US stablecoin bill debate hones in on preventing ‘race to the bottom’

Debate over whether or not states should be able to regulate stablecoins, and tension over whether that would create a “race to the bottom,” took up much of the latest Congressional hearing on creating a comprehensive framework for digital assets. 

The hearing at the Digital Assets, Financial Technology and Inclusion Subcommittee on Thursday featured dueling stablecoin bills from the top Republican and Democrat on the House Financial Services Committee, bringing formerly closed door negotiations out into the public. 

Debate on stablecoin legislation drew unusual lines of agreement as House Republicans, who typically favor lowering regulation, argued that their bill went far enough in creating new guardrails for the still-nascent technology. 

Both sides see the need for stablecoin legislation after supposedly-stable tokens crashed much of the crypto market last year, culminating with the collapse of FTX and its affiliated firms and financial contagion throughout much of the crypto and digital asset industry. 

State of play

Some Democrats on the panel took issue with allowing state regulators to set standards for stablecoin issuance, arguing that the baseline could be lowered too far, driving firms to states with the loosest regulation.

“A race to the bottom is a practice, is the custom of this industry, you know, to go offshore and seek areas of least regulation,” argued Rep. Stephen Lynch, the top Democrat on the subcommittee. “My feeling is that if we directed this to 50 states, and territories perhaps, that that practice would continue and that cryptocurrencies would seek out those areas, those jurisdictions, that offer the best opportunity for them to maximize their profit and avoid cumbersome and costly regulation and disclosure.”

That would hamstring regulations like the New York Department of Financial Services, Lynch said. New York’s approach to stablecoins was put forward as a model by all sides, though Republicans say they want states, which currently regulate payments providers, to have the freedom to set their own standards as long as they meet certain criteria.

The Federal Reserve, given prominence over the area by Democrats in their own draft, would still potentially play a role under the Republican bill. Republicans also want the Office of the Comptroller of the Currency to continue to oversee stablecoin issuers who register as national trust companies, a bank-like category that focuses on providing a service that does not involve lending. 

‘Both sides of the aisle’ 

Republicans could try to pass their own legislation out of committee along party lines, and the House of Representatives, with zero support from Democrats since a simple majority is all that’s needed in that chamber of Congress. But Democratic control of the Senate and White House means the more support they can gain from across the aisle, the more likely a bill will become law. 

Republicans on the committee did not see the gap between the two sides over state-level regulation as insurmountable.

“It’s important as we work through the drafts that we strike the right balance there,” said Rep. French Hill, the Republican subcommittee chair. “It’s a key, effectively, a difference between these two drafts and one that we’re going to try to figure out between both sides of the aisle as we work through this.”

© 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.

FTX lawyers sue Bankman-Fried over fintech they now say is ‘worthless’

The team overseeing the bankruptcy of FTX, Alameda Research and the over 100 other companies affiliated with Sam Bankman-Fried’s failed business empire are suing the former FTX CEO, FTX co-founder Gary Wang, and former FTX senior executive Nishad Singh over what they say was a wildly overpriced acquisition just weeks before the exchange’s implosion.

In a suit filed in U.S. Bankruptcy Court for the District of Delaware on Wednesday, FTX’s current leadership claims that Bankman-Fried and other executives knew that Alameda Research, the investment fund also owned by Bankman-Fried, was insolvent when it finalized a nearly $250 million deal to buy stock clearing platform Embed. 

The lawsuit claims that Bankman-Fried and others knowingly used fraudulent funds taken from FTX customers for Alameda’s acquisition of the company. On top of targeting former FTX/Alameda leadership, separate suits also seek to claw back funds from Embed’s founder and former CEO Michael Giles, as well as early investors who sold their stakes to Bankman-Fried and company, including Propel Venture Partners, a venture capital firm that has backed several other notable tech startups, including Coinbase and Docusign. 

Unlike Bankman-Fried and others, Giles and Embed shareholders named in a parallel separate suit are not accused of criminal wrongdoing. 

Lawyers representing the failed FTX crypto empire want to claw back money on the grounds that Alameda was already insolvent when it finalized the deal in late September, and that the investment fund and sister company West Realm Shires, also controlled by Bankman-Fried, paid an inflated price for Embed. The suits are an attempt to maximize pay back to FTX and Alameda’s own creditors within the bankruptcy process. 

Allegedly terrible deal

Aside from allegations of fraud and self-dealing using customer funds – also alleged in criminal proceedings brought by U.S. prosecutors – FTX’s bankruptcy stewards also accuse Bankman-Fried and company of making a terrible deal. Lawyers representing FTX in the bankruptcy process put Embed up for bidding but now say that the platform is near-worthless compared to what Bankman-Fried and company paid for it. 

On June 27, after the acquisition was agreed to but had not been finalized, two senior employees noted in internal messages quoted in the filing that “Embed platform’s inability to handle approximately 600 new user accounts as part of the gradual release of FTX Stocks,” though a release plan called for Embed to handle 10,000 new accounts. 

The company had approximately $37 million in assets and made $25,000 profit as of March 31, 2022, the filing claims. 

On top of that the company gave Embed’s founder and CEO, named in a separate suit along with other equity holders who sold their stakes to Alameda, a $55 million retention bonus, to be paid in five installments beginning on Sept. 30, 2022, that did not require him to stay with the company past deal closing. 

‘Almost no due diligence’

“They performed almost no due diligence on Embed and accepted the significant terms proposed by Giles, Embed’s founder, CEO, and sole representative during the negotiation, who personally received approximately $157 million in connection with the acquisition,” FTX bankruptcy lawyers argue. “As a consequence, WRS paid far more than fair or reasonably equivalent value for Embed, and awarded Giles an extravagant and unwarranted retention bonus as an incentive to complete the acquisition quickly.”

FTX’s bankruptcy representatives argue that the retention bonus was an “unusual arrangement” because it only tied Giles to Embed through the closing of the deal, rather than keeping him on to run the company afterwards. He also received over $100 million for his equity as Embed’s largest shareholder. 

In communications between Embed employees, included as part of the lawsuit filing, two of them note the speed that Alameda hoped to close the deal while talking about whether they needed to prep for any sort of due diligence around the purchase. 

“I get a sense that they are [cowboy emoji] over there[.],” replied one. 

‘Essentially worthless’

FTX’s lawyers say that after trying to sell the company only months after the acquisition of Embed, no one wants to buy it for anywhere near what Bankman-Fried and others paid for it.  

Giles himself submitted the highest bid during a process held earlier this year, seeking to buy back the company for $1 million “subject to potential reductions at closing.” 

Giles did not immediately respond to a request for comment. 

“The result of the bidding process—including Giles’ own bid of $1 million, or 0.45% of the purchase price that WRS had paid just a few months before—leaves no doubt that the $220 million paid by WRS to acquire Embed was wildly inflated relative to the company’s fair value, which Giles well knew,” lawyers representing FTX’s caretaker leadership argue in the suit. “The bidders had figured out what the FTX Group and FTXInsiders did not bother to assess prior to the Embed acquisition, namely, that Embed’s vaunted software platform was essentially worthless.”

© 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.

The SEC calls Coinbase’s suit over digital asset rules petition ‘baseless’

The Securities and Exchange Commission responded to Coinbase’s lawsuit seeking a response to the company’s petition for new digital asset regulations, arguing that the commission is under no obligation to issue new regulations and Coinbase has no standing to sue the agency.

At the heart of the lawsuit is the longstanding dispute between the crypto industry and markets regulator over which digital assets should be considered security investments, subject to existing registration and transparency requirements, or exempted on the argument that they don’t fall neatly into those existing laws.

“Neither the securities laws nor the Administrative Procedure Act impose on the Securities and Exchange Commission an obligation to issue the broad new regulations regarding “digital assets” Coinbase has requested,” SEC lawyers responded in a filing to the Third Circuit of the U.S. Court of Appeals late Monday.

The Coinbase lawsuit, and the SEC’s response, is the latest escalation in growing tensions between the trading platform and markets regulator dating back to at least last summer.

SEC says it has more time to decide

The suit, which seeks to compel a specific response out of the SEC over Coinbase’s petition, with the possibility of continued legal fighting once one comes, is also unreasonably close to when Coinbase asked for the new set of rules, the agency argued.

“The rulemaking petition as to which Coinbase seeks an immediate determination asks the Commission to take a series of discretionary actions to replace existing applicable securities laws and regulations with a comprehensive new regulatory regime for the trading of crypto assets that are securities,” continues the SEC. “As Coinbase’s own submissions make clear, considering the various paths it suggests is a necessarily complicated endeavor.”

But Coinbase’s lawsuit came less than a year after its request for new rules that would potentially overhaul much of the U.S. financial system beyond cryptocurrencies and digital assets, the SEC continued.

The SEC called Coinbase’s argument that a decision had already been determined on the petition “baseless” and said the commission could still decide to move forward with crypto-specific rules.

“The Commission continues to consider Coinbase’s petition in the ordinary course,” SEC lawyers wrote to the court.

Agency argues rules exists for digital assets already 

Part of the SEC’s argument also repeats a familiar sentiment among regulators: that the crypto industry has rules and laws governing it, but just doesn’t like them.

As part of its filing, the SEC’s lawyers note that “as a part of the Commission’s overall regulatory agenda, it is also pursuing a number of actions that concern crypto assets that are securities.”

Those actions include the proposed rule changes to how companies safeguard customer assets that Coinbase submitted a comment letter to last week, in addition to cybersecurity, trade execution, and exchange-related rule tweaks that the SEC has proposed this year. The commission argues that those changes, and the feedback from industry, experts and customers that the agency solicits as part of its rulemaking process are part of its consideration of whether completely new rules around digital assets are needed.

“The information gathered from any or all of these efforts could inform the Commission’s consideration of its regulatory approach in this area, including its consideration of the regulatory approaches suggested in Coinbase’s petition,” the SEC says in its filing.

Citing multiple public documents issued by the agency over the years, including a widely publicized 2017 report on the original Decentralized Autonomous Organization and the tokens it issued, the SEC also argues that it has provided digital asset guidance outside of enforcement actions over the years.

Context of Coinbase v. SEC

Coinbase petitioned the commission for new digital asset rules at the same time that the commission accused a former Coinbase executive of the first ever insider trading case involving cryptocurrency. Coinbase also acknowledged an SEC investigation into multiple parts of the company’s business in late March, approximately a month before suing the federal regulator.

The former employee, Ishan Wahi, pleaded guilty to charges he participated in front-running listings by the company and was sentenced to two years in prison last week. In April he notified a court that he would likely settle his related but separate civil case with the SEC.

Authorities have not accused Coinbase of wrongdoing in connection to the case, but several of the tokens that Wahi traded on using insider knowledge were named as securities by the SEC, implying that the agency believed Coinbase illegally listed them.

The suit is seen as part of a preemptive legal effort over the investigation, a major bet by Coinbase that initiating legal action will help its leverage, despite the SEC’s strong record in enforcement actions against digital asset companies. 

© 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.

Banks, lawmakers add to Circle, Coinbase, a16z critiques of custody rules

It’s not just the usual cast of crypto companies complaining about a proposed overhaul to custody rules from the SEC. Republican lawmakers and traditional finance companies aren’t happy either, and that could send regulators back to the drawing board.

The rule changes, which advanced with bipartisan support within the commission and are still early in the rulemaking process, have raised concerns that they will further limit the number of banks willing to do business with the industry, and trading platforms like Coinbase fear their current means of safeguarding assets in pooled wallets could be upended. 

Congressional Republicans, led by House Financial Services Committee Chair Patrick McHenry, suggested the new rule language could further limit the universe of banks willing or able to work with digital asset companies, a concern in the industry following regulator guidance in January warning about exposure to crypto clients and assets. 

“Recent joint statements from the federal banking regulators have discouraged federally chartered banks from holding digital assets or even holding the deposits of digital asset firms. As a result, many digital asset companies have opted to custody their assets with state-chartered banks and trusts,” a comment letter from McHenry, as well as each subcommittee chair on his committee, reads. “Thus, the question in the proposal regarding whether qualified custodians should be limited to federally chartered entities is highly concerning, especially as it applies to digital assets.”

The definition of a qualified custodian

At issue is a rule change that would alter what it means to be a “qualified custodian,” and in doing so would strip some banks and savings associations of that definition with a stroke of a pen. A broad coalition of bank and financial industry associations that includes the American Bankers Association and the Securities Industry and Financial Markets Association, among others, has said the proposal “could have a material impact on their business.” 

