FTX and Crypto Bubbles: Will Self-Regulation Be the Savior?

FTX and Crypto Bubbles: Will Self-Regulation Be the Savior?

In the aftermath of the FTX crash, the crypto market experienced significant shifts, with developments like the Ripple v.s. SEC lawsuits and BlackRock’s Bitcoin bonds injecting energy and optimism into the community. Despite the distance from that troubling period in 2022, the panel discussion on FTX, regulations, and self-regulation remains insightful.

Led by Sebastian Becciu from Sygnum Bank, the panel includes experts like Robert Le from Pitchbook, Kevin Murcko of Coinmetro, James Ryan from GammaX, and Michael Jackson from Fabric Ventures. As the crypto industry rebuilds trust and aligns with regulations worldwide, it paves the way for institutional players to enter the space.

Could the FTX Collapse Have Been Prevented With More Regulations?

The FTX collapse sparked a debate on the role of regulations in preventing such incidents. Michael attributes the FTX bubble to FOMO and the abundance of free cash during the Covid-19 pandemic.

On the other hand, Robert emphasizes the cyclical nature of financial markets and argues that the lack of regulations allowed FTX’s founder to present the exchange as legitimate while evading legal oversight. 

While Michael and Kevin believe that regulations may have lessened the damage, they acknowledged that bad actors will persist in any industry, making complete prevention challenging. Michael points out that the crash might have been caused more by internal governance and management issues within the company rather than a regulatory failure. He thinks that maybe with proper regulations, the damage of the FTX crash would have been lessened, but it wouldn’t have been stopped.

“Regulations move slower than innovation, everybody knows that saying, right? At the same time, if you’ve ever run a business, you’ll know that criminals outpace whatever you do to stop them. At the end of the day, you can try, you can lessen, but you’re not going to stop it.”
– Kevin Murcko, Founder & CEO of Coinmetro

What Are the Impact of Regulations?

James thinks that it’s inevitable that companies are going off-shore. If customers are demanding less friction, companies will move to countries where they can set up an exchange with less friction, which is basically going off-shore. 

Robert responds to this by saying that in the U.S. a lot of the federal regulators are taking steps to cut off crypto from the banking system, and he believes this is going to push crypto companies off-shore.

Kevin agrees with them, stating that the current cycle of regulation hasn’t worked to prevent fraud and has failed to establish a better ecosystem. Apart from pushing companies off-shore, there might also be potential regulatory risks that come along. He states that regulations often leave the biggest companies in the world to do whatever they want while smaller entities have to follow rules, making them less competitive.

Michael complements this conversation by looking at the finance and VC perspective. He thinks nowadays VCs won’t permit their money to be invested in companies that are in shady jurisdictions, but only in reputable companies that don’t focus merely on arbitrage. He believes that this, rather than regulations, will be what brings companies on-shore.

More EBC insights on crypto regulations:

The conference room is full of the audience listening to the FTX panel at EBC23.

What Are Your Take on Self-regulation?

Robert foresees a combination of regulations and self-regulatory organizations (SROs) in the industry while Michael also thinks that the regulations will be framework regulations. 

On the other hand, Kevin emphasizes the importance of self-regulation. He thinks a self-regulating system is like having a person in your neighborhood that is always complaining about everything, but after the complaint, the annoying things just stop happening, benefiting the whole community. 

Similarly, he points out that it was Twitter that first disclosed the scandal of FTX. Kevin thinks that what differentiates SROs from regulators is that SROs are formed by insiders, which can also be corrupt, for sure, but they can be more powerful as well.

How Do We Get Rid of Bad Actors in the Industry?

Michael states that enforcement needs to be stronger against scammers in crypto, who often hide their identity. Self-sovereign identity systems are being developed to link real-world identities to online activities and prevent scamming by illuminating the shadows. Meanwhile, the development of insurance policies in DeFi may also improve the problem.

