Selected Publications

China bans; the US doesn’t: Crypto wins (October 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: On 24 September 2021, China’s key monetary and financial agencies issued a blanket ban on all crypto transactions and mining. This confirmed and reinforced the May 2021 ban on financial institutions and payment companies providing cryptocurrency-related services that enable cryptocurrency transactions. Similar bans were issued in 2013 and 2017, and there was, more broadly, a relentless effort to suffocate the domestic cryptocurrencies market. The latest ban came days after the securities regulatory commission re-affirmed the work on introducing smart contracts and blockchain-based services to digitise the securities and futures market; it also followed a period of heavy work by the monetary authority that culminated in the release of the e-yuan in 2020. China has always supported the distributed ledger technologies-based applications. On 1 October 2021, the chair of the US Federal Reserve System clarified that the US does not intend to ban cryptocurrency. The chair of the securities and exchange commission (SEC) took the same stance on 5 October 2021. The statement followed several months of intense scrutiny and analyses of the cryptocurrency markets, and political procedural steps by the federal monetary and financial regulators. These steps were undertaken to address the cryptocurrency market’s weaknesses exposed by the correction that took place in May 2021, such as those related to market infrastructure, market conduct, and investor protection. On 1 September 2021, the SEC urged crypto exchanges to embrace the regulation in order to not lose public trust, and on 5 September 2021, it called for the crypto space to work in cooperation with regulators. Daily bitcoin price charts evidence that strong statements made by superpowers do move the market. Investors should consider such statements within a broader context and be mindful of the following. First, cryptofinance cannot be stopped unless the Internet is shut down or extensively controlled. Second, regulatory adoption and sustainable practices are necessary conditions for mass cryptofinance adoption. Then, recent global developments show that cryptofinance-unfriendly jurisdictions are increasingly a minority.


The DeFi Regulatory Challenge (September 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: DeFi is a new financial paradigm that generates significant benefits. As of 14 September 2021, DeFi transactions were funded by no less than USD 88.7 billion. The risks associated with DeFi are also significant and amplified by its unregulated environment. Since 2017, the evolution of cryptofinance has shown that a regulatory approach that can provide certainty to the private sector, support innovation, and mitigate money laundering and investors’ risk can boost cryptocurrencies adoption. The same holds true for DeFi. The critical question is how to regulate DeFi. In this context, the current debate in the US suggests that the enforcement approach – the application of financial laws to DeFi – is ill-suited to achieve the intended goal, because it is built on the concept of centralised intermediary – which per definition is absent in DeFi. A prudential regulatory approach, focused on setting risk control and capital or liquidity boundaries on the private sector and actors, may be more conducive to the intended outcome, particularly when informed by a principle-based regulation. It will require a proactive stance from the DeFi sector and actors. Embedding RegTech solutions in smart contracts may constitute a constructive opportunity going forward.


Comments on BCBS consultative paper ‘Prudential treatment of cryptoasset exposures’ (September 2021)

METI Advisory AG was pleased to offer to the BCBS comments on the captioned consultative paper. Key message: The BCBS sticks to the idea of applying the one-size-fits-all, harshest possible capital charge to the exposure to all cryptoassets other than tokenised traditional financial assets and non-algorithmic stablecoins. METI Advisory AG notes that that from a risk viewpoint, such an approach assimilates diverse cryptoassets such as bitcoin, ether, utility tokens, DeFi tokens, and other network coins, as well as algorithmic and crypto-backed stablecoins, to a single asset, akin to the worst externally rated traditional securitisation tranches. METI Advisory AG firmly believes that the assimilation of diverse cryptoassets to a single asset evidences i) a poor understanding of the natures of these diverse cryptoassets and ii) a lack of progress, compared to the discussion paper issued in 2019, in the analysis and understanding of what constitutes the most genuine asset addition since the emergence of blockchain-based finance. This position cannot be the final one and needs to be further elaborated. Bitcoin, ether, utility tokens, DeFi tokens, and other network coins, as well as algorithmic and crypto-based stablecoins differ widely in terms of their economic functions, risk profiles, and governance arrangements, and these differences need to be understood, acknowledged and taken into account when specifying capital adequacy and risk management prudential rules. The operational risk associated with these assets is bound to reduce over time as the framework ecosystem becomes more professional and possibly regulated (e.g., regarding cryptoexchanges). METI Advisory AG is strongly convinced that to achieve a more detailed and realistic understanding, it is important that the BCBS includes in the process the know-how of the cryptoindustry, which typically resides outside the scopes of BCBS-regulated entities. The full position will be made publicly available by the BCBS ind due course. 


