Ripple Lawyer Argues SEC Chair Gensler Has Prejudged Crypto Asset Cases

March 1, 2023 Bitcoin.com

Crypto regulation decided by Congress, not the SEC: Blockchain Association

February 15, 2023 Coin Telegraph

Advocacy

The group's policy head doubted a divided Congress can create crypto legislation but said it doesn’t give regulators absolute authority in the interim.

Despite attempts to police cryptocurrency through enforcement actions, United States financial regulators “are bound by legal reality” and Congress will ultimately decide crypto regulations the policy expert for the crypto advocacy group Blockchain Association has suggested.

The association's chief policy officer, Jake Chervinsky, shared his views in an extensive Feb. 14 Twitter thread on the state of crypto policy.

He noted neither the Securities and Exchange Commission (SEC) nor the Commodity Futures Trading Commission (CFTC) “has the authority to comprehensively regulate crypto.”

14/ No matter how many enforcement actions the SEC and CFTC bring, they are bound by legal reality:

Neither has the authority to comprehensively regulate crypto, neither can obtain it through any amount of enforcement, and neither will ever have it without an act of Congress.
— Jake Chervinsky (@jchervinsky) February 14, 2023

Chervinsky believed a deal on crypto legislation seems “unlikely, given the ideological gap between House Republicans and Senate Democrats.” He accused the SEC and CFTC of overstepping their authority in an attempt to “get things done” without Congress.

Chervinsky called for the industry to remain calm following the recent flurry of activity from “crypto’s chief antagonist,” the SEC, and pointed to its crackdown on staking services as an example.

13/ The SEC's main tactic is regulation by enforcement, and it struck again last week by labeling Kraken’s staking service a security.

That's frustrating, but it doesn't change much for anyone else. Settlements aren't the law, and every set of facts is unique. Others will fight.
— Jake Chervinsky (@jchervinsky) February 14, 2023

The SEC’s Feb. 9 settlement with crypto exchange Kraken, that banned the exchange from ever offering staking services to U.S. customers, was publicly rebuked by SEC Commissioner Hester Peirce.

In a Feb. 9 dissenting statement, Peirce argued that regulation by enforcement “is not an efficient or fair way of regulating” an emerging industry.

Chervinsky suggested litigation is one way the crypto industry can push for good policy, noting the judiciary plays an important role in dictating policy that has been “ignored.”

20/ FIFTH, we can litigate.

Policy is made in all three branches of government, and we’ve ignored the judiciary for too long.

At the core of crypto is a fight for civil liberty, a fight that calls for impact litigation.

Our best allies may be in the courts. Let's go find them.
— Jake Chervinsky (@jchervinsky) February 14, 2023

Crypto exchange Coinbase also faces an SEC probe similar to what resulted in Kraken’s settlement.

Coinbase CEO and co-founder, Brian Armstrong, has taken a more resolute stance, claiming that getting rid of crypto staking would be terrible for the U.S.

Armstrong argued in a Feb. 12 Twitter post that Coinbase’s staking services are not securities and would “happily defend this in court if needed.”

Coinbase's staking services are not securities. We will happily defend this in court if needed.https://t.co/GtTOz77YV3
— Brian Armstrong (@brian_armstrong) February 12, 2023

Judge’s rulings in landmark cases create a legal precedent. If such a case were brought to court and a judge decided Coinbase’s staking services did not classify as securities, other crypto companies in a similar position could use the precedent as part of their defense.

‘Kraken Down’ — SEC commissioner rebukes own agency over recent action

February 10, 2023 Coin Telegraph

Coin Telegraph

"Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and therefore dissent," said commissioner Hester Pierce.

United States Securities and Exchange Commission (SEC) commissioner Hester Pierce has publicly rebuked her own agency over the shut down of Kraken's crypto staking program in the United States.

The commissioner blasted her regulator in a Feb. 9 statement called "Kraken Down," noting that regulation by enforcement “is not an efficient or fair way of regulating” in an emerging industry, stating:

Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and therefore dissent.

Peirce's statement also slammed the regulator for shutting down a “program that has served people well."

“Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating. Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it," she said.

My thoughts on today's Kraken settlement: https://t.co/mijt3MNN4U
— Hester Peirce (@HesterPeirce) February 9, 2023

Peirce implied the regulator was “lazy and paternalistic” and suggested the SEC should have initiated a “public process to develop a workable registration process that provides valuable information to investors.”

Coinbase CEO and co-founder Brian Armstrong agreed with Peirce’s comments in a Feb. 9 tweet, suggesting that requiring businesses to register its staking services is a “disingenuous offer” as there is no clear path to registration.

Well said. There was no way to register (a disingenuous offer).

“Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.” https://t.co/6wVZZbQt23
— Brian Armstrong (@brian_armstrong) February 9, 2023

Earlier this week, Armstrong said he had heard “rumors that the SEC would like to get rid of crypto staking in the U.S. for retail customers,” and said “it would be a terrible path for the U.S.” as it would further drive crypto businesses offshore.