Kevin argues that bad actors exist in all industries, there will always be people that outsmart the system, and it’s impossible for us to ever get rid of them. In crypto, scammers exist, but they represent a small percentage of transaction volume. The problem is the media focuses on sensational numbers without comparing them to other industries. The solution is to establish norms and standards as the industry grows

Watch the full panel to learn about the expert’s opinions on the FTX crash and self-regulation!

XRP Lawsuit: Key Insights and Future Impacts You Should Know

XRP Lawsuit

Ripple Labs achieved a partial victory in the XRP lawsuit against the Securities and Exchange Commission (SEC) in the Southern District of New York on July 13th. Judge Analisa Torres ruled that XRP is not a security for programmatic sales but is classified as one for institutional investors

As the SEC aimed to impose regulatory measures on several crypto companies, the recent triumph of Ripple and its XRP currency has encouraged investors, and the prices of XRP and other cryptocurrencies catapulted last week following the news. 

However, both Ripple and the SEC could perceive this outcome as a potential victory, as it lends support to their respective arguments in the ongoing security classification debate. Future trials are also anticipated by various industry experts.

Latest Summary Judgment: SEC v.s. Ripple

This XRP lawsuit has been going on since December 2020 as the SEC filed a lawsuit against Ripple, its CEO Brad Garlinghouse, and its co-founder Chris Larsen, accusing the company of offering an unregistered security. The regulator alleged that Ripple had deliberately created an “information vacuum” (p.2) and selectively disclosed only the information it deemed essential.

From the latest summary judgment, the judge decided that XRP is NOT considered a security when Ripple puts XRP on exchanges for trading and when the company pays its employees with XRP. 

However, while Ripple celebrates its partial victory, some ruling favors the SEC. The court upheld the SEC’s position regarding “Ripple’s Institutional Sales of XRP to sophisticated individuals and entities.” The judge ruled that Ripple’s $728.9 million worth of XRP sales to hedge funds and sophisticated buyers WERE unregistered sales of securities.

Bill Hughes, a lawyer from ConsenSys, tweeted the summary of the SEC v.s. Ripple ruling on July 13th. https://twitter.com/BillHughesDC/status/1679525517068759040?s=20.

The SEC imposes stricter regulations compared to the Commodity Futures Trading Commission (CFTC). When a cryptocurrency is considered a security, failure to register the token with the SEC before listing it violates U.S. laws. The SEC has achieved significant wins in civil lawsuits against Block.one and Kik for conducting initial coin offerings (ICOs) to fundraise, resulting in alleged violations of securities laws in 2019 and 2020.

The classification of a financial asset as a security or commodity hinges on the Howey Test, which refers to the U.S. Supreme Court case (SEC v. Howey). The Test determines if a transaction qualifies as an “investment contract” under securities laws. According to the SEC, an “investment contract” exists when “an investment contract exists if there is an “investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”

In the Ripple v.s. SEC case, the judge thinks that the institutional investments in XRP should be considered a security as there is “a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others” (p.18). Ripple and its executives entice investors with the promise of improving the crypto ecosystem, thereby creating anticipation of returns through the purchase of XRP tokens.

Image source: U.S. District Court, Southern District of New York. “SEC vs. Ripple Labs,” p.19.

Why Is the XRP Lawsuit Important for the Crypto Industry?

The case outcome may impact future crypto lawsuits

The outcome of the Ripple v.s. SEC case may set a precedent for similar lawsuits involving other crypto companies and the SEC.  In a recent lawsuit involving Coinbase, the SEC categorized Polygon (MATIC), Solana (SOL), Cardano (ADA), and Stellar Lumens (XLM) as securities.

The SEC also launched investigations on Binance’s BNB token and the ApeCoin token of Bored Apes Yacht Club. Therefore, the court’s determination on whether XRP tokens are securities and fall under SEC oversight holds significant implications for companies, investors, and the entire industry.

