State of Crypto: Will 2021 Finally Be the Year of the Bitcoin ETF?

There’s been renewed interest in bitcoin exchange-traded funds (ETFs) with the nomination of Gary Gensler to head the Securities and Exchange Commission and the approval of a true Canadian bitcoin ETF. Whether one gets approved in the U.S. is still unclear.

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When ETF?

The narrative

The big news last week was the Ontario Securities Commission approved North America’s first bitcoin ETF in Canada. An ETF, which is essentially a retail-friendly, regulated bitcoin investment vehicle that can trade in popular brokerage apps, has long been a product the industry has wanted. Numerous applications have been rejected in the U.S., but the approval of one in Canada could be an early sign that we’ll soon see something similar in the States.

Why it matters 

Basically, the idea is a bitcoin ETF would provide everyday investors with:

  1. Bitcoin exposure through existing retail trading apps, such as TD Ameritrade, BUT:
  2. These traders would not actually need to buy bitcoin.

In short, an ETFwould let people invest in bitcoin without having to set up a wallet or trust in an exchange that might go down when market volatility rises. 

There are also those who believe an ETF would help spark or continue a bull run, but considering Elon Musk can pretty much just do that on his own now I’m not so sure an ETF seems as necessary as it did in 2018.

Breaking it down

The crypto market has matured since 2017 and 2018, when the U.S. Securities and Exchange Commission (SEC) was rejecting ETF applications left and right. 


Matthew Hougan, the chief investment officer at Bitwise Asset Management (a firm that’s gone to great lengths to get a bitcoin ETF approved), told CoinDesk that the futures market tied to cryptocurrencies has grown significantly, the underlying spot markets are functioning better and the U.S. regulatory structure has evolved. But is that enough? 

The main question is whether the market has matured enough to meet the requirements listed under the Securities Exchange Act, the federal law that oversees securities trading within the U.S.

Ark Investment Management CEO Cathie Wood recently told an audience she thinks the bitcoin market might need to see $2 trillion in demand before the SEC is comfortable with an ETF. 

Hougan isn’t so sure, saying he thinks bitcoin’s futures market is comparable to hard wheat in size (hard wheat has both a futures market and ETFs, which is more than you can say for onions).

Gary Gensler

Some of the thinking about whether or not to file a bitcoin ETF application involves the new administration and the nomination of Gary Gensler as SEC chair. Gensler, a longtime crypto advocate who’s perhaps best known for his work on derivatives regulation at the Commodity Futures Trading Commission after the last financial crisis, is expected to be fairly crypto-friendly, at least to the degree of approving an ETF. Still, questions remain. 

“It’s certainly too early to say what his view will be on crypto, whether it will be a priority, what that will do to influence the market, and I think that may even be a premature conversation,” Hougan said. 

At the least, while Gensler may be interested in crypto, it’s not likely to be a priority, given many of the other issues he’ll have to address, including likely having to form a response to the market volatility seen last month with the GameStop stock pump. 


The better question is what has changed over the past two years.

According to Hougan, the factors that would support an ETF approval include:

  • Market efficiency has increased;
  • Regulatory oversight has evolved;
  • New custody solutions have entered the market; and
  • There are better audit processes.

However, the SEC has used various objections in rejecting past ETF applications. The outstanding questions include:

  • Whether the SEC’s market surveillance questions have been answered; and
  • Whether the SEC’s market manipulation questions have been answered.

“The market has gotten better and so the question you’re left with is ‘do we know enough’ and ‘has the market gotten better enough’ and we just don’t know,” Hougan said. 

Canada

One positive sign for the industry is last week’s approval of an open-ended ETF in Canada. To be clear, it’s not the first fund to trade in Canada: 3iq launched a bitcoin fund last year. However, this is the first ETF that will trade on a retail-accessible exchange – the Toronto Stock Exchange – within North America. 

Eric Balchunas, a senior ETF analyst at Bloomberg, said on Twitter the “U.S. usually follows shortly after” Canadian regulators in approving such products, calling the approval a “good sign” for American applicants. 

His guess: Late September is when we’ll see the approval, and it could see $50 billion in inflows over its first year. 


Here’s what needs to happen:

  • A company has to file for an ETF by filing a Form 19b-4. Two companies have filed for an ETF recently: VanEck and Valkyrie. However, neither has filed a 19b-4 form, which would kick off the SEC review process.
  • Once someone does file the 19b-4 form, however, the SEC has to acknowledge it’s reviewing it. This kicks off a 45-day review period. 
  • The SEC can say it needs more time and/or provide feedback. The agency can extend the review period up to 240 days (240 days from today would be Oct. 14). 
  • The SEC staff would decide whether or not to approve the application, and then the five commissioners would agree (or disagree, as the case may be).

At some point, the SEC would have to approve or reject the application. 

  • If the application is approved, congratulations to the issuer and to the next big thing that everyone will get excited about.
  • If the application is denied, a Commissioner (or applicant) could request a review of the decision. This happened to nine ETF applications that were rejected simultaneously in 2018. I still have no idea what the resolution was.
  • Come to think of it, the SEC also reviewed a Bitwise application that was rejected. The company later withdrew that particular application.

So, in short, while there are positive signs for an ETF approval in 2021, nothing is guaranteed.


SEC lawsuits

In other, unrelated news, last week Acting SEC Chair Allison Herren Lee published a statement ending the contingent settlement offers that could lead to the faster resolution of SEC cases. This means that cases could drag on longer for crypto companies that get caught in the SEC crosshairs. (Here’s looking at you: Ripple.)

