Libra Promotion, Its Consequences, and the Regulatory Fallout

On February 14, 2025, President Javier Milei shared a social media post referencing Libra. Within minutes, the token’s market capitalization skyrocketed to $4.5 billion as investors rushed in, seemingly taking Milei’s post as an endorsement. However, shortly thereafter, Libra’s value collapsed, wiping out billions in investments and triggering accusations of a classic pump-and-dump scheme.

Milei denied any wrongdoing, claiming that his post was merely an expression of support for “free markets”, and not financial advice. However, the backlash was immediate. Argentina’s Anti-Corruption Office and a federal judge launched investigations into whether any fraudulent or manipulative practices were involved, while regulators scrutinized the token’s issuers and exchanges that had listed it. Almost a month into the investigation, no significant results have emerged — though it feels more like the rule than the exception, as nearly 10 years after the first ICOs, regulators and prosecutors around the cryptocurrency industry are still struggling to find a legal framework capable of deterring snippers and rug pullers to perform their legal wrongdoings.

This event adds yet another chapter to Argentina’s recent tumultuous history with crypto-related legal cases. But unlike past scandals such as Generación Zoe, another local crypto-related case structured as a clear Ponzi scheme promising impossibly high returns which fell under traditional fraud statutes and allowed for straightforward prosecution, Libra operated within decentralized finance (DeFi) infrastructure, making it a more complex case for the courts.

This is the ultimate paradox of how lackluster regulation is missing the opportunity to take advantage of DeFi blockchain activity tracking that enables immediate public scrutiny — embodying the principle of “don’t trust, verify” — allowing investigators, analysts, and the public to examine on-chain transactions in real time.

This transparency allows the formation of initial conclusions instantly, bypassing the need for years-long investigations often susceptible to political influence.

Argentina’s financial system has been a fertile ground for crypto adoption due to its history of inflation and capital controls. However, it remains largely unregulated. While the Ley de Financiamiento Productivo grants the Comisión Nacional de Valores (CNV) oversight over securities, it does not explicitly cover cryptocurrencies unless they are structured as investment contracts. Similarly, the Banco Central de la República Argentina (BCRA) has only issued non-binding warnings about the risks of digital assets. This regulatory vacuum has allowed crypto schemes to flourish and take the place of traditional ponzi schemes, leading to frequent investor losses and even slower legal enforcement.

The Libra case only underscores the broader debate on the legal frameworks for DeFi markets. While Argentina has laws regulating financial advice and market manipulation, they were crafted for traditional investment vehicles, not volatile digital assets, amplified by social media influence that leaves traditional finance mostly untouched. The question now is whether Milei’s involvement — intentional or not — could lead to future legal precedents defining how traditional prosecutorial tools can be merged with blockchain proof for swift and clear justice.

Libertarian Governments, Cryptocurrencies, and the Reality of Financial Deregulation

Milei’s presidency has been marked by a firm libertarian stance on economic policy, pushing for the removal of regulatory barriers and reducing state intervention in financial markets. His administration has consistently positioned cryptocurrencies as a means to achieve financial sovereignty, aligning with the broader libertarian vision of a decentralized monetary system beyond the reach of central banks. For months, his controversial comments about closing the Argentine Central Bank were widely discussed within crypto circles as a potential forefront for the industry — though, ultimately, more pragmatic voices prevailed once in office.

However, the Libra scandal exposes the contradiction between ideological aspirations and regulatory realities. In theory, a fully deregulated crypto market would allow for open financial experimentation without government oversight. In practice, without regulatory safeguards, fraudulent schemes thrive, investors face greater risks, and the lack of legal clarity hampers mainstream adoption, especially if the head of state and his inner circle is directly involved.

Even in jurisdictions with a strong libertarian ethos, some degree of oversight has proven necessary. Countries like El Salvador, which adopted Bitcoin as legal tender under a similarly anti-regulatory framework, have faced challenges in implementation, requiring government intervention to ensure exchange stability and consumer protection. In contrast, Argentina’s lack of clear crypto regulations means that when things go wrong, legal recourse is often slow, inconsistent, or honestly nonexistent.

The Libra case highlights a key paradox: while Milei’s administration promotes crypto as a pathway to economic freedom, its failure to establish a regulatory framework allows market abuses that undermine public trust in digital assets. The challenge moving forward is finding a balance — one that aligns with libertarian principles while recognizing the need for legal structures that protect investors and ensure market integrity.

As Argentina grapples with the fallout from Libra, the country’s approach to crypto regulation will be tested. Will it embrace a structured framework that mitigates risks without stifling innovation, or will it continue down a path of politically driven ideological deregulation, leaving the market to self-correct at the expense of individual investors? The answer will shape the future of digital finance in Argentina and beyond.

Santiago Marina is a corporate and Web3 lawyer with broad experience in digital asset regulation in latin America, venture capital structuring, and DAO governance. He advises tech-driven companies and investment firms on navigating complex legal landscapes, bridging traditional legal practice with decentralized innovation.

#Facts
On February 14, 2025, at 19:01, the President of the Argentine Republic, Javier Milei, posted a tweet on the social media platform X promoting the launch of the $LIBRA token. The tweet, pinned to his profile, described it as a private project aimed at funding small businesses and startups in Argentina. In his message, Milei included the smart contract address and a link to the project’s website:

“Argentina’s liberal economy is growing!!!

This private project is dedicated to promoting economic growth in Argentina by funding small businesses and startups.

The world wants to invest in Argentina.

vivalalibertadproject.com
Contract: Bo9jh3wsmcC2AjakLWzNmKJ3SgtZmXEcSaW7L2FavUsU

$LIBRA
VIVA LA LIBERTAD CARAJO…!!!”

The market reaction was immediate: within seconds, the token, which had been trading at USD 0.000001, surged dramatically. In just 40 minutes, its price peaked at USD 5.20, driven by the enthusiasm generated by the President’s post.

However, by 19:40, the project’s creators withdrew approximately USD 99 million from the liquidity pool on the Meteora platform, causing an abrupt price collapse. By 22:00, $LIBRA’s value had plummeted to USD 0.12, leaving most investors with near-total losses.

Two and a half hours after the crash, at 00:38 on February 15, President Milei deleted the post and stated that he had not been fully informed about the project’s details, leading him to remove his tweet.

This event had significant global repercussions, with estimates indicating that 86% of $LIBRA traders incurred losses totaling USD 251 million, most of whom were foreign investors.

One crucial aspect to highlight is the strong indications of premeditation behind this scheme. Up until Milei’s tweet, the token was available for purchase but had no set price. The first purchases occurred at 19:01:00, just 22 seconds before Milei’s post.

A total of 87 transactions from 74 different wallets acquired USD 13,500,000 worth of tokens before the broader public could react.

The media and some financial experts quickly identified the incident as a “Rug Pull” or “Pump and Dump” scheme, while others categorized $LIBRA as a meme coin, a classification that could allow those responsible to avoid securities regulations — provided it passes the Howey Test.

On February 27, 2025, the Division of Corporation Finance of the U.S. Securities and Exchange Commission (SEC) issued a Staff Statement on Meme Coins, concluding that meme coins meeting the described characteristics are not considered securities. However, they warned that fraudulent tokens could still be subject to enforcement actions by other regulatory bodies.

The SEC defined meme coins as follows:

“A ‘meme coin’ is a type of crypto asset inspired by internet memes, characters, current events, or trends for which the promoter seeks to attract an enthusiastic online community to purchase the meme coin and engage in its trading. Although individual meme coins may have unique features, meme coins typically share certain characteristics. Meme coins are usually purchased for entertainment, social interaction, and cultural purposes, and their value is driven primarily by market demand and speculation. In this regard, meme coins are akin to collectibles. Meme coins also typically have limited or no use or functionality. Given the speculative nature of meme coins, they tend to experience significant market price volatility and are often accompanied by statements regarding their risks and lack of utility, other than for entertainment or other non-functional purposes.”

# Backstage

A thorough analysis indicates that $LIBRA is not a cryptocurrency but rather a token created on the Solana blockchain, distinguishing it from a cryptocurrency in the strict sense of the term. To avoid confusion, the most appropriate term to encompass both would be crypto asset, or in a more simplified form, crypto. It is important to highlight that while all cryptocurrencies are tokens, not all tokens are cryptocurrencies.

In simple terms, the category of crypto assets includes cryptographic tokens with economic value, such as utility tokens, security tokens, asset tokens, and currency tokens. Within the latter category, we find cryptocurrencies, altcoins, stablecoins, shitcoins, and meme coins, among others. Despite these classifications, it is important to recognize that token taxonomy remains a dynamic field that has yet to find a universally accepted criterion in legal and financial doctrine.

Serious projects in the crypto sector are structured with a white paper, a roadmap, and tokenomics, serving as the foundational charter, vision, and economic model of the token. Any legitimate project should include these elements.

$LIBRA is a token built on the Solana blockchain, lacking tokenomics, a roadmap, or a white paper. It’s only notable reference is its website, which claims its mission is to stimulate the Argentine economy by financing small projects and local businesses, supporting entrepreneurs seeking to grow their ventures and contribute to the country’s development. This aligns with the President’s tweet, which suggested that the funds raised would be directed toward small projects and businesses. However, as analyzed throughout this article, $LIBRA lacks the structure and transparency that characterize solid projects within the crypto ecosystem.

$LIBRA was designed to operate within a sub-ecosystem of meme coins, using platforms such as Meteora and PumpFun.

The key to understanding its mechanics lies in the involvement of Hayden Mark Davis and his company, Kelsier Ventures, in partnership with Meteora. The project was developed on this platform, a decentralized exchange on the Solana blockchain launched in 2024, which specializes in facilitating the launch of meme coins while implementing mechanisms aimed at fostering sustainable growth and community ownership of these assets.

Meteora, previously known as Mercurial Finance until 2024, has been operational since 2021. Among its investors are Solana Foundation and Alliance DAO, the latter of which has also financed Pump.fun, another platform dedicated to meme coin creation.

In recent months, Meteora has facilitated the launch of several meme coins, including those associated with viral influencer Hailey Welch (HAWK), U.S. President Donald Trump (TRUMP), and First Lady Melania Trump (MELANIA). These projects have sparked controversy, with accusations of insider trading and unethical financial practices involving members of Meteora.

From the outset, there was a deliberate alignment with this platform, initially with the TRUMP token and later with $LIBRA. This raises the question of whether we are witnessing a mechanism for governments or entities close to political power to rapidly generate funds.

The connection between these tokens and public figures, as well as their creation through platforms like Meteora, could indicate a strategy to capitalize on the recognition and influence of Key Opinion Leaders (KOLs) while facilitating financial maneuvers that, in some cases, may bypass traditional regulations.

Some argue that the project attempted to create an illusion of legitimacy by committing 50% of the funds to a vesting mechanism, a practice in crypto that gradually releases tokens over a specified period.

This was established on Jupiter, a platform often mistaken for a DEX (Decentralized Exchange) but in reality, is an aggregator that finds the best pricing across multiple DEXs. However, despite this element, the reality is that $LIBRA was marketed as a meme coin and retains the defining characteristics of this category.

Certain large-scale projects, particularly those promoted by celebrities, have also incorporated vesting mechanisms to create a perception of legitimacy and long-term sustainability. Notable examples include Floki Inu and Kishu Inu, which implemented these features to prevent massive sell-offs and stabilize token prices. While vesting mechanisms can contribute to a project’s credibility, they do not necessarily change its classification as a meme coin.

The participation of a Key Opinion Leader (KOL) is essential in this strategy. By leveraging their fame and credibility, the KOL endorses the token, generating massive demand. In the case of $LIBRA, the price surged by 1,300% within hours, only to collapse moments later.

Consistent with the SEC’s definition, meme coins are highly speculative crypto assets inspired by memes, public figures, current events, or internet trends. Their promoters seek to attract an engaged online community to buy and trade the token.

This methodology was employed in the $LIBRA launch, where the primary KOL was Argentina’s President, Javier Milei, who promoted the token through his X (formerly Twitter) account. To ensure the success of such a scheme, it is critical for the KOL to post promotional content on their social media accounts in coordination with the token’s launch team.