Stellar, for example, provides technology for various prominent crypto entities, including Circle, Coinme, Abra, Anchorage, and Binance. If the SEC triumphs over Ripple in this case, it’s likely that the regulator would file a separate lawsuit against Stellar and its creators, which will have a market-wide impact on the entire crypto market.

Watch the full panel for insights into Stellar and other companies pioneering Web3 infrastructure development!

Ripple is expected to bring TradFi into Web3

The XRP court case has garnered significant attention in crypto communities due to Ripple and XRP’s potential to facilitate the entry of traditional finance (TradFi) players into the crypto space. With a market cap of 33.87 billion euros, Ripple’s XRP is one of the world’s most valuable cryptocurrencies.

The company developed RippleNet, which utilizes blockchain technology to create a global payment network, aiming to provide faster, cheaper, and more efficient cross-border payments. Transactions that would last a few days before can now be settled within seconds. 

With backing from notable entities like SBI Holdings, Banco Santander, and prominent venture capital firms such as Andreessen Horowitz, Ripple has reached a private valuation of $10 billion. The company and its XRP tokens play a vital role in bridging the gap between cryptocurrencies and TradFi.

Antony Welfare, Senior Advisor CBDC and Global Payments at Ripple, shares his viewpoints on CBDCs and how they can improve people’s lives worldwide.

Is It A True Win For Crypto?

The crypto industry is celebrating its victory against the SEC as the prices of various cryptocurrencies surge. Three major US crypto exchanges, Coinbase, Kraken, and Gemini decided to give XRP listing a second chance after the court ruling.

The market displays a bullish sentiment towards the XRP ruling, with industry professionals expressing optimism for the future. The distinction between securities and commodities gains clarity with the decision. Optimists believe that this decision is likely to prompt the SEC to reevaluate its approach in other ongoing cases, potentially categorizing additional tokens as non-securities. According to Bloomberg, many people believe that platforms like Coinbase may now face fewer concerns regarding public purchases.

However, as crypto market investors rejoiced following the ruling, some crypto experts have taken the contrarian stance. Antonio Juliano, the founder of dYdX, tweeted to advise investors to remain cautious of fraudulent “pump and dump” schemes prevalent in the market. 

Christian Schultz, a former official at the SEC division of enforcement, stated that as the institutional sales of XRP were considered investment contracts by the judge, virtually all ICO might be classified as securities in the future. 

What Will Happen Next?

Even though the New York Times states that the ruling of Thursday might complicate SEC’s case with Binance and Coinbase and “provide fodder for the crypto industry to defend itself in court,” the judges of those cases still “have to make separate determinations about whether the sale of those digital assets broke the law.”

Several experts also cautioned that the order on Thursday was just a partial summary judgment from a single district court judge. The conclusions and rationale of this decision are somewhat confined to the particular dispute at hand. It is important to note that judges within the same court, and even federal judges nationwide, disagree with or ignore this decision.

Palley and Preston Byrne, partners at Brown Rudnick, stated that the summary judgment is not the end of this lawsuit. The case can still be appealed or even reversed, and they expected a trial soon. It is thus crucial not to “yolo into anything based on that decision.” ConsenSys lawyer Bill Hughes also expected SEC to appeal immediately. 

Consequently, the outcome of the XRP lawsuit has the potential to impact the regulatory landscape of the entire crypto industry, as an appeal opportunity exists that could lead to a revision of the decision.

EBC Insights on the XRP Lawsuit

It’s important to remember that this Ripple v.s. SEC lawsuit pertains specifically to the US. Regulations in different regions do not follow a global-encompassing, one-size-fits-all approach, as highlighted by Alex Strzesniewski, Founder & CEO of AngelBlock. Understanding compliance nuances is essential

In Europe, the most important regulations are the Markets in Crypto Assets Regulation (MiCA) and the Digital Operational Resilience Act (DORA). EBC panelists have discussed its impact on the stablecoin industry. The European Union’s approach, as explained by Joachim Schewin from the European Commission, focuses on empowering decentralized initiatives from individuals, reflecting a distinct perspective from the US.

