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Crypto Regulation

New Acting SEC Chair Named

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SEC Commissioner Allison Herren Lee has been named as the agency’s new acting chair

President Joe Biden has named Democrat Allison Herren Lee as the new acting chair of the U.S. Securities and Exchange Commission, according to a Jan. 21 press release.

While commenting on the appointment, Chair Lee mentioned that the securities watchdog would continue its work of protecting investors:

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I have tremendous respect for my colleagues on the Commission and the exceptional staff across the agency, and look forward to working closely with them. Together we will continue the agency’s work of protecting investors and ensuring market integrity.

Lee has replaced Republican Elad Roisman who was appointed as the agency’s interim chairman following the departure of Jay Clayton back in December.

Biden’s recent nomination of former CFTC chair Gary Gensler is subject to a future Senate confirmation.

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Crypto Regulation

SEC Commissioner Warns Celebrities Will Not Bail Out Crypto Buyers

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Celebrities will not bail out naive cryptocurrency buyers, SEC commissioner warns

U.S. Securities and Exchange Commissioner Hester Peirce told Washington-based newspaper Roll Call that cryptocurrency investors have to manage their risk tolerance when taking cryptocurrency advice from celebrities.

Peirce, who is affectionally called “Crypto Mom” because of her pro-cryptocurrency stance, warns that there will no bailouts if things go south:

It’s your money that’s on the line, so do your own research and make your own decision based on your own risk tolerance and your own circumstances. After all, if things turn out badly, the celebrity won’t be there to bail you out.

During the initial coin offering (ICO) mania, some celebs were charged by the SEC with unlawfully shilling tokens on their social media profiles. Actor Steven Seagal, who became a Russian citizen in 2016, agreed to pay a disgorgement of roughly $330,000 in 2020. After he failed to pay the whole fine, the agency moved to collect money through his U.S. representatives.

A slew of musicians, actors, athletes and prominent influencers hopped on the crypto train once again to cash in on the ongoing bull run.

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As reported by U.Today, Kim Kardashian’s ad promoting a dubious cryptocurrency called “Ethereum Max” was seen by a third of crypto owners.

In September, Charles Randell, the head of the UK’s Financial Conduct Authority (FCA), stated that those who invested their money in the token promoted by Kim K had to be prepared to lose it all.

Dogecoin, the meme cryptocurrency touted by centibillionaire Elon Musk, rapper Snoop Dogg and a bunch of other stars, is currently down 66% from its historic peak that coincided with Musk’s appearance on “Saturday Night Live” in early May.

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Law professor Lawrence Cunningham told Roll Call that celebrities, who often have little to no knowledge of crypto, are fueling crypto speculation, which can cause system risks:

At scale, that can lead to a systemic misallocation of capital with adverse system-wide effects.

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XRP

Gary Gensler met with Jay Clayton in 2018 and was instrumental in XRP hostility: Report

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  • Gary Gensler is said to have held a sitting in 2018 with Jay Clayton to discuss cryptocurrencies, and he was fond of BTC and hostile towards XRP and Ethereum.
  • According to a new report, Gensler’s contribution to the meeting was instrumental in the ensuing XRP hostility and even the famous Bill Hinman speech.

When Gary Gensler took over at the U.S Securities and Exchange Commission (SEC) this year, many in the cryptocurrency community touted it to be the beginning of a new era – one that would spell clarity and prosperity for the nascent industry. However, it’s been anything but. Genser has been just as tough, if not even more so than his predecessor. And as a new report now reveals, Gensler’s hostility, especially towards XRP, started years ago and could have influenced the SEC’s stand against the cryptocurrency even before he took over the leadership.

The report by the New York Post revealed that Gensler met with his predecessor Jay Clayton in 2018. At the time, Gensler was just settling into his new role as a professor at the MIT Sloan School of Management. Ironically, at MIT, he served as the senior advisor to the school’s Digital Currency Initiative, teaching extensively about blockchain technology.

