regulations

SEC’s ‘brute force’ crypto regulation attempt is ‘bad policy’ — Paradigm

The venture capital firm pointed out the fundamental differences between crypto assets and securities.

Criticisms of the United States Securities and Exchange Commission are mounting as the agency remains unrelenting in its war on crypto.

On April 21, Web3 venture capital firm Paradigm published a policy piece on the problems with SEC registration.

It claimed that SEC Chair Gary Gensler’s “attempt to brute force crypto assets that may not even constitute ‘securities’ into an ill-fitting disclosure framework is bad policy.”

The firm, which invests hundreds of millions into crypto and Web3 startups, said thythe SEC fails to provide crypto asset users and investors with the information they need.

It also denied the SEC’s claims it offers crypto entrepreneurs a viable path to compliance.

Paradigm points out the current disclosure policy was developed in the 1930s, long before the internet. It claims current policies are “tailor-made for centralized companies issuing securities” and that crypto markets are fundamentally different.

The firm noted that securities provide the holder legal rights against a centralized entity, however, there are no “legal rights” with most cryptocurrencies but “technological abilities in a protocol.”

Additionally, crypto assets can be completely independent of their issuer and maintain full functionality without their input.

Crypto assets can also be traded peer-to-peer and on a fundamentally different technology stack, unlike traditional securities and stocks, which trade on an “archaic system full of intermediaries.”

The venture firm concluded that the financial regulator needs to modify its current disclosure regime to incorporate new technologies and asset classes.

“Unsurprisingly, without major changes to the SEC’s current disclosure regime, the SEC is unable to effectively regulate crypto asset markets.”

Paradigm is not the only crypto industry representative that has been critical of the SEC and its policies.

Related: Gary Gensler’s SEC is playing a game, but not the one you think

Congressman Warren Davidson has also been vocal about the agency and its chief “cop on the beat.”

On April 16, the pro-crypto politician introduced legislation “to correct a long series of abuses” aiming at replacing Gensler with an executive director that reports to the board.

In an April 18 hearing on oversight of the SEC, Gensler was grilled by the chair of the House Financial Services Committee, Patrick McHenry. “Clearly, an asset cannot be both a commodity and a security,” said McHenry as Gensler refused to say what he considers the classification of Ether (ETH).

Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?

US needs to regulate stablecoins to keep a strong dollar: Stellar CEO

The United States and the greenback will suffer if stablecoin regulations are not rolled out this year, Stellar Development Foundation’s chief has claimed.

United States financial regulators are tightening their grip on the crypto industry and the U.S. dollar has also been under pressure with countries distancing themselves from dollar hegemony, but the chief of Stellar says stablecoin regulation may solve that.

In an April 11 Bloomberg interview, Denelle Dixon, the CEO and executive director of the Stellar Development Foundation, spoke about the prospects of regulating dollar-pegged digital assets in the United States.

Dixon said she was very optimistic that there would be some form of stablecoin regulation in the U.S. by the end of the year because “they want to set the standard.”

“If we want a strong U.S. dollar globally, a USD stablecoin is the way to see that happen.”

President Joe Biden’s administration has already highlighted the need for a stablecoin regulatory framework, but Dixon said that needs to be pushed through Congress.

“If we don’t do something in the U.S., we’re going to be in this bifurcated world where we have legislation outside the U.S. that’s friendlier to crypto,” Dixon said, adding:

“There will be companies outside the U.S. and there will still be the issue that U.S. consumers will want to leverage this technology.”

Dixon was optimistic about stablecoin regulation “only because we don’t have a choice,” saying the focus should be more on the utility and value to users than on the tech stack.

“Stop talking about the technology and start demonstrating the utility,” she added.

Stellar is a decentralized cross-border payments network powered by the Lumens (XLM) token. It was created as a modified fork from Ripple’s codebase in 2014.

Related: Stablecoins are solution to crypto’s banking problem, exec says

Stablecoins currently represent around 10.5% of the entire crypto market capitalization with $133 billion in circulation. Dixon hinted that it was paramount that stablecoins are regulated and accepted in America as the vast majority of them are pegged to the U.S. dollar.