The statement said the agency’s Division of Enforcement will no longer recommend settlements that are contingent on whether or not a company receives a waiver to act as a Well-Known Seasoned Issuer (WKSI). 

These waivers had perks. In the past, they could be used as part of a settlement offer if the SEC was suing a company on securities law violations. 

In other words, if the SEC Division of Enforcement is suing a company, say a hypothetical cryptocurrency-related firm, for alleged violations of the law, a settlement could have been contingent on the firm receiving WKSI status. This condition helped companies know what their penalties would be in a settlement, and what they could do post-litigation. 


Lee said this leads to a potential conflict between the SEC’s different divisions. 

This new policy would appear to lessen the chances of such settlements occuring in future. 

Commissioners Hester Peirce and Elad Roisman pushed back against the move in a dissenting statement, writing that the previous policy didn’t lead to any structural conflicts. 

Companies may be less willing to pursue settlements if they don’t know whether they’ll receive waivers to continue operating, they wrote, warning that this could lead to more time (and therefore, resources) spent pursuing cases.

It remains to be seen what incoming chair Gary Gensler will do. By the way – I’ll be talking about this case during a virtual panel hosted by the New York Financial Writers’ Association next Tuesday at 7:00 p.m. ET. Come check it out.

Biden’s rule

Honestly, not a whole lot has happened in the past week. No new nominations, no confirmation hearings scheduled yet. However, the U.S. Senate’s impeachment trial of former President Donald Trump has wrapped up, which should give the body more time to consider nominations.

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)


Elsewhere:


Outside crypto:

  • Tesla Bitcoin Bet Exposes Limits of Crypto Accounting Rules: Okay, so within crypto, but outside CoinDesk. Anyways, it turns out that because taxes are weird,  Tesla has to report any potential loss in the value of the $1.5 billion in crypto it bought last month, even if it hasn’t actually sold the bitcoin, should the holdings’ value decline before its next earnings report, according to Bloomberg. However, should the bitcoin’s value increase, Tesla cannot report that. This is because U.S. tax standards-setters (the Financial Accounting Standards Board) haven’t created any specific guidance around digital currencies. Probably wouldn’t hurt if they did, though Bloomberg Tax reports that’s not likely to happen anytime soon.
  • Canadian Woman Cited in Online Attacks Is Arrested in Toronto: A few weeks ago I flagged a New York Times report about how a single individual may have published false information about a number of people over the course of decades. She’s now been arrested by Canadian police on harassment and libel charges.



If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde. 

You can also join the group conversation on Telegram. 


See ya’ll next week!



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State of Crypto: India and Nigeria’s Crypto Crackdowns Continue Old Trends

Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De.

Are governments worrying more about the growth of crypto? Two countries already announced crypto-related bans, though this could be an extension of previous efforts at controlling the space – and their own economies – rather than new initiatives

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The crackdown begins (again)

The narrative

In recent weeks, both India and Nigeria have made noises about banning crypto industry participants’ access to the traditional banking sector. This could be a sign of renewed government crackdowns on the space. 

Why it matters 

Bitcoin and subsequent cryptocurrencies were designed to be censorship-resistant, stateless and a tool of economic freedom. Citizens in Belarus and Nigeria used bitcoin to raise funds for those who lost their jobs or otherwise faced repercussions for protesting against authoritarian regimes. People in other countries use cryptocurrencies as a way of cheaply transferring value across borders. 

But the crypto space might not yet be mature enough to actually fulfill those goals – at least, not entirely. Ray Dalio, head of major hedge fund Bridgewater Associates, said government prohibition could have a significant negative impact on cryptocurrency adoption, and we’re indeed seeing governments try to enact or enforce stringent regulation. 


Breaking it down

The Indian government began considering a bill that would ban private cryptocurrencies late last month, defining “private” as any cryptocurrency that’s not state-backed. The bill, which was introduced to the Lok Sabha, the lower house of the Indian parliament, also suggested that India could launch its own central bank digital currency (CBDC), issued by the Reserve Bank of India (RBI), the nation’s central bank. 

There are two details here that stick out to me, The first is that the RBI tried to restrict cryptocurrencies once before, when it told banks they could not provide services to crypto companies in 2018. That ban was later struck down by the nation’s Supreme Court, though RBI vowed to fight the ruling. This new bill, which was also introduced in the Rajya Sabha (the upper house), could be a natural evolution of that policy goal, one that would have the force of law behind it.

The second detail is the Indian government has also tried to control its financial system before. In 2016, the government demonetized the ₹500 and ₹1,000 notes, some 86% of the circulating currency, nominally in an effort to stamp out “black money,” or cash held from illicit means. In 2018, India’s Aadhaar system decided every resident effectively needed access to the biometric identification platform in order to buy a cell phone or access banking services. 

A continent away, the Central Bank of Nigeria (CBN) published a document saying banks cannot provide crypto exchanges with services. Binance and Bundle Africa immediately announced they would suspend deposits. 

Here, too, the CBN says its ban isn’t new, but rather that its statement last week is merely reiterating a position it has held since 2017. Still, the timing of the move is interesting, coming just months after residents began using bitcoin to raise funds as part of the #ENDSARs movement. 

Basically, this looks like a trend. Crypto is getting to a place where governments have to pay attention to it. Some industry insiders seem less alarmed about Nigeria’s ban than their Indian counterparts are about the subcontinent’s ban. 

