Shalini Nagarajan

A global securities regulatory authority has released its inaugural global framework for crypto — but decentralized finance (DeFi) will go without for now.



As part of the framework, the International Organization of Securities Commissions (IOSCO) proposed 18 crypto policy recommendations in a recent <a href="https://www.iosco.org/library/pubdocs/pdf/IOSCOPD734.pdf" target="_blank" rel="noreferrer noopener">consultation report</a>.&nbsp;



The recommendations cover six key areas: conflicts of interest, market manipulation, cross-border risks, custody and asset protection, operational and technological risk and retail access.



One advises regulators to mandate that “cryptoasset service providers,” or CASPs, segregate client assets from their proprietary assets.&nbsp;



This involves placing client assets in trusts or segregated bankruptcy-remote accounts to ensure they remain separate and distinct from the CASP&#8217;s own assets or estate — a notable inclusion considering the <a href="https://blockworks.co/news/sec-charges-sam-bankman-fried-with-defrauding-investors" target="_blank" rel="noreferrer noopener">alleged misappropriation of customer funds</a> at crypto exchange FTX.



This set of recommendations is focused only on centralized market activity. DeFi-specific considerations being examined by another financial task force under the same regulatory body.



As for how the IOSCO feels about how to map digital assets to existing securities laws, the report states that worldwide regulators should use frameworks — either existing or tailor-made — that track IOSCO&#8217;s <a href="https://www.iosco.org/about/?subsection=key_regulatory_standards" target="_blank" rel="noreferrer noopener">current standards</a> for securities regulation.



That includes the sale, issuance and marketing of crypto assets. &#8220;The regulatory approach should seek to achieve regulatory outcomes for investor protection and market integrity that are the same as, or consistent with, those that are required in traditional financial markets.&#8221;



The proposed recommendations underscore the importance of cooperation between global regulators. IOSCO’s goal is to set a benchmark for members, encouraging collaboration, coordination and effective responses to cross-border challenges in enforcement and supervision.



&#8220;IOSCO is also seeking to encourage optimal consistency in the way crypto asset markets and securities markets are regulated within individual IOSCO jurisdictions, in accordance with the principle of ‘same activities, same risks, same regulatory outcomes’,&#8221; the report states.



Countries including the US, UK, Japan, Germany and Singapore are <a href="https://www.iosco.org/about/?subsection=membership&amp;memid=1" target="_blank" rel="noreferrer noopener">member countries</a> of the IOSCO board.



IOSCO is actively seeking public input on its recommendations until July 31, and they’re expected to be finalized by the end of the year.



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Securities Commissions Share 18-point Global Crypto Framework

Katherine Ross

A new class action lawsuit, helmed by Hoppin Grinsell, has been filed against BProtocol Foundation and Bancor DAO.



“The lawsuit alleges that Defendants violated federal securities laws and various state laws by offering and selling investment contracts to Bancor liquidity providers, without registering under applicable federal securities laws as an exchange or brokerdealer, and without a registration statement in effect for the securities it offered and sold,” a press release for the lawsuit said.



When Bancor, a DeFi liquidity protocol, rolled out the second version of the investment product, it introduced impermanent loss protection — insurance for losses caused by value differences between automated market makers and spot markets. 



The function attracted liquidity providers (LPs) to the protocol, which led to over $2.3 billion worth of crypto assets invested in it.



But &#8220;the quantity of the crypto assets held by Bancor was insufficient to meet its obligations to LPs. If a sufficiently large number of LPs withdrew their investments at the same time, the protocol would crumble, much like a run on the bank,&#8221; the lawsuit <a href="https://storage.courtlistener.com/recap/gov.uscourts.txwd.1218725/gov.uscourts.txwd.1218725.1.0.pdf" target="_blank" rel="noreferrer noopener">alleges</a>.



In 2022, after withdrawals triggered a payment obligation from the liquidity providers, Bancor suspended the impermanent loss protection, leaving the providers to incur &#8220;the very losses that Defendants had promised to ‘100% protect’ against.&#8221;



Blockworks at the time <a href="https://blockworks.co/news/bancor-halts-impermanent-loss-safeguard-to-fight-off-hostile-antagonist" target="_blank" rel="noreferrer noopener">reported that Bancor temporarily paused</a> its impermanent loss protection feature due to &#8220;<a href="https://blockworks.co/news/bancor-describes-hostile-antagonist-behind-impermanent-loss-defense" target="_blank" rel="noreferrer noopener">hostile market conditions</a>&#8221; and &#8220;manipulative behavior.&#8221; Mark Richardson, Bancor product architect said “it would be difficult to imagine the protocol withstanding such a large flight of liquidity all at once.”



Through conferences and interviews, Bancor and its representatives targeted US investors, the lawsuit alleges. Representatives for the protocol used condoms and t-shirts to advertise to potential investors.



