July 31, 2022 | Issue 26
WHO WILL REGULATE CRYPTO?
The Department of Justice (DOJ) and the Securities & Exchange Commission (SEC) announced an insider trading action against a former employee at Coinbase.
The employee told two people about cryptocurrencies that were going to be listed on the Coinbase exchange. The defendants made $1.5 million. On its face, this looks like insider trading.
While this case shows that the Feds won't tolerate "front-running," what was more significant was that SEC also alleged several of the cryptocurrencies were securities.
This stunned the crypto industry, lawyers well-versed in administrative law, and even the CFTC (Commodity Futures Trading Commission). Shortly after the case was made public, CFTC Commissioner Caroline Pham issued a press release criticizing a sister agency.
Pham said that SEC's action "is a striking example of regulation by enforcement.... Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input – through notice-and-comment rulemaking pursuant to the Administrative Procedure Act. Regulatory clarity comes from being out in the open, not in the dark." Determining whether a cryptocurrency is a security or commodity goes to the heart of a debate that is raging in Washington. Also, its odd that the SEC did not name Coinbase or the crypto currency companies who are allegedly selling unregistered securities. Is it incumbent on the named defendants to argue that the coins are commodities and not securities? Will the defendants' counsel get guidance from the flagged crypto companies and Coinbase attorneys? A much better process would have been for the SEC and/or the CFTC to publish a proposed regulation and invite comments. [See "What are regulations?"] There are over a dozen federal agencies and interagency groups looking at the "security versus commodity" issue. Plus, several committees on the Hill have been working on legislation. For SEC Chair Gensler to unilaterally make a call without any supporting legal reasoning is a blatant power grab. It has rocked the industry and was a major set back. Shame on you, Gary!! Reach out to me with your thoughts and questions. If you'd like me to speak to your office about crypto, I'm scheduling talks for September and October. Have a productive week and stay crypto curious! Rich Hopen richard.hopen@compass.com | 908.917.7926 PS. You can find all CNR newsletters here. PSS. This newsletter is supported by home buyers and sellers in NJ who retain me as their real estate agent. If you know of anyone looking to buy or sell a home, please reach out to me.
CRYPTO NEWS ▸ Crypto Exchanges Are Being Stress Tested The past few months have been challenging for crypto exchanges because fewer customers are opening accounts and trading volume has declined. But falling revenue has been harder on smaller exchanges. According to Paul Vigna's article in the Wall Street Journal, two exchanges are benefiting from the current conditions. FTX's market share grew almost 50% from 6% market share in January to 8.95% in June. Binance's market share is at 49.7% compared to 45% in January. FTX and Binance are actively looking to acquire struggling exchanges. Kraken, an exchange valued at $11 billion, is under investigation by the Treasury Department's office of Foreign Assets Control for allowing users in Iran to trade on its platform.
▸ Schwab Will List Crypto ETF on NYSE Schwab Asset Management announced it will launch a crypto ETF that tracks companies benefiting from cryptocurrencies and other digital assets. It will not directly track or invest in cryptocurrencies.
▸ FDIC Ordered Bankrupt Crypto Lender to Cease False Claims The Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) issued a cease-and-desist order to Voyager Digital. Voyager advertised that its crypto was FDIC insured. Voyager made this claim because it had a partnership with Metropolitan Commercial Bank. The bank issued a statement explaining that the FDIC insurance covers a failure of the bank, not Voyager. Voyager is currently in bankruptcy and last week crypto exchange FTX presented an offer to Voyager customers. FTX offered to give Voyager customers an advance on their bankruptcy claims to buy more digital assets on FTX, or withdraw cash. Voyager rejected the offer as "a low-ball bid dressed up as a white knight rescue."
CRYPTO CLASS – CRYPTO LENDER BANKRUPTCY
US bankruptcy courts are about to create a new area of law – crypto lender bankruptcy.
Crypto lenders Voyager and Celsius filed for Chapter 11 bankruptcy in July and both companies have billions in assets and liabilities.
Chapter 11 bankruptcy allows a company to stay in business while its obligations are restructured. The company may propose a reorganization plan.
Both Voyager and Celsius are going this route.
Alternatively, creditors may propose their own plans.
Which creditors get paid back, how much do they receive, and in what order are they paid? Answering these question won't be easy.
Celsius customers fall into two groups. The "earned customers" loaned funds to Celsius and received a yield as high as 18%. "Custodial customers" simply held their crypto in an account.
This is analogous to depositing money in a traditional bank and receiving interest ("earned customers") versus putting cash into a bank safety deposit box ("custodial customer").
If the bank became insolvent and went into bankruptcy, the safety deposit customer would get back all their money. The earned customers would be treated as creditors.
The bankruptcy court will scrutinize the terms of service and will give priority to the the custodial wallet customers.
But the problem is that Celsius and Voyager commingled the earned customer funds with the custodial funds.
Also, before assets are dispersed to Celsius and Voyager customers, the bankruptcy administrators and lawyers will be paid first.
Law firm Kirkland & Ellis is representing Celsius and Voyager. In just three weeks, it billed Voyager $3 million. The total bankruptcy fees could be $100 million.
INFLUENCERS - People to follow Alex Gladstein – @gladstein Gladstein is the Chief Strategy Officer for Human Rights Foundation, author, speaker, and prolific writer on how BTC is bringing opportunity to developing countries and the bankless.
RESOURCES – Books, websites, podcasts, interviews, articles, videos Bitcoin Magazine is one of the original crypto industry publications. Lots of terrific essays and articles.
CRYPTO WORD – Multi-signature (multisig)
Multi-signature (multisig) refers to requiring multiple keys to authorize a Bitcoin transaction, rather than a single signature from one key. It has a number of applications.
Dividing up responsibility for possession of bitcoins among multiple people and a
voiding a single-point of failure, making it substantially more difficult for the wallet to be compromised.
OH, ONE MORE THING –
Thanks for reading! See you next week.
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