At the beginning of 2024, with the victory of the Grayscale case and the push from Wall Street capital led by BlackRock, BTC ETF was historically approved, marking the first entry of virtual assets into the mainstream traditional capital's vision and initiating a bull market.
This bull market not only reflects the value of virtual currencies but also the gradual acceptance of blockchain technology by mainstream institutions, with the most influential being the successful launch of BUIDL, a tokenized fund by BlackRock. Undoubtedly, traditional financial capital will increasingly be integrated into the blockchain in the future.
On the regulatory front, the United States still lacks a unified virtual asset regulatory framework. However, this does not hinder the U.S. regulators from cracking down on illegal activities (such as KuCoin's violation of anti-money laundering requirements) and the gradual recognition of virtual assets by traditional Wall Street capital (such as BTC ETF, tokenized funds, etc.).
In contrast, the European Union and Hong Kong are actively establishing comprehensive virtual asset regulatory frameworks (such as the EU's MiCA and Hong Kong's VASP licensing system and numerous consultation opinions). In practice, we can see that these regulatory frameworks bring huge expansion costs and compliance business adjustments to market participants.
Crypto Friendly is not Crypto Easy.
This article will review the first quarter of 2024, observing global Web3 virtual asset regulation and hot events, covering the historic approval of BTC ETF, regulatory enforcement against KuCoin and its founder, BlackRock's tokenized fund BUIDL, the EU's new anti-money laundering regulations for non-custodial wallets, and Hong Kong's comprehensive move towards virtual asset compliance.
1. Historic Approval of BTC ETF
After a decade-long arduous approval process, the dawn of victory finally arrived for BTC ETF on January 11, 2024, when the U.S. Securities and Exchange Commission (SEC) simultaneously approved 11 spot BTC ETFs. All of this should be attributed to the victory of Grayscale in the lawsuit.
1.1 Victory of Grayscale
On August 29, 2023, a ruling by a U.S. federal court allowed Grayscale to win the lawsuit against the SEC's rejection of its application for spot BTC ETF [1]. This accelerated the application process for BTC ETF by traditional financial giants such as BlackRock and Fidelity in the past few months.
The SEC's previous reason for not approving BTC ETF was concerns about market fraud and manipulation. Although the SEC had allowed trading of futures BTC ETF in 2021, it stated that futures products are more difficult to manipulate because the market is based on the futures prices of the Chicago Mercantile Exchange (CME), which is regulated by the U.S. Commodity Futures Trading Commission (CFTC).
However, in the case, the court agreed with Grayscale's argument that the logic of approving futures BTC ETF should be the same as approving spot BTC ETF. The court found that the SEC had failed to explain its differential treatment of similar ETF products and that its refusal of Grayscale's application was arbitrary and unsupported, violating administrative law. The court ultimately granted Grayscale's request and revoked the SEC's rejection of the application.
As a result, it was not until after the Grayscale case that the SEC's attitude completely changed from passive rejection to active review, and in the 22-page approval document, it stated: "This order approves the Proposals on an accelerated basis."
1.2 SEC Tells Us Where the Risks of BTC ETF Lie
As an established compliant financial product, ETF itself has no legal obstacles, and BTC is the only asset defined as a "non-security" by U.S. regulators, especially the SEC. So where do the risks of BTC ETF lie?
In the 22-page approval document [2], the SEC tells us: The risk comes from the uncontrollability of the underlying asset trading market of the ETF—namely, the manipulation risk of the BTC spot market.
Although each ETF has signed a Surveillance Sharing Agreement with compliant regulated exchanges (such as the Chicago Mercantile Exchange CME) to monitor the risk of BTC futures market, the monitoring does not cover the BTC spot market itself.
The SEC's argument is that BTC futures at CME are already compliant products, and it needs to be demonstrated that the price correlation between BTC spot and BTC futures is the best choice. Therefore, the SEC compared the correlation between the BTC prices of the virtual currency exchanges Coinbase and Kraken with the CME futures prices since 2021 and found them to be highly correlated. This means that if there is fraud or manipulation in the BTC spot market, these actions are likely to also affect the futures market, which can be detected by CME's monitoring system, allowing regulators to control the risk.
The market manipulation risk in the BTC spot market mainly comes from market makers or participants in centralized exchanges (CEX). If U.S. regulators can cover the regulation of CEX, they can relatively control the risk. In response, U.S. regulators have implemented compliance regulation covering Coinbase and Kraken, two virtual currency exchanges, and have also "targeted" the largest trading volume exchange, Binance, and successfully entered and controlled it in compliance.