The business groups signing onto the letter count industry giants like Fidelity Investments, Franklin Templeton, Goldman Sachs, Blackstone, Bridgewater Associates, Elliot Investment Management, Bain Capital, and Bank of America among the hundreds to thousands of financial companies who are members to the groups that raised concerns. The Independent Community Bankers of America, who represent smaller banks but are one of the most influential trade groups in Washington, also signed onto one of the business association letters expressing concerns. 

Trade associations representing community bankers, hedge funds, investment broker-dealers, private equity and large banks asked for a 60-day extension to the comment period for the proposed rule in order for more analysis to be done on its effects, intended or otherwise. 

Stablecoiners seek clarification

Stablecoin issuer Circle raised similar concerns over the impact on state-chartered banks and trusts, arguing that the SEC could address them by simply making explicit that those companies, like crypto industry players Paxos and Custodia Bank, qualify as custodians under the proposed new changes. 

“The SEC should finalize the rule as proposed and explicitly affirm that state-chartered banking organizations may continue to serve as qualified custodians,” Circle’s letter to the markets regulator reads

Paxos, a New York-chartered trust that provides custody services to crypto firms, also wanted the SEC to clarify that financial institutions regulated at the state level could continue to provide custody services to digital asset companies. The SEC could do that by setting a minimum standard for state-chartered companies to meet, Paxos argued

The approach by those two companies contrasts with stronger opposition from venture capital firm Andreesen Horowitz and a company it invested in, U.S. crypto trading giant Coinbase. 

Circle also echoed congressional Republican critique the potential unintended consequence with guidance to federal banks against exposure to digital assets, and raised flags about how the proposed rule changes could interact with smart contracts. 

But the company said it supports the spirit of the effort, which also includes language specifically aimed at limiting risks to customers in the event of future digital asset company failures. In explaining his rationale for the rule changes, SEC Chair Gary Gensler referenced several high-profile crypto failures last year, like FTX, Celsius, and Voyager, that put customers into lengthy bankruptcy processes in which they’re unlikely to fully recover the assets they kept with those companies. 

But Circle supports ‘SEC goals’

Despite some of those concerns Circle said it supports the SEC’s goals in changing the rule, despite the criticisms raised by the major stablecoin issuer. 

“Circle supports the SEC’s goals in proposing the Safeguarding Rule and proposals including the expansion of the rule to include cryptoassets, among other client positions,” the company said in its letter. “It believes that the Safeguarding Rule will protect investors, increase confidence in the cryptoasset industry, and keep investment in this generational technology inside of the United States. As the SEC finalizes the rule, it should pay attention to unintended effects that would lead to investor harm as described above.” 

© 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.

US Chamber of Commerce blasts SEC’s approach to ether, Coinbase

The U.S. Chamber of Commerce, one of the most influential business advocacy groups in the country, is taking up the banner of digital asset critics of U.S. regulation, and blasting the Securities and Exchange Commission’s approach to ether, Coinbase, Kraken and the broader digital asset industry. 

The association lent its support to Coinbase’s lawsuit against the SEC for a response to a request for crypto-specific rulemaking. 

Coinbase filed a rare writ of mandamus lawsuit against the SEC last month following up on a request made last summer for new rulemaking specific to digital assets. 

In its own filing to the court in support of that suit, the Chamber argues that the lack of direct response from the SEC to Coinbase’s request “is causing substantial economic harm to both Coinbase and the broader business community.” 

The Chamber also criticizes the commission’s enforcement action against Kraken’s staking-as-a-service business. The company settled and ended that business line in the U.S., but the Chamber criticized the action as emblematic of an aggressive SEC enforcement stance that could force more digital asset companies to end offerings in the U.S. 

Ether-eal ambiguity

The business group also blasts the uncertainty around ether, the second-largest cryptocurrency by market capitalization, and the major area around digital assets where SEC Chair Gary Gensler has taken a different tack from his predecessor, Jay Clayton. Under Clayton the SEC took a stance that ether may be sufficiently decentralized as to no longer be a financial security, whereas Gensler has strongly indicated otherwise while declining to explicitly express his opinion one way or the other in a recent congressional appearance. 

“Ether has been around for almost a decade, has a market capitalization exceeding $220 billion, and is a fundamental building block in the industry,” the Chamber’s brief reads. “Yet despite the ubiquity of ether, regulators still cannot agree on what it is.” 

The brief notes the shift in tone around ether from the SEC, the agency’s disagreement with the CFTC over the digital asset, and Gensler’s recent ambiguity before Congress and to reporters afterwards over whether ether is a security or not

The amicus brief filed earlier this week also piggybacks on one of the arguments the crypto trading platform makes in its own suit, that the SEC has already made up its mind on whether or not to issue a rule but declined to formally respond to the request, due to public statements by Gensler that current financial markets laws are enough to regulate digital assets. 

Coinbase could challenge the agency’s decision in court, though that would likely be a lengthy process. But the company chose to gamble with the preemptive lawsuit against the SEC now, and fight on its own terms, rather than wait on whether an investigation into several of its business lines would result in an enforcement action.

© 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.

US House builds consensus toward crypto action, but visions still differ

A rare joint committee hearing in the U.S. House of Representatives highlighted strong consensus around the need for new rules for crypto and other digital assets, while also showcasing where bridges still need to be built between differing visions of what those policies should look like. 

Despite some clear hurdles toward new rules, industry advocates and crypto holders may be encouraged by statements showing a clear and urgent desire to act from senior members of both political parties. 

“The Securities and Exchange Commission needs to modify its rules for broker dealers and securities exchanges,” Rep. Patrick McHenry, the Republican chair of the House Financial Services Committee, said during that committee’s unusual joint hearing with the House Agriculture Committee.

The Commodity Futures Trading Commission also needs more authority to regulate non-security digital assets, like bitcoin, McHenry argued, adding that SEC disclosure rules should be modified for digital assets that fall under that regulator’s regime. 

Only through new laws passed by Congress and signed by President Joe Biden can those changes happen, continued McHenry, making his case for urgency to pass digital asset legislation this year. 

“Those things have to happen because the CFTC and the SEC alone can’t do this,” said McHenry. “Congress must act.” 

Agreement on need for crypto action

The top Democrat on the committee McHenry chairs, Rep. Maxine Waters, agreed that legislation should happen and noted the bipartisan cooperation between herself and McHenry in developing a comprehensive regulatory framework for stablecoins. 

“Treasury and our financial regulators also identified further gaps in oversight in the crypto markets, such as limits in the SEC’s authority to go after frauds like FTX, even when they operate just off the coast of Florida,” Waters said in an opening statement for Wednesday’s hearing. “These should be bipartisan concerns, and legislation to address them should have a path to the President’s desk.”

“I hope this Congress we can quickly return to developing legislation together,” she added. 

Though House Republicans don’t need Democratic votes to pass a bill out of their chamber, sign-off from Waters and other Democrats, especially the Treasury Department, could raise the odds of a bill passing the Democrat-controlled Senate significantly. 

Congress working toward compromise

McHenry, one of the most effective vote counters in the House, has indicated he wants to draft legislation that will become law, meaning working to compromise with the Biden administration and congressional Democrats, rather than crafting an ideologically pure bill that would die on the vine in the Senate after a show vote in the House. He named consumer protection as a top priority in passing new legislation, in an appeal to skeptical Democrats. 

Although Waters suggested cooperation in her opening statement, she made clear her parameters for what she would go along with: regulation for stablecoins, increasing the SEC’s ability to go after overseas firms, and giving the CFTC more power over spot markets for digital commodities like bitcoin. 

But she made clear that re-drawing lines of jurisdiction over a majority of the tokens created since the 2017 initial coin offering bubble isn’t on the table for her. 

“There’s a broader effort underfoot to establish an entirely new market structure for cryptocurrencies and their issuers. I think that we should first hit pause and consider whether our security and commodity market structure is sufficient to address these issues,” the California Democrat said. 

Years-old questions still need answering

Despite support for congressional action, including from the Biden administration, longstanding questions over when a token or coin no longer fits neatly into existing financial asset definitions remain a central problem. 

“I think that inflection point, it’s a challenging one,” said Matthew Kulkin, a former CFTC official and current partner at WilmerHale, which has digital asset industry clients. “It’s sort of easy to draw out the two ends of the spectrum in terms of the token being offered to raise capital, versus something that’s highly commoditized and hedged in the derivative markets, but that point in-between is a challenging one to try to draw a bright line.”

Tim Massad, a former chair of the CFTC, argued that even if government defines a digital asset as a commodity it could still also fall under securities law, or vice versa, as happens with financial derivatives. Massad pitched a self-regulatory organization, similar to what exists in traditional financial markets, on top of existing government regulation. 

New York Stock Exchange Chief Operating Office Michael Blaugrund argued that similar rules governing his stock exchange should apply to firms facilitating crypto trades. That notion received some pushback from crypto industry panelists, who fear that exchanges would have to choose between listing digital commodities like bitcoin or digital securities, as markets regulators see the vast majority of tokens, if they were to register as national securities exchanges. 

The ideas put forward by both witnesses and committee members, however, highlighted areas of potential overlap to create new rules for crypto and stablecoins in the U.S. Whether industry and digital asset owners will embrace those new rules or want to be left to their own devices figures to be another ongoing question as debate continues. 

© 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.

U.S. House to hold rare joint committee hearing in growing crypto effort

A rare hearing between two committees in the U.S. House of Representatives on Wednesday is the latest sign of growing momentum for digital asset legislation. 

The House Agriculture and Financial Services Committees will hear testimony on regulatory gaps for digital assets in the U.S., with an eye towards creating new law explicitly for governing trading platforms and stablecoins. The unusual collaboration comes as policymakers try to put action to broad consensus that more rules are needed for crypto and stablecoin companies in the U.S.  

A number of high-profile firm failures, starting last May with the Luna-Terra crash, months of policy work, and years of lobbying lend some urgency to the effort. So does a quirk of the calendar in which the House and Senate Agriculture Committees will spend most of their time later this year on reauthorizing billions in agricultural and food programs run by the federal government, due to expire in October. 

As opposed to a number of other issues debated in the halls of Congress, crypto has yet to become a fully entrenched or partisan issue, giving efforts to craft new policy on a bipartisan basis chance of becoming law in a narrowly divided government. 

“This is a town where people very much like to fight over turf, and where egos can sometimes get in the way of progress,” said Rep. Dusty Johnson, R-S.D., chair of the Agriculture Committee’s panel with jurisdiction over digital assets during a hearing last month. “That cooperation is a testament to the importance that both Chairman McHenry and Chairman Thompson, as well as teams on both sides of the aisle have had, to getting things done on digital assets this Congress.”

Wednesday’s hearing will be the next indication as to how effective that turf-sharing could be.

Stop. Collaborate and Listen.

After a quiet few months to begin this Congress, talks around new legislation for digital assets became more public in recent weeks. 

Republicans Patrick McHenry and Glenn ‘GT’ Thompson have made a point to work together due to the unusual overlap between their committees on crypto; the Financial Services Committee oversees capital markets and the Securities and Exchange Commission, while the Agriculture Committee maintains power over the Commodity Futures Trading Commission, which regulates bitcoin and ether futures. 

CFTC Chair Rostin Behnam also told a Senate committee in March that stablecoins fall within his agency’s jurisdiction in the absence of legislation telling them otherwise, creating another area of disagreement around digital assets between the commodities regulator and the SEC, and lending more urgency to Congress sorting out the issue. 

House Financial Services Committee Republicans already introduced a fresh draft bill on stablecoins late last month to advance conversations beyond where they stalled on new rules for the payments assets. 

Wednesday morning’s joint hearing will focus on regulatory gaps for cryptocurrencies, with an eye towards building around existing rules and ideas rather than starting from scratch. 

Witnesses include former CFTC Chair Tim Massad, now a Harvard fellow, New York Stock Exchange Chief Operating Officer Michael Blaugrund and Kraken Chief Legal Officer Marco Santori, among others. 

Measured Enthusiasm

Industry advocates have become cautiously optimistic that digital asset legislation has a better chance than most other bills to pass Congress and become law with President Joe Biden’s signature this year. 

Several more hearings related to crypto are expected this summer, and McHenry told The Block last month that the Treasury Department has once again engaged with him and his staff on stablecoins after reaching an impasse last year. 

But whether Senate Banking Committee Chair Sherrod Brown, D-Ohio, whose committee also has jurisdiction, will agree to act on a bill if it passes the House remains to be seen. The Ohio Democrat is a crypto skeptic who told The Block he would defer to SEC Chair Gary Gensler’s views on the topic but he and his staff have engaged more on cryptocurrency policy so far this Congress, in part because of the epic implosion of the industry, highlighted by FTX’s high-profile collapse. 