U.S. Congress

Meanwhile, Congress is gearing up to face a number of issues this year, beginning with an impeachment trial that starts this week and coronavirus pandemic relief. However, a number of cryptocurrency issues will likely work their way through Capitol Hill. Here are a few of the major players to watch:

House of Representatives

  • Representative Maxine Waters (D-Calif.) – Rep. Waters chairs the House Financial Services Committee, the main committee that oversees cryptocurrency and fintech issues in the House of Representatives. She has called a hearing next week on Robinhood and the GameStop pump.
  • Representative Patrick McHenry (R-N.C.) – Rep. McHenry is the ranking member on House Financial Services. McHenry has said publicly that he’s a proponent of cryptocurrencies and fintech innovation.
  • Representative Jim Himes (D-Conn.) – Rep. Himes is the chair of the HFSC Subcommittee on National Security, International Development and Monetary Policy, which is holding a hearing on domestic terrorism funding in the wake of the Jan. 6 Capitol Hill insurrection later this month. Expect bitcoin to come up.
  • Representative French Hill (R-Ark.) – Rep. Hill is the ranking member on the National Security subcommittee.

Senate

  • Senator Sherrod Brown (D-Ohio) – Sen. Brown is the new chair of the Senate Committee on Banking, Housing and Urban Development. In public statements he has said his focus will be on evaluating a real-time payments system, as well as paying more attention to housing and urban development issues than the committee has in years past.
  • Senator Patrick Toomey (R-Pa.) – Sen. Toomey is the ranking member of the Senate Banking committee.
  • Senator Elizabeth Warren (D-Mass.) – Sen. Warren, who drove the creation of the Consumer Financial Protection Bureau, is on the Senate Banking and Finance committees. She hasn’t explicitly said anything about cryptocurrencies recently but has been outspoken on consumer protection issues that could intersect with the crypto industry.
  • Senator Cynthia Lummis (R-Wyo.) – Sen. Lummis, who won her seat in last year’s election, is joining the Senate Banking committee as its first member who’s an active bitcoin advocate. She has already announced her intention to launch a fintech caucus in the Senate and said she hopes to “work with federal regulators to ensure that regulation of digital assets are structured to encourage innovation, instead of stifling it.”

Biden’s rule

Last week, President Joe Biden formally withdrew the nominations of Robert Benedict Bowes and Brian Brooks. Bowes was former President Donald Trump’s nominee to be a Commodity Futures Trading Commission commissioner to succeed current Commissioner Brian Quintenz. Brooks, the former Acting Comptroller of the Currency, was nominated to a full five-year term. Biden is expected to name Chris Brummer and Michael Barr to fill the CFTC and OCC roles.

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)


Elsewhere: 

  • US Senate Bill Re-Introduces Suspicious Activity Reports for Social Media: There’s a new bipartisan bill introduced in the U.S. Senate that would basically create a sort-of FinCEN for social media platforms. Anyone can file a “Suspicious Transmission Activity Report,” or STAR, to report allegedly illegal activity on different technology platforms to this new agency. What could possibly go wrong?
  • Ethereum Futures Are Now Trading on CME: Cash-settled ether futures are live on the CME, one of the first U.S. exchanges to launch bitcoin futures back in 2017. Tim McCourt, CME’s global head of equity products, told my colleagues on CoinDesk TV that, “we’ve had record adoption of institutional players” since those first bitcoin futures contracts began trading. 
  • Protego Becomes Second Crypto Firm to Win Bank Charter From OCC: A Seattle-based digital asset firm Protego Trust has won a conditional bank charter, joining Anchorage in being one of the first crypto firms approved to operate as a national bank. This is an interesting move to me because former Acting Comptroller Brian Brooks is no longer at the regulatory agency, meaning critics of the OCC’s moves on crypto can’t say he influenced this particular decision. It’s a promising sign. Also, Metal Pay has filed for a charter with law firm Anderson Kill’s assistance.
  • Ron Hammond, a former legislative staffer for Rep. Warren Davidson (R-Ohio) who wrote the Token Taxonomy Act before joining Ripple as a government liaison, has joined the Blockchain Association as Director of Government Relations. 

Outside crypto:

  • Getting vaccinated is hard. It’s even harder without the internet.: This MIT Technology Review article looks at the difficulties Americans living in San Francisco – the heart of the nation’s tech scene – face trying to get internet access. It’s not just a matter of physical infrastructure either. Reporter Eileen Guo notes that even where the internet is easily accessible, people might not be able to afford telecom provider costs.



If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde. 

You can also join the group conversation on Telegram. 


See ya’ll next week!



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State of Crypto: How Will the Government React to GameStop?

Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De.

Yeah, of course we’re talking about GameStop (GME) today. Here are my questions: What can the U.S. government do, what might the government do and what impact could that have on the crypto space?

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Free-for-all

The narrative

I’m assuming you’ve heard that Gamestop’s stock price rose, like, a lot last week. In fact, it rose so much that individuals and hedge funds that shorted it lost billions of dollars. Except not really, and I’ll touch on that, but what I’m more interested in is how the U.S. government (and other nations) will react.

Why it matters 

Retail investors coordinating a massive share price pump for a public company seems like a pretty big story. The White House is monitoring it, newly confirmed Treasury Secretary Janet Yellen is looking at it, the Securities and Exchange Commission published not one but two brief statements saying it was monitoring the situation, and both the U.S. Senate and House of Representatives plan to hold hearings.

