At the beginning of 2024, with the victory of the Grayscale case and the promotion of Wall Street capital led by BlackRock, the BTC ETF was historically approved, marking the first time that virtual assets have entered the vision of mainstream traditional capital, and thus opened a bull market.
Such a bull market is not only reflected in the value of virtual currencies, but also in the gradual acceptance of blockchain technology by mainstream institutions. The most influential is the successful launch of BlackRock's tokenized fund BUIDL. There is no doubt that traditional financial capital will be more grafted onto the blockchain in the future.
At the regulatory level, the United States still lacks a unified virtual asset regulatory framework, but this does not hinder the US regulatory crackdown on illegal crimes (such as KuCion's regulatory enforcement of anti-money laundering requirements) and the gradual recognition of virtual assets by traditional Wall Street capital (such as BTC ETF, tokenized funds, etc.).
On the other hand, the EU and Hong Kong are actively establishing comprehensive virtual asset regulatory frameworks (such as the EU's MiCA and Hong Kong's VASP licensing system and numerous advisory opinions). In practice, we can see that these regulatory frameworks bring huge business development costs and obstacles to compliance business adjustments for market participants.
Crypto Friendly is not Crypto Easy.
This article will sort out the global Web3 virtual asset regulation and hot event observations in the first quarter of 2024, covering the historic approval of BTC ETF, regulatory enforcement of KuCoin and its founder, BlackRock's tokenized fund BUIDL, the EU's new anti-money laundering regulations for non-custodial wallets, and Hong Kong's comprehensive move towards virtual asset compliance.
1. Historic approval of BTC ETF
After ten years of arduous approval process for BTC ETF, the dawn of victory finally came. At 4:00 a.m. on January 11, 2024, the U.S. Securities and Exchange Commission (SEC) approved 11 spot BTC ETFs at the same time. All of this should be attributed to Grayscale's victory.
1.1 Grayscale’s Victory
On August 29, 2023, a ruling by a U.S. federal court allowed Grayscale to win the lawsuit against the SEC for rejecting its application for a spot BTC ETF [1]. This move accelerated the process of traditional financial giants such as Blackrock and Fidelity applying for BTC ETFs in the past few months.
The SEC’s previous reason for not approving the BTC ETF was concerns about market fraud and manipulation. Although the SEC allowed the trading of futures BTC ETFs for the first time in 2021, it stated that futures products are more difficult to manipulate because the market is based on the futures prices of the Chicago Mercantile Exchange (CME), which is regulated by the U.S. Commodity Futures Trading Commission (CFTC).
However, in the case, the judge agreed with Grayscale's statement: the logic of approving futures BTC ETFs should be equal to the logic of approving spot BTC ETFs. The judge believed that the SEC failed to explain how it treated similar ETF products differently, and believed that the SEC's rejection of Grayscale's application was arbitrary and unfounded, and that this administrative behavior of differential treatment violated administrative law. The court finally agreed to Grayscale's request and revoked the SEC's rejection of the application.
Thus, it was not until after the Grayscale case that the SEC's attitude completely changed, from passive non-approval to active review, and in the 22-page approval document it stated: This order approves the Proposals on an accelerated basis.
1.2 SEC tells us where the risks of BTC ETF are?
ETF itself, as a long-standing compliant financial product, has no legal barriers, and BTC is also the only asset defined as "non-security" by US regulators (especially the SEC). So what are the risks of BTC ETF? In the 22-page approval document [2], the SEC tells us: The risk comes from the uncontrollable trading market of the underlying assets of the ETFs - that is, the manipulation risk of the BTC spot market. Although each ETF has signed a surveillance sharing agreement with a compliant exchange (such as the Chicago Mercantile Exchange CME) to monitor the risks of the BTC futures market, BTC spot itself is not traded on CME, and the surveillance cannot cover the BTC spot market.
SEC's argument is that BTC futures are already compliant products on CME, and it is necessary to prove that the price correlation of BTC spot BTC futures is the best choice. Therefore, the SEC compared the correlation between the BTC prices of the two virtual currency exchanges Coinbase and Kraken and the CME futures prices since 2021, and found that the two are highly correlated. This means that if fraud or manipulation occurs in the BTC spot market, these behaviors are likely to affect the futures market as well, and thus be detected by CME's monitoring system, so that regulators can intervene to control risks.
