2023 was another tumultuous year for the global digital asset industry. High-profile court cases and scandals continued to dominate the headlines, chief amongst them were the trial of disgraced founder and former CEO of FTX, Sam Bankman-Fried, and the historically punishing settlement for Binance and its founder Changpeng “CZ” Zhao.
Bankman-Fried was found guilty in November of seven criminal counts of defrauding customers, lenders, and investors of FTX and faces a potential maximum 115-year prison sentence. In contrast, and perhaps in the hopes of fending off or delaying a similar fate, CZ pleaded guilty a few short weeks later to violating the U.S. Bank Secrecy Act as part of a $4.3 billion settlement he and Binance reached with the Department of Justice (DOJ) and other federal agencies. CZ faces almost certain prison time as part of his plea deal, but how much is undetermined. It will likely be around 18 months to 10 years, a lot less than the possible time his counterpart at FTX is facing.
Naturally, cases such as these have had an impact on the image of the digital asset space amongst the public and lawmakers, two prominent reactions being the International Organization of Securities Commissions (IOSCO) indicating a strong intent to push for global regulations for the digital asset industry following the collapse of FTX; and the International Monetary Fund (IMF) proposing a framework to help countries assess systemic risks from the digital assets space, citing “the FTX debacle” as motivation for increasing regulation and supervision measures globally.
Yet several ongoing court cases might have an even more direct impact on regulation by setting significant legal precedents, such as the U.S. Securities and Exchange Commission (SEC) lawsuits against Coinbase (NASDAQ: COIN), Ripple Labs, and Terraform Labs.
But before examining the possible impact some of this year’s most high-profile court cases might have—depending on their outcomes—the obvious place to start any review of 2023’s regulatory changes in the digital asset space is the most substantial piece of legislation yet passed by any jurisdiction, the European Union’s landmark Markets in Crypto Assets (MiCA) regulation, which was finally signed into law in April.
MiCA and European developments
No conversation of developments in digital asset regulation would be complete without mentioning MiCA, which passed its final vote in the EU parliament in April, and a month later, on May 31, European Parliament President Roberta Metsola and Swedish Rural Affairs Minister Peter Kullgren officially inked it into law.
When it eventually comes into force, which will not be until 2024, MiCA will bring digital assets, issuers, and service providers under a broad regulatory framework. Digital asset service providers, such as exchanges and wallet providers, will need to obtain a license from national regulators to offer services to EU citizens. Along with license mandates, MiCA will provide new classifications for different digital assets, rules specific to those assets, proof-of-funds requirements for stablecoin issuers, and the requirement for any company seeking to issue digital assets/coins to publish a white paper containing information about the project, including possible risks.
In July, the European Securities and Markets Authority (ESMA), the European Union’s financial markets regulator and supervisor, published its first consultation package under MiCA, which included proposals on how digital asset firms should handle complaints and conflicts of interest.
The 158-page consultation was the first major set of proposals to come after the passage of MiCA, which handed ESMA more powers to regulate the digital asset space.
Outside of MiCA, other key developments included the EU parliament’s approval of its Anti-Money Laundering and Countering the Financing of Terrorism (AML/CTF) bill in April, imposing a €1,000 ($1,088) cap on anonymous digital asset transactions and approving a new anti-money laundering authority; the Denmark Supreme Court ruled that Bitcoin profits are taxable, also in April; and toward the end of the year, the European Central Bank (ECB) stepped up its central bank digital currency (CBDC) trials.
The UK keeps pace
Not to be outdone by its neighbor and former partner, the United Kingdom has also been busy preparing to regulate digital assets. But in keeping with the country’s recent manifesto of ‘doing its own thing,’ the U.K. took a somewhat different approach than the EU.
Despite a brief and slightly strange flirtation with the idea of regulating digital assets as gambling, the passage of the Financial Services and Markets Act (FSMA) 2023 on June 29 confirmed the U.K.’s commitment to bringing digital assets into its well-functioning financial service regulatory regime—this is in contrast to the EU approach of instituting an entirely new regime specifically molded to digital assets.
The passage of the bill extended the banking rules of the FSMA—such as maintaining adequate capital to withstand financial shocks, implementing robust risk management practices to identify, and providing clear and transparent information to customers—to stablecoins and digital assets. This means that, for the first time in the U.K., digital assets were officially recognized as a regulated financial activity.
