Crypto Regulation Weekly: Global Stablecoin Crackdown?; CFTC, SEC Battle for Control; New Jitters in India

The collapse of the TerraUSD stablecoin has already started to reverberate throughout the regulatory world, with any agency or organization that has oversight over digital assets treating it as both a grave warning and a call to arms.

The stablecoin, also called UST, and its sister cryptocurrency, LUNA, suffered the crypto equivalent of a bank run that saw the value of both run to zero and cost investors $45 billion.

Read more: TerraUSD’s Price Collapse Shows Vulnerability of Dollar-Pegged Cryptos

On a global scale, the Basel Committee on Banking Supervision, the international regulatory organization that sets global banking standards, announced that it is taking another run at a 2021 proposal that would require banks to hold $1 in capital for each $1 worth of crypto they hold — a rule some major banks said went too far.

The committee said it has “progressed” in its work toward a new proposal. It added that “recent developments” — meaning the TerraUSD collapse — have shown the need for a global minimum regulatory framework “to mitigate risks from crypto assets.”

Translation: It probably isn’t going to be suggesting a softer touch.

Meanwhile, the United Kingdom is proposing giving its financial regulators the ability to appoint financial overseers if a stablecoin becomes insolvent.

South Korea, on the other hand, is taking a far tougher approach to the collapsed stablecoin issued by local firm Terraform Labs. JTBC television reported that prosecutors in Seoul have announced plans to interview all Terraform employees as part of an investigation into the debacle.

Battling for Control

Among those pointing to the stablecoin collapse in the U.S. was Commissioner Caroline Pham of the Commodity Futures Trading Commission (CFTC), who said in an interview with CNBC that the incident highlighted the growing need to fend off unregulated shadow banking.

Banking and financial industry regulators are “kind of historians of money-like instruments,” she said, adding “this is a really familiar story, and the way to deal with it is prudential regulation.”

That’s a lot easier if “you’re just talking about extending the regulatory perimeter around newer, novel products,” Pham said in the interview. “It’s always faster to stand up a regulatory framework when it’s already existing.”

For example, regulating stablecoins as derivatives, which would give her agency oversight, rather than — or at least in addition to — the Securities and Exchange Commission (SEC).

See more: At Senate Hearing, CFTC Chair Behnam Steps up Battle With SEC for Crypto Oversight

Extending the regulatory perimeter is how Congress dealt with the last time “risky, opaque, complex financial products” blew up, she said, pointing to the “Wall Street Reform and Consumer Protection Act” — also known as the Dodd-Frank Act — passed in response to the Great Recession of 2007.

Crypto Regulation Bill Leaks

Sens. Cynthia Lummis and Kirsten Gillibrand have been careful not to leak any details of their negotiations over a wide-ranging, bipartisan crypto regulation bill. So, Lummis’ office was unamused when crypto industry news source The Block got its hands on one, saying the bill was a draft that was months out of date.

Read more: US Senators Set to Unveil Crypto Bill

Nonetheless it had a couple of very interesting points. First, it gave “exclusive jurisdiction over any agreement, contract or transaction involving a contract of sale of a digital asset that is offered, solicited, traded, executed or otherwise dealt in interstate commerce” to the CFTC while also giving control of “ancillary assets” like the governance tokens used to run blockchains and the decentralized autonomous organizations (DAOs) that run decentralized finance (DeFi), according to the report.

That is to say it gives the CFTC a fair bit of the control the Securities and Exchange Commission (SEC) wants and believes it already has. The SEC believes virtually all cryptocurrencies are securities under its regulatory control.

See more: SEC, CFTC’s Crypto Aspirations to Be Tested by Courts, Lawmakers

Soothing Banks’ CBDC Fears

Another reaction to the threat that many central bankers and financial regulators feel stablecoins present is to launch a central bank digital currency (CBDC). If that happens, the Federal Reserve will ensure that private commercial banks are not cut off from their customers, newly appointed Federal Reserve Vice Chair Lael Brainard told Congress last week.

While the U.S. central bank’s position on a digital dollar has matured from dismissive to skeptical to noncommittal over the past few years, the banking lobby’s formal comments earlier this month on the Fed’s January just-the-facts CBDC report made clear that some feather de-ruffling was in order.

Read more: Fed’s Vice Chair Tells Banks Digital Dollar Won’t Cut You Out

With the Bank Policy Institute warning that by poaching deposits during a downturn as safety-minded depositors choose the Fed over fallible commercial institutions, a “CBDC likely would undermine the commercial banking system in the United States, and severely constrict the availability of credit to the economy… [and] present serious risks to financial stability,” Brainard came with one message: We won’t let it happen.

One of, if not the, only forceful positions she took before the House Financial Services Committee Thursday (May 26) was that preventing the disintermediation of banks would be a key design feature of any digital dollar. That includes not offering interest on deposits, which she said “would confine their use to payments” to ensure banks aren’t drained of funds used to make loans.

Besides, Brainard added, a digital dollar is a bare minimum of five years away.

India Gets Jumpy Again

India said it is about ready to publish a paper looking at its crypto policy. While the country’s controversial crypto plans, notably its new taxes, have already worried its crypto industry, new comment by a Finance Ministry official suggesting that India might still be looking at a full ban — which he called an “extreme” option, so it’s unlikely — worried some.

But whatever a country’s stance on crypto, it won’t be very effective without a coordinated global framework, said Ajay Seth, secretary of the Department of Economic Affairs, CoinDesk reported.

Separately, after the Coinbase cryptocurrency exchange was booted off the National Payments Corporation of India (NCPI) popular but crypto-hostile Reserve Bank of India (RBI)-regulated Unified Payments Interface (UPI) three days after launching service in the country, the U.S.-based company’s CEO, Brian Armstrong, called it a “shadow ban” that may violate a Supreme Court ruling that forced the RBI to end a de facto ban.

Tough questions, and good questions, for NPCI and RBI in India. Is their “shadow ban” a violation of the supreme court ruling?https://t.co/59tbDH1zLS

— Brian Armstrong – barmstrong.eth (@brian_armstrong) April 25, 2022

See more: India Boots Coinbase From Payments Interface Days After It Enters Market

Those were apparently strong enough words that the Internet and Mobile Association of India (IAMAI), which represents the crypto industry, told CoinDesk it was not launching the court challenge that Armstrong’s tweeted message suggested.

Around the World

In Paraguay, a bill establishing a legal framework for trading and mining crypto moved one step closer to passage with the Chamber of Deputies sending a revised bill back to the Senate. It would require crypto exchanges to register and mining operations to be licensed. The country’s central bank opposes the measure, saying the potential damage to the reputation and costs to the financial system — as well as electricity consumption by miners — outweighed any potential benefits, The Block reported.

Binance, the world’s largest cryptocurrency exchange, is slowly turning around its 2021 regulatory annus horribilis, when it was booted from several European Union countries, the U.K., Singapore and several other nations.

Hot on the heels of a license from French authorities earlier last month, the company announced Friday (May 27) that it had won an Italian Cryptocurrency Service Provider license.