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Crypto Regulation

US Senator Slams SEC Chair Gary Gensler for Regulation-by-Enforcement Approach to Cryptocurrencies

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A US Senator is slamming the chairman of the U.S. Securities and Exchange Commission (SEC) for his approach to regulating the digital asset space.

In a new letter addressed to SEC Chair Gary Gensler, Senator Pat Toomey of Pennsylvania says that investors in the new space need clear rules and guidance rather than harsh enforcement and fines.

“For investors to benefit from a fair and competitive marketplace, regulators must proactively provide rules of the road to industry. Unfortunately, the Securities and Exchange Commission (SEC) has instead adopted a strategy of regulation-by-enforcement in this area.”

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Toomey adds that during the Senate Banking Committee hearing on September 24th, Gensler said that some crypto assets are deemed as commodities while some are considered securities. The US Senator is now asking Gensler to determine what sets these crypto assets apart.

”Please identify the specific characteristics that distinguish a cryptocurrency that is a security from one that has been deemed a commodity.”

Toomey also asks whether Gensler and the SEC consider stablecoins like Tether (USDT) and USD Coin (USDC) as securities.

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“Is it your contention that such a stablecoin constitutes an ‘investment contract’ and is, therefore, a security? If so, could you please explain why you believe such a stablecoin would meet the ‘expectation of profit’ prong of the Howey test?”

The Howey test was established in a Supreme Court case and determines whether certain transactions qualify as investment contracts and are subject to securities laws.

Toomey also says his concerns about the lack of clarity in the regulatory space are shared by others, including big names like SEC Commissioners Hester Peirce and Elad Roisman.

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“My concerns about the SEC’s lack of regulatory clarity are shared by others, including SEC commissioners. In one recent enforcement action, SEC Commissioners Hester Peirce and Elad Roisman stated they were ‘disappointed’ by the SEC’s failure to explain which digital assets were securities”

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Crypto Regulation

Crypto Firm Terraform Sues the U.S. SEC for Issuing Subpoena to Its Chief Executive

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Singapore-based crypto Terraform Labs has filed a fresh lawsuit against the U.S. Securities and Exchange Commission (SEC). This development is in response to the subpoena issued by the securities regulator to Terraform chief executive for attending an event in New York.

The subpoenas are the latest efforts from the U.S. SEC to extend its purview over crypto firms even when based abroad. It is also an effort by the U.S. SEC to extend its global reach in the crypto space.

Terraform Labs said that the SEC’s process server approached its chief executive Do Kwon when he was on his way to the “Mainnet 2021” summit last month in September. The crypto firm’s attorneys argued that this subpoena was an improper attempt by the U.S. SEC to claim jurisdiction.

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What Led to the SEC Issuing the Subpoena?

Singapore-based Terraform specializes in offering synthetic stocks on its blockchain through its Mirror Protocol. Similarly, it offers synthetic versions of the ETFs like the Ark Innovation ETF. Terra’s native cryptocurrency LUNA is currently the 11th largest cryptocurrency with a market cap of $17.6 billion.

The lawsuit notes that Kwon had voluntarily consented to an interview by the SEC. It further adds that post the interview, the SEC demanded documents from Kwon and the company. Terraform noted that this request was overly broad and didn’t make sense.

But last month in September, SEC told Kwon’s lawyers that the sanctions were warranted. The latest rift between the SEC and Terraform comes amid a broader crackdown by the U.S. regulators. The U.S. regulators have been cracking down