Week In Crypto: No-Shows At South Korea’s LUNA Hearings And Has FTX CEO Become Too Powerful?

October 28, 2022
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South Korean politicians fume as key witnesses fail to turn up to hearing on high-profile crypto failure, questions raised at FTX CEO’s lobbying on Capitol Hill and Singapore consults on new crypto trading and stablecoin rules.

South Korean politicians fume as key witnesses fail to turn up to hearing on high-profile crypto failure, questions raised at FTX CEO’s lobbying on Capitol Hill and Singapore consults on new crypto trading and stablecoin rules.

Lawmakers in South Korea were left disappointed this week when several key witnesses of an investigation into the Terra-LUNA stablecoin collapse failed to show up.

On Monday (October 24), South Korea’s National Assembly was scheduled to hold several hearings into the crash as part of a major audit of the country’s crypto industry.

Five witnesses were called to testify, but in the end only one showed up. The no-shows included Lee Jung-hoon, former chairman of crypto exchange Bithumb, and Simon Seojoon Kim, CEO of venture capital firm Hashed.

Both submitted statements in which they explained that they could not attend the hearings due to the psychological trauma they have suffered since the LUNA crash.

Jung-hoon said he now suffers from depression and panic attacks, while Seojoon Kim said he suffers from stress, panic attacks and anxiety issues after losing €3.6bn during the crash.

However, in the eyes of lawmakers, the most frustrating no-show was that of Daniel Shin, co-founder of LUNA creator Terraform Labs, where he worked until 2020, and is currently CEO of payments firm Chai Corporation.

“The continued absence of representatives such as Daniel Shin, who is most responsible for the LUNA incident, is an act of ignoring the 280,000 victims,” one lawmaker said, according to South Korea’s Chosun Ilbo new agency.

Do Kwon, the most well-known face of Terraform Labs, remains at large, having not responded to a warrant for his arrest.

In a separate hearing on Tuesday (October 25), South Korean prosecutors filed a motion to sentence former Bithumb chairman Jung-hoon to eight years in prison for defrauding a potential takeover bidder of $70m.

The victim was Kim Byung Gun, founder and owner of BK Plastic Surgery Hospital, who had to pay an “upfront fee” as part of a takeover negotiation.

The making of a kingmaker?

In the US, another crypto exchange executive has become a thorn in the side of regulators, albeit for different reasons.

This week, the Consumer Choice Center (CCC), a right-wing libertarian lobby group, sent a letter to US lawmakers involved in drafting crypto regulations, warning them of recommendations made by Sam Bankman-Fried, the billionaire CEO of FTX, the world’s second-largest crypto exchange.

The CCC linked to an FTX company blog post, written by Bankman-Fried, in which he sets out a “draft of a set of standards” for the US crypto industry to follow in lieu of a federal regulatory framework.

So far this year, Bankman-Fried has donated well over $40m to Democrat campaigns and candidates, and in May this year he pledged to donate up to $1bn to Democrat candidates by the 2024 election.

The CCC, therefore, warned lawmakers of Bankman-Fried’s increasing influence on Capitol Hill, and the possibility that his combination of largesse and self-promotion may be aimed at benefiting himself and his company.

“The main caution we invoke is that many [of his] proposed regulations aim to cement existing industry players and lockout innovative upstarts, while at the same time requiring the same restrictive rules that caused many people to explore cryptocurrencies in the first place,” said Yaël Ossowski, deputy director of the CCC.

“While many proposals laid out by Mr. Bankman-Fried do address consumer needs — especially as it relates to hacks, scams, and protection of funds — his recommendations for a highly licensed regime on all sides of digital transactions go against the spirit of why cryptocurrencies were created in the first place."

In the interests of keeping the crypto ecosystem decentralised, as it was intended by design, Ossowski said that regulators must acknowledge that Bankman-Fried’s interventions come from a place of “vested interests” that may not favour the consumer.

Instead, Ossowski called on lawmakers to consider the CCC’s Principles for Smart Crypto Regulation, published last year, which stresses the need for fraud prevention, technological neutrality, low taxation and legal certainty and transparency.

Singapore seeks comment on crypto trading, stablecoin proposals

Consumer protection was also a top priority in the Monetary Authority of Singapore’s (MAS) latest proposals on crypto trading and stablecoins, which the city-state is seeking feedback on until late December and is intended to form part of an expanded Payment Services Act.

The MAS argues that cryptocurrency trading is “highly risky” and “not suitable for the general public”, but at the same time it is “not feasible” to ban it.

Therefore, to reduce the risk to consumers from speculative trading, the MAS seeks to require that crypto service providers follow similar rules and risk disclosures to that of other financial firms.

In terms of consumer access, for example, the MAS wants to prohibit crypto firms from offering leverage or any kind of credit facility to retail customers, similar to current rules in European jurisdictions.

In terms of business conduct, the MAS says crypto firms should be required to implement customer asset segregation and should also establish a complaints handling process.

Similar to other financial institutions, such as banks, the MAS also wants crypto firms to be subject to high availability and recoverability requirements of their critical systems.

For stablecoins, the MAS intends to complement existing anti-money laundering/counter-terrorism financing (AML/CTF) laws with rules around value stability and management of reserve assets.

For example, issuers of stablecoins whose market cap exceeds S$5m ($3.5m) must hold reserve assets in cash, cash equivalents or short-dated sovereign debt securities that are at least equivalent to the par value of the coins in circulation.

Requirements on audit and segregation of reserves, and timely redemption at par value will also apply.

The MAS also proposes that stablecoins can only be pegged to the Singapore dollar or any other G10 currency.

In the hope of preventing another LUNA-style collapse, stablecoin issuers will be required to publish a white paper disclosing technical details of the product and the redemption rights of stablecoin holders.

Issuers must also meet certain base capital requirements and must hold liquid assets that are valued at 50 percent or more of the issuer’s annual operating expenses, or another amount, as assessed by the issuer, that is necessary to achieve an “orderly wind-down” or recovery.

Crypto set for legal recognition in UK

Finally, turning to the UK, where MPs have voted to recognise crypto-assets as regulated financial instruments and products under new legislation.

The move was part of the passage of the Financial Services and Markets Bill that was introduced in July this year, as reported by VIXIO.

Put forward by Conservative MP Andrew Griffith, the latest amendments will bring crypto-assets under the same regulations as other financial instruments and products.

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