One industry advocate tracking the bills, who asked for anonymity in order to speak freely, said that his enthusiasm varied from week-to-week. But he felt optimistic when reached on Tuesday.  

“It’s going to be a pretty busy summer,” said the lobbyist, though he added, “We’ll see if Senate Banking ever has that markup.”

© 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.

Bankman-Fried blames ‘crypto winter’ for FTX failure in seeking dismissal of most charges

Sam Bankman-Fried’s lawyers have come out swinging against federal prosecutors, seeking to preemptively dismiss most of the criminal charges made against the disgraced FTX co-founder and former CEO before a trial can take place.

A late filing on Monday by the fallen crypto mogul’s legal team seeks to toss fraud-related charges that they argue are duplicative, and also a campaign finance-related charge, on the grounds that the charge violates terms under which the Bahamian government extradited Bankman-Fried to the U.S. to face prosecution.

Bankman-Fried’s lawyers filed seven motions to dismiss charges brought against him, arguing that most could not be prosecuted by the government. The argument made by the former FTX and Alameda Research CEO’s defense team also seeks to paint the trading platform’s practices as standard in the crypto industry, and lay blame with the U.S. government over its regulatory wrangling around digital assets over the last several years.

Blame crypto and the government, not FTX, SBF lawyers say

Calling the U.S. government’s pursuit of Bankman-Fried “a classic rush to judgment,” the FTX and Alameda owner’s defense team argues that shortcomings leading to FTX’s demise are common throughout the crypto industry. They also contend the company’s failure stems from a broader crypto winter, rather than reported failure to back FTX’s native token FTT, or secret loans from FTX to Alameda alleged by both prosecutors and the bankruptcy team put in place to manage the repayment of FTX customers and creditors.

“Like many other cryptocurrency market participants, and many other start-ups that experience exponential growth in a short period, FTX did not have fully developed controls and risk management protocols,” Bankman-Fried’s lawyers told the judge presiding over the case. “FTX, like other market participants, was susceptible to a broader market collapse.”

Bankman-Fried’s team also argues that “every major participant” in the crypto industry “cratered,” and draws parallels between the collapse of different digital asset firms and the 2008 global financial crisis, the catalyst for the popularity of bitcoin and growth of digital assets.

Double jeopardy question

In the motions filed with the federal Southern District of New York, Bankman-Fried’s defense team argues that a conviction in either of two pairs of charges would be a convocation for the same crime, since the charges stem from similar portions of the law. Defendants cannot be convicted twice for the same crime in the U.S., termed a right against “double jeopardy.”

The early defense effort argues that going to trial with multiple criminal charges that, in their eyes, could be canceled out by others he faces may lead to “undue prejudice” in his trial. It may also be an early effort by the defense to undermine the credibility of prosecutors in the eyes of a court or a future jury.

The pairs of charges in question are a charge of conspiracy to commit bank fraud and another of conspiracy to commit wire fraud on FTX customers; and a charge of conspiracy to operate an unlicensed money transmitting business and another for conspiracy to commit commodities fraud on FTX customers. Bankman-Fried argues these pairs of charges are redundant, and that one of the charges from each pair should be withdrawn.

In separate but related motions to dismiss, the defense team also makes a series of more obscure legal arguments against other charges, including that the Bahamian government did not give its consent for some of the allegations brought against Bankman-Fried when it agreed to extradite him.

© 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.

Coinbase vs. the SEC: A gamble to take on a regulator undefeated on crypto

Coinbase started a legal and public relations battle with its government regulator by suing the Securities and Exchange Commission on Monday, preemptively acting before the agency advances in its own fight with the crypto giant.

The lawsuit, which seeks a clear answer surrounding crypto rulemaking, could be the company’s best possible chance to take on the SEC, and speed up a lengthy court battle that it already faced. Or, it could just be a desperate ploy to grab headlines. Regardless of opinions on the lawsuit’s merit, stakeholders see the latest salvo fired by Coinbase at the U.S. government as aimed at the court of public opinion in addition to the actual courtroom. 

“This preemptive strike that Coinbase is doing with this writ of mandamus is just another attempt to rally the mob,” said John Reed Stark, former chief of the SEC’s Office of Internet Enforcement, a current compliance consultant and vocal crypto critic. “They make these arguments like a bunch of children, running around with silly ideas, and they rally the mob with silly ideas.”

The narrow suit brought by Coinbase against the SEC revolves around a petition to the agency for new rules around digital assets. While the company has said it “firmly believes that a new regulatory framework is needed to ensure that the SEC can fulfill its responsibility to oversee the digital asset securities markets,” it has yet to receive a response to the request sent last July.

Coinbase didn’t respond to a request for additional comment. 

Coinbase fighting on its own terms

“For whatever reason Coinbase loves to speak loudly about everything and antagonize the SEC,” Stark said.  

They may have good reason to do so, said Jennifer Schulp, a financial regulation expert at the Cato Institute and a former enforcement director at the Financial Industry Regulatory Authority, a self-regulatory organization for the securities industry.

“They want to be able to point out that the SEC is deficient here” by “not acting in good faith” with regards to digital assets, Schulp said. 

By filing a writ of mandamus, a specific type of lawsuit against the government described as an “extraordinary remedy,” Coinbase may be giving itself its best chance of fighting on its own terms before the SEC can pursue legal action against the company. The U.S. crypto giant publicly disclosed last month that the SEC launched an investigation into Coinbase over its staking, wallet, institutional and exchange businesses. 

At the center of the unusual lawsuit is a petition for rulemaking specific to digital assets, which Coinbase first requested in July. The legal maneuver aims to force the SEC to provide a yes or no response to the petition, with the likely next step to be appealing a ‘no’ decision in court and beginning a legal fight with the SEC that Coinbase knows could come anyway. 

“If the SEC says no to our rulemaking petition, which it has the right to do, then Coinbase would be allowed to challenge that decision in court and explain in that formal setting why rulemaking is required,” wrote Paul Grewal, Coinbase’s chief legal officer, announcing the action this week. “From the SEC’s public statements and enforcement activity in the crypto industry, it seems like the SEC has already made up its mind to deny our petition. But they haven’t told the public yet.”

Playing the long game

“The current writ of mandamus is an unusual move, it is aggressive, doesn’t mean it’s wrong, but it’s not the usual tack that people take when there’s a petition for a rulemaking and it’s been nine months,” Schulp said. 

Schulp, who used to work at Gibson Dunn, the law firm hired by Coinbase to argue its case against the SEC, saw a thin argument around the length of time that has passed since the petition for a rule was made, since most SEC rules take a substantial amount of time. But she saw a stronger case to be made that SEC leadership already made up its mind without giving a formal yes or no answer. 

“From a legal strategy standpoint this is about moving the ball forward,” while also getting “good optics” for the company, she said. She noted that Eugene Scalia, a former cabinet secretary and previous colleague of hers who is leading Coinbase’s case, has won cases against the SEC and other financial regulators.

“It’s playing a long game and it depends on what the SEC’s action looks like against Coinbase,” she said, adding that the move is providing “more color and evidence to the argument that Coinbase will make in defending itself against the SEC” in a way that at least builds more material for Coinbase’s defense if the SEC comes after it.

Careful what you wish for

But even if Coinbase forced the SEC to make a rule specific to digital assets, it might not be a rule that the crypto industry would want. And if the process plays out as Coinbase seems to think it will, with the SEC refusing to make a specific rule, Coinbase could appeal in court but may not win. 

“The SEC has never lost a single one of those cases,” Stark said, referring to the over 100 cases brought against crypto projects. Every enforcement action has ended in an SEC win or settlement where the subject of an enforcement action ceases an activity or pays a fine, and often both. 

Stark, who said he leans libertarian, is a critic of the SEC in other areas of its jurisdiction and has authored Wall Street Journal op-eds critical of agency policies. But on crypto, he said he agrees with the SEC’s “regulatory onslaught” of enforcement actions, policy positions and speeches, and noted that the agency has never seen the success rate it has against crypto in any other area it polices. 

“They had no program area where they were undefeated, until crypto came along,” he said.

Courting disaster?

From a business perspective, a win might provide a short-term bump for Coinbase’s stock. In the meantime, major legal hurdles are hindering the stock’s performance, and recent moves being made haven’t helped, according to a Mizuho analyst.

In March, the SEC issued Coinbase a Wells Notice regarding aspects of the company’s exchange, staking service Coinbase Earn, and Coinbase Wallet after a cursory investigation. That put “30-40% of revenue at risk” for Coinbase, according to Ryan Coyne, a research analyst at investment bank Mizuho.

“Over 80% of their business currently is done in the U.S.,” Coyne said, noting that most of that with retail investors. He highlighted how reliant the company is on U.S. customers and said that it’s unlikely to follow through on hints that it could leave the U.S. altogether. 

A recent licensing in Bermuda, meanwhile, is only expected to attract more regulatory scrutiny given continued concern from regulators over offshore arbitrage, especially after the epic implosion of Bahamas-based FTX, the analyst said. 

“It’s not like they’re going to domicile in Bermuda and no longer serve the U.S. user,” Coyne said. “I’m not totally sure that Coinbase has the firmest of grounds to stand on in this battle.” 

Adam Morgan McCarthy contributed to this report. 

© 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.

Coinbase sues the SEC for answer on rule specific to digital assets

Coinbase is suing the Securities and Exchange Commission. 

The lawsuit follows on a petition for a rulemaking that the company filed with the SEC last summer, requesting the commission draft and approve a rule specific to digital assets. The lawsuit aims to force the agency to provide a yes or no to Coinbase’s ask. 

Since that request by Coinbase, the SEC has reopened custody and exchange rules to explicitly say that they apply to digital assets, but has not engaged in drafting a rule specific to digital assets. The agency has also engaged in several enforcement actions against crypto companies, including an investigation into Coinbase

“From the SEC’s public statements and enforcement activity in the crypto industry, it seems like the SEC has already made up its mind to deny our petition. But they haven’t told the public yet. So the action Coinbase filed today simply asks the court to ask the SEC to share its decision,” the company’s chief legal officer Paul Grewal wrote in a blog post about the filing. 

Eugene Scalia, son of former Supreme Court Justice Antonin Scalia and former secretary of labor, a cabinet-level position, is one of the outside counsels representing Coinbase in their petition. Scalia, currently a partner at the law firm Gibson Dunn, has won several suits against financial regulators, including a case against the Financial Stability Oversight Council that ended with the revoking of insurance company MetLife’s “too big to fail” regulatory status. 

If the SEC declines to make a new rule, Coinbase can file another lawsuit in an attempt to make a federal court force them to do so. 




© 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.

Republicans move to take regulatory power over stablecoins from Gensler, SEC

House Republicans fed up with the Securities and Exchange Commission’s stance on crypto proposed new draft stablecoin legislation that would take jurisdiction away from the agency over payment stablecoins.  

The draft, made public as negotiations continue over a comprehensive framework for stablecoins, comes amid the SEC’s investigation into BUSD, a shared stablecoin between digital asset infrastructure company Paxos and international crypto exchange Binance. As currently written, the bill would shift authority over stablecoins to federal and state bank and credit union regulators.

In a difference from where bipartisan talks previously stood, the bill would no longer touch algorithmic stablecoins or mandate a study of a central bank digital currency. Instead the bill would narrowly focus on stablecoins used for payments, and is intended to be a companion piece to legislation that would govern digital asset markets in the U.S. 

The move to limit the SEC’s role comes as little surprise as both industry executives and congressional Republicans have criticized SEC Chair Gary Gensler’s approach towards digital assets.

“I’ve been disappointed in the SEC approach on digital assets, particularly stablecoins, but other aspects too, of not bringing clarity,” Arkansas Republican French Hill told The Block last week.

As chair of a new digital assets and financial technology-focused subcommittee, Hill plays a key role on stablecoin negotiations.

Gensler frustration

House Financial Services Chair Patrick McHenry, R-N.C., among others, was frustrated with Gensler over a lack of clarity around whether or not he believes ether is a security or a commodity. Frustration has also grown with the SEC chair over his assertion of jurisdiction over stablecoins.

Gensler asserted that they were a security investment that would fall under the SEC’s jurisdiction, seemingly putting him at odds with other Biden administration officials, according to a source familiar with bipartisan talks around a stablecoin regulatory framework last year.