Market leader Tether (USDT) has issued $14 billion in USDT so far this year, strengthening its market share to 60% with its circulation of $80 billion.

The gains come at the expense of Circle’s USD Coin (USDC) and Binance’s Binance USD (BUSD) stablecoins, both of which have seen considerable declines in supply this year.

Magazine: Unstablecoins: Depegging, bank runs and other risks loom

Fair crypto laws ‘possible’ in the US but needs ‘a lot of work’ — Crypto Council adviser

Crypto Council for Innovation adviser Sean Lee said more education is needed for policymakers and financial regulators.

There are still industry executives that remain hopeful the United States will develop laws to treat crypto fairly; however, an adviser to the Crypto Council for Innovation warns it will take “a lot of work.”

Speaking to Cointelegraph on March 29 at the World of Web3 (WOW) Summit in Hong Kong, Crypto Council for Innovation adviser and co-founder of Odsy Network, Sean Lee, said that fair treatment of the crypto industry is possible in the United States.

He commented that financial reform was addressed following the 2008 financial crisis so there is no reason the same cannot be applied to crypto.

“It is possible, it will take a lot of work […] and usually implementation comes after a massive crisis, which we have right now.”

The comments come in the wake of a massive crypto crackdown by U.S. financial regulators that some industry commentators have labeled a “war on crypto.”

CCI Senior APAC Adviser Sean Lee at the WOW summit. Source: Twitter

The FTX meltdown in November appears to have given regulators and anti-crypto lawmakers plenty of ammunition to bring the hammer down on the fledgling crypto industry. However, Lee pointed out that FTX is not crypto, it was just a centralized trading venue, adding:

“If you don’t properly regulate centralized entities, well, we’ve seen back in history many times about what can go wrong.”

He said that there was a lot of education that needed to be done, and this is what organizations such as the Crypto Council for Innovation are trying to achieve.

The council is striving for dialogue with politicians to help them understand where things are and “help them also understand what other jurisdictions are thinking about,” he added.

The assistance can be provided to “help craft more progressive policies” that allow for both the communities and companies to understand the landscape much better.

Related: 7 details in the CFTC lawsuit against Binance you may have missed

Sheila Warren, CEO of the Crypto Council for Innovation, made similar arguments in a statement on the recent CFTC Binance lawsuit, stating that it “will hopefully mean the end of people coming into the crypto space trying to take advantage of the lack of regulatory clarity in the United States.”

She also said that the CFTC’s classification of certain cryptos as commodities was “a powerful shot across the bow of the SEC.”

In a related development, SEC Chair Gary Gensler this week requested a larger budget to tackle what he termed the “Wild West” — crypto markets. Therefore, it remains unlikely that Uncle Sam’s war on crypto will be over any time soon.

7 details in the CFTC lawsuit against Binance you may have missed

Within the 74-page complaint, the CFTC has labeled Ether, Binance USD, Tether and Litecoin as commodities along with Bitcoin, and made a few other startling claims.

The surprise lawsuit from the Commodity Futures Trading Commission against crypto exchange Binance sent shock waves across the markets on March 27. 

In addition to allegations that Binance manipulated markets and lacked compliance efforts, the regulator has also accused the exchange of not cooperating with investigative subpoenas and obscuring the location of its executive offices. Binance has rejected many of the allegations.

However, the devil is in the details when it comes to the 74-page complaint. Here are a few interesting snippets you may have missed.

Tokens labeled as commodities

Contrary to assertions by the United States Securities and Exchange Commission chief Gary Gensler on crypto assets, the latest CFTC lawsuit has labeled Bitcoin (BTC), Ether (ETH), Litecoin (LTC), Tether (USDT), and Binance USD (BUSD) as commodities.

Earlier this year, the SEC argued that BUSD is an “unregistered security” in its Wells notice against Paxos. Gensler on many occasions has also argued that virtually all crypto assets are securities, with the exception of Bitcoin.