In 2021, a New York City court <a href="https://www.scribd.com/document/495824058/Bancor-Dismissal?irclickid=TLy1zAzcqztNWrKzLcSXdTO3UkAXM1RsexpoXI0&amp;irpid=10078&amp;utm_source=impact&amp;utm_medium=cpc&amp;utm_campaign=affiliate_pdm_acquisition_Skimbit%20Ltd.&amp;sharedid=coindesk.com&amp;irgwc=1" target="_blank" rel="noreferrer noopener">dismissed</a> a class action suit against Bancor and BProtocol Foundation, which alleged that the protocol offered unregistered security offerings.



Hoppin Grinsell and Bancor did not immediately respond to requests for comment.&nbsp;



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Bancor Perks for Liquidity Providers Broke Securities Laws: Lawsuit

Sebastian Sinclair

The US SEC has been busy with crypto-related enforcement actions — now on track to outpace 2022.



SEC regulators have dished out at least 13 actions over allegedly dodgy crypto dealings so far this year. That’s nearly half the number of SEC enforcement actions from last year (30), and we’re only four months into 2023.



Industry insiders expect SEC Chair Gary Gensler to execute further charges in the coming months, part of his apparent pursuit of crypto regulation through litigation.



The SEC could seek to further target market intermediaries, trading platforms and larger cryptocurrency companies, according to Martin Leinweber, digital asset product strategist at MarketVector Indexes.



“Gensler has increased the number of enforcement attorneys in the SEC&#8217;s <a href="https://blockworks.co/news/sec-boost-crypto-enforcement" target="_blank" rel="noreferrer noopener">crypto unit</a>, shifting the focus from individual tokens to trading platforms that cater to US investors,” Leinweber said. “This strategic shift suggests that regulatory scrutiny will intensify in the future.”



And that could prove profitable. Last year, the SEC racked up more than $2.6 billion in fines and monetary penalties against digital asset participants, Cornerstone’s <a href="https://www.cornerstone.com/wp-content/uploads/2023/01/SEC-Cryptocurrency-Enforcement-2022-Update.pdf" target="_blank" rel="noreferrer noopener">research</a> shows.



“Under the Gensler administration, the proportion of enforcement actions charging individuals (rather than firms) has increased relative to prior years, from nearly 20% in the 2013-2020 period to 35% in 2021 and 50% in 2022.”



<h2 class="wp-block-heading">SEC still riding the FTX wave</h2>



The SEC’s recent <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation" target="_blank" rel="noreferrer noopener">Wells notice</a> issued to the US’ largest and only publicly traded crypto exchange, Coinbase, over potentially dealing in unregistered securities only highlights the issues at hand — how digital assets fit into the 67-year-old Howey Test.



As does <a href="https://blockworks.co/news/binance-stablecoin-security-paxos-sec-wells" target="_blank" rel="noreferrer noopener">Paxos’ own Wells notice</a> over its Binance-branded stablecoin offering, as well as <a href="https://blockworks.co/news/kraken-settles-sec-crypto-staking-program" target="_blank" rel="noreferrer noopener">rival Kraken</a>’s settlement over its staking as a service products (which the SEC deemed securities).



Anne-Sophie Cissey, legal and compliance head at crypto-financial services firm Flowdesk, believes several projects and companies are on the SEC’s radar. Ongoing cases are expected to make bigger waves due to the size and significance of the players under scrutiny.



“Obviously, the FTX saga has not ended yet, we know that there should also be a ruling in the case of Ripple very soon, too, and that Coinbase may have to go to court, too,” Cissey said.



As know-your-customer and compliance monitoring techniques improve, more entities may find themselves in the regulator’s sights, she added. 



“This is actually what happened with big European [traditional finance] banks. So there is a chance that this may happen in crypto, too.”&nbsp;&nbsp;



Cissey continued: “The question remains, however, whether it will be the SEC or CFTC that will continue to wield this power in the US. It might be a very political play that will determine that — whose outcome is difficult to predict right now.”



<h2 class="wp-block-heading">SEC wants crypto precedents</h2>



Regulators will continue to come down heavily on larger crypto exchanges and set precedents for new regulation this year, according to Victoria Bills, chief investment strategist at Banrion Capital Management.



Exchanges operating outside of US regulations are bound to get in trouble eventually, the executive told Blockworks. “Exchanges like Binance have been operating by skirting regulatory rules and now they are facing heavy scrutiny,” Bills said.



Still, recent SEC actions are a sign of the agency casting “as wide a net as possible,” according to Ian Corp, commercial litigator and crypto advisor at law firm Agentis.



“Exchanges have repeatedly asked for clarity, Coinbase in particular, on what the applicable regulatory framework is. The SEC has deflected these questions and instead responded with litigation.”



In any case, what the SEC does over the short-term is politically sensitive. Corp posited that if President Biden loses re-election, then the next president would install their own agency secretaries alongside selecting new cabinets.