Crucially, it also gave the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA)—the former being the country’s top financial sector regulator and the latter the banking watchdog—the necessary powers to begin implementing the HM Treasury’s goals set out in its February 2023 consultation on the Future Regulatory Regime for Cryptoassets.
This included establishing an issuance and disclosure regime tailored to digital assets, strengthening the rules that apply to financial intermediaries and custodians of digital assets, and adopting a bespoke, digital asset-specific market abuse regime.
The implementation process of the FSMA 2023 will be gradual, with the various proposals of the Treasury’s February Consultation likely not being fully implemented until 2025. However, the process has begun, and one of the first rules to be implemented was the new ‘Financial Promotions Regime’ for digital assets, designed to govern the way firms operating in the U.K. can advertise and market their products.
The U.K. announced the new digital asset promotions rules back in June, and they came into force on October 8. They amount to an updated version of the previous financial promotions regulation, adding specific rules for “cryptoassets” to those for traditional financial instruments.
Specifically, under the new regime, any promotion of digital asset products or services needs to attach a ‘clear warning,’ and firms marketing digital assets to U.K. consumers need to introduce a 24-hour cooling-off period for first-time investors to allow them to think about and possibly back out of, spur-of-the-moment or potentially unwise investments.
But perhaps the crucial change is that there are now only four lawful routes firms can take to communicate digital asset promotions in the U.K.:
- The promotion can be communicated by an “authorized person,” as defined by the FCA. This includes ICVC, the Society of Lloyd’s, and persons with Part 4A permission.
- An unauthorized person can communicate a promotion that has been approved by an authorized person.
- The promotion can be communicated by a digital asset business registered with the FCA under the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 (MLRs).
- The promotion meets the conditions of an exemption in the Financial Promotion Order.
- Promotions not using one of these routes will be considered in breach of the new rules and thus “a criminal offense punishable by up to 2 years imprisonment, an unlimited fine, or both.”
However, in the 24 hours after the rules kicked in, the FCA was forced to issue 146 warnings to non-compliant digital asset promoters, and by early November, that number had risen to 221.
Outside of the FSMA 2023, the U.K. also passed the Economic Crime and Corporate Transparency Bill in July, which expands the reach of British authorities in their pursuit of financial criminals. It amends the country’s laws regarding company registration, reporting of financial crimes, financial confidentiality, and digital assets.
But it’s not just Europe that’s been more actively getting to grips with the fast-moving blockchain space in 2023.
Whistlestop tour of the globe
The country with the highest digital asset adoption in the world, India, has been relatively late to the party when it comes to regulating the space. However, 2023 saw its Ministry of Home Affairs announce the development of an on-chain tool to monitor transactions and send alerts over suspicious behavior. The Cryptocurrency Intelligence and Analysis Tool (CIAT), as it’s known, will help the government monitor the digital asset ecosystem, particularly in relation to dark web activity.
In October, India also joined with Australia to pledge to strengthen bilateral ties and shape the governance framework of disruptive technologies such as blockchain and AI; the aim was to establish uniform standards in such areas.
Moving east, in May, Japanese lawmakers confirmed plans to impose stricter Anti-Money Laundering (AML) rules for the digital asset industry, including the ratification of the Financial Action Task Force’s (FATF) Travel Rule, requiring detailed reporting of transactions. The Travel Rule mandates digital asset exchanges to report all details of any digital asset transaction exceeding $3,000.
South Korea also renewed its focus on digital asset rules. In May, following an uproar over South Korean lawmaker Kim Nam-kuk’s undisclosed digital currency holdings, a new bill was presented before the South Korean parliament urging public officials to disclose their holdings of digital currencies.
In July, South Korea passed the “Virtual Asset User Protection Act,” which will facilitate and strengthen the protection of digital asset users and set in place certain restrictions on unfair trade practices when it comes into force on July 19, 2024.
This was followed in September by the announcement that the country plans to submit a revised bill to track and freeze digital assets used by North Korea. An earlier version of the bill was first announced in November by the National Intelligence Service (NIS), the agency responsible for overseeing national cybersecurity policy and defending against cyber threats, but was sent back for further revision on the orders of President Yoon Suk Yeol.
Spinning round to the other side of the globe, the Bahamas proposed stricter digital asset regulations in 2023, possibly to redress any negative PR the country received from being the base of operation for the now disgraced and defunct digital asset exchange FTX. The DARE Bill 2023, as it’s called, would strengthen financial and reporting requirements for digital asset companies, as well as requirements related to custody and custodial wallet services; the management of digital assets; staking services; stablecoins; and—uncoincidentally—operating a digital asset exchange.