Cross-border challenges of a Central Bank Digital Currency and Global Stablecoins (August 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: On 9 July 2021, the Bank for International Settlements (BIS), the International Monetary Fund (IMF) and the World Bank, issued a Joint Report to the G20, which analyses how CBDCs could facilitate faster, cheaper, more transparent, and more inclusive international payments. The report concludes that reaping such benefits will require significant conceptual and practical work and effective multilateral collaboration and the implementation of new infrastructures, in short, a long timeline. In these circumstances, could the implementation of a GSC in open collaboration with monetary authorities deliver those efficiency and inclusiveness enhancements to the international payments system more swiftly? After all, last year, the G20 made the enhancement of cross-border payment a priority, and the G7, in June this year, reiterated that no GSC should launch unless it is properly regulated. Open collaboration with the monetary authorities would ensure appropriate consideration to the impacts of a GSC rollout on monetary policies and on the management of cross-border flows. The alternative is to perpetuate the drawbacks of the current international payments system for the foreseeable future.


Basel Committee Consultation: A Prudential Treatment of Banks’ Cryptoasset Exposure (July 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: The Basel Committee on Banking Supervision (BCBS) commenced in June 2021 the consultation on the ‘Prudential treatment of cryptoasset exposures’ document as an initial step towards the promulgation of the internationally binding capital and liquidity rules applicable to banks’ exposure to cryptoassets. Building on a discussion paper issued in December 2019, this consultation document introduces the distinction between tokenised traditional assets and non-algorithmic stablecoins and other cryptoassets, such as bitcoin, ether, utility tokens, DeFi tokens, and other network tokens, as well as algorithmic and crypto-backed stablecoins. The ‘Pillar 1’ formulaic minimum capital charge for banks’ exposure to tokenised traditional assets should be at least equivalent to those of traditional assets. However, the exposure to non-algorithmic stablecoins should be subject to new, dedicated Pillar 1 guidance. Other cryptoassets (e.g. bitcoin, ether, utility tokens, DeFi tokens, and other network coins), as well as algorithmic and crypto-backed stablecoins, should be subject to the one-size-fits-all, harshest possible Pillar 1 charge (1,250% risk-weight) corresponding to the full exposure deduction from the capital base. The BCBS plans to supplement the Pillar 1 minimum charge with an operational risk add-on, as well as provide additional guidance under Pillar 2 (supervisory review process) and Pillar 3 (disclosure), and extend the current leverage ratio, large exposures, and liquidity ratio frameworks to cryptoassets. While the consultation paper recognises the ineluctability of asset tokenisation and stablecoins, it disappoints by continuing to apply the one-size-fits-all, harshest possible capital charge to the exposure to all cryptoassets other than tokenised traditional financial assets and non-algorithmic stablecoins. From a risk viewpoint, this approach assimilates diverse cryptoassets such as bitcoin, ether, utility tokens, DeFi tokens, and other network coins, as well as algorithmic and crypto-backed stablecoins, to a single asset, akin to the worst externally rated traditional securitisation tranches. It thus evidences a poor understanding of the natures of these diverse cryptoassets. The BCBS recognises that the specification of final rules will likely require more than one consultation. Further, it is important that this process includes the know-how of the cryptoindustry, which typically resides outside the scopes of BCBS-regulated entities. As such, it can lead to a deeper understanding of cryptoassets and the recognition of the diversity of their economic functions, governance arrangements, and risk profiles. However, an implementation of the proposed blunt approach would likely stifle innovation and promote parallel, unregulated cryptoasset activities.


Cryptocurrency Markets and Regulators - What to expect (June 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: The 12-month period of substantial increases in cryptocurrency values (bitcoin’s value grew by 845% from 14 April 2020 to 14 April 2021) evolved, in May 2021, in a correction that has exposed market conduct, infrastructure, and investors’ protection issues. The US federal financial and banking regulators have teamed up to pursue, rapidly and rigorously, a clear and explicit cryptocurrency regulatory framework. Given the US share in the global economy and the influential role of its regulators, the outcome of the process is likely to shape cryptocurrencies regulation and markets globally. Investors should welcome further regulatory clarity in areas such as market infrastructure, conduct, and investor protection inspired by traditional financial regulation, which will promote the development of institutional-grade cryptofinance in the mid to long term. Cryptocurrencies are not deemed systemically relevant by Central Banks, and a major clampdown can be excluded.


