The road to compliance for the US digital asset industry
Original title: "The Road to Compliance in the U.S. Digital Asset Industry | TokenInsight"
Original source: TokenInsight < /blockquote>Satoshi Nakamoto releases Bitcoin white paper It has been 12 years now. Digital assets such as Bitcoin and Ethereum have gradually gained a place in the minds of the public. In the past year, the federal government's legal exploration of digital assets is accelerating. On March 9, 2020, at the beginning of the outbreak, the federal government introduced the "Cryptocurrency Act 2020" to clarify the regulatory power over digital assets. To this day, we can clearly feel that the high market enthusiasm for digital assets has promoted the accelerated improvement of laws.
· This fall, the U.S. Office of the Comptroller of the Currency (OCC) began to pay attention to The compliance of digital asset business, the first licensed digital asset bank appeared;
· Wyoming government’s banking and custody of digital assets The active deployment of business and other regulatory frameworks has attracted the attention of the federal government;
· The US Securities Commission SEC began to look for qualified "digital asset banks" , "Old players" such as Coinbase and Grayscale are eligible;
· Recently, the U.S. government has frequently issued policies, and the compliance process has accelerated, marking the digital asset market Going through puberty.
Can digital assets be managed?
In the traditional financial field, the Asset Custody business , usually refers to the commercial bank with certain qualifications as the custodian, in accordance with the relevant laws and regulations, sign a contract with the client, safe custody of customer assets, charge custody fees, and provide services such as investment management.
In the United States, such traditional custody companies usually have trust companies, securities Escrow companies and banks.
And when it comes to digital asset custody business, the traditional financial The method is similar, the customer's digital assets such as BTC, ETH, etc. are handed over to a centralized institution for safekeeping, just like the customer deposits precious metals in the bank vault. Only the storage method is slightly different. The custody of digital assets is often stored in the cold/hot wallet of the centralized exchange. The cold wallet is a storage device that is not connected to the network like a hard disk, and stores the customer's public key and private key (similar to a bank card number and password). Cold wallets are generally offline.
The security of assets is the core consideration for users to choose custody institutions or services factor. Asset management experience, institutional credit, and treasury security strength are all key factors to be investigated. The offline cold wallet mechanism mentioned above is an effective measure to ensure the security of digital assets.
As the market value of the digital asset market continues to rise, people’s interest in digital assets The demand for hosting has also increased. When the scale reaches a certain level, non-compliant institutions as the main players in custody will bring huge potential danger to the market. Governments will naturally pay more attention to this area in order to avoid the hidden dangers planted by lack of compliance.
In the United States, at least 10 states have A warning is sounded by service businesses, where hosting is a top priority. However, different state governments have different attitudes towards digital assets. Some state governments have shown a very positive attitude, while others are not. Some states even explicitly prohibit digital assets as a means of payment.
Wyoming is one of the more positive states. Its state government seems very bullish on the future of digital assets. Several institutions have been approved by Wyoming's legal department to become compliant digital asset service providers. Wyoming is the least populous state in the United States, and none of the 30 banks in the state have a total deposit of more than $1 billion, nor any foreign banks. At the same time, Wyoming's tax environment is very loose, because it is "small" and has a higher degree of flexibility in the framework of emerging industries. Here, the relaxed regulatory environment is more like a laboratory for the digital asset market. The state government also has ambitions to open up new markets and appreciates "forward-looking" emerging companies that are not limited to areas such as Silicon Valley and New York.
“Because our legislation is small and flexible, it makes Wyoming Be unique in such an emerging field. … People have always expected innovation to come from New York or California, and now we can be the first movers. Our challenge is to stay ahead.”
Wyoming Governor Mark Gordon
The U.S. Office of the Comptroller of the Currency OCC will allow national banks to provide digital asset custody services in mid-July 2020. In September and October, Kraken Financial* and AvantiBank* successively obtained the authorization of “Digital Asset Bank” in Wyoming, becoming the first and second digital asset “new bank”.
*Note: Kraken is an old-fashioned digital asset exchange established in the United States in 2011, and provides price information to Bloomberg terminals; the founder and CEO of AvantiBank is an active advocate of the blockchain industry in Wyoming State By.
Before, there were only some trust institutions that could manage digital assets in compliance Corporations and large mutual fund companies such as Fidelity Investments.
