Hello Fintech Friends,

Welcome to another eventful week of fintech policy. Last week saw a number of significant enforcement actions and policy developments related to cryptocurrencies. From the arrest and indictment of Do Kwon, founder of collapsed Terraform Labs, to the Wells notice served to Coinbase, and the White House's Council of Economic Advisors report that criticized crypto, both industry insiders and outsiders are uncertain about what to expect next.

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1. Enforcement

The eventful enforcement week started on Tuesday with news about Sushi DAO, the maker of the decentralized exchange SushiSwap, and its “Head Chef” (or CEO) Jared Grey receiving a subpoena from the Securities and Exchange Commission (SEC). Grey submitted a proposal to the Sushi DAO to establish a fund to cover legal fees but provided little information about the content of the subpoena.

On Wednesday, Coinbase, the largest crypto exchange in the U.S. by trading volume, announced that it received a Wells notice relating to potential violations of U.S. securities law. Based on initial investigations, Coinbase believes that some digital assets listed on its platform as well as its staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet are involved. Also on Wednesday, the SEC charged crypto asset entrepreneur Justin Sun and three of his companies (Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc.) with “the unregistered offer and sale of crypto asset securities.”

Then on Thursday came the big news of the arrest and indictment of Terraform Labs founder Do Kwon in Montenegro. Kwon is wanted in both the U.S. and South Korea in connection with the collapse of stablecoin Terra Luna last May, which wiped off $40B worth of value and marked the beginning of the ongoing crypto winter. Authorities in both the U.S. and South Korea said that they intend to extradite Kwon.

2. Crypto Regulation

Last week, the White House’s Council of Economic Advisors published its annual report, which included a chapter on digital assets. The report was harshly critical of crypto, stating that “[p]roponents have been relearning the lessons from previous financial crises the hard way.” It also noted that while “[s]ome have hoped that crypto assets could act as a form of decentralized money, making the U.S. payment systems faster, cheaper, safe, and more inclusive…, [t]his vision has not been realized.”

In other news, the Federal Reserve (Fed) explained why it rejected Custodia Bank’s application for a Fed master account. The Fed cited the risk of excessive exposure to a single sector, which we discussed two weeks ago. While the Fed acknowledged that “Custodia appears to have sufficient capital and resources to sustain initial operations,” its concern was that “Custodia’s revenue and funding model relies almost solely upon the existence of an active and vibrant market for crypto-assets.”

Internationally, the National Assembly’s Economics Committee in France approved an amendment to Bill no. 790, which would prohibit French social-media influencers from promoting unlicensed crypto products. Also, EU policymakers reintroduced a rule into an upcoming EU anti-money laundering regulation that would restrict commercial crypto payments of over €1,000 made by self-hosted wallets (i.e., wallets that are held by owners of assets rather than crypto exchanges), unless the identity of the wallet owner is known.

3. CBDCs

Republican opposition to a future U.S. central bank digital currency (CBDC) is intensifying. Sen. Ted Cruz (R-TX) reintroduced a bill that seeks to prevent the Fed from issuing a CBDC, and Florida Governor Ron DeSantis made a “first-in-the-nation proposal” to amend Florida’s Uniform Commercial Code “to explicitly prohibit the use of federal or foreign CBDC as money.” Meanwhile, the Central Bank of the UAE (CBUAE) signed agreements with G42 Cloud and R3 as the infrastructure and technology providers to start implementing the CBUAE CBDC Strategy.

4. CPFB

A three-judge panel of the U.S. Court of Appeals for the Second Circuit has unanimously found that the funding of the Consumer Financial Protection Bureau (CFPB), which comes from the Fed, is constitutional. Next October, the Supreme Court will hear the CFPB’s appeal of a previous ruling by the Fifth Circuit, which found the CFPB’s funding unconstitutional and, thus, should be subject to Congressional appropriations.

5. Payments

The Bank for International Settlements (BIS) Innovation Hub Singapore Centre, together with its partners such as the Bank of Italy, the Central Bank of Malaysia, and the Monetary Authority of Singapore, have completed a successful test of a multilateral network that linked three existing instant payment systems using the Nexus model. Payments were initiated using the mobile phone numbers or the recipients’ company registration numbers. The next phase of the project will focus on expanding the project to a population of about 500 million people.

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See you next week!