Generally, it is necessary to hire a deployer and/or market maker. These deployment teams are experts in using the Meteora SDK (Software Development Kit) and have the skills to design and execute meme coin launches.

Lastly, the team behind Kelsier Ventures, led by Davis, consists of professionals with extensive experience in meme coin projects. They have previously worked on similar projects and have direct ties to the MELANIA token.

On-chain investigations have revealed that transaction patterns and wallet addresses associated with $LIBRA share direct links to MELANIA, strongly suggesting that both projects may have been orchestrated by the same team. This leads to an unavoidable question: If $LIBRA was truly intended as a fundraising initiative for investment projects in Argentina, why was it structured in a manner that closely resembled classic meme coin speculation and rug pull tactics?

# MemeCoins # RoadMap

The following diagram summarizes the path a token follows based on its level of market acceptance and the amount of capital it moves within the crypto market.

In the first circle, we observe the meme coin market, which also functions as a decentralized exchange where low-capitalization tokens (the total money invested in a token) are traded. Analogously, this sub-ecosystem could be compared to the dark web. The second circle represents pure DEXs (decentralized exchanges), which we might liken to the deep web. If tokens from the first circle surpass a certain boarding curve (a percentage of market approval), they may be listed in the second circle. The journey continues from DEXs to CEXs (centralized exchanges), akin to transitioning from the deep web to the traditional internet.

Typically, meme coin market capitalizations range between USD 3,000 and USD 70,000 within DEXs dedicated to this type of token. Over time, they migrate to more established and serious DEXs and CEXs, where projects have higher capitalizations and greater legitimacy.

In these meme-focused DEX sub-ecosystems, transactions occur within fractions of a second through bot-operated trading platforms such as Bull X, Axiom Pro, and GmGn, which are currently in vogue.

Additionally, these meme DEXs are integrated with Telegram, enabling users to trade directly from the platform using bots like NOVA Bot, further complemented by real-time tracking tools via Discord or X (formerly Twitter). These tools monitor global trends, each of which can quickly be transformed into potential meme tokens. While this might seem chaotic, this market operates precisely in this manner.

The use of bots is essential due to price slippage, which can reach up to 100%. This means that if an individual attempted to trade manually, they would lack the speed and efficiency needed to execute orders at the optimal price, as the extreme volatility dictates that the executed price will always be the best available at that moment. Comparatively, this form of trading is even faster than scalping, a strategy well-known in traditional markets where trades are executed within minutes. Traders operating in this environment specialize in high volatility and function in a jurisdictionally unregulated space.

Their profits stem from similar strategies, with many projects being ruthlessly manipulated by snipers — investors who use automated tools such as bots — and insiders — individuals with access to privileged or non-public information. It is estimated that 99.9% of tokens in these markets are scams.

To trade within the first two layers of this ecosystem, a user must create an account with a decentralized wallet such as Phantom Wallet and then connect to the corresponding DEXs, similar to logging into an online platform.

$LIBRA was designed to replicate the model of the Trump token ($TRUMP) but with a critical difference: the tokens were not locked, meaning that developers could sell them at any time. This feature, far from being a minor detail, served as an implicit warning about the lack of investor protections, allowing for unrestricted mass liquidation. More than 80% of the total token supply was concentrated in and linked to related wallet addresses. As a general investment guideline, no more than 30% of a token’s total supply should be concentrated within a few wallets.

The Staff Statement from the SEC emphasizes that while individual meme coins may have unique features, they typically share common characteristics. The statement clarifies that it does not extend to the offer and sale of meme coins that deviate from the characteristics described, nor does it apply to products labeled as “meme coins” that attempt to evade federal securities laws by disguising a financial product that would otherwise qualify as a security. The SEC’s Division of Corporation Finance assesses the economic realities of each transaction.

In the case of $LIBRA, there was no pre-existing community to support its launch; its website was developed just one day before its release. However, it could be argued that the project aimed to attract an online community by positioning the token as a libertarian movement symbol and launching it in honor of Javier Milei’s libertarian ideas. The website stated that it was designed to strengthen the Argentine economy from the ground up by supporting entrepreneurship and innovation.

Regardless of whether $LIBRA qualifies as a meme coin, this classification alone does not exempt it from SEC regulations if it does not align with the definitions set forth in the SEC Staff Statement. The Division of Corporation Finance evaluates the economic substance of each transaction, applying the Howey Test, which determines whether an investment is structured as an enterprise with a reasonable expectation of profit derived from the entrepreneurial or managerial efforts of others.

An initial analysis suggests that $LIBRA does not meet this standard, as its website describes the project’s objective as efficiently financing small businesses, startups, or educational initiatives in a decentralized manner. This implies that profits would not be dependent on the managerial efforts of a third party, as required by the Howey Test.

$LIBRA gained the backing of a major opinion leader — namely, the President’s tweet and subsequent social media discussions — which directly influenced its volatility, causing a sharp price spike followed by an equally rapid collapse. However, the promoters’ efforts were primarily limited to social media engagement and online forums, without any activity that could reasonably lead investors to expect profits based on their managerial work. There was no whitepaper, nor even a brief explanation on the website to indicate otherwise.

Although $LIBRA does not meet the criteria of an investment contract in the transactional sense, it was marketed as a serious project with supposed social utility. This characteristic distinguishes it from typical meme coins, which are primarily designed to capitalize on trends, internet memes, or public figures and often lack any real use or functionality, with clear disclaimers regarding their risks and speculative nature.

“With this token, we aim to channel funding efficiently and in a decentralized manner, allowing investors and citizens to take part in Argentina’s growth.”

The appearance of a socially beneficial project, combined with the mass withdrawal of liquidity that reduced the trading pool and harmed investors, as well as the use of an unaudited smart contract that allowed unrestricted liquidity modifications, could lead to the application of criminal fraud laws should the necessary elements of a criminal offense be met. However, this analysis falls outside the scope of this work.

# LegalPerspective

Crypto assets are not currently regulated in Argentina. There is no specific law enacted by the National Congress that addresses their issuance, offering, or operation. However, as Dr. Ismael Lofeudo explains, and as previously stated by Prof. Daniel Rybnik, virtual assets and transactions involving them are not explicitly prohibited by law and do not violate any constitutional mandate, as they do not constitute goods or activities expressly forbidden. This places them under the protection of the principle of reserve enshrined in Article 19 of the National Constitution, which ensures that anyone wishing to own or conduct transactions involving virtual assets may do so legally and lawfully.

At the beginning of 2024, in compliance with the Financial Action Task Force (FATF) requirements and following global trends, Law 27.739 was enacted as a reform to the “Anti-Money Laundering and Counter-Terrorism Financing Law” (Law 25.246). This introduced, for the first time in Argentine law, a legal definition of virtual assets and Virtual Asset Service Providers (VASPs). The law also mandated the creation of a VASPs Registry under the National Securities Commission (CNV) and classified them as obligated entities required to report to the Financial Intelligence Unit (UIF) in accordance with the regulations issued by that body.

A few days later, in compliance with this legal mandate, the CNV established the VASP Registry through General Resolution 994/2024 (a new resolution with stricter requirements for VASPs is currently under development). Additionally, the UIF issued Resolution 49/2024, setting forth the minimum compliance requirements for VASPs as obligated entities under Article 20, Section 13 of Law 25.246 and its amendments.

From a taxation perspective, the Income Tax Law incorporated crypto assets as taxable assets. Similarly, the Customs and Tax Collection Agency (ARCA) issued an opinion considering them a new category of financial assets subject to the Wealth Tax. Additionally, several Argentine provinces have amended their Tax Codes to classify crypto asset transactions as taxable events under the Gross Income Tax.

The Argentine Penal Code does not specifically criminalize “rug pulls”, but it does include general fraud and deception provisions, which could be applied to rug pull cases through general fraud laws. The same applies to Pump and Dump schemes, which are not explicitly penalized but could still be prosecuted under broader fraud statutes.

The regulations related to consumer protection, as applicable to this case, are found in the National Constitution (Article 42), Law 24.240, the Civil and Commercial Code (Article 1092 et seq.), Law 26.831 (Capital Markets Law), and Law 27.349 (Entrepreneurial Capital Support Law). However, none of these laws explicitly address investors operating on decentralized finance (DeFi) platforms.

Given the regulatory void concerning the issuance, offering, required disclosures, advertising, and consumer protection for crypto assets, the pre-existing legal framework must be used as a reference, despite having been developed for traditional markets and not specifically designed for digital asset transactions.

It is also essential to consider that these operations are transnational in nature, not only due to the residence, nationality, or domicile of investors, but also because some of the project’s creators are U.S. nationals. This further complicates the legal analysis, as laws from other jurisdictions may also apply.

According to The Buenos Aires Times, in addition to a criminal complaint filed with the U.S. Department of Justice and the FBI, legal action is now being prepared by a New York law firm. The firm Burwick Law, which specializes in legal protection for digital consumers, is reportedly preparing a class-action lawsuit involving more than 200 clients from different countries who suffered losses in last week’s controversial launch of the $LIBRA cryptocurrency.

In Spain, a criminal complaint was filed against one of the project’s creators and their family, arguing that since they reside in Spain, they should be investigated under Spanish jurisdiction for alleged financial crimes linked to $LIBRA. The accusations include serious offenses such as market manipulation, aggravated fraud, and insider trading.

# Consumers or #VolatilityTraders?

The facts indicate that those who invested in $LIBRA did so within a very short window of time from its launch — some even seconds before — many using bots and through decentralized exchanges (DEXs) such as Raydium, Orca, and Meteora.

It is evident that these investors possessed a solid understanding of decentralized finance (DeFi), an environment where autonomy and self-responsibility in transaction analysis are fundamental.

This leads us to the well-known crypto principle: “Do Your Own Research” (DYOR). It seems that many investors failed to apply this principle; otherwise, the clear lack of project information (no whitepaper outlining the token’s utility, governance, or economic model), the concentration of token distribution, and the smart contract’s unrestricted liquidity modification structure should have raised red flags.

The speed at which these transactions occurred suggests that investors prioritized short-term gains over a serious analysis of the project. Those who participated likely did so with a purely speculative motive rather than conducting thorough due diligence — otherwise, they would have identified the risks involved.

This raises an essential question: Should investors who jumped on the hype wave at the last stage be considered consumers? Are crypto traders with advanced knowledge and strategy still considered consumers? Is a trader who invested USD 1,000 the same as one who invested USD 1,000,000?

Common sense suggests that consumer protection laws may be inadequate for situations like the one analyzed in this article, as they reveal a mismatch between traditional consumer rights and the specificities of the crypto ecosystem, which the legislature has never fully addressed.

A comparative legal analysis of Argentine and European Union consumer and advertising regulations follows.

In Argentina, the current consumer protection framework is based on constitutional and legal guarantees (Article 42 of the National Constitution and Article 3 of Law 24.240), as well as the Civil and Commercial Code (Book Three, Title III). Additional legislative vectors related to investor protection can be found in the Capital Markets Law and the Entrepreneurial Capital Support Law.

Under this legal system, a consumer is defined as a natural or legal person who acquires or uses goods or services for personal or social consumption, without the intent to integrate them into a productive or commercial process.

Although the current legal framework does not explicitly regulate crypto assets, as it predates their rise, it still applies to crypto transactions under general consumer protection principles and contractual good faith obligations.

The Consumer Protection Code Bill, currently under parliamentary discussion, aims to modernize and strengthen consumer rights in Argentina by aligning them with international standards. While it does not specifically regulate crypto assets, it proposes advertising regulations for online platforms, requiring a minimum level of transparency to help consumers and users distinguish between content and advertising.

Current regulations prohibit misleading advertising that contains false claims or could mislead consumers.

By contrast, the European Union’s Directive 2011/83/EU provides a more restrictive definition of consumers, defining them as any natural person acting for purposes unrelated to their trade, business, craft, or profession. This definition excludes legal entities even when they operate outside their commercial scope and does not extend consumer protection to transactions made within professional settings.