Industry advocates believe Gensler tried to undermine talks between McHenry, Rep. Maxine Waters, D-Calif., and the Treasury Department last year in order for the SEC to continue to hold full sway over stablecoins in the U.S., but a separate source familiar with those talks has disputed that.

Aside from shifting oversight of stablecoins from the SEC to federal and state bank and credit union regulators, the bill also subjects nonbank stablecoin issuers to regulatory examinations, that every stablecoin be backed by legal tender or short-term Treasury bonds and includes a monthly reporting requirement with a certified public accounting firm.

Payment focus

States could approve stablecoin issuances using their own standards, but the bill sets a floor for state regulators for evaluating projects. The Federal Reserve can also halt projects, even if approved by a state, if the stablecoin does not meet those baseline criteria. 

Under terms of the bill stablecoins would have to be backed at least one-to-one with legal tender or short-term Treasury bills. In the event of a bankruptcy, a common occurrence for digital asset firms in 2022, payment stablecoin holders would be treated preferentially for reimbursement. 

Senior Republican committee staff characterized the bill as a conversation starter, and that it has been shared with Democratic staff of the House Financial Services Committee as well as the Biden administration. Any digital asset-related bill will need bipartisan support in order to become law, due to a Republican majority in the U.S. House of Representatives and a Democratic majority in the Senate, as well as required sign off from President Joe Biden, a Democrat. 

© 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.

Crypto effort in House gathers steam, could gain allies in Lummis, Gillibrand

Momentum is building for the first major U.S. crypto legislation to have a realistic shot at becoming law. 

Members of the House and Senate have begun working together on a bill to create new market structure rules around digital assets.

The talks come amidst a regulatory crackdown on the industry by the Commodities Futures Trading Commission and the Securities and Exchange Commission. Both the enforcement actions and top-level recommendations for new laws to govern digital assets were part of an agenda released by the Biden administration last year. 

The markets effort is running in parallel to another major effort to advance a bipartisan framework for stablecoins. 

Details of the Republican-led crypto market effort remain under negotiation. The goal is to introduce it this spring or early summer, and that it and a stablecoins bill would reach bipartisan consensus in the closely divided chambers of Congress, as well as final sign off from President Joe Biden, and provide more rules specific to digital assets. 

Key House players

House Financial Services Committee Chair Patrick McHenry, R-N.C., and House Agriculture Committee Chair Glenn ‘GT’ Thompson, R-Pa., are the senior House players in the market structure effort. 

Thompson authored legislation around spot crypto markets last Congress, and his committee has jurisdiction over commodities laws, since a number of commodities come from the agriculture industry. The Pennsylvania Republican told The Block his committee was starting “from scratch” in this effort while “working collaboratively” with the Financial Services Committee, but that the two chairs are on the “same page.”  

Thompson and McHenry agreed to principles on what new legislation governing crypto markets should look like earlier this year, after the North Carolina Republican approached him to coordinate efforts given an unusual degree of overlapping jurisdictions between the two committees on the issue. 

“We’re working from those principles to structure Ag and Financial Services pieces for a securities and commodities regime for a holistic market structure bill,” McHenry told The Block. 

That said, the Financial Services Committee holds the lion’s share of jurisdiction on the topic, with the power to rewrite securities laws central to crypto market regulation.

McHenry, in addition to being one of the most effective negotiators and vote counters in Congress, is also considered one of the most knowledgeable members of Congress on financial technology, as co-author of a landmark equity crowdfunding law passed over ten years ago. The law was one of the last to amend securities laws to accommodate new technology, a similar dynamic to conversations around legal tweaks for digital assets. 

Senate cooperation

The legislation effort recently picked up momentum when the House Republicans began coordinating with the authors of a high-profile, wide-ranging crypto policy bill from last Congress: Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y. 

The two were expected to reintroduce a version of their wide-ranging crypto legislation from last Congress before an upcoming industry conference later this month, but have pushed their timetable to coordinate with the House effort, Lummis said in an interview. 

“We’re going to try to work with them and see if we can find ways to dovetail our concepts,” said Lummis. “So now it’s going to look a little different, I suspect, but because we’re trying to merge ideas, we’re hoping that once we get the merged product, that it’s going to be easier to move.” 

The coordination is mutually beneficial and can give more weight to legislation going forward. Though last Congress’ Lummis-Gillibrand bill was well-received by industry, it fell short of picking up momentum in Washington, and McHenry and Thompson enjoy the privileges of chairmanship in a chamber where Republicans can pass legislation on a party-line vote. Meanwhile Lummis and Gillibrand give House drafters sponsors in the Senate, and Lummis sits on the Senate Banking Committee, the counterpart to the committee McHenry chairs. 

“As we finalize those things we’re going to try to team up with the folks who are most knowledgeable and interested in the Senate,” said McHenry. “And certainly Senator Gillibrand and Senator Lummis have been deeply engaged on this.” 

Still an up-Hill climb

Though having Senate allies to introduce the legislation on that side of the Capitol could help the effort, Senate Banking Committee Chair Sherrod Brown, D-Ohio, and the Treasury Department will also play major roles in any bills becoming law.

Treasury Secretary Janet Yellen signed off on recommendations for new laws around stablecoins and crypto firms in October. The Treasury Department and McHenry’s staff did not always see eye-to-eye during stablecoin talks last year, but he said on Wednesday that the Biden administration was working with him and his staff, at least on stablecoins legislation. 

Brown, whose committee any legislation would go through, has yet to express much enthusiasm for legislating around digital assets. The Ohio Democrat told The Block following a hearing in February that he’s not convinced crypto has “a real role” in the financial system and he is largely deferring to Securities and Exchange Commission Chair Gary Gensler

Gensler has made clear that he sees cryptocurrencies as securities that should be following securities laws.

“We’re talking to Gensler ongoing,” Brown said when asked by The Block following a hearing before his committee in February what his thoughts on legislation were. “I’m very interested in a legislative answer here, but we need them,” meaning the SEC, “to be aggressive here.”

© 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.

Signature Bank didn’t fail because of crypto, New York regulator says

New York’s head banking regulator used an appearance before a congressional committee on Wednesday to push back against the narrative that Signature Bank failed because of its exposure to the crypto industry.

“It is a misnomer that the failure of Signature Bank was related to crypto,” said  Superintendent Adrienne Harris. In her testimony before the House Financial Services Committee’s panel on digital assets, financial technology and inclusion, Harris noted that Signature customers including fiduciary trusts and wholesale food vendors pulled their money from the bank during a panic last month following the collapse of Silicon Valley Bank.

“So it’s of course unfortunate that there was a run on the bank,” Harris said. “But it is not the case that the failure Signature was related to crypto.” 

Maxine Waters, the top Democrat on the House Financial Services Committee, pressed Harris as to how she could say that cryptocurrency didn’t play a part in the large regional bank’s sudden collapse. 

Harris replied that about 20% of Signature’s deposits left the bank the evening that Silicon Valley Bank failed, but that only “20% of that 20%” were crypto-related deposits. “The rest were normal commercial customers with uninsured deposits that were leaving the bank, and so we did not see the collapse as a result of crypto deposits and their instability,” Harris said. 

Harris’ comments came during a hearing on legislation to create a U.S. regulatory framework tailored to stablecoins. 

Signature Bank closure

The New York regulator announced its closure of the bank two days after Silicon Valley Bank’s failure in order to prompt continuation of operations by the Federal Deposit Insurance Corp., a federal bank regulator. 

The New York regulator’s testimony came before the same committee that former Rep. Barney Frank, a Signature Bank board member, used to chair. Frank has criticized the NYDFS for what he alleged was premature action in closing the bank because of its involvement with the digital asset industry.

In addition to holding deposits from digital asset-related companies, Signature also ran a crypto-oriented payments network called Signet, which Martin Gruenberg, the chair of the FDIC, said last month that the agency was trying to sell as part of its wind down of the bank. The regulator also has tried to offload all deposits to other banks to avoid disruption to customers, though Gruenberg indicated in testimony last month that the FDIC had yet to find a buyer for the crypto parts of the business. 

“They closed us even though there was no good, compelling reason to do that because they wanted to show that banks shouldn’t be involved in crypto,” Frank told The Block last month.

© 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.

Gensler says securities law is time-tested, crypto just needs to fall in line

Securities and Exchange Commission Chair Gary Gensler continued to hint that ether, among other crypto tokens, may face increased scrutiny as an unregistered security. And with securities laws time-tested, the industry better get in line.

“If the public is anticipating profits based upon the efforts of others in a common enterprise, those are the indicia of a security,” Gensler said when asked by The Block why he declined to directly weigh in on whether the second-largest cryptocurrency by market capitalization is a security or a commodity. 

“Overall, these token operators they generally have websites, they generally have a group of individuals that are updating software, they often have Twitter accounts, they often hire lawyers, they often lobbyists who come and meet with members of the SEC and members of congressional staff,” Gensler said. “It kind of belies logic that there’s not some common group of promoters that are in the middle of this.”

The Republican chair of the House Financial Services Committee, Patrick McHenry, earlier pressed the SEC chair to provide more clarity on the topic, a seeming friction point between Gensler and fellow markets regulator Rostin Behnam, the chair of the Commodity Futures Trading Commission. In a recent enforcement action against crypto firm KuCoin, New York Attorney General Letitia James asserted that ether is an unregistered security, possibly opening Ethereum co-creator Vitalik Buterin and other early developers up to legal liability. 

“Give me a break, come on,” said McHenry during repeated attempts to get Gensler to provide further detail on ether. “There’s a lack of clarity here, can you at least agree with that?” 

‘Clarity’ in crypto

Gensler spoke to reporters following Tuesday’s hearing before that committee, during which he received a lengthy grilling from Republicans on digital assets, among other issues, as well as the occasional critical question from committee Democrats.

Asked by The Block whether more direct guidance on ether might make sense given conflicting views from policymakers on the cryptocurrency, including from a former SEC divisional head, Gensler responded that “this is a field that has clarity and mistakenly attempts to ignore it.” 

“The time-tested securities laws really are time-tested,” added Gensler. “And that’s why we need to ensure that a number of your readers, maybe even your owners, come into compliance with the securities laws.”

© 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.

Gensler grilled by Republicans over SEC’s approach to cryptocurrencies

House Republicans grilled Securities and Exchange Commission Chair Gary Gensler over his agency’s handling of digital assets, especially a lack of clarity over whether or not ether is a security, stablecoins regulations and the agency’s handling of FTX.  

Appearing before the House Financial Services Committee on Tuesday, Gensler faced criticism from the outset of the hearing when the committee’s chairman questioned him about whether or not he views the cryptocurrency with the second-largest market capitalization, ether, as a security. Gensler responded with previous statements about the amount of digital asset projects and tokens in violation of securities law. 

“I’ve never seen a field that’s so non-compliant with laws written by Congress and affirmed over-and-over by the courts,” as digital assets, Gensler said. “We talk to the crypto firms about tokens and how they can register.” 

Chair Patrick McHenry grew exasperated with Gensler after repeatedly attempting to get him to weigh in on whether ether is a security or commodity. 

“Give me a break, come on,” said McHenry. “There’s a lack of clarity here, can you at least agree with that?” 

Gensler replied that securities laws are clear, and that the SEC enforces securities laws that require disclosures to investors on investment vehicles. 

In the ether

The status of ether in particular remains uncertain. Under the leadership of Gensler’s Republican predecessor, Jay Clayton, the SEC took a similar stance that almost all tokens are securities under longstanding laws, but said a small number of tokens might cease to be considered securities if they became broadly decentralized. 

A 2018 speech by a senior SEC official, speaking on his own views, said that ether had reached a threshold of being decentralized enough that he no longer saw the value in applying securities laws. The official, William Hinman, was willing to set aside whether or not its initial offering, which became a model for the 2017 initial coin offering boom that started greater SEC scrutiny of digital assets, violated the law. 

But Gensler has implied that ether, and any other proof-of-stake cryptocurrency, could be considered a security, seeming to disagree with those past views of senior commission officials on the world’s second-largest digital asset. 

Further confusing the matter, Commodity Futures Trading Commission Chair Rostin Behnam sees ether as a commodity falling under his jurisdiction, while New York Attorney General Letitia James declared ether an unregistered security in an enforcement action taken against the crypto firm KuCoin.

© 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.

Bittrex founder to customers in SEC filing: ‘Go f*** yourself’

Despite publicly crying “regulatory uncertainty,” Bittrex’s co-founder and employees knew they were breaking securities laws. That’s what the Securities and Exchange Commission alleges in a complaint made against the company Monday, and they have messages they say prove it. 

