Blockchain Payments – October/November 2022

Regulation

On Nov 7, 2022

• Regulation Is

Easier Said

Than Done
P. 04

• EU Takes The

Lead, With

U.S. Following

Closely
P. 14

• Ethereum’s

Proof-Of-Stake

Gambit
P. 28

• Biden Talks

Cryptocurrency

For The First

Time
P. 30

October/November 2022

Blockchain Payments Tracker® Series

Is Regulation Friend

Or Foe For Blockchain?

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What’s Inside

04 Regulation Is Easier Said Than Done

Cryptocurrencies are exploding in popularity, and regula-
tors around the world are struggling to craft regulations
that limit their risks but unlock their benefits.

10 New Blockchain Regulations Around The World

The UAE, U.K. and U.S. are just some of the countries that
are scrambling to regulate the burgeoning blockchain scene.

14 The EU Takes The Lead, With The U.S.

Following Closely
New regulatory and legislative actions on both sides of the
Atlantic are kicking regulation into high gear.

22 Businesses View Regulatory Uncertainty

With Concern
Fifty-two percent of cryptocurrency exchanges and block-
chain companies worry that the lack of legal certainty
could harm their industry.

24 Navigating Blockchain’s Complex Regulatory

Landscape
Andreas Veneris, professor of electrical and computer
engineering at the University of Toronto, breaks down the
fractured state of the current blockchain regulation scene.

28 Ethereum’s Proof-Of-Stake Gambit

Ethereum’s move from proof-of-work to proof-of-stake
could cut carbon emissions by more than 99%.

30 Biden Takes Blockchain Action

The White House issues its first-ever cryptocurrency order,
but more guidance may be released in the months to come.

32 About

Information on PYMNTS

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Need To Know

Regulation Is Easier

Said Than Done

Energy usage of most popular
cryptocurrencies, as of August 2022

The blockchain market is expected to grow by $4.02 billion
by 2026, according to a recent study, but the industry’s rapid
growth has also brought some risks that put regulators on
alert. Price volatility associated with cryptocurrencies was
a concern, for example, as regulators believe some inves-
tors may not be fully aware of the risks they take. Bitcoin
topped out at more than $19,000 per coin in 2017, sky-
rocketed to more than $65,000 last year, then plummeted
right back down to its current value of approximately
$20,000. Regulators are also concerned about fraud, with
the Federal Trade Commission seeing $575 million in cryp-
tocurrency losses reported last year.

Experts and policymakers have also raised concerns about
the environmental impact of cryptocurrency. Until recently,
a single Ethereum transaction used more energy than the
average household consumed in a week, thanks to its proof-
of-work (PoW) verification. The company claims to have
reduced this power consumption to that of boiling a house-
hold kettle with its recent switch to proof-of-stake (PoS).

120B-240B

kilowatt-hours per year

Total electricity usage of global crypto-assets

60%-77%

Bitcoin’s share of crypto-asset energy usage

20%-39%

Ethereum’s share of crypto-asset energy
usage, pre-PoS

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$130M

2020

$680M

2021

$329M

Q1 2022

Need To Know

Reported cryptocurrency losses, by year

Well-crafted regulation could

unlock the blockchain’s full

potential.

The blockchain has enormous capability to improve
cybersecurity, financial inclusion, cross-border pay-
ments and a host of other functionalities, but its
current free-for-all status is holding it back. The big-
gest drawback to the status quo is not necessarily
regulation or lack thereof but rather the uncertainty of
regulatory status, with 55% of leading cryptocurrency
companies saying that regulatory ambiguity hinders
blockchain adoption.

Government regulation could potentially curb these
drawbacks and improve the blockchain for both corpo-
rates and individual investors. Another 60% of leading
blockchain companies say that regulatory clarity could
have the most significant positive impact on institu-
tional cryptocurrency adoption. This relatively new
industry will require a gentle hand, however, as over-
bearing or misguided regulations could irreparably
damage the industry and snuff it out before it reaches
its full potential.

