Selected Publications

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.


Regulatory uncertainty in cryptofinance (April 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: Globally, the cryptofinance regulatory landscape is fragmented, but developing and improving. Market participants taking exposures in cryptofinance by investing in crypto assets or operating related processes may face considerable regulatory uncertainty, depending on their chosen jurisdiction. Our own records show that over 100 jurisdictions and at least 15 supranational bodies have taken formal steps to regulate cryptofinance products and processes over the last few years. None of the supranational bodies have banned or prohibited cryptofinance, and the large majority of countries have embraced it by increasing regulatory certainty for market participants and promoting innovation in a risk-controlled way. Currently, Switzerland, Liechtenstein, and Singapore offer crypto market participants the highest degree of regulatory certainty. While the EU has just begun a regulatory process that will lead to a similar regulatory certainty in a few years, certain member states, such as France and Germany, have considerably lowered uncertainty in recent years. The same can be said of the UK and several states in the Asia-Pacific region. Other jurisdictions, such as India and Russia, have been sending mixed signals regarding their intended direction, while the US has been struggling, owing to its intricate federal and state-based regulatory system, as well as its directionally unsettled economic policy stance (Congress). At the other end of the spectrum, countries including China, South Korea, Laos, Burundi, and Qatar provide regulatory certainty by prohibiting some or all cryptofinance products and processes. Crypto asset investors and entrepreneurs wishing to develop cryptofinance businesses hedge the risk of undue exposure to regulatory uncertainty by doing business in jurisdictions that offer the highest degree of regulatory certainty. Overall, the trend clearly points to a steady and global reduction of regulatory uncertainty.


Illicit use of cryptocurrencies (March 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: Two authoritative market intelligence reports on the illicit use of cryptocurrencies, released in February 2021 (by Chainalysis and CipherTrace), evidence a marked decrease in the phenomena during 2020 - compared to 2019 - but also new worrying trends in the areas of ransomware and Decentralised Finance (DeFi). Further regulatory action to combat the illicit use of cryptocurrencies is therefore expected. Progress in the implementation of existing regulatory Guidance and a further growth in overall cryptocurrencies transactions should lead to a further decline in the illicit use of cryptocurrencies in the coming years. Regulators have feared the illicit use of cryptocurrencies since bitcoin was born. Still in 2017 about one-quarter of global bitcoin users were involved in illicit activities, for a total transactional value of around USDbn 76. The authorities took concerted action in 2018 under the leadership of the G20. The resulting Guidance issued by the Financial Action Task Force (FATF) in June 2019 basically subjects virtual assets (VA) and their providers (VASP) to the same standard and procedure governing transactions in fiat currencies and their providers. Yet, as apparent from statements by US Treasury Secretary in February 2021, the illicit use of cryptocurrencies continues to worry regulators, who see it as growing.


The UK tackles stablecoins (February 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: On 7 January 2021, the UK government released a consultation paper that examined recent developments in Distributed Ledger Technology (DLT) and proposed an authorisation regime for stablecoins. Stablecoins have the potential to bring efficiencies to (cross-border) payments, promote financial inclusion, and facilitate the implementation of retail Central Bank Digital Currency (CBDC). The UK emerged as the third jurisdiction to single out and address stablecoins. Switzerland issued guidelines in September 2019, the EU issued regulatory proposals in September 2020, and the Financial Stability Board (FSB) provided a fundamental endorsement of stablecoins in October 2020. The UK government proposes to include stablecoins that can be reliably used for retail or wholesale transactions and that achieve a stable peg to assets such as single currency, multi currencies, or gold within the scope of the regulation. It further proposes to exclude stablecoins that achieve a stable value through algorithms that control their supply. The regulatory requirements would extend to the organisation, operation, and governance of the stablecoin arrangement. Global stablecoins would be subject to additional requirements as well. Existing cryptoasset regulation would be leveraged and extended to cover stablecoins.