The complaint cites internal messages detailing the delisting of tokens and removal of marketing statements, “scrubbing” in the company’s parlance, in an effort to cover up that Bittrex helped sell tokens they knew could qualify as security investments under U.S. law. 

The SEC quotes an unnamed employee telling one of Bittrex’s three founders, “I hate people bitching that we don’t email them about market removals.” The SEC says the founder, who also remains unnamed, remarked that his preferred response to those customers was “go f*** yourself” and to tell them to “track your own damn investment or get a broker to do it for you.” 

The Bittrex complaint is the latest in a string of regulatory actions that have used internal communications from the companies themselves to help build cases. Most recently, the Commodity Futures Trading Commission’s suit against Binance was riddled with company emails, Slack messages and even text conversations between Chief Executive Changpeng Zhao and other employees.   

During the 2017 initial coin offering bubble, Bittrex co-founder Bill Shihara allegedly advised different projects to scrub investment-related phrases from their marketing materials after sales were made, according to Monday’s complaint. The move was an effort to make more assets available on the platform and to avoid regulatory scrutiny, according to the SEC. 

Bittrex’s problematic statement cleanup

“Congratz on the crowdsale,” write Shihara in an email to the developer team behind the TKN coin in May 2017, which was included in the SEC filing. Shihara then asked them if they had removed “investment related terms” from their documents. 

bittrex email
An alleged Bittrex email included in the SEC complaint

Bittrex went on to list several tokens it knew might be securities, the complaint alleges, including several projects that the SEC took action against.

Shihara and other Bittrex employees also allegedly combed through whitepapers, marketing materials and social media posts and urged issuers to remove “problematic statements.” They even had a “cheat sheet” to use as a guide when reviewing materials. 

Bittrex cheat sheet
The Bittrex cheat sheet the SEC alleges was used by the company

At the root of the SEC’s complaint is that the alleged failure to follow securities laws hurt investors because Bittrex did not follow established rules and laws governing exchanges. The agency also alleges that Bittrex is still operating in the U.S. now, with plans to formally wrap operations at the end of April. 

‘No obligation’

According to Bittrex’s terms of service, as quoted in the SEC complaint, the company has “no obligation” to separate customer fiat deposits or digital assets and that Bittrex could send whatever fiat currency it wanted to if or when a customer requested to withdraw from their account. That echoes FTX’s alleged similar lack of segregation of customer deposits from other pools of funds. 

SEC Chair Gary Gensler has cited the trouble customers have in collecting their money from bankrupt digital asset firms as an ongoing concern for the agency. 

In October Bittrex agreed to pay $53 million in fines to two separate enforcement entities within the U.S. Treasury Department charged with combating money laundering and enforcing sanctions laws. 

Bittrex said last month that it would stop operating in the U.S., citing the regulatory environment as the main reason.  According to analysis by The Block, the firm’s market share of U.S. dollar crypto trading, a metric that largely captures U.S. market share, fell from approximately 23% of total volume in 2018 to under 1% in 2021. 

© 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.

New stablecoin bill draft introduced in US House of Representatives

Members of the U.S. House of Representatives are taking another crack at creating a comprehensive regulatory framework for stablecoins, like USDC and Tether, digital assets intended for payments whose price is supposed to remain the same at all times. 

The House Financial Services Committee released a new discussion draft bill with no official notice on Saturday, in apparent anticipation of a hearing on the topic on Wednesday by the committee’s new panel focused on digital assets and financial technology. 

The draft may not be the final version of the bill as debate and talks will continue in Washington over coming weeks and months. Negotiations picked back up after stalling shortly before midterm elections — and the FTX collapse — last year due to differences between congressional Republicans, Democrats and the Biden administration. There was additional finger-pointing at the Securities and Exchange Commission, which provided technical advice on the topic and recently began investigating stablecoins as securities offerings

Here are highlights of what the draft bill would do if it becomes law: 

  • Put the Federal Reserve in charge of nonbank stablecoins

The U.S. central bank would approve and regulate non-bank companies like Circle and Tether that currently issue or want to issue their own stablecoins in the U.S. Credit unions and banks that want to issue their own stablecoins could do so with approval from the main financial regulator they fall under, the National Credit Union Administration, Federal Deposit Insurance Corp. or Office of the Comptroller of the Currency. Failure to register would be punishable by up to five years in prison and a $1 million fine. Any issuer that wants to do business in the U.S., regardless of where the company is based, would need to register. 

  • A (temporary) ban on new stablecoins without fiat backing

The new draft bill includes a two-year ban on stablecoins that aren’t backed by a hard asset, and it directs the Treasury Department to lead a study on the topic of such “endogenously backed” stablecoins. Tokens already in existence before the bill passes into law would be grandfathered in.

  • Allow the government to set interoperability standards

Banking regulators and the National Institute of Standards and Technology would have the ability to set standards for interoperability between stablecoins to allow for ease of use, including mandatory technical and legal specifications to allow users to clear and settle across different payment systems without buying native stablecoins for each. 

  • Direct the Fed to study a digital dollar

If the bill becomes law, Congress and the president would direct the Federal Reserve to study the effects of a digital dollar issued by the central bank. The Fed has already begun studying whether to issue a digital dollar, but the bill would mandate certain areas of focus, like the potential impacts on monetary policy, financial stability and privacy for individuals. Fed leaders have expressed mixed views on a digital dollar, with the long-awaited FedNow real-time payments system due to launch in July and provide similar faster payments to a digital currency, but using more traditional financial infrastructure than a central bank digital currency. 

© 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.

Silk Road hacker sentenced for multibillion dollar bitcoin fraud

Prosecutors have secured another prison term in connection with the infamous darknet marketplace Silk Road, though this time the person serving a sentence was convicted of stealing from the website. 

James Zhong, 32, of Gainesville, Ga., stole over 50,000 bitcoin from the Ross Ulbricht-run marketplace by using nine accounts to create rapid transactions that tricked the illicit marketplace’s withdrawal processing system. He pleaded guilty to one count of wire fraud and was sentenced to one year and one day in prison.

The incidents occurred between 2011 and 2013, when bitcoin held far less value. The original cryptocurrency ended 2013 at less than $800 per coin, far less than its current market price of approximately $30,000. Authorities raided Zhong’s home on Nov. 9, 2021, close to the time when bitcoin reached its highest ever value of nearly $69,000. Zhong became a multibillionaire due to the market appreciation.

At the time federal authorities took control of the bitcoin, both in the initial seizure and two voluntary forfeitures after Zhong’s arrest, the tokens in total were worth $3.4 billion. They were still worth over $1.57 billion at the time of his sentencing. 

Silk Road’s flaw

In one instance Zhong deposited 500 bitcoin into a wallet and within five seconds executed five withdrawals, exploiting a flaw in Silk Road’s payment system that turned his initial deposit into 2,500 bitcoin, according to the U.S. Justice Department. 

Zhong also received over 50,000 in bitcoin cash following the 2017 hard fork split between bitcoin and bitcoin cash’s blockchains.

Federal law enforcement recovered the nearly 50,500 bitcoin from a single-board computer hidden under blankets in a Cheetos popcorn tin stored in a bathroom closet, according to a Justice Department release announcing Zhong’s sentencing.

In addition to that bitcoin, law enforcement also seized nearly $662,000 in cash and 25 Casascius coins, physical metal coins created to represent bitcoin that also contained private keys to control actual bitcoin. Those physical representations held value totaling approximately 174 bitcoin. 

Zhong’s over 50,000 bitcoin, 25 Casascius coins, several physical metal bars, cash, and an investment in a real estate holding company are now property of the United States.

© 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 poised to increase its scrutiny of decentralized finance exchanges

The U.S. Securities and Exchange Commission is set to remove any doubt that they plan to police decentralized finance. 

The commission is expected to declare on Friday that rules governing trading exchanges in the U.S. also apply to decentralized finance. The procedural move isn’t a change to rules, but rather an effort to make explicit whether existing exchange rules apply to decentralized finance.The proposed clarification and amendments to the definition of an exchange are subject to a vote by the Democratic majority commission that leads the agency, making them likely to pass. 

The action would formalize the SEC’s assertion of jurisdiction over activities labeled ‘decentralized’ that the agency sees as still falling under traditional definitions of securities trading. It may also signal increased scrutiny by the regulatory agency into that area of digital assets. So far the SEC has focused more on centralized crypto firms.

“Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws,” SEC Chair Gary Gensler said in prepared remarks for Friday’s meeting. “Yet these platforms are acting as if they have a choice to comply with our laws. They don’t.”

DeFi ‘trading interest’

DeFi projects that bring together multiple buyers and sellers for the trading of assets, including non-firms and structured projects, could be considered securities exchanges by the SEC, and subject to civil charges if they fail to register as national securities exchanges or broker-dealers in the U.S. The exchange definition is tied to “trading interest,” according to SEC staff.

The move is meant to make clearer the SEC’s view of DeFi may imply that the agency is already investigating certain projects. The SEC does not comment on open investigations, and staff did not single out any particular project during a press call. The Commodity Futures Trading Commission, the other federal U.S. markets regulator, launched the first enforcement action against a decentralized autonomous organization, Ooki DAO, late last year, and the agencies have competing views on certain digital asset issues. The SEC has previously weighed in on the original DAO, but did not take an enforcement action against the project.

Decentralized finance isn’t the only market touched by Friday’s SEC action. The Democratic majority commission is expected to amend its rules related to U.S. Treasury and municipal bond markets.

But the SEC received a large amount of conflicting views on DeFi following a 2022 proposal to amend current exchange rules, which agency staff say prompted Friday’s meeting and explicit communication that DeFi projects could qualify as securities exchanges.

“In particular, the proposal would require communication protocols—venues that bring together buyers and sellers of securities through structured methods to negotiate a trade—to comply with rules for exchanges,” Gensler said in remarks prepared for Friday’s meeting. “As one example, request-for-quote platforms perform several exchange-like functions in the Treasury markets, among others. Ensuring that exchange-like platforms follow our exchange-specific rules benefits investors and markets alike.”

The move also allows the agency to release its own economic analysis of decentralized finance.

Gensler is scheduled to make an appearance before the House Financial Services Committee next week, and he and his agency face scrutiny from Congress over their handling of failed crypto firm FTX.

© 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.

Gensler blasted by House Republicans over lack of Bankman-Fried details

Securities and Exchange Commission Chair Gary Gensler is being threatened with a subpoena if the regulator doesn’t provide information related to charges brought against Sam Bankman-Fried.

House Financial Services Committee Chair Patrick McHenry and Bill Huizenga, the head of that committee’s oversight panel, want the staff memo recommending charges for Bankman-Fried as well as other information related to the charges filed by the agency against the failed crypto mogul, who has also been criminally-charged by U.S. prosecutors.

The Republicans first sent an inquiry on Feb. 10 asking for more details on the the lead up to Bankman-Fried’s civil charges by the SEC and argue they’ve been stonewalled since then. If the SEC does not provide information ahead of Gensler’s scheduled appearance before their committee next week they say they will consider a “compulsory process” to secure it, likely through a subpoena to the agency. 

The congressional probe relates to the timing of Bankman-Fried’s arrest, which occurred the night before he had agreed to testify before the House committee alongside caretaker FTX CEO John Ray III in December. Both Democrats and Republicans on the committee voiced frustration at the time over losing a chance to grill Bankman-Fried, particularly after the high-profile negotiation to secure his appearance before the committee, which does not have the ability to compel nongovernmental witnesses to testify. 

“Ignoring the deadline, the SEC actively impeded Committee staff from discussing the request with anyone in the Office of the General Counsel until Chairman Huizenga formally requested a conversation with the SEC General Counsel,” their letter to the SEC reads. “The subsequent staff level conversations have yet to yield any of the requested documents.”

Communications related to Bankman-Fried

The Republicans claim that the SEC Chair and his staff have failed to produce the information they’ve requested, which includes all communications in the SEC’s Enforcement Division related to Bankman-Fried from the time of the FTX collapse to his indictment, as well as records related to communications between the agency and the Justice Department related to their coordination on civil and criminal charges filed against Bankman-Fried. 

The latest letter from McHenry and Huizenga, sent Thursday, details a briefing by SEC staff and 232 pages of publicly available documents that the Financial Services Committee members say lacked the details they want. The congressional Republicans continue to push for the memo recommending civil charges against Bankman-Fried, which could also provide more details on the timing of that complaint as well as the criminal charges brought against the FTX and Alameda Research owner.

McHenry and Huizenga have set a new deadline for the SEC to provide its charging recommendation memo by 5 pm ET on Monday, April 17, the evening before SEC Chair Gary Gensler will testify before the House committee that the Republicans sit on. 

