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Crypto Market Structure Bill; DEF Responds to HMRC; AMF on DeFi Regulation; Coinbase Letter

U.S. House Financial Services Committee to Vote on Crypto Legislation in July

What Happened?

The U.S. House Financial Services Committee (HSFC), led by Chair Patrick McHenry (R-NC), is set to vote on a comprehensive bill to establish a regulatory framework for cryptocurrency products after lawmakers return from the July 4th recess. The proposed legislation aims to clarify responsibilities for overseeing crypto products by regulators and provide a pathway for crypto companies and exchanges to register with those agencies.

The draft measure seeks to address the regulatory uncertainty that has plagued the crypto industry. The legislation aims to close gaps in the authority between the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). It also seeks to establish a viable regulatory framework for digital assets that will protect consumers and promote American innovation.

What Does This Mean?

The HFSC’s vote on the proposed legislation is a significant step towards providing much-needed regulatory clarity for the crypto industry in the U.S. However, the legislation’s prospects remain unclear as key democrats in the House, including Representative Maxine Waters (D-CA), have expressed concerns with the legislation. Ultimate passage will also require full House and Senate approval, where Senators Sherrod Brown (D-OH) and Elizabeth Warren (D-MA) serve as outspoken skeptics of the crypto industry.

DEF Responds to HMRC’s Consultation on DeFi What happened?

On Thursday we submitted a response to a consultation from the HMRC, the UK’s tax, payments and customs authority, regarding “the taxation of DeFi involving the lending and staking of cryptoassets.”

HMRC invited the public to offer commentary in order “to ascertain whether administrative burdens and costs could be reduced for taxpayers engaging in this activity, and whether the tax treatment could be better aligned with the underlying economics of the transactions involved.” Specifically, the call for evidence invited commentary on three potential options:

  1. Bring DeFi into existing rules;

  2. Create new, separate rules for DeFi;

  3. Apply a “no loss no gain” treatment, deferring tax liability until the assets are “economically disposed of.”

At a high-level, in our submission, which strongly supported option 2, we note that any changes to the tax regime that concern DeFi must: be flexible to account for future innovation; exhibit clarity and simplicity to promote compliance by minimizing the burden on taxpayers; and align with the underlying economic substance of a typical DeFi transaction.

We appreciated the opportunity to provide a response and we applaud the efforts of HMRC to create a new framework that is tailored to digital assets rather than forcing this new technology into old, and ill-fitting laws.

What does it mean?

DeFi has immense potential to advance innovation across the globe, and that potential can be realized through smart policy. Again, we appreciate HMRC’s progress and dedication to developing a tailored regime for DeFi transactions.

Towards Global Harmonization: The AMF's Initiative for DeFi Regulation What happened?

On Monday, the Autorité des Marchés Financiers (AMF), France's chief markets regulator, issued a comprehensive discussion paper that delves into Decentralized Finance (DeFi) and its multifaceted regulatory challenges. In doing so, it proposed an array of discussion points and considerations that it believes should guide the global regulatory approach to DeFi.

Specifically discussing DeFi, the AMF called for an assessment of the nature and degree of permissibility of blockchain protocols, which determines the decentralization level of a protocol. It also emphasized the need to establish a legal basis for smart contract enforceability, akin to real-world contracts, and highlighted the potential need for legislation mandating smart contract designs to adhere to regulatory requirements. Additionally, it called for a review of the use of open-source code in protocol development, which can be freely distributed without licensing terms.

Other topics include:

DeFi Markets: The regulator explored whether existing regulations applicable to traditional finance could be extended to DeFi where similarities exist. However, it cautioned that such requirements could prove impractical or impossible to implement or enforce in certain cases. The paper proposed considering "ad hoc" regulation as potentially offering better user protection.

DEXs and AMMs: The AMF emphasized the need to distinguish DeFi trading protocols from centralized finance (CeFi) platforms, and suggested a clear delineation of where trading occurs, whether on-chain or off-chain. It also mentioned the possibility of applying requirements to smart contracts’ code to make it translatable into non-technical language for regulators to review and approve.

Risks: The paper recognized unregulated market risk, including illicit activities like market abuse and manipulation, liquidity, pricing model risks, slippage risks, and leverage risks. It also acknowledged governance risks, where price manipulation and front-running may not be prevented despite protocols being decentralized.

DAOs and Governance Tokens: The AMF advised assessing the degree of decentralization over a DAO's governance and the underlying blockchain protocol. It encouraged considering cases where control might be exerted by third parties who are not protocol users.

What does it mean? The AMF's initiative brings a detailed and nuanced perspective to the regulatory discourse surrounding DeFi. It acknowledges the sector's unique challenges and proposes a balanced, thoughtful approach, underlining the need for regulation to be "progressive and proportionate". This is a nod to DeFi's innovative potential and a call for safeguarding user interests without stifling innovation. However, the regulator's approach raises some concerns. While it acknowledges the importance of understanding the decentralized nature of DeFi, its propositions could be seen as potentially antithetical to DeFi's core principles—decentralization, permissionless innovation, and open access.

Stay tuned for our response.

Coinbase's Call for Response

What happened?

On June 13th, the U.S. Securities and Exchange Commission (SEC) submitted a letter to the U.S. Court of Appeals, requesting a 120-day period to respond to Coinbase's initial rulemaking petition. In response, this week on June 16th, Coinbase filed an additional letter to the Court, stating that the SEC should be required to deliver regulatory clarity under the writ of mandamus. Additionally, Coinbase proposed a response deadline of 60 days starting from June 13th.

What does this mean?

As stated by Paul Grewal, the Chief Legal Officer of Coinbase, “It is unusual for the government to defy a direct question from a federal court”. If the Court grants the writ of mandamus, the SEC would be required to fulfill their official duties under the law and produce a clear response to Coinbase’s petition.


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