In the specific case of crypto assets, the EU enacted the MiCA Regulation, which establishes advertising rules for the public offering or admission to trading of crypto assets (excluding reference asset tokens and e-money tokens). These advertisements must:

• Be clearly identifiable as promotional material.
• Present impartial, clear, and non-misleading information.
• Be consistent with the whitepaper (if required).
• Indicate the existence of a whitepaper, the website of the issuer or trading platform, and contact details.
• Include a clear disclaimer stating that the ad has not been reviewed or approved by any EU regulatory authority.

Both legal frameworks aim to ensure that consumers have access to justice and effective remedies, but transnational transactions complicate enforcement, as multiple countries’ laws may apply.

The $LIBRA case presents a fragmented regulatory landscape, where one jurisdiction might classify an individual as a consumer while another considers them a sophisticated investor subject to standard contractual rules.

Beyond Argentina’s broad definition of a consumer, it is crucial to recognize that some investors’ sophistication and market knowledge should prompt a reconsideration of their classification as “consumers deserving special protection.”

The absence of a whitepaper, lack of clear data, and even the involvement of a high-profile public figure could be interpreted as deceptive advertising, warranting protection for those misled by defective information. However, the fast-paced and massive nature of these purchases suggests that many investors disregarded basic due diligence and ignored the DYOR principle.

This lack of caution challenges the very spirit of consumer protection laws, as these investors were not uninformed or vulnerable consumers, but rather active DeFi participants accustomed to assessing volatility risks and rug pulls.

Applying consumer protection laws analogically to such cases could lead to distortions and forced interpretations, as the typical DeFi investor does not fit the traditional concept of a vulnerable consumer (who relies on these laws for essential goods, utilities, etc.).

Analyzing a similar case involving preference share acquisitions and swaps in traditional Spanish financial markets, legal scholar Alicia Agüero Ortiz noted:

“… Not everything is permissible, and the consumer cannot hide behind their retail investor status to evade the risks inherent in their business decisions. Particularly when, during prosperous times, they reaped significant returns from risky transactions without complaints — often even with a sense of superiority over more conservative investors.”

“…Nor can we tolerate the rampant misinformation and deception that has dominated, and continues to dominate, financial institutions’ dealings with clients.”

It is possible that some investors (those with limited knowledge, drawn in by the President’s endorsement) may claim deceptive advertising. This raises the need for investor segmentation, recognizing that not all investors share the same level of sophistication or transaction volume.

A trader investing USD 1,000 is not equivalent to one investing USD 1,000,000 — the scale of exposure and assumed risk differs significantly.

$LIBRA provides a critical lesson: the necessity of a clear regulatory framework for crypto asset advertising and minimum issuance and offering standards, including mandatory whitepapers.

Equally important is the financial education of both citizens and policymakers.

The magnitude of the market impact caused by the President’s tweet underscores a regulatory gap.

Law 24.240 and its complementary regulations do not explicitly mandate risk disclosures when promoting crypto assets. If such a warning had been required, or if advertising content had been subject to verification, it is highly likely that the President would not have published the tweet.

Without the tweet, the $LIBRA case would not exist.

While the President’s lack of knowledge and inadequate advisory support are questionable, the responsibility or negligence of the country’s highest authority is beyond the scope of this analysis.

# Conclusion

The $LIBRA case has exposed the consequences of the absence of a specific regulatory framework for crypto asset advertising, issuance, taxonomy, and the classification of market participants. The lack of clear regulation creates uncertainty, exposing investors to unnecessary risks and hindering the effective protection of the market.

Crypto asset transactions are inherently transnational, adding legal complexity. A large number of foreign investors acquired $LIBRA, raising uncertainty over the applicable jurisdiction for legal disputes. The decentralized nature of these assets, combined with user pseudonymity, the uncertain geographic location of network nodes, and the involvement of multiple intermediaries, presents new legal challenges that demand in-depth analysis and innovative regulatory approaches.

In this context, the harmonization of Private International Law (PIL) rules is imperative to ensure legal certainty for both crypto asset projects and related transactions, reducing uncertainty and mitigating associated risks. Supranational organizations such as the Hague Conference on Private International Law (HCCH), UNCITRAL, UNIDROIT, and IOSCO have intensified efforts to develop clearer and more uniform regulatory frameworks, aiming to offer solutions tailored to the digital economy.

Argentina urgently needs a comprehensive law regulating crypto assets, addressing issues such as advertising standards, mandatory whitepapers, and risk disclosures to strengthen legal certainty. However, the solution is not to simply extend consumer protection laws to all crypto investors. Instead, the regulatory framework must be adapted to the nuances and specificities of this evolving market, distinguishing between different participants in the ecosystem.

Regulation for the sake of regulation is not the answer. As Mark Branson, CEO of BaFin, has emphasized, it is essential to implement well-balanced and flexible regulatory approaches that allow legitimate projects to thrive without stifling innovation. The key is not in overburdening the industry with excessive regulation, but in designing a regulatory framework that fosters transparency and trust without hampering the sector’s dynamism.

This transformation can only be achieved through the education of legislators and collaboration with industry experts. The development of an effective regulatory framework requires input from specialists who understand the technical, economic, and legal challenges of crypto assets, ensuring the creation of a safer and more sustainable ecosystem for all market participants.

Ana Elisa de Iparraguirre

Lawyer (UNR), Tokenization Consultant. Holds a Diploma in Advanced Specialization in Blockchain from the Complutense University of Madrid. Faculty member in the Specialization in Real Estate, Urban Planning, and Construction Law, as well as a guest lecturer in the Specialization in Inheritance Law and the Specialization in Sports Law, all at the Faculty of Law of UNR. Lecturer in the Diploma in Blockchain, Cryptocurrencies, and Web3 at UCES. Speaker and author of academic articles.

Rosendo Martín Garavanago

Lawyer and Notary Public (UNLP), Technology Consultant. Holds a Diploma in Cryptoeconomics (UnCuyo) and has training as a Compliance Officer (IAE). Currently serves as a legal professional in the Inspections and Investigations Division of the National Securities Commission (CNV), where he also collaborates with the Board of Directors on cryptoasset-related matters. He is the Academic Co-Director of the Diploma in Blockchain and Web Industry (UDE) and co-founder of the consulting firm Legalits. Additionally, he is a speaker and co-author of the book The Blockchain: An Off-States Jurisdiction.

Lawyer and Notary Public (UNLP), Technology Consultant. Holds a Diploma in Cryptoeconomics (UnCuyo) and has training as a Compliance Officer (IAE). Currently serves as a legal professional in the Inspections and Investigations Division of the National Securities Commission (CNV), where he also collaborates with the Board of Directors on cryptoasset-related matters. He is the Academic Co-Director of the Diploma in Blockchain and Web Industry (UDE) and co-founder of the consulting firm Legalits. Additionally, he is a speaker and co-author of the book The Blockchain: An Off-States Jurisdiction.

By Andrea DiSandro

Today, as Donald Trump is welcomed back into the White House, the United States is on the verge of a new era for decentralized finance (DeFi) and digital assets. At DELV, we’re ready to do our part in helping this administration advance a new pro-crypto agenda that will accelerate economic growth and provide everyone with opportunities to pursue their financial goals.

We’re ready to serve the American people. We’re ready to empower users in the DeFi space with solutions that are both robust and responsible. We’re ready to drive innovation domestically.

In other words, we’re ready to level up crypto and DeFi in the USA.

Every new president enters office amid a buzz of speculation about the first steps their administration will take and the agenda that will be set. But one thing President Trump has been crystal clear about is his intent on elevating crypto as a policy priority. He has signaled that he will issue a wide range of Executive Orders, including many that will affect the DeFi industry, while also establishing comprehensive guidelines for digital assets.

Let’s take a closer look at what we can anticipate from Trump’s second term — and what we’re doing here at DELV to push DeFi forward.

What the Industry Expects from Trump’s Pro-Crypto Administration

We predict that the Trump Administration will prioritize crypto legislation, such as Fit21 and guidelines in support of stablecoins, signalling a shift toward embracing digital assets and innovation.

Trump will quickly issue Executive Orders supportive of the crypto industry, which may:

• Address debanking; and
• Repeal SEC guidance SAB 121 that requires financial institutions holding crypto for clients to list them as liabilities.

The Presidential Council of Advisers for Digital Assets, under David Sacks (as Chair and first-ever AI and Crypto Czar) and Bo Hines (as Executive Director) is made up of CEOs and founders in the crypto space, and will help reshape U.S. policy on digital assets. It will also explore the safe adoption of blockchain technologies based on a deeper understanding of the underlying mechanics.

We’ll see traction on Bitcoin reserve legislation, which could stabilize the U.S. economy, hedge against inflation, bolster the U.S. dollar, and reassert the U.S. as a global leader in the digital economy. (We’re already seeing movement in this direction among states like Texas and Oklahoma.)

America will have a chance to refocus on its values of freedom, independence, privacy, and autonomy through thoughtful and intentional “deregulation through regulation.” This shift will provide clarity on which agencies regulate which aspects of the industry, while still accounting for the values (and inherent limitations) of DeFi and creating necessary frameworks to foster innovation.

Incoming Chairs like Paul Atkins (SEC) and leaders like Cynthia Lummis, French Hill, Ted Cruz, and others will help walk back overly aggressive regulatory stances taken over the last four years.

We also expect that U.S. governmental agencies like the SEC, CFTC, FinCEN, CFPB, and IRS will be more collaborative with the DeFi industry, realign their focus to protect what really matters, and otherwise foster an environment that clears the way for innovation and entrepreneurship.

Enforcement will (and should) target fraud and malicious actors, improving consumer protection and industry integrity, while allowing the real players in the space to work with regulators on positive change that will provide what both the industry and regulators want: clear rules with a rubric to operate in the country that allows industries to innovate, safely, fairly, and competitively.

What DELV Will Be Doing
We’re ready to unleash the power of American innovation with access to cutting-edge DeFi products for U.S. users.

With the Hyperdrive Protocol, a novel automated market maker (AMM), users can access fixed rates, access multiplied exposure to variable rates, and LP in markets built on top of popular yield sources like stETH, LRTs, sUSDE, sUSDS, Morpho markets, and many more.

More specifically, over the past three months many new yield sources have been onboarded to the protocol, offering users more opportunities to trade, earn, and pursue their financial goals. Hyperdrive also deployed across major EVM chains — Ethereum, Gnosis Chain, Linea, and Base -bringing its unique pricing mechanism and innovative yield opportunities to a wider audience.

The Hyperdrive ecosystem expanded at a rapid pace through the end of 2024, marking many important milestones for the growth and scalability of the platform.

Points programs have also been integrated from some top yield sources and chains, letting users boost their exposure to rewards through Hyperdrive. Learn about them here.

Additionally, the HyperVue Foundation recently created a native rewards program for the Hyperdrive Protocol — Miles. With Miles, LPs can earn additional rewards on top of their regular APY. Miles are distributed weekly based on liquidity provision to certain pools. And at DELV, we’ve added new UI features to make it simple, easy, and quick for users to track their potential rewards. Learn more about them here.

We’re excited offer access to fixed rates, LP opportunities, and (where applicable) rewards to U.S. users through the following products:

• For fixed rates and LP’ing, users can access our DELV Hyperdrive One app, where traders have access to principal-protected fixed-rate returns with terms on demand and supply liquidity to earn variable interest rates on idle capital, trading fees, and PnL from balancing market activities.
• For a transparent, reliable, and predictable way to offset their risk against variable-rate volatility, DeFi borrowers can open a position on our DELV Fixed Borrow app to get fixed rate coverage on top of their Morpho loans.

Conclusion
This change in leadership offers opportunities to explore a new era of DeFi and digital assets. As we’ve seen, it is a complex environment with many unknowns.

Fortunately, we at DELV provide solutions that can tackle your biggest crypto challenges, and give you options to pursue your financial strategies.

We’re thrilled for this new era of crypto and DeFi and we’re ready to play our part to bring great DeFi products back to the USA. We’re Locked In. Are You?