Such transformation has accelerated the complementary effect of enterprises and governments. Since the autumn, Wyoming's digital asset custody business seems to have made a lot of progress.
The Wyoming Banking Department's "New Bank"
Wyoming is trying to stimulate the state's economic development by creating favorable conditions for laws and regulations in the field of digital assets to develop the industry. The bill intends to achieve the compliance of private enterprise digital asset custody business by establishing a "new type of bank".
Letter of non-prosecution opinion, source: STATE OF WYOMING, DEPARTMENT OF AUDIT
On October 23, 2020, the Department of Banking in Wyoming, USA issued a "Letter of Non-Prosecution Opinion". Claiming that it has included a trust institution "Two Ocean Trust" in the list of "Qualified Persons for Digital Asset Custody Business" in accordance with Wyoming law, allowing it to provide custody services for digital assets. This company is not the same as Kraken and Avanti, this company is an asset management company.
This letter pointed out that although Two Ocean is an asset management institution, However, he meets the definition of "bank" in the "1940 Advisers Act." Banks have been licensed to operate digital asset custody business and can become "qualified custody" under the "SEC Custody Rule". people". So this has created the compliance of Two Ocean, which is the first asset management company to become a compliant custodian.
The most important thing is that an asset management institution that meets the definition of "bank" It can be counted as a "qualified custodian", but what kind of asset management institution can be counted as a "bank"? The letter is intended to provide interpretive guidance on this key part of the Escrow Rules. In short, institutions need to meet four key elements:
· Under the U.S. regulatory legal system;
· The deposit and custody business performed should be similar to the U.S. banks regulated by the OCC, and these businesses must be Main business;
· The company must be regulated by state or federal bank deposit system laws;
· Must not violate federal securities laws.
According to this definition, the law favors banks as qualified custodians It is not a state-level asset management or trust company, because most asset management or trust institutions are difficult to meet the above definition.
& NBSP; Source: State of Wyoming, Department of Audit
& nbsp;
Immediately afterwards, on November 9, 2020, the US Securities and Exchange Commission SEC responded to the letter: saying that it is looking for a qualified digital currency custodian "Organization. They are particularly interested in the following points of Qualified Custodian:
· Does the licensed trust company have similar characteristics to the financial institutions identified by the Commission as qualified custodians? If yes, to what extent?
· How is the custody service provided by a licensed trust company the same or different from that of a bank, broker or futures commission merchant? If a licensed trust company acts as a custodian of customers' digital assets or other assets, what aspects may be missing in protecting customer assets and enhancing security?
· How does a consultant assess whether a custodian is qualified under the SEC Custody Rules? What qualities do consultants look for when looking for qualified custodians? Do these qualities vary across asset classes? In short, compared with the custody of other assets, what special qualifications are required for custody of digital assets? Why?
· Are there currently institutions that already meet the definition of the SEC Custody Rule but cannot be counted because they did not meet the policy objectives? Conversely, are there institutions that have been counted but not in compliance with the rules?
On the whole, the SEC regards this letter and the The attitude of the "new type of bank" is both positive and cautious. The custody of financial assets itself is a legal problem, especially when traditional assets and digital assets are in parallel, the legal system is difficult to improve. The term "custodian" is often misused, and there are not a few institutions that take advantage of existing legal loopholes. Therefore, clear definitions and responsibilities are indeed the top priority for financial regulators.
SEC statement to Wyoming Department of Banking "Digital Asset Custody and Qualified Custodian," source: www.sec.gov
Coinbase and What are the advantages of Grayscale?
Grayscale and Coinbase with multiple compliance qualifications, their credit endorsement higher than other peers.
Coincidentally, Coinbase Custody also meets the "qualified custodian" defined by the SEC Conditions, currently serving Grayscale, hosting most of its digital assets. As the largest digital asset management company, Grayscale has two products that meet the conditions: Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Trust (ETHE). At present, all the BTC and ETH received by Grayscale are stored in Coinbase's cold wallet.
The agreement between Coinbase Custody and Grayscale also highlights the fact that That is, Coinbase Custody is only the trustee for hosting Bitcoin, and Grayscale as a customer is always the owner of the assets. This is important to understand because Coinbase Custody holds a Bitlicense* in New York, is chartered as a trust company, and acts as a trustee by exercising its fiduciary powers with Grayscale, legally holding Grayscale's digital assets adding to the company's credibility.