1.3 Disagreement Among SEC Commissioners
Although the SEC ultimately approved BTC ETF, there is still a huge disagreement at the decision-making level within the SEC. SEC Chairman Gary Gensler cautiously stated in a press release [3]:
"The SEC's approval of this ETF is limited to holding one non-security commodity, bitcoin. It should by no means indicate that the SEC is willing to approve the listing standards of any other virtual asset securities. The approval also does not indicate the SEC's view on the status of other virtual assets under the securities laws or the non-compliance of certain virtual asset market participants with the securities laws.
As I have said in the past, the vast majority of virtual assets are investment contracts and are therefore subject to securities laws.
Although the SEC is neutral, I want to point out that the underlying assets in precious metal ETFs have consumer and industrial uses, whereas, in contrast, BTC is primarily a speculative and volatile asset, also used for numerous illegal activities, including ransomware, money laundering, sanctions evasion, and terrorist financing.
Although the SEC approved the listing and trading of spot BTC ETFs today, we have not approved or endorsed BTC. Investors should exercise caution with BTC and products related to virtual assets."
The controversy among other commissioners lies in the fact that spot and futures BTC ETFs are completely different, and it is not advisable to regulate spot BTC ETFs using the logic of regulating futures BTC ETFs, as the two are not correlated. This is because the Bitcoin spot market does not have a major regulatory body to prevent price manipulation and fraud.
1.4 Historical Significance of BTC ETF
Regardless, the approval of BTC ETF is of great historical significance, allowing us, who hold the ideals of crypto punks and overnight wealth fantasies, to be part of it and add a vivid color to the historical tide.
Just as Chuan Wang, the king of Silicon Valley (X: @Svwang1), said: "The significance of January 10, 2024 in the history of world currencies, when looked back upon in the future, may be comparable to August 13, 1971 (Nixon's announcement of the gold standard), and January 18, 1871 (German unification, leading European countries and the United States to join the gold standard system within a few years)."
2. Criminal Lawsuit Against KuCoin and Its Founders for Violating Anti-Money Laundering Regulations
On March 26, 2024, the U.S. Department of Justice filed a criminal lawsuit against the virtual currency exchange KuCoin and its two founders for conspiring to operate an unlicensed money transmission business and violating the Bank Secrecy Act's anti-money laundering compliance procedures [4].
The U.S. prosecutors stated: "KuCoin and its founders intentionally attempted to conceal the fact that a large number of U.S. users were trading on their platform, with daily trading volumes reaching billions of dollars and annual trading volumes reaching trillions of dollars. Financial institutions like KuCoin must comply with U.S. laws, register with FinCEN and the CFTC, and implement KYC/AML/CTF anti-money laundering compliance procedures. KuCoin allegedly chose not to do so intentionally, making it a haven for illegal money laundering. KuCoin received over $50 billion and sent over $40 billion of suspicious and criminal funds.
Virtual currency exchanges like KuCoin cannot have it both ways. Today's indictment should send a clear message to other virtual currency exchanges: if you plan to serve U.S. customers, you must comply with U.S. laws."
At the same time, the CFTC also filed a civil lawsuit against KuCoin [5], accusing KuCoin and its entities of engaging in off-exchange commodity futures trading, leverage, margin, or retail commodity trading business without a license, in violation of the Commodity Exchange Act (CEA) and multiple CFTC regulations.
In fact, a closer look at the U.S. regulatory enforcement against KuCoin is no different from that against Binance. In summary, it echoes a statement by U.S. Treasury Secretary Yellen: "Any entity that wants to operate in the U.S. and benefit from the good U.S. financial markets should strictly comply with U.S. laws."
3. BlackRock's Tokenized Fund
In our article last year, we analyzed the importance of tokenized funds in connecting TradFi and DeFi, and the fact that funds, as an asset form, are the best carrier for RWA assets due to (1) their regulatory compliance and (2) their relatively standardized digital representation.
In March 2024, BlackRock's tokenized fund flagship set sail in partnership with Securitize on the public blockchain—Ethereum, launching the first tokenized fund "BlackRock USD Institutional Digital Liquidity Fund" (BUIDL), which will provide qualified investors with the opportunity to earn USD-denominated returns through Securitize Markets [6].
Tokenization is a core part of BlackRock's digital strategy, and the tokenization of the BUIDL fund signifies BlackRock's proactive entry into the tokenization of real-world assets (RWA) and brings significant benefits to investors. For example, investors can achieve ownership issuance and trading on the blockchain, access on-chain products, receive instant and transparent settlements, and transfer ownership across platforms.
