Some thoughts on recent US regulatory actions ☠️
The SEC's heavy handed enforcement actions will likely force crypto firms to find new homes abroad
Taking a quick diversion from my normal Brazil focused content here to share some thoughts on what’s happening in the US right now. I’m still trying to process everything so putting words on a page here is helpful for me.
The TLDR is that the regulatory situation for crypto in the US is not good and it’s probably going to get worse. I don’t have many answers here but the following is my assessment of the situation as it stands currently and the spillover impacts it could have in regions like Brazil and Latam.
😬 Big Trouble
There’s no way to sugar coat at this point. It’s been a pretty rough couple of weeks for the crypto industry in the United States. It has been dealt multiple blows from multiple financial regulators, apparently coordinated by arch-nemesis SEC chairman Gary Gensler.
For context, the industry has been clamoring for years about the need for “regulatory clarity”, particularly around token issuances (when is a crypto token a security, etc), stablecoins and a host of other issues.
The assertion is that the SEC has refused to provide clarity on any of these areas, and that it has instead employed a “regulation by enforcement’ approach whereby market participants have to try to read Gary Gensler’s mind and guess the right approach (all while spending millions of dollars on legal fees…securities lawyers aren’t cheap). And if you guess wrong… well, then you get hit with an enforcement action.
Just this month we have seen:
Crypto exchange Kraken forced to settle with the SEC for $30 million and end its staking-as-a-service program on the grounds that staking products are unregistered securities
The SEC announce it will be suing Paxos, the crypto trust company that issues the Binance USD stablecoin, for selling BUSD as an unregistered security. Paxos ceased minting new tokens in response to the announcement. The New York Department of Financial Services is also investigating Paxos on the grounds that it was not administrating BUSD in a “safe and sound manner”
Crypto native bank Custodia’s membership application to the Federal Reserve System was denied
Rumors swirling that Circle and Coinbase are the next targets, and both companies are battening down the hatches and playing heavy defense
Bunch of other stuff that I don’t have time to list here but it’s been all over the news so easily findable
🤔 But why?
While Gensler’s attacks are couched in noble rhetoric about protecting retail investors and promoting healthy capital markets, it’s pretty clear that this is nonsense and that he has other motivations.
Unfortunately I’m not skilled at mind-reading so I don’t know for sure what his motivations are, but here are some widely-held theories:
Gensler is angling for a more senior post in the Biden Administration (ie Treasury Secretary) and thinks that he can earn the brownie points he needs to climb the hierarchy by quashing crypto.
This seems the most plausible of all the options
Perhaps he’s seeking a high-paying Wall Street gig after he leaves the SEC and reckons that doing the dirty work cracking down on crypto will land him a bigger payday.
A lot of people subscribe to this, but I personally don’t buy into this theory mainly because he’s already plenty wealthy from his previous stint on Wall Street at Goldman Sachs (hence the nickname “Goldman Gary”). To me, he seems much more motivated by power than by money at this stage, but who knows.
Perhaps he just genuinely believes that crypto is a total scam that needs to be eradicated and that he has been divinely appointed to carry out this task.
This seems unlikely given that he understands the technology incredibly well: recall that he taught an entire course on blockchain tech and cryptocurrencies at MIT in 2018. You can watch his courses on YouTube - they are actually highly informative and worth watching if you have time!
This begs the question why would Gensler turn his guns on crypto after going deep down the rabbit hole? This is a head scratcher. Anyone recall how much the industry celebrated in 2020 at the news that Gensler would head the SEC? We thought we finally had “one of us” in that critical post. Didn’t quite turn out as hoped.
🥾Kick ‘em while they’re down
Irrespective of Gensler’s motivation, he is clearly on the warpath against crypto and appears determined to keep kicking the industry in the teeth while it’s down.
The collapse of FTX and Scam Bankman-Fraud’s antics from last year have drained the industry of any remaining reputational and political capital it had remaining in Washington, DC circles (to be fair, there wasn’t much left after Terra/Luna, Celsius, Three Arrows Capital, Voyager, BlockFi, etc).
Understanding that his enemy is gravely wounded, Gensler is now moving in for the kill. The Paxos lawsuit is clearly an attempt to kneecap Binance - which is viewed as the sinister, non-compliant offshore exchange in these circles - by killing its stablecoin.
It also feels like there is an impending action coming against Coinbase and/or Circle, either regarding Coinbase’s earn/yield/rewards programs or Circle’s USDC stablecoin - both of which the SEC will allege are unregistered securities offerings.