Coinbase is currently the subject of a SEC probe similar to the one which resulted in the Kraken settlement, which it revealed in an Aug. 9 SEC filing was also related to its staking services.

On Feb. 9, the SEC announced that it had reached a $30 million settlement with crypto exchange Kraken, saying it failed “to register the offer and sale of their crypto asset staking-as-a-service program.”

Today we charged Kraken with failing to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent.
— U.S. Securities and Exchange Commission (@SECGov) February 9, 2023

Kraken said in a Feb. 9 blog post that it would still offer staking services to non-U.S. customers through a subsidiary, but according to the SEC announcement the firm is permanently banned from providing staking services to U.S. residents, even if they sought to register it with the regulator.

Peirce, also known as the SEC’s “Crypto Mom,” has been a strong advocate for the crypto industry during her time at the regulator.

Peirce has previously proposed a “safe harbor” for token projects which are looking to build decentralized networks, in which the network developers would receive a three-year grace period where they were exempt from SEC legal action, with an updated version of the proposal released on Apr. 13, 2021.

CFTC’s Johnson urges Congress to expand commission’s crypto oversight powers

January 27, 2023 Coin Telegraph

Anti-trust

Commodity Futures Trading Commission Kristin Johnson wants to protect customers in a way that reduces the risk of future crises.

Commodity Futures Trading Commission (CFTC) Commissioner Kristin Johnson has urged Congress to adopt legislation that "closes the current gap in the oversight of crypto spot markets."

During a speech at a digital assets conference at Duke University on Jan. 21, Johnson propose d a number of amendments that would enable the CFTC to conduct “effective due diligence” on businesses, including crypto firms, that want to acquire CFTC-regulated entities.

The commissioner also wants expanded powers for the commodities regulator to enhance customer protection, prevent liquidity crises and mitigate conflicts of interest.

*CFTC Commissioner Kristin Johnson. Source: YouTube*

One of these potential changes would be to give the commodities regulator new powers to investigate any business that wants to purchase 10% or more of a CFTC-registered exchange or clearinghouse.

Johnson highlighted the example of derivatives exchange LedgerX, which became a subsidiary of FTX on Aug. 31, 2021 and is now wrapped up in the crypto exchange’s collapse.

The commissioner notes that the regulator currently has no ability to conduct due diligence on whichever firm buys the business and is merely a passenger as the exchange goes through the sales process.

Johnson also addressed co-mingling of customer funds, which was one of the more egregious accusations levied at FTX following its collapse — calling for regulation that formalizes the obligation of crypto firms to segregate customer funds.

Another gap pointed out by Johnson was in risk management procedures, pointing to the contagion that has continued to spread after major crypto company collapses, such as FTX:

“Interconnectedness among crypto-firms amplified by fragile or non-existent risk management, corporate governance failures, and conflicts of interests at individual firms fuels the likelihood of crises.”

The commissioner suggested that current “frameworks such as anti-trust law and regulation may prove too limited in scope” in increasingly diverse markets and is advocating for “tailored and effective governance, and risk management controls.”

CFTC commissioner compares crypto contagion risk to 2008 financial crisis

October 28, 2022 Coin Telegraph

Coin Telegraph

The commissioner warnes that vulnerabilities seen within the crypto markets are similar to those seen during the global financial crisis and calls for the agency to be given additional authority.

Commodity Futures Trading Commission’s (CFTC) Christy Goldsmith Romero has pointed to the collapse of the Terra ecosystem and its flow-on effects as an example of how contagion risks within crypto markets are similar to those experienced by the traditional financial (TradFi) system during the global financial crisis (GFC) of 2008.

Romero suggested in a speech given at the International Swaps and Derivatives Association’s (ISDA) Crypto Forum on Oct. 26 that increased links between crypto markets and TradFi increases the risk posed by crypto to overall financial stability, noting:

“The digital asset market remains relatively small and contained from the level of systemic risk that would come with greater scale or interconnections with the traditional financial system. But this may not be the case in the near future, particularly given growing interest by traditional finance.”

One area of TradFi the commissioner would prefer to remain distant from crypto is retirement and pension funds, an opinion which has likely been influenced by recent events in the U.K. where pension fund issues required intervention from the Bank of England.

I have significant concerns about the possibility of pensions and retirement funds investing in #Cryptocurency
— Commissioner Christy Goldsmith Romero (@CFTCcgr) October 27, 2022

While Romero cautions the U.S. not to rush regulations, she supports a “same risk, same regulatory outcome” approach as the level of risk posed by the crypto industry increases, suggesting:

“Similar to post-crisis reforms, Congress can address financial stability risks by providing additional authority to the CFTC.”

The GFC came about after banks began to lend recklessly to people without the means to fully pay back their mortgages. These ‘subprime’ mortgages were bundled together and sold as safe investment products before defaults started a ripple effect that spread across the world.

