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The International Organization of Securities Commissions ( IOSCO) issued for consultation detailed principles-based and outcomes-focused recommendations as to how to regulate crypto-assets, aimed at the activities performed by crypto-asset service providers (CASPs). It proposes 18 policy recommendations that IOSCO plans to finalize in Q4 2023 to support greater consistency with respect to regulatory frameworks and oversight in its member jurisdictions, to address concerns related to market integrity and investor protection arising from crypto-asset activities. The proposed recommendations do not cover "decentralized finance" (DeFi).

Etonec and Mina Foundation will roll out a new zero-knowledge (ZK) proof-powered regulatory compliance tool for the decentralized finance (DeFi) and Web3 space. It will address gaps within the privacy and compliance space by providing know-your-customer (KYC) and anti-money-laundering (AML) services on the Lumina DEX when it goes live later this year. The prototype is powered by zkApps, which enables private and compliant transactions. https://www.etonec.com/post/etonec-partners-with-mina-to-address-trade-offs-between-privacy-compliance-and-decentralization

The Bank for International Settlements (BIS) published the results of its Project Mariana proof of concept that demonstrated technical feasibility of automated market-makers (AMMs) for cross-border trading and settlement of wholesale central bank digital currencies (wCBDCs). It borrows ideas and concepts from decentralized finance (DeFi) and leverages a public blockchain to design and test a transnational transnational FX interbank market using wCBDCs. Project Mariana is a collaboration between the BIS Innovation Hub, the Bank of France, the Monetary Authority of Singapore and the Swiss National Bank.

"There is something wrong when sizeable attacks and fraud are so common, and yet investors appear to shrug them off entirely. Researchers on trust generally identify ability, benevolence, and integrity as the three pillars for establishing trustworthiness. When digital asset and DeFi firms demonstrate their inability to safeguard assets, and engage in behavior that suggests ill-intent or inconsistency, it should result in a drop in trust. The fact that many such firms, and the market as a whole, do not experience such a reaction, indicates that investors may not rationally be assessing risks. This could be a recipe for disaster."

"Last week the IMF published a paper on X-C, a platform for cross border payments, co-authored by the IMF and members of MIT's Digital Currency Initiative. The solution proposes a global centralized ledger for cross border payments in which central banks, banks and payment providers participate. An X-C platform would not just centralize payments and settlement, but also provide a foreign exchange (FX) market, hedging and compliance. "

The Bank of Canada [BoC] published a paper on the risks stablecoins could pose to the financial system. It argues that the stabilization mechanisms of stablecoins give rise to the risk of confidence runs, which can propagate to broader crypto-asset markets and the traditional financial sector. It also argues that stablecoins can contribute to financial stability risks by facilitating the buildup of leverage and liquidity mismatch in decentralized finance (DeFi). Such risks cannot be addressed by ensuring the price stability of stablecoins alone. Finally, it explores the potential implications of stablecoins for the current system of bank-intermediated credit and for monetary policy.

A recent Economist article goes through the most likely path towards zero crypto - basically ending at the point where no one is using it. It rejects the attack-and-shut-down the major crypto-assets because that would essentially involve gaining 51% control of the computational power or value of tokens staked to verify transactions, which would be extraordinarily expensive, even at today's depressed prices. The more likely scenario, according to the article, is the collapse and generally a massive loss in faith in the exchanges and decentralized finance (DeFi) lending protocols. This could lead to further collapses of crypto prices, making 51% attacks more feasible, triggering a self-reinforcing crash as confidence in the protocols tanks.

According to Chainalysis, illicit addresses sent nearly $23.8 billion worth of cryptocurrency in 2022, a 68.0% increase over 2021. As is usually the case, mainstream centralized exchanges were the biggest recipient of illicit cryptocurrency, taking in just under half of all funds sent from illicit addresses. More illicit funds were sent to DeFi protocols than ever before, a continuation of a trend that began in 2020.

"JP Morgan already enables tokenized U.S. dollar deposits with JPM Coin. Now it plans to enable blockchain-based Euro deposits 'soon'… Most blockchain financial applications sit under JP Morgan's Onyx division. This includes Onyx Digital Assets with an intraday DLT repo application, Liink for messaging around conventional payments and JPM Coin. It's also experimenting with using JPM Coin on a public blockchain as part of Project Guardian, its Singapore DeFi experiments with the Monetary Authority of Singapore."

The Monetary Authority of Singapore (MAS) launched Ubin+, an expanded collaboration with international partners on cross-border foreign exchange (FX) settlement using wholesale central bank digital currency (CBDC).  Ubin+ will develop technical standards and infrastructure to support cross-border connectivity, interoperability and atomic settlement of digital currency transactions across platforms using distributed ledger technology (DLT), and non-DLT based financial market infrastructures. It will also evaluate the efficiency and risk implications of such platforms, and establish the related policy frameworks. (The BIS Innovation Hub led Project Mariana that is investigating the use of decentralized finance (DeFi) protocols and automated market makers (AMMs) to automate FX trading and settlement, is part of Ubin+.)

