Degen Lawyer's Newsletter

1st August, 2023

GM. Welcome to Degen Lawyer's Newsletter, where we bring you your weekly dose of legal insights and regulatory updates in crypto and emerging tech space. Our expert lawyers serve up curated analysis, breaking news, and expert commentary.

In this week’s edition:

1. Updates from around the world

2. Regulatory Watch - US moves closer to crypto regulatory clarity!

3. Weekly Breakdown - This week - ‘Decoding Blockchain Trilemma‘

4. Article in the spotlight - ‘UK's Approach to Crypto Regulation and Lessons from Singapore and Switzerland’

5. Crypto Chronicles

Updates From Around The World

• Indian Supreme Court demands clear regulations amidst increasing crypto fraud cases

  The Indian Supreme Court expressed its disappointment over the lack of clear regulations on cryptocurrencies in the country. The Court urged the government to take action and establish a specialized federal agency to investigate crypto-related criminal activities.

  The Court made this observation during a hearing relating to cryptocurrency fraud cases across various Indian states. In 2018, the Govt of India said, ‘Let’s draft a crypto bill!’ But here we are still waiting for that elusive draft. No wonder the crypto world's feeling like a wild west, all regulation-less and untamed!!

• Worldcoin's Data Collection and Storage Under Fire: Labelled "Questionable"

  Commission Nationale Informatique & Libertés (CNIL), the French data protection agency, questioned the legality of Worldcoin's data collection methods and the storage of biometric data. Worldcoin claims compliance with local laws, promising to cooperate with authorities and ensure a secure and transparent service for verified users.  Hey, at least they promise to play nice and follow the rules... or do they? Time will tell!.

• The Nigerian Securities and Exchange Commission (SEC) has declared the operations of crypto exchange Binance illegal in the country. According to the SEC, Binance, as well as any platform affiliated with the company, is neither registered nor regulated by the commission. Binance's troubles doesn’t seem to end like a shitcoin race to the bottomless pit – no sign of slowing down!

Regulatory Watch

US crypto industry gets more regulatory clarity!

The House Financial Services Committee (FSC) approved the Financial Innovation and Technology for the 21st Century Act (FIT21) on July 26. FIT21 aims to provide clarity for fintech companies and protection to consumers. Let’s deep dive to understand how this piece of regulation is relevant to the crypto industry:

1. Definition of digital asset: It defines "digital asset" as a value stored in a secure digital ledger, covering major cryptocurrencies like Bitcoin and Ethereum.

2. Classification of digital assets: Digital assets are classified as securities or commodities, determining the relevant regulator's jurisdiction.

3. Registration requirements: Digital asset exchanges and intermediaries must register with the regulators namely, Securities Exchange Commission (SEC) or Commodities Future Trading Commssion (CFTC) based on their classification.

4. Disclosure requirements: Digital asset issuers must disclose project details and risks to investors.

5. Regulatory sandbox: A regulatory sandbox for the cryptocurrency industry, allowing businesses to test new products and services without the full regulatory burden.
   

What does the FIT21 mean for the future of the crypto industry?

Well, many things! Firstly, this would provide the much needed regulatory clarity for businesses, investors and consumers in the crypto landscape.

Secondly, it creates an atmosphere of responsible growth of the crypto industry. Registration with the SEC or CFTC means that firms will be required to disclose certain information to investors in order to protect them from fraud and malpractices.

Finally it provides a pathway for crypto businesses to remain compliant with laws by clarifying the requirements and providing routes/structures for the industry to operate in a legally compliant manner.

Though the bill is still under consideration, if passed, it could significantly impact the crypto industry by providing clarity, certainty, and consumer protection. A positive step indeed.

Weekly Explainer

Decoding Blockchain Trilemma

The blockchain trilemma is a concept in blockchain technology that states that- it is impossible to achieve all three of the following goals simultaneously:

1. Security: The blockchain must be highly secure from any attack.

2. Scalability: The blockchain must be able to process massive number of transactions.

3. Decentralization: The blockchain must be decentralized, i.e., that it is not controlled by any single entity.

Some examples of the Blockchain Trilemma phenomenon-

• The Bitcoin blockchain is very secure and decentralized, but it is not very scalable. This means that the Bitcoin network can only handle a limited number of transactions per second.

• However, the Lightning Network is a scalability solution for Bitcoin that increases scalability, but it does so at the cost of decentralization. Gotta let one of the three goals go :(

• Ethereum, is more scalable, but is not as secure or decentralized as Bitcoin.