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Need To Know

Countries around the world

are attempting to solve the

regulatory puzzle.

The White House, for example, is calling for legislation that would
develop comprehensive standards for the cryptocurrency industry’s
environmental issues. Other pieces of legislation require cryptocur-
rency exchanges to comply with the same anti-money laundering
(AML) protocols that currently apply to banks, placing verification
requirements on an industry that was once largely self-regulating.

The European Union recently enacted legislation allowing cryptocur-
rency wallet providers to market themselves across the continent
so long as they meet certain AML and stability requirements. The
European cryptocurrency industry has so far been welcoming of
these regulations, despite questions about their applicability to
non-fungible tokens (NFTs). This law should go into effect one year
to 18 months after next spring.

A sampling of blockchain regulatory

legislation and its status, by country

Economic Crime

and Corporate

Transparency Bill

Introduced in House of

Commons, September 2022

Markets in

Crypto-Assets

regulation

Passed, October 2022

Lummis-Gillibrand

Responsible Financial

Innovation Act

Introduced in Senate

committee, June 2022

European Union

United Kingdom

United States

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News And Trends

New Blockchain

Regulations Around

The World
Employees of the U.S. government are typically sub-
ject to strict ethics rules to ensure they are not
unfairly profiting from their positions, and the U.S.
Office of Government Ethics (OGE) just updated
these regulations to account for NFTs. The new
guidance says that government employees must file
financial disclosures if they own an NFT worth more
than $1,000 or if the asset produces more than $200
in income during the reporting period.

This guidance applies only to NFTs purchased for
investment purposes rather than for personal or
household use. The OGE issued a seven-part test to
determine if a given employee’s NFT falls into these
categories, including questions as to whether the
employee purchased the NFT for its potential value
or aesthetic reasons.

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News And Trends

Portion of IT experts

whose top concerns were

energy consumption and

environmental impact

Portion of IT experts
whose top concerns were
money laundering and
wallet security

UAE cracks down on

cryptocurrency money

laundering
Bad actors sometimes use cryptocurrency in scams and illicit
purchases, with the real estate field emerging as a new favor-
ite for cryptocurrency scammers. The United Arab Emirates
recently announced new regulations to curb cryptocurrency
real estate fraud and money laundering, requiring real estate
agents to alert authorities of any property purchased using
cryptocurrency.

The new rules will also attempt to curb other forms of real
estate fraud by requiring government notification of any real
estate cash purchase of more than AED 55,000 ($15,000 USD).
These new regulations leave “little or no room for manipu-
lation or illegal practices that could negatively impact the
work environment and the economy and investment,” said
UAE Minister for Economics Abdulla bin Touq Al Marri.

Experts skeptical of

U.K. government’s

cryptocurrency plans

The U.K.’s recent Chancellor of the Exchequer, Nadhim Zahawi,
introduced a new bill that regulates the cryptocurrency sec-
tor and will allow firms to test new blockchain technologies
in a sandbox environment. Cryptocurrency experts are skepti-
cal of the U.K.’s move to enter the blockchain field, considering
the currently plummeting values of cryptocurrencies, NFTs and
other blockchain-related products. Experts raised several con-
cerns, including environmental issues and the safety of crypto
wallets and exchanges.

23%

15%

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PYMNTS Intelligence

The EU Takes The

Regulatory Lead,

With The U.S.

Following Closely
Blockchain is drawing government scrutiny worldwide as
regulators seek to constrain fraudsters, limit its environ-
mental impact and protect investors and enthusiasts from
the technology’s potential drawbacks. The EU and the
U.S. are currently taking the lead in blockchain regulation,
although other countries, such as China, have taken the
simpler step of banning it entirely.

This relatively new technology will require a careful hand
when it comes to regulation, however. Overly onerous
restrictions could constrain its potential economic ben-
efits, while a laissez-faire approach could enable fraud,
money laundering and worse. This month, PYMNTS exam-
ines how the U.S. and the EU are threading this needle in
their current and developing blockchain regulations.

