Hello Fintech Friends,

Welcome to another week of fintech policy news. This week, we'll cover some of the latest updates in crypto and stablecoin regulation, enforcement, central bank digital currencies (CBDCs), and payments.

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1.       Crypto Regulation

Crypto regulation proposals are once again being discussed on Capitol Hill. Last week, the U.S. House Financial Services Committee introduced a new stablecoin bill, which bears great resemblance to the Waters-McHenry stablecoin bill that was released last July. The new bill designates the Federal Reserve (Fed) as the regulator of non-bank stablecoin issuers, establishes reserve and liquidity requirements for issuers, and provides for a two-year ban on stablecoins that are backed by other digital assets. Additionally, the bill authorizes banking regulators and the National Institute of Standards to set standards for interoperability among different stablecoins. The bill also requires the Fed to conduct a study on certain aspects of a future U.S. CBDC, such as its potential impacts on monetary policy. The sponsors of the bill will have to overcome the challenging hurdle of gaining bipartisan support in a Congress that is deeply divided before the bill can be enacted into law.

At the state level, Katie Hobbs, the Democratic governor of Arizona, vetoed SB 1236, a bill that aimed to prevent local authorities from taxing crypto mining operations in the state. Several innovative regulatory initiatives are also emerging. In Nevada, the Senate Committee on Commerce and Labor proposed the establishment of a recovery fund that would be financed by a 5% fee on cryptocurrency transactions. The fund would protect citizens who fall victim to crypto scams, marking an unusual approach to financial regulation. In Utah, the governor signed two very innovative bills into law. The first bill, HB 470, pertains to digital identities and requires the state’s Division of Technology Services to launch a pilot program for on-chain digital credentials. The second bill, HB 357, recognizes decentralized autonomous organizations (DAOs) that are not registered in the state as for-profit or non-profit entities as limited liability companies.

Internationally, the Indian presidency of the G20 continues to work on developing a global crypto regulation before their term ends in November of this year. However, it remains unclear if this regulation will be an international regulatory framework that countries can join or a model domestic regulation that countries will be encouraged to adopt. The International Monetary Fund (IMF) has also highlighted the need for a consistent international regulatory framework for cryptocurrency in its annual Global Financial Stability Report.

2.       Enforcement

Decentralized finance (DeFi) is quickly becoming a top enforcement priority in 2023. Recently, the U.S. Treasury Department and the French Central Bank published two reports on the risks associated with DeFi projects and how these risks can be mitigated by regulators and developers (the reports can be found here and here). Following the release of the Treasury report, the U.S. Securities and Exchange Commission (SEC) announced the reopening of the comment period on a proposed amendment to the definition of “exchange” under Exchange Act Rule 3b-16, which would extend the rule to DeFi exchanges. By the same token, the French Central Bank report indicates that DeFi exchanges may be required to incorporate or establish that they meet certain governance and security standards in the near future.

Turning to other enforcement news, the Republican-led House Financial Services Committee is threatening to use a "compulsory process" against the SEC if the agency does not provide extensive information related to its enforcement action against bankrupt FTX. Meanwhile, the state of Wyoming is defending its regulatory framework for special purpose depository institutions, which is used to charter banks that deal with digital assets, in an ongoing lawsuit brought by Custodia Bank against the Fed. And in a significant development, Coinbase is set to receive $470k from its former employee Ishan Wahi and his brother Nikhil Wahi in the first-ever crypto insider trading case.

3.   CBDCs

In response to “unprecedented levels of global interest in CBDCs,” the IMF is planning to publish a CBDC handbook that “will be a compendium of knowledge and experience on CBDC.” The handbook will serve as “the basis for capacity development and hopefully help countries make as well-informed decisions as possible when taking the major step to design and issue their own CBDC.” The G7 is also considering a similar initiative, which will be geared towards supporting developing counties in the introduction of their own CBDCs.

4.       Payments

Last week, the Director of the Consumer Financial Protection Bureau (CFPB), Rohit Chopra, made a groundbreaking proposal to recognize certain payment systems as systemically important financial institutions. If implemented, these systems would be subject to stricter regulatory scrutiny, higher capital requirements, certain limits on activities, and enhanced resolution planning. Director Chopra also expressed his concern about how many consumers store funds on digital wallets and payment apps, especially in the current environment of high volatility. He noted that, unlike bank deposits, such funds are not covered by deposit insurance, which could pose a risk to consumers.

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See you next week!