“Failure to produce the requested information could result in the Committee considering using compulsory process, if necessary, to obtain the requested information,” the pair say in the letter, threatening to subpoena the memo if the SEC does not provide that information. 

© 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 summons Justin Sun, Soulja Boy and YouTuber Austin Mahone over Tron

The Securities and Exchange Commission issued a summons for Tron Foundation Ltd. founder Justin Sun, as well as rapper Soulja Boy and YouTube music star Austin Mahone, following a civil complaint from the agency last month over tokens issued by Tron and the filesharing company BitTorrent. 

The trio were named by the SEC as the only holdouts in a celebrity-filled complaint declaring Tronix and BTT, the BitTorrent token, as unregistered securities offerings. Actress Lindsay Lohan, YouTuber-turned-boxer Jake Paul, porn star Kendra Lust, rapper Lil Yachty, and singers Akon and Ne-Yo all settled with the SEC over similar civil charges, per an agency release announcing the case last month. The celebrities who settled agreed to disgorge their earnings and settle charges without admitting or denying the SEC’s findings. 

If Sun, Mahone, and Soulja Boy, whose given name is Deandre Cortez Way, do not respond within 21 days then a judgement by default will be entered against them “for the relief demanded in the complaint.” 

The SEC asked a court to bar Sun and his companies from ever offering securities, including digital assets, again, forfeit their proceeds plus interest and pay civil penalties. The complain also sought to permanently bar Sun from serving as the officer or director of any company that issues securities, a standard punishment sought in similar complaints.

The markets regulator also wants Way and Mahone to be banned from receiving money for future endorsements of digital assets and to pay their own penalties.

Inflating Tronix’s volume

Sun, who no longer claims a diplomatic post with Grenada despite continuing to use the acronym for ‘His Excellency,’ a diplomatic honorific, in his Twitter handle, has been accused of the most serious charges. Those include Sun allegedly orchestrating a scheme to artificially inflate Tronix’s trading volume, in addition to selling unregistered securities and paying for celebrity endorsements without disclosing that those were paid spokespeople. 

According to the SEC, Sun directed employees to engage in more than 600,000 wash trades of Tronix between multiple crypto exchanges in order to create the appearance of high demand for the token, and boost its price. The SEC found that between 4.5 million and 7.4 million tokens were wash traded daily, a major violation of antifraud provisions. 

Sun, who also owns BitTorrent Foundation, which the SEC says is a for-profit organization despite its nonprofit title, allegedly made $31 million from illegal sales of the token in the secondary market. 

Though he has yet to respond in court, the Tron Foundation founder answered the SEC’s charges on Twitter last month, saying that “we believe the complaint lacks merit, and in the meantime will continue building the most decentralized financial system.”

© 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.

‘Hubris’, hot wallets and missing millions: FTX’s new bankruptcy report

A new report related to the bankruptcy of FTX and its affiliated companies provided fresh detail as to how dysfunctional Sam Bankman-Fried’s global crypto empire was.

The report, prepared by the company’s caretaker CEO John Ray III and an outside legal team, adds more detail to the chaos of Bankman-Fried’s business practices, which it ascribes to “hubris, incompetence, and greed.”

Here are highlights from the 43 page document

‘Hot’ wallets were a hot mess 

Had Bankman-Fried not been accused of fraudulent activity, it’s possible FTX and its affiliates would’ve failed due to massive security concerns outlined in the fresh report. Keys to hot wallets holding tens of millions of dollars-worth of assets weren’t securely stored, and the reliance on hot wallets themselves goes against standard industry practice, the report says. 

“[T]he FTX Group kept virtually all crypto assets in hot wallets, which are far more susceptible to hacking, theft, misappropriation, and inadvertent loss than cold wallets because hot wallets are internet-connected,” the report said. “Prudently-operated crypto exchanges keep the vast majority of crypto assets in cold wallets, which are not connected to the internet, and maintain in hot wallets only the limited amount necessary for daily operation, trading, and anticipated customer withdrawals.”

In the report, Ray alleges that Bankman-Fried and others “lied” when asked about their security practices by customers and counterparties. 

Those wallets did not require multisignature capabilities to transfer assets, meaning any one employee could remove millions of dollars-worth of assets, and keys to wallets weren’t well-protected. 

FTX’s current management identified private keys for different wallets, including one with over $100 million in “Ethereum assets”, stored in plain text without encryption and easily accessible. Separately, private keys to billions of dollars-worth of additional digital assets were stored within an Amazon Web Services password manager that “many FTX Group employees” had access to and could transfer those assets by themselves, whenever they wanted to. 

Alameda Research, the sister hedge fund owned by Bankman-Fried, had similar security issues. 

“For example, a key for $600 million dollars’ worth of crypto assets was titled with four non-descriptive words, and stored with no information about what the key was for, or who might have relevant information about it. [Bankman-Fried companies] identified other keys to millions of dollars in crypto assets that were simply titled ‘use this’ or ‘do not use,’ with no further context.”

To punctuate its point, the report notes that $432 million worth of digital assets were stolen from FTX by a malicious actor the night the majority of the crypto empire was placed into bankruptcy by Bankman-Fried. The report says that $1.4 billion of digital assets have been recovered and secured in cold wallet storage, but have identified an additional $1.7 billion in digital assets that still need to be recovered. 

Blockchain analysis firms TRM and Chainalysis have been contracted to assist in tracking down those assets. 

FTX and Alameda’s digital assets could’ve been lost forever

Aside from being highly vulnerable to theft or hacking, a number of wallet keys weren’t backed up. 

“Many FTX Group private keys were stored without appropriate backup procedures such that if the key was lost, the associated crypto assets would likely be permanently lost,” putting the world’s then-second largest digital asset firm in the same position as individual crypto owners who forgot to transfer their private key over from an old laptop. 

“Because the FTX Group failed to maintain appropriate records of access to private keys, employees or others could potentially copy those keys to their own electronic devices and transfer the associated crypto assets without detection,” the report continues. 

There’s always (FTX) money in Alameda

Alameda Research, the investment firm co-founded by Bankman-Fried and Wang prior to FTX, had no idea how much money it had, or didn’t have. But the firm kept operating through money it took from FTX in return for IOUs, if anything at all. 

“Alameda often had difficulty understanding what its positions were, let alone hedging or accounting for them,” the report reads. “For the vast majority of assets, Alameda’s recordkeeping was so poor that it is difficult to determine how positions were marked.”

Bankman-Fried highlighted Alameda’s black box nature in an internal communication included in the report submitted to court. 

“‘Alameda is unauditable,’” Bankman-Fried wrote. “‘I don’t mean this in the sense of ‘a major accounting firm will have reservations about auditing it’; I mean this in the sense of ‘we are only able to ballpark what its balances are, let alone something like a comprehensive transaction history.’”

To emphasize this, he added, “We sometimes find $50m of assets lying around that we lost track of; such is life.”

The former FTX CEO used Alameda as his personal piggybank, transferring tens of millions to a personal bank account in 2021 and 2022 but listing the transactions as “investments-cryptocurrency.” 

But funds from, which was the primary retail investment platform owned by Bankman-Fried, kept his investment firm afloat. 

“[T]he FTX Group configured the codebase of and associated customer databases to grant Alameda an effectively limitless ability to trade and withdraw assets from the exchange regardless of the size of Alameda’s account balance, and to exempt Alameda from the auto-liquidation process that applied to other customers,” the report reads. It notes that existing controls by “financial institutions and exchanges in established financial markets” would have prevented the withdrawals. 

The backdoor from to Alameda existed since July 31, 2019, but Bankman-Fried tweeted that “‘just like everyone else’s’” and “‘Alameda’s incentive is just for FTX to do as well as possible.’”

The backdoor inserted into’s operational code allowed Alameda a line of credit with FTX of up to $65 billion. 

An investigation by caretaker FTX group leadership into Alameda remains ongoing, the report notes. 

What decentralization?

Decision-making at FTX was so tightly-controlled by a small group of executives, the report says, that an executive said if either co-founder Gary Wang or engineering head Nishad Singh were incapacitated then the whole multi-billion dollar operation would effectively end, due to the lack of technical know-how among other members of leadership, including Bankman-Fried. 

The court-submitted document quotes an anonymous FTX executive saying, “if Nishad [Singh] got hit by a bus, the whole company would be done. Same issue with Gary [Wang].”

FTX.US President Brett Harrison apparently resigned over the lack of delegation, as well as “protracted disagreement” with Bankman-Fried and Wang over formal management structure and key hires at the U.S. affiliate that turned out to be less independent than advertised. 

Harrison’s bonus “was drastically reduced and senior internal counsel instructed him to apologize to Bankman-Fried for raising the concerns, which he refused to do,” the report claims. 

Slacking for millions + Who does what?

Crypto assets weren’t the only parts of the company that FTX and affiliated companies couldn’t keep track of. Executives also didn’t know who they employed. 

“At the time of the bankruptcy filing, the FTX Group did not even have current and complete lists of who its employees were,” the report says. There was also no record of how companies related to each other within the over 100 company crypto empire, or who owned which entity. 

Corporate messages were sent using Signal and Telegram, with the auto-disappearing function, making it tough to verify what was said. Meanwhile tens of millions of company spending was requested or approved by emojis on Slack, “leaving only informal records of such transfers, or no records at all.”

More to come

Ray, as well as FTX’s bankruptcy advisers and lawyers, say they’ll continue to unpack the mess of record-keeping they outline – a mess that helps explain the large fees being paid out to them.

The next court date in the bankruptcy case is April 12.

© 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 fills the vacuum left by lack of new crypto, stablecoin laws in US

While U.S. lawmakers are grappling with how, or whether, to move forward on legislation to create new rules in the country around digital assets, the Securities and Exchange Commission has filled the vacuum "regulatory gaps" identified by President Joe Biden’s administration.

Though senior U.S. regulators, including Treasury Secretary Janet Yellen, have called for new laws to govern digital assets, one of the top regulators for the industry, SEC Chair Gary Gensler, reiterated to reporters last week that he doesn’t see the need for new laws to regulate the space.

“If Congress were to act, though I don’t think we need these authorities, not to undermine inadvertently through definitions of what’s in or out, or in essence allowing for conflicts that we don’t allow,” Gensler said following testimony before a House Appropriations subcommittee.

Last fall, the Financial Stability Oversight Council, which is a super committee of U.S. financial regulators that Gensler also sits on, recommended legislation in three areas for digital assets — stablecoins, trading firms that integrate different financial activities that go beyond what a traditional financial exchange does, and direct oversight of spot market trading in bitcoin and other crypto commodities.

The lack of new laws has kept the SEC’s lane clear to proactively regulate in new areas that it hadn’t previously focused on including stablecoins and firms that combine a number of traditionally separate financial activities.  

Behind-the-scenes maneuvering, finger pointing

Stablecoins have driven much of the recent instability in the digital asset industry. The collapse of Terra last year led to multiple bankruptcies, as did the collapse of FTX’s FTT token in the fall.

A new law to create standards for stablecoins has been top of the agenda in Congress since the Terra collapse last spring, and bipartisan talks in the House of Representatives ran for months last year as now-House Financial Services Committee Chair Patrick McHenry, R-N.C., and then-House Financial Services Chair Maxine Waters, D-Calif., who remains the top Democrat on the committee, negotiated on legislation for a comprehensive framework.

Despite cooperation from those key policymakers, talks stalled over reluctance from the Treasury Department. Support from the department was seen as helpful to gain support of several fence-sitting Democrats on the House Financial Services Committee and in the Senate, as well as necessary for a bill to receive a presidential signature to become law. 

Multiple people familiar with those deliberations say the SEC drove Treasury’s reluctance through constant objections and last-minute revision requests. 

“The stablecoins legislation was coming together over the summer, and the SEC was known to oppose it,” said a former government official familiar with the matter. A major objection was that legislation should only touch “payment stablecoins,” the person said. But the SEC demanded a definition so narrow that it would not apply to existing tokens, the person argued. 

“I think the true aim was to stop any stablecoin legislation, which interestingly was at odds with the position that they took with the President’s working group report” on digital assets published last year, said the former official. “It tracked with their activities now, which is essentially claiming through enforcement action that these stablecoins are securities.”

A current industry advocate with previous government experience agreed. “The SEC was fighting every bill in Congress, period,” they said.

A third person familiar with those talks, who also asked for anonymity to speak freely, disputed the claim that the SEC actively sought to sink the bill.