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PYMNTS Intelligence

21%

Share of Americans who have used or
invested in cryptocurrency

19%

Share of Americans who view
cryptocurrency in a positive light

A rapidly growing number of Americans
have invested in cryptocurrency,
but many more are suspicious of
its potential, resulting in calls for
government regulation.

U.S. executive action

is kicking blockchain

regulation into high gear.

Until now, cryptocurrency supervision was primarily based on
the Securities and Exchange Commission’s (SEC’s) interpretation
and enforcement of the Securities Act of 1933, the Securities
Exchange Act of 1934 and the Investment Company Act and
Investment Advisers Act of 1940. In most cases, cryptocurrencies
have been considered securities, and cryptocurrency exchanges
and issuers are required to register and disclose market activities
to federal regulators in the same manner as other investments
under the SEC’s oversight.

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PYMNTS Intelligence

The Biden administration is looking into further cryptocurrency
regulation, but the most pressing question is the clarification
of whether cryptocurrencies should be defined as securities
or commodities. Classifying them as securities would continue
their current jurisdiction under the SEC, but a new congres-
sional bill would change their classification to commodities,
placing crypto under the control of the Commodity Futures
Trading Commission (CFTC) instead. Both the SEC and the CFTC
heads acknowledged, however, that not all cryptocurrencies are
equal, and a case-by-case analysis may be needed.

Placing cryptocurrency oversight under CFTC control would be
a game-changer, as industry players see the agency as a more
crypto-friendly regulator than the SEC and more willing to issue
new regulations. Still, if the CFTC were to obtain new powers
to regulate crypto, it would likely assess new fees on crypto
industry players to pay for the enforcement of new regulations,
as the agency is much smaller than the SEC.

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PYMNTS Intelligence

17%

Percentage of Europeans who own
cryptocurrency

40%

Share of European cryptocurrency
owners who first invested last year

Europe lags behind much of the world
in crypto adoption.

The EU is focusing on the

blockchain’s environmental

concerns.

The European Parliament Committee on Economic and Monetary
Affairs recently endorsed the Markets in Crypto-Assets regula-
tion, which requires crypto-asset service providers to disclose
their total energy consumption. While it does not specifically
mandate that cryptocurrency companies reduce their car-
bon footprints, the hope is that these providers will voluntarily
become more energy-efficient under public pressure.

This energy-focused regulation follows initiatives in other parts
of the world to limit cryptocurrency mining due to environmental
concerns. China, for example, banned cryptocurrency transac-
tions entirely, and the state of New York passed a cryptocurrency
mining moratorium and began a study on the damage of PoW
mining. Some cryptocurrencies, such as Ethereum, are already
shifting to a PoS technique to reduce these damages.

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Chart Of The Month

Top Blockchain Adoption Risks
Among Merchants

Source: PYMNTS

Cryptocurrency, Blockchain And Cross-Border Payments:

Selecting A Blockchain Technology Partner, February 2022

N = 250: Multinational financial institutions, fielded April 2021

Regulatory

Uncertainty Is

Top Concern

For Blockchain

Adoption

Businesses have enormous risks to contend with
when entering the blockchain realm, and regula-
tion tops the list. Fifty-two percent of firms cited
regulatory concerns as their top risk, followed by
uncertainty about operational efficiency at 41%, data
quality at 37% and data security at 35%. Despite
these concerns, businesses are still exploring ways
to leverage the blockchain to make their processes
more efficient.

52%

Regulatory concerns

37%

Data quality

41%

Uncertainty about

operational efficiency

35%

Data security

34%

Profits

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[Blockchain regulation

until now] has been like

closing your eyes and

throwing a dart at the

wall. It is a field that has

been very puzzling to a lot

of people because there

are so many different new

entities — and so many

unknown entities.

ANDREAS VENERIS

Professor of electrical and

computer engineering

Insider POV

Navigating

Blockchain’s Complex

Regulatory Landscape

Andreas Veneris, professor of electrical and computer engineering at
the University of Toronto, tells PYMNTS why cross-border payments
would be a good start for blockchain regulation.