Moving very much in the opposite direction in terms of controls, El Salvador, which in 2021 became the first country in the world to adopt BTC as legal tender, announced in January this year that its assembly had approved a law for issuing more virtual assets, creating the initial legal infrastructure to one day issue Bitcoin bonds.
Meanwhile, in colder climates, pariah state Russia also hinted at its intention to double down on the digital asset space in the hopes that it could help combat drastic inflation and the unprecedented sanctions imposed on it after its illegal invasion of Ukraine. In July, Putin signed the digital ruble bill into law, allowing the country’s central bank to issue a CBDC.
In Africa, approaches to the digital asset space have varied. In February, Zambia’s Securities and Exchange Commission and the Bank of Zambia announced they were working in unison to regulate digital assets using revolutionary technology; June saw Kenyan President William Ruto sign the Finance Bill 2023 into law, which included the introduction of a 3% digital asset tax; meanwhile, in South Africa, government mandated that digital asset exchanges be licensed by the end of the year, in a move aimed at protecting investors.
The variety in global approaches paints a picture of a largely country or jurisdiction-specific approach to digital asset regulation in 2023, but there have been some attempts at cross-border measures as well.
One such example is the Financial Stability Board (FSB), an international body under the G20 that monitors and makes recommendations about the global financial system, publishing its final recommendations for a global regulatory framework for supervising digital assets and stablecoins in July. It advocated for a “same activity, same risk, same regulation” approach, taking into account events of the last year, as well as feedback received during a public consultation on the topic. The recommendations included calls for cross-border cooperation between regulators, governance requirements for digital asset issuers, and mandatory disclosures for the industry.
Of course, this globetrotting tour of 2023’s regulation has a very prominent absentee, the country where nearly 48% of the all Blockchain startup industry is found, the United States.
US regulatory quagmire
The various collapses and scandals in the digital asset space in 2022 and 2023 resulted in a crackdown on the sector by U.S. regulators such as the SEC and Commodities Futures Trading Commission (CTFC).
In March this year, Gary Gensler, chairman of the SEC, requested an increase in the agency’s budget to help combat “misconduct” in the digital asset space, while in May, CTFC Chairman Rostin Behnam said that decentralized digital asset exchanges will be regulated regardless of how they’re constituted.
Not to be outdone, the U.S. Department of the Treasury was also active in the fight against the ‘crypto wild west.’ In October, it announced it would designate international coin mixers as money-laundering hubs, utilizing one of the government’s most powerful sanctioning powers to clamp down on illicit finance; and in December, it was revealed that the Treasury was seeking expanded authority to continue its crackdown on illicit activity in the space, particularly sanctions violations and terrorist financing.
Whether to reign in the enthusiastic regulators and prosecutors or assist them in their work by removing any legal ambiguities, Congress spent much of 2023 attempting to progress various digital asset-related regulations.
In July, the U.S. House Financial Services Committee passed a number of digital asset-related bills aimed at “providing robust consumer protections and legislative clarity for the digital asset ecosystem.” The key pieces of legislation were the Financial Innovation and Technology (FIT) for the 21st Century Act, the Blockchain Regulatory Certainty Act, the Financial Technology Protection Act of 2023, and the Clarity for Payment Stablecoins Act of 2023.
The FIT for the 21st Century Act passed in a 35-15 committee vote and is potentially the most significant of the bills for the industry. It aims to give digital assets regulatory certainty and eliminate some of the grey areas in oversight that, according to some, have caused frustration for regulators and industry alike. Effectively, the Act widens the jurisdictional authority of the CFTC over the digital asset space and narrows that of the SEC, which has been under fire for its regulation-by-enforcement approach.
The Blockchain Regulatory Certainty Act, championed by Congress’ “crypto-king” Rep. Tom Emmer (R-MN), is aimed at ensuring that blockchain developers and providers of blockchain services that do not take control of consumer funds are not deemed financial institutions or money service businesses under the law – meaning they would avoid falling within the scope of financial sector regulators, such as the CFTC and SEC.
The “Financial Technology Protection Act of 2023,” offered by Rep. Zach Nunn (R-Iowa), would establish the Independent Financial Technology Working Group to Combat Terrorism and Illicit Financing under the Department of Treasury. In addition, it would encourage public-private sector partnerships in tackling issues surrounding illicit finance in the digital asset ecosystem.