Disclaimer

This blog post is general in nature and for informational purposes only. It is not legal, tax, investment, financial or other advice, nor is it a comprehensive or complete statement of the matters discussed. It is not a recommendation of an investment strategy and should not be used as the basis of any investment decision.

All transactions and investments involve risk, and past performance does not guarantee future results. Certain complex strategies carry additional risk and are not appropriate for all users. As with any DeFi or crypto position, you may incur losses. You alone are responsible for evaluating the benefits and risks associated with any decision to use DELV products — such as DELV Hyperdrive One or DELV Fixed Borrow — and the risks or concerns with any underlying yield source.

Certain (or all) features of DELV products are not currently available in particular jurisdictions, such as the USA and/or the UK (as applicable to the relevant jurisdiction, the “ US/UK Geoblocked Features”). If you are a US or UK citizen/LPR or currently located there, you may access a read-only version (if available) of the US/UK Geoblocked Features solely to see examples of frontend features built on top of the Hyperdrive protocol. DELV does not promote or advertise use of US/UK Geoblocked Features in the USA or the UK.

In January 2025, $TRUMP — a Solana-based memecoin tied to the then president-elect Donald Trump — launched via his Truth Social and X accounts, igniting a market frenzy. Branded as the “only Official Trump Meme” token, its value spiked to an eye-watering $75 billion before crashing over 80%, a rollercoaster fueled by hype, insider control, and regulatory uncertainty. This isn’t just a quirky crypto tale; it’s a stress test for blockchain oversight and political accountability. This article unpacks $TRUMP’s structure, Trump’s crypto shift, and the broader stakes, arguing for the need for a first principles approach to regulatory clarity.

Token Structure: Bundled Supply, Insider Edge

$TRUMP’s tokenomics tilt heavily toward insiders. Of its 1 billion-token supply, only 20% hit the market at launch, with 80% bundled in the hands of Trump-affiliated entities under a vesting schedule unlocking over three years. The extreme concentration enabled price manipulation. Side wallets — some funded just before launch — sniped early trades, cashing out millions as retail buyers piled in at peak prices. Blockchain data shows a stark split: a few early buyers scored big, while roughly 200,000 smaller traders took losses post-crash. The setup, paired with transaction fees funneled to creators via Solana exchanges, underscores a design favoring insiders over the crowd.

Trump’s Crypto Turn: Opportunism in Play

Trump’s $TRUMP tie-in marks a sharp pivot from his past. Once a crypto skeptic — calling Bitcoin “thin air” in his 2017–2021 term — he recast himself post-2024 election as the “crypto president,” vowing to lead the U.S. into a digital asset future. $TRUMP’s launch, driven by his personal brand, turns that promise into a financial stake. Narrative control stays centralized — holders get no rights or promises, just a token riding Trump’s name. The shift wreaks of opportunism more than conviction, likely steered by advisors and profit seeking rather than a blockchain epiphany. A president wielding policy clout over an industry he’s now invested in raises obvious questions about where public duty ends and private gain begins.

SEC’s Sidestep: No Rules, No Relief

The SEC’s early 2025 guidance — not a formal ruling, per agency statements, but a staff clarification — deemed most memecoins, including $TRUMP, outside securities law under the Howey Test. Lacking a “common enterprise” or profits tied to centralized efforts, $TRUMP dodges registration requirements. Its website echoes this, denying investment intent. But this move frustrates two fronts. Retail investors, lured by Trump’s reputation, face unchecked manipulation — insider sniping and fee-skimming flourish without protections. Meanwhile, crypto’s earnest builders get no clarity. After years of policy via stochastic (random, case-by-case) enforcement, the SEC finally weighs in under a “crypto-friendly” administration — and provides nothing in the way of clear legislation or relevant safe harbors. Legit projects craving bright-line standards to innovate responsibly are left twisting, while speculative tokens like $TRUMP blast investors.

Legal and Ethical Tangle

$TRUMP’s legal ripples are messy. A president shaping crypto policy — via January 2025 orders for a digital assets framework, and more recently the announcement of a Strategic Bitcoin Reserve — while tied to a token he promotes flirts with conflict-of-interest lines. His assets in a family trust don’t fully dodge the issue; policy wins for crypto could still boost his bottom line. Bribery risks loom too: a tradable asset linked to a leader could let big players juice its value to curry favor. Insider trading suspicions — wallets cashing out millions at launch — add fuel, though hard proof stays elusive. Legislative pushback, like Rep. Sam Liccardo’s “MEME Act” to bar officials from such ventures, signals unease, but it faces an uphill battle against a Trump-aligned Congress.

Policy Echoes: Bitcoin Reserve and $TRUMP’s Shadow

Trump’s crypto footprint extends to his Strategic Bitcoin Reserve pitch, amplifying his stake in the game. Supporters see it as bold; skeptics tie it to his $TRUMP play. Global flops like MiamiCoin (down 95%) and Venezuela’s Petro (a sanctions dodge gone bust) offer cautionary parallels, but $TRUMP’s political heft stands apart. Its hype also paved the way for $LIBRA, a brief but sizable boom and bust that rode $TRUMP’s coattails, duping investors with promises from Argentine president Javier Milei before collapsing in scandal. These cases highlight crypto’s allure — and peril — for public figures.

Conclusion

$TRUMP isn’t a sideshow; it’s a wake-up call for crypto’s regulatory haze. Its insider-skewed structure, Trump’s opportunistic flip, and the SEC’s limp response reveal a system unready for politically charged tokens. Investors took hits, crypto’s reputation lost significant ground, and ethical boundaries blurred. Clear frameworks rooted in core legal principles — as opposed to ad hoc enforcement — aren’t optional; they’re overdue. Without them, $TRUMP’s fallout risks becoming a template for future exploits, testing trust in both crypto and governance.

Daniel is a lawyer specializing in crypto, decentralized organization, and innovative finance. As General Counsel for Fabrica, he brings real estate ownership onchain. Daniel also explores how AI can amplify legal expertise, aiming to become a 100x lawyer. His current focus is on the disruptive opportunity and regulatory challenges emerging from new technologies.

Once, long ago, cryptocurrency companies operated comfortably in the United States. In that quaint, bygone era they would often conduct funding events called “Initial Coin Offerings” to raise funds, and then use those funds to try to do things in the real and blockchain world. Now, they largely do this “offshore” through foreign entities while geofencing the United States.

The simple story about this is that the SEC in 2017 released a document called “The DAO Report” that said these coins were actually regulated instruments called securities, sued Ripple for selling some of them, and then jealously guarded the US from future launches for the ensuing years.

The truth is more complex. Americans are rich and so broadly everyone wants to access the US market — if in 2017 the SEC told the world that that goal was impossible, then crypto development might have slowed and died. But the SEC didn’t say that.

Around the same time as The DAO Report came out, SEC Director of Corporate Finance William Hinman publicly expressed his views that Bitcoin and ETH were not securities. In 2019, the Commission released a “Framework for “Investment Contract” Analysis of Digital Assets” that purported to list “factors” that might be relevant to determine whether a token was a security or not. Some of these factors included the development of the token network and its consumptive use.

All the while, tax implications were crystalizing. From the very beginning, tax advisers reached a consensus that, unlike traditional financing instruments like SAFEs or preferred equity, token sales were fully taxable events in the U.S. And SAFTs (contracts to issue future tokens) faced little better tax treatment, with the taxable event merely deferred until the tokens were released. This meant that a token sale by a U.S. company would generate a massive tax liability.

For a little while, projects tried in good faith to adhere to these guidelines. Lawyers extracted principles and advised clients to follow them. Some bit the bullet and paid the tax rather than contriving to create a foreign presence for a U.S. project. And all this chugged along for a few years until events conspired to knock this uneasy equilibrium out of balance. Gary Gensler entered the scene in 2021, Sam Bankman Fried did some fraud and blew up FTX in 2022, and an unheralded opinion came out of the sleepy United States District Court for the District of New Hampshire called SEC v. LBRY.

What LBRY said, more or less, was that, no, it doesn’t actually matter if you hand wave at the SEC Framework. It doesn’t matter if you actually have real consumptive uses! If, in fact, there is evidence that you have marketed your token as offering potential profit, or even if it just seems likely that people bought it to profit, then it is a security, friend, and you can enjoy a big fine and dead project.

This case law dramatically destabilized the landscape of cryptocurrency projects. Instead of a potential framework to work within, there remained just a single vestige of hope — decentralization. Even the SEC admitted that Bitcoin and ETH were not securities because they were decentralized. Rather than having any promoter who could be responsible for their sale, they were the products of diffuse networks, attributable to no one. So projects in ’22 and ’23, out of arguments, were left with little option but to chase this down.

The move went something like this. The only way to legally operate a blockchain protocol is for it to be “decentralized”, but it is impossible for a startup to be decentralized at inception. Founders couldn’t suddenly be thousands of people, so instead, they participated en masse in foundation kabuki.

Inevitably, the operations would begin in the United States. A few devs in a bad apartment in Bushwick forking some code and making something great. As they found success they would want to fundraise, and in crypto, when you fundraise, investors demand tokens. But they were in Bushwick! It’s illegal to sell tokens there.

So instead, their VC or their lawyer would tell them that there was another way. They could set up a foundation in a more favorable jurisdiction, maybe the Cayman Islands, Zug, Switzerland or Panama. That foundation could be set up to “wrap” a Decentralized Autonomous Organization (DAO), which would have governance mechanisms tied to tokens. Through that entity or another offshore entity they would either sell tokens under a dubious Reg S exemption, or simply give tokens away in an airdrop. In this way, projects hoped, they could (I) develop liquid markets and a sizeable market cap and (II) eventually achieve the hallowed “decentralization” that might allow them to operate legally as an entity in the United States again.

These offshore structures didn’t just provide a compliance function–they also offered massive tax advantages. Because foundations have no owners, they aren’t subject to the “controlled foreign corporation” rules, under which foreign corporations get indirectly taxed in the U.S. through their U.S. shareholders. Well-advised foundations also made sure they engaged in no U.S. business activities, preserving their “offshore” status. Presto: they became amazing tax vehicles, unburdened by direct U.S. taxation because they operate exclusively offshore and shielded from indirect U.S. taxation because they are ownerless. Even better, this arrangement often gave them a veneer of legitimacy, making it difficult for regulators to pin down a single controlling party.

After the formation, the U.S. enterprise would become a rump “labs” or “development” company that earned income through licensing software and IP to these new offshore entities. Waiting for the day when everything would be different, checking the mail for Wells notices, and feeling a bit jumpy.

So it wasn’t just regulation that drove crypto offshore. It was hope. A thousand projects wanted to find a way to operate legally in the United States, and offshore decentralization was the only path.

But now, that may change.

With Trump in office, the hallways of 100 F Street in Washington, D.C. may just be thawing again. Commissioner Hester Peirce has taken the mantle and is leading the SEC Crypto Task Force. In recent weeks, Commissioner Peirce has expressed interest in offering prospective and retroactive relief for token issuers, and creating a regulatory third way where token launches are treated as “non-securities” through the SEC’s Section 28 exemptive authority.

At the same time, evolutions in law are beginning to open the door for onshore operations. David Kerr of Cowrie LLP and Miles Jennings of a16z have pioneered a new corporate form, the DUNA, that may allow autonomous organizations to function as legal entities in U.S. states like Wyoming. Eric Trump has proposed favorable tax treatments for cryptocurrency tokens which, though it might be a stretch, could offer a massive draw to bring assets back onshore. And without waiting on any official shifts in regulation, tax attorneys have come up with more efficient fundraising approaches, such as token warrants, to help projects navigate the existing system.

As much as founders love to talk about decentralization, few genuinely want to run their organizations that way. No one picked convoluted cross border forms and sky-high legal bills because it was fun–they did so because it was the only option. While these structures come with tax advantages, they also come with hefty tax risk and cumbersome operational requirements: US teams have to tread carefully when accessing foundation funds and must avoid exercising any real control or agency over these entities. Figuring out how to reverse those incentives–and persuade projects to move back onshore–will be one of Washington’s biggest crypto questions for the next four years.