Legislators have been toying with the idea of regulat-
ing the blockchain field for several years, but they only
recently started passing legislation in earnest. This inter-
est is long overdue, said Veneris, spurred by the collapse
of the stablecoin TerraUSD this past May. This fall cost
investors tens of billions of dollars despite its pegging to
the U.S. dollar, casting intense doubt on the viability of
stable cryptocurrencies.

“The collapse of TerraUSD brought up the need for stron-
ger, more thorough and more detailed regulation to protect
the public from scams and fishy cryptocurrencies.”

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There are 18,142
cryptocurrencies in circulation.

There are 460 cryptocurrency
exchanges around the world.

The market cap for
cryptocurrency is $1.7 trillion.

Until now, blockchain and

cryptocurrency have been

largely unregulated, despite

their increasing market size.

Insider POV

These regulatory efforts remain quite slapdash, however, as law-
makers are still trying to understand this complex technology and
craft appropriate legislation. Governments commonly perceive cryp-
tocurrency as a payment for dubious purposes and not as its own
complex economy on par with traditional financial systems.

“The regulatory environment is still a mess, but in fairness, it’s still
a very new medium. But the genie’s out of the bottle right now, and
they cannot stop the ride. It’s like BitTorrent 20 years ago: The music
industry tried to scare people into not downloading songs, but that
didn’t work out at all.”

The best way forward for blockchain regulations is to focus on
cross-border payments, said Veneris. These already rely on inter-
national cooperation and avoid the central problem of per-country
regulation: Different countries will likely never totally agree on the
best way to regulate the blockchain, and cryptocurrency exchanges
can easily flock to the country with the loosest laws and continue to
sell all around the world.

“For the purposes of advancing interoperability, it might be neces-
sary for regulators to have some provisions that are similar. If they
are not similar, there will be a lot of opportunities for regulatory arbi-
trage, where one country’s regulations are not in line with another
country’s regulations. People might want to take advantage of other
jurisdictions with relaxed regulatory provisions.”

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Ethereum’s much-hyped shift from PoW to PoS is finally here
after seven years of planning. Ethereum’s developers made this
move in an attempt to alleviate environmental and energy usage
concerns, with some experts estimating that the blockchain’s
power consumption could drop by more than 99.9%. This is
because the new PoS underlies a consensus mechanism that
requires far less energy than what the PoW computations need.
Gas fees will remain unaffected, however, as the total network
capacity will remain largely the same. Ethereum is not the only
blockchain working to reduce energy consumption. Algorand’s
blockchain, for example, was designed as a greener alternative
and carbon-neutral, as its protocol requires the energy con-
sumption of 10 average U.S. households.

Companies To Watch

Ethereum’s

Proof-Of-Stake

Gambit

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What’s Next

White House

Releases First-Ever

Cryptocurrency

Framework

Cryptocurrency regulation in the U.S. has largely been
left to financial regulators, but it is quickly gaining
interest from higher up in the chain of command. The
White House recently issued its first-ever framework
on future cryptocurrency regulation, with a special
emphasis on borderless transactions and cracking
down on digital asset fraud. The U.S.’s next steps
are a risk guidance assessment from the Treasury
Department and an exploration of a new digital cur-
rency that the Federal Reserve would issue.

JANET YELLEN

United States secretary

of the treasury

Innovation is one of the hallmarks

of a vibrant financial system and

economy. But as we’ve painfully

learned from history, innovation

without adequate regulation can

result in significant disruptions

and harm to the financial systems

and individuals.

Source: The White House. Background Press Call by Senior
Administration Officials on the First-Ever Comprehensive Framework
for Responsible Development of Digital Assets. 2022. https://
www.whitehouse.gov/briefing-room/press-briefings/2022/09/16/
background-press-call-by-senior-administration-officials-on-the-
first-ever-comprehensive-framework-for-responsible-development-of-
digital-assets/. Accessed October 2022.

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