According to Charles Gasparino, the Fox Business reporter who exposed the 2018 meeting, the two leaders talked about how much they could regulate cryptocurrencies at the meeting.

Citing sources who were privy to the meeting, the report claims Clayton and Gensler dwelt on how digital currencies were largely unregulated and a haven for scams. They both agreed that most coins were securities that fell under the SEC oversight.

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Liking Bitcoin, opposing Ether and XRP

Gensler has always been a big fan of Bitcoin, a fact he conveyed during the meeting. According to him, it was the only “true crypto.” This is a belief he has held since before joining MIT and the SEC, back when he was the head of the CFTC, yet another regulator that has dipped its toes into cryptocurrency regulation.

Gensler disliked Ethereum, which at the time wasn’t nearly as big as it is today. He disliked XRP even more, sources revealed. Both, he claimed, were securities that were using jargon and regulatory ambiguity to escape securities regulations.

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Gensler has never been shy to admit that he believes the two – Ethereum and XRP – are securities and not currencies. In 2018, he gave an interview to the New York Times in which he claimed:

There is a strong case for both of them — but particularly Ripple — that they are non-compliant securities.

According to those close to the economist, his biggest problem with XRP and Ether are that Ripple and the Ethereum Foundation respectively sold the coins and used the proceeds to build their platforms. This makes them illegal securities.

It gets better.

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Three months after the Clayton-Gensler meeting, Bill Hinman went on to give his famous 2018 speech. Hinman, who was the director of the division of corporate finance at the SEC, claimed that BTC and ETH were not securities.

This speech has been the subject of intense legal face-offs between Ripple and the SEC in their ongoing lawsuit. Hinman has claimed that these were personal opinions. However, according to the report, Clayton reviewed the Hinman speech before the presentation, “and provided some reactions.”

And if this in itself isn’t dubious enough, there’s the career advancements of the two – Clayton and Hinman – after leaving the SEC. As CNF reported Clayton now works with an organization that manages billions of dollars worth of BTC. The firm, known as One River Asset Management, has even applied for a Bitcoin ETF, which ironically, Clayton repeatedly turned down when at the helm of the SEC.

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Hinman, on the other hand, is an adviser to Simpson, Thatcher and Bartlett, a member of the Enterprise Ethereum Alliance, which seeks to advance the growth of the Ethereum blockchain.

Is the SEC picking the winners and losers?

Just about a year ago, there were three top cryptocurrencies – Bitcoin, Ethereum and XRP. While the other altcoins were coming up quite remarkably, these were the three to watch. The SEC’s lawsuit against XRP dismantled this trinity, bringing devastating losses to XRP, and since then, it has yet to recover.

XRP is the only cryptocurrency in the top 10 to not hit an all-time high in this year’s bull run.

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Gasparino believes that the SEC is picking winners and losers, and at the moment, it’s skewed against XRP and for Bitcoin. The top cryptocurrency recently had an ETF approved, indicative that the SEC is fully onboard with the coin, he observed.

Ethereum held an ICO, why aren’t they [SEC] going after them? It’s just a weird regulatory thing that they’ve got going on here. I think it’s time Congress steps in if this [the blockchain industry]is worth saving. The Internet was worth saving.

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Clayton, Gensler behind looming over-regulated crypto disaster

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A private meeting between then-Securities and Exchange Commission Chair Jay Clayton and a newly minted professor at the MIT business school named Gary Gensler appears to have set the stage for the misguided course of crypto-regulation we see today. 

Gensler, of course, would go on to take Clayton’s job after Joe Biden’s 2020 presidential victory. It’s unclear if the hyper-ambitious Gensler was actually prepping for that outcome by asking for the meeting. What is unmistakable: his intention to shape regulatory policy for crypto that has increasingly become a disaster. 