While the CFTC is often regarded as the more crypto-friendly regulator compared to the Securities and Exchange Commission (SEC), it appears to be attempting to change that image as part of its bid to gain more regulatory oversight after revealing it instigated 18 enforcement actions on the sector throughout the 2022 fiscal year.

One of the more recent CFTC actions was the fine levied at the Ooki DAO and its members, which was heavily criticized by a CFTC commissioner and members of the crypto community, who referred to it as “blatant regulation by enforcement.”

Before this action, decentralized autonomous organizations (DAOs) were regarded by many advocates as being “above the law”, and have resulted in the formation of legal entities within DAOs as a way to limit liability.

Bankman-Fried ‘100%’ supports knowledge tests for retail derivatives traders

October 17, 2022 Coin Telegraph

CFTC

The FTX founder said a knowledge test for derivative retail customers “could make sense” but it doesn’t need to be specific to crypto.

The founder and CEO of cryptocurrency exchange FTX, Sam Bankman-Fried has backed the idea of knowledge tests and disclosures to protect retail investors but said it shouldn’t just be crypto-specific.

Bankman-Fried tweeted his thoughts in response to an idea floated by the Commodities Future Trading Commission (CFTC) commissioner Christy Goldsmith Romero on Oct. 15, saying the establishment of a “household retail investor” category for derivatives trading could give greater consumer protections.

Romero said due to crypto, more retail investors are entering the derivatives markets and called for the CFTC to separate these investors from professional and high-net-worth individuals and have “disclosures written in a way that regular people understand or could be used when weighing rules on the use of leverage.”

Derivatives trading is when traders speculate on the future price of an asset, such as stock, commodities, fiat currency, or cryptocurrency through the buying and selling of derivative contracts, which can involve leverage.

The FTX founder said he “100%” agrees with mandating disclosures and knowledge tests for all Future Commissions Merchants (FCMs) and Designated Contract Markets (DCMs) who face retail traders, adding it “could make sense.”

He added however that it doesn’t “necessarily make sense” for the disclosures and tests to be specific to cryptocurrencies, suggesting these should apply to all derivative products.

DCMs are CFTC-regulated derivate exchanges on which products such as options or futures are offered which can only be accessed through an FCM, which accepts or solicits buy and sell orders on futures or futures options contracts from customers.

Bankman-Fried’s comments come as FTX.US, FTX’s United States-based entity, looks to launch cryptocurrency derivatives trading and the exchange has already created a knowledge test that could be used for its platform according to Bankman-Fried.

The CFTC is ramping up its efforts to become the regulator of choice for the U.S. crypto market as calls for regulatory clarity become more persistent.

On Sept. 27 CFTC Commissioner Caroline Pham said the regulator should create a crypto retail investor-focused office to expand its consumer protections, the proposed office would be modeled off a similar office at the Security and Exchange Commission (SEC).

CTFC commissioner proposes office focused on retail crypto investors

September 29, 2022 Coin Telegraph

Coin Telegraph

The commissioner said the potential of blockchain and cryptocurrency to change existing markets necessitates a new retail investor protection office similar to that of the SEC.

Commodity Futures Trading Commissioner (CFTC) Caroline Pham has proposed the creation of an “Office of the Retail Advocate” aimed at expanding the CFTC's consumer protection mandate.

Pham referred to the office as a “voice for the people” in a speech given at an event hosted by blockchain project Corda on Sept. 27, suggesting recent events in crypto make retail protection a more pressing issue, noting:

“The crypto crash, risk management failures, and substantial retail losses, gives urgency to the need to balance innovation with retail protection and appropriate regulation.”

Pham has modeled the proposed office on the Security and Exchange Commission's (SEC's) Office of the Investor Advocate, stating it’s a “tried-and-true way” to advance customer protection.

The SEC's office has four core functions according to Pham, which are to provide investors a say in policymaking, assist retail investors resolve problems with the SEC or self-regulatory organizations, support advisory committees, along with studying investor behavior and conducting research and economic analysis.

Pham highlighted the potential of digital assets and blockchains to change existing markets outlining “ten fundamentals for responsible digital asset markets,” noting:

“It might still be early, but there are promising use cases if we can achieve blockchain stability and scalability across layer 1, 2, or whatever’s next.”

These fundamentals include initially determining whether something is a security, mitigating systemic risks such as the cascading liquidations due to the collapse of Terra, protection of customers and the retail public, ensuring transparency, and addressing conflicts of interest.

The proposal marks the latest effort in a broader push from the CFTC to increase its authority over crypto markets and follows calls from the community and United States lawmakers seeking clarity on the regulation of crypto.

The CFTC has been under fire recently following its “regulation by enforcement” over the Ooki DAO case, with the community comparing it to the regulation by enforcement tactics seen in the SEC's handling of the ongoing Ripple case.

Pham said these views are hers and are not necessarily shared by the CFTC or other commissioners.

Commissioner

Share this video