Hello Fintech Friends,

Welcome to another week of fintech policy updates. Last week, the U.S. Securities and Exchange Commission (SEC) made history by giving the green light to eleven spot bitcoin Exchange-Traded Funds (ETFs)! We discuss this major development in crypto regulation, alongside other developments in the U.S. and around the globe. We also shed light on the most important updates in the realms of enforcement actions and artificial intelligence (AI).

As always, if you are not yet subscribed to the Policy Edition of This Week in Fintech, make sure to subscribe below! Additionally, if you are interested in contributing to the Policy Edition as a guest writer to cover ongoing events or dive deep into fintech policy issues, please feel free to reach out to me on Twitter or LinkedIn.

1. Crypto Regulation

On Wednesday, January 10, the digital asset space witnessed a historic moment. The U.S. Securities and Exchange Commission (SEC) approved 11 spot bitcoin ETF applications from major Wall Street firms, including BlackRock, Fidelity, and Grayscale. The other eight applicants are Bitwise, Hashdex, Valkyrie, BZX, Invesco, VanEck, WisdomTree, and Franklin. This approval marks the culmination of more than a decade of persistent efforts to launch spot bitcoin ETFs. In a statement, SEC Chair Gary Gensler pointed to a specific court decision as the main driving force behind the agency’s historic move. In 2023, the D.C. Circuit Court of Appeals ruled that the SEC's rejection of Grayscale's attempt to convert its roughly $26B Grayscale Bitcoin Trust into a spot ETF was "arbitrary and capricious." In response to the court's concerns, the SEC decided to approve all ETFs as “the most sustainable path forward.”

The SEC's decision came on the heels of dramatic events, notably the hacking of the SEC's X account one day before the announcement. Following the incident, Chairman Gensler issued a statement to reassure the public, affirming that there was no evidence of unauthorized access to SEC systems, data, devices, or other social media accounts. On the same day, Gensler also tweeted a warning to investors, emphasizing the risks involved in investing in cryptocurrency.

After the announcement of the SEC decision, House Republicans, specifically House Financial Services Committee Chairman Patrick McHenry (R-NC) and digital assets subcommittee head French Hill (R-AR), commended the SEC decision, calling it a "historic milestone" for the crypto industry. In contrast, Sen. Elizabeth Warren (D-MA) expressed strong disagreement, arguing that the SEC is "wrong on the law and wrong on the policy." Subsequent statements from SEC commissioners further underscored the contentious nature of the decision.

In practical terms, the SEC decision means that investors in these spot bitcoin ETFs will now be able to get direct exposure to bitcoin, marking a shift from the previously approved bitcoin futures ETFs, which allowed holding derivatives contracts linked to bitcoin. Moreover, investors in the new ETFs will no longer need digital wallets to hold and trade bitcoin, which should dramatically broaden access to “digital gold.” The irony, however, is that the creator of bitcoin, Satoshi Nakamoto, envisioned a completely decentralized new currency, yet what is happening is the exact opposite! The SEC decision will enable a substantial influx of new investments in bitcoin, which will be managed by centralized funds, rendering access to bitcoin more centralized than ever!

 In other crypto regulation news, the Technology Advisory Committee for the U.S. Commodity Futures Trading Commission approved a set of recommendations related to Decentralized Finance (DeFi). These recommendations urge policymakers to deepen their understanding of DeFi and call for a thorough assessment of existing federal and state regulatory frameworks. Across the Atlantic, the European Banking Authority conducted a crucial hearing on the inaugural set of guidelines pertaining to the internal governance of stablecoin issuing companies and will hold another hearing this week. In Asia, the Monetary Authority of Singapore is pushing a legislative amendment to bolster its authority over unregulated products, especially bitcoin futures, offered by Capital Markets Services License holders. And recent research by TRM Labs revealed that 80% of 21 major countries, collectively representing around 70% of crypto’s global market cap, have tightened their crypto regulations in the year 2023.

2. Enforcement

In our enforcement news for this week, cryptocurrency brokerage Genesis Global Trading has reached a settlement with the New York State Department of Financial Services (NYDFS), agreeing to pay $8M for its failure to maintain a functional compliance program. As part of the settlement, Genesis Global Trading will cease operations in the state and surrender its BitLicense, a special license NY State grants for virtual currency activities.

Broadly speaking, enforcement actions against crypto firms in the U.S. have been unprecedented in 2023. A recent Financial Times report revealed that cryptocurrency and fintech companies faced fines totaling $5.8B for insufficient financial controls. This amount is more than seven times the total fines traditional finance firms had to pay, which amounted to $835M for the same year. Notably, a significant portion of the $5.8B comes from the $4.3B penalty imposed on Binance last year.

Meanwhile, in India, Apple complied with a request by the government to remove Binance and seven other cryptocurrency platforms from its Indian App Store. Within a few days, Google also took parallel action, removing Binance and several other crypto exchanges from the Google Play Store. This government request is part of an overarching crackdown on crypto platforms, which involves unconventional measures such as blocking these platforms’ URLs in India.

3. AI

Last week, House Financial Services Committee Chairman Patrick McHenry (R-NC) and Ranking Member Maxine Waters (D-CA) announced the formation of the Working Group on Artificial Intelligence—a bipartisan group that will focus on AI and its impact in the finance and housing sectors. More specifically, the working group will explore AI's impact on new product development, fraud prevention, compliance, supervision, regulation, and the financial services workforce. The working group will have 12 members and will be part of the Digital Assets, Financial Technology and Inclusion subcommittee.

Join me in conversation on Twitter or LinkedIn or leave a comment below.

See you next week!