Hello Fintech Friends,

Welcome to another week of fintech policy updates. In this edition, we explore the latest developments from the past week in crypto regulation, enforcement, central bank digital currencies (CBDCs), artificial intelligence (AI), and payments.

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1. Crypto Regulation

On November 15, a bipartisan group of nine House Representatives jointly penned a letter to the U.S. Treasury addressing concerns about the rule the Internal Revenue Service (IRS) proposed last August for taxing crypto. Signatories on the letter included Chairman of the House Financial Services Committee Patrick McHenry (R-NC), Ritchie Torres (D-NY), Tom Emmer (R-MN), and Eric Swalwell (D-CA). The letter specifically focuses on two contentious issues. Firstly, it highlights challenges with the broad categorization of "broker," arguing that it could encompass various digital asset service providers, including decentralized finance (DeFi) platforms that often lack user identity information. Secondly, the letter questions the definition of "digital assets," suggesting that the term may cover assets like non-fungible tokens (NFTs) and stablecoins, which are not traditionally regarded as investment instruments.

Members of the House Financial Services Committee, led by Chair Patrick McHenry (R-NC), and over 50 other House Representatives, predominantly Republicans, sent another letter to U.S. President Joe Biden and Treasury Secretary Janet Yellen. The letter expressed concerns regarding the potential overstatement of crypto usage by militant group Hamas, urging for precise quantification of such usage. Additionally, the letter sought clarification on the United States' involvement in imposing sanctions on crypto wallets and the seizure of funds potentially linked to Hamas or other similar organizations.

At the state level, the New York State Department of Financial Services (DFS) issued new guidelines mandating crypto companies to establish comprehensive coin listing and delisting policies. The goal of the new guidance is to ensure that, in the event of a necessary coin delisting, the process unfolds in an orderly manner to safeguard consumers and minimize market disruptions.

Meanwhile, on the global stage, the International Organization of Securities Commissions (IOSCO) recently released long-awaited recommendations for the regulation of cryptocurrencies. These recommendations concentrate on centralized crypto asset service providers (CASPs) and encompass 18 recommendations spanning six crucial areas of CASPs' activities that are of special importance from IOSCO’s perspective.

2. Enforcement

The legal saga involving stablecoin issuer Tether and cryptocurrency exchange Bitfinex has reached a turning point as the U.S. District Court for the Southern District of New York denied the plaintiffs' motion to amend their complaint in a class action lawsuit. The plaintiffs sought to challenge Tether’s contention that its stablecoin, the largest by global market share, is fully backed by U.S. dollar. In its most recent reports, Tether indicated that its stablecoins are fully covered by reserves and that 85.7% of these reserves are held in cash and cash equivalents.

Concurrently, in a separate legal battle, plaintiffs, including major crypto firms and advocacy groups, are contesting the sanctions imposed by the U.S. Treasury Office of Foreign Asset Control (OFAC) on Tornado Cash. The alleged role of the crypto mixer in facilitating money laundering prompted the sanctions in August 2022. Despite an initial loss in the district court, the plaintiffs in one of the cases filed an appeal in the Fifth Circuit last week with the support of crypto exchange Coinbase.

3. CBDCs

Last week, the Monetary Authority of Singapore (MAS) revealed three pioneering initiatives aimed at exploring the feasibility of establishing a comprehensive and integrated tokenized monetary system that encompasses wholesale CBDCs, tokenized deposits, and regulated stablecoins. The upcoming testing phase will zero in on critical infrastructure components, including a settlement ledger designed to support programmability and atomic settlement on a per-transaction basis. Additionally, a tokenization bridge that facilitates transactions involving tokenized assets such as bonds will be studied. The framework will also feature a programmability protocol, allowing users to specify conditions for the use of digital money, along with a name service to enhance interoperability.

4. AI

Following the success of the UK’s AI summit that led to the renowned Bletchley Declaration, the UK's first minister for AI and intellectual property surprised many by revealing last week that the UK would not haste to regulate AI and instead prioritize fostering innovation in the novel sector. This approach comes as a notable departure from more proactive regulatory stances seen in other regions. In stark contrast, just last month, the Biden administration in the United States issued an extensive executive order on AI, which is widely regarded as one of the most comprehensive regulatory initiatives in the field to date.

5. Payments

The Federal Reserve (FED) Board announced an average increase of 1.8% in the prices of its services, effective as of 2024. Notably, fees for the FedNow Service®, the Federal Reserve's real-time payment service, will remain unchanged.

And in the EU, European Central Bank President Christine Lagarde stressed the need for a "European SEC" to consolidate the fragmented European capital markets. Lagarde pointed out the significant financial challenges facing European countries, drawing a parallel to the challenges the U.S. encountered during the development of its railroads. Lagarde highlighted the current discrepancy between EU and U.S. capital markets, citing that EU bond markets are three times smaller than their U.S. counterparts, and venture capital in the EU is five times smaller.

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See you next week!