It all started with a subreddit called r/WallStreetBets, which showed how a dedicated decentralized community can take on traditional finance. Though this initially had little to do with crypto, the mania quickly spread to cryptocurrencies including DOGE and XRP. But the implications for the industry could be much more far-reaching.


Breaking it down

What happened?

Let’s just recap what happened, in case this is the first time you’ve been on the Internet in over a week. For the past few months, users of the r/WallStreetBets subreddit (a subreddit is a community on Reddit.com) have been buying shares of GameStop and propping up its price. 

This really entered the mainstream when people realized some large hedge funds, including Melvin Capital, had heavily shorted $GME and needed to buy up the stock to ensure they could cover the short. This pumped $GME by a lot. 

People went nuts. White House Press Secretary Jen Psaki has now fielded multiple questions about how President Joe Biden’s team might respond. The SEC has published multiple statements saying the same. Jimmy Kimmel is, for some reason, saying “Russian disruptors” are behind the price boom. 

What will the government do?

So we have to split the U.S. government into two groups here: Congress and regulators. 

Let’s start with Congress, which is already planning on holding hearings about market volatility. The House Financial Services Committee, chaired by Rep. Maxine Waters (D-Calif.) is holding a hearing on Feb. 18 with Robinhood CEO Vlad Tenev, while the Senate Banking Committee, chaired by Sen. Sherrod Brown (D-Ohio) will hold its own hearing. 

Beyond Robinhood’s chief executive testifying at a hearing, there aren’t a lot of details available right now about what Congress might do. Part of this may be because the situation is still fairly new and the committees need to organize these hearings on top of their other tasks, which include confirmation hearings for the new administration and an impeachment trial for the old one. 

That brings us to the regulators. And … it’s unclear what they can actually do. The GameStop pump was coordinated among a huge number of individuals on a public forum. It doesn’t look like a traditional pump-and-dump scheme, one attorney told me.


The SEC could look at whether the participants were acting in concert and coordinating as part of a pump-and-dump, but this seems unlikely. 

Other attorneys seemed equally skeptical about whether the SEC has any real jurisdiction over matters like GameStop. 

The attorney above, who requested anonymity due to the general lack of clarity around this issue, said the GameStop saga might be great for decentralized communities and the general idea of decentralization, but could also lead to more market volatility that would scare investors (and therefore draw the SEC’s attention, given its mandate on investor protection). 

A bit of a mea culpa here: Last week I tweeted that “r/WSB has scared hedge funds more in a week than bitcoin has in a decade changemymind.jpg.” But then, after doing more  research, I’ve changed my mind. Twitter isn’t great for nuance but I now think a better take would have been along the lines of “r/WSB has gotten hedge funds’ attention more effectively.” It turns out plenty of Wall Street firms are making out like thieves by selling their now-highly valued shares on the open market (or could if they actually sold their shares). 

The chief takeaway seems to be that regulators can’t actually stop this kind of thing because it’s not clear if any laws have been broken. They can say they’re monitoring the situation but that’s probably what they have to say. (Imagine the SEC saying, “Hey, we saw the GameStop thing but it’s not really something we’re keeping an eye on.”)

In other words, this drama suggests a properly decentralized entity might be able to  operate without fear of an SEC shutdown. This, in theory, should be good for the cryptocurrency industry. 

Ripple fights back

I should also mention Ripple’s response to an SEC lawsuit alleging it violated federal securities laws by selling XRP since 2013. The company filed a response Friday in federal court, denying XRP sales were securities transactions and saying XRP isn’t a security. It also announced filing a Freedom of Information Act (FOIA) request to the SEC asking how the agency determined that bitcoin and ether are not securities. 

As I said in a previous edition of this newsletter, it’s still early days. Ripple looks like it’s still fighting in the realm of public relations as much as it’s fighting in court. What Ripple does not appear to have done is file a motion to dismiss the case. It does appear to be following Kik’s playbook in responding to the SEC’s complaint paragraph by paragraph.

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)


We’re still waiting on confirmation hearings and votes for most of President Biden’s nominees for financial regulatory positions. The second-week president has yet to officially confirm that Chris Brummer will be nominated to lead the Commodity Futures Trading Commission or that Michael Barr will be nominated to lead the Office of the Comptroller of the Currency. 

Elsewhere: 

  • Bitcoin and Inflation: Everything You Need to Know: My colleague Sandali Handagama explored the relationship between inflation and bitcoin’s value proposition. She found that while the cryptocurrency is seen as an inflation hedge, there hasn’t  been a whole lot of inflation to hedge against. Indeed, Fed Chair Powell said he’d “welcome higher inflation” at this juncture. 
  • Harvard, Yale, Brown Endowments Have Been Buying Bitcoin for at Least a Year: Sources: Let me take you behind the curtain for a minute here. This is actually a story CoinDesk has been quietly investigating for maybe 18 months now. Ian Allison is exceedingly great at reporting, and he was finally able to confirm this story: University endowments are investing in bitcoin. Put another way, crypto is seen as a mature and regulated enough market that typically cautious investment vehicles are comfortable putting funds into it. 
  • Judge Rejects Virgil Griffith’s Motion to Dismiss Charges of Aiding North Korea: A federal judge has rejected Ethereum developer Virgil Griffith’s motion to dismiss a federal criminal case alleging he violated U.S. sanctions law. District Judge P. Kevin Castel wrote Griffith doesn’t necessarily need to have been compensated for his talk at a North Korean crypto conference to have rendered “services,” which is what he’s being accused of doing. There will be a telephone conference on Feb. 11 next.
  • FinCEN’s Wallet Rule Aims to Close Crypto-Cash Reporting Gap, Official Says: FinCEN Deputy Director Michael Mosier provided the first public comments on the proposed counterparty surveillance rule on wallets in a talk with TRM Labs. According to Mosier, the rule was a response to a perceived discrepancy between the reporting requirements for cash and crypto. He encouraged commenters to file specific, technical and practical feedback about the implications of the rule. (Need a refresher? Click here).

