Selected Publications

Will 2022 deliver a unified US federal approach to crypto regulation? (January 2022)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: One year ago, we revealed seven regulatory developments we expected to happen during 2021. All seven expectations but one materialised, albeit to different extents. Two jurisdictions went live with their Central Bank Digital Currency (CBDC); the Financial Action Task Force (FATF) continued to enforce the Travel Rule and addressed Decentralised Finance (DeFi); several Global Stablecoin (GSC) projects developed further while Tether considerably clarified its legal position with the US NY District Court and Commodity Futures Trading Commission (CFTC); the US Securities and Exchange Commission (SEC) approved the first bitcoin crypto Exchange Traded Fund (ETF), albeit one trading in the futures market and not spot, and enforcement continued to shape cryptofinance; contrary to our expectation, the Basel Committee on Banking Supervision (BCBS) did not introduce crypto prudential regulation although material development is expected in 2022. Finally, during 2021, US regulators initiated a clarification and alignment process of their cryptofinance regulatory framework. We expect this work to be completed during 2022. We anticipate the issuance of a federal cross-agency cohesive and coherent framework able to strengthen market infrastructure, market conduct, and investor protection. We expect the framework to close the gaps currently affecting cryptocurrency markets and grant complementary roles to federal agencies. We also expect core focus areas to include crypto exchanges, DeFi, stablecoins as well as banks’ crypto exposures. As some of these areas are working sites shared with international standard setting bodies such as the G7, the Financial Stability Board (FSB) and the Bank for International Settlements (BIS), we expect material influence of the US framework on this international work. Finally, we expect cryptoactors to have to adjust operations to comply with the requirements of a framework that on balance will support the development of sustainable cryptofinance.


Bitcoin ETF: Substance over form, please (December 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: Since the first postponement of the decision to authorise trading in a bitcoin spot ETF — in March 2019 (proposal by VanEck and SolidX) — the US SEC has rejected eleven bitcoin spot ETFs consecutively and has not approved any. The rejections have been substantiated by the argument of insufficient compliance with Section 6(b)(5) of the Securities Exchange Act of 1934 and by insufficient evidence that the relevant bitcoin market is resistant to manipulations beyond that of traditional security or commodity markets. The SEC, however, authorised the first bitcoin futures ETF on 18 October 2021, which seems to be a situation of ‘form over substance’. A bitcoin futures ETF, being based on derivatives, is inherently riskier than a bitcoin spot ETF, and the arguments supporting the rejection of a spot ETF logically carry over the bitcoin futures ETF. The CFTC formal overseeing of the bitcoin futures cannot alleviate the substantial concerns. The sense is that by privileging form over substance, the SEC tries to risk control the access to bitcoin by retail investors. However, given the increasingly easy access to bitcoin and other cryptos through products and services offered by the (often unregulated) market, the SEC stance may increase the risks for investors rather than provide effective protection.


Promotion of sustainable ‘cryptoization’ by global standard setters (November 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: October 2021 witnessed several fundamental policy pronouncements on cryptofinance by global standard setters. These aimed to set the policy direction for cryptocurrencies (or ‘crypto’) in the foreseeable future. The emerging global policy message from standard setters such as the International Monetary Fund (IMF), Financial Stability Board (FSB), Bank for International Settlements (BIS), International Organization of Securities Commissions (IOSCO) and the Financial Action Task Force (FATF) is supportive. Risk-based regulations should support the buoyant ‘cryptoization’ (a term introduced by the IMF in its latest Global Financial Stability Report (GFSR)) of economies, and the potential role of stablecoins in enhancing cross-border payments should be recognised. Furthermore, developers of decentralised finance (DeFi) applications should be assured of a pragmatic and selectively permissive regulatory stance. On balance, global standard setters intend to introduce supportive regulation for cryptoization to ensure the societal sustainability of distributed ledger technology (DLT)-based innovation.
In a significant development in cryptofinance, the United States (US) Securities and Exchange Commission (SEC) authorised a bitcoin futures exchange-traded fund (ETF) for the first time on 18 October 2021. Other notable regulatory developments include progress in the central bank digital currency (CBDC) space in Hong Kong, France, Georgia, Ghana, and Nigeria, and material regulatory/governmental cryptofinance developments in jurisdictions such as Australia, Malta, Guernsey, Sri Lanka, and Russia.