Panelists discussed the impact of crypto regulations at the 8th European Blockchain Convention.

Several speakers at EBC expressed their desire to address the regulatory fragmentation across countries. Ernest Lima from XReg Consulting highlighted that MiCA can serve as a benchmark for other jurisdictions. 

Michael Fasanello, Crypto Compliance Officer at AnChain.AI, stressed the significance of collaborative efforts to educate governments about blockchain technology’s benefits, preventing overreactions and hasty bans. Coty de Monteverde, Blockchain Center of Excellence Director at Banco Santander, also suggested that banks and service providers should collaborate in adapting to forthcoming regulations.

With the crypto space entering a new era of regulations, EBC gathers industry leaders, TradFi experts, and legal professionals to explore the future of crypto. With growing enthusiasm from TradFi and Web3 enthusiasts, the next EBC is a must-attend event for stakeholders, entrepreneurs, and developers alike!

European Blockchain Convention 9 Press Release

Regulations Unmasked: Decoding Banks and Laws in the Crypto Realm

Regulations Unmasked: Decoding Banks and Laws in the Crypto Realm

This panel about crypto regulations was moderated by Jose Luis Perán, Head of Delivery for financial services at VASS. Coty de Monteverde, Blockchain Center of Excellence Director at Banco Santander, Francisco Maroto, Blockchain Lead at BBVA, and María Ñiguez Olalla, IT Lawyer at EJASO, provided valuable insights from the perspectives of banks and law.

Regulations Are Coming

Francisco compared the upcoming regulatory changes in the crypto market to the regulatory wave that occurred in the financial industry after the 2008 crisis. He believed that the crypto industry must prepare and invest to comply with the upcoming regulations.

All speakers highlighted the need for regulations in the crypto market to attract institutional money and protect retail customers from fraud and bankruptcy. Different countries are approaching crypto regulation at different speeds and in different directions, with some like Singapore and Switzerland already having regulations in place and others like China forbidding the use of cryptocurrencies. 

The European Union’s regulations, such as the Markets in Crypto-Assets (MiCA) regulation and Digital Operational Resilience Act (DORA), aim to provide legal certainty, protect consumers, prevent market manipulation and financial crime, and professionalize the crypto sector.

Healthy markets need liquidity, protection and security. This is mainly brought by two factors: institutional money and regulation.

Francisco Maroto, Blockchain Lead at BBVA

Law and banking experts discussed how crypto regulations are reshaping the banking industry.

MiCA’s Impact on the Crypto Industry and Banks

According to Maria, MiCA regulations introduce compliance regimes for issuers of crypto assets. Different types of investments have different levels of risk and requirements. Issuers of e-money tokens (EMTs) face the strictest regime, while asset reference tokens (ARTs) require authorization and whitepaper approval. Other crypto assets are considered to pose lower risks, and while the issuers still need to present a specific substantive whitepaper, they don’t need the approval of the supervision. 

On the other hand, crypto service providers, such as exchanges and custodial wallets, need to obtain a MiCA license and comply with governance and transparency obligations. Specific obligations depend on the type of service provided, such as having a custody policy for custodial wallets.

Maria believed that MiCA regulations can protect the customer and at the same time, give certainty for the institutions that want to start providing crypto services.

Coty, from the bank’s point of view, shared that MiCA regulations will impact the financial sector and crypto asset service providers. Banks must adapt and seize opportunities, while service providers will face challenges, including risk management, capital requirements, and compliance procedures. Therefore, collaboration between banks and service providers will be necessary

“Regulation is key for market development!” Watch the EBC interview highlight with Esther Teuber to understand how regulations will change the crypto industry from a law perspective.

More EBC insights on MiCA and crypto:

EBC aims to bring together TradFi experts, crypto startups, and law professionals to discuss the future of finance!