Jonathan Van Loo is a founding partner of Belcher, Smolen & Van Loo LLP where he advised cryptocurrency, SaaS and other clients on a variety of tax issues. He has particular expertise in the tax aspects of ICOs, cryptocurrency compensation, cross-border structures for crypto companies, and the loss of crypto assets. He also regularly advises SaaS, crypto and other technology companies on the tax aspects of M&A transactions.

Aaron Brogan is the founder and managing attorney of Brogan Law, an elite boutique law firm that focuses on cryptocurrency and novel financial products. Brogan Law advises clients on regulatory strategy, serving as a key partner to early-stage start-ups operating in the United States. Before founding Brogan Law, Aaron was an attorney with the same focus at several major international law firms. Aaron is a graduate of Harvard Law School and the University of Chicago.

As far as regulatory aggressiveness goes, the first thirty days of the second Trump Administration were a break-neck U-turn in supervisors’ four-year chase of crypto developers. The White House appointed a Crypto Czar, called for the formation of crypto-asset stockpiles, and tapped crypto-friendly heads for Treasury Department, the Commerce Department, the SEC, the CFTC, the FDIC, and the OCC. The SEC dropped virtually every major crypto-related enforcement action and announced the formation of a Crypto Task Force, headed by none other than “Crypto Mommy” Hester Peirce. And, just as importantly, lawmakers began to introduce legislation to address the mammoth regulatory gap in U.S. crypto policy.

Stablecoins were the first subjects of significant policy consideration. Within days of each other, draft bills hit the Senate and House. Both bills — respectively dubbed the GENIUS and STABLE Acts — look to regulate issuance and maintenance of fiat-backed coins. Then, the next week, House Financial Services Committee Ranking Member Maxine Waters released her own discussion draft of stablecoin legislation, based on prior draft legislation on which the STABLE Act is based.

Unlike in the previous Congressional sessions, where stablecoin bills failed to get off the ground, Republican majorities in both chambers of Congress and the Administration’s strong embrace of the crypto sector make it close to certain that we will see stablecoin legislation enacted this year. And as I note below, the draft bills are similar in key respects. So the question with stablecoins in the U.S. is no longer when we will see legislation, or even, in large part, what it will look like, but what effect it may have on the world financial system. When you consider that stablecoins eclipsed more than $200 billion in market cap by the end of last year and are perhaps the single most disruptive use case for crypto, I would argue they have the potential to make the most significant, long-term global market impact over any other crypto-related legislation on the horizon. I take a closer look below.

The Bills

Each draft bill sets similar key standards. They would:

• Require issuers to hold 1:1 reserves of issued stablecoins to assets backing the coins.
• Ban re-hypothecation of assets.
• Require issuers to undergo and publicize monthly reserve audits.
• Limit issuers to certain core activities, such as issuing, redeeming, and providing custody of stablecoins.
• Mandate that reserves be composed of only highly-liquid, stable assets, such as cash equivalents, Treasury bills, and repurchase agreements.
• Direct regulators to establish reserve, liquidity, and risk-management standards.
• Subject issues to anti-money-laundering and sanctions-compliance standards.

There are some notable differences. Most significantly, Rep. Waters’ bill would subject all issuers to Federal Reserve oversight, whereas the GENIUS and STABLE bills give issuers the option of choosing state or federal oversight (except, under the GENIUS Act, if the issuer has a market cap higher than $10 billion). The GENIUS Act also requires state regulators to certify, each year, that their regulatory regime is substantially similar to federal rules — a standard the STABLE Act does not set and that would be superfluous in Rep. Waters’ bill given that state-level oversight is not an option.

Despite any differences, all of the bills before Congress have the clear goal of strengthening the dollar by pushing capital to dollar-equivalents. (Indeed, in its executive order announcing the formation of the Digital Assets Working Group, the Administration noted that one of its policy goals is to use stablecoins “promote and protect the sovereignty of the United States dollar.”) Given the state of the global stablecoin market, if we see final stablecoin legislation similar to the drafts now pending in Congress, I think the bill outstrips all other crypto-related — and, perhaps, non-crypto-related, since Dodd-Frank — pieces of financial regulation in terms of overall market effect.

The Potential Effects of U.S. Stablecoin Policy on Global Markets

It comes down to two main reasons: the nature of the blockchain itself, and the dollar.

In my mind, the most disruptive characteristic of the blockchain is its ability to allow users to move and access capital easily and efficiently. An open, decentralized, and de-fragmented financial system means equity in access to financial markets and asset transmission. Easier, less expensive flow of capital — a core benefit of stablecoins — can create a positive feedback loop as more and more participants enter the markets.

Take that and consider that the dollar, despite the efforts of some countries, remains the world’s leading reserve currency. In Latin America, Africa, and other regions where local currencies can devalue quickly, the dollar’s relative safety and locals’ access to the blockchain — and, thus, stablecoins — has driven up the total market cap for all stablecoins by more than 40 times during the last five years. The two largest stablecoins by market cap — USDT and USDC — are both dollar-backed and account for the vast majority of the total value of stablecoin issuances. The dollar already has a massive head start in the stablecoin market. Its demand, and stablecoins’ ability to move capital quickly, will just add to the feedback loop I mentioned above.

And when U.S. legislation gives stablecoin issuers the official green-light to operate and issue coins in the U.S. — in other words, the world’s financial hub — that effect will likely magnify given that all coins must be backed by Treasuries or other liquid assets. That means more capital flowing to dollar-denominated assets and U.S. firms. It also means more efficient flow capital generally, giving market participants — including projects, investors, and others — access to value-stable and redeemable assets.

In sum, the blockchain’s efficiencies will encourage additional stablecoin usage, on-chain investment, and innovation. Firms will be able to meet the pent-up demand for dollar-backed stablecoins, driving millions — or, perhaps, billions — of new users to on-chain capital markets and global economies. You can’t add that many market participants without creating a seismic change in the global financial system.

Steve Aquino is the Head of Legal at Mesh, the first global crypto payments network, where he leads the company’s global policy, regulatory, and compliance strategies. Steve has counseled tech and Web3 startups, financial institutions of all sizes, small-cap securities issuers, and investment banks. Before starting his career as a lawyer, Steve was a reporter, covering national politics, social justice issues, civil rights, and internet privacy in the Web2 era.

By Christopher Martin

The crypto-industry has been at the forefront of innovation in both retail and business services; seeking to provide alternative solutions to existing traditional financial services. Whilst this has successfully generated significant new opportunities, products and wealth, issues in terms of consumer protection, security, financial stability, and governance have emerged in what is generally an unregulated space.

The Markets in Crypto-Assets Regulation (MiCAR) represents a sea-change in the regulation of crypto-asset service providers (CASPs) in the EU, bringing with it many challenges for existing operators who have to date avoided the full scope of financial regulation.

The downfall of operators such as OFX demonstrate the gulf between the approach of crypto-firms and the needs and expectations of regulated financial service providers in other markets. Existing operators will therefore need to get to grips with a significant shift in how they operate and do business, both from an organisational and compliance perspective. The move from the unregulated to the regulated space will therefore require significant uplift for existing operations; importing many aspects of financial regulation supervision, oversight and management, including rules on: corporate governance; capital requirements; conduct of business; financial crime; and outsourcing and operational resilience.

These new requirements will ultimately bring CASPs fully within the regulatory perimeter; with all of the associated oversight and challenges.

With the imminent implementation of MiCAR and the need for CASPs to submit authorisation applications, how can new and existing firms best prepare?

Lessons can be learnt from the evolution of financial regulation and supervision in other sectors, as well as the ever-evolving approach of regulators both in Ireland and across the EU. Whilst there has been much discussion of the precise rules under MiCAR, what will regulation mean in practice for firms, and where do they need to best focus their resources and effort to ensure compliance and meet regulators’ expectations?

These requirements do not necessarily derive directly from MiCAR, but instead apply to all regulated entities. It is therefore important to consider both MiCAR and other regulatory requirements more generally as they will apply to CASPs.

Although MiCAR includes broader requirements on issuers of crypto-assets, and specific requirements relating to certain assets, such as stablecoins, this papers seeks to focus on the particular regulatory and governance issues facing CASPs, which will need to understand the consequences and challenges of becoming fully authorised regulated financial service providers, subject to the on-going supervision and oversight of regulators such as the Central Bank of Ireland (Central Bank).

Corporate Governance

Registered Office in the EU

The decentralised nature of crypto-assets and the global nature of service providers has meant that EU customers have, to date, been serviced by firms operating all over the globe, with limited, if any, physical presence within the EU. MiCAR effectively requires all CASPs looking to provide services to customers in the EU (and EEA) to establish a registered office in a Member State in order to obtain authorisation under MiCAR. Some level of solicitation of local customers would, however, be required, and MiCAR recognises that where services are provided on a reverse solicitation basis / at the client’s own initiative, this will not trigger a need for local authorisation.

In Ireland, the establishment of a company is generally a straightforward process and can be completed quickly through registration with the Companies Registration Office. From a practical perspective, this is not a significant undertaking. However, it is important to understand that as for other types of regulated entity it will be this company, once authorised, which will be expected to ‘own’ the legal and regulatory requirements under MiCAR, and will need to be the ‘mind and management’ of the CASP in the EU. This means that the day-to-day decisions about the direction of the business will need to be taken by the directors and management of this company. Although regard can be had to group approaches and their international implementation, regulators will require that the business is ultimately run by the directors and management of this entity, and not group boards or individuals located in third country such as the US or UK.

This requirement also means that the use of Decentralised Autonomous Organisations (DAOs) for CASPs will not be permissible.

Board Structure

MiCAR requires CASPs to have at least one director resident in the EU. However, in practice, at least in Ireland, it is likely that in order to ensure the mind and management of company is in Ireland, as well as for tax reasons, a majority of the board will need to be locally resident.

In terms of composition, it is expected that a minimum of three directors will be needed on the board, with a majority of non-executive directors. The need for non-executive directors, and particularly independent non-executive directors (INEDs) is seen by the Central Bank as being a fundamental part of effective corporate governance. The role of the INED in regulated entities is to provide independent challenge on boards; bringing an independent viewpoint to the deliberations of the board that is objective and independent of the activities of the management. The chair of the board will also need to be a non-executive director.

At a minimum, it should therefore be expected that the board would be comprised of an executive director / chief executive officer, at least one INED, and another non-executive director (either an INED or a group non-executive director). It is also possible that for potentially larger or systemically important CASPs the Central Bank could seek a larger board, with additional executive and/or non-executive directors, to ensure effective governance in light of the nature, scale and complexity of the firm’s business.

Key Senior Management

In addition to a board, firms will be expected to have a number of key functions. Although the precise roles are not prescribed, in line with other regulated entities, these will likely include: Head of Finance / Finance Director, Head of Compliance, Head of Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT), Head of Risk, Chief Operating Officer, Head of Internal Audit, and Chief Information Officer / Chief Technology Officer.

Depending on the nature scale and complexity of the firm’s business, it may be possible to dual-hat some of these functions (i.e. one individual may carry out more than one role) and/or to outsource certain of these functions to third party providers or group functions. However, the overarching requirement to ensure that the mind and management of the firm remains within the firm will need to be borne in mind.

Fitness and Probity: Pre-Approval Controlled Functions

MiCAR includes a general requirement to ensure that all members of the management body of a CASP are of sufficiently good repute and possess the appropriate knowledge, skills and experience, both collectively (i.e. when viewed holistically across all members) and individually. There is also a requirement to ensure that the CASP more generally employs personnel with the knowledge, skills, and expertise necessary for the discharge of responsibilities allocated to them.

In Ireland, these requirements are also more generally reflected in the Central Bank’s Fitness and Probity regime. This includes a requirement for all regulated entities to obtain prior approval from the Central Bank for certain key management positions (referred to as Pre-Approval Controlled Functions (PCFs)). This will include all directors as well as all of the key senior management functions listed above.