The BUIDL fund will maintain a stable value of $1 per token and distribute interest through rebase, paying accrued dividends as new tokens directly to investors' wallets daily. 100% of the fund's assets will be invested in cash, U.S. Treasury bonds, and repurchase agreements, allowing investors to earn returns while holding assets on-chain. Most importantly, investors can transfer their tokens to other pre-approved investors 24/7/365, and the fund also offers flexible custody options.
The Bank of New York Mellon will facilitate interoperability between the digital and traditional markets for the fund and serve as the fund's custodian and manager, while Securitize will act as the transfer agent and tokenization platform, managing tokenized fund shares and reporting on fund subscriptions, redemptions, and distributions. Securitize Markets will act as the sales agent, offering the fund to qualified investors. PricewaterhouseCoopers has been appointed as the fund's auditor. Other asset custody partners include Anchorage Digital Bank, BitGo, Coinbase, and Fireblocks.
3.2 Huge Potential of Tokenized Funds
From the perspective of traditional finance (TradFi), the tokenization of funds through blockchain and distributed ledger technology can unlock even greater value.
Previously, BlackRock CEO Larry Fink explicitly stated in an interview with Bloomberg that asset tokenization will be BlackRock's next development direction: "We believe that the tokenization of financial assets will be the next trend, which means that every stock and bond will be recorded on a general ledger."
In addition, the UK regulator is also actively exploring fund tokenization, stating in its Investment Association's declaration that fund tokenization is expected to improve efficiency, transparency, and international competitiveness in the investment management field, and released a report titled "UK Fund Tokenization—Implementation Blueprint" [7].
While Franklin Templeton had already tokenized funds on the public blockchain, BlackRock's flagship undoubtedly opens the door to a new world for traditional finance RWA. In the future, we will see more traditional financial assets leveraging blockchain technology to unlock even greater value. The tokenization of the stock market is within reach.
4. EU's Anti-Money Laundering Regulation for Non-Custodial Wallets
On March 23, 2024, according to a report by Cointelegraph [8], the EU regulators are updating a new anti-money laundering regulation aimed at regulating virtual currency business transactions in non-custodial wallets, as part of the EU's broader anti-money laundering strategy and the continuation of the comprehensive regulatory framework for virtual assets established last year (Markets in Crypto-Assets Regulation, MiCA). The anti-money laundering law is expected to be implemented in 2027, three years from now, and will strengthen restrictions on service providers offering services to anonymous accounts, in conjunction with the MiCA law.
The anti-money laundering law requires virtual currency service providers (Crypto Asset Service Providers, CASPs) operating in the EU to conduct customer due diligence and identity verification (KYC) for transactions with non-custodial wallet users that exceed 1000 euros. It is important to note that this is a compliance requirement for virtual currency service providers regulated under MiCA—any transactions between non-custodial wallets and virtual currency service providers exceeding 1000 euros will be regulated, while transactions between non-custodial wallets are not subject to this law.
5. Comprehensive Compliance in Hong Kong
With the introduction of the "Policy Statement on the Development of Virtual Asset in Hong Kong" in October 2022, a new Virtual Asset Service Provider (VASP) regime was officially implemented in Hong Kong on June 1, 2023, marking a significant positive development for the virtual asset industry in China's Hong Kong.
In order to comprehensively regulate all virtual asset trading activities in Hong Kong and implement the standards of the Financial Action Task Force (FATF), the Hong Kong government, in addition to amending the Anti-Money Laundering Ordinance, has established a new "mandatory licensing" regime for VASPs. This includes comprehensive regulation of the participation and forms of virtual assets in the actual circulation process, such as stablecoins, OTC entry and exit of virtual assets, and virtual asset custody.
Although aspects of the regulation are still in the process of soliciting opinions or legislative norms, it provides a comprehensive overall regulatory framework.
Previously, we introduced the VASP licensing system for virtual asset exchanges, so we won't go into detail here.
5.1 Stablecoins
On December 27, 2023, the Hong Kong Treasury Bureau and the Hong Kong Monetary Authority jointly issued a public consultation paper on the legislative proposal for the regulation of fiat stablecoin issuers in Hong Kong [9].
Legislative background: Due to the important role of stablecoins in the Web3 and virtual asset ecosystems, and the increasingly close connection between the traditional financial system and the virtual asset market, the Hong Kong government believes that there is a need to establish a regulatory regime for fiat stablecoin issuers. By regulating fiat stablecoin issuers in a risk-based and flexible manner, potential risks to currency and financial stability can be appropriately managed, and a clear legal and regulatory environment can be provided to promote the sustainable and responsible development of the virtual asset ecosystem in Hong Kong.
