The Solidus Brief: Digital Asset Market Surveillance, Compliance & Regulation News | June 2019

All the crypto news compliance professionals need to know. This month's highlights: SEC Chairman Jay Clayton again calls for better market surveillance and reduced manipulation before the agency can approve a crypto-ETF; A study by The Block raises concerns that 86% of volume in 48 exchanges is potentially wash trading; 94% of surveyed US, UK and Canadian endowment funds are actively engaged with crypto investments

Regulation, Legislation and Enforcement

• Once again, SEC Chairman Jay Clayton says better surveillance to prevent manipulation is one of the key upgrades needed to get an ETF-Crypto approved. In his CNBC interview, Clayton asked for “sophisticated rules and surveillance to ensure that people are not manipulating the stock market,” as well as better custody solutions. This past month, the SEC postponed its decision regarding SolidX and VanEck’s joint ETF application, while Crescent Crypto Asset Management submitted a new proposal for an ETF that would track BTC and Ether.

• In Korea, major Exchange Coinnest shut down in April.
• Poloniex delisted 9 crypto tokens In the U.S., fearing SEC enforcement.
• Bittrex officially informed NY State users they will no longer be serviced and withdraw their funds by June 9th, after its Bitlicense application was declined.
• According to an Estonian consulting firm, two-thirds of 25 leading European and American exchanges do not have sufficient compliance policies to fulfill the requirements of the newly introduced AMLD5 guidelines in Europe.
• China announced it is once again legal to own bitcoin. Trading bitcoin remains illegal.
• The Finish exchange LocalBitcoins did not explain why it banned Iranians from buying bitcoin, though many assume it is due to a concern of violating the US sanctions.
• France’s finance regulator AMF reports a 14,000% surge in crypto-related scam enquiries since 2016.
• Dutch authorities shut down Bestmixer, a service allegedly used to help launder Bitcoin.
• Australia’s Securities watchdog releases an update to its guidelines on crypto regulation. Among other directives, crypto exchanges will be required a government issued license.
• Japan tightens crypto regulation, ruling that “any company even storing cryptocurrency will be considered a “cryptographic asset exchange.”
• G20 countries announce they will adopt FATF’s digital asset guidelines, including requirements that go beyond KYC/AML compliance measures.
• In a widely publicized move, Canadian messaging app provider Kik announced it joined others in raising $5 million to support legal action against the SEC. A few days later, the US securities agency filed a lawsuit against Kik, claiming its $98 million ICO violated securities laws.
• Malaysian regulators continue the effort to reach a fully regulated crypto industry, officially registering three crypto exchanges that managed to fulfill new requirements revised in May.

Our take: The fact that digital asset regulation is intensifying globally is not news, though the repercussions of non-compliance are becoming increasingly clear. Even major actors are required to scale down, limit operations or in some cases shut down. One result is increased tension with regulators, which in Kik’s case led to litigation. At Solidus we acknowledge litigation is a legitimate form of dialogue between innovators and regulators. Nonetheless, it’s important to stress that the key to moving the industry forward is innovators and regulators working together.

Market Integrity and Manipulation Concerns

• A report by The Block, based on a 6-month analysis of 48 crypto exchanges cross-examining volume and website visits, concludes 86% of total reported volume is likely fake. The report joins many others that raised concerns of crypto market integrity including a report submitted by Bitwise to the SEC late in May.
• Major Exchange Huobi admitted some marketing integrity concerns raised by the Bitwise report, stated it does not engage in wash trading and announced it is taking steps to further combat manipulation.

Our take: Across the board, manipulation continues to be a major issue holding back mainstream and institutional adoption, and troubling regulators. It seems that the combination of studies consistently demonstrating the magnitude of the problem and intensifying enforcement is beginning to resonate with major exchanges, which in turn take action. At Solidus, we believe the two keys to addressing market integrity are [a] better surveillance and monitoring solutions tailored for crypto markets and [b] improved industry standards. We are working tirelessly with our partners and clients to promote both.

Adoption and Industry Growth

• According to a recent study, 94% of 150 endowment funds surveyed in the U.S., UK and Canada, including those managed by Ivy League universities, are already investing in crypto and digital assets. 55% plan to increase allocations in the next year.
• CME hits record high in Bitcoin futures demand, reaching 13.6K volume, +36% versus April.

• CFTC chair Giancarlo stated that blockchain is a tool that may allow us to know the exposure of one financial institution to another. Just this week, the CFTC announced Giancarlo, who recently earned the nickname “Crypto Dad” for his light-handed approach to digital asset markets, will step down in July.
• A Yahoo-backed cryptocurrency exchange was launched in Japan, receiving FSA regulatory approval.
• It is now official: Facebook plans to launch a GlobalCoin and is engaged in preliminary talks with the CFTC regarding KYC/AML implementation.
• Fidelity will offer cryptocurrency trading focusing their service on Bitcoin.
• AWS launched a blockchain service with AT&T and Nestlé already subscribed.
• AT&T now allows customers to pay their bills using Bitcoin.
• Samsung considers integrating crypto payments to expand its user base.
• Japan’s SBI holdings expands its crypto exchanges’ retail focus to also service to institutional investors.
• EY publicly released its Nightfall blockchain protocol for one week.
• UBS partners with 14 banks to invest $60 million in a token to ease cross-border payments.
• Walmart pushes blockchain initiatives to track pharmaceutical products with FDA.

Our take: Up until a few months ago, each time a large mainstream institution indicated an interest in blockchain or digital assets, it was major news. Nowadays not a week goes by without a few major announcements. Institutional adoption isn’t approaching — it’s already here.