The purpose of this column has never been to provide investment advice on cryptocurrencies or other digital assets, nor to provide individual legal advice. It has mostly revolved around my desire to present my written thoughts on the state of the cryptocurrency market and the legal issues surrounding it..
Turns on… is a monthly column by Marc Powers, who spent much of his 40-year legal career working on complex securities cases in the United States after joining the SEC. He is currently an adjunct at Florida International University College of Law, where he teaches a course on “Blockchain & the Law.”
So let me be clear: it’s been particularly bad for the last two months in cryptography. Both in activities related to digital assets and cryptocurrencies. However, there are silver linings that need to be considered. And when considered, perhaps readers will gain more perspective and not react in a retroactive way with their digital assets or blockchain transactions.
The last two months have been particularly bad for cryptography. However, there are silver linings that need to be considered.
As I have referred to in previous columns, I believe that Bitcoin, Ether and other cryptocurrencies are here to stay. No single country, or group of countries or regulators, can stop their use and development – nor a series of failures or freezes on assets by a stablecoin issuer, other large cryptocurrency lenders like Celsius, or cryptocurrency hedge funds like Three Arrow Capital which submitted bankruptcy proceedings here in the United States last Friday. I also believe, like many blockchain and crypto experts, among them Dan Morehead at Pantera Capital, that over time, the price of many of these cryptocurrencies, backed by trusted blockchains or blockchain companies, will improve and rise.
First it was a complete collapse of stablecoin TerraUSD – now known as TerraUSD Classic following reclassification – in early May. When I reported this in my last post, I warned that cryptocurrency investors need to better understand the lack of protection of their stablecoin investments, both because they are not tied up and supported solely or even in part by a reserve currency such as the US dollar and because of the lack of clear, guaranteed redemption rights in one’s capacity to convert stablecoin to dollar. In addition, there was no government backing when the issuer of stablecoin failed, as SIPC Insurance provided securities with traditional SEC-listed brokerage firms and FDIC Insurance with traditional OCC licensed banks.
I also pointed out in my column from the crisis that investors should not console themselves with other stablecoin issuers with BitLicenses from New York State. That license does not provide federal SIPC or FDIC protection for investors in stablecoins issued by Circle, with USDC, and Tether, with USDT. In addition, none of them was required to provide redemption rights or to be fully secured by the dollar.
Response from the parliament and regulators
So, what happened within two weeks of my column? A very welcome development. In fact, it seems that Adrienne Harris, the head of the New York State Department of Finance, has read my concerns and those of others. June 8, Harris announced new regulatory guidelines for BitLicense holder regarding stablecoins. In part, the new regulations require all issuers of stablecoin to have their currency “fully backed” by asset reserves, which are limited to US government documents and bank deposits. Equally important, investors must have a clear redemption right in US dollars. Finally, the reserve asset must be separated from the issuer’s other own assets and not mixed with its working capital.
The tour in New York came the day after another important event for cryptography. On June 7, Senators Cynthia Lummis and Kirsten Gillibrand set new laws, the Act on Responsible Financial Innovation. This is important in its bilateral communication and the breadth of areas that deal with digital assets. Of particular importance is a provision that provides primary oversight to the Securities and Exchange Commission, not the Securities and Exchange Commission, and efforts to provide legal clarity around the Howey exam. This is done by defining specific assets that would be considered “ancillary assets” and reducing their reporting obligations to twice a year. Given the importance of this proposed legislation, I will probably devote another whole column to it and its consequences. In short, this is encouraging and thought-provoking legislation for the start-up industry that protects it and invests without overwhelming regulations and costly demands.
Finally, it is appropriate to focus on the May 3 announcement from the SEC. That day, Chairman Gary Gensler announced that the SEC would double the size of the recently renamed cryptographic assets and network unit to 50 employees. The publication states that the unit was re-established in 2017 and has filed over 80 enforcement actions and received financial assistance amounting to over 2 billion dollars. To me, this was Gensler’s clear “land grab” effort to secure extensive jurisdiction for the SEC – perhaps aware that the Lummis-Gillibrand legislation would be announced soon would make the CFTC the primary cryptocurrency regulator. The publication stated that the unit’s focus was on investigating possible breaches of securities laws related to cryptocurrencies, cryptocurrencies, cryptocurrencies and mortgages, DeFi systems, NFTs and stablecoins. It seems to cover pretty much all the space for blockchain financial use, right?
What these movements really mean
Like me wrote again in early 2021 When he was originally nominated for the SEC chairmanship, Gensler, in my opinion, is ambitious – far too so – and could be dangerous to the industry, as he is focusing on the SEC’s enforcement efforts rather than ways to help the industry grow. Even Chief of Police Hester Peirce was unhappy with this expansion of SEC enforcement staff. On the same day as the announcement was announced, she tweeted:
The SEC is an enforcement agency, not an enforcement agency. Why are we a leader in cryptography?
– Hester Peirce (@HesterPeirce) May 3, 2022
Well said, Crypto Mom!
I believe that over time, Gensler is revealing himself further and being in the form of former SEC chairman Mary Jo White, a former prosecutor, rather than a civilian regulator. This is not good, in my humble opinion. That’s not good for blockchain. It’s not good for innovation in technology. This is not good for more efficient and cheaper financial services. It is not good for financial adjustment for everyone. And it is not good for those citizens in parts of the world where their governments are corrupt, oppressive or irresponsible and they need to protect the value and ownership of their property and wealth without government intervention or involvement.
Marc Powers is currently an adjunct at Florida International University College of Law, where he teaches “Blockchain & the Law” and “Fintech Law”. He recently retired from the Am Law 100 law firm, where he built up both a national securities and law enforcement team and the hedge fund industry. Marc began his legal career in the SEC’s enforcement department. During his 40 years in law, he has been involved in litigation, including the Bernie Madoff Ponzi scheme, the recent pardon of the president and the insider trading trial of Martha Stewart.
The views expressed are those of the authors only and do not necessarily reflect the views of Cointelegraph or the Florida International University College of Law or its affiliates. This article is for general information purposes only and should not be construed as legal or investment advice.
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