Outside crypto:

  • A Vast Web of Vengeance: This New York Times article is stunning. It is absolutely worth a read. In short, people are finding it extremely difficult to remove defamatory information about them off the internet. This may feel like an edge case but it is absolutely the sort of thing that those building decentralized, censorship-resistant platforms should keep in mind. 


If you have thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik@coindesk.com or find me on Twitter @nikhileshde. 

You can also join the group conversation on Telegram. 


See ya’ll next week!



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State of Crypto: Unpacking the Trump Presidency’s Crypto Legacy

Welcome to State of Crypto, a CoinDesk newsletter looking at the intersection of cryptocurrency and government. I’m your host, Nikhilesh De.

A number of crypto issues are on deck as Joe Biden enters the second week of his presidency. This week’s edition of SoC looks at what now-former President Donald Trump left behind.

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Where we’re at

Key narrative

Crypto grew rapidly over the four years Trump was in office – despite his own public admission that he is “not a fan” of bitcoin. While he wasn’t directly responsible for this growth, the regulators he appointed and some of the policies his administration pursued undeniably boosted the crypto industry. After four years, here’s what his administration left behind. 

Why it matters 

The Trump administration was largely friendly toward the industry (with a few notable exceptions), and ushered in a wave of regulations and products that were welcomed by the crypto community. The Trump administration stopped short of actually setting a policy direction, however. Almost all of the crypto-friendly actions were conducted by the regulators he nominated to various posts, and no significant legislation on the crypto space was passed or signed into law. 

Breaking it down

SEC: Light on the guidance

The Securities and Exchange Commission (SEC) hasn’t published a ton of guidance, Commissioner Hester Peirce’s attempts notwithstanding. Mostly it came down to: initial coin offerings (ICO) and cryptocurrencies may violate securities laws, hit up the SEC if you have questions. Also, the SEC rejected like a gazillion bitcoin exchange-traded fund (ETF) applications, though there’s some renewed hope one will be approved in 2021. Here are some other memorable moments from the Trump era:


  • An SEC staffer asked the general public to “please stop asking” about bitcoin ahead of a decision on whether it will approve a bitcoin ETF in March 2017 (the SEC later rejected the ETF application).
  • The SEC published the DAO Report, arguably its most consequential guidance as far as the crypto industry is concerned. The report, which examines the DAO, an Ethereum-based funding vehicle, concluded federal securities laws might apply to certain cryptocurrencies and sales involving crypto. 
  • The SEC spun up a new cyber unit to focus on crimes committed using cryptocurrencies and the dark web in September 2017.
  • The SEC announced in November 2017 that celebrity endorsements of ICOs might violate the law if the celebrities don’t disclose they’re being paid for their endorsements. In a stunning turn of events, it later filed charges against celebrities who didn’t disclose they were being paid for their ICO endorsements.
  • In January 2018, several companies withdrew their bitcoin ETF applications at the SEC’s request.
  • Dalia Blass, the SEC’s director of Investment Management, says valuation, liquidity, custody, arbitrage and market manipulation concerns all need to be addressed before the agency will approve a bitcoin ETF.
  • Also in January 2018, the SEC shared that it’s taking a look at companies that announced blockchain pivots. In an entirely predictable sequence of events, it later suspended trading in three companies that made such announcements.
  • The SEC appointed Valerie Sczcepanik, the previous head of its distributed ledger working group, as its senior adviser for digital assets and innovation in June 2018.
  • SEC Director of Corporation Finance William Hinman says that, in his view, ether doesn’t look like a security. While this isn’t formal guidance, SEC Chair Jay Clayton later endorsed Hinman’s view, opening the door for Commodity Futures Trading Commission Chair Heath Tarbert to invite and approve companies looking to create an ether futures product. 
  • In August 2018 the SEC rejected nine bitcoin ETF applications at once before announcing it was reviewing those rejections. Despite asking for public input on the applications in October, nothing more was said about them.
  • The SEC created FinHub, a division specifically focused on distributed ledger technology and other financial technology products. Valerie Sczcepanik was tapped to lead it.
  • The SEC charged decentralized trading platform EtherDelta’s founder Zachary Coburn with operating an unregistered securities platform, showing that decentralized exchanges (DEX) aren’t necessarily beyond the agency’s reach.
  • In April 2019, the SEC published a token framework explaining when a cryptocurrency might be a security in its view. Industry participants say it leaves many questions unanswered.
  • Also in April, the SEC published its first no-action letter allowing a company to legally sell tokens.
  • The SEC sued Kik over its 2017 kin token sale in June 2019. A judge ruled the sale violated U.S. law, and Kik later settled, paying a $5 million fine.
  • The SEC also sued Telegram over a $1.7 billion gram token pre-sale (it later won this case).
  • The SEC said some stablecoins may not be securities, but issuers should work with the federal regulator to ensure it isn’t in violation of any U.S. laws in September 2020.

In short, almost all of the SEC’s actionable guidance came via enforcement actions and informal warnings. What is clear is a) token sales may violate securities laws and b) the SEC will go after entities if it thinks there’s a violation.