FATF and DeFi: Further thinking is required (May 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: On 19 March 2021, the FATF issued an update to its 2019 Guidance on the risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs) for consultation. The consultation was concluded on 20 April 2021, and the FATF will report its way forward in June 2021. Among other aspects, the proposed updates broaden the definition of VA and extend the definition of VASP with the goal to ensure that all digital financial assets are captured by FATF standards. The FATF is attempting to extend an approach that is constructed around the notion of centralised intermediaries (e.g. banks and exchanges) and the possibility of expert judgment (e.g. assess the suspicious nature of transactions) on highly automated, per definition decentralised, DeFi protocols. If the update is not modified to account for the specificities of DeFi, the final Guidance may cause the overregulation of the digital financial industry and disincentivise financial innovation.


Regulatory uncertainty in cryptofinance (April 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: Globally, the cryptofinance regulatory landscape is fragmented, but developing and improving. Market participants taking exposures in cryptofinance by investing in crypto assets or operating related processes may face considerable regulatory uncertainty, depending on their chosen jurisdiction. Our own records show that over 100 jurisdictions and at least 15 supranational bodies have taken formal steps to regulate cryptofinance products and processes over the last few years. None of the supranational bodies have banned or prohibited cryptofinance, and the large majority of countries have embraced it by increasing regulatory certainty for market participants and promoting innovation in a risk-controlled way. Currently, Switzerland, Liechtenstein, and Singapore offer crypto market participants the highest degree of regulatory certainty. While the EU has just begun a regulatory process that will lead to a similar regulatory certainty in a few years, certain member states, such as France and Germany, have considerably lowered uncertainty in recent years. The same can be said of the UK and several states in the Asia-Pacific region. Other jurisdictions, such as India and Russia, have been sending mixed signals regarding their intended direction, while the US has been struggling, owing to its intricate federal and state-based regulatory system, as well as its directionally unsettled economic policy stance (Congress). At the other end of the spectrum, countries including China, South Korea, Laos, Burundi, and Qatar provide regulatory certainty by prohibiting some or all cryptofinance products and processes. Crypto asset investors and entrepreneurs wishing to develop cryptofinance businesses hedge the risk of undue exposure to regulatory uncertainty by doing business in jurisdictions that offer the highest degree of regulatory certainty. Overall, the trend clearly points to a steady and global reduction of regulatory uncertainty.


Illicit use of cryptocurrencies (March 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: Two authoritative market intelligence reports on the illicit use of cryptocurrencies, released in February 2021 (by Chainalysis and CipherTrace), evidence a marked decrease in the phenomena during 2020 - compared to 2019 - but also new worrying trends in the areas of ransomware and Decentralised Finance (DeFi). Further regulatory action to combat the illicit use of cryptocurrencies is therefore expected. Progress in the implementation of existing regulatory Guidance and a further growth in overall cryptocurrencies transactions should lead to a further decline in the illicit use of cryptocurrencies in the coming years. Regulators have feared the illicit use of cryptocurrencies since bitcoin was born. Still in 2017 about one-quarter of global bitcoin users were involved in illicit activities, for a total transactional value of around USDbn 76. The authorities took concerted action in 2018 under the leadership of the G20. The resulting Guidance issued by the Financial Action Task Force (FATF) in June 2019 basically subjects virtual assets (VA) and their providers (VASP) to the same standard and procedure governing transactions in fiat currencies and their providers. Yet, as apparent from statements by US Treasury Secretary in February 2021, the illicit use of cryptocurrencies continues to worry regulators, who see it as growing.


The UK tackles stablecoins (February 2021)

Foreword: METI Advisory wrote this report for SEBA Bank AG. Abstract: On 7 January 2021, the UK government released a consultation paper that examined recent developments in Distributed Ledger Technology (DLT) and proposed an authorisation regime for stablecoins. Stablecoins have the potential to bring efficiencies to (cross-border) payments, promote financial inclusion, and facilitate the implementation of retail Central Bank Digital Currency (CBDC). The UK emerged as the third jurisdiction to single out and address stablecoins. Switzerland issued guidelines in September 2019, the EU issued regulatory proposals in September 2020, and the Financial Stability Board (FSB) provided a fundamental endorsement of stablecoins in October 2020. The UK government proposes to include stablecoins that can be reliably used for retail or wholesale transactions and that achieve a stable peg to assets such as single currency, multi currencies, or gold within the scope of the regulation. It further proposes to exclude stablecoins that achieve a stable value through algorithms that control their supply. The regulatory requirements would extend to the organisation, operation, and governance of the stablecoin arrangement. Global stablecoins would be subject to additional requirements as well. Existing cryptoasset regulation would be leveraged and extended to cover stablecoins.


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