China bans; the US doesn’t: Crypto wins (October 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: On 24 September 2021, China’s key monetary and financial agencies issued a blanket ban on all crypto transactions and mining. This confirmed and reinforced the May 2021 ban on financial institutions and payment companies providing cryptocurrency-related services that enable cryptocurrency transactions. Similar bans were issued in 2013 and 2017, and there was, more broadly, a relentless effort to suffocate the domestic cryptocurrencies market. The latest ban came days after the securities regulatory commission re-affirmed the work on introducing smart contracts and blockchain-based services to digitise the securities and futures market; it also followed a period of heavy work by the monetary authority that culminated in the release of the e-yuan in 2020. China has always supported the distributed ledger technologies-based applications. On 1 October 2021, the chair of the US Federal Reserve System clarified that the US does not intend to ban cryptocurrency. The chair of the securities and exchange commission (SEC) took the same stance on 5 October 2021. The statement followed several months of intense scrutiny and analyses of the cryptocurrency markets, and political procedural steps by the federal monetary and financial regulators. These steps were undertaken to address the cryptocurrency market’s weaknesses exposed by the correction that took place in May 2021, such as those related to market infrastructure, market conduct, and investor protection. On 1 September 2021, the SEC urged crypto exchanges to embrace the regulation in order to not lose public trust, and on 5 September 2021, it called for the crypto space to work in cooperation with regulators. Daily bitcoin price charts evidence that strong statements made by superpowers do move the market. Investors should consider such statements within a broader context and be mindful of the following. First, cryptofinance cannot be stopped unless the Internet is shut down or extensively controlled. Second, regulatory adoption and sustainable practices are necessary conditions for mass cryptofinance adoption. Then, recent global developments show that cryptofinance-unfriendly jurisdictions are increasingly a minority.


The DeFi Regulatory Challenge (September 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: DeFi is a new financial paradigm that generates significant benefits. As of 14 September 2021, DeFi transactions were funded by no less than USD 88.7 billion. The risks associated with DeFi are also significant and amplified by its unregulated environment. Since 2017, the evolution of cryptofinance has shown that a regulatory approach that can provide certainty to the private sector, support innovation, and mitigate money laundering and investors’ risk can boost cryptocurrencies adoption. The same holds true for DeFi. The critical question is how to regulate DeFi. In this context, the current debate in the US suggests that the enforcement approach – the application of financial laws to DeFi – is ill-suited to achieve the intended goal, because it is built on the concept of centralised intermediary – which per definition is absent in DeFi. A prudential regulatory approach, focused on setting risk control and capital or liquidity boundaries on the private sector and actors, may be more conducive to the intended outcome, particularly when informed by a principle-based regulation. It will require a proactive stance from the DeFi sector and actors. Embedding RegTech solutions in smart contracts may constitute a constructive opportunity going forward.


Comments on BCBS consultative paper ‘Prudential treatment of cryptoasset exposures’ (September 2021)

METI Advisory AG was pleased to offer to the BCBS comments on the captioned consultative paper. Key message: The BCBS sticks to the idea of applying the one-size-fits-all, harshest possible capital charge to the exposure to all cryptoassets other than tokenised traditional financial assets and non-algorithmic stablecoins. METI Advisory AG notes that that from a risk viewpoint, such an approach assimilates diverse cryptoassets such as bitcoin, ether, utility tokens, DeFi tokens, and other network coins, as well as algorithmic and crypto-backed stablecoins, to a single asset, akin to the worst externally rated traditional securitisation tranches. METI Advisory AG firmly believes that the assimilation of diverse cryptoassets to a single asset evidences i) a poor understanding of the natures of these diverse cryptoassets and ii) a lack of progress, compared to the discussion paper issued in 2019, in the analysis and understanding of what constitutes the most genuine asset addition since the emergence of blockchain-based finance. This position cannot be the final one and needs to be further elaborated. Bitcoin, ether, utility tokens, DeFi tokens, and other network coins, as well as algorithmic and crypto-based stablecoins differ widely in terms of their economic functions, risk profiles, and governance arrangements, and these differences need to be understood, acknowledged and taken into account when specifying capital adequacy and risk management prudential rules. The operational risk associated with these assets is bound to reduce over time as the framework ecosystem becomes more professional and possibly regulated (e.g., regarding cryptoexchanges). METI Advisory AG is strongly convinced that to achieve a more detailed and realistic understanding, it is important that the BCBS includes in the process the know-how of the cryptoindustry, which typically resides outside the scopes of BCBS-regulated entities. The full position will be made publicly available by the BCBS ind due course. 