Finally, the Clarity for Payment Stablecoins Act of 2023 was authored by House Financial Services Committee Chair Rep. Patrick McHenry (R-NC) and, if enacted, would create a regulatory framework for the issuance and oversight of payment stablecoins. Principle goals would include defining stablecoins and establishing a clear regulatory framework for their issuance and operation; mandating Stablecoin issuers to obtain licenses from state regulators and ensure compliance with their relevant rules; and enforcing robust AML and KYC procedures for issuers.
More recently, another House Committee, the Energy and Commerce Committee, unanimously passed a draft bill called the ‘Deploying American Blockchains Act of 2023’. The 13-page bill directs Secretary of Commerce Gina Raimondo to take a range of actions to progress blockchain technology in the U.S., including establishing best practices to assist the public and private sectors in the deployment of the technology, developing policies and recommendations on related issues and risks, establishing a Blockchain Deployment Program to support American leadership in the space, and examining how Federal agencies can benefit from utilizing blockchain technology.
All these bills will now head to full House votes. If passed, the digital asset bills will then need to pass a Senate vote, before returning for final congressional and presidential approval. In other words, they are still a long way from becoming law.
Speaking of the Senate, that chamber of Congress also cautiously dipped its toe into digital asset regulation in 2023. U.S. Senators Thom Tillis (R-NC) and John Hickenlooper (D-CO) introduced the Proving Reserves of Others Funds (PROOF) Act on October 20, a bipartisan bill that would establish protections against “unethical co-mingling of customer funds” while also requiring digital assets institutions to submit to a monthly proof of reserves (PoR) inspection by a neutral third-party auditing firm.
Away from the Capitol, a potentially impactful bill was approved in California. In October, California Governor Gavin Newsom rubber-stamped a bill that, when it comes into force in 2025, will require digital asset firms to adhere to licensing requirements, provide disclosures, and maintain financial records, as well as give the state financial regulator the authority to enforce rules and prosecute those who violate them.
As these various regulatory efforts painstakingly make their way through the already lengthy legislative process in the U.S., progress is often hampered further by a clear divide on the Hill between, on the one hand, those favoring consumer and market protection, and on the other the innovation-friendly, laissez-faire capitalists. A divide that tends to fall down partisan lines.
In the meantime, the Courts are left to interpret current rules and laws, applying them to the digital asset space. In the absence of more detailed and specific regulation from Congress, several ongoing cases may set crucial precedents for how the industry develops and is governed in the U.S. in 2024 and beyond.
Cases to watch
Several important cases that have developed throughout 2023 involve the SEC, which has been pursuing its regulation-by-enforcement approach to overseeing the digital asset space with gusto. Many of these cases revolve around the contentious debate over which digital assets are classified as securities and if this classification can change over time.
The SEC currently views the vast majority of digital assets, other than Bitcoin, as securities because they meet the Howey Test, which is used to determine whether an asset can be classified as a security. Therefore, any entity issuing or trading in these securities that is not registered with the SEC and in full compliance with the securities law is operating illegally.
Many digital asset companies refute or refuse to accept the SEC’s interpretation of the Howey Test—which states that an asset is a security if it is an investment of money, in a common enterprise, with an expectation of profits solely from the efforts of others—thus conflict arises.
In December 2020, the SEC sued Ripple Labs, along with CEO Bradley Garlinghouse and Executive Chairman Christian Larsen, accusing them of engaging in illegal securities offerings from 2013 up to the present based on the sale of the firm’s digital asset and native token XRP.
In July this year, Judge Analisa Torres of the U.S. District Court for the Southern District of New York ruled on summary judgment motions from both parties. In a partial victory for each party, Torres ruled that institutional sales of XRP amounted to illegal securities based on Howey, but that “programmatic sales “—such as through exchanges in blind transactions—did not.
This was initially praised by the regulation shy in the industry; however, the ruling was almost immediately thrown into doubt. Firstly, the SEC announced shortly after the ruling its intention to appeal (which is pending), but possibly more damaging for those hopeful that the ruling would set a new legal precedent was that the Judge of another digital asset case suggesting Torres had gotten it wrong.