CFTC: Light-touch guidance

During the Trump era, the Commodity Futures Trading Commission approved the entrance of crypto derivatives products in the U.S., creating a regulated trading market in which institutions could participate. Here are the key points:

  • Cash-settled bitcoin futures (where traders receive the fiat equivalent to the contract’s value when it settles) launched in December 2017 (under the oversight of former Chair Chris Giancarlo).
  • CFTC General Counsel Daniel Davis authorized agency staff to hold and trade cryptocurrencies in February 2018.
  • A federal judge ruled bitcoin is a commodity and therefore subject to the CFTC’s enforcement supervision in a case brought by the agency against an alleged crypto scammer.
  • Physically settled bitcoin futures (where traders receive bitcoin when the contract settles) launched in September 2019 (under the oversight of former Chair Heath Tarbert).
  • The CFTC defined “actual delivery” for cryptocurrency contracts in March 2020, answering a long-running question about what it means for a customer to receive bitcoin earned through margin trading (the definition is later cited as Coinbase’s reason for ending margin contracts).
  • Physically settled ether futures launched in May 2020 (Tarbert).

Giancarlo, who was widely referred to as “Crypto Dad” during his time in office because of his advocacy for a light-touch regulatory framework, told CoinDesk in 2019 the approval and introduction of a bitcoin futures market helped pop the 2017 crypto bubble. Bitcoin’s price rose to nearly $20,000, what would have been an all-time-high at the time, but the price fell shortly after the first futures contracts were introduced to the U.S. market.

The former regulator now spends his time advocating for a U.S.-issued central bank digital currency (CBDC) as part of the Digital Dollar Foundation. His successor, Tarbert, gave the industry a shot of hope by explicitly calling ether a commodity, opening the door for derivatives products around the cryptocurrency.

OCC: Light-speed guidance

The Office of the Comptroller of the Currency wasn’t hugely involved in the crypto space for most of Trump’s term, outside of a legal fight over a fintech charter. It wasn’t until Brian Brooks got to the agency by way of an appointment by Treasury Secretary Steven Mnuchin that the OCC really began making public moves relevant to the industry.

  • As First Deputy Comptroller, Brooks raised the idea of a nationwide charter for fintech firms, allowing them to bypass individual states’ money transmitter license requirements.
  • In July 2020, the OCC made waves by publishing an interpretative letter saying banks can provide custody services for cryptocurrencies. 
  • The OCC published stablecoin guidance for banks, giving them cover to work with stablecoin issuers in a legally-compliant fashion in September 2020. 
  • Fintech lender SoFi, which has a digital assets wing, received a conditional charter from the OCC in October 2020.
  • Brooks said banks may be looking to partner with or acquire custodians to enter the crypto market in October 2020.
  • The OCC began a rulemaking process to prohibit banks from not serving certain industries, including the cryptocurrency industry in November 2020 (this rule was finalized in January 2021). 
  • The OCC published additional guidance in the form of an interpretative letter saying banks can use stablecoins for payments, as well as operate nodes on public blockchains at the beginning of January 2021.
  • Anchorage, a South Dakota-based crypto custodian, became the first federal crypto bank after the OCC granted it a conditional trust charter in January 2021.

The OCC moved so quickly under Brooks that several members of Congress felt the need to ask him to focus on other issues such as the coronavirus pandemic. Rep. Maxine Waters (D-Calif.) also included all of the OCC interpretive guidance in a letter to incoming President Joe Biden listing Trump administration actions Biden should undo. Trump nominated Brooks to a full term running the OCC.

Biden’s rule

Looking ahead, here’s what the regulator landscape looks like as of right now. Most of President Biden’s nominees still need confirmation hearings and votes, so a lot of these departments have acting heads, particularly after several Trump-nominated heads stepped down. Fed Reserve Chair Jerome Powell’s term doesn’t expire until next year. A few of the smaller Treasury Department agencies, including the Office of Foreign Assets Control (OFAC) and the lFinancial Crimes Enforcement Network (FinCEN), seem set to continue with their incumbent directors. Janet Yellen was confirmed yesterday as Treasury Secretarty and sworn in late last night.

Changing of the guard

Key: (nom.) = nominee, (rum.) = rumored, (act.) = acting, (inc.) = incumbent (no replacement anticipated)


Elsewhere: 

  • Janet Yellen Says Cryptocurrencies Are a ‘Concern’ in Terrorist Financing: Yellen’s comments raised a stir last week, with much of the industry indignantly pointing out that not a lot of crime is conducted using crypto and only a tiny fraction of crypto is used to conduct crime. Yellen’s written remarks, published two days later, showed a bit more nuance. Honestly, I don’t think we can draw any conclusions from her remarks last week because they were her first crypto comments in over two years. On the plus side: She has said she’ll review the FinCEN rulemaking Mnuchin tried to rush through.
  • Japan Rallies Behind XRP as Ripple Faces US Litigation: An interesting conflict inherent in crypto is that it’s supposed to be borderless and stateless, but it exists in a world that still has borders and states. We’re seeing what that actually means now, with the SEC suing Ripple on allegations it sold XRP in unregistered securities transactions. While the SEC might believe XRP is a security, that doesn’t mean other nations do. My colleague Sandali Handagama found that investors in Japan are (understandably) still fairly confident in XRP, particularly after an endorsement by local financial services giant SBI. 
  • The Relationship Between US Government Debt and Bitcoin, Explained: So one of the tenets of the crypto twitterati is that inflation is bad, money printing is bad, sound money is good and deflationary currencies like bitcoin are very good. As it turns out, inflation in the U.S. has been pretty low. My colleague Nathan DiCamillo spoke to some economists, and while it’s entirely possible that inflation will rise in future “we’re not seeing it yet,” at least one told him. Nate’s conclusion: Bitcoin’s role as a hedge might not be imminent. 

