Response to digital/decentralized finance
On April 21, Japan’s Financial Services Agency held the 9th Study Group on How to Respond to Digital and Decentralized Finance. It has been held since July 26, 2021, with the participation of scholars and financial practitioners, including technical experts.
The secretariat will consider the enforcement cases related to crypto assets (virtual currencies) and DeFi (decentralized finance) overseas (especially in the United States), and discuss the issues unique to these emerging technologies that are different from traditional financial assets. asked to discuss.
This includes effective methods of deterring illegal activities, comprehensive market surveillance and analysis including on-chain and off-chain information, the spread of derivative trading and credit instability, agreements and governance in DAOs (Decentralized Autonomous Organizations), including the existence of unregulated jurisdictions. He also urged them to mention points to keep in mind when considering these issues in Japan.
The secretariat also asked for opinions on who should be held responsible for illegal activities in DeFi services and services using smart contracts.
Unfair trading of digital assets
As a representative example of unfair trading of digital assets, the secretariat exemplified insider trading by former Coinbase employees. Coinbase is the largest cryptocurrency trading platform in the United States, and between June 2021 and April 2022, employee Ishan made a profit of approximately 150 million yen ($1.1 million) by communicating non-public information to Nikhil and Sameer. Obtained. In April 2022, unnatural trading was identified on Twitter, and the US Securities and Exchange Commission (SEC) and the US Department of Justice (DOJ) prosecuted three people.
connection:Three former Coinbase employees arrested for insider trading of cryptocurrencies
In response to this matter, the secretariat will ensure the effectiveness of investigations and enforcement of unfair transactions, utilize transaction transparency on public blockchains, analyze and track combined on-chain and off-chain information, and implement crypto asset trading platforms. He points out the construction of an internal system for the company as an issue.
Responsible entity for smart contract type service
Two DeFi projects, Tornado Cash and Ooki DAO, are shown as responsible entities for illegal activities in smart contract services.
Tornado Cash, a cryptocurrency mixer that makes it difficult to trace transaction history on the blockchain, was sanctioned by OFAC for being used to launder money by a hacking organization backed by North Korea. Dutch investigative agency FIOD has also arrested Tornado Cash developer and governance token holder Alexey Pertsev.
connection:U.S. lawmakers send letter to Treasury Secretary Yellen about Tornado Cash sanctions
As issues that emerge from this case, the secretariat pointed out how to recognize the responsible entity when an autonomously operating mixing service promotes illegal activities and the appropriateness of existing regulatory enforcement approaches. Furthermore, since it is unclear whether blockchain validators can approve transactions of sanctioned addresses, there is a need for clarification of effective enforcement methods to prevent criminal activity while maintaining anonymity.
The U.S. Commodity Futures Trading Commission (CFTC) has also prosecuted the Ooki DAO and Ooki token holders involved in the decentralized derivatives exchange BZRX for similar violations, calling the Ooki DAO an unincorporated association. organization)” and demands responsibility from governance token holders. In December 2022, the court ruled that the Ooki DAO was competent to sue, but whether the DAO would be held liable under the Commodity Exchange Act remains undecided.
connection:US CFTC overturns litigation process against OokiDAO
Overseas regulatory trends
Overseas, regulations are being developed for DeFi and virtual currency, and changes are taking place in the industry.
In April, the U.S. Department of the Treasury announced the “Fraudulent Financial Risk Assessment of Decentralized Finance,” analyzing the decentralization of DeFi and the dangers and vulnerabilities of criminal use. We are proposing how to deal with it. It has been pointed out that DeFi’s fraudulent financial risks can be exploited by criminals looking to profit from non-compliant services, no-intermediary schemes, regulatory gaps between jurisdictions, and cyber vulnerabilities. .
connection:U.S. Treasury assesses DeFi financial fraud risk: report
In February 2023, the Federal Reserve Board (FRB) and others issued a statement regarding the possibility that vulnerabilities in the cryptocurrency industry could affect the liquidity risk of traditional banks. He called on banks that deal with cryptocurrency companies to strengthen their risk management.
The stability of customer deposits may be affected by sudden capital outflows and inflows due to cryptocurrency market events, media reports and crypto holders’ reaction to market news.
connection:U.S. Federal Reserve and others warn banks handling funds in the cryptocurrency industry
The European Parliament passed the Crypto Asset Market (MiCA) bill on April 20. The MiCA Regulation aims to harmonize the regulation of virtual assets not regulated by current EU law and protect users and investors. It focuses on regulating stablecoins and other digital asset transactions, setting licensing and consumer protection requirements.
connection:European Parliament Approves MiCA Regulation, Toward Harmonization of EU-Wide Regulations on Cryptocurrencies