June 8, 2022 | Issue #223
U.S. Senators Introduce Landmark Regulatory Framework For Digital Assets
Yesterday, after months of anticipation, two U.S. senators, Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-NY), introduced the Responsible Financial Innovation Act, also known as the Lummis-Gillibrand bill for short.
Typically, we save these stories for our Regulatory Front section, but in this case, the news was too big to pass up as our leading piece. In short, the bill represents a watershed moment for our country's crypto industry.
It is the first major BIPARTISAN regulatory framework for digital assets set forth that, if passes, will bring much-needed regulatory clarity for businesses, token issuers, and investors alike. Not only that, but the bill would essentially recognize digital assets as a legitimate part of the U.S. financial system.
Inside The 70-Page "Responsible Financial Innovation Act"
After sifting through the specifics, here's pretty much everything you need to know about the bill, the key points, and what it means for the industry going forward...
- Most digital assets will be viewed as commodities, rather than securities. In this case, it means that several digital assets – including the big names like bitcoin and ethereum – would be overseen by the Commodity Futures Trading Commission (CFTC), instead of the SEC. This would be considered as a boon for the industry considering that the SEC has been extremely strict on crypto regulation, to the point that it's been somewhat of a thorn in the side of domestic crypto innovation.
The move would also allow token issuers to know whether their potential token is either a security or a commodity before launching. As of today, many founders are hesitant to launch something simply because they don't know which regulatory body or framework they must abide with. They deploy token protocols or business models, only to find out they didn't file correctly, which typically leads to a harsh penalty or fine from the SEC. The new framework could be a solution that finally gives founders more clarity and confidence behind their decisions, without having to constantly worry about which side of the bed the regulators wake up on.
- You won't get taxed on any crypto transactions under $200. The so called de-minimis exclusion would liberate the consumer purchases of goods and services via crypto from having any small-scale tax implications – paving the road for cryptocurrencies to serve more like, well, a real currency. Under current tax laws, we can't buy anything – not even a cup of coffee – with bitcoin without getting hit by a capital gains tax derived from your initial bitcoin purchase.
- Assets obtained by crypto mining won't be taxed until the mined crypto is actually sold. Yes, in another "wait, this sh*t actually exists?" moment, mined bitcoin is currently getting taxed as income immediately after it gets mined. The bill aims to fix this headachy burden so that miners won't be taxed until after they sell.
- All stablecoins must be 100% reserved. In light of the dramatic Terra/Luna collapse, it was easy to assume that stablecoin providers were going to be met with more scrutiny in the months ahead. It's now evident that this framework doesn't want to cut stablecoin providers any slack as well.
Interestingly, the bill outlines a new framework for banks and credit unions to also issue stablecoins to sort of level the playing field. The lawmakers insist that “existing stablecoin issuers and new entrants into the market have an adequate opportunity to compete with existing banks and credit unions.”
- Lastly, in what is perhaps the most important of all, this is a bipartisan effort. Lummis and Gillibrand sit on different sides of the political bandwagon, so it's cool to see that crypto can be the driving force on bridging two political parties together – something we rarely ever see. This kind of stuff holds weight in the next phases of legislation.
What Happens Next?
Due to the nature of our political system, we probably won't see anything signed or put into place until next year. The bill, as CoinDesk points out, will likely have to split into several pieces as it winds through congressional committees in the next session.
But with Lummis on the Senate Banking Committee that oversees the SEC, and Gillibrand holding a spot on the Agriculture Committee that oversees commodities and the CFTC, the lawmakers are well positioned to propel this bill forward and into passing.
PayPal Steps It Up
Last year, PayPal started giving its 400 million user base the ability to buy, sell, and hold crypto assets. This week, the fintech darling is finally allowing its users to withdrawal those assets/earnings off of the platform.
"Starting today, PayPal supports the native transfer of cryptocurrencies between PayPal and other wallets and exchanges," the financial giant said in a press release, with PayPal's crypto lead Jose Fernandez da Ponte promising "additional crypto features, products and services in the months ahead."
In addition to allowing users to withdraw crypto assets to external wallets like MetaMask, PayPal is enabling its users to transfer digital assets between themselves. This means that users will be able to transfer their assets into PayPal, send/receive tokens between friends and family similar to Venmo, and presumably exchange which ever assets for U.S. dollars.
In terms of adoption, this is a massive step forward simply because it gives a large user base more flexibility with doing what they want with their own capital. What's the point of buying crypto and holding crypto on a platform when you can't even move it? We don't know. What we do know, however, is that our company can start receiving sponsorship checks in BTC, knowing that we can now actually distribute that income into our books 😊. And we can't imagine that we were the only ones with this dilemma.
Now, with this news, we have to remember that PayPal's core focus in on commerce, rather than operating as a fee-hungry exchange like Coinbase, so expect to see more product features that compete more in line with Block's (SQ) CashApp, and other crypto-freindly merchant platforms. For now, PayPal also boasts Checkout With Crypto, which allows users to interact with millions of merchants worldwide using bitcoin.
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A Bad Week For Binance
The largest crypto exchange by a wide margin, Binance, is having a bad week both optically and legally. On Monday, two stories emerged within a few hours of each-other, accusing Binance of wrongdoing.
First, it was reported that the SEC is investigating the exchange around whether the company should have registered the initial coin offering (ICO) of Binance Coin (BNB) as a security.
Then, an investigative report from Reuters was released accusing Binance for serving as a conduit for the laundering of at least $2.35 billion in illicit funds.