The meeting occurred back in 2018 as the SEC was grappling with how much it could regulate crypto. Gensler had good reason to be part of that process. The former Goldman Sachs banker had more recently been head of the Commodity Futures Trading Commission (CFTC), which began to dip its toe into crypto regulation. At the time, he was a special adviser of MIT’s Digital Currency Initiative, which was a significant supporter of Bitcoin and its blockchain platform. 

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Clayton was appointed by then-President Donald Trump as Wall Street’s top cop after many years as a corporate lawyer specializing in M&A deals advised by firms like Goldman Sachs, so he knew of Gensler. Crypto and the blockchain technology that support digital currencies were possibly transformational technology seeking to replace traditional measures of conducting business by eliminating intermediaries and transaction costs. 

But SEC officials believed it was also a haven for scams. The two discussed, I am told, how many cryptos were trading like largely unregulated currencies but were actually securities that fell under SEC oversight. The most established crypto, Bitcoin, and its blockchain platform were seeing intense competition from the Ethereum blockchain. Upstart Ripple Labs had created a platform to facilitate cross-border payments using the XRP digital coin. 

Going back to his days at the CFTC, Gensler gave the nod to Bitcoin as something that was a true crypto. He wasn’t a big fan of Ethereum, and he appeared to like Ripple even less. Both were skirting securities laws, trading as non-registered securities without SEC oversight, he believed. “There is a strong case for both of them — but particularly Ripple — that they are noncompliant securities,” he told the New York Times in 2018. 

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I asked crypto experts what exactly Gensler meant by that (he didn’t return my telephone calls) and they tell me his rationale goes something like this: The people at Ethereum, and to a larger extent Ripple, created unregistered securities because they sold digital coins they held to build out their platforms. 

For many in the crypto business, this remains regulatory hair-splitting at its finest. For Ripple, it was a huge blow to its business model. 

Within three months of the Clayton-Gensler sitdown, Bill Hinman, chief of the SEC’s corporation-finance unit, appeared to channel at least some of Gensler’s thinking. In a speech that would have significant ramifications for crypto, he said neither Bitcoin nor Ethereum were securities. He made no mention of Ripple. 

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Though his remarks offered the standard disclaimer that they were “the author’s views and (do) not necessarily reflect those of the Commission, the Commissioners or other members of the staff,” Clayton clearly was in the information flow. A source with direct knowledge tells me he provided “some reactions” after reviewing the text prior to the event. 

Sensing trouble, Ripple began to meet with the SEC arguing that its operations were not fundamentally different than those in the crypto cool kids’ club. It didn’t work. In December 2020, the SEC filed its last major enforcement action under Clayton, charging Ripple with failing to register $1.3 billion in XRP with the commission. Gensler, now SEC chair, is continuing Clayton’s case and promises others. 

This regulatory mishmash is stifling crypto innovation. The Gensler SEC is on the verge of approving a Bitcoin ETF, further cementing its status as the go-to crypto. But he recently shut down an attempt by Coinbase to offer a crypto-lending program. People at Ripple tell me they’ve been forced to expand operations overseas to escape the ­uneven regulatory environment here. The XRP digital coin has been kicked off many crypto exchanges. 

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Some crypto investors and industry executives are fighting back. Coinbase is asking Congress to create a separate regulator to oversee the crypto business with a clear set of rules. Class-action attorney John Deaton has sued the SEC on behalf of more than 45,000 XRP investors who have seen the value of XRP plummet after the SEC action. 

Deaton believes the SEC officials who brought the Ripple case have conflicts. He points out in his suit that Clayton advises a money manager with investments in Bitcoin and Ether. As Eleanor Terrett of Fox Business is reporting, Hinman is an adviser at the law firm Simpson, Thacher & Bartlett, a member of the “Enterprise Ethereum Alliance,” dedicated to the advancement of Ether. 

I’m dubious that such possible conflicts are the root cause of the regulatory morass, but I’m highly confident there’s got to be a better way to oversee something that could be the next Internet.

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