Week In Crypto: Hurry Up With Federal Stablecoin Legislation, Yellen Tells US Congress

February 9, 2024
US financial regulators demand stablecoin regulation now, South Koreans face life imprisonment under a new crypto crime law, and the founder of the TerraUSD stablecoin has escaped extradition (again).

US financial regulators demand stablecoin regulation now, South Koreans face life imprisonment under a new crypto crime law, and the founder of the TerraUSD stablecoin has escaped extradition (again).

US Treasury secretary Janet Yellen has told members of the House Financial Services Committee to speed up on proposed legislation to regulate stablecoins.

On Tuesday (February 6), Yellen appeared before the committee for a hearing to mark the publication of the 2023 Annual Report of the Financial Stability Oversight Council (FSOC).

“The Council is focused on digital assets and related risks such as from runs on crypto-asset platforms and stablecoins, potential vulnerabilities from crypto-asset price volatility and the proliferation of platforms acting out of compliance with applicable laws,” said Yellen.

“Applicable rules and regulations should be enforced, and Congress should pass legislation to provide for the regulation of stablecoins and of the spot market for crypto-assets that are not securities.”

Created after the 2008 financial crisis, the FSOC is a Treasury agency that aims to provide collective accountability for identifying risks and responding to emerging threats to financial stability.

Alongside the Treasury secretary as chair, the FSOC is made up of ten voting members and five non-voting members.

Nine of the voting members are heads of other federal financial regulators, and the tenth is an independent expert.

In its 2023 annual report, the FSOC repeated its assessment that stablecoins and spot crypto-assets that are not securities are the two main gaps in US regulation to be addressed.

“The Council reiterates its recommendations from last year’s Annual Report that Congress pass legislation to close each of these regulatory gaps,” it said.

During her testimony, Yellen added that the FSOC believes it is “critical” for there to be a “federal regulatory floor” on stablecoin issuance that would apply to all states.

Status of McHenry’s stablecoin bill remains unchanged

Last July, the House Financial Services Committee marked up the Clarity for Payment Stablecoins Act, meaning it was cleared from the committee stage to move to the House floor.

The bill was introduced to Congress by Patrick McHenry (R-NC), chair of the House Financial Services Committee, but it has not yet been voted on.

Among its provisions, McHenry’s bill would require that all US dollar stablecoins are backed at least one-to-one at all times.

The bill would limit acceptable reserves to insured funds held at banks and credit unions, short-dated Treasury bills and repurchase agreements backed by Treasury bills or central bank reserve deposits.

Additionally, issuers would be prohibited from accessing their reserves except to process redemptions, and they would be required to publish monthly reports on redemptions and reserve composition.

If McHenry’s bill becomes law, some stablecoin issuers will already be in compliance with many of its requirements.

However, others such as Tether, which still holds about 15 percent of its reserves in loans, gold and Bitcoin, would have to change their procedures.

Moreover, Tether still faces the prospect of US enforcement action in relation to suspected money laundering and terrorist financing offences.

In its 2024 Terrorist Financing Risk Assessment, also published this week, the Treasury mentioned Tether by name as a preferred vehicle for funds used by ISIS terrorists.

South Koreans to face life imprisonment for crypto crimes

South Korea is preparing for a new crypto bill to come into effect that could see rule-breakers jailed for life.

The Virtual Asset User Protection Act was passed in July 2023 and is set to come into force in July this year.

Drawn up by the Financial Service Commission (FSC), the act aims to safeguard user assets and deposits, prevent unfair trading practices and supervise virtual asset issuers and service providers.

The act stipulates severe penalties for market manipulation, the use of material non-public information in virtual asset trading and other forms of illegal trading.

Depending on the profits gained, those convicted of illegal trading could be sentenced to imprisonment or a fine equivalent to three to five times the amount gained.

Those who profit ₩5bn ($3.7m) or more from illegal trading could face up to life imprisonment.

The act is also heavily focused on preventing loss, theft and hacks of user assets and deposits when in the custody of a service provider.

For example, service providers that custody user assets must store at least 80 percent of such assets in cold wallets (i.e., offline).

They must also take out insurance or set aside reserves of their own to cover at least 5 percent of the value of their users’ assets that are stored in hot wallets.

Regardless of the size of the business, crypto exchange operators must hold at least ₩3bn ($2.2m) in reserves and wallet operators must hold at least ₩500m ($375,000).

Do Kwon extradition on hold after successful appeal

Do Kwon, the creator of the TerraUSD stablecoin, has been spared extradition from Montenegro for a second time following another successful appeal.

After serving four months in prison last year for falsifying travel documents, the former CEO of Terraform Labs was once again set to be extradited to his native South Korea.

In November last year, a High Court in Podgorica, Montenegro’s capital, ruled that the legal criteria for Do Kwon’s extradition to South Korea had been met.

However, as the court did not consider a competing extradition request from the US, an Appellate Court overturned the decision one month later and ordered a retrial.

Between the end of December and this week, an almost identical cycle of extradition, appeal and retrial has come around again.

This time, the appeal was successful because Do Kwon’s defence argued that the order in which his extradition requests were received — one from the US and one from South Korea — was not adequately considered.

In the US, Do Kwon has been served eight criminal charges, including wire fraud, commodities fraud and conspiracy, in addition to a civil complaint from the Securities and Exchange Commission (SEC).

He is wanted in South Korea for similar offences.

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