All PCFs will be assessed by the Central Bank for both fitness (i.e. their ability, knowledge and competence to carry out the relevant role) and probity (i.e. their honesty, integrity, and financial soundness). PCFs are required to complete individual questionnaires providing details of the professional background, and any issues which could impact on their probity (for example whether they or firms in which they have had previous involvement have been the subject of regulatory investigations or fines, or have been subject to criminal sanctions). The PCF assessment will be carried out by the Central Bank in parallel with the authorisation application.

Once authorised, it will be necessary to obtain the Central Bank’s prior approval for any proposed new appointments. It will therefore be important to ensure that appropriate succession planning is in place to avoid situations where one or more of the above board or senior management functions becomes vacant.

Individual Accountability Framework

The Central Bank has recently implemented an Individual Accountability Framework (IAF) applicable to all regulated entities, with the aim of enhancing the governance and culture in regulated firms. Firms will need to identify how the business and its risks are being managed, and the specific individuals responsible.

The IAF Introduced Common Conduct Standards for all person subject to fitness and probity requirements (including both PCFs (discussed above) as well as persons carrying out certain other controlled functions), and Additional Conduct Standards for certain senior management.

These conduct standards will need to be embedded within a firm’s broader governance structure and culture, as well as employment contracts and processes.

The IAF also introduced a Senior Executive Accountability Regime (SEAR), under which certain senior management had a duty to take reasonable steps to prevent the firm from committing regulatory breaches. The SEAR is being introduced on a phased basis from 1 July 2024. CASPs will not be included in the categories of regulated entities impact under the initial phase of SEAR, but may be included in subsequent phases. Notwithstanding, many of the elements required under SEAR, including identifying areas of responsibility and management responsibility mapping, are useful guides to good corporate governance. CASPs may therefore wish to consider which elements of SEAR may assist in meeting general good corporate governance requirements.

Three Lines of Defence

Regulated entities are expected to employ the so-called ‘three lines of defence’ model to compliance. The three lines are:

First Line: The people who have responsibility for complying with regulatory requirements and policies on a frontline basis (e.g. executive management and frontline staff).

Second Line: Those responsible for the oversight of the first line (i.e. the compliance and risk functions).

Third Line: The audit function, which oversees both the first and second lines.

In order to ensure an effective compliance framework, regulated firms are required to ensure that there is operational independence between the three lines. In practice this means that persons performing a function in one line of defence cannot also carry out a role in another. Thus, a person responsible for day-to-day management of the firm could not also have a role in the compliance or risk functions, and similarly a person working the compliance function could not have a role in the audit function. This is to prevent conflicts of interest arising within the compliance framework, i.e. to effectively ensure that people are not ‘marking their own homework’.

Accordingly, as noted above, whilst it may be possible for certain individuals to carry out more than one role within a firm, it will not be possible for individuals to dual-hat roles from different lines of defence (e.g. the Chief Operating Officer could not also be the Head of Risk or Internal Audit). This will therefore need to be taken into account in the firm’s resource planning and management.

Shareholders in CASPs

Shareholders in CASPs will be subject to assessment by the Central Bank in a similar manner to other regulated entities. MiCAR includes a requirement that shareholders with qualifying holdings (i.e. at least 10% direct or indirect capital or voting rights) must be of sufficiently good repute, and particularly must not have been convicted of money laundering or terrorist financing (or any other convictions impacting on their repute).

All qualifying shareholders will need to be assessed by the Central Bank as part of the initial authorisation, and any new qualifying shareholders will need to go through the acquiring transaction process. Increases in qualifying shareholdings above certain thresholds (namely 20%, 30% or 50%) will similarly require the Central Bank’s non-objection. Disposals of qualifying shareholdings, or where one of the thresholds is crossed as a result of a disposal, will need to be notified to the Central Bank.

It should also be noted that if the Central Bank considers that shareholders could exercise influence “likely to be prejudicial to the sound and prudent management” of the CASP, it is required by MiCAR to take appropriate measures to address those risks. Such measures could include judicial orders, the imposition of penalties against directors or management, or the suspension of the voting rights of the shareholder. This requirement derives from the need for the CASP and its management to be ultimately responsible for the day-to-day management of the business. It is also likely that in the event that shareholders were found to have exercised influence which could be prejudicial to this, that the overall corporate governance and management structure of the CASP will draw on-going supervisory focus to ensure that such influence does not, in practice, continue or resurface.

Capital Requirements

As for many regulated entities, CASPs will be subject to initial and minimum capital requirements. The level of initial minimum capital is set by reference to the proposed crypto-asset services to be provided: CASPs providing execution, placing, transfers, receipt and transmission, advice or portfolio management will have a minimum capital requirement of €50,000; CASPs providing custody and exchange services will require €125,000; and CASPs operating a trading platform will require €150,000. CASPs will need to maintain at all times at least this minimum capital requirement, or a quarter of the fixed overheads of the firm in the preceding year (to be reviewed annually), whichever is greater.

In order to meet these requirements, CASPs will need to either hold own funds (consisting of Common Equity Tier 1 items as set out in the Capital Requirements Regulation), and/or to put in place an insurance policy for this amount. The insurance policy will need to provide cover against the risk of loss of documentation, misrepresentations or misleading statement, acts, errors or omissions resulting in breaches, failures relating to conflicts of interest, losses arising from business disruption or systems failures, gross negligence in safeguarding clients’ crypto-assets and funds (where relevant) and liability towards clients for loss of assets.

Conduct of business

One of the key drivers of MiCAR was the experience of consumers who were being exposed to significant risks from “investments” in crypto-assets. Whilst Bitcoin was initially touted as primarily a decentralised payment system, its volatile (and increasing) value attracted many people looking to purchase it as an investment, rather than for the purpose of making payments. This created similar risks for consumers as with other types of investment products, such as shares, but in a generally unregulated market.

Further, although initial speculators may have been on the more ‘tech-savvy’ side, often using self-custody, as more traditional consumers moved into the market, service providers increasingly sought to provide both transactional services and custody, intermediating between consumers and market makers, again moving towards more traditional models of financial services, such as investment firms.

With the increase in services, as well as risks, and a number of high-profile failures and frauds, it was inevitable that regulations similar to the Markets in Financial Instruments Directive (MiFID), the Payment Services Directive, and the Prospectus Regulation (in respect of issuers) would arise.

MiCAR therefore includes a number of key conduct of business measures for CASPs, including:

• Consumer protection: This includes general requirements to act honestly, fairly and professionally in the best interests of clients, and to ensure that information and marketing is fair, clear and not misleading, as well as requirements around complaints handling. These are similar to the existing provisions of the Consumer Protection Code and aim to mitigate the risk to consumers and smaller businesses when dealing with financial service providers.
• Transparency and Disclosure requirements: CASPs will be required to have in place agreements with clients outlining the nature of the services to be provided, the fees, costs and charges, and various other prescribed matters and policies (depending on the services being provided), as well as associated policies and procedures. These aim to ensure that customers are provided with clear and transparent terms relating to the services, as well as the policies and procedures in place to protect customers and their assets.
• Client asset protections: Similar to both client asset requirements for investment firms, and safeguarding requirements for payment and e-money institutions, CASPs will be required to segregate and safeguard client crypto-assets and funds. This will seek to ensure that in the event of a CASP’s insolvency crypto-assets and funds held by the CASP in connection with its services will be both identifiable and protected. In particular, CASPs will be required to ensure that they have adequate arrangements to safeguard the ownership rights of clients and prevent the use of clients’ funds for their own account (something which was notably absent in the case of FTX, which used client assets to fund the owner’s trading firm, Alameda Research). Similarly, any client funds (i.e. money provided by clients in connection with services) held at the end of the business day following receipt of the funds (T+1) will need to be placed with a credit institution or central bank, and held in accounts segregated from the funds of the CASP. Whilst not expressly stated in MiCAR, periodic reconciliation of the assets held on behalf of clients is also likely to be necessary to ensure that these obligations are met, and that there is clear identification and segregation of crypto-assets and funds held on behalf of a client.
• Conflicts of interest: As for investment firms, the nature of CASPs’ services can potentially create conflicts of interests between the CASP, its management body, its employees, and its clients. CASPs are therefore required to implement and maintain effective policies and procedures to identify, prevent, manage and disclose potential conflicts of interest. The general nature and sources of potential conflicts of interest will need to be displayed in a prominent place on a CASP’s website and disclosed to clients and prospective clients. These will need to be kept under review, at least annually, in order to ensure that all relevant conflicts are captured.
• Market abuse: The potential for insider trading and other market manipulation by CASPs is a significant risk to customers, as well as the broader market in crypto-assets. MiCAR has therefore introduced specific rules for crypto-assets admitted to trading (or that have been requested to be admitted to trading), irrespective of whether the trades take place on or off of a trading venue. These rules closely follow those already in place for listed securities and require the disclosure of inside information, prohibit insider dealing, and prohibit market manipulation (e.g. through the disclosure of false or misleading information relating to a crypto-asset’s demand or price). CASPs will be required to have in place appropriate systems and procedures to prevent and detect potential market abuse and will need to report suspicions of market abuse to the Central Bank.

Financial Crime

Money Laundering and Terrorist Financing

A key driver in the regulation of CASPs has been the potential misuse of crypto-assets to facilitate money laundering and/or terrorist financing, and to circumvent financial sanctions. For this reason, a registration regime for virtual-asset service providers (VASPs) (broadly equivalent to CASPs) was introduced as part of the Fifth Money Laundering Directive in advance of MiCAR. This was to ensure that service providers were clearly captured by the obligation to put in place appropriate measures to prevent and detect money laundering and terrorist financing, including carrying out customer due diligence, monitoring transactions, and putting in place policies and procedures to support this. Notwithstanding, there has been significant divergence in the approach to the registration process across the EU, with some Member States using a light-touch registration process, and others (including Ireland) making the process almost akin to a full authorisation. The MiCAR authorisation process for CASPs should eliminate this divergent approach.

Existing VASPs/CASPs should therefore already have developed AML/CFT processes and procedures, but it should be expected that additional scrutiny will be placed on these controls as part of the authorisation process, and on an on-going basis going forward, as regulators continue to see the sector as being exposed to a high risk of money laundering and terrorist financing.

Information to Accompany Transfers of Crypto-Assets

In addition to general AML/CFT requirements, there are also requirements under the Funds Transfer Regulation, which currently requires certain information on payers and payees to accompany transfers of funds for the purposes of preventing money laundering and terrorist financing, that are to be expanded to include transfers of crypto-assets, including transfers “executed by means of crypto-ATMs, where the crypto-asset service provider, or the intermediary crypto-asset service provider, of either the originator or the beneficiary has its registered office in the Union”.

The CASP of the beneficiary (i.e. the person to whom the transfer is being made) will also be required to have in place systems to detect missing information which should have accompanied the transfer, and to verify the information on the beneficiary. If missing information is identified, the beneficiary’s CASP will be required to either reject the transfer or to take steps to obtain the information from the originator’s CASP before making the crypto-assets available. If a CASP repeatedly fails to include the required information, the beneficiary CASP will be required to warn the originating CASP, reject any future transactions from the CASP, and inform the Central Bank (or other competent authority). Suspicious transactions reports may also need to be filed with the Financial Intelligence Unit of An Garda Síochána and the Revenue Commissioners.

CASPs will therefore need to ensure that their systems facilitate these requirements both when sending and receiving transfers of crypto-assets.

Financial Sanctions

It is also important to note that financial sanctions (such as those currently imposed in respect of the Russian invasion of Ukraine) will also need to be complied with (as for all EU persons). CASPs will therefore need to ensure that they have appropriate systems and controls in respect of customers and transactions to ensure that they are not used to facilitate payments to sanctioned persons or entities, or otherwise circumvent the relevant sanctions. Further, specific provision has already been made as part of the EU financial sanctions packages against Russia in relation to crypto-asset wallets, accounts, or custody services, which are expressly prohibited from being provided to Russian nationals, or natural persons residing in Russia, or to legal persons, entities or bodies established in Russia.

