TRM Talks: Policy with Chris Brummer and Recap

In the last week of June, after a busy quarter of policy consultations, new legislative packages and ongoing debate, TRM’s Policy team held its latest edition of TRM Talks Policy. Ari Redbord and Isabella Chase were joined by Dr. Chris Brummer, TRM Labs special advisor and professor of Law and Financial Technology at Georgetown University Law Center, to unpack the latest regulatory and policy developments in digital assets around the world. The discussion also shed light on what we can expect over the coming months.

Watch the video to enjoy the full discussion. For a snapshot of the key takeaways, take a look at our roundup below.

‍A series of milestones capped a blockbuster quarter for EU and UK policy

Policy-wise, it has been a jam-packed quarter in the EU and the UK. On June 28 2023 - dubbed “Super Wednesday” in regulatory circles - the European Commission released a major new set of packages. The Single Currency Package includes proposals for a digital euro - the EU’s central bank digital currency (CBDC) - and will likely be subject to extensive debate ahead of a vote in October 2023. Digital payments policy packages which also dropped on the same day included a proposed update to the current Payment Services Directive (PSD2, which will become PSD3). This package aims to bolster the fight against fraud - currently one of the biggest issues affecting digital payments.

Earlier in the quarter, the EU finalized both the Markets in Crypto-Assets (MiCA) and Transfer of Funds (TFR) regulations. Both will enter into force in July 2023. Efforts will now turn towards putting these regulations into practice. Meanwhile, negotiations on the European Commission’s AML Package continue.

In the UK, the quarter similarly ended with a series of regulatory milestones. In June 2023, a significant consultation on the UK’s future regulatory framework closed. Concrete follow-up action is already underway, with what the government has termed “Phase 1 of the regulatory response.” The Financial Promotion regime has been finalized, and will enter into force on October 8 2023. Meanwhile, the Financial Services and Markets Bill - a sweeping piece of legislation that will bring digital assets and fiat-backed stablecoins under UK financial services regulation - is on the cusp of being passed. (Editor’s note: The bill was subsequently granted Royal Assent on June 29, 2023.)

Elections on the horizon in both the EU and UK are unlikely to change the direction or pace of travel, according to Ms. Chase. The regulation of virtual assets is not expected to take center stage in any election campaigns, while future efforts are likely to remain concentrated on tackling fraud, broader illicit finance and market conduct.

‍The future direction of U.S. crypto policy is still being decided, with the courts set to play a key role

The picture in the U.S. tells a different story, explained Dr. Brummer. Though enforcement actions have continued in the wake of the White House Framework on Digital Assets, no significant policy moves were made during the quarter, and the direction of U.S. crypto strategy remains unclear. However digital assets and their regulation do remain a keenly debated topic, engaging all branches of government and both sides of the aisle.

The debate is building to a crescendo, according to Dr. Brummer, with the courts set to play a pivotal role in determining the future course of digital assets and their regulation. Landmark cases, such as the ongoing SEC proceedings against cryptocurrency exchanges Binance and Coinbase, will have far-reaching implications. What the courts decide will shape the future direction of crypto policy, set precedents for cases in the cryptosphere and determine the future power of administrative agencies and the enforcement tools at their disposal. However, this will all take time.

‍Elsewhere in the world, Brazil stands at the forefront of innovation in the digital payments and CBDC space

In terms of jurisdictions that are innovating in virtual assets and broader financial technology regulation, Dr. Brummer singled out Brazil as a striking example. The Brazilian central bank is accelerating efforts to launch a digital real - its CBDC - underpinned by PIX, its faster payments system.

Brazil’s CBDC project follows PIX’s success. Launched in 2020, the payments platform swiftly boomed during the Covid-19 lockdowns as Brazilians turned to online banking - over half of them for the first time. PIX is now the most used means of payment in Brazil.

What is encouraging about the Brazilian example is the country’s holistic, “whole of government” and public-private approach to pioneering digital solutions to address domestic challenges surrounding service delivery, regulation and financial inclusion. The central bank has teamed up with a range of private players on a project to explore potential use cases for the CBDC, in order to render other services besides payments and settlements.

‍FATF signals a poor international understanding of crypto risks, and may be preparing to get tough on regulatory non-compliance

Days after the Financial Action Task Force (FATF) held its June Plenary, the global AML watchdog published its Targeted Update on the Implementation of FATF Standards on Virtual Assets and Virtual Asset Service Providers report. It makes for “sobering” reading, according to Ms Chase.

The headline message is that there remains a poor understanding of the risks associated with virtual assets, with low levels of engagement by individual countries. Some 75% of jurisdictions that have made changes to their regimes are either only partially or non-compliant with the FATF’s requirements, while the quality of implementation of the Travel Rule - a fundamental AML/CFT measure - is still low.

The update raises serious concerns around the North Korean threat. This topic is similarly reflected in TRM’s June 2023 Illicit Crypto Ecosystem Report, which maps the crypto-crime landscape and offers up a useful tool for policymakers around the world. Where the emerging areas of DeFi, peer-to-peer and unhosted wallets are concerned, FATF is continuing to call for a “watch and monitor” approach and has not made any statements on required action.

Interestingly, FATF’s report finds that blanket bans on crypto activities are proving ineffective. Sought by some countries (often without any prior risk assessment) as a regulatory “quick fix,” these bans are extremely difficult to impose in practice. FATF instead favors the proportionate, risk-based approach to crypto regulation advocated by the IMF.

In a sign that FATF may be preparing to adopt a tougher stance on non-compliance, in the first half of 2024 the body will start listing materially important virtual asset jurisdictions and specifying the progress of each in implementing recommendations 15 and 16.

‍Topics to monitor in the months ahead

Looking ahead, here are some policy topics to keep tabs on:

• Though there is a sense in the EU and UK that the regulatory foundations have been set, the hard work is far from over. Focus will now turn to the “grittier” task of implementation. To that end, later this summer, TRM will host the European Banking Authority for an edition of TRM Talks dedicated to the more challenging aspects of putting MiCA into practice.

• As the focus on CBDCs continues to deepen across the globe, expect efforts to intensify on addressing challenges such as defining use cases for digital currencies, boosting wider understanding of crypto assets and blockchain technology and ensuring their cross-border interoperability. For further details on the latest CBDC developments readers should check out the latest survey from BIS on CBDCs.

• With FATF seemingly poised to “get tough” on crypto and financial crime non-compliance, time appears to be running out for individual countries to fix deficiencies in their regulatory frameworks. Expect this shift to focus minds and spur developments by individual countries in the regulatory arena over the next 12 months.

DeFi received a considerable amount of attention in Q2 with the U.S. Treasury Illicit Finance Risk Assessment and the French ACPR and AMF issuing discussion papers on the topic. Over the next few months we expect for AML/CFT conversations to continue but broader financial regulation is likely to take more time.

After a great discussion and journey around the world of crypto policy one thing is certain. There will be much more to discuss in our next TRM Talks Policy.