Hallo Fintech-Enthusiasten! Who doesn’t love pretzels?

Last week, we talked about the crypto winter and why we should expect to see more liquidity crises, crypto runs, and legal proceedings. Well, another failure episode of crypto ventures happened this week with the default of the prominent crypto hedge fund Three Arrows Capital on a $670-million loan. The news broke when digital asset brokerage Voyager Digital announced that Three Arrows Capital failed to repay an old loan in USDC and Bitcoin. Today, a court in the British Virgin Islands ordered the liquidation of the fund. Meanwhile, the crypto market cap continued its decline to $934 billion, down from its $3-trillion peak in November 2021.

When do you think we will see an end to the freefall of the prices of crypto assets?

Also, we are starting to see some important reactions to the Lummis-Gillibrand crypto bill in the U.S. Gary Gensler, the chair of the Securities and Exchange Commission (SEC) made public that he is working on a formal agreement with the Commodity Futures Trading Commission (CFTC) to ensure that crypto trading has adequate safeguards and transparency. Specifically, Gensler spoke about the importance of having “one rule book” that would apply to all crypto trading, regardless of whether they are securities or commodities. Such an unprecedented agreement would institute a different division of labor between the SEC and CFTC than the one proposed by the Lummis-Gillibrand bill: The bill establishes a prima-facie case that a crypto asset is a commodity, and thus is subject to the jurisdiction of the CFTC unless it is shown to be a security, which places it under the purview of the SEC.

On the Hill, Federal Reserve Chair Jerome Powell showed support for the idea of “one rule book.” In a hearing before the Senate’s Committee on Banking, Housing, and Urban Affairs, Powel argued that “[t]he same activity should have the same regulation no matter where it appears, and that isn't the case right now because a lot of the digital finance products, in some ways, are quite similar to products that have existed in the banking system or the capital markets, but they're just not regulated the same way.”

In your opinion, what are the pros and cons of such a unified regulatory approach to crypto assets?

In non-crypto news, the deputy director of the Consumer Financial Protection Bureau (CFPB) said that the bureau is taking a “close look” at “rent-a-bank” schemes, which are lending partnerships between banks and nonbanks, usually fintech companies. Through such schemes, lenders partner with an out-of-state bank and offer a “bank loan” that would be exempted from states’ interest rate caps, sometimes with 100% annual interest rates. Fintech lenders argue that the scheme is permissible under federal law, which allows state-charted banks to “export” loans to out-of-state borrowers, even if payable interest rates are above the caps of the importing state, as long as they are permitted where the exporting bank is located.

Do you think the advent of DeFi makes the circumvention of states’ interest caps through “rent-a-bank” schemes more or less likely?

Outside of the U.S., crypto markets are on the lookout for the approval of two major EU crypto regulations by the end of the month: The Markets in Crypto-Assets (MiCA), and the Transfer of Funds Regulation (TFR). Over the past two years, European regulators tried to resolve three challenging questions that held up consensus over the two regulations: the treatment of NFTs, the regulation of stablecoins, and the supervision of the largest crypto-asset service providers (CASPs). Among other things, the upcoming legislations are expected to impose some limitations on the use of stablecoins as a means of payment. It is also expected that large NFT issuers would be required to apply for a CASP license.

To what extent do you think the upcoming EU regulations should be instructive for U.S. regulators? Are there structural differences between the U.S. and European crypto markets that require caution while looking at what is happening in the EU?

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See you next week!