The market manipulation risk of the BTC spot market mainly comes from the transactions of market makers or market participants in CEX. If the US regulation can cover the regulation of CEX, then the risk can be relatively controlled. In this regard, the US regulatory approach is to cover the two virtual currency exchanges Coinbase and Kraken through on-site regulatory compliance, and at the same time "targeted blasting" Binance, which has the largest trading volume, and successfully settled in and implemented compliance control.
1.3 Disagreement among SEC Commissioners
Although the SEC ultimately approved the BTC ETF, there are still huge differences at the SEC’s decision-making level. SEC Chairman Gary Gensler cautiously stated in a press release [3]:
“The SEC’s ETF approval is limited to an ETF holding one non-security commodity, bitcoin. It should in no way indicate that the SEC is willing to approve any other listing standards for crypto assets. The approval also does not indicate the SEC’s views on the status of other crypto assets under securities laws or the current situation where some crypto asset market participants do not comply with securities laws.”
“
The SEC’s ETF approval is limited to an ETF holding one non-security commodity, bitcoin. It should in no way indicate that the SEC is willing to approve any other crypto asset securities.
The SEC’s ETF approval is limited to an ETF holding one non-security commodity, bitcoin.
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The SEC’s ETF approval is limited to an ETF holding one non-security commodity, bitcoin.
As I have said in the past, the vast majority of virtual assets are investment contracts and therefore subject to securities laws.
While the SEC is neutral, I would point out that the underlying assets in precious metals ETFs have consumer and industrial uses, while BTC, by contrast, is primarily a speculative, volatile asset that is also used for numerous illegal activities, including ransomware, money laundering, sanctions evasion, and terrorist financing.
While the SEC approved the listing and trading of the spot BTC ETF today, we have not approved or endorsed BTC. Investors should be cautious about products related to BTC and virtual assets."
The controversial point of the other committee members' statements is that spot and futures BTC ETFs are completely different things, and using regulated futures BTC It is not advisable to regulate the spot BTC ETF based on the logic of ETF. The two are not relevant because there is no major regulatory agency in the Bitcoin spot market and it is impossible to prevent price manipulation and fraud in the BTC spot market.
1.4 The historical significance of BTC ETF
In any case, the passage of BTC ETF is of great historical significance, allowing those of us who have the ideals of crypto-punk/the fantasy of getting rich overnight to be part of it, adding a strong and colorful color to the torrent of history.
As Silicon Valley’s Chuan Chuan (X: @Svwang1) said: “The significance of January 10, 2024 in the history of world currency may be compared with August 13, 1971 (Nixon announced the decoupling from gold) and January 18, 1871 (Germany unified and led European countries and the United States to join the gold standard system within a few years).”
II. Criminal prosecution of KuCoin and its founder for violating anti-money laundering regulations
2024 On March 26, 2019, the U.S. Department of Justice indicted the virtual currency exchange KuCoin and its two founders for conspiring to operate an unlicensed money transmission business entity and violating the anti-money laundering compliance procedures of the Bank Secrecy Act [4].
U.S. prosecutors stated: "KuCoin and its founder deliberately attempted to hide the fact that a large number of U.S. users were trading on its platform, with daily trading volumes reaching billions of dollars and annual trading volumes reaching trillions of dollars. Financial institutions like KuCoin must comply with U.S. law, register with FinCEN and the CFTC, and implement KYC/AML/CTF anti-money laundering compliance procedures, but KuCoin allegedly deliberately chose not to do so, making it a haven for illegal money laundering. KuCoin received more than $5 billion and sent more than $4 billion in suspicious and criminal funds.
Virtual currency exchanges like KuCoin cannot have it both ways. Today's indictment should send a clear message to other virtual currency exchanges: If you plan to serve U.S. customers, you must follow U.S. law."
At the same time, the CFTC also filed a civil lawsuit against KuCion [5], accusing KuCion of Many of its entities violated multiple provisions of the Commodity Exchange Act (CEA) and CFTC regulations by engaging in over-the-counter commodity futures trading, leverage, margin or providing financing for retail commodity trading business without a license.
In fact, if you look closely at the US regulatory enforcement of KuCion and Binance, there is no difference. The summary is still the words of US Treasury Secretary Yellen: Any entity that wants to do business in the United States and benefit from the good financial markets in the United States should strictly abide by US laws.
Third, BlackRock's tokenized funds
Our article last year analyzed the importance of tokenized funds in connecting TradFi and DeFi, and the asset form of funds is the best carrier of RWA assets because (1) it is regulated itself; (2) it is a relatively standardized digital expression.
Then in March this year, Blackrock’s tokenized fund aircraft carrier set sail.
