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July 13, 2022

Global regulation; Trade bodies; DeFi tax

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:

  • Regulators are beginning to sing from the same hymn sheet
  • It’s time for crypto to set up a trade body
  • UK looking to tax DeFi

Regulators are beginning to sound the same – Timo Lehes

Another week goes by and evermore regulatory bigwigs are voicing their view on the crypto space. While on the face of it driven by market distress, it feeds directly into an important underlying trend at play – crypto is becoming more important and more noticeable to authorities. Regulators are starting to sound awfully alike when discussing crypto, and this is no bad thing.

Most recently we’ve had Lael Brainerd, vice chair of the US Federal Reserve Board of Governors calling for crypto regulation and talking about DeFi. And the Bank of England’s deputy governor for financial stability John Cunliffe said that crypto needs regulation to promote financial stability, which is no surprise considering his remit.

Interestingly enough with Brainerd and Cunliffe’s comments – while coming from separate events – both could have been reading each other’s notes as the substance of both is crypto and DeFi ultimately function with similar risk features as TradFi, and for that reason it needs regulating. At Swarm we are firmly of the belief that eventually there will be no distinction between TradFi and DeFi – just ‘Fi’ – so why should regulation differ as such?

While the technology used to create that infrastructure is different, the risk it confers is arguably similar. Cunliffe’s comments are commendable because he adds much of what already exists in regulatory terms can be applied to DeFi without much pain. This is correct, and indeed desirable, for both regulator and crypto.

It’s time for crypto to set up a trade body – Philipp Pieper

The Financial Stability Board (FSB) has said it wants to propose robust crypto regulations. The group of regulators, central bankers and treasury officials from the G20, a highly influential group at an international level, is making the right noises to provide a framework for how this should proceed. The announcement also plays into what IOSCO are doing with their report on standards for the industry.

But there is still a missing piece in this puzzle – the crypto sector itself. Regulators can put forward a desire to regulate and positively codify rules for the sector, but our sense from speaking to major bodies is they’re still very much looking to crypto for guidance on the direction of travel. No one seems to be giving a definitive answer.

While firms such as ourselves at Swarm make key representations to these institutions, there is a feeling that crypto lacks a unifying trade body to give a definitive answer to the question: what do you want regulation to look like?

It’s essential to have a broad spectrum of players giving views on policy, and not just the large players, who will inevitably reach out to regulators anyway, not least because they have resources to do so. At this juncture failure to unify will lead to fragmented rulemaking and ultimately negative outcomes for the sector.

UK Government looking at how to tax DeFi – Philipp Pieper

The UK Government has announced its looking at ways to tax DeFi, and wants views from the sector on what this should look like in practice. On the face of it this is completely unsurprising. Governments are in the business of figuring out how to tax anything that creates value.

But crypto throws up an interesting conundrum that the UK Gov seems to be trying to solve, i.e., what is crypto and how do you value it effectively? There are specific calls for views on taxing cryptoasset loans and staking.

There’s an element of chicken and egg to this issue, but ostensibly taxation should derive from coherent (and ultimately fair) definitions of the asset in question. The trouble arrives when you have Governments, which price in fiat, and crypto which is in some ways anathema to fiat.

The UK may want to look to Germany. The German finance ministry clarified the tax treatment of cryptoassets earlier this year, providing further vital legal clarity for the sector, resulting from engagement with the crypto industry and investors. The BMF has outlined a uniform code for the tax treatment of cryptoassets, giving all users – be it private investors or corporate entities – a one-year tax-free exemption on the sale of cryptoassets such as bitcoin and ether. This extends to lending and staking, a key aspect of the clarification

Germany’s forward leaning approach to crypto offers innovators and entrepreneurs clarity to build projects in the region, not only from a regulatory standpoint but taxation too.