Hello Fintech Friends,

Welcome to another exciting edition of our fintech policy updates. This week, we delve into a wide range of fintech policy topics; from the ever-evolving world of crypto regulation to the nuances of enforcement actions. We also cover the most recent updates on central bank digital currencies (CBDCs), artificial intelligence (AI), and fintech. Let’s get started.

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1. Crypto Regulation

Last week, new Democratic voices got involved in the ongoing crypto regulation debates on the Hill. Sens. Elizabeth Warren (D-MA), Bernie Sanders (D-VT), Robert Casey (D-PA), and Richard Blumenthal (D-CT) sent a letter to the Department of Treasury and the Internal Revenue Service (IRS), seeking clarification on the timeline for new cryptocurrency tax rules. The new rules are required under the Infrastructure Investment and Jobs Act, which was passed in November 2021. The letter pointed out that the deadline for passing the rules is in less than six months and that the rules are necessary to close an estimated "crypto tax gap" of around $50B.

Earlier in the week, the IRS released new guidelines on the taxation of cryptocurrency rewards received through staking. The guidelines require taxpayers to include validation rewards as part of their gross income, considering the fair market value of assets at the moment of receipt. This rule applies when the taxpayer gains control over the rewards and equally extends to exchanges and third-party services offering staking rewards.

Globally, significant regulatory developments are taking place. The Capital Market Authority of Oman is seeking input on its proposed framework for virtual assets, and Namibia's President Hage Geingob signed the Namibia Virtual Assets Act 2023 into law. India, the current President of the G20, voiced the importance of including the perspective of developing economies in the drafting of recommendations on crypto regulation currently being prepared by the International Monetary Fund and the Financial Stability Board. The Indian presidency also emphasized focusing on regions with higher crypto adoption and involving non-G20 members in the process.

2. Enforcement

The recent ruling by Judge Jed Rakoff of the U.S. District Court for the Southern District of New York in the U.S. Securities and Exchange Commission (SEC) v. Terraform Labs case has sent ripples through the crypto community. The case involves Terraform Labs, the developer of the Terra-Luna stablecoin, which collapsed in May 2022. Judge Rakoff denied Terraform Labs' motion to dismiss the SEC lawsuit, diverging from a recent decision by Judge Analisa Torres, who had ruled that programmatic sales of Ripple’s token XRP to retail investors did not violate securities law. Rakoff contested Torres' distinction between institutional and retail sales, asserting that it misinterpreted the Howey test. The new judgment was especially surprising for those who view Judge Torres' decision as an unequivocal, unreversible triumph for Ripple.

3. CBDCs

In Russia, an amendment to the federal law "On currency regulation and currency control" came into effect on August 1^st. This amendment expands the definition of foreign currency to encompass digital forms issued by foreign state central banks. Consequently, non-residents are now unrestricted in conducting transactions involving such digital currencies. Furthermore, the Bank of Russia unveiled its digital ruble logo and released a comprehensive transaction fee structure. This fee schedule introduces varying charges for transactions, with person-to-person (P2P) transfers remaining exempt. Across the globe, in Brazil, the Banco Central do Brasil (BCB) announced the official logo and name of its CBDC – "DREX:" The D in the acronym stands for digital, R for real, E for electronic, and X for transaction.

4. AI

The SEC may soon shift its enforcement focus to AI, as highlighted by Chairman Gary Gensler's recent statement. Gensler emphasized that the priority should be on auditing AI due to its transformative impact on markets and regulators. He noted that AI presents both challenges and opportunities, expressing concerns about accountability in financial decisions caused by AI's opacity. Gensler also warned that the rise of algorithms in pursuit of client returns could potentially destabilize markets.

In Africa, reports emerged from Kenya where local law enforcement conducted a raid on Worldcoin's Nairobi warehouse. Authorities confiscated documents and machines under the supervision of Kenya's Data Protection Commissioner, sparking discussions on data security and privacy concerns. Meanwhile, Worldcoin has announced its intention to expand operations globally, offering organizations paid access to its iris-scanning and identity-verification technology. For instance, if a coffee shop wants to give customers a complimentary coffee, Worldcoin's technology could be employed to guarantee that individuals do not attempt to obtain multiple coffees, without the need to collect more information. Welcome to the future!

5. Fintech

On August 1, the U.S. Small Business Administration (SBA) started implementing a series of new policies aimed at enhancing small businesses' access to capital through the modernization of the SBA's renowned 7(a) and 504 Loan Programs. The most notable change is an elimination of a 40-year ban on new licenses for the widely utilized 7(a) lending program, which was commended by experts who argue that the market's demand is not adequately met by the few banks and credit unions primarily focusing on loans averaging between $500K-$1M. The SBA will now need program lenders specializing in loans under $150K, a niche precisely suitable for fintech lenders.

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See you next week!