Hello Fintech Friends!

The crypto world is still grappling with the aftermath of the implosion of FTX, which not only has affected tens of crypto firms but also is giving rise to some big changes in crypto policy, which we cover this week.

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1.       FTX

In case you have not been following (here’s the recap of the whole saga), Sam Bankman-Fried (SBF), the ex-CEO of FTX was arrested last night in the Bahamas upon a request from the U.S., which notified the Bahamian government that “it has filed criminal charges against [SBF] and is likely to request his extradition.” It was just a matter of time before this happens. Remember, however, that FTX is technically a Bahamian crypto exchange and the subsidiary it owns in the U.S., FTX U.S., remains solvent to this day. So, we should be on the lookout for the explanation the U.S. Department of Justice will give for how SBF’s actions, which mostly happened outside of the U.S., are punishable in the U.S. This will also give us a better idea about the extent to which U.S. markets were impacted by FTX’s violations. For now, the arrest renders moot the whole back-and-forth between SBF and the Chair of the U.S. House Committee on Financial Services about SBF’s appearance before the Committee on December 13.

In other FTX-related news, FTX’s “dollar footprint” in the crypto world and beyond is being heavily scrutinized. We are not talking here about other firms’ exposure to FTX, which makes these firms creditors of FTX. We are rather talking about money FTX has directly donated to or invested in other entities. On December 7, Sen. Elizabeth Warren (D-MA) and Sen. Tina Smith (D-MN) sent letters to Federal Reserve Chair Jerome Powell, Federal Deposit Insurance Corporation Acting Chair Martin Gruenberg, and Acting Comptroller of the Currency Michael Hsu to enquire about their plans to review U.S. banks’ relationships with crypto firms. The letters specifically mentioned Alameda Research’s investment of $11.5M into a bank called Moonstone—an investment that was “more than double Moonstone’s worth at that time.” FTX’s money also made the CEO of the major crypto news website The Block resign on December 9 after having failed to disclose the receipt of $43M in loans from Alameda Research.

2.       Crypto Regulation

The FTX fiasco is making EU regulators consider if “reverse solicitation,” which we discussed last week (i.e., the idea that EU citizens can simply bypass EU crypto regulations if they use the services of foreign crypto firms on the Internet), represents a major loophole in the EU’s Markets in Crypto Assets Regulation (MiCA). Regulators indicated that they will ask the European Securities and Markets Authority to provide more clarity about reverse solicitation, noting that MiCA gives them the power to “bring down advertisements and websites for unauthorized crypto venues.”

Would bringing down ads be enough to eliminate reverse solicitation in the EU?

Now, on to some non FTX-related news. On December 6, the EU passed a new anti-money laundering legislation that limits cash payments in the EU to €10,000. So, if you need to buy something that costs more than that in the EU, including digital assets, you will not be able to use cash. We should also keep in mind that under the EU’s Transfer of Funds Regulation, which should go into effect next year, any crypto transaction involving over €1,000 will have to be probed by the virtual asset service provider facilitating the transaction.

In the U.S., Sen. Cynthia Lummis (R-WY), the co-author of the Responsible Financial Innovation Act which establishes the Commodity Futures Trading Commission (CFTC) as the primary crypto regulator, said last week that Ether, the second largest cryptocurrency, has become a security after the merge. This means that its regulator should be the Securities and Exchange Commission (SEC) rather than the CFTC, confirming what SEC Chair Gary Gensler said earlier this year about Ether becoming a security after the merge. Support for the SEC playing a larger regulatory role in crypto also came from Sen. Warren Elizabeth Warren (D-MA), who has reportedly started working on a comprehensive crypto bill that will give more power to the SEC as a crypto regulator in the U.S.

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See you next week!