The European Union's Markets in Crypto Assets (MiCA) legal framework received unanimous approval from the European Council (comprised of the finance ministers from all 27 EU member states) on May 16, 2023. It will require crypto-asset firms to seek a license to operate across the bloc, and for stablecoin issuers to hold suitable reserves. Although it does not encompass every aspect of digital assets, leaving out areas like non-fungible tokens (NFTs) and decentralized finance (DeFi), they are expected to be included in subsequent versions of the law. https://www.consilium.europa.eu/en/general-secretariat/corporate-policies/transparency/open-data/voting-results/?meeting=3948

The Financial Action Task Force (FATF) published an update on implementation of its standards on virtual assets (VAs) and virtual asset service providers (VASPs), with a focus on the travel rule. The travel rule requires VASPs to collect and share with each other personal data on participants (both senders and receivers) in transactions exceeding USD/EUR 1,000. In other words, the personal data of the transacting parties is supposed to "travel" along with their transfers. The report that notes only 11 of 98 surveyed jurisdictions are enforcing and supervising it. The also report highlights the continued need to monitor monitor the growth of, and illicit financing risks associated with DeFi and NFTs markets and unhosted wallets.

Ava Labs CEO Emin Gün Sirer has dismissed allegations from CryptoLeaks that the company formed a "secret pact" with U.S. law firm Roche Freedman LLP to use the American legal system "gangster style" to "attack and harm crypto organizations [i.e., Ava Labs competitors]." Ava Labs is the firm behind Avalanche (AVAX), an Ethereum (ETH) rival in the decentralized finance (DeFi) and customized blockchain space. Roche Freedman LLP was recently involved in separate high-profile lawsuits against Solana Labs and Binance, claiming that the firms were engaging in unlawful activities.

The BIS Innovation Hub's Hong Kong Centre and the Hong Kong Monetary Authority have launched Project Dynamo, which aims to deliver a prototype for the compliant use of decentralised finance (DeFi) tools, such as blockchain and smart contracts, to improve access to finance for unfunded and underfunded small and medium enterprises (SMEs). The research will extend into related topics such as decentralised identifiers and the interoperability of digital payment methods such as stablecoins and central bank digital currencies.

Coin Metrics published an update on stablecoin market developments, concluding that the expanding supply of stablecoins serves as a clear indicator of rising activity and usage within the digital asset ecosystem, with Tether on Tron leading the charge. Despite challenges in the U.S. regulatory environment and a complex political landscape, stablecoin liquidity has shown impressive resilience. The update attributes this to the wide utility of stablecoins, through avenues such as decentralized finance (DeFi) pools to exchanges and in diverse yield generating products. These trends also evidence the central role stablecoins play in the crypto-economy.

Circle, the issuer of the USD Coin (USDC) dollar-pegged stablecoin, is launching a EUR-backed stablecoin (EUROC) on June 30. EUROC will be 100% backed by euros held in euro-denominated banking accounts so that it's always redeemable 1:1 for euros. Businesses will be able to mint EUROC straight from the source by depositing euros into their Circle Account using Silvergate's Euro SEN network, after which it will be available to non-Circle Account users via digital asset exchanges and DeFi protocols. Additional deposit options are expected to be available later this year. EUROC will be issued as an ERC-20 token on the Ethereum blockchain, with support for additional blockchains expected later this year.

The market reactions over the past week are a reminder that stablecoins are far from homogenous and carry different reserve profiles with varying risk, not unlike banks in traditional finance. The crypto markets are still assessing the aftermath of the UST collapse but one immediate effect has been a drawdown in stablecoin liquidity within DeFi. The amount of USDC held in smart contracts on Ethereum has fallen by about $5B since its peak in March. Similarly, the supply of DAI (an over-collateralized, crypto-backed stablecoin) in smart contracts has also fallen about $2B. Most of this decline can be attributed to weakening demand for DAI on decentralized exchanges, cross-blockchain bridges, and lending protocols. Estimates of total value locked (TVL) have also come down, but these measures are often exaggerated due to rehypothecation of assets.

"The crypto ecosystem relies on stablecoins as a cheap and plentiful form of dollar liquidity. If all stablecoins were classed as securities, dollar liquidity for onshore crypto exchanges and platforms would dry up as stablecoin issuers either went offshore or out of business. It is very hard to see what would replace it, at least in the short term: U.S. dollars (and other fiat currencies) are not liquid on crypto exchanges, because to move them around requires banks, and non-USD stablecoins have gained little traction thus far. So trading crypto onshore would become much more expensive and considerably riskier. The dollar liquidity drought could also severely impact DeFi, because that relies on stablecoins (or derivatives of stablecoins) as collateral. So the SEC's action could bring down the onshore crypto ecosystem. "