Outside crypto:

  • SEC Chair nominee Gary Gensler is likely to take the regulator in a sharply different direction than predecessor Jay Clayton did on a number of issues, including a rule on prohibiting conflict of interest for investment advisors and climate change, Politico reports. 



If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik.de@coindesk.com or find me on Twitter @nikhileshde. 


You can also join the group conversation on Telegram. 

See ya’ll next week!



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State of Crypto: What the Crypto World Should Watch for in the Biden Era

Hello and welcome to State of Crypto, a CoinDesk newsletter examining the intersection of cryptocurrency and government. I’m your host, Nikhilesh De. You’re receiving this newsletter because you either signed up for it, or were previously a recipient of one of CoinDesk’s pop-up newsletters. Don’t want to see this again? Click here to unsubscribe. 

In this week’s debut issue, I take a look at some of the key topics and stories I expect to see this year, a day ahead of the inauguration of President-elect Joseph R. Biden and as the Democratic Party takes control of both houses of Congress. 

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A new administration

Key narrative

Former Vice President Joe Biden is set to take the top office in the U.S. tomorrow. His nominees for federal office will shape crypto policy in the country for years to come. And once again, the same major party controls Congress as well as the presidency, which means a unified economic and regulatory agenda may be implemented.  

Why it matters

  • The U.S. Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and Office of the Comptroller of the Currency (OCC) will all see a change in leadership. Next year, so will the Federal Reserve.
  • The SEC is suing Ripple Labs and two executives on allegations they sold XRP in unregistered securities sales for over seven years, which has implications for companies that didn’t conduct initial coin offerings, but may have still sold tokens.
  • The Financial Crimes Enforcement Network (FinCEN) is considering a number of rules that bring crypto transactions under closer scrutiny.
  • The OCC has issued a number of interpretative letters over the past year under an acting head that powerful Dems on the Financial Services Committee already want overturned.
  • Congress will consider how it can implement new real-time payments services and boost financial inclusion this year, targeting two goals that the crypto community has long discussed. This is a conversation the industry wants to participate in.
  • Democrats are furious at Republicans who they think helped incite the attempted Capitol insurrection in January, and that could have implications for crypto-friendly legislation spearheaded by Representatives who objected to the Electoral College votes.

Breaking it down

Let’s take things in order. 


Biden announced Monday he would tap former CFTC Chair Gary Gensler to head up the SEC. This is important for a few reasons. For one thing, Gensler understands crypto and blockchain. He’s not adored by Wall Street and it’s doubtful he’ll create a regulatory regime that the crypto industry will love, but at least there are reasonable chances of getting a clear regulatory structure. Plus, his fellow CFTC alum Jeffrey Bandman believes he may approve a bitcoin exchange-traded fund.


As far as litigation goes, I would be surprised if the SEC suit against Ripple were dropped. We are in the early stages of this litigation and while Ripple CEO Brad Garlinghouse has said previous attempts at negotiating a settlement failed, that doesn’t mean we won’t see a settlement before the court case ends.

I haven’t seen anything on who Biden might tap to head up the CFTC, and the OCC’s new chief hasn’t been announced.  Currently the CFTC’s Heath Tarbert plans to step down from the chair role, while the OCC’s Brian Brooks left last week. The chances of having a crypto-savvy trifecta leading the three agencies are low. It’s also worth watching the Federal Reserve and Federal Deposit Insurance Corporation for how they approach the question of stablecoins and insurance for banks touching on crypto.

FinCEN: A question mark

As of my writing this, the domestic money laundering watchdog has extended the comment period on a controversial rule proposal that would require crypto exchanges to record name and address info for transactions aggregating over $3,000 per person per day that go to private wallets (also referred to as unhosted wallets, or self-hosted wallets, or just wallets). The industry wasn’t wild about this rule; it could break decentralized finance smart contracts (which have neither names nor addresses), create potential honeypots of information (remember last year’s headlines about Treasury/FinCEN being hacked and private files released?) and result in a massive burden for exchanges. Coinbase alone expected the new rule would require it to file some 7,000 reports per day. 

Treasury Secretary Steven Mnuchin was reportedly the main government official pushing the rule, and with Janet Yellen taking over that role, it’s hard to know if this rule will be modified, yanked entirely or implemented. Yellen hasn’t commented on bitcoin since 2018, when she dismissed it in some public remarks. But as Fed Chair she indicated she was against heavily regulating the industry.

What’s really interesting about FinCEN’s extension of the comment period is it bifurcated the different parts of the rule. One aspect, which FinCEN said was a typical currency transaction report rule (i.e. the $10,000 reporting requirement), gets just a further 15 days. However, the record-keeping and counterparty detail is seeing a 45-day extension due to how “complex” the issue is. This was the part that raised the most ire among industry participants, so I imagine they’ll welcome the longer time period to discuss this with the regulators. Also worth watching: The thresholds rule and offshore reporting rule FinCEN brought up near the end of last year.