(Side note: how does the “expectation of profit” prong of the Howey Test apply to a stablecoin where the entire value proposition is that it’s pegged to the US dollar?)
This could be devastating for the so-called “CeFi” industry in the US. Sure, decentralized finance platforms will continue to operate normally, but CEXes who have tried to do the “right thing” by engaging with regulators proactively will be so tarred and feathered by the ordeal that no retail user will want to risk using these platforms. The approach is simple: since you can’t just ban crypto outright, you instead make it such a risky and scary activity so people shy away from using it.
Crypto lobby’s hands are tied
For its part, the industry has no viable recourse right now against Gensler’s attacks. While there are several industry lobby groups in Washington that generally do a pretty good job of advocating for crypto in policy circles, they are extremely outgunned in a fight of this magnitude. They are stuck playing defense due to resource constraints when they need to be playing offense.
Unfortunately, there doesn’t seem to be many good options beyond running out the clock on Gensler, as his term will expire in June 2026. Ideally, a Republican president will be elected in 2024 and nominate pro-markets commissioners who will restore some sanity to the SEC, but right now all roads point to Trump being the Republican nominee again - which means that the Democrat nominee (probably California Governor Gavin Newsome) will prevail in the general election. In this scenario we’ll most likely be stuck with the status quo that we have now. Not a great situation.
The only real hope is for Congress to claw back power from the SEC by passing a law that mandates a new framework for treatment crypto assets. Given the current political landscape this isn’t likely to happen anytime soon.
So this is Gary’s chance to destroy crypto once and for all and he’s timed it optimally. Irrespective of whether he succeeds or not, the damage he’ll have done to the US industry will be irreparable.
If this is how the companies that tried to play by the rules, obtain the required licenses, engage with regulators proactively, etc. are treated, then why on earth would they want to continue to operate in this market? (Especially in light of revelations that Gensler and SBF were holding backdoor meetings in early 2022, but that’s an entirely different conversation).
To be fair, crypto proponents in the US have been shouting from the rooftop the “innovation is going to go offshore if you don’t give us regulatory clarity” threat for as long as I can remember (well, since at least 2016 when I started tracking this industry).
Like every good marketing or lobbying slogan, there’s a kernel of truth and a kernel of disingenuousness to this. For the better part of 2017-20, the promoters of this were mainly companies who raised money via shitcoin ICOs in 2017-18 that were obviously securities marketed to retail investors, etc. For them, this threat to leave the US was essentially a form of attempted blackmail.
This time is different
Yet, despite all of the noise about this during the last cycle, most of the major crypto companies in 2023 are still based in the US. The threat to leave the market due to a lack of “regulatory clarity” was basically a bluff. The same thing happened in 2016 when all of those celebrities threatened to move to Canada if Donald Trump won the presidential election. Guess what happened: Trump won and nobody moved to Canada.
Could this time be different? I do think so. The SEC’s enforcement actions up until now have largely been slaps on the wrist against inconsequential shitcoin projects that didn’t have any money to defend themselves in court so were forced to settle.
And of course how can we forget about cracking down on Kim Kardashian for not properly disclosing her involvement in a token project.
The outlier here is the SEC’s case against Ripple, in which it claims that XRP was an unregistered security offering. One can argue that the fate of the industry in the US rests on Ripple winning a favorable judgment here.
Even if we assume that the SEC loses its case against Ripple and a hypothetical lawsuit against Coinbase or Circle, the SEC’s level of aggression in enforcement actions against the industry will have completely poisoned the well. There will be no going back from this - there is just no way you can operate in good faith any longer with a regulator like this (and enablers in the presidential administration).
What does any of this have to do with Brazil?
I’d like to tie this all together by arguing that markets like Brazil have a massive opportunity given the US’s decision to turn hostile against this new technology. For reasons I’ve outlined here and others, the political situation in the US is simply not conducive to providing the regulatory clarity that this industry needs to blossom.
With enabling legislation signed into law and regulatory bodies like the Central Bank and CVM eager to get to work on these topics, Brazil appears to be optimally positioned here.
What could this look like in practice? Industry stalwart companies relocating to Brazil, startups and new projects being launched out of Brazil, new experiments with asset tokenization and capital formation projects being undertaken.
Granted, Brazil has enough problems of its own that need to be dealt with, but I really believe that the opportunity here may be bigger than most realize.
We’re at a critical turning point for this industry right now; those who understand this and position themselves accordingly so as to reap maximum benefit will be rewarded.
Anyways, thanks for reading this far and I hope you find this helpful. These are all my personal thoughts and opinions and not reflective of anybody else or any particular organization!
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