Either of these would have been damaging, but together, they may just be detrimental.
SEC Investigates Binance
First, some context... Binance is the world's largest exchange and it's native token, BNB, is the 5th largest token by market cap – currently at $47 billion. For those readers that weren't around, 2017 was rampant with hype for ICOs. This hype led to some of the largest fundraising events in crypto history with projects raising hundreds of millions and even billions of dollars in days. The BNB ICO occurred at the height of this boom with Binance looking to entice crypto traders to use BNB by offering lower fees when using the exchange.
Although it was a time of fast money, over the past few years the SEC has begun taking action (some would argue inconsistently) against some of the world's largest ICOs such as EOS (~$4.2 billion), BitConnect ($2 billion), Telegram ($1.7 billion), XRP ($1.3 billion), and AriseCoin ($600 million).
Although Binance only raised $15 million during the ICO, the size and scope of Binance today has made it a target for regulators.
Beyond BNB, the SEC is also probing the exchange around:
- Possible trading abuses by company insiders
- Whether the American arm of the exchange BinanceUS, is appropriately separated from the parent company
- A potential conflict of interest between Binance's CEO, CZ, and market makers that the exchange uses
- Whether the exchange has conducted broker-dealer activities
Accusations of Complicit Money Laundering
Now, although the above section relates to investigations by federal task forces, the following are currently only accusations. With that being said, if the accusations are true, and if regulators do get involved, the blowback could be severe.
Although Binance has been accused of being complicit in money laundering in the past, this week Reuters published an investigation stating that the exchange was used to process at least $2.35 billion of illicit funds, including crypto stolen by the North Korean Lazarus group.
Lazarus group, which the US government sanctioned in 2019, has been accused of regularly engaging in cyberattacks designed to support North Korea’s weapons program. The group was behind the largest DeFi hack of all time, when it stole $600 million from Axie Infinity's Ronin sidechain. Blockchain research firm Chainalysis estimates that Lazarus had stolen more than $1.75 billion of crypto by 2020.
Reuters claims that interactions between the exchange and illegal actors are part of a much larger picture of illicit activity. Besides laundering Lazarus group money, Reuters claims that "buyers and sellers on the world’s largest darknet drugs market, a Russian-language site called Hydra, used Binance to make and receive crypto payments worth $780 million."
In response to Reuters’ investigation, Binance published a lengthy blog post attempting to debunk the claims.
Overall, it was a bad week for Binance, with everything occurring at the same time that the company is attempting to extend its reach into traditional businesses in the US with a $200 million investment into Forbes and committing $500 million to Elon's bid to take over Twitter.
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Gemini Being Sued by Multiple Entities Including the CFTC
As if there wasn't enough regulatory news this week (see Binance story above), Gemini, founded by Cameron and Tyler Winklevoss, is also going through the ringer.
This week, the Commodity Futures Trading Commission (CFTC) filed a lawsuit against the exchange for providing "material false" statements about its bitcoin futures products. The CFTC alleges that Gemini misled the regulators in an effort to gain approval for its bitcoin futures product.
For some background, Gemini was twice rejected by the SEC in an attempt to get approval for a bitcoin futures ETF. Throughout the period, Gemini met with the CFTC to "persuade the staff" as to why a Gemini Bitcoin Futures Contract should be approved. By December 2017, they were successful in their persuasion efforts when futures contracts began trading on the Chicago Board Options Exchange (CBOE) that were priced using data from the Gemini Trust Company.
The CFTC alleges that Gemini offered undisclosed incentives such as credits, fee rebates, and loans to promote the products trading volumes. They also accuse Gemini of wash trading and incentivizing liquidity from some of its bespoke clients without disclosing it to the public.
Then, to make matters worse for the Winklevii, news just broke that IRA Financial Trust is suing the exchange, alleging that it failed to protect its customers from a hack that resulted in the theft of $36 million worth of crypto.
All of this is occurring while Gemini is in the process of laying off 10% of its staff.
Grayscale Isn't Messin' Around
By July 6 – less than one month away – the SEC has to make a decision on crypto asset manager, Grayscale's, latest application to convert its bitcoin trust (GBTC) into a spot ETF.
To date, regulators have continuously denied the steady stream of spot bitcoin ETF applications on the grounds that the market doesn't fall under a market regulator's oversight. Regulators did however allow bitcoin futures ETFs to begin trading in October 2021.
Longtime CoinSnacks readers know that we have been covering spot bitcoin ETF applications and what an approval's second order effects would potentially be since we first started writing this newsletter in 2017.
Simply, not only would a bitcoin ETF bring an enormous amount of eyeballs and capital into the crypto ecosystem from retail investors who may have been sitting on their hands to date, but it would also immediately close GBTC's discount to Net Asset Value (NAV) that is currently ~30%. If approved, this means that investors in GBTC would immediately make 30% on their investment as the gap between where the trust trades today and its true value closes.
That's why Grayscale's recent announcement on hiring Donald B. Verrilli Jr., a former Solicitor General of the United States under the Obama administration, is such a big deal. Verrilli is one of the nation's most experienced attorneys, having argued more than 50 cases before the Supreme Court.
Our go-to crypto lawyer, Jake Chervinsky tweeted:
"The SEC's deadline to approve or deny the application to convert GBTC to an ETF is July 6. No doubt, it should be approved. I don't see how the SEC survives a legal challenge if not, especially one led by Don Verrilli."
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