Regulatory Developments for 2021 (January 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: In 2021 we expect the following digital regulatory developments: 1) A handful of Central Banks (CBs) will go live with their respective digital currencies; 2) The Financial Action Task Force (FATF) will continue to enforce the Travel Rule and expand its reach to Decentralised Finance (DeFi); 3) The Basel Committee on Banking Supervision (BCBS) will introduce a crypto prudential regulation; 4) GSC projects will box themselves through a challenging regulatory journey; 5) The U.S. Securities and Exchange Commission will approve the first crypto ETF; 6) The regulatory enforcement tool will materially shape sustainable cryptofinance; 7) The US will materially clarify and align its cryptofinance regulatory framework. We hold as certain that Switzerland will complete its comprehensive digital regulatory framework and that taxation frameworks will develop across the globe. These developments will support further mainstream adoption of cryptofinance, by providing certainty to the actors and a structure to the activities.


The Swiss DLT regulatory framework crosses the finishing line (December 2020)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: During the past few months, the Swiss Parliament endorsed the Federal Act adapting federal laws to distributed ledger technologies (DLTs). The project began in late 2018, and the Swiss Federal Council (FC) adopted the dispatch on the framework conditions for DLTs in November 2019. The FC initiated the consultation on adapting various ordinances on 19 October 2020. The consultation ends on 2 February 2021, as does the process of fundamental adaptation of the Swiss legal framework to DLTs. At that point, Switzerland will feature a comprehensive and articulated DLT regulatory framework. Realised through the adaptation of existing laws, as opposed to introducing a dedicated Act, this framework would offer entrepreneurs, investors, and consumers the highest regulatory certainty in the blockchain space, adding to the traditional attractiveness of Switzerland as an innovation and entrepreneurs-friendly jurisdiction in the global economy.


The EU pilot regime for DLT-based market infrastructure (November 2020)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: The European Commission’s (EC) Digital Finance Package (DFP), issued on 24 September 2020, includes a proposal for a pilot regime for market infrastructures based on the distributed ledger technology (DLT). The EC acknowledges that no sustainable and expanding primary crypto-asset market is possible without a secondary market that provides liquidity. The proposal for a pilot regime is, therefore, a logical complement to the recommended EU regulatory framework on crypto-assets reviewed in the October issue of the Digital Regulator. Despite recognising the mutual dependency of the two proposals, the EC takes a very cautious approach by proposing rules for a pilot regime with sandbox characteristics, as opposed to offering a regulation for a fully-fledged regime. The European Council and the European Parliament will decide the fate of the pilot regime, five years after it comes into force. Meanwhile, Switzerland has adopted a full-fledged and final crypto-asset regulation, also covering DLT-based market infrastructure, which comes into force next year after the ongoing consultation on implementing ordinances is over.


The proposed EU framework for crypto-assets (October 2020)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: The EU’s regulatory crypto-asset landscape has so far been characterised by fragmentation and uncertainty. This has hindered the scaling-up and development of crypto-asset products and services. The European Commission (EC) reacted to this situation on 24 September 2020, by issuing a Digital Finance Package (DFP) that includes a proposal for an EU regulatory framework on crypto-assets aimed at seizing related opportunities in a risk-controlled environment. The DFP also includes strategy papers for digital finance and retail payments, a proposals for a framework on digital operational resilience, as well as a proposal for a pilot regime for market infrastructures based on the distributed ledger technology (DLT). A closer look at the proposals for crypto-assets—which include stablecoins, significant stablecoins, and crypto-asset service providers—reveals an approach based on the principles of ‘same activity, same risk, same rule’, proportionality and complementarity. The proposals are comprehensive and would implement, de facto, the current financial regulatory framework for crypto-asset products and services. This would also create additional duties and accountabilities for all concerned national and regional regulatory bodies. While the intention is laudable and much needed, the timeline for implementation (2024) is too far off, and the nature and extent of the proposed requirements raise the issue of adequacy vis-à-vis the reality of an industry that is, at best, embryonic. The proposal risks the deterrence—instead of the promotion—of the industry if not implemented in a way that encourages and attracts entrepreneurs.


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