In its lawsuit against Do Kwon and Terraform, filed in February this year, the SEC accused the company and its founder of violating securities laws in connection with its offering of the TerraUSD (UST) token. In light of the Ripple ruling, Terraform Labs attempted to have the SEC’s case dismissed. However, Judge Jed Rakoff, who is presiding over the Terra case, stated in a ruling two months after the Ripple decision that he rejected the court’s approach in that case as being inconsistent with the Howey Test and suggested that secondary sales can amount to illegal securities transactions.
Terraform has since filed further supporting arguments in favor of its dismissal motion, but by October 27, the SEC felt confident enough in its own position to file a motion for summary judgment, saying it sees no need for a lengthy trial as “the evidence that establishes Defendants’ violations is clear, undisputed, and overwhelming.”
Terraform, Kwon—who is currently in detention in Montenegro awaiting extradition, which was approved by the Montenegrin High Court in December—and the SEC will have to wait until next year for Judge Rakoff’s final decisions on their motions, after which the case may continue to trial.
But the debate about what is and isn’t a security extends beyond Ripple and Terra.
On June 6, the SEC charged Coinbase with operating its digital asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its digital asset staking-as-a-service program.
Coinbase is the largest digital asset exchange in the U.S. and was given approval for its IPO by the SEC. Coinbase has made a point of claiming compliance as a public company based in the U.S. and only trading in what it states that it believed, and continues to believe, to be either non-securities or registered securities.
After it was sued by the SEC, Coinbase asked for summary judgment in August, arguing that the subject matter of the case falls outside the SEC’s jurisdiction because none of the assets listed on its exchange were securities “as a matter of law.” In another filing in October, Coinbase again blasted the SEC for what the exchange claimed is jurisdictional overreach.
This case, like the Ripple and Terra lawsuits against the SEC, will also hinge on the Howey Test and how the judges in these three cases rule will potentially determine how securities law is applied to the digital asset space in the U.S. going forward.
The debate will likely end up on the plate of a higher court at some point, via appeal or otherwise, at which time they will also have to choose with which interpretation to side.
Not everyone sued by the SEC in 2023 decided to go down fighting. Digital asset exchange Kraken was charged by the SEC for operating as an unregistered securities exchange, broker, dealer, and clearing agency, as well as commingling customer funds. In February, it settled and was penalized $30 million by the SEC whilst being forced to give up its U.S. token-staking business.
The other top financial regulator in the U.S. was not afraid to get its hands dirty in court either. A key case that came to fruition in 2023 was the CTFC v Ooki DAO.
In September 2022, the regulator sued the decentralized autonomous organization (DAO) Ooki DAO for violating the Bank Secrecy Act. In its filing, the CTFC pointed out how the founders had openly attempted to use the decentralized structure to avoid complying with regulators. To which the CTFC said, “DAOs are not immune from enforcement and may not violate the law with impunity.”
In June, U.S. district judge William H. Orrick ruled in favor of the CFTC, ordering Ooki DAO to shut down and pay a civil monetary penalty of $643,542, in what the regulator described as a “sweeping victory” that proves DAOs can be held legally accountable.
The lawsuit was the first time regulators had gone after a whole DAO, including all the token holders who didn’t actively participate in any illegal actions, and victory for the CTFC represented a potentially precedent-setting decision that has implications for the future regulation and oversight of decentralized organizations.
But the U.S. doesn’t have a monopoly on far-reaching and influential court cases.
COPA v Wright – the Satoshi case
Outside of the U.S., 2023 saw the scheduling of the single-issue trial for Crypto Open Patent Alliance (COPA) v Dr. Craig Wright in the U.K., which aims to definitively determine whether Dr. Wright is the pseudonymous creator of Bitcoin and writer of the Bitcoin White Paper, Satoshi Nakamoto.
Dr. Wright is being sued by COPA, a coalition of some of the most powerful companies in Silicon Valley, who claim he is not Satoshi Nakamoto and they seek an injunction against Dr. Wright to prevent him from making the assertion that he is Satoshi in the future – thus potentially avoiding copyright or intellectual property suits from Dr. Wright down the line.
Because the identity issue is recognized as common to several co-pending cases, in June, it was consolidated into COPA v. Wright to be tried first. The other cases are temporarily stayed, awaiting the outcome of COPA v. Wright.
The trial of COPA v. Wright is set to start in early February 2024, and for the first time, the central issue of the lawsuit is Satoshi Nakamoto’s identity. A result for either side could have significant ramifications for the market value and future of Bitcoin (BSV) as well as BTC and BCH and thus, potentially, for the entire digital asset space.
Watch: Crypto regulation will make life easier for BSV
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