Historic crypto market bill approved to advance to full US House

https://www.theblock.co/post/241812/historic-crypto-market-bill-approved-to-advance-to-full-us-house

The House Agriculture Committee advanced legislation to overhaul how crypto markets are regulated in the U.S., a day after the House Financial Services Committee did the same.

The bill becomes the most significant piece of digital asset legislation to advance this far in Congress. Now that committees debated, amended and advanced the unusual cross-jurisdictional effort, the legislation is likely to be voted on by the entire House of Representatives in the near future. Uncertainty remains in the Senate though, and the Securities and Exchange Commission appears to be skeptical of the effort.

The historic step came amidst tenser debate at the House Financial Services Committee over a separate, but related bill that had been expected to garner more bipartisan support.

Market opening

House Republicans, as well as industry advocates, have worked to gain as much support from Democrats as possible in order to give the market structure bill, titled the ‘FIT for the 21st Century Act’, enough momentum for it to be considered despite skepticism in the Democrat-majority Senate.

The market bill appeared to have more Democratic support in the Agriculture Committee, though the measure was advanced by a voice vote, making it hard to quantify how much bipartisan support there was. But multiple Democrats offered amendments to tweak the bill that were accepted by Republican Agriculture Committee Chair Glenn “GT” Thompson and other Republican members of the committee, who hold a small majority on both the panel and in the full House of Representatives.

“The legislation marks a significant milestone in the House Committee on Agriculture’s efforts to create a much-needed digital asset regulatory framework that protects consumers and investors while promoting American leadership in finance and technology,” said the Pennsylvania Republican at Thursday’s committee meeting.

In addition to granting more power and funding to oversee crypto spot markets for so-called digital commodities, bitcoin being the most notable, by the Commodity Futures Trading Commission, the bill also would direct regulators to create a clear pathway for a digital asset to transition from being a security investment to a commodity, with less disclosure requirements for the latter. The bill also would allow a process for streamlined, securities-style capital raises through digital asset offerings, and adds $120 million to the CFTC’s budget for three years by redirecting it from the Securities and Exchange Commission.

Thursday’s debate and amendment process at the House Agriculture Committee was significantly less tense than either Wednesday’s debate of the same bill, or a concurrent debate over the stablecoin bill in the House Financial Services Committee. The bill had an unusual two committee debate and amendment process due to shared jurisdiction over the two different types of asset markets, and respective regulatory agencies, at play: securities and commodities.

Stablecoin debate more uneasy

Bipartisan talks over a comprehensive framework for payment stablecoins, seen as a connected effort to the market bill because of the role stablecoins often play in shifting investments from one cryptocurrency to another, broke down in a very public way at the same time as the Agriculture Committee’s meeting. The stablecoin effort was also seen as more driven by recent market events, as talks around the issue began last summer following the Terra/Luna collapse.

Democrats raised concerns that the bill would allow tech companies like Meta and Amazon to issue their own stablecoins and cut out federal regulation of the digital assets.

Rep. Maxine Waters, D-Calif., the top Democrat on the committee, called the current Republican-led draft of the bill under consideration “deeply problematic and bad for America” during Thursday’s meeting.

Republicans sought input from the New York Department of Financial Services, seen as one of the stauncher state-level regulators, on the main sticking point, a provision that allows states to approve stablecoin issuance, to attempt to counterbalance concerns over the state licensing option.

The Biden administration has issues with the provision, according to statements made at Thursday’s tense committee meeting on the bill. Traditional financial industry players like banks and credit unions also raised similar concerns in correspondence last week. House Financial Services Committee Chair Patrick McHenry, R-N.C., fired back that they could also benefit from the legislation.

As his own committee recessed from the tense stablecoin debate, McHenry informed members that the Agriculture Committee approved its portion of the joint market bill a few minutes earlier, by the expedited voice vote. In contrast, debate and amending of the same bill occupied the financial policy panel for much of Wednesday, only for six Democrats to end up joining Republicans in the recorded vote.

“I don’t seek to emulate the Ag Committee in many ways, but man, oh man, was that sweet,” quipped McHenry.

A recorded vote on the stablecoin bill is scheduled for later Thursday.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

SEC faces ‘wake up call’ after Ripple ruling, though appeal likely

https://www.theblock.co/post/239559/sec-faces-wake-up-call-after-ripple-ruling-though-appeal-likely

Ripple Labs won a partial victory in court on Thursday as a federal judge ruled that some of its sales of the XRP token, which were challenged as securities violations by the Securities and Exchange Commission, did not fully meet the definition of a securities offering.