Sheila Warren, CEO of the Crypto Council for Innovation, said the statement is a “powerful shot across the bow of the SEC” and could have significant implications for the industry and for which regulator will have ultimate authority.

Meanwhile, Coinbase Chief Legal Officer Paul Grewal criticized the lack of agreement between the two U.S. regulators, stating:

“A security can apparently also be a commodity, except when it’s not. And it depends on which regulator you ask, and when. If you’re confused, you are not alone. Is this really the best American law has to offer?”

CZ’s phone was accessed

Binance CEO Changpeng Zhao has been named as a defendant and has been repeatedly singled out throughout the complaint.

Interestingly, the CFTC stated it was been able to gather evidence by collecting Signal text chains and group chats from “Zhao’s telephone.” Many are now wondering how this was possible.

“Zhao has communicated over Signal with the auto-delete functionality enabled with numerous Binance officers, employees, and agents for widely varying purposes,” the CFTC said.

Terrorist activity accusations

Another startling allegation from the commodities regulator accuses the firm’s employees of knowing that its platform had facilitated “illegal activities.”

“Internally, Binance officers, employees, and agents have acknowledged that the Binance platform has facilitated potentially illegal activities.”

It specifically referred to a February 2019 incident in which former compliance chief Samuel Lim received information “regarding HAMAS transactions.” According to the filing, Lim explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering.”

Excerpt from CFTC lawsuit. Source: District Court of Northern District of Illinois

One man at the top

According to the complaint, the CFTC has alleged Zhao owned and controlled dozens of entities that operate the Binance platform as a “common enterprise.”

It cited an example of the CEO personally approving minor office expenses and paying for company services such as Amazon Web Services with his own personal credit card.

Excerpt from CFTC lawsuit. Source: District Court of Northern District of Illinois

VIP program perks

Meanwhile, a Binance “VIP” program with preferential rates and perks has also been scrutinized by the regulator.

In addition to allegedly encouraging customers to use virtual private networks (VPNs) to access the platform, the CFTC also alleged that part of the perks for VIP customers was that they were given “prompt notification” of any law enforcement inquiry about their account.

Excerpt from CFTC lawsuit. Source: District Court of Northern District of Illinois

“Zhao wanted U.S. customers, including VIP customers, to transact on Binance because it was profitable for Binance to retain those customers,” it alleged.

Ignoring U.S. regulatory requirements

The CFTC also accused Binance of being aware of U.S. regulatory requirements but ignoring them and making “deliberate, strategic decisions to evade federal law.”

The filing goes back to internal messages between Binance executives in 2018 regarding its strategy for the U.S. exchange and complying with sanctions imposed by regulators for the global exchange.

Excerpt from CFTC lawsuit. Source: District Court of Northern District of Illinois

Fines and injunctions

Toward the end of the document, the commodities regulator said it is seeking monetary penalties, disgorgement of any trading profits, salaries, commissions, loans, or fees gained from their purportedly wrongful actions, along with paying penalties to resolve the investigations.

It also orders a permanent injunction against further violations.

Related: Binance CEO CZ rejects allegations of market manipulation

The CFTC “doesn’t waste its time on jabs — it goes straight for the knockout,” said Warren from the Crypto Council for Innovation.

Binance has already rejected a number of allegations and claims from the commodities regulator, hinting that a more in-depth response is incoming. 

On March 28, CZ responded to what he termed an “unexpected and disappointing civil complaint,” stating that the company has cooperated with the CFTC for the past two years.

In comments to Cointelegraph, a spokesperson from Binance maintained that the exchange maintains country blocks for U.S. citizens, regardless of where they live in the world.

“Consistent with regulatory expectations globally, we have implemented a robust ‘three lines of defense’ approach to risk and compliance, which includes, but is not limited, to:

  • Ensuring mandatory KYC for all users worldwide
  • Maintaining country blocks for anyone who is a resident of the U.S.
  • Blocking anyone who is identified as a U.S. citizen, regardless of where they live in the world
  • Blocking for any devices using a U.S. cellular provider
  • Blocking log-ins from any U.S. IP address
  • Preventing deposits and withdrawals from U.S. banks for credit cards.”

