Salam kawan fintech!

It sounds like Arabic, but it is not. It is rather the official language of a relatively small, sunny, tropical island in Southeast Asia which is one of the greatest crypto hubs on the planet and the world's most 'business-friendly' crypto country, according to a recent report by Coincub.

The policy debates in the crypto world, both in the U.S. and beyond, are still centered around FTX and the ramifications of its collapse. This week, we parse through some of these debates and bring to light what they may mean for the future of crypto policy.

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1.       FTX

On December 1, the U.S. Office of Trustee of the Department of Justice (DoJ), which oversees the administration of bankruptcy cases, filed a motion in the U.S. Bankruptcy Court in Delaware requesting the appointment of an independent examiner to probe any potential wrongdoing in the collapse of FTX. The motion argued that “[t]he appointment of an independent examiner would be in the interests of … creditors,” drawing parallels between the “extraordinary collapse” of FTX and the collapse of “Lehman, Washington Mutual Bank, and New Century Financial.” The decision to appoint the examiner rests with the court, which is also planning to hold a hearing in the case that will be live-streamed on December 16.

On the Hill, the Senate Agriculture Committee, which oversees the Commodity Futures Trading Commission (CFTC), held the first congressional hearing on the collapse of FTX. The sole witness was CFTC Chair Rostin Behnam who seized the opportunity to garner more support for the Digital Commodities Consumer Protection Act (DCCPA). The Act, which remains a work in progress, was introduced last August by four Senators on the Senate Agricultural Committee and was strongly backed by FTX’s ex-CEO Sam Bankman-Fried (SBF). It grants the CFTC an “exclusive jurisdiction” over what it calls “digital commodities.”

Behnam made sure to explain that he does not think that the U.S. can regulate crypto out of existence, noting that “[e]ven if we try to regulate it [to] outside the borders of this country, it would still exist elsewhere, and that risk would inevitably come back to us through retail or institutional [investors].” Despite his plea that “we … take a pause and look at the [DCCPA] … and make sure there are no gaps or no holes,” Behnam was adamant that “[t]he DCCPA ... would have prohibited [serious violations] …from occurring at FTX."

Is that true? Would the DCCPA have prevented the FTX collapse? The answer is no, simply because U.S. law does not apply to Bahamian crypto exchanges. Perhaps that is why U.S. Deputy Treasury Secretary Wally Adeyemo had insightfully remarked that the U.S. needs to work with other nations to create international crypto regulations. In fact, the same conclusion holds under the EU’s Markets in Crypto Assets Regulation (MiCA) which, despite being very strict, does not extraterritorially apply to foreign crypto firms. This means that EU citizens can simply bypass EU regulations if they use the services of foreign firms on the Internet—a dynamic known as “reverse solicitation.”

2.       Crypto Regulation

In a dramatic turn of events, Sen. Sherrod Brown (D-OH), Chairman of the Senate Banking Committee, sent U.S. Treasury Secretary Janet Yellen a letter dated November 30 in which he expressed, for the first time, his willingness to work on a crypto legislation. Brown, a long-time crypto skeptic, is widely viewed as a linchpin of any future crypto regulation. A week before, at his committee’s hearing on the nominations for the Federal Deposit Insurance Corporation (FDIC) board members, Brown insisted that not letting crypto into the U.S. banking system is “a national security issue.”

Brown’s letter to Yellen arguably shows a turning tide in the position of some key democratic lawmakers towards regulating crypto, while others remain opposed or uninterested. Sen. Jon Tester (D-MT) exemplified this opposition at the FDIC Senate hearing when he said: “I don't want to give [crypto] credibility by regulation.” More importantly, Democrats are challenging the DCCPA. On December 1, Brown said that “[t]his bill leans too much to the industry.” In the same vein, Sen. Elizabeth Warren (D-MA) argued that “[t]he CFTC has no experience in investor protection, which makes them the worst possible candidate for regulating a financial product that has been used to rip off millions of people.” She also has not confirmed or denied if she is working on an alternative bill. Whether more Democrats will follow the footsteps of Brown remains to be seen.

3.       Enforcement

Remember the Terra-Luna tokens whose collapse last May ushered the beginning of the crypto winter? The co-founder of Terraform Labs—the company that created and marketed the tokens—Shin Hyun-seung (also known as Daniel Shin), along with seven other Terra employees, appeared before a court in South Korea on December 2. The court interrogated the eight individuals and is expected to decide if they should be arrested following requests made by local prosecutors. Meanwhile, the whereabouts of Terraform Labs’ CEO Kwon Do-hyung remain unclear until this day.

4.       CBDCs

The Depository Trust & Clearing Corporation, the financial-infrastructure giant that provides clearing and settlement services to every security trade in the U.S., published a white paper on the findings of a project that was formerly known as Project Lithium. The project sought to explore how trades of tokenized securities can be settled using a wholesale Central Bank Digital Currency (CBDC) and distributed ledger technology (DLT). The white paper emphasized the gains from CBDCs in terms of the speed and efficiency of settlements. It also cited evidence showing how DLT can save billions of dollars through simplification and automation of trades.

In Congress, Republican lawmakers are still pushing back against a future U.S. CBDC, even though they are starting to soften their opposition. Nine members of the House, led by Rep. Tom Emmer (R-MN) and Rep. Patrick McHenry (R-NC) of the House Financial Services Committee, sent a letter to Susan Collins, President of the Federal Reserve of Boston (Boston Fed). The Boston Fed is currently leading a CBDC experiment known as Project Hamilton in collaboration with Massachusetts Institute of Technology Digital Currency Initiative. The letter requested more information about the involvement of private-sector actors in the project who, according to the letter, “intend to use government resources from the project to design a CBDC with the intent to then sell those products to commercial banks.” Yet, in what seems to be timid support of a CBDC, Emmer said that “[a]ny U.S. CBDC must be open, permissionless, and private.”

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See you next week!