OCC: Brooks’ legacy 

The OCC’s in an interesting position. On the one hand, this banking regulator just granted a national trust charter to Anchorage, converting it from a South Dakota trust company to a federal one, effectively making it the first crypto-native national bank. While it doesn’t yet have benefits like FDIC insurance, the company told my colleague Ian Allison that that is absolutely on the menu. Granting this charter is the capstone of Brooks’ tenure at the regulatory agency, which lasted all of eight months and also  included a handful of interpretative letters that sought to define how national banks could interact with the crypto space. 

The attention Brooks paid to crypto guidance angered several House Democrats, who asked him to focus more on pandemic and economic relief late last year. House Financial Services Committee Chair Maxine Waters (D-Calif.) went a step further, writing an open letter to Biden asking him to rescind all recent rulemaking and guidance under the Trump era, which would include all of the OCC letters. 


The charter likely cannot be easily revoked though, and while Brooks may have sped the publication of these letters, Senior Deputy Comptroller Jonathan Gould told me last year that the agency had already been looking into much of its guidance over the last few years, a statement Brooks echoed at a public seminar last week. In other words, despite what some lawmakers might want, this guidance might be here to stay. Whether any bank acts on it is another question entirely.

Meanwhile, Politico is reporting that Biden might tap Professor Mehrsa Baradaran, of the University of California, Irvine, or Dean Michael Barr, of the University of Michigan Ford School of Public Policy, to succeed Brooks. Baradaran has testified on crypto multiple times in Congress, while Barr joined Ripple’s board of advisors in 2015.

Congress: Bringing back real-time payments

Let’s get to the really interesting bits: Senator Sherrod Brown (D-Ohio) is going to run the Senate Banking Committee for the next Congressional session, and one of his focuses will be on real-time payments and how to implement them, as well as in bringing the financially excluded onto payment rails. An idea being tossed around is postal banking, where post offices (which are plentiful) are able to provide certain financial services. Rohan Grey, a legislative adviser who helped create the STABLE Act, said FedAccounts will likely receive a lot of attention. Brown himself mentioned the concept during a virtual media availability. “The Fed will administer, not subsidize, a no-fee account. It can be done online, it can be done at post offices … you can get access perhaps at a small bank in your neighborhood,” he said of the idea.

One common perception around crypto is that proof-of-work networks like Bitcoin are incredibly energy intensive and are primarily powered by oil or coal plants. Industry participants say hydroelectric and other forms of renewable energy sources are used instead. Either way, regulators like the New York Department of Financial Services and CFTC are warning their regulated firms to be mindful of the environmental costs of their services. Crypto miners in the U.S. in particular may see new requests or regulations heading their way.

The other major storyline to watch out for is how exactly Congress will proceed in the coming weeks and months. We all saw the mob breach the U.S. Capitol Building in January, followed by several Republican Senators and Representatives objecting to the acceptance of the certified Electoral College votes from the states of Arizona and Pennsylvania. Several members of the Congressional Blockchain Caucus gave speeches and voted against accepting the votes – essentially disagreeing with consensus, to use a rough crypto analogy. Punchbowl News reported that some Democratic lawmakers and aides are considering freezing the objectors out of parts of the legislative process. 

This could mean that bills introduced by blockchain proponents like Rep. Warren Davidson (R-Ohio), such as the Token Taxonomy Act, might go nowhere if they’re introduced or reintroduced this year. Kristin Smith, executive director of the Blockchain Association, said the “political tensions right now are incredibly high,” and noted that “there’s currently a lot of pressure on Democrats to stop working across the aisle with anyone who voted the other way” last week, though she expects this to subside as time moves on. “The Democrats may have the White House, the House and the Senate today but they won’t always be on that side of things and they’ll want to work across the aisle when they’re in the minority as well,” she said. “I’m hopeful we’ll return to seeing some bipartisanship.”

Speaking of the insurrection, Twitter banned Trump, alongside many other social media firms. Big Tech’s role in society was already going to be a question for Congress, but after deplatforming the U.S. president, expect those conversations to take on a new level of importance. Also important, but perhaps less discussed: Some payment processors also deplatformed Trump supporters and his campaign. 

Elsewhere

  • Alt-Right Groups Received $500K in BTC Month Before Capitol Riot: Chainalysis: Actually, there’s more about this insurrection we should talk about. Last week, analytics firm Chainalysis published a blog post noting that 13.5 BTC had been sent to 22 wallets, some of which were tied to far-right activists who participated in the mob on Jan. 6. The bitcoin appears to have been sent by a French computer programmer who has since passed away, according to Chainalysis. Crypto has been tied to extremists before, and as the new legislative session begins it would not surprise me if legislation to combat terrorist funding via crypto is raised again. The other concern legislators and regulators may have is that these funds reportedly came from overseas – foreign funds involved in U.S. politics is a sticky area for local lawmakers. 
  • Tron-Owned Video Platform Criticized for Hosting Extremists, US Capitol Rioters: People deplatformed from YouTube and Twitch for espousing hate and/or violence turned to DLive, which pays creators in crypto and is owned by Tron. Mind you, Tron/DLive is now also kicking off anyone who streamed from the Capitol.
  • Jerome Powell on CBDCs: ‘We Don’t Feel a Need to Be First’: Fed Chair Jerome Powell talked about stablecoins and CBDCs last week. In short: he said stablecoins might pose risks, and the U.S. is working with other nations on this (more Libra talk?), and central bank digital currencies are probably coming later rather than sooner. I’ll just refer you to my colleague Nate DiCamillo’s reporting above.

Outside crypto




If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at nik.de@coindesk.com or find me on Twitter @nikhileshde. 

You can also join the group conversation on Telegram. 


See y’all next week!



Disclosure

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