“This could likely mean replacing Chair Gensler and his philosophy of ‘shoot first ask questions later’,” Corp said.



He noted the <a href="https://blockworks.co/news/coinbase-sec-rulemaking-petition" target="_blank" rel="noreferrer noopener">latest lawsuit filed by Coinbase</a> in the Third Circuit Court of Appeals, which seeks to compel the SEC to engage in rule-making, is an interesting development to monitor.



“If that petition fails, then certainly Gensler’s SEC will not propose any new rules. Hopefully Coinbase prevails and if it does not, then perhaps the calls to remove Gensler are answered.&#8221;



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SEC Crypto Enforcements on Track to Eclipse 2022

<div id="highlights-block_632438ce4e773" class="highlights">
 <ul>
 <li>SEC chair Gary Gensler believes most cryptocurrencies are securities and should be regulated by his agency</li>
 <li>Gensler&#8217;s recent comments indicate Ethereum’s move to PoS could open regulatory attack vectors</li>
 </ul>
 
</div>



Ethereum switched to proof-of-stake following the <a href="https://cms.blockworks.co/ethereum-switches-to-proof-of-stake-after-7-years-of-work/" target="_blank" rel="noreferrer noopener">Merge</a> on Thursday, but its transition towards energy efficiency may just bring stiff resistance from the US Securities and Exchange Commission (SEC).



The SEC has continued to advocate on the basis that most cryptos are securities — by definition under an 80-year-old Supreme Court ruling. That’s opposed to being recognized as commodities, which only explicitly applies to bitcoin, the regulator has said previously.



Now that Ethereum requires validators to stake their holdings to secure the network, alongside many other blockchains including Binance Smart Chain, Avalanche and Solana, questions regarding the role of intermediates in these systems are taking precedent.



Lending, staking and earning rewards, as defined by the 1946 Howey Test, could constitute securities activity, the <a href="https://www.wsj.com/articles/ethers-new-staking-model-could-draw-sec-attention-11663266224" target="_blank" rel="noreferrer noopener">Wall Street Journal</a> first reported Thursday, citing comments made by SEC chair Gary Gensler to reporters after a congressional hearing. The price of ether has since dropped up to 9%, now trading for about $1,460, while bitcoin shed just 1%.



Both bitcoin and ether may yet be regulated by the more amenable Commodity Futures Trading Commission (CFTC) should a group of <a href="https://cms.blockworks.co/bitcoin-ether-to-be-regulated-as-commodities-by-cftc-per-new-senate-bill/" target="_blank" rel="noreferrer noopener">bipartisan senators</a> get their way, but certainty over how securities laws maps to cryptocurrencies is still hotly debated.



Addressing the U.S. Senate Banking Committee on Thursday, Gensler defended his agency’s stance which, among other things, believes crypto intermediaries such as brokers and exchanges should <a href="https://www.reuters.com/technology/crypto-intermediaries-should-register-with-us-sec-agency-chair-says-2022-09-08/" target="_blank" rel="noreferrer noopener">register with the regulator</a>.



Multiple crypto exchanges, including Coinbase, Binance and Kraken, offer ether staking services, allowing users to participate in the Ethereum ecosystem directly from their accounts. 



Those three platforms recently controlled more than 30% of all staked ether, according data analytics unit Nansen, while liquid staking provider Lido Finance, through its <a href="https://research.lido.fi/t/lido-node-operator-validator-metrics/1431" target="_blank" rel="noreferrer noopener">node operators</a>, managed 47%.



Gensler reportedly believes that process seems consistent with lending, which would render Ethereum staking services akin to securities offerings under SEC law.



Long-time crypto advocate Sen. Pat Toomey took aim at the regulator over its approach to securities definition as it relates to digital assets while accusing the regulator of overstepping its legal mandate.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">5/ <a href="https://twitter.com/LidoFinance?ref_src=twsrc%5Etfw">@LidoFinance</a>, a decentralized on-chain liquid staking protocol, is the largest staker of ETH, boasting a total of ~31% of the total staked ETH. Following Lido, Coinbase, Kraken, and Binance have ~30% of the total staked ETH. <a href="https://t.co/is7eT3jJFq">pic.twitter.com/is7eT3jJFq</a>&mdash; Nansen🧭 (@nansen_ai) <a href="https://twitter.com/nansen_ai/status/1569702804817838080?ref_src=twsrc%5Etfw">September 13, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



The senator also levied criticism at the SEC’s proposed and controversial climate disclosure rule, which would force public companies to include climate risks within their company filings.



“Crypto tokens have varying degrees of decentralization, usually do not have a financial claim on the issuer, and typically can be settled in real-time without intermediaries,” Toomey said in a statement.



Those varying degrees of decentralization and a lack of financial claim on the issuer are what separates digital assets from traditional securities, the senator said. 



They merit a clearly defined and bespoke regulatory framework, he argued, echoing sentiment felt across the industry.



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