This Week in Crypto – Ether ETF and FIT21 Approved, and Cyber Breach Fines Shake the Crypto Landscape by Fleming Airunugba

The cryptocurrency landscape witnessed a series of significant developments as the US Securities and Exchange Commission (SEC) approved spot Ether exchange-traded funds (ETFs), marking a milestone for institutional adoption. 

Concurrently, regulatory scrutiny intensified as Hong Kong’s privacy watchdog cracked down on Worldcoin over biometric data concerns, and the Biden administration opposed the crypto bill FIT21 ahead of a pivotal House vote. 

Amidst these events, the SEC’s $10 million fine on the Intercontinental Exchange (ICE) for delayed cyber breach reporting underscored the regulator’s vigilance, as the industry braced for potentially landscape-altering decisions shaping the future of digital assets.

SEC Grants Approval for Spot Ether ETFs

The US Securities and Exchange Commission (SEC) has made a groundbreaking decision by granting regulatory approval for spot Ether exchange-traded funds (ETFs) to be listed and traded in the United States. 

Approved ETF Issuers

In a filing dated May 23, the SEC gave the green light to several prominent firms, including VanEck, BlackRock, Fidelity, Grayscale, Franklin Templeton, ARK 21Shares, Invesco Galaxy, and Bitwise, to launch spot Ether ETFs.

Potential Classification of Ether as a Security

This move comes despite speculations that the SEC has been investigating whether to classify Ether (ETH) as a security. 

Next Steps for Trading

While the firms’ 19b-4 filings have been approved, the SEC still needs to sign off on their respective S-1 registration statements before the ETFs can officially commence trading. According to industry experts, this process could take days to months. Notably, the SEC reportedly instructed applicants to expedite their 19b-4 filings on May 20, with the removal of staking being a notable amendment across several filings.

Hashdex’s ETF Application Status

Interestingly, the SEC did not announce approval for Hashdex’s spot Ether ETF application, despite the asset manager’s filing deadline being set for May 30, ahead of other firms like Grayscale, Invesco Galaxy, BlackRock, and Fidelity. It remains uncertain whether the SEC will ultimately greenlight Hashdex’s ETF.

Regulatory Clarity and Market Impact

This SEC decision follows a day after the US House of Representatives voted in favor of the Financial Innovation and Technology for the 21st Century Act, which aims to provide regulatory clarity for the cryptocurrency industry by delineating the roles of the SEC and the Commodity Futures Trading Commission.

In the wake of the SEC’s announcement, the price of ETH initially surged to over $3,900 before settling at around $3,759 at the time of publication, according to data from Cointelegraph Markets Pro.

Significance for the Crypto Industry

The approval of spot Ether ETFs marks a significant milestone for the crypto industry, potentially paving the way for increased institutional adoption and mainstream acceptance of Ether and other digital assets.

Hong Kong’s Privacy Watchdog Rules Against Worldcoin’s Biometric Data Collection

Hong Kong’s Office of the Privacy Commissioner for Personal Data (PCPD) has concluded its inquiry into the Worldcoin project, determining that its operations in Hong Kong violated the Personal Data (Privacy) Ordinance (PDPO).

Enforcement Notice and Halt of Operations

In a May 22 notice, Privacy Commissioner Ada Chung Lai-ling issued an enforcement notice to Worldcoin, ordering the immediate halt of all project operations in Hong Kong that involve scanning and collecting iris and facial images of the public using iris scanning devices.

Investigation and Findings

The PCPD started its investigation against the Worldcoin project in January 2024 to determine whether the identity verification methods posed serious risks to citizens’ personal data privacy and violated the requirements of the PDPO. 

The investigation involved 10 covert visits at six premises involved in operating the Worldcoin project from December 2023 to January 2024.

According to the PCPD, collecting face images was unnecessary for verifying the humanness of participants, as the iris scanning device operators were already capable of performing this verification in person at the operating locations, making the scanning or collection of face images an unnecessary step.

Lack of Transparency and Informed Consent

The PCPD also pointed out that Worldcoin failed to provide sufficient information, preventing informed decisions and genuine consent. 

The investigation revealed that Worldcoin’s privacy notice was unavailable in Chinese, which meant non-English speaking participants could not understand the project’s policies, practices, terms, and conditions. The PCPD stated:

“[…] the iris scanning device operators at the operating locations also did not offer any explanation or confirmed the participants’ understanding of the aforesaid documents. They also did not inform the participants the possible risks pertaining to their disclosure of biometric data, nor answered their questions.”

Unjustified Retention of Biometric Data

The PCPD ruled that Worldcoin’s retention of sensitive biometric data for up to 10 years solely for AI model training, including face and iris images, was unjustified.

Worldcoin confirmed that 8,302 individuals had their faces and irises scanned for verification during its operation in Hong Kong.

Regulatory Scrutiny and Privacy Concerns

The Worldcoin project, announced in 2021, has attracted the attention of regulators in many countries over privacy concerns, leading to the suspension of services in Kenya and the pausing of iris scans in India. 

The project had more than two million people signing up before its official launch in July 2023.