Breaches of financial sanctions (for example sending assets to a sanctioned person) are generally strict liability offences (i.e. there is no requirement to prove that a person intended to provide assets to a sanctioned person in order to attract criminal liability). Notwithstanding, liability can be avoided where a person can demonstrate that “they did not know, and had no reasonable cause to suspect” that their actions would result in a breach of financial sanctions. However, this defence is interpreted narrowly. It is therefore it is important that firms which have the potential to breach financial sanctions (particularly those in financial services) are able to demonstrate that they had in place appropriate systems and controls around financial sanctions to prevent breaches. Appropriate sanctions screening procedures will therefore be important for CASPs to mitigate against the risk of breaches of financial sanctions.

Outsourcing and Operational Resilience

Outsourcing

Regulators have increasingly focussed on outsourcing and operational resilience as being an area of potential risk from a governance and compliance perspective. Having in place appropriate outsourcing frameworks and contractual arrangements is therefore important to ensure that where elements of service provision and back office support are not within a regulated entity, the firm can be confident that its outsource service providers are operating in a compliant manner, as ultimately it will be the regulated entity which will bear responsibility for any failures by its outsourced service providers.

MiCAR includes specific provisions on outsourcing by CASPs which generally reflect existing practices and expectations already applicable to other regulated entities. In particular, this includes requirements that the outsourcing does not result in the delegation of responsibility, does not alter the relationship between CASPs and their clients, does not impact on the ability of regulators to effectively exercise their supervisory functions, and that CASPs have direct access to relevant information on the outsourced services.

CASPs in Ireland will be subject to the Central Bank’s Cross-Industry Guidance on Outsourcing, and will therefore need to ensure that their internal governance and oversight frameworks, as well as contractual arrangements with outsourced service providers, meet Central Bank expectations and requirements. This may necessitate engagement with these service providers to ensure that the CASP, its auditors, and the Central Bank, will have ready access to information on any outsourced services or activities, and that this is reflected in contractual arrangements with the providers. CASPs will also need to be conscious of any sub-outsourcing by their providers, and make sure that similar access to any sub-providers is also included.

CASPs will need to put in place appropriate policies, procedures, systems and controls to manage outsourced services and activities, with a particular focus on supervision and oversight of the activities through clear reporting lines, key performance indicators, and regular testing and challenge. Both the Chief Operating Officer as well as the Chief Technology Officer / Chief Information Officer will play key roles in this regard, and they should anticipate the actions they take concerning outsourced services and activities will be important consideration in any assessment of their compliance with their obligations under the IAF.

Operational Resilience

In addition to general outsourcing requirements, operational resilience has been a significant focus from both the Central Bank and at an EU level. Operational resilience is the ability of firms, as well as the financial services sector as a whole, to prepare for and deal with operational disruptions. Although disruptive events may occur, these must be planned for and managed effectively to ensure that a firm is able to recover critical or important services, as well as protect customers and the broader financial system.

The Central Bank has produced its own Cross Industry Guidance on Operational Resilience, which sets out expectations with respect to the design and management of operational resilience, emphasises board and senior management responsibilities around operational resilience as part of risk management and investment decisions, and requires boards and senior management to take actions to ensure their frameworks are well-designed, robust, and operate effectively.

At an EU level, similar requirements are also set out in the Digital Operational Resilience Act (DORA) which is due to be implemented from the beginning of 2025. This is slightly narrower than the Central Bank’s guidance (as it is limited to digital operational resilience), but will be particularly relevant to CASPs given their online business and operating models. DORA will necessitate putting in place certain measures to manage and mitigate against digital operational risks, and includes requirements in respect of contracts with third party service providers.

What’s Next?

New CASPs will need to apply for authorisation from 1 January 2025.

For existing CASPs already operating in accordance with national laws, a transitional period of 12 months has been provided and will run until the end of December 2025. These CASPs should however prepare applications for authorisation and engage with the Central Bank prior to the end of that period, as CASPs subject to the grandfathering provisions will not benefit from passporting rights (i.e. the ability to provide services on a cross-border basis across the EEA) until they are fully authorised.

Christopher Martin is a Partner in Financial Service Regulation in KPMG Law (Ireland). He has experience working in both the public and private sectors advising on legal and regulatory issues, including experience in the Central Bank. He advises domestic and international regulated and unregulated clients on regulatory and compliance issues, including conduct of business and product requirements (including in respect of digital and crypto-assets), prudential requirements, authorisation and passporting requirements, acquisitions and disposals, corporate governance, fitness and probity, AML/CFT, financial sanctions, structuring and best practice norms.

He is the Internal Examiner on the Law Society’s Diploma in Regulation Law and Practice, and was recently ranked Band 3 in Fintech Legal in Ireland by Chambers 2024. He regularly lectures and speaks on legal and regulatory matters, as well as participating in and chairing committees and working groups in various industry bodies, including the Compliance Institute and Blockchain Ireland. He is also the Internal Examiner and lecturer for the Law Society of Ireland’s Post-Graduate Diploma in Regulation Law and Practice, and a supervisor for the Law Society’s Masters in Advanced Law

OVERVIEW

This article explains the basics of crypto staking and key elements of staking contracts between staking service providers and token holders in Canada and internationally.

BASICS

Staking promotes the informational integrity of blockchain networks by appealing to the self-interest of token holders. Staking involves pledging tokens as collateral to the blockchain network and proposing the addition, and validating the addition by other validators, of serial blocks of information to the blockchain ledger. In exchange for the work, blockchain networks pay tokens denominated in the native tokens of the network.

Staking is characteristic of networks, like Ethereum and Solana, that use the proof-of-stake (PoS) consensus model of information validation. Proof-of-work (PoW) networks, like Bitcoin, do not involve pledging tokens and use different informational validation processes. In PoS networks, the proposal and validation work is performed by computer nodes in the network which are called validators.

PoS networks generally use a carrot and stick approach to promote network security. The network will pay tokens (called rewards) to a token holder if the validator to which its tokens are pledged produces the same result as a critical mass of other validators. Alternatively, the network takes away a portion of the staked tokens if the validator produces a different result or refuses to work when selected by the network (called slashing).

Given the open architecture of public networks, token holders can generally either freely launch their own validator to the network or stake their tokens to a third party validator.

This article canvasses key terms in contracts between token holders and third party validators. While staking is a computer-level process that does not require a legal contract, both customers and service providers alike often seek the deal certainty afforded by a well drafted contract.

STAKING CONTRACTS

Staking contracts between third party validators (service provider) and token holders (customer) are sometimes called Staking-as-a-Service contracts or Platform-as-a-Service contracts.

Key terms of staking contracts may include:

• Delegation and nomination — the contract should specify that the token holder can nominate the service provider to perform validation work in respect of the holder’s tokens. Depending on technological integration of the holder’s wallet and the service provider’s infrastructure, the service provider may provide a copy of its validator node’s public key to which the holder can bond or stake its tokens.
• Custodial or non-custodial — the contract should indicate whether or not the service provider will have custody of the staked tokens. Staking is non-custodial if validators do not need custody of the holder’s tokens to stake them. However, a service provider may offer both custodial and staking services to a single customer in respect of the same tokens, which changes the commercial and legal relationship between the customer and service provider.
• Withdrawal or unstake — the contract should indicate whether or not the customer can withdraw its staked tokens at any time. Depending on the network, the withdrawal or unstake periods range from immediate to approx. 28 days. Accordingly, tokens might not be transferable immediately after a customer initiates a withdrawal. Separately, the service provider might impose its own withdrawal period, especially if it holds custody of the staked tokens.
• Description of services — the contract should articulate that the service provider will perform the validation work in respect of the staked tokens. This imposes the duty to validate on the service provider.
• Service standard — the contract typically requires that the service provider performs the services at a service standard such as using appropriate technology and skill.
• Representations and warranties — service providers and customers often make representations including those that are, among others and as applicable: (1) similar to technology service contracts outside of blockchain regarding formation, existence, capacity, no conflict, and compliance with law; (2) similar to financial services contracts regarding sanctions, AML, ATF, and financial licensure; (3) related to securities law issues including acknowledgments that the staked tokens are not an equity investment; (4) acknowledgments that the staked tokens are not a loan; and (5) bonus points for customers who ask that the service provider represent that its nodes satisfy the network’s requirements for inclusion in the network’s active set of validators.
• General indemnities — each party may promise to indemnify the other party for breaches of representations and warranties, failures to perform contractual duties, and for third party liabilities including, in the case of the service provider, intellectual property infringement. As with most service agreements, the service provider is more likely to be asked to payout an indemnity than the customer.
• Coverage or indemnity for slashing penalties — slashing coverage, if any, can fall under the indemnity or a separate section. Slashing is a catch-all term for penalties applied by the network following a performance failure by the validator (typically validating the double spending by a single wallet of the same token). If the validator is slashed, a portion of the tokens staked to the validator are automatically forfeited to the network and generally burned (removed from existence). The contract may require that the service provider reimburse the customer for slashed tokens.
• Coverage or indemnity for missed rewards — missed reward coverage, if any, can fall under the indemnity or a separate section. Rewards are “missed” when a validator fails to perform the validation work required to generate rewards. Missed rewards coverage addresses opportunity costs suffered by customers. The contract may require that the service provider reimburse the customer for missed rewards.
• Limits on liability — liability limits vary. Service providers typically seek to cap direct damages under the contract, generally including the indemnity and slashing and missed rewards coverages at an absolute value expressed in fiat money or tokens or a relative value expressed, for example, as a percentage of the tokens staked or service fee earned by the service provider over a defined period of time. Service providers sometimes seek to exclude liability for, among other things: (1) indirect or consequential damages; (2) damages caused by network failures (like software bugs); and (3) reductions in the market value of the staked tokens. The force majeure provision, if any, is a backdoor liability limit as it usually disclaims liability related to events that arise outside of a party’s control (read the boilerplates carefully). Some service providers offer uncapped slashing and missed rewards coverages to win deals with sophisticated, high value customers (so-called whales).
• Pricing — service providers generally charge a service fee calculated as a percentage of the rewards generated (example: eight percent of rewards) or sometimes a flat fee. The service fee is usually payable in tokens but can be payable in fiat money. Market service fee rates typically vary on a network by network basis. If the parties intend for the service fee to increase or decrease during the term of the contract depending on the dollar value of the tokens staked by the customer, the contract should articulate the time at which the dollar value is calculated and the source of the exchange rate used.
• Payment details (funds flow) — networks generally either pay directly (i) all the rewards to the customer or (ii) the amount of rewards equal to the service fee to the validator and the balance of the rewards to the customer. The specific funds flow generally happens automatically following the performance of successful validation work and is hardwired into the protocols of the network. Note that if the hardwired fee differs from the contractually agreed upon service fee, then the contract should provide covenants regarding and processes by which the parties settle up.
• Term and termination — the contract should indicate how long it remains in effect and processes for ending it. Consider specifying that the contract does not end until the completion of the withdrawal period. Also, service providers might seek to require that customers withdraw their tokens upon their receipt of notice of termination from the service provider or otherwise at the end of the term.
• Governing law — pay close attention to the law that governs the contract and its interaction with the law applicable to the service provider and the customer. As regulators grapple with this evolving field, laws can change quickly with significant positive or negative outcomes for the network participants.
• Independent contractor — the contract should indicate that the service provider is an independent contractor of the customer, if that is the intention of the parties. As with many aspects of the blockchain ecosystem, old legal concepts are sometimes clumsily applied to novel arrangements like staking, which creates risk that courts or regulators could determine that the relationship between the parties is different than they intended.
• Taxation — the contract should state that each party is responsible for remitting taxes on its share of the rewards, with the service provider bearing responsibility for the portion of the rewards equal to the service fee and the customer bearing responsibility for the balance of the rewards. Staking contracts sometimes include tax indemnities.
• And — so much more!

