Hello Fintech Friends,

This past week, crypto regulation was the most salient topic in fintech policy debates. We’ll address novel policy issues related to taxing crypto and partisan divides over stablecoins in the U.S. We will also shed light on important updates related to central bank digital currencies (CBDCs) and lawsuits involving Ripple and JP Morgan.

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1. Crypto Regulation

Taxes on crypto is instigating a heated debate in the U.S. and the EU. Last March, the Biden Administration presented its annual Revenue Proposals, which provide an explanation of the Administration's revenue proposals for fiscal year 2024. The Administration floated the idea of imposing a new tax on crypto miners called the Digital Asset Mining Energy (DAME) excise tax, which would be equal to 30 percent of the cost of the electricity used in mining. The proposed tax would be implemented gradually, beginning at a 10% rate in 2024 and reaching 30% in 2026. Expectedly, the crypto community in the U.S.  responded negatively to the proposal, insisting that the tax singles out a single energy-intensive activity among several similar activities.

In the EU, on May 16, the European Council politically approved the eighth version of the Directive on Administrative Cooperation (DAC8), which introduced new tax transparency rules related to crypto assets. DAC8 requires crypto asset service providers (CASPs) to collect and share information on any crypto transfers with the relevant competent authority, which would transfer the data to the relevant Member State. This sequence of data sharing would be automatically triggered under DAC8 if a natural person conducts a transaction or series of transactions exceeding €1.5M in value. In contrast to the American proposal, which focuses on mining, the European proposal did not engender notable backlash among European CASPs.

On the Hill, lawmakers are still focused on stablecoins and the security-commodity debate. On May 18, the U.S. House of Representatives’ Subcommittee on Digital Assets, Financial Technology and Inclusion held another hearing on stablecoins titled “Putting the ‘Stable’ in ‘Stablecoins’: How Legislation Will Help Stablecoins Achieve Their Promise.” The hearing was very similar to that of last week, perhaps the only difference was the increased attention given to the competing stablecoin bills currently proposed by Democrats and Republicans. The House also saw the reintroduction of the Securities Clarity Act, a bipartisan proposal led by majority whip Tom Emmer (R-MN) and Rep. Darren Soto (D-FL). The Act aims to distinguish an asset sold based on an investment contract, whether tangible or not, from the investment contract itself, which should be considered a “security” under the Securities Act of 1933.

At the state level, Texas’ Senate passed a pioneering bill that requires digital asset providers, including crypto exchanges, that have a customer base of more than 500 customers within the state and more than $10M in customer funds to maintain reserves sufficient to honor all withdrawal requests at any time. Providers will also be prohibited from comingling their own funds with customer funds or using customers’ funds for any purpose other than executing the transactions requested by customers. The bill will turn into law once signed by the state governor.

2. CBDCs

Last week, the New York Innovation Center of the New York Federal Reserve and the Monetary Authority of Singapore published a report on the second phase of Project Cedar x Ubin+, a joint research experiment of cross-border transfers using wholesale CBDCs that operate on different ledgers and represent different currencies. The experiment showed that (1) cross-border payments could be made across ledgers without the need for a central clearing authority or the establishment of a shared ledger, (2) atomic settlements (i.e., per-transaction settlements) under these conditions are possible, and (3) end-to-end settlements could be completed in under thirty seconds.

3. Enforcement

Last week, a major development occurred in the prolonged case brought by the Securities and Exchange Commission (SEC) against crypto company Ripple. The judge denied the SEC’s motion to seal “Hinman documents,” a speech given by William Hinman, the former Director of the SEC’s Division of Corporation Finance, more than four years ago, making it possible now to produce the speech in discovery. In another notable lawsuit, the shareholders of JP Morgan are suing the bank’s board, including CEO Jamie Dimon, alleging that the board breached its fiduciary duties and undermined the bank’s reputation by failing to address fraudulent transactions involving the money-transfer app Zelle and reimburse customers for the resulting losses.

4. Open Banking in the UK (from the Policy Edition’s friends Joshua Kaplan and Chris Hurn)

The UK Joint Regulatory Oversight Committee (JROC) has published a report outlining its recommendations for the future of Open Banking in the UK. The report emphasizes three key priorities. The first priority is to establish a sustainable and competitive footing for the UK Open Banking ecosystem, which will involve improving data sharing and collection between participants. The second priority is to unlock the potential for future growth in Open Banking payments, which should be supported by providing better choices and services to customers (e.g., improving customer journeys and lowering costs), and by enabling Open Banking transactions in retail to be a widespread alternative to card-based payments. The third priority is to adopt a scalable model for future data sharing models within Open Banking, including enhanced data sharing for the purposes of managing financial crime risks and testing use cases with service users, particularly those with vulnerable characteristics. The report’s priorities are supported by 29 actions due to take place by the end of 2024, including several regulatory and industry-led consultations and working groups.

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See you next week!