The findings of the Hong Kong’s PCPD investigation highlight the growing concerns surrounding the collection and use of biometric data, particularly in the context of emerging technologies and projects involving personal data privacy.

US House Passes Crypto Bill FIT21 with Bipartisan Support

In a significant development for the cryptocurrency industry, the United States House of Representatives has voted to pass the Financial Innovation and Technology for the 21st Century Act, commonly known as the FIT21 Act, with bipartisan support.

Bipartisan Vote and Key Details

The bill, H.R.4763, was approved in a 279 to 136 vote on May 22, with 71 Democrats joining 208 Republicans in favor of the legislation. If passed by the Senate and signed into law, the FIT21 Act aims to establish regulatory clarity over digital assets by delineating the roles of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in overseeing the crypto industry.

Proponents Highlight Innovation and Regulatory Clarity

Proponents of the bill, such as Representative Patrick McHenry, argued that the current regulatory framework is hindering the potential of digital asset innovation. “Unfortunately, our current regulatory framework is preventing digital assets’ innovation from reaching its full potential,” McHenry stated before the House vote. “The SEC and the CFTC are currently in a food fight for control of these asset classes.”

Opposition Raises Concerns over Deregulation

However, the bill faced opposition from lawmakers like Representative Maxine Waters, who expressed concerns about potential deregulation and market instability. “This [bill] is perhaps the worst, most harmful proposal I have seen in a long time,” Waters said. “This bill would deregulate crypto and certain traditional securities to the extent that I and other experts have expressed serious concerns about this bill causing a potential market crash and recession.”

Additional Legislation on Central Bank Digital Currencies (CBDCs)

In addition to the FIT21 Act, the House also passed a bill prohibiting the Federal Reserve from issuing a central bank digital currency (CBDC) through intermediaries.

The passage of the FIT21 Act in the House represents a significant step towards providing regulatory clarity for the cryptocurrency industry in the United States. However, the bill still needs to navigate through the Senate and receive the President’s signature to become law. The bipartisan support in the House highlights the growing recognition of the importance of digital assets and the need for a well-defined regulatory framework.

ICE Fined $10 Million by SEC for Failing to Report Cyber Attack

The Intercontinental Exchange (ICE), the company behind the world’s largest network of exchanges and clearing houses, including the New York Stock Exchange (NYSE), has been fined $10 million by the United States Securities and Exchange Commission (SEC) for failing to promptly inform authorities about a cyber intrusion.

The Breach and ICE’s Response

The cyber breach, discovered in April 2021, involved malicious code inserted into a VPN device, allowing unauthorized access to ICE’s corporate network. Although ICE quickly identified the threat, the SEC alleges that the company failed to notify legal and compliance officials at its subsidiaries, including the NYSE, for several days.

The SEC’s Regulation Systems Compliance and Integrity (Regulation SCI) requires companies to immediately inform the agency of any significant cybersecurity incident. SEC director of enforcement Gurbir S. 

Grewal emphasized the importance of timely reporting, stating, “When it comes to cybersecurity, especially events at critical market intermediaries, every second counts and four days can be an eternity.”

Affected Subsidiaries and Penalties

The SEC’s enforcement action affected several ICE subsidiaries, including Archipelago Trading Services, Inc., New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., ICE Clear Credit LLC, ICE Clear Europe Ltd., NYSE Chicago, Inc., and NYSE National, Inc. 

Additionally, the Securities Industry Automation Corporation agreed to a cease-and-desist order in addition to the monetary penalty.

Dissenting Voices and Criticisms

In response to the fines, SEC Commissioners Hester Peirce and Mark Uyeda released a statement calling the fine an “overreaction” to a “minimal incident.” 

They argued that the “disproportionately large penalty for failure to report promptly an incident that the ICE SCI subsidiaries ultimately determined was de minimis suggests to us that the Commission is more concerned with generating large penalties than with ensuring that important market entities address technological vulnerabilities.”

Peirce and Uyeda further criticized the SEC’s approach, stating that the fine contributes to the perception that the “Commission’s penalty regime is more a tool to generate numbers for year-end statistics and less a means to achieve outcomes that enhance market integrity.” The Commissioners had previously criticized the SEC’s approach to crypto companies.

Implications and Takeaways

The SEC’s enforcement action against ICE highlights the agency’s emphasis on timely reporting of cybersecurity incidents, particularly for critical market intermediaries. 

While the dissenting Commissioners raised concerns about the proportionality of the penalty, the case underscores the importance of robust cybersecurity measures and compliance with regulatory requirements in the financial industry.

Closing Remark

As the crypto world embarks on a new journey with new ETFs approvals, upholding compliance and addressing concerns around consumer protection, privacy, and security will be paramount. 

Striking the right balance between innovation and oversight remains the industry’s biggest challenge as it navigates an uncertain future influenced by shifting political tides and intensifying scrutiny from global watchdogs. 

The implications of upcoming rulings and actions will reverberate for years to come, testing crypto’s resilience and adaptability.

Join the Conversation

What are your thoughts on this week’s crypto news? Did any particular development stand out to you? Leave a comment below and let us know your perspective!

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