Other Relevant Regulations for Banks and Crypto

Apart from MiCA, there are three additional regulations that influence banks in the crypto space. The travel rule, which requires all financial institutions to pass on certain information to the next financial institution, has expanded to crypto asset service providers, requiring them to identify transaction sources and destinations for anti-money laundering reasons.

Another regulation is the Prudential treatment of crypto assets, which establishes standards to classify and manage assets, ensuring financial stability and setting appropriate capital levels.

The third relevant regulation, according to Coty, is the Pilot Regime. It is similar to a European sandbox that provides a safe environment for financial market infrastructures to test DLT applications, particularly in trading and settlement systems, for a duration of six years.

The panelist agreed that regulations will bring a positive impact on the crypto space, as they will provide more confidence to institutional players, protect the market with legal certainty, and offer protection to retail customers.

Watch the full panel to understand the coming regulations in the banking realm!

The Future of Crypto Tax and Web3 Infrastructure

The Future of Crypto Tax and Web3 Infrastructure

This infrastructure panel was moderated by Oskars Jepsis, CEO & Co-Founder of ALTER Network. Berken Menges, Head of Marketing of CoinTracking, and Antoine Scalia, Founder and CEO of Cryptio, contributed to the discussion, providing insights from B2B and B2C perspectives.

What Are the Current Tax Regimes in the Crypto Space?

Antoine believes that the current tax regimes in the crypto space are generally clear for trading, capital gains, and swap tradings, but there are still complexity and uncertainty in new use cases such as staking and rewards on lending protocols. 

After the FTX collapse in 2022, some media is claiming that the auditing firms stop doing audits for crypto clients, but Antoine disagrees. He mentions that many companies pause Proof of Reserve until they find better ways to do it, but they are still conducting financial statement audits. 

Berken shares that even though the tax regulations are relatively complete in Germany, the public is still hesitant to invest in cryptos. His company has been actively communicating with policymakers and educating the public to increase people’s trust. He also believes that making the infrastructure more user-friendly and automated will be crucial in helping the public adopt digital assets. 

Oskars, Berken, and Antoine discussed infrastructure and regulations at EBC23.

What Are the Challenges for Enterprises and Retail?

Berken identifies several challenges from the B2C side. Since different transactions belong to different types of taxation, aggregating and classifying all the data is the hardest part. It requires distinct methods to obtain data from centralized exchanges and decentralized finance (DeFi) platforms. Also, Berken acknowledges the importance to keep up with new blockchains and trends while prioritizing.

Complementing Berken’s point, Antoine thinks that the B2B side also faces challenges with coverage and integration with exchanges. It takes lots of time to collect accurate and complete data in an auditable way. Since the existing data analyzing tools, such as EtherScan, aren’t designed to be used for accounting purposes, there are missing features and a lack of consistency.

Antoine points out that, for conducting both Proof of Reserve and financial statement audits, there is an obvious lack of adequate tools. While auditors are normally not familiar with the latest technology, he thinks there are many market opportunities for companies providing tools and infrastructure to ease up the process.

Berken shared his insights on crypto audits, regulations, and institutions at EBC23.

What Is the Future of Web3 Infrastructure?

Antoine argues that the emergence of new use cases is too rapid for regulations to catch up. It’s thus important for enterprises to collaborate with experts in the field to navigate the evolving tax landscape. He emphasizes the need for reliable data infrastructure that can provide clear and easily understandable data for new use cases, in order to rebuild trust in the blockchain systems.

Berken thinks it’s challenging to understand and comply with different tax requirements in different countries. The process of evaluating tax reports and interpreting regulations can be time-consuming and complicated, especially with new use cases. However, he believes that once there is a clearer path and more clarity in tax regulations, it may ease up the challenges for institutional adoption.

Watch the full EBC panel to navigate crypto tax and Web3 infrastructure!