There is no one-size fits all staking contract. As each network has its own unique protocols, staking contracts should address the specific technology at issue, not to mention jurisdictional legal and market differences as well as the idiosyncratic commercial concerns of the contractual counterparties. Also, staking contracts between a customer and a custodial service provider (e.g., an exchange) may differ from contracts between a customer and a non-custodial service provider in respect of a range of issues withdrawal times, rewards, risk issues regarding who has custody of the tokens (i.e., the private keys), and other matters. Crypto, including staking, offers opportunities and risks. Seek assistance from experienced counsel when negotiating and drafting staking contracts.

Disclaimer

This article is provided as an information service and may include items reported from other sources. Neither Kirk Emery nor Miller Thomson LLP warrant its accuracy. This information is not meant as legal opinion or advice.

Kirk Emery is a Partner in the Toronto, Ontario office of Miller Thomson LLP, a national law firm in Canada. He was formerly the Executive Vice President of Legal & Business Development at a leading global staking company. Should you have any questions or concerns on this article, staking contracts, or doing business in Canada, please feel free to contact Kirk by email at kemery@millerthomson.com.

India’s stance on cryptocurrency regulation has been the subject of global intrigue, a dramatic tale filled with legislative uncertainty, judicial twists, and evolving policies. As one of the world’s largest markets for digital assets, India’s approach to crypto remains a delicate dance between cautious acceptance and tight control.

India’s relationship with cryptocurrency is akin to a suspense thriller — full of twists, turns, and an ever-present sense of uncertainty. As one of the world’s largest markets for digital assets, India’s regulatory journey has been anything but straightforward. It’s a delicate tango between cautious optimism and stringent oversight, with policymakers and innovators alike tiptoeing through a minefield of evolving regulations. The global spotlight is on India as it grapples with this new frontier, leaving everyone wondering: will it embrace the future or retreat into caution?

A Brief History of Crypto Regulation in India

India’s relationship with cryptocurrency is far from linear — it’s more of a zigzag through uncharted territory. It all started in 2013 when the Reserve Bank of India (RBI) issued its first cautionary note on cryptocurrencies, highlighting risks related to money laundering, consumer protection, and market volatility. This cautious stance set the tone for subsequent actions, culminating in the infamous RBI circular of 2018, by which the RBI directed banks to not provide services to those dealing in cryptocurrencies. At the time, this drastic move sent shockwaves through the nascent industry, forcing many start-ups to shutter their operations or flee to crypto-friendlier shores.

However, the Supreme Court of India later overturned the RBI’s 2018 circular, in the landmark case Internet and Mobile Association of India v. Reserve Bank of India (2020).

The Court ruled that the circular was disproportionate and violated the constitutional rights of carrying on trade and commerce under Article 19(1)(g) of the Indian Constitution. This decision rekindled hope within the crypto community, signalling a potential shift towards a more balanced regulatory approach.

Current Regulatory Landscape

However, despite the Supreme Court’s ruling, India’s regulatory landscape for cryptocurrencies remains murky at best.

Although India has yet to roll out specific legislation for the Web3 industry, existing statutes and guidelines like the Prevention of Money Laundering Act, 2002, the Income Tax Act, 1961, and Guidelines for Advertising of Virtual Digital Assets and Linked Services issued by the Advertising Standards Council of India Guidelines are being stretched to fit the new digital asset landscape. This piecemeal approach has resulted in a fragmented regulatory environment, leaving investors and entrepreneurs in a constant state of uncertainty.

A particularly thorny issue is the use of stablecoins — digital assets pegged to traditional currencies — by individuals providing services to international clients. The crux of the problem lies in the Foreign Exchange Management Act, 1999 (FEMA), which mandates that payments for export services must be received in freely convertible foreign currencies like the US Dollar or Euro. Since stablecoins (like USDT) don’t qualify as “freely convertible” under FEMA, their use in payments is problematic. The Reserve Bank of India has yet to offer clear guidance on stablecoins, leaving their legal status in a grey area, a stark contrast to the more defined frameworks seen in other jurisdictions.

Challenges and Opportunities

The primary challenge facing the Indian crypto ecosystem is the glaring absence of clear, comprehensive regulatory guidelines. The perception that cryptocurrencies are illegal in India is a misunderstanding. The reality is that while cryptocurrencies are not illegal, they operate in a legal grey area due to the absence of a comprehensive and specific regulatory framework. This ambiguity breeds uncertainty, stifling innovation and scaring off potential investors who fear that the government might pull the rug out from under them at any moment.

Yet, amid these challenges, there are also opportunities. With its large, tech-savvy population, India is ripe for the adoption of digital currencies and blockchain technology. A well-crafted regulatory framework could position India as a global leader in the crypto space, attracting investment and fostering innovation. The potential for blockchain to drive financial inclusion, streamline supply chains, and enhance governance is enormous — if the government can strike the right balance.

Future Prospects

Looking ahead, the future of cryptocurrency regulation in India will likely hinge on a balanced approach that recognizes both the risks and the potential benefits of digital assets.

The Department of Economic Affairs recently announced that India plans to release a Discussion Paper (DP) outlining its policy stance on cryptos before September 2024. This paper aims to get feedback from relevant stakeholders. The forthcoming discussion paper, could be the game-changer we’ve all been waiting for.

India’s approach will likely be influenced by developments in more ‘crypto-tolerant’ jurisdictions. As global regulatory norms evolve, India may seek to align its policies with international standards to stay competitive in the rapidly expanding digital economy.

Conclusion

India is at a critical juncture in its approach to cryptocurrency regulation. The decisions made now will have far-reaching consequences for the future of digital finance and technological progress in the country. While the journey so far has been anything but smooth, there is a growing acknowledgment that cryptocurrencies and blockchain technology are here to stay. A forward-looking regulatory framework that encourages innovation while safeguarding against risks could unlock the full potential of these transformative technologies for India.

Disclaimer: This article is not a legal opinion. This article does not represent the position or perspectives of any clients, organizations or industry bodies that I provide legal services to or am affiliated with. The content herein is intended solely for informational and personal purposes.

Anuradha Chowdhary, founder of ZeroTo3 Collective, is an experienced lawyer specializing in disruptive technologies. She advises AI, Web3, gaming, and other tech and entertainment businesses on corporate structuring, virtual assets licensing, token issuance, commercial contracts, IP strategies and registration, and fundraising. A passionate advocate for responsible tech adoption, Anuradha frequently speaks at global events and has been featured in multiple publications.

As part of the “Digital Agenda for Europe” the EU created the Data Act (Regulation (EU) 2023/2854 of 13 Dec 2023) aimed at establishing harmonized rules for fair access to and the use of data, in particular data created by the use of smart devices in terms of the Internet of Things (“IoT”), such as smart fridges, smart TVs, or connected vehicles. The Data Act has been heatedly debated in the crypto industry during the legislative proceedings and since it will enter into effect in September 2025, it’s time to revisit that debate and ask: Is blockchain ready for the Data Act?

Legislative intention of the Data Act

The Data Act, amongst others, provides for the right of users of IoT-devices to request the holder of such data (typically the manufacturer of the IoT-devices) to share this data with third parties, e.g. to make the device interoperable. The idea is that the sharing of user data will accelerate the realization of an all-encompassing Internet of Things by breaking up data silos and avoiding lock-in effects. To perform the user’s request for data transfer to a third party, the data holder and the data recipient will have to enter into a data sharing agreement.

Considering the enormous number of smart devices constantly generating data which needs to be shared with recipients in the Internet of Things, the EU expected that data sharing will be executed by autonomous devices that follow pre-defined decision-making processes enrooted in their systems: Smart Contracts.

The Data Act defines Smart Contracts as: “a computer program used for the automated execution of an agreement or part thereof, using a sequence of electronic data records and ensuring their integrity and the accuracy of their chronological ordering” (cf. Article 2 (39)).

According to the recital (104), the definition of Smart Contracts — a term that was initially coined in the 1990s — is technologically neutral and therefore covers all kinds of electronic or digital processes that execute legal transactions. As a result of this broad definition, the stipulations of the Data Act may also apply to Smart Contracts as used in the crypto industry as parts of the blockchain technology that execute transactions. Smart Contracts are essential for the crypto/web3 ecosystem as they guarantee for permissionless (i.e. open-source) blockchains that are transparent, immutable, and tamper-proof. Since the blockchain is decentralized as a distributed ledger, there is no central agency that curates (or even controls) its operation.

Kill Switch for Smart Contracts

The broad definition of the term Smart Contract in the Data Act and the regulatory requirements of the Data Act for Smart Contracts run the risk of threatening the operation of blockchains/DLT. In particular, Article 36(1) lit (b) Data Act requires the “safe termination and interruption [of Smart Contracts], to ensure that a mechanism exists to terminate the continued execution of transactions and that the smart contract includes internal functions which can reset or instruct the contract to stop or interrupt the operation, in particular to avoid future accidental executions.”

What the Data Act requests here is literally a “Kill Switch” that allows, at any time and without laying down further requirements, the termination of the execution of the Smart Contract. This has been criticized by the crypto industry as contrary to the core tenets of decentralization and immutability that underpin blockchain technology, as the presence of a “Kill Switch” would imply that a single entity would be granted control over the execution of Smart Contracts thereby turning the principle of decentralization on its head. Also, the “Kill Switch” would need certain conditions to be executable, e.g. end-users should be granted a right to claim the termination of a Smart Contract, something that would run against the principle of immutability of the blockchain. Last, the “Kill Switch” would need to be enforceable, e.g. subjecting the operation of the blockchain to legal review by competent courts, something that does not sit well with the spirit of self-government.

Against this backdrop and in the eye of the significant penalties for non-compliance with the requirements of the Data Act (up to 20,000,000 Euros or up to 4 percent of the worldwide annual turnover), the crypto industry lobbied against the preliminary drafts of the Data Act during the legislative process — in vain.

Not all Smart Contracts are Smart Contracts

From a plain reading of the language of the Data Act, one would consider the act applicable to Smart Contacts as used in crypto. In consequence, all vendors of Smart Contracts or deployers of Smart Contracts for third parties (cf. Article 36 (1)) would have to provide Smart Contracts, inter alia, with the necessary “Kill Switch”. The addressee of the compliance obligations would remain unclear as the Data Act does not further specify who is the vendor of a Smart Contract or deploys Smart Contracts for third parties. Considering the broad language of the act and its technological neutrality, one might argue that the scope of the act applies to protocol developers as providers of the blockchain software as well as to each individual node operator as deployer of Smart Contracts for third parties.

On the other hand, there are good arguments that not every Smart Contract is a “Smart Contract” in terms of the Data Act.

First, the language of Article 36 (1) arguably limits the scope of application to Smart Contracts used in an agreement “to make data available”. Even though the language of the paragraph is all but clear (also neither the German nor the French versions add clarity), vendors and deployers of Smart Contracts alike should only fall within the scope of the paragraph if Smart Contracts are used in the context of data sharing agreements. This argument is underpinned by the caption of Article 36 that lays down the “Essential requirements regarding smart contracts for executing data sharing agreements”. Secondly, recital (104) documents the legislator’s intention to lay down essential requirements for Smart Contracts to promote the interoperability of tools for automated data sharing agreements. Smart Contracts that do not serve the execution of data sharing agreements are therefore not the objective of the Data Act. Last, Smart Contracts used for crypto typically do not process data originating from IoT devices. Eventually, the applicability of the Data Act hinges on the question whether the specific blockchain or protocol deploys a Smart Contract in the context of data sharing agreements. As data sharing agreements are contracts that are concluded between the data holder and the data recipient in cases where data is handed over to a third party at the request of a user, this will rarely be the case for Smart Contracts on a blockchain but needs to be reviewed on a case-by-case basis.

After all, most smart contracts deployed on blockchain will not fall within the scope of the Data Act with its strict regulatory requirements. Borrowing the term “smart contract” that had acquired a particular meaning within an industry already facing increasing regulatory attention might have caused unnecessary concern and could have been avoided by using a language more specific for the Data Act.

Dr. Benedikt Flöter is Associated Partner with YPOG in Berlin, Germany, where he advises start-ups, growth companies and investors from the venture capital ecosystem on IP/IT and data law with a particular focus on emerging technologies and data-driven business models such as web3, distributed ledger, machine learning/AI concerning questions of the operative business and financing rounds.