3.1 What is the tokenized fund BUIDL?
On March 21, 2024, Blackrock and Securitize jointly launched the first tokenized fund BUIDL "BlackRock USD Institutional Digital Liquidity Fund" on the public blockchain Ethereum. The BUIDL fund will provide qualified investors with the opportunity to earn USD-denominated returns through Securitize Markets [6].
Tokenization is one of the core of BlackRock's digitalization strategy. The tokenization of the BUIDL Fund marks a key step for BlackRock to actively enter the field of real-world asset (RWA) tokenization, and also brings huge benefits to investors, such as investors can issue and trade ownership on the blockchain, provide investors with access to on-chain products, provide instant and transparent settlement, and allow cross-platform equity transfer.
The BUIDL Fund will maintain a stable value of $1 per token and distribute interest through rebase, that is, accrued dividends will be paid directly to investors' wallets as new tokens every day. 100% of the fund's total assets will be invested in cash, U.S. Treasuries and repurchase agreements, allowing investors to earn income while holding coins on the chain. Most importantly, investors can transfer their tokens to other pre-approved investors 24/7/365, and the fund also provides flexible custody options.
Bank of New York Mellon will enable interoperability between digital and traditional markets for the fund and serve as the custodian and manager of the fund. Securitize will serve as the fund's transfer agent and tokenization platform, managing tokenized fund shares and reporting fund subscriptions, redemptions and distributions. Securitize Markets will serve as a sales agent to offer the fund to qualified investors. PwC has been appointed as the auditor of the fund. In addition, other asset custody partners include: Anchorage Digital Bank, BitGo, Coinbase, and Fireblocks.
3.2 Tokenized funds have great potential
From the perspective of traditional finance TradFi, after the fund is tokenized through blockchain and distributed ledger technology, it can release greater value.
Previously, Larry Fink, CEO of BlackRock, made it clear in an interview with Bloomberg that asset tokenization will be the next development direction of BlackRock: "We believe that the tokenization of financial assets will be the next trend, which means that every stock and bond will be recorded in a general ledger."
In addition, British regulators are also actively exploring fund tokenization. In a statement from its Investment Association, it stated that fund tokenization is expected to improve the efficiency, transparency and international competitiveness of the investment management field, and released the report "UK Fund Tokenization - Implementation Blueprint" [7].
Although Franklin Templeton has already realized tokenized funds on public blockchains, BlackRock's aircraft carrier has undoubtedly opened the door to a new world of traditional financial RWA. In the future, we will see more traditional financial assets using blockchain technology to release greater value. The tokenization of the stock market is within sight.
(https://app.rwa.xyz/treasuries)
IV. New EU Anti-Money Laundering Regulations for Non-Custodial Wallets
On March 23, 2024, Cointelegraph reported [8] that EU regulators are updating a new anti-money laundering regulation aimed at conducting KYC and other supervision on virtual currency commercial trading activities of non-custodial wallets.
This measure is seen as a continuation of the EU's establishment of a comprehensive virtual asset regulatory framework (Markets in Crypto-Assets Regulation, MiCA) last year, and is an important part of the EU's broader anti-money laundering strategy. The anti-money laundering bill is expected to be implemented in 2027, three years later, and together with the MiCA bill, it will strengthen restrictions on anonymous account service provision.
（EU scraps proposed $1K payment limit for self-custody crypto wallets）
The anti-money laundering bill requires virtual currency service providers (Crypto Asset Service Providers, CASPs) providing services in the EU to conduct customer due diligence and identity identification (KYC) for transactions of more than 1,000 euros with non-custodial wallet users. It is worth noting that this is the EU's compliance requirement for virtual currency service providers (mainly service providers that hold user funds, such as exchanges, custodial wallets, etc.) under MiCA supervision - that is, any transaction between a non-custodial wallet and a virtual currency service provider exceeding 1,000 euros will be regulated, while transactions between non-custodial wallets are not subject to the restrictions of this law.
There is no doubt that the EU's regulatory provisions have brought huge challenges to the anonymity of virtual assets. After the EU adopted the MiCA Act to bring virtual currency service providers under regulation, it also adopted the Anti-Money Laundering Act to bring non-custodial wallets related to virtual currency service providers under regulation. It is clear that after comprehensive supervision, the next step will be the tax bill related to it.
Recently, we have seen that both entities that are already in the EU or intend to provide virtual currency services in the EU are actively fulfilling the compliance requirements of the EU MiCA Act, and EU member states are also playing games with virtual currency service entities. After the EU's various regulatory aspects are fully implemented, it will undoubtedly reconstruct the pattern of the wild growth of the EU virtual asset market.