The Rise of Digital Assets: Benefits, Challenges, and How to Become a Winner

Issuing Digital Assets and Revolutionizing Financial Markets

The panel about the opportunities and challenges of issuing digital assets for financial markets is moderated by Bernard Nicolay, Adjunct Professor of Finance at the Solvay Brussels School of Economics & Management. Panelists include Thomas Jeulin, Head of Sales at Flowdesk, Victor Busson, CMO at Taurus, Kasper Luyckx, Head of Product at the Crypto Finance Group, and Viktor Banh, Digital Assets Markets at DekaBank.

Benefits and Challenges of Digital Assets

There are three main types of digital assets: cryptocurrencies, tokenized assets, and digital currencies. Tokenized assets are digitized private assets, such as equity, debts, and real estate while CBDC and stablecoins are examples of digital currencies.

Tokenization can reduce costs and settlement time, increase liquidity, and provide access to different investors in the market. With DeFi, actors that didn’t have opportunities to engage in the traditional financial market, such as many small and medium-sized enterprises (SMEs), will be able to participate due to the reduction of the counterparty risks. 

<Read more: Tokenization – What Traditional Bankers Have to Say?>

Kasper explains that blockchain technology enables direct peer-to-peer transfer of assets without the need for intermediaries, which fundamentally disrupts the security space as it eliminates intermediaries that charge fees for simple handovers. And as the networks grow and more assets are represented on the networks, we will be able to reap an even more significant impact on capital markets. 

However, scalability, standardization, and interoperability need to be considered. Interoperability allows different networks to communicate with each other using shared protocols and standards, and it facilitates a more seamless and efficient system. On the other hand, a lack of standardization creates additional costs and complexities for banks and other institutions. Having different regulations in different countries makes it difficult to carry out new projects, and investigating local regulations is simply time-consuming and complicated.

The panel “Issuing Digital Assets & Revolutionizing Financial Markets” at the EBC23.

Factors to Be Considered When Building a Business Case

Profitability, scalability, and security are the important factors to consider for a business case. Victor states that, when building a business case, the first step is to choose a technological provider and make sure the tokenization is profitable. However, once the proof of concept is proven to be profitable, it’s crucial to analyze whether profitability and security can be maintained when the model scales up. 

“The bear market is the builders’ market!” Watch the EBC interview highlight with Lex Sokolin to learn why 2023 is a year for protocol development!

A lot of businesses will have to ‘unlearn’ things they’re doing today and learn new things… We will see a lot of disruption and some of these companies will have to rethink how they can stay relevant in the future.

Kasper Luyckx, Head of Product at the Crypto Finance Group

What Roles Will Banks Play in the Future Financial Market? 

Kasper thinks that as peer-to-peer transaction popularizes and transaction fees decrease, it will be unnecessary for a middleman to exist, and business models that rely on intermediaries will be significantly disrupted. Custodians, however, will still play an important role in the market because not everyone will be willing to maintain self-custody over their assets. The key for those centralized institutions is to open up their platforms and be willing to connect to the services and wallets that their clients want to use.

More EBC insights on traditional banks and cryptos:

Panelists discussed the future of financial markets at EBC.

The Needed Talents in the Market of Digital Assets

According to Thomas, the winners in the future financial market will be compliant firms that bridge the gap between traditional finance and crypto space, and firms that are agile, innovative, and strong in technology. 

Apart from learning how technology works, Kasper emphasizes the importance of gaining hands-on experience. Only through doing and experimenting can we gain a true understanding of how the technology operates, where it adds value, and how it can make a real impact. 

On the other hand, speaking from an individual perspective, Victor thinks that mastering the tech stack and possessing the ability to adapt to technical challenges are valued in the market. At Taurus, they are looking for talented developers that are positive, eager to learn, and agile in this fast-paced industry.

I’ve seen so many bankers who take expensive courses that teach DeFi while you can just get a wallet, connect to DeFi, and try it out yourself. I think it’s so important because you learn while you do. You interact with the technology and you see where it adds value and where it doesn’t.

Kasper Luyckx, Head of Product at the Crypto Finance Group
Watch the full panel to understand how digital assets are revolutionizing financial markets!