The decision, which the SEC said it is still reviewing for possible appeal, does not fully exonerate Ripple or its lead executives from possible civil consequences. Judge Analisa Torres of the Southern District of New York ordered a trial by jury for Ripple CEO Brad Garlinghouse and Executive Chairman Chris Larsen over whether they are liable in illegal securities sales to institutional investors who bought hundreds of millions of dollars worth of XRP.

But the crypto industry at large celebrated the partial win for Ripple, framing it as a development that showed cracks in the SEC’s armor. The agency has an undefeated track record in enforcement cases brought against crypto firms dating back to the initial coin offering bubble of 2017.

“Looking forward to getting a refund on my Acela tickets now that I no longer need to come in and talk to the @SECGov. Lmfao,” Gemini co-founder Cameron Winklevoss tweeted in reaction to the ruling.

In a statement, an SEC spokesperson lauded parts of the judgment that found sales of XRP to be, “investment contracts in violation of the securities laws in certain circumstances,” and noted that the court rejected Ripple’s preferred definition of a security test for investment contracts.

The full impact of what Thursday’s ruling means will continue to play out over months, as experts agree that appeals by both Ripple and the SEC appear likely.

Split decision with possibly major implications

Torres ruled that Ripple’s “blind bid” sales, in which the company used an algorithm to sell XRP on trading platforms to bidders whose identity it didn’t know, was not a securities offering because buyers “could not have known if their payments of money went to Ripple, or any other seller of XRP.”

The federal judge noted that these so-called programmatic sales represented less than one percent of global XRP transactions since 2017. Torres seemed to indicate that purchases of XRP in transactions where the buyer either didn’t know that Ripple was the seller, as in the programmatic sales, or on the secondary market would not qualify as de facto investments in the company, which would qualify as illicit securities sales.

“Therefore, the vast majority of individuals who purchased XRP from digital asset exchanges did not invest money in Ripple at all,” Torres wrote.

She contrasted this with Ripple’s sales to institutional buyers, who did know who they bought XRP from, and could reasonably expect to earn a profit from investing in a common enterprise, a hallmark of securities law.

Still, it’s not clear whether Torres intended her ruling on blind bid sales to be a broad green light for secondary market sales. In her ruling, the judge wrote that the “totality of circumstances” around the transaction would determine whether a secondary sale is an illegal securities offering or not.

Ripple effects

Though ruling did not take the company and its lead executives off the hook for potential enforcement repercussions, legal experts saw the programmatic buyer part of Torres’s ruling as a win for both Ripple and the broader crypto industry.

“The logical conclusion is that secondary sales of XRP are not securities transactions,” said Stephen Palley, partner and co-chair of the digital commerce group at the law firm Brown Rudnick.

That could have major implications for the secondary market for digital assets, where most crypto transactions take place. It could also bolster industry arguments in other proceedings, like the SEC’s case against Coinbase over several of the digital assets the company listed for public trading.

“This is a major victory for the industry and a major loss for the SEC because in fact by holding that the programmatic sales are not investment contracts, she is holding that secondary market transactions in crypto assets are not securities,” said Gary DeWaal, senior counsel at law firm Katten.

Teresa Goody Guillén, a partner at law firm BakerHostetler, agreed.

“So far digital asset issuers have not battled in court this far and obtained a ruling that in some circumstances the transaction involving a digital asset is not a security and so I think you’ll see implications for this in the Coinbase and Binance cases,” she said. “The blind bid seemed to be a big part of her reasoning here that if the buyer and the seller don’t know who each other are then, in these circumstances, there wasn’t an investment contract.”

Ruling as a ‘wake-up call’ for the SEC

But the order though is not binding and even judges within the same district court could disagree, Goody Guillén added. The judge’s ruling, too, can still be appealed to the Second Circuit Court of Appeals, which multiple experts predict will happen, possibly before a trial to determine whether Garlinghouse and Larsen might be liable in civil court for unlawful securities sales.

“I suspect that both the SEC and Ripple are looking at their options there,” said Palley. “If I’m Ripple I’m looking at the ruling on institutional sales and thinking maybe I want to take that up too.”

In a note analyzing the ruling, TD Cowen Managing Director Jaret Seiberg called the ruling a “wake-up call to the SEC that its legal authority may not be as clear as it believed.”