*Note: Bitlicense licensees issued by the New York State Department of Financial Services NYDFS can store, hold, maintain or trade digital assets on behalf of others in New York State (including NYC).
Coinbase Custody emphasizes its commitment under this Charter and as its The level of compliance of the custodian. According to a Coinbase Custody spokesperson, “…our designation as a limited liability trust, chartered and supervised by (NYDFS), reinforces Coinbase’s commitment to maintaining the highest standards of security and compliance. Coinbase Custody is an SOC1 and SOC2 compliance requirements."
The key to what Coinbase is doing is the revised definition by the SEC that a qualified custodian can be someone who "habitually" takes care of digital assets, that is, if they have always been a custodian, they are now more likely to qualify as a "custodian". Definition of Qualified Custodian. This applies whether it is Bakkt, which is doing bitcoin futures, or Coinbase, which is the Grayscale bitcoin trust. It seems that these companies are the "old players" in the custody of digital assets. And they are all now accredited by national regulators. Looked at this way, compliance does seem to be enhanced.
The credit endorsement brought by compliance is a blessing to some extent This premium also partly explains why investors choose Grayscale's GBTC products rather than simply holding BTC themselves.
Under the "ambiguous" unified system, different state governments have their own trends
At the federal government level, most of the focus on the regulation of digital assets is still on the institutional and administrative levels. While each agency is highly involved, formal rulemaking is lacking. Federal agencies and policy makers have long expressed recognition and appreciation for distributed technology, saying that it is an important part of the future infrastructure of the United States, and they also require the United States to maintain a leading position in the development of this technology.
From the state level, some state governments have passed some Most of the laws that affect the digital asset industry are at the legislative level. Generally speaking, there are two regulatory attitudes at the state level: the first is a positive attitude, which tries to develop the industry through the establishment of preferential conditions in laws and regulations, and then stimulate the economic development of the state. Wyoming is the prime example. The second attitude is relatively conservative, choosing to prohibit the use of digital assets as a means of payment before a complete system emerges, such as Colorado (Maryland and Hawaii have also issued investment warnings).
Digital Currency Group companies such as Grayscale and Coinbase, due to digital custody The "Founding Father" of the industry, and then has the potential to become a qualified compliance custody institution.
The establishment of the MSB regulatory network* also marks a unified nationwide The day of the standard has arrived. Although it is not very mature, the traditional financial business is still used as a template for reference, but the compliance process has made considerable progress so far.
* Note: At present, in the United States, if you want to legally operate digital asset services, you must first register as a money service business (Money Services Businesses, MSB) and receive the supervision of MSB by federal law; Next, you need to hold a business license for digital currency service businesses such as Bitlicense, NY, etc., in order to legally provide services such as trading or custody of digital assets. According to TokenInsight's survey, the cost of obtaining a national license through a license intermediary is $176,226, plus an annual fee of $136,855.
The digital asset market is going through "adolescence"
The digital asset market is going through a period of "adolescence" both in terms of market value and policy. While growing rapidly, it is inevitable to encounter bumps and setbacks. The key is whether the "visible hand" can play a role in rectifying the crooked and righting the right.
Gu Yanxi, the founder of American Liyan Consulting Company, once said: " The future digital financial ecology is an ecology based on distributed accounting technology, using digital currency for daily payment and digital currency trading digital assets."
Fortunately, SEC Chairman Jay Claton will end his term at the end of this year. During his reign, he strictly classified all kinds of "Crypto Assets" into two categories: tools and securities. Therefore, all digital assets classified as securities must be strictly controlled by the securities law, which in turn led to the development of digital assets. The development of securities attributes is slow.
Office Comptroller of the Currency, source: www.occ.treas.gov
At the same time, OCC has always been very active in the layout of digital assets. On November 17, 2020, President Trump nominated the former chief legal officer of Coinbase, Brain Brook, as the next OCC chairman. If passed by Congress, the "Crypto-Friendly" chairman will take office in early January next year and will take the second place. Served for up to 5 years. Timely system follow-up and close regulatory guidance are of great help to the digital asset industry. This may bring about major innovations in the regulation of digital assets.
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