• The Ethereum 2.0 upgrade is designed to increase scalability and security, but it may also lead to a decrease in decentralization.

So in simple words- 

The blockchain trilemma is a trade-off between security, scalability, and decentralization. Blockchains that are more secure and decentralized are typically less scalable, and blockchains that are more scalable are typically less secure and decentralized.

The blockchain trilemma is a challenge that all blockchain developers face. There is no easy solution, but there are a number of promising approaches that are being explored. There is no perfect blockchain, and developers must choose the right balance of these three factors for their specific application.

To learn more about such concepts, visit our resource page linked below:

Article in Spotlight

UK's Approach to Crypto Regulation and Lessons from Singapore and Switzerland

Introduction

In May 2023, the United Kingdom's House of Commons Treasury Committee recommended classifying crypto trading as gambling, citing concerns about the absence of intrinsic value and the potential risks posed to consumers. However, the HM Treasury rejected this proposal, expressing firm disagreement.

Instead, the UK government explored a different path, considering the implications of such regulation and the potential of driving crypto activity offshore. Ultimately, they opted against treating crypto as gambling and instead pursued a financial services regulatory framework.

Lessons from Singapore and Switzerland

Singapore

In Singapore, the regulatory approach is known as the "Payment Services Act" (PSA) and is administered by the Monetary Authority of Singapore (MAS). The PSA categorizes cryptocurrencies into different classes. Each class is subject to different regulatory requirements based on its characteristics and purpose.

1. Payment Tokens: These are cryptocurrencies that are used as a medium of exchange and are regulated for anti-money laundering (AML) and countering the financing of terrorism (CFT) purposes under the PSA.

2. Utility Tokens: If a cryptocurrency is designed to provide digital access to a product or service, it may be classified as a utility token. Utility tokens are generally not regulated under the PSA unless they involve specified payment systems.

3. Security Tokens: If a cryptocurrency has characteristics of traditional securities (e.g., shares or bonds), it may be considered a security token. Security tokens are subject to the full suite of securities laws and regulations in Singapore.

Switzerland

Switzerland has established a favorable regulatory environment for cryptocurrencies and blockchain projects. The Swiss Financial Market Supervisory Authority (FINMA) is the regulatory authority responsible for overseeing cryptocurrency-related activities in the country. FINMA follows a principle-based approach, where they analyze the specific characteristics and purpose of cryptocurrencies to determine the applicable regulatory treatment.

They distinguish between payment tokens (similar to Singapore's payment tokens), utility tokens, and asset tokens (similar to security tokens). The classification of a cryptocurrency as a security token would subject it to more stringent regulatory requirements, similar to traditional securities.

In conclusion

Both Singapore and Switzerland's regulatory frameworks aim to strike a balance between providing clarity and investor protection while fostering innovation and growth in the cryptocurrency and blockchain industries. By analyzing the nature and purpose of different types of cryptocurrencies, they can tailor their regulations accordingly.

To read more such informative article, visit our Blog:

Crypto Chronicles- Stories from the wild world of Crypto

In this weeks edition of Crypto Chronicles, $BALD Token Turns Trader into Overnight Millionaire! 🚀🤑

Last weekend in the crypto world a new token, $BALD, inspired by Bald Folk, turned a regular trader, cheatcoiner.eth into a millionaire in just 48 hours with an initial investment of $500! (How’s your SIP going?)

But here's the kicker—the token is locked on a chain, meaning you can't bridge your investments out. (SUS right?)

This is not even the crazy part, brace yourself for the twist! Once the market cap hit $50 million, the $BALD developer allegedly, rug pulled all the liquidity (price dropped 99%), and then casually added 100 ETH back to the pool. And, then the token bounced back and rose 5 times from its lows! 🎢\

Long story short, bald developer launched this memecoin, provided 8 figures in liquidity to the Liquidity Pool, ran it up 5 million percent in 24 hours to $50M market cap, rugged all of the liquidity, the price dropped 99%, & then proceeded to add 100ETH back to the pool? Last when we checked its up 5x from it’s lows!!

In case you are wondering what happened to the hero of our story, cheatcoincer.eth. Here’s the update:

Remember, it's never a dull moment in the crypto universe!

That’s all for this week folks, we’ll catch you in the next one.

Thank you for reading!

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