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May 31, 2023

IOSCO; US crypto war; Euro CBDC

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:


  • IOSCO proposals bely FTX clean up act
  • US crypto war sends businesses to Ireland
  • Digital euro rears its head again


IOSCO launches global crypto regulation proposals


The International Organization of Securities Commissions (IOSCO) has published its proposals for a global policy standard for crypto regulation. The proposals seem to speak directly to the debacle of FTX last year and would appear to echo the framework already in place around the world for TradFi exchanges. 


It is likely in years to come we’ll see the FTX crisis in the crypto market as a foundational event in how the sector is regulated. The comingling of assets, frank lack of decentralization and inherently opaque business practices led to its downfall. It was cursed by leadership and organizational conflicts of interest built into its design. 


IOSCO’s proposals directly tackle these issues, including conflicts of interest, market manipulation and cross-border risks. Overall the recommendations appear to lead toward extant frameworks for TradFi institutions, which is overall a desirable goal for those in the sector who wish to play ball with regulators and legal frameworks. 


This is an important distinction. A regulatory-first approach is key to the formation of a stable and successful market for DeFi and digital assets. The cowboy crypto projects of the past will be left firmly behind once a global framework is in place and market participants can see clear dividing lines with those that play by the rules.  


US crypto war is arriving on EU shores 


The US regulatory battle over the status of crypto is landing on EU shores. This comes in the form of companies setting up bases in the EU, most notably in Ireland where the likes of Gemini have announced a presence, in order to escape the uncertainty and wrangling stateside. 


Regulatory authorities have, it would appear, taken note of this – reminding firms of the need to disclose their status to regulators in a timely manner. This is a rather predictable consequence of the issues in the US, and testament to the regulatory leadership the EU is demonstrating in the sector. 


The EU is close to adopting MiCa and with it a defined legal framework for crypto firms to operate within. Unlike the US, the EU has a clear policy direction and path to regulation at a whole-union level. It is incumbent on firms to comply with these.


This is in stark contrast to the US, where essentially fear reigns. There is little clear guidance from regulators, while a culture of generous legal interpretations appears to prevail with big-name firms targeted with suits and other enforcement out of the blue. This is clearly no way for a market to function, with inevitable migratory consequences. 


Euro CBDC rears its head, with the same concerns as ever 


CBDCs seem to come in and out of conversations. But the concerns remain the same no matter progress. The ECB is reportedly finalizing a prototype of a euro CBDC, before deciding if it plans to formally adapt the fiat currency to a digital format. 


CBDCs have been around conceptually for some time now, and are often posed as a digital alternative to crypto and stablecoins. But they come with real concerns over centralization, transparency and privacy. Many CBDC projects seem to overtly do away with some of the key tenets of decentralized assets and their formal adoption should definitely raise eyebrows. 


The euro CBDC for instance, drew significant criticism for involving Amazon – a massive, powerful corporation. What business does such an institution have in the creation of digital money, other than if users spend it on their platform? 


The CBDC also rejects distributed ledger tech – a cornerstone of digital asset technology – on the basis that it was faster and more efficient. In doing so the project’s leaders deny the utility of asset-backed stablecoins, which have already proliferated and successfully work as the interchange point between DeFi and TradFi institutions. It makes one wonder whether the real goal here is about permeating control, rather than creating something truly useful.