IMF to prefer regulating crypto than banning it outright: Report

On the sidelines of the G20 meeting in India, IMF managing director Kristalina Georgieva said the agency would prefer to regulate crypto than an outright ban.

The International Monetary Fund would prefer to differentiate and regulate crypto assets rather than enforce an outright ban, though the nuclear option will remain on the table for now.

Speaking on the sidelines of the G20 finance ministers meetings in Bengaluru, India, IMF Managing Director Kristalina Georgieva explained how the United Nations financial agency views digital assets and what it would like to see in terms of regulation.

“We are very much in favor of regulating the world of digital money,” and this is a top priority, she stated.

During an interview with Bloomberg published on Feb. 27, she responded to a question on her recent comments about a potential complete ban on cryptocurrencies. She said there was still much confusion around the classification of digital money.

“Our first objective is to differentiate between central bank digital currencies that are backed by the state and publically issued crypto assets and stablecoins.”

Fully-backed stablecoins create a “reasonably good space for the economy,” however non-backed crypto assets are speculative, high risk, and not money, she added.

Citing a recent paper recommending global regulation standards, she said that crypto assets cannot be legal tender because they are not backed.

However, the option to ban cryptocurrencies “should not be taken off the table” if they begin to pose a greater risk to financial stability, she warned.

Nevertheless, good regulations, predictability, and consumer protection would be a better option, and banning would not need to be considered, said Georgieva.

Related: IMF exec board endorses crypto policy framework, including no crypto as legal tender

When asked what could cause the decision to ban crypto, she said that an inability to protect consumers from the rapidly evolving world of crypto assets would be the primary catalyst.

The IMF, the Financial Stability Board, and the Bank for International Settlements (BIS) are jointly preparing regulatory framework guidelines to be released in the second half of the year.

IMF prefers to regulate crypto than banning it outright: Report

On the sidelines of the G20 meeting in India, IMF managing director Kristalina Georgieva said the agency would prefer to regulate crypto than an outright ban.

The International Monetary Fund would prefer to differentiate and regulate crypto assets rather than enforce an outright ban, though the nuclear option will remain on the table for now.

Speaking on the sidelines of the G20 finance ministers meetings in Bengaluru, India, IMF Managing Director Kristalina Georgieva explained how the United Nations financial agency views digital assets and what it would like to see in terms of regulation.

“We are very much in favor of regulating the world of digital money,” and this is a top priority, she stated.

During an interview with Bloomberg published on Feb. 27, she responded to a question on her recent comments about a potential complete ban on cryptocurrencies. She said there was still much confusion around the classification of digital money.

“Our first objective is to differentiate between central bank digital currencies that are backed by the state and publically issued crypto assets and stablecoins.”

Fully-backed stablecoins create a “reasonably good space for the economy,” but non-backed crypto assets are speculative, high risk, and not money, she added.

Citing a recent paper recommending global regulation standards, she said that crypto assets cannot be legal tender because they are not backed.

However, the option to ban cryptocurrencies “should not be taken off the table” if they begin to pose a greater risk to financial stability, she warned.

Nevertheless, good regulations, predictability and consumer protection would be a better option, and banning would not need to be considered, Georgieva said.

Related: IMF exec board endorses crypto policy framework, including no crypto as legal tender

When asked what could cause the decision to ban crypto, she said that an inability to protect consumers from the rapidly evolving world of crypto assets would be the primary catalyst.

The IMF, the Financial Stability Board, and the Bank for International Settlements are jointly preparing to release regulatory framework guidelines in the second half of the year.

SEC is not the appropriate regulator for stablecoins: Circle CEO

Circle boss Jeremy Allaire maintains that “payment stablecoins” are payment systems, not securities.

The United States Securities and Exchange Commission is not the appropriate agency to regulate stablecoins, according to Circle founder and CEO Jeremy Allaire.