But he also noted that “appeals courts often overrule trial court judges” and that experts at the investment bank “do not see it as a given that the appeals court will uphold the district court’s decision or reasoning.”

Spot Bitcoin ETF could still face significant hurdles, experts say

https://www.theblock.co/post/237299/spot-bitcoin-etf-could-still-face-significant-hurdles-experts-say

It was never going to be this simple.

Bitcoin’s price shot up nearly 25% in the two weeks following the news that investment giant BlackRock submitted an application with the Securities and Exchange Commission to offer a bitcoin spot exchange-traded fund. BlackRock has a sterling record with ETF applications and ETFs tend to make it easier for retail investors to access underlying assets, potentially pumping millions or billions more into various markets.

Bitcoin holders and investors saw the influential firm’s entrance into the historically crowded field of bitcoin spot ETF seekers as the chance for Charlie Brown to finally kick a football that’s been teed up for years.

But news first reported by the Wall Street Journal, that the SEC wants BlackRock and other recent applicants, including Nasdaq, Cboe and Fidelity, to revise and resubmit those applications didn’t surprise industry experts.

A spokesperson for the SEC declined to comment “on potential filings.” A Cboe spokesperson said it plans to update their filing and resubmit it to the SEC. Nasdaq, BlackRock and Fidelity declined to comment.

So you’re saying there’s a chance…

“The notion of a spot bitcoin ETF is very emotionally charged for some people, but it’s not unusual for the SEC to send applications back and ask for clarifications,” said Sean Tuffy, a financial regulatory expert.

Vivian Fang, a finance professor at Indiana University, sees the SEC’s move asking applicants to make changes to their applications as a step forward in the approval of a spot bitcoin ETF.

BlackRock, for example, will change the language and then work to quickly resubmit, though the SEC could still ask for more clarity, Fang said.

“I see this as very encouraging news as the SEC did not just go ahead and turn it down,” Fang said. “It basically kicked it back and said, work on the application and there is a chance that this may get approved.”

The SEC too likely wants “reputable” exchanges and asset managers involved with a spot bitcoin ETF, Fang added.

That may exclude existing crypto trading platforms, as none are registered as national securities exchanges, and most have listed assets that the SEC considers to be unregistered securities, likely complicating their ability to apply for that status.

Commingling of operations an issue

Financial regulators including the SEC have also raised concerns that the way most if not all are structured, with normally separate functions like exchange and broker-dealer services, and sometimes proprietary trading, under the same roof. Allegations of crypto trading platform providers betting against their own customers are one example of what concerns regulators about the combination of those functions, and regulators in the U.S. and elsewhere highlighted it as a major concern, even prior to the collapse of trading giant FTX.

“In other parts of our securities markets, the exchange, broker-dealer, and clearing functions are separate,” SEC Chair Gary Gensler said in a speech earlier this month. “Separation of these core functions helps mitigate the conflicts that can arise with the commingling of such services.”

Splitting those services might also help assuage the SEC’s longstanding hangup with bitcoin spot ETF applications: that the underlying market is opaque and prone to possible manipulation. The agency accuses Binance of market manipulation in its enforcement action against the crypto trading giant.

That’s ‘TradFi’s’ music

Tuffy saw this regulatory skepticism towards existing crypto trading platforms as an issue for ETF applications moving forward. Even putting aside the SEC’s recent enforcement action against Coinbase over the agency’s belief that Coinbase listed unregistered securities, among other violations the agency alleges, Coinbase isn’t registered as a national securities exchange, so they likely could not be used for the spot market surveillance sharing agreement central to the new applications.

The lack of compliance in the digital asset industry may clear the path for traditional financial giants to step into the void and provide that service, potentially leaving established crypto trading firms behind.

“If you have BlackRock co-sharing the monitoring duties with Nasdaq, it is a golden team, you can’t really beat that,” Fang said.

Tuffy also saw it as an opportunity for traditional financial institutions to step into a bigger role in crypto markets, seeing it as a possibility that Nasdaq accelerates their offering in reaction to the SEC’s guidance.

“I think overall it’s in-line with the SEC’s skepticism over the bitcoin ETF. But if you’re in the crypto world it’s sort of hopeful, because they didn’t outright reject it, they just asked for clarification,” said Tuffy.

But he added a dose of cold water.

“Ultimately I think that as long as Gary Gensler is in charge I don’t think we’re going to get a bitcoin ETF through, so I am skeptical about the outcome,” he said.