Crypto regulation in the world: weekly digest # 25

USA

According to the SEC, investors should not trust the audits of cryptocurrency exchanges. Also, the data on reserves that crypto exchanges began to publish after the collapse of FTX doesn’t give much at all.

Due to the loss of customer confidence in cryptocurrency exchanges and the lack of special requirements for their capital (such as capital requirements for credit institutions), companies began to actively order an audit of their finances. However, such reviews do not necessarily prove that companies are financially sound and trustworthy. Such reports often lack important information, such as the company's obligations for instance.

The largest cryptocurrency exchange Binance was the very first to order Mazars an audit of its reserves. The auditors readily confirmed that there were sufficient reserves, but were immediately criticized and even forced to remove the audit results from their website.

Mazars report did not say anything about the company's obligations to third parties and investors, and the state of bank accounts was not given. And most importantly, no mention of the issuance of own BNB tokens and its use as an investment asset.

The need for an adequate assessment of the financial stability of cryptocurrency companies is long overdue. The refusal of the auditors of Mazars and Armanino to continue working with crypto companies fully demonstrates the crisis of the methodology.

Speaking about the confirmation of the reserves of cryptocurrency exchanges, we can recall the interesting proposal of the founder of Ethereum, Vitalik Buterin. He suggested using zk-SNARKs and zk-STARKs technologies to check reserve data, as he also believes that the Proof-of-Reserve procedures that exchange clients are currently offering cannot be called effective.

SEC Chairman Gary Gensler also criticized the ways in which cryptocurrency exchanges' reserves are confirmed. At the same time, Gensler sees that the entire industry has a problem, and companies that are not registered with the SEC are very similar to casinos.

Moreover, according to the head of the American watchdog, the practice of proof of reserves, which large cryptocurrency companies such as Binance have begun to use, does not meet the disclosure requirements necessary to protect investors. The publication of such information, on the contrary, can mislead investors. According to Gansler, the cryptocurrency market may well operate according to the rules that apply to the securities market.

Earlier, the SEC accused the former head of the exchange, Sam Bankman-Fried, and two of his colleagues - Caroline Ellison and Gary Wang - of participating in a multi-year scheme to deceive investors and illegally use customer funds. In a lawsuit against Allison and Wang, the SEC also recognized FTT, the native token of the FTX exchange, as a security.

Sam Bankman-Fried was extradited to the United States from the Bahamas, where he had been since the beginning of the scandal, and released by the court of the State of New York on bail in the amount of $250 million. He will be at his parents' house to await the end of the investigation and trial.

Marshall Islands

The Marshall Islands became the first state in the world to legalize DAOs - decentralized autonomous organizations - at the legal level. DAO is one of the key components of the De-Fi world. Regulators around the world, including in the US and Europe, still have not decided how to regulate DAO. For example, the almost ready-made European MiCA bill says nothing about DAO. American legislation is also devoid of special rules for this type of organization.

The new DAO law allows legal entities to implement governance tools based on autonomous organizations. Commercial and non-commercial DAOs will be able to register in the Marshall Islands in the internationally recognized LLC format. The management, voting and tokenization of assets within the DAO are declared legal.

The Marshall Islands, where a large number of cryptocurrency companies are registered, including those that do not conduct KYC, are actively creating conditions for the development of crypto business.

Also, in order to get away from dependence on the US dollar, the country announced the creation of its own CBDC. Until that time, the state used the US dollar as the official currency.

News from other countries:

• Nigeria plans to pass a bill to legalize the use of cryptocurrency and other digital assets. If the amendments are passed, the local SEC will be able to regard cryptocurrencies and other digital funds as investment capital. At the moment, Nigeria ranks first in Africa in terms of the use of cryptocurrency by the population. Large cryptocurrency exchanges operate in the country, such as Busha.
• The UK is also planning to pass the Financial Services and Markets Act in 2023, which will give regulators more control over cryptocurrencies.
• The Basel Committee on Banking Supervision has approved standards regarding the concentration of bank risks in crypto-currency assets. The new requirements will come into effect on January 1, 2025.
• In Russia, the adoption of the bill on mining and cryptocurrencies was postponed until 2023. At the same time, the country is the world’s third in bitcoin mining. There are also hundreds of cryptocurrency exchange services in Russia.

We continue to highlight the news of the world of crypto regulation worldwide. Stay tuned for the latest news!