In an interview with Bloomberg on Feb. 24, the Circle chief executive aired his views on the SEC and its recent moves to clamp down on the crypto industry, including stablecoin issuer Paxos.

Allaire appears to have taken issue with the SEC’s focus on stablecoins, arguing that dollar-pegged “payment stablecoins” should be under the oversight of a banking regulator, rather than the SEC.

“I don’t think the SEC is the regulator for stablecoins,” said Allaire, adding:

“There is a reason why everywhere in the world, including the U.S., the government is specifically saying payment stablecoins are a payment system and banking regulator activity.”

Circle confirmed last week that it had not been targeted by the SEC following the issuance of a Wells notice to Binance USD (BUSD)-issuer Paxos.

“There are lots of flavors, as we like to say, not all stablecoins are created equal,” Allaire said, adding, “But, clearly, from a policy perspective, the uniform view around the world is this is a payment system, prudential regulator space.”

The Circle CEO however said that he was generally in favor of a recent SEC proposal on crypto custody that would make it much harder for exchanges to become custodians.

“We think having qualified custodians that can provide the appropriate control structures and bankruptcy protections and the other things is a very important market structure and very valuable.”

Circle is the issuer of the world’s second-largest stablecoin, USD Coin (USDC). It has a circulating supply of $42.2 billion which gives it a market share of 31%. Tether remains the dominant stablecoin with a supply of $70.6 billion and a market share of 52%, according to CoinGecko.

Related: Why the SEC wants to ban crypto staking and stablecoins under scrutiny

On Feb. 23, Allaire agreed with SEC Commissioner Hester Peirce, who said that the agency should refer to Congress. Due to the lack of legislation, some believe the SEC has been taking things into its own hands concerning crypto regulations and enforcement.

Circle is expanding its headcount by as much as 25%, bucking the general trend of crypto layoffs, the report noted.

US regulatory crackdown leads to $32M digital asset outflows: CoinShares

Institutional investors are feeling the heat as the SEC targets all aspects of the crypto industry in the United States.

Institutional investors may have gotten the jitters on crypto in the wake of the regulatory crackdown in the United States, with digital asset investment products seeing the largest weekly outflow of 2023. 

On Feb. 20, institutional crypto fund manager CoinShares reported that digital asset investment products saw outflows totaling $32 million last week, the largest outflow of the year.

The outflow comes in the wake of a massive crackdown on the digital asset industry in the U.S., which has targeted everything from staking services to stablecoins to crypto custody as the Securities and Exchange Commission ramps up what industry analysts have dubbed its war on crypto.

Outflows hit $62 million midway through last week but slowed by the end of it as sentiment improved, added CoinShares analyst James Butterfill.

The majority of those outflows, or 78%, were from Bitcoin (BTC) related investment products and there was an inflow of $3.7 million to Bitcoin short funds. The firm blamed the regulatory crackdown for the increased outflows.

“We believe this is due to ETP investors being less optimistic on recent regulatory pressures in the US relative to the broader market.”

However, negative sentiment from institutional investors was not mirrored by the broader markets, which saw a 10% gain for the period. This pushed total assets under management for institutional products to $30 million, the highest level since August, Butterfill said.

There were also outflows for Ethereum (ETH) and mixed-asset funds but blockchain equities bucked the trend with inflows totaling $9.6 million for the week.

Related: Digital asset investment products see highest inflows since July 2022: Report

Institutions started pouring capital back into crypto funds in January with inflows for the last week of the month totaling $117 million, reaching a six-month high.

However, funds have seen outflows for the past fortnight following four weeks of inflows in January.

The regulatory enforcement action responsible for the sentiment shift includes the SEC’s charges against Kraken for its staking services on Feb. 9. A few days later, it sued Paxos over the minting of Binance USD (BUSD), and it also last week proposed changes targeted at crypto firms operating as custodians.

Binance readies checkbook for potential fines from US regulators: Report

The world’s largest crypto exchange wants to resolve outstanding investigations with U.S. regulators.