The SEC provided technical assistance that “dealt a lot with definitions of issues,” the person said. “Sometimes the technical assistance is discordant,” the person added. “It’s the job of the authors to take what they want and leave with the rest.” 

SEC Empowered

Though any new legislation is unlikely to completely cut the SEC out of regulating digital assets, the lack of new laws in the areas identified as "regulatory gaps" by the U.S. government has kept an open vacuum for the SEC to fill. 

In February, the agency sent a letter to Paxos informing the crypto infrastructure company of an investigation into its joint stablecoin project with Binance, BUSD. Paxos says it has since stopped minting the token.

And last week the SEC took action against Beaxy due to the way the platform combined several traditionally separate financial activities under one company, another area where the FSOC recommended new laws to create guardrails. 

“To protect investors, there are separate registration requirements for exchanges, brokers, and clearing agencies, with each essentially acting as a check on the other,” Gurbir Grewal, Director of the SEC’s Division of Enforcement, said in a statement connected to the action. “When a crypto intermediary combines all of these functions under one roof—as we allege that Beaxy did—investors are at serious risk. The blurring of functions and the lack of registrations meant that regulations designed to protect investors were not followed or even recognized by Beaxy.”

The move highlights a longstanding criticism of the digital asset space, that ‘exchanges’ combine functions in ways that traditional stock or commodities exchanges don’t by offering investment accounts, market-making in a way that leads to trading against their own customers and providing loans. Laws and ethical considerations prevent the commingling of those activities.

But a Commodity Futures Trading Commission complaint against crypto behemoth Binance last week also showcased how exchanges may be engaged in activities that concern regulators. The company allegedly operated approximately three hundred undisclosed trading accounts on its own platform, in addition to owner Changpeng ‘CZ’ Zhao owning two investment firms that traded through the company’s platform, and two of his own personal trading accounts. That fact raises questions about possible market manipulation, as the company traded against its own customers with advantages in speed of execution and internal data.

The SEC has yet to publicly announce an investigation into Binance, though the charges levied by the CFTC last week could likely be applied in a securities law context. The commodities regulator claims that Binance knowingly violates U.S law by not enforcing its own geofencing for U.S. customers, allowing it to operate illegally in the U.S. The SEC could claim similar illegal securities-related activity if the agency agrees with the CFTC that Binance is illegally doing business in the U.S. market, in addition to other possible violations over combining various activities on the same platform.

Though the SEC does not comment on ongoing investigations, it acknowledged in court that agency staff sees Binance as an unregistered securities exchange as part of an effort to block Binance.US’ acquisition of Voyager Digital Holdings, a bankrupt digital asset firm.

© 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.

Former Coinbase employee ready to settle insider trading case with SEC

The Securities and Exchange Commission appears poised to settle a landmark insider trading case focused on a former Coinbase product manager Ishan Wahi and his brother, Nikhil Wahi.

The details were included in a joint court filing submitted Monday.

Per the filing: "At this time, the SEC has an agreement in principle with Ishan Wahi to resolve all of the SEC’s claims in this matter. The SEC and Nikhil Wahi are also in good faith discussions that may resolve the SEC’s claims."

Ishan Wahi had previously sought to dismiss the civil charges raised by the SEC, but pleaded guilty in February to related criminal wire fraud-related charges brought by the Justice Department. 

Both the agency and the defendants want to postpone an upcoming April 6 deadline to the summer to give time for that settlement to be finalized. That requires approval by the politically-appointed chair of the SEC, Gary Gensler, the commission’s bipartisan panel of four other commissioners.

Broader implications 

A settlement could have broader implications for much of the digital asset industry. The charges represent the first major crypto-related insider trading and factor around nine tokens listed by Coinbase that the SEC sees as unregistered securities. It also comes in the context of an ongoing investigation by the markets regulator into multiple aspects of Coinbase’s business.

The former Coinbase employee, Ishan Wahi, already pleaded guilty to wire fraud-related charges brought by the Justice Department in February. That plea made observers believe a key question in the SEC civil case may have mooted whether the nine tokens listed by Coinbase — that Wahi admitted to trading on with inside knowledge — are securities. The tokens in question are: AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM.

Other major trading firms, like Binance, Gemini, and, also list some or all of the tokens, meaning precedent over their determination in the Wahi case could be applied in enforcement actions against them if a court sees those tokens as unregistered securities. However, it’s unclear whether a settlement would do so. The potential settlement also comes in the context of a recently disclosed investigation into Coinbase itself.

Wells notice

Late last month, Coinbase received a Wells notice, an official letter notifying them of an investigation by the SEC. The agency is probing Coinbase’s Earn and wallet products and overall exchange activity. Coinbase has not been accused of any wrongdoing in the Wahi case.

The civil charges were put on hold until Wahi could be sentenced in criminal proceedings. But Monday’s filing makes it clear that the SEC and the Wahis filed to settle those charges, citing cooperation by the brothers with the regulator, but need more time for settlement approval. 

“Any settlement recommended by SEC staff must be reviewed within the SEC and approved by the SEC’s Commissioners before it may be submitted to the Court for approval, a process that can take a number of weeks,” the letter notes.

The stipulation letter requests that the judge presiding over the case in the U.S. District Court for the Western District of Washington move the original April 6 deadline to June 15, with a reply deadline of July 15.

© 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.

Fed explains why Custodia got an ‘F’ on its examination

The Federal Reserve published its previously announced rejection of Custodia Bank’s application to become a member of the Fed system, citing the lender’s management, financial condition and narrow focus on digital assets as reasons for its failure. 

The Fed also highlighted its desire to avoid further connecting the volatile asset class with the traditional banking sector. 

“In general, the Board has heightened concerns about banks with business plans focused on a narrow sector of the economy,” the Fed’s decision document reads. “Those concerns are further elevated with respect to Custodia because it is an uninsured depository institution seeking to focus almost exclusively on offering products and services related to the crypto-asset sector, which presents heightened illicit finance and safety and soundness risks.”

Bank regulators conduct an examination of institutions applying to join the Fed system, or who want or hold other charters. In the Fed board’s eyes, Custodia received an ‘F’ on its pre-application exam. The order itself was published weeks after the announced rejection because the central bank redacts sensitive information around business plans. 

The Fed concluded that “findings indicated Custodia’s risk management and controls for its core banking activities were insufficient, particularly with respect to overall risk management; compliance with the Bank Secrecy Act and U.S. sanctions; information technology; internal audit; financial projections; and liquidity risk management practices.”

‘Heightened risks’ by concentrating on crypto

Those “deficiencies” and a “novel” business model focused largely on crypto-related activities with no federal deposit insurance worried the Fed, which called Custodia’s plan “an unprecedented business model that presents heightened risks involving activities that no state member bank previously has been approved to conduct.”

The Fed’s Board of Governors also cast doubt on Custodia’s ability to make money in the future. 

“Indeed, some products that are estimated to be significant sources of revenue were still in the ‘conceptualization phase,’ and policies, procedures, and processes related to planned crypto-asset-related activities remained in the early stages of development, especially in the area of compliance,” the Board of Governors said.

The central bank noted that Custodia’s revenue and funding model relied "almost solely" on an "active and vibrant" crypto market, then went on to cite events like the bankruptcies of  Celsius, Voyager, BlockFi, and FTX as proof that "the global and largely unregulated or noncompliant crypto-asset sector lacks stability and that dislocations in the sector can result in stress at financial institutions focused on serving the crypto-asset sector.”

The Fed also said Custodia’s business model largely relied on a series of business activities that it saw as too risky for member banks to participate in, due to the potential liability to U.S. taxpayers in the event of a failure. 

“[I]n the event Custodia’s application were to be approved, the Board would prohibit Custodia from engaging in a number of those activities because Custodia has not demonstrated that it can conduct the activities in a safe and sound manner and, in some cases, also because the activities would be impermissible for a national bank,” the Fed order reads, adding that it does not believe Custodia can survive as a business without those activities, citing Custodia’s own financial statements made to examiners. 

‘Shortcomings’ in Custodia management

Custodia management anticipated the failure of their application, filing suit against the Fed months before the central bank made its final judgment. It accused the central bank of a bias against crypto in response to today’s disclosure.

“The recently released Fed order is the result of numerous procedural abnormalities, factual inaccuracies that the Fed refused to correct, and general bias against digital assets,” Custodia Bank spokesperson Nathan Miller said in an emailed statement. “Rather than choosing to work with a bank utilizing a low-risk, fully-reserved business model, the Fed instead demonstrated its shortsightedness and inability to adapt to changing markets.

That same management didn’t avoid criticism either. The Fed wrote that “the depth of relevant banking experience and bank-specific risk management experience among Custodia’s board of directors and management team is limited” and that “the number and degree of shortcomings identified in the pre-membership examination suggest that management’s experience is not commensurate with the firm’s intended risk profile.”

The Fed also says it would be “unprecedented” to approve membership of a bank without deposit insurance, like Custodia, an issue that has received more scrutiny in the weeks since the rejection due largely to the failure of Silicon Valley Bank.

Bank runs

In the order, which was written and delivered well-before Silicon Valley Bank’s failure, the Fed notes that the lack of deposit insurance could raise risk for a bank run at Custodia. Crypto-friendly Silvergate Bank, a Fed member and, like Custodia, a state-chartered bank, saw troubles emerge late last year due to its large exposure to the digital asset industry through companies including FTX and the failed Facebook-led stablecoin project Diem, additional context the Fed considered Custodia’s application. 

Banks accepted to the Fed system gain access to ongoing facilities run by the central bank that helps provide additional low-cost liquidity to member banks. The central bank carefully guards access to its system largely because of that access, and bank regulators are conservative in their evaluations of bank business models due to a strong aversion to failures, which can necessitate government intervention, as has recently happened with Silicon Valley and Signature Banks. Non-crypto fintech firms have also faced high hurdles in recent years in applying for similar access.

The Kansas City Federal Reserve, the regional Fed bank named by Custodia in its lawsuit over the application, has asked a federal judge presiding over the case for an extension until March 28 to respond to Custodia’s claims.

“It is a shame that Custodia must turn to the courts to vindicate its rights and compel the Fed to comply with the law,” Custodia’s Miller said.

© 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.

White House blasts digital assets in new report, sees little value in crypto

A new report from the White House blasts digital assets as failing to live up to their purported initial promise and raising risks for both consumers and the entire U.S. financial system.

The president’s annual economic report to Congress casts major doubt on the benefits of digital assets, and comes almost exactly a year after President Joe Biden ordered multiple federal agencies to research and issue reports on the matter.

Noting that digital assets have been touted as distribution tools for intellectual property and financial value, a better payment mechanism, an avenue for increased financial inclusion and a way of cutting out financial middlemen, the report argues that “so far, crypto assets have brought none of these benefits.”

“Indeed, crypto assets to date do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient; instead, their innovation has been mostly about creating artificial scarcity in order to support crypto assets’ prices — and many of them have no fundamental value,” the report issued by the Biden administration says. “This raises the question of the role of regulation in protecting consumers, investors, and the rest of the financial system from panics, crashes, and fraud related to crypto assets.”

Shift in tone

The critiques in the report to Congress may signal a shift in approach from agnostic to openly adversarial towards digital assets. 

The White House suggests that the Fed’s soon-to-be debuted faster payments network may eliminate much of the argument for digital assets, saying that “continued investments in the nation’s financial infrastructure have the potential to offer significant benefits to consumers and businesses.” The report casts doubt on — but does not rule out — the possibility of a U.S. central bank digital currency, saying that CBDCs could hurt credit availability and raise the risk of bank runs. 

The annual economic report notes that some of the benefits of distributed ledger technology may be achieved in the future. It specifically cites the New York Federal Reserve’s pilot program for a wholesale central bank digital currency aimed at making payments between banks, including cross-border transactions, virtually instantaneous. 

The White House document also argues that digital assets are neither an effective store of value, nor an effective means of payment. 

“There is also tension in an asset being promoted as both money and an investment vehicle,” the report reads. “As money, the instrument should have a stable value, suggesting limited price volatility. But as a risky asset, it should experience price volatility, for which an investor would be compensated with a high expected return. Holding everything else constant, the riskier an asset is, the less likely it can effectively serve as money.”

That includes the prospect of stablecoins becoming a widely adopted payment tool, the report says. 

“Stablecoin holders that lack redemption rights may be unable to find willing counterparties to exit their stablecoin positions,” reads the document, which echoes a Financial Stability Oversight Council report that singled out Tether and Circle’s USDC. The White House adds that stablecoins are “too risky” to serve a broad payments purpose yet. 