Big fish will continue to participate in the market game in a more EU way, and small fish will be eliminated due to regulatory compliance pressure.
Reference article: Can the Virtual Asset Market Supervision Act MiCA make the EU fully embrace Web3?
V. Hong Kong is fully compliant
With the proposal of the "Policy Declaration on the Development of Virtual Assets in Hong Kong" in October 2022, Hong Kong's new virtual asset VASP system has been officially implemented on June 1, 2023. This is a major positive for the virtual asset industry in Hong Kong, China in history.
In order to fully supervise all virtual asset trading activities in Hong Kong and implement the standards of the Financial Action Task Force (FATF), the Hong Kong government has not only amended the Anti-Money Laundering Ordinance and established a new VASP "mandatory licensing" system, but also comprehensively supervised the participants and forms of participation in the actual circulation of virtual assets from aspects such as stablecoins, virtual asset deposits and withdrawals OTC, and virtual asset custody.
Although in addition to the VASP licensing system, other aspects of supervision are still in the process of soliciting opinions or legislative regulations, they can still provide us with a comprehensive overall regulatory framework.
The VASP licensing system for virtual asset exchanges has been introduced before, so I will not repeat it here.
5.1 Stablecoins
On December 27, 2023, the Financial Services and the Treasury Bureau (“FSTB”) and the Hong Kong Monetary Authority (“HKMA”) jointly issued a public consultation document to launch a consultation on legislative proposals for implementing a regulatory regime for fiat stablecoin issuers in Hong Kong [9].
Legislative background: Due to the important role of stablecoins in the Web3 and virtual asset ecosystem, and the increasingly close connection between the traditional financial system and the virtual asset market, the Hong Kong Government believes that it is necessary to establish a regulatory regime for fiat stablecoin issuers. By regulating fiat stablecoin issuers in a risk-based and flexible manner, the potential risks of fiat stablecoins to monetary and financial stability can be appropriately managed, and a clear legal and regulatory environment can be provided to promote the sustainable and responsible development of Hong Kong's virtual asset ecosystem.
The legislative proposal considers introducing new laws to implement a licensing system for fiat stablecoin issuers, which mainly consists of two parts:
(1) Licensing and regulatory system for fiat stablecoin issuers.Fiat stablecoin issuers must meet a series of strict licensing conditions and regulatory requirements and only after obtaining a license can they operate in Hong Kong. Regardless of the stabilization mechanism and related supporting assets of the fiat stablecoin, all fiat stablecoin issuers will be subject to the same regulatory framework. This means that USDC and USDT stablecoin issuers need to apply for a license to operate in Hong Kong.
(2) Regulatory system for the entities involved in the issuance and promotion of fiat stablecoins. Only licensed fiat stablecoin issuers, authorized institutions, licensed corporations and licensed virtual asset trading platforms can provide services for purchasing fiat stablecoins in Hong Kong, or actively promote such services to the public in Hong Kong; only fiat stablecoins issued by licensed issuers can be sold to retail investors (the general public), otherwise they can only be sold to professional investors. This means that only licensed entities can sell them in Hong Kong. For example, USDC and USDT stablecoin issuers that are not licensed in Hong Kong can trade through licensed deposit and withdrawal service providers, but only for professional investors.
Hong Kong's stablecoin regulatory regime focuses on fiat stablecoins rather than other types of stablecoins (such as stablecoins pegged to gold or other assets). Hong Kong's stablecoin regulatory regime will adopt a risk-based approach to regulate fiat stablecoin issuers and related activities, and will follow the regulatory principle of "same business, same risk, same regulation". The Hong Kong government has the right to adjust the scope of application of the new regulatory regime based on the development of the virtual asset market.
In addition to the public consultation document, in order to cooperate with the consultation on the legislative proposals for the regulatory system for stablecoin issuers, the HKMA announced the launch of a "sandbox" for stablecoin issuers. Through the "sandbox", the HKMA hopes to convey regulatory expectations to institutions that intend to issue legal currency stablecoins in Hong Kong and collect participants' opinions on regulatory requirements to promote the implementation of the subsequent regulatory system [10].
