TRM Weekly Roundup | July 4, 2024
Today, as we celebrate Independence Day in the US, let's take a moment to reflect on the spirit of freedom and innovation as we all work together to build a safer financial system for billions of people.
Enjoy the fireworks, stay safe, and catch up on the latest from a busy week in the crypto policy space with ??The Weekly Roundup?? from Ari Redbord , Isabella Chase , and Angela Ang .
On deck this week:
Dig in below ??
?? IRS issues long-awaited crypto tax reporting rules
Last week, the US Internal Revenue Service dropped 365 pages of long-awaited tax rules for cryptocurrency transactions, and we read it so you don’t have to! Here’s the TL;DR:
?? Why this matters:
The rule is written in a way that strikes a balance between ensuring that digital assets are not used to hide taxable income, while at the same time not including the decentralized ecosystem—as many in the crypto space have feared since the "broker rule" was included in the 2021 infrastructure bill. While DeFi is accepted for now, Treasury and IRS make clear that they "do not agree that non-custodial industry participants should not be treated as brokers," but, "would benefit from additional consideration of issues involving non-custodial industry participants."
An enormous amount of work goes into a rule like this. We look forward to continuing to work with Treasury, IRS, and the crypto ecosystem to ensure that regulation is fit for purpose and crafted in a way that does not stifle the extraordinary innovation that is occurring in the space.
?? FinCEN announces proposed rule to modernize AML programs
Last week, US Treasury’s Financial Crimes Enforcement Network, US Treasury (FinCEN) announced a proposed rule to strengthen and modernize financial institutions' AML/CFT programs. While the 178-page proposed rule does not mention crypto businesses specifically, it applies to MSBs, which include many crypto businesses, such as exchanges. The word of the day? "Modernization."
The rule would require financial institutions to develop a risk assessment process that identifies and evaluates risks based on their business activities, products, services, customers, and geographic locations. This process should be updated periodically. The results of the risk assessment must then be integrated into the institution's policies, procedures, and controls—and institutions should incorporate the reports they file with FinCEN into their risk assessment process to better manage ML/TF risks.
The proposed rule encourages financial institutions to adopt innovative technologies to enhance the efficiency and effectiveness of their AML/CFT programs. Additionally, FinCEN promotes public-private collaboration to advance technological innovation and overcome regulatory obstacles.
???? US Supreme Court overturns regulatory deference, paving way for greater judicial scrutiny for crypto regulation
Last week, the US Supreme Court overturned the Chevron deference doctrine in the case of Loper Bright Enterprises v. Raimondo . Established in the 1984 case?Chevron U.S.A., Inc. v. Natural Resources Defense Council, Chevron deference required courts to defer to a federal agency's interpretation of ambiguous statutes if the interpretation was reasonable. The recent decision limits this deference, emphasizing that courts should independently interpret statutory language without automatically deferring to agency interpretations. The decision represents a seismic shift in administrative law doctrine.
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?? So, what does this mean for crypto?
Regulatory agencies like the U.S. Securities and Exchange Commission (SEC) and U.S. Commodity Futures Trading Commission (CFTC) will face greater judicial scrutiny when their interpretations of ambiguous statutes are challenged. This means courts will independently review the statutory language, potentially leading to different interpretations and outcomes compared to when Chevron deference was applied. However, with reduced deference to agencies, there may be greater regulatory uncertainty with courts interpreting statutes in various ways, leading to inconsistent regulatory guidance and enforcement.
As agencies like the SEC and CFTC navigate this new landscape, they must ensure that their rules and enforcement actions are solidly grounded in statutory authority to maintain regulatory effectiveness and consistency.
5???The 5th FATF Virtual Asset Report is on its way
A fifth report on the implementation of Financial Action Task Force (FATF) Recommendation 15 will be released in the coming weeks, according to the outcome statement from last week’s FATF plenary. The statement implies that the historic poor performance of countries complying with this rule has continued with “three quarters of jurisdictions (75%; 97 of 130) . . . only partially or not compliant with the FATF Standards in this area.”
This outcome is at odds with the list of jurisdictions with materially important virtual asset sectors FATF published earlier this year , which indicated that these countries are moving towards robust implementation of the rules.
Other notable outcomes of the plenary included:
???MiCA rules for stablecoins get underway
On Monday, the first set of rules under the EU’s Market in Crypto Assets Regulation (MiCA) came into effect. The rules apply to the issuers and issuance of asset reference tokens (ARTs) and electronic money tokens (EMTs) in the EU, more commonly referred to as stablecoins. They necessitate that these entities must be appropriately licensed in Europe, publish a white paper, hold a prescribed volume of reserves in the EU, and subscribe to a robust governance model.
Ahead of Monday, several firms issued statements exploring the complexities of the new rules and how they plan to comply with them. Circle, one of the EU’s most prominent issuers of stablecoins, announced their successful “attainment of an Electronic Money Institution (EMI) license” to coincide with Monday’s deadline, making them “the first global stablecoin issuer to achieve compliance with the European Union's landmark Markets in Crypto Assets (MiCA) regulatory framework.”
???? What’s next for Hong Kong’s crypto framework?
On Wednesday, Christopher Hui (Secretary for Financial Services and the Treasury for Hong Kong) responded to a question to the Legislative Council, reassuring investors that “the HKMA and the SFC will keep in view market developments, and review the requirements on VA-related activities as appropriate.”
This response comes after several exchanges withdrew their applications to the HKMA for licenses, in part due to the stringent regulatory requirements in place. Hong Kong aims to be a crypto hub in the region, but has struggled with balancing innovation with rigorous consumer protection requirements. Although this is not without cause, just last week, the SFC issued a warning against three unlicensed exchanges operating in the jurisdiction which could be linked to fraudulent activity.
Find TRM’s Guide on “How Regulators Can Detect and Investigate Unregistered VASPs Using Blockchain Intelligence” here .
Global Head of Policy and Government Affairs at TRM Labs
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