But what about the underlying technology?

The White House appears to have a dim view of distributed ledger technology as a whole, citing arguments that previously existing technology could perform similar functions better, and poking holes in several specific use cases. It also notes the frequent noncompliance in securities and other financial regulatory law, large numbers of scams, and unusual concentration of activities by crypto trading platforms that would be prohibited at an existing exchange. 

The White House also blasts proof-of-work mining, arguing that it "has few, if any, attendant benefits,” for the communities where miners set up while increasing local energy costs and heightening the risk of power crises. 

DeFi doesn’t escape the White House’s criticism either. 

“Though DeFi applications claim to help broaden access to credit by decreasing intermediation fees, they create serious risks to investors and cause at least two risks for the broader financial system: the use of significant leverage, and the performance of regulated functions without compliance with appropriate regulations.”

In the conclusion of its chapter on digital assets, the White House urges that regulators “must apply the lessons that civilization has learned, and thus rely on economic principles, in regulating crypto assets.”

The Council of Economic Advisers, one of the two main economic policy units within the White House, drafts the annual report, which the president signs off on. Biden in February nominated Jared Bernstein, a current member of that panel and former Obama and Clinton administration official, to become its chair.

Whether the criticisms presented in the report reflect a majority opinion in the administration remains to be seen. Lael Brainard, the former Federal Reserve vice chair and new head of the National Economic Council, the other major White House economic policy group, played an active role in the Fed’s CBDC research.

© 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.

Gensler suggests proof-of-stake tokens are securities

Securities and Exchange Commission Chair Gary Gensler suggested to reporters on Wednesday that tokens using staking protocols could be considered securities under U.S. law. 

"The investing public is investing anticipating a return, anticipating something on these tokens, whether they’re proof-of-stake tokens, where they’re also looking to get returns on those proof-of-stake tokens and getting 2%, 4%, 18% returns,"  Gensler said. "Whatever they’re promoting and putting into a protocol, and locking up their tokens in a protocol, a protocol that’s often a small group of entrepreneurs and developers are developing, I would just suggest that each of these token operators … seek to come into compliance, and the same with the intermediaries." 

Gensler made the remarks after being asked for his reaction to statements made last week by Commodity Futures Trading Commission Chair Rostin Behnam, who reiterated his own belief, and that of his agency, that ether is a commodity.

Gensler spoke to reporters after a commission vote advancing three proposed rules aimed at tightening cybersecurity, consumer privacy, and system standards for the securities industry, including at some firms involved in digital assets. 

Gensler has previously said that proof-of-stake protocols could fall under U.S. securities laws, but he elaborated in more detail during Wednesday’s remarks. The SEC also recently undertook it first staking-as-a-service enforcement action and settled with Kraken last month. 

New York Attorney General Letitia James has separately argued that ether is an unregistered security and that its creators, including Vitalik Buterin, are not in compliance with U.S. securities law as part of an enforcement lawsuit filed against crypto firm KuCoin. 

© 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.

Circle, Coinbase highlight instability, crypto concentration in ‘TradFi’

Representatives for Circle and Coinbase blamed traditional financial institutions — ‘TradFi’ — for instability in the digital asset sector. 

“What happened over the last several days is a little bit of an ironic black swan situation where the contagion was not from crypto to TradFi, the contagion was TradFi to crypto” said Caroline Hill, senior director for global policy and regulatory strategy at Circle during a panel at South By Southwest.

The Circle policy advocate gave the company’s first spontaneous public remarks on the situation since its flagship product, the USDC stablecoin, went on a rollercoaster ride over the weekend, depegging from the dollar after three banks the company worked with failed in the five days.

La Jolla, Calif.’s Silvergate Bank announced it would begin a self-liquidation process on Wednesday after major losses related to its dealings with the digital asset industry, while regulators closed Silicon Valley Bank on Friday citing a massive bank run, and Signature Bank on Sunday “in order to protect depositors,” according to a New York Department of Financial Services announcement.  

Hill also cited announcements made by the stablecoin giant over the weekend that aimed to provide transparency with regards to where USDC reserves were held. 

"We’ve seen the market correct. But it is another reason why I think regulation is needed,” she said. “Ultimately we are a fully reserved model reliant on a fractional banking industry.” 

Events of the last week figure to further complicate relationships between banks and the digital asset industry. U.S. bank regulators issued multiple warnings about exposure to digital assets in the lead up to Silvergate’s troubles and demise, though a massive run on deposits fueled by a capital raise and jittery startup and venture capital customers led to Silicon Valley Bank’s failure. 

The future of crypto

A policymaker who played a key part in the creation of the European Union’s comprehensive digital asset framework acknowledged the complications that events of the past week could have on future policy for the industry. 

“Many banks say they will have nothing to do with crypto,” said Peter Kerstens, an adviser with the European Commission. “Some regulators don’t want anything to do with crypto.” 

Because few banks are comfortable with the asset class, there’s a limited number who do business with digital asset companies. That creates more risk for the crypto industry, argued Coinbase VP of Global Regulatory Policy Scott Bauguess. 

“Right now there’s lot of concentration of risk in the banking industry by crypto firms,” due to specialization, he said. 

As two banks, Silvergate and New York, NY.’s Signature Bank faced operational challenges, and Santa Clara, Calif.’s Silicon Valley Bank failed, that meant two of the main U.S. crypto banks were no longer available, while a startup and venture capital-friendly bank failure threatened to have broader repercussions for the global tech industry, including crypto. 

“What we’re seeing is TradFi has infected crypto, it’s been just the opposite,” of concerns about crypto affecting the traditional banking sector, Bauguess argued.


© 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.

New York sues KuCoin, claims ether is an unregistered security

New York Attorney General Letitia James has sued digital asset exchange KuCoin for violating New York laws governing the trading of securities and commodities, and named ether, among other tokens, as unregistered securities the exchange has listed in the state. 

KuCoin “offered, sold and purchased and effected transactions in cryptocurrencies that were commodities and securities within New York, without having been registered as a commodity broker-dealer and securities broker or dealer in New York,” James argues in the suit brought against the Seychelles-based firm Thursday. 

James and her office also implicate ether, the second-largest cryptocurrency by market capitalization, as an unregistered security. That argument could have broader implications for digital assets beyond any punitive damages New York may win from KuCoin. 

"ETH’s development and management is largely driven by a small number of developers who hold positions in ETH and stand to profit from the growth of the network and the related appreciation of ETH," the suit filed with the New York state Supreme Court argues.

It also cited the Ethereum Foundation’s initial coin offering as evidence of a securities offering. The suit argues that documents from the time of the initial coin offering describe it "as a means of promoting the development of the Ethereum blockchain by paying expenses incurred by developers, paying for legal contingencies, research, and further development." This is similar to the capital formation purpose of security offerings in the U.S.

New York’s attorney general also claims that ICO materials promoted ether as, "’a digital store of value because the creation of new ETH slows down over time.’" 

Non-binding remarks

A former Securities and Exchange Commission official famously made non-binding remarks in 2018 indicating that the agency saw the Ethereum network as sufficiently decentralized as to no longer consider ether a security, though he refrained from offering an opinion as to whether the ICO had violated any laws. After an ICO bubble formed in 2017 the SEC began cracking down on the practice, successfully pursuing dozens of unregistered securities offering cases. 

The network’s transition to a staking protocol, from proof-of-work validation of holdings and transactions, which occurred last year, is also cited in the suit. 

"Buterin and the Ethereum Foundation retain significant influence over Ethereum and are often a driving force behind major initiatives on the Ethereum blockchain that impact the functionality and price of ETH," the suit argues, referring to Vitalik Buterin, the founder of Ethereum.

Common enterprise and value of an asset derived from the effort of others are common aspects of securities in the U.S.

"Most relevant here, Buterin and the Ethereum Foundation played key roles in facilitating the recent fundamental shift of the transaction verification method from proof-of-work to proof-of-stake." 

There is disagreement at the federal level about whether ether is a security or a commodity, with Securities and Exchange Commission Chair Gary Gensler implying he believes it to be an unregistered security, while Commodity Futures Trading Commission Chair Rostin Behnam sees the cryptocurrency as a commodity. 

With additional reporting by Stephanie Murray. 

© 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.

CFTC head says stablecoins are in agency’s jurisdiction without ‘clear direction from Congress’

The head of the Commodity Futures Trading Commission views most stablecoins as commodities, barring new law that could change their classification.

"Not withstanding that, they are a commodity, and we have to police that market without a clear direction from Congress that they’re some other type of asset," CFTC Chair Rostin Behnam told reporters Wednesday, following an appearance before the Senate Agriculture Committee. "Based on the cases that we’ve brought around stablecoins, I think that there’s a strong legal argument that USDC and other similar stablecoins would be commodities," unless Congress tells regulators otherwise.

Behnam singled out a specific enforcement action that the CFTC took against stablecoin issuer Tether and its sibling exchange BitFinex in 2021. 

That interpretation appears to put the CFTC and Securities and Exchange Commission on different pages on another digital asset-related topic. Last month the SEC notified Paxos that its U.S.-pegged stablecoin with Binance, BUSD, was an unregistered security. Paxos announced that it had stopped minting BUSD tokens after receiving the SEC notice. 

"As far as I know, with fiat-backed stablecoins, there’s no expectation of profit and return to the stablecoin holder," Behnam said. But he made it clear that he was not sure how algorithmic stablecoins could be characterized. 

Differing on ether

Behnam and SEC Chair Gary Gensler already seem to have different views of ether, the second-largest cryptocurrency by market capitalization. Gensler has hinted that he views ether as a security, along with nearly every non-bitcoin digital asset. 

"We have regulated ether derivatives," Behnam told reporters. "It’s not a coincidence that those futures were listed on CFTC markets. We did the analysis, the listing exchange did the legal analysis, and the analysis led to the conclusion that ether is a commodity, and I’ve been pretty consistent with that in the past." 

The SEC has not formally declared whether ether is a non-security asset, but in 2018 the then-SEC Director of Corporation Finance Bill Hinman said he viewed ether as the Ethereum network at that point as "decentralized" to the extent that, "current offers and sales of Ether are not securities transactions." Hinman has since returned to private practice and Gensler took leadership of the agency in 2021. 

Asked whether SEC action around ether could lead to complications for the CFTC, Behnam responded, "We feel confident that our legal analysis is correct and ether futures have been listed, I think for several years now." 

Calling on Congress

Behnam, when pressed on whether the current regulatory approach to digital assets in the U.S. is working, once again emphasized the need for comprehensive regulatory legislation from Congress. 

"There’s a gap in regulation and we need to comprehensively regulate it because enforcement alone is not going to solve the problem, the risks, the customer protection issues around crypto," Behnam said. "And as our markets have proven, as our regulations have proven over many, many decades, comprehensive regulation can prevent fraud, can prevent manipulation, and can stabilize markets and ultimately protect customers." 

The CFTC chair added that such legislation could aid regulators in cracking down on activity by offshore crypto firms that violate U.S. law, as FTX allegedly did.

Citing similar authority for the CFTC in international swap markets that interact with U.S. customers, Behnam told The Block, "my thought is legislation should probably consider a similar policy around what is the significant nexus to U.S. customers." 

Work on Senate bill continues

Behnam’s call for comprehensive legislation seems to continue to resonate with senators. Michigan Sen. Debbie Stabenow, the Democratic chair of the Agriculture Committee, has pledged to continue working on the issue after a bill she and top committee Republican Sen. John Boozman of Arkansas co-authored with input from Behnam stalled last year.

The bill, known as the Digital Commodities Consumer Protection Act, divided industry advocates and was strongly supported by former FTX CEO Sam Bankman-Fried. The high-profile collapse of FTX led to further examination of that support. 

That bill would have granted the CFTC more direct power over crypto exchanges and spot markets, as the CFTC can only proactively regulate commodity derivatives and pursue fraud and market manipulation through enforcement. Comprehensive stablecoins legislation drafted by current House Financial Services Committee Chair Patrick McHenry, R-N.C., and now Ranking Member Maxine Waters, D-Calif., would have created a new framework around stablecoins, but talks around the bill stalled over objections from the Treasury Department. 

During Wednesday’s Senate Agriculture Committee hearing, Sen. Roger Marshall, R-Kan., a crypto skeptic, asked Behnam what his level of concern over digital assets is on a scale of 1-10. Behnam put his at "7.5."

Senate Banking Committee Chair Sherrod Brown, D-Ohio, who also sits on the Agriculture Committee, quipped that his was "8.2," while Marshall added that his was "12." 

The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.

© 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.