5.2 Over-the-counter trading of virtual assets OTC
On February 8, 2024, the Treasury Department issued a public consultation document on the "Legislative Proposals on the Regulation of Over-the-Counter Trading of Virtual Assets" ("OTC Legislative Proposals") [11], proposing to establish a new licensing system for virtual asset over-the-counter trading service providers under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, with the Hong Kong Customs as the regulatory agency, to regulate all entities that provide virtual asset over-the-counter trading services (OTC services). Under the proposed regime, any person who engages in business in relation to any virtual asset spot trading services in Hong Kong must apply for a licence from the Commissioner of Customs and Excise.
Virtual asset OTC business will be defined as:
(a) providing spot trading services of any virtual asset in the form of business, excluding non-business transactions of virtual assets between peers;
(b) providing services through physical stores (i.e. including ATMs) or other platforms (e.g. internet platforms), and not applicable to persons who are not parties to the contract/binding transaction, such as operators of relevant online platforms/online applications/communication systems (which only provide display services but do not participate in transactions);
(c) explicitly excluding the operation of virtual asset trading platforms that are already covered by the virtual asset trading platform licensing regime.
Similarly, taking into account the wide range of business forms of virtual asset OTC operators. Based on the principle of same business, same risks and same rules, ensure that all forms of virtual asset OTC services are regulated by the proposed system.
The Hong Kong Government proposes that anyone who operates a virtual asset OTC business in Hong Kong, or actively promotes the provision of virtual asset OTC services to the Hong Kong public, must obtain a license issued by the Commissioner of Customs and Excise and comply with the fit and proper criteria and other regulatory requirements.
The definition of “active promotion” may take into account factors such as whether there is a detailed promotion plan, whether it is promoted through promotion channels (Internet, newspapers, etc.), and whether the promotion is carried out in a planned manner.
5.3 Virtual Asset Custody
On 20 February 2024, the HKMA issued guidelines on virtual asset custody activities, which provide clear governance and risk management, client asset segregation and protection, delegation and outsourcing standards for institutions applying for a virtual asset custody service provider (TCSP) license [12].
Background of the guidelines: As the virtual asset industry continues to develop, the HKMA has noted the growing interest of authorized institutions in virtual asset-related activities, especially in providing virtual asset custody services to clients. In order to ensure that the virtual assets of clients in the custody of authorized institutions are fully protected and the related risks are properly managed, the HKMA considers it necessary to provide guidelines on the provision of virtual asset custody services by authorized institutions.
We have already seen the Hong Kong government’s requirements for virtual asset custody in the VSAP licensing system, such as the VASP licensing system requiring exchanges to hold clients’ funds and virtual assets on trust through wholly-owned subsidiaries. This further regulation of virtual asset custody requirements will further implement the implementation form of virtual asset participants and protect the interests of investors. REFERENCE [1] Grayscale vs. SEC https://www.docdroid.net/9mRdJzU/sec-arbitrary-capricious-PDF [2] SEC BTC ETF Decision https://www.sec.gov/files/rules/sro/nysearca/2024/34-99306.pdf [3] Statement on the Approval of Spot Bitcoin Exchange-Traded Products https://www.sec.gov/news/statement/gensler-statement-spot-bitcoin-011023 [4] Prominent Global Cryptocurrency Exchange KuCoin And Two Of Its Founders Criminally Charged With Bank Secrecy Act And Unlicensed Money Transmission Offenses
https://www.justice.gov/usao-sdny/pr/prominent-global-cryptocurrency-exchange-kucoin-and-two-its-founders-criminally
[5] CFTC Charges KuCoin with Operating Illegal Digital Asset Derivatives Exchange
https://www.cftc.gov/PressRoom/PressReleases/8884-24
[6] BlackRock Launches Its First Tokenized Fund, BUIDL, on the Ethereum Network
https://www. [7] UK FUNDS GIVEN THE GREEN LIGHT FOR TOKENISATION DEVELOPMENT https://www.theia.org/news/press-releases/uk-funds-given-green-light-tokenisation-development [8] EU scraps proposed $1K payment limit for self-custody crypto wallets https://cointelegraph.com/news/eu-enacts-ban-on-anonymous-crypto-transactions-via-self-custody-wallets?utm_source=tldrcrypto [9] Stablecoin Issuers - Hong Kong Monetary Authority
https://www.hkma.gov.hk/eng/news-and-media/insight/2023/12/20231227/
[10] Hong Kong Monetary Authority - HKMA launches “Sandbox” for Stablecoin Issuers
https://www.hkma.gov.hk/gb_chi/news-and-media/press-releases/2024/03/20240312-4/
[11] Public Consultation on Proposed Legislation to Regulate OTC Transactions in Virtual Assets
https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2024/20240220e4.pdf
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