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October 23, 2023

California’s digital assets framework; ESMA on DeFi; Australia’s regulatory framework

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments.

Comments available on the following news items:


  • California lays out digital assets framework rollout timeline
  • ESMA digs into DeFi
  • Australia looks to bring crypto under existing regulatory scope


California begins digital asset framework rollout


California has signed into law the Digital Financial Asset Law – an attempt to establish a regulatory framework for crypto in the west coast state by governor Gavin Newsom. 


The US exists in a strange structure whereby states can very much forge ahead with their own regulatory initiatives, but this still has to come under the purview of Federal authorities. Newsom for his part has made encouraging noises around the crypto market, saying that consumer protections are key but that an “appropriate balance” is essential to build a “responsible innovation environment.”


Given the lack of clarity at a Federal level in the US, any regulatory development is positive. The vacuum in the current framework at a national level has only really benefited the lawyers as firms look to defend their positions while various regulators jostle to have authority over the sector – something that is still far from settled. 


To an extent the damage is already done. We’ve seen high-profile crypto outfits move to more accepting jurisdictions such as the EU as the market looks to settle in regions that have clear constructive plans in place. The US might figure out how to treat crypto firms in the coming months and years but a lot has already been decided for them. 


Bitcoin market action shows power of regulatory clarity and the dangers of false rumours


The realization by the market that the Grayscale bitcoin ETF application would not be subject to further setbacks for now from the SEC brought back to life an otherwise quiet crypto market. But dangerous fake news threatens to derail progress from positive steps for regulatory approval, and could burn the fingers of investors.


The bitcoin market has been on tenterhooks since the potential for major institutional ETF launches became evident over the summer. The implications of such large scale firms allocating serious capital to the market is clearly nothing to be trifled with. But regulatory pressure – withholding approval – has served to dampen further enthusiasm.


The events of the past few days illustrate the enormous potential for movement in the wake of a good news reaction, and are indicative of the positive effect that ETF approvals could have in the future. But it also shows the danger for investors from fake news after it was falsely reported that the BlackRock bitcoin ETF had been approved. The report sent the market spiralling but quickly corrected itself once investors realised it wasn’t true.


The SEC’s intervention and reticence to allow these ETFs to move forward has left the market guessing so it’s no surprise that even a whisper of good news can move the price meteorically. 


The sector itself isn’t waiting for approval though, with major outfits already beginning to prepare their niches as the bitcoin ETF landscape begins to take shape. There is significant appetite for derivative and structured products for example, and other technological innovations that the biggest firms won’t want to get bogged down in developing. Approvals won’t likely come this side of Christmas, but once they do, it could be a crypto equivalent of the “Big Bang” of the 80s for TradFi. 


Australia looks to incorporate crypto into existing regulations


Not wishing to be left behind, Australia looks ready to begin incorporating crypto into existing regulatory frameworks for financial services and assets. Licensing of the sector will be a positive step for both market participants and consumers. The plans will require licensing of exchanges in order to continue operating.


The implementation of regulatory change needn’t be a mess of new rules and procedures. At its core, crypto should be regulated in the same way TradFi is. These are rules that have been honed and developed over decades and form a core component of the normal financial plumbing globally. 


Streamlining crypto regulation to match this makes sense because it normalises the operation of crypto without demonising its existence. Ultimately the most important thing here is that market participants – be they consumers, investors or innovators, are protected – but that this doesn’t come at the cost of participation completely. 


There are however some nuances in the Australian approach which will provide unique regulations for digital assets and tokenization. It makes sense to develop new standards here as this is very much an innovative area of crypto and takes the lead of regulatory jurisdictions further down the line, such as MiCa in the EU. 


Ultimately though the Australian Government says the regulation is “technologically neutral” in that it seeks to licence providers rather than digital assets. This is welcome as it places responsibility in the hands of market actors instead of applying pressure on the market itself.