Cross-border challenges of a Central Bank Digital Currency and Global Stablecoins (August 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: On 9 July 2021, the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the World Bank, issued a Joint Report to the G20, which analyses how CBDCs could facilitate faster, cheaper, more transparent, and more inclusive international payments. The report concludes that reaping such benefits will require significant conceptual and practical work and effective multilateral collaboration and the implementation of new infrastructures, in short, a long timeline. In these circumstances, could the implementation of a GSC in open collaboration with monetary authorities deliver those efficiency and inclusiveness enhancements to the international payments system more swiftly? After all, last year, the G20 made the enhancement of cross-border payment a priority, and the G7, in June this year, reiterated that no GSC should launch unless it is properly regulated. Open collaboration with the monetary authorities would ensure appropriate consideration to the impacts of a GSC rollout on monetary policies and on the management of cross-border flows. The alternative is to perpetuate the drawbacks of the current international payments system for the foreseeable future.


Basel Committee Consultation: A Prudential Treatment of Banks’ Cryptoasset Exposure (July 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: The Basel Committee on Banking Supervision (BCBS) commenced in June 2021 the consultation on the ‘Prudential treatment of cryptoasset exposures’ document as an initial step towards the promulgation of the internationally binding capital and liquidity rules applicable to banks’ exposure to cryptoassets. Building on a discussion paper issued in December 2019, this consultation document introduces the distinction between tokenised traditional assets and non-algorithmic stablecoins and other cryptoassets, such as bitcoin, ether, utility tokens, DeFi tokens, and other network tokens, as well as algorithmic and crypto-backed stablecoins. The ‘Pillar 1’ formulaic minimum capital charge for banks’ exposure to tokenised traditional assets should be at least equivalent to those of traditional assets. However, the exposure to non-algorithmic stablecoins should be subject to new, dedicated Pillar 1 guidance. Other cryptoassets (e.g. bitcoin, ether, utility tokens, DeFi tokens, and other network coins), as well as algorithmic and crypto-backed stablecoins, should be subject to the one-size-fits-all, harshest possible Pillar 1 charge (1,250% risk-weight) corresponding to the full exposure deduction from the capital base. The BCBS plans to supplement the Pillar 1 minimum charge with an operational risk add-on, as well as provide additional guidance under Pillar 2 (supervisory review process) and Pillar 3 (disclosure), and extend the current leverage ratio, large exposures, and liquidity ratio frameworks to cryptoassets. While the consultation paper recognises the ineluctability of asset tokenisation and stablecoins, it disappoints by continuing to apply the one-size-fits-all, harshest possible capital charge to the exposure to all cryptoassets other than tokenised traditional financial assets and non-algorithmic stablecoins. From a risk viewpoint, this approach assimilates diverse cryptoassets such as bitcoin, ether, utility tokens, DeFi tokens, and other network coins, as well as algorithmic and crypto-backed stablecoins, to a single asset, akin to the worst externally rated traditional securitisation tranches. It thus evidences a poor understanding of the natures of these diverse cryptoassets. The BCBS recognises that the specification of final rules will likely require more than one consultation. Further, it is important that this process includes the know-how of the cryptoindustry, which typically resides outside the scopes of BCBS-regulated entities. As such, it can lead to a deeper understanding of cryptoassets and the recognition of the diversity of their economic functions, governance arrangements, and risk profiles. However, an implementation of the proposed blunt approach would likely stifle innovation and promote parallel, unregulated cryptoasset activities.


Cryptocurrency Markets and Regulators - What to expect (June 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: The 12-month period of substantial increases in cryptocurrency values (bitcoin’s value grew by 845% from 14 April 2020 to 14 April 2021) evolved, in May 2021, in a correction that has exposed market conduct, infrastructure, and investors’ protection issues. The US federal financial and banking regulators have teamed up to pursue, rapidly and rigorously, a clear and explicit cryptocurrency regulatory framework. Given the US share in the global economy and the influential role of its regulators, the outcome of the process is likely to shape cryptocurrencies regulation and markets globally. Investors should welcome further regulatory clarity in areas such as market infrastructure, conduct, and investor protection inspired by traditional financial regulation, which will promote the development of institutional-grade cryptofinance in the mid to long term. Cryptocurrencies are not deemed systemically relevant by Central Banks, and a major clampdown can be excluded.


FATF and DeFi: Further thinking is required (May 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: On 19 March 2021, the FATF issued an update to its 2019 Guidance on the risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs) for consultation. The consultation was concluded on 20 April 2021, and the FATF will report its way forward in June 2021. Among other aspects, the proposed updates broaden the definition of VA and extend the definition of VASP with the goal to ensure that all digital financial assets are captured by FATF standards. The FATF is attempting to extend an approach that is constructed around the notion of centralised intermediaries (e.g. banks and exchanges) and the possibility of expert judgment (e.g. assess the suspicious nature of transactions) on highly automated, per definition decentralised, DeFi protocols. If the update is not modified to account for the specificities of DeFi, the final Guidance may cause the overregulation of the digital financial industry and disincentivise financial innovation.


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