The Policy Pulse: March 10, 2023

There’s a lot to unpack in this week’s edition of the Policy Pulse. This week saw a number of significant developments in policy and regulation.

The New York Attorney General alleged that Ethereum (ETH) is a security, while the Chairman of the Commodities and Futures Trading Commission (CFTC) stated that stablecoins are commodities and not securities. The US Treasury Department proposed a phased-in excise tax of up to 30% on the cost of electricity used in crypto mining facilities. Thailand’s cabinet also approved tax breaks for companies that issue “investment tokens”, while there were a number of developments regarding Central Bank Digital Currencies (CBDCs) and cross-border and interoperability solutions

New York Attorney General Alleges Ethereum is a Security

In her action against Kucoin, the New York AG Letitia James alleged that the crypto exchange was unlawfully selling securities (including Ethereum), by failing to register as a securities and commodities broker-dealer in the state of New York.

The AG Office’s press release stated that “This action is one of the first times a regulator is claiming in court that ETH, one of the largest cryptocurrencies available, is a security. The petition argues that ETH, just like LUNA and UST, is a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders of ETH. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST.”

James claims that Ethereum satisfies the “Waldstein Test” which states “in general, any form of instrument used for the purpose of financing and promoting enterprises, and which is designed for investment, is a security“

The lawsuit notes that:

“ETH’s development and management is largely driven by a small number of developers
who hold positions in ETH and stand to profit from the growth of the network and the related
appreciation of ETH.”

The New York AG’s action against Kucoin comes at a time when the SEC has significantly increased their enforcement actions against crypto exchanges for selling unregistered securities.

CFTC Chairman: Stablecoins are commodities, not securities

Keeping on the topic of securities, Chairman of the Commodities and Futures Trading Commission (CFTC), Rostin Behnam, this week said that most stablecoins are commodities and should be policed as such unless Congress directs regulators otherwise.

This is contrary to what SEC appears to believe. Just last month the SEC instructed Paxos to cease issuing BUSD, on the basis that the stablecoin could potentially be a security.

Behnam, however, disagrees. The head of the CFTC said that he wouldn’t consider dollar-backed stablecoins to be securities as there is “no expectation of profit”.

Read the full article here.

US proposal to impose 30% tax on crypto mining

The US Treasury Department has proposed a phased-in excise tax of up to 30% on the cost of electricity used in crypto mining facilities, to be imposed on companies using computing resources to mine cryptocurrencies.

The tax would be based on how much electricity they use and the type of power tapped, and companies would have to report this information. The proposal is included in the department’s Greenbook, a list of tax proposals and explanations for the US President’s budget proposal.

The document argues that this tax could reduce mining activity and associated environmental impacts. Additionally, the Greenbook includes proposals to close a loophole in the tax code, which enables investors and traders to tax loss harvest to reduce their tax liability.

Tax breaks in Thailand for investment token issuers

Also this week, Thailand’s cabinet approved tax breaks for companies that issue “investment tokens”, with plans to waive corporate income tax and VAT.

The move aims to provide an alternative way for companies to raise capital aside from traditional methods. Investment tokens are a type of token that grants ownership rights to investors but are not classified as security tokens.

Read the full article here.

CBDC Developments

This week there were a number of developments regarding Central Bank Digital Currencies (CBDCs) and cross-border and interoperability solutions.

• SWIFT, the financial messaging network, has successfully tested its solution for enabling central bank digital currencies (CBDCs) to move between distributed ledger technology (DLT)-based and fiat-based systems.
• The Bank for International Settlements (BIS) also completed a pilot study called “Project Icebreaker” to explore the potential benefits and challenges of using retail central bank digital currencies (CBDCs) in international payments. The project was conducted in collaboration with the central banks of Israel, Norway, and Sweden.

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