Hello Fintech Friends,

As we enter the second quarter of 2023, it appears that this year is shaping up to be the "year of crypto enforcement" given the unprecedented frequency and severity of enforcement actions against crypto firms. The latest of these is the complaint filed last week by the Commodity Futures Trading Commission (CFTC) against Binance, the largest crypto industry in the world. Today, we will explore this and other stories related to crypto regulation, central bank digital currencies (CBDCs), and decentralized autonomous organizations (DAOs). Let’s dive in.

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1. Enforcement

On March 27, the CFTC filed a civil enforcement action in the U.S. District Court for the Northern District of Illinois against Changpeng Zhao (CZ) and three entities that operate the Binance platform. The CFTC alleges that Binance knowingly offered unregistered derivatives in the U.S. without being registered, violating the Commodity Exchange Act. These derivatives are related to digital assets such as bitcoin, ether, and litecoin, which the CFTC classified as “commodities.” The CFTC’s filing includes detailed information, probably obtained from an insider, about how Binance instructed its U.S. customers to use virtual private networks (VPNs) to obscure their location and gain access to Binance’s products. It also contains allegations that Binance traded against its customers and used a very complex corporate structure to conceal these violations.

As a remedy, the CFTC is seeking an injunction that would permanently prevent Binance and CZ from offering the aforementioned crypto derivatives in the U.S., trading on any U.S. registered entity, and holding commodity interest or directing the trading of any digital asset in the U.S. Additionally, the CFTC is seeking an order directing CZ and Binance to pay back the trading profits, revenues, salaries, commissions, loans, or fees derived, directly or indirectly, from their U.S. customers, and to make each and every U.S. customer and investor whole. And as if this was not enough, a federal judge approved a request by the U.S. government for an emergency stay of Binance’s acquisition of bankrupt crypto lender Voyager on the same day the CFTC lawsuit was filed, further complicating the situation for the largest crypto exchange in the world.

When it rains enforcement, it pours!

2. Crypto Regulation

On the regulation and policy front, Sen. Elizabeth Warren (D-MA) said that she is leading a new campaign to build an “anti-crypto army,” which will probably include lawmakers from across the aisle such as Sen. Roger Marshall (R-KS). The Office of the Comptroller of the Currency, one of the main bank regulators in the U.S., has created a new “fintech office” that will primarily focus on crypto, and the National Futures Association has approved new rules for handling digital assets.

Internationally, EU lawmakers approved the €1,000 limit on payments for goods and services made by unhosted crypto wallets, which we discussed last week. European lawmakers are also considering adding a “kill switch” to smart contracts, which would basically “pause” smart contracts that otherwise work deterministically and automatically in the event of a data breach. The dilemma is that this would fundamentally change key features of smart contracts, particularly with regard to privacy and decentralization. This is because the kill switch will most probably involve a centralized admin intervening in a decentralized system and using users’ private keys when necessary, even though these keys should only be known to users.

3. CBDCs

States are becoming hotbeds for CBDC confrontations. In South Dakota, Governor Kristi Noem vetoed a bill last week that would have amended the state’s Uniform Commercial Code to exclude all digital assets other than CBDCs from the definition of money. In Sweden, the central bank recommended reconsidering plans to issue an e-krona in light of the present risks to financial stability. The Danish central bank also expressed similar concerns.

4. DAOs

In Pasadena, California, a federal judge denied a set of motions that sought to absolve the members of bZx DAO from legal liability in a class action brought against the DAO involving $55M lost because of a hack. Many DAO enthusiasts are left wondering if this denial implies that members of a DAO could be on the hook simply by virtue of their membership, which would practically turn DAOs into general partnerships in which partners are jointly and severally liable for the liabilities of their joint venture. Clearly, decentralized organizations like DAOs are having a hard time operating under a centralized legal system.

Join me in conversation on Twitter or LinkedIn or leave a comment below.

See you next week!