The world’s largest digital asset exchange, Binance, is preparing to face fines and penalties in order to settle outstanding regulatory and law-enforcement investigations in the United States.

According to a Feb. 15 WSJ report that cited the firm’s chief strategy officer, Patrick Hillmann, Binance has been working with regulators to remedy past compliance issues.

Hillmann stated that Binance is “working with regulators to figure out what are the remediations we have to go through now to make amends for that.”

He added that the outcome of ongoing investigations will likely be fines but could be more, stating “that is for regulators to decide.”

Binance has been subject to several investigations in the U.S. including one which began in 2018 by the Department of Justice over potential violations of anti-money-laundering laws.

In March 2021, the Commodity Futures Trading Commission also probed whether the company offered crypto derivatives to U.S. customers without registering with the agency.

The Securities and Exchange Commission also launched a probe into Binance’s U.S. division last February, regarding trading firms connected to CEO Changpeng Zhao.

Hillmann added that Binance was “highly confident and feeling really good about where those discussions are going,” but couldn’t put a figure on the size of the fines or a timescale for resolution with U.S. regulators.

He said the lack of clarity for crypto in America made it a “very confusing time for us.”

The SEC has recently ramped up what industry observers call a “war on crypto” — which appears to target certain staking services and stablecoins which it has deemed as falling under securities laws.

Referring to the recent enforcement activity, the Binance executive said it “would have a really deep and long-lasting chilling effect in the United States.”

Related: Bad day for Binance with SEC investigation and Reuters exposé

Earlier this week, New York regulators cracked down on Paxos, preventing it from issuing more of the Binance-branded stablecoin BUSD.

Last week, U.S. crypto exchange Kraken was hit with a $30 million fine and ordered to halt its staking services following SEC enforcement action.

Patrick Hillmann concluded that resolving issues with U.S. regulators would be good for the firm and its future.

“It will be a good moment for our company because it allows us to put it behind us.”

Binance declined to offer any additional comments on the matter.

Congressman Hill to ‘make sure’ US is the place for blockchain innovation

The chair of the Financial Services Subcommittee on Digital Assets wants to make America the place for fintech and blockchain innovation.

The chairman of the newly formed United States congressional subcommittee on digital assets has pledged to promote progressive crypto regulations to ensure that “America is the place for innovation in fintech and blockchain.”

Speaking on CNBC’s Squawk Box on Jan. 26, U.S. Representative French Hill offered some of his first insights into what is anticipated for crypto regulations in the country.

The Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion, which is chaired by Hill, was put together on Jan. 12 with the remit of “identifying best practices and policies that continue to strengthen diversity and inclusion in the digital asset ecosystem.”

During the interview, Hill said that Bitcoin (BTC) was not quite ready to be a real-time payment method yet, but added that “we want to make sure that America is the place for innovation in fintech and blockchain is part of that future.”

When asked about the possibility of a spot Bitcoin exchange-traded fund (ETF), Hill commented that the new subcommittee also wants to explore this possibility.

The Securities and Exchange Commission has repeatedly rejected applications for a spot Bitcoin ETF, including one by the world’s largest crypto asset manager, Grayscale.

Other areas of the subcommittee’s focus will be related to federal privacy law, a stablecoin bill and the ramifications for the securities market, while working with the Senate on the commodity aspect of the crypto industry.

He said crypto trading and exchanges would need to be “overseen” but did not specify which agency would do so.

“All of that is on the table and all of that is going to be a priority this year,” he said.

Related: Next House committee chair reintroduces bill on crypto innovation

The host implied that the SEC has been dragging its feet, inquiring “as long as [Chair] Gary Gensler is there, do you see any progress being made?”

Hill said that Gensler was the “cop on the beat” last year claiming to be an expert in this area, adding:

“So we’ll invite him up to Congress to tell us what he knows, what he recommends in this area, and what he was doing last year when we had so many challenges for our investors and consumers.”

The SEC has been accused by crypto-friendly senators of regulating by enforcement and conducting extrajudicial sweeps on the crypto industry.