Hello Fintech Friends,

Welcome to another week of fintech policy updates! In this edition, we'll explore the latest developments in crypto regulation, enforcement, decentralized autonomous organizations (DAOs), artificial intelligence (AI), and payments from the past week.

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1. Crypto Regulation

During her testimony before the House Financial Services Committee last Tuesday, Treasury Secretary Janet Yellen underscored the urgent need for Congress to establish a regulatory framework for cryptocurrency, particularly stablecoins. Yellen emphasized that the Financial Stability Oversight Council, a body encompassing major U.S. financial regulators that the Secretary leads, supports implementing a baseline of federal oversight over stablecoin issuers rather than relying solely on state-level regulators, the approach favored by House Republicans. Following the hearing, Rep. Maxine Waters (D-CA), the ranking member of the House Financial Services Committee, disclosed ongoing efforts by Democrats to draft comprehensive stablecoin regulation. In a brief statement to Politico on February 7, Waters remarked: “We’re very, very close — very close.”

On February 6, the U.S. Securities and Exchange Commission (SEC) approved two new rules on dealers stipulating that entities offering over $50M in liquidity through market-making activities must register with the SEC and affiliate with a self-regulatory organization. These rules, originally proposed in March 2022, were designed to enhance safety in the Treasury market. However, their ramifications extend beyond traditional finance to decentralized finance and the cryptocurrency sphere. Automated market makers such as Uniswap, which operate in a decentralized manner without any centralized control, may be required to adhere to these regulations when they enter into effect.

At the state level, Tennessee has recently joined the ranks of states where the Blockchain Basics Act has been introduced to the state legislature. Sponsored by the Satoshi Action Fund, a nonprofit committed to educating lawmakers on crypto-related regulations, this bill mirrors similar initiatives in states like Virginia, Missouri, Indiana, and Nebraska, with 14 additional states poised to follow suit. The Blockchain Basics Act is designed to safeguard the cryptocurrency rights of Tennessee residents, particularly the right to ownership, self-custody, and mining activities.

In our international news, the government of Hong Kong is set to implement stricter regulations on over-the-counter (OTC) digital assets trading, bringing it under the same requirements as retail digital assets trading. In Kenya, the Kenya Blockchain Association, an industry association, has drafted a comprehensive crypto regulatory framework known as the Virtual Assets Service Provider Bill and will submit it to the relevant parliamentary committee by February 14.

2. Enforcement

In a significant development in the SEC v. Ripple legal battle, the court has granted the latest SEC's motion, compelling Ripple to disclose financial statements pertaining to the institutional sale of its XRP tokens. This decision follows the court's previous classification of XRP tokens sold to institutional investors as unregistered securities in July. Meanwhile, the New York Attorney General, Letitia James, has escalated allegations against the Digital Currency Group (DCG) in an ongoing fraud case. The value of the alleged fraud has surged from $1B to a staggering $3B, attributed to losses associated with the Earn product of DCG’s platform Gemini and direct investments through DCG’s crypto brokerage Genesis. Shifting focus from the crypto realm, the Federal Trade Commission (FTC) announced plans to issue over $610k in refunds to consumers who fell victim to a tech support scam facilitated by payment processor Nexway. Last year, the FTC filed a complaint against Nexway, accusing the company and its executives of orchestrating offshore tech support scams, processing millions in charges, and providing scammers access to the U.S. credit card network.

3. DAOs

Japan is exploring innovative approaches to recognize DAOs as legal entities. The country's Financial Services Agency (FSA) has introduced a new proposal to amend the definition of Article 2 of the Financial Instruments and Exchange Act. This amendment seeks to afford a distinct token known as the "Limited Company Type DAO Employee Rights Token" equivalent treatment to traditional limited liability companies (LLCs). Currently, the FSA is inviting public feedback on this proposed amendment until March 4th.

4. AI

The EU’s 27 member states reached a significant milestone on Friday, February 2, by unanimously approving the final text of the groundbreaking AI Act. This pivotal legislation is poised to be formally adopted pending approval by policymaker committees on February 13, followed by a crucial European Parliament vote expected in either March or April. Originally proposed in 2021, the EU’s comprehensive rules outline four distinct risk levels for foundation models and frontier AI systems, accompanied by tiered restrictions governing their deployment in the market. Additionally, the regulations mandate that companies provide detailed documentation regarding the content of AI system training data, aiming to enhance transparency and accountability. Notably, the Act also includes provisions for watermarking AI-generated media, further bolstering transparent consumption of AI.

5. Payments 

On Wednesday, February 7, the European Parliament adopted comprehensive regulations designed to enhance real-time payments accessibility and efficiency for businesses and individuals. The new rules mandate payment service providers (PSPs) to ensure that instant payments are both available and affordable, with costs capped to match traditional transfers. Furthermore, PSPs must verify recipient information rigorously to prevent errors or fraud and conduct daily client verifications against EU sanctions lists. These regulations are expected to come into effect soon, potentially leading to a significant increase in real-time payments volume across the EU.

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See you next week!