematic understanding of DeFi and crypto-assets, leading to some questionable assertions and recommendations. The report seems to oversimplify & misinterpret the complexities of these rapidly evolving areas.

One of the concerning suggestions includes implementing a backdoor in smart contracts for potential upgrades or regulatory control—a move that directly undermines the foundational principle of DeFi and decentralization broadly. Furthermore, this would not only infringe on the trustless and censorship-resistant nature of smart contracts but also introduces a potential point of failure, which threatens network security.

Moreover, the over-regulation of DeFi developers through stringent design requirements or intellectual property limitations may hamper innovation and discourage participation. This goes against the ethos of the blockchain and DeFi movement, which was birthed as a response to traditional financial systems' failures, leveraging the power of open-source collaboration and creativity.

The report's proposal for regulating DeFi deployers based on tort liability also seems severe and detrimental. While audits before deployment are crucial, legal liabilities could deter potential developers, given the risk of severe penalties for unintentional mistakes.

While the intention to protect consumers and maintain financial stability is valid, there needs to be a careful balance to avoid stifling innovation and growth in the DeFi sector. As such, the ESRB's report highlights the necessity for regulators to deepen their understanding of these technologies, ensuring a balance between prudent regulation and preserving the innovative spirit that propels the crypto and DeFi sectors.

Ex-Coinbase employees settle insider trading charges with the SEC

What happened?

In a May 30th press release, the Securities and Exchange Commission (SEC) announced that former Coinbase product manager, Ishan Wahi, together with his brother, Nikhli Wahi, agreed to resolve the acquisitions of insider trading of at least “nine crypto assets securities”. As part of the settlement agreement, both individuals have agreed to a permanent injunction against breaking Section 10(b) of the Securities Exchange Act and Rule 10b-5. Subsequently, Ishan and Nikhil Wahi pleaded guilty to conspiracy to commit wire fraud.

What does this mean?

The fact that crypto assets are referred to as "securities” reiterates the view of the SEC that a majority of cryptocurrencies fall within the definition of securities under the SEC.

Treating crypto assets as securities means that they are subject to existing securities laws and regulations— ignoring underlying technology that differentiates decentralized finance from traditional finance and possibly undermining future innovation. The SEC may use this case to justify the imposition of stricter disclosure regimes as well as set a legal precedent for future cases involving insider trading and fraudulent activities in the crypto industry.

Importantly, this represents just another instance of the outcomes of regulation by enforcement. Since pressure placed on defendants by the agency to settle is so high, allegations that might otherwise be tested in front of a jury—such as the proposition that all nine crypto-assets traded by Wahi were securities—lose their day in court.


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