The legislative proposal considers introducing new legislation to implement a licensing regime for fiat stablecoin issuers, consisting of two main parts:
- Licensing and regulatory regime for fiat stablecoin issuers. Fiat stablecoin issuers must meet a series of strict licensing conditions and regulatory requirements before they can operate in Hong Kong. Regardless of the stable mechanism and related support assets for fiat stablecoins, all fiat stablecoin issuers will be subject to the same regulatory framework. This means that stablecoin issuers such as USDC and USDT need to apply for a license to operate in Hong Kong.
- Regulatory regime for entities engaged in the sale and promotion of fiat stablecoins. Only licensed fiat stablecoin issuers, recognized institutions, licensed corporations, and licensed virtual asset trading platforms can provide services to purchase fiat stablecoins in Hong Kong or actively promote such services to the public in Hong Kong. Only fiat stablecoins issued by licensed issuers can be sold to retail investors (the general public), otherwise they can only be sold to professional investors. This means that only licensed entities can retail in Hong Kong. If stablecoin issuers such as USDC and USDT are not licensed in Hong Kong, they can conduct transactions through licensed entry and exit service providers, but only for professional investors.
The stablecoin regulatory regime in Hong Kong focuses on fiat stablecoins rather than other types of stablecoins (such as those pegged to gold or other assets). The stablecoin regulatory regime in Hong Kong will adopt a risk-based approach to regulate fiat stablecoin issuers and related activities, and will follow the principle of "same business, same risk, same regulation." The Hong Kong government has the right to adjust the scope of application of the new regulatory regime based on the development of the virtual asset market.
In addition to the public consultation paper, to complement the legislative proposal for the regulation of stablecoin issuers, the Hong Kong Monetary Authority announced the launch of a "sandbox" for stablecoin issuers. Through the "sandbox," the Hong Kong Monetary Authority hopes to convey regulatory expectations to institutions interested in issuing fiat stablecoins in Hong Kong and gather participants' opinions on regulatory requirements to facilitate the implementation of subsequent regulatory regimes [10].
5.2 Over-the-Counter (OTC) Virtual Asset Trading
On February 8, 2024, the Treasury Bureau issued a public consultation paper on the legislative proposal for regulating over-the-counter virtual asset trading, aiming to establish a new licensing regime for providers of over-the-counter virtual asset trading services, with the Hong Kong Customs and Excise Department as the regulatory authority, to regulate all entities providing over-the-counter virtual asset trading services (OTC services). Under the proposed regime, anyone conducting any form of spot trading services for any virtual asset as a business, excluding non-business peer-to-peer transactions, must apply for a license from the Commissioner of Customs and Excise in Hong Kong.
Over-the-counter virtual asset trading business will be defined as:
(a) Providing spot trading services for any virtual asset in a business form, excluding non-business peer-to-peer transactions; (b) Providing services through physical stores (including ATMs) or other platforms (such as internet platforms), not applicable to individuals who are not parties to contractually binding transactions, such as online platforms/applications/communication system operators that only provide display services without participating in transactions; (c) Specifically excluding the operations of virtual asset trading platforms covered by the VASP licensing regime.
Similarly, considering the wide range of business forms of over-the-counter virtual asset trading operators, the proposed regime will ensure that all forms of over-the-counter virtual asset trading services are regulated based on the same business, same risk, and same rules.
The Hong Kong government proposes that anyone conducting over-the-counter virtual asset trading business in Hong Kong or actively promoting the provision of over-the-counter virtual asset trading services to the public in Hong Kong must obtain a license from the Commissioner of Customs and Excise and comply with appropriate criteria for personnel and other regulatory requirements.
The definition of "actively promoting" may consider factors such as whether there is a detailed promotion plan, whether promotion is carried out through various channels (internet, newspapers, etc.), and whether promotion is planned.
5.3 Virtual Asset Custody
On February 20, 2024, the Hong Kong Monetary Authority issued guidelines on virtual asset custody activities, providing clear standards for governance and risk management, client asset segregation and protection, delegation and outsourcing for institutions applying for a Virtual Asset Service Provider (VASP) license [12].
Background of the guidelines: With the continuous development of the virtual asset industry, the Hong Kong Monetary Authority has noticed the growing interest of recognized institutions in virtual asset-related activities, especially in providing virtual asset custody services to clients. To ensure that client virtual assets held by recognized institutions are fully protected and that related risks are properly managed, the Hong Kong Monetary Authority believes that guidelines should be provided to recognized institutions offering virtual asset custody services.
We have already seen the Hong Kong government's requirements for virtual asset custody in the VASP licensing system, such as the requirement for exchanges to hold client funds and virtual assets in trust through wholly-owned subsidiaries. The further regulation of virtual asset custody requirements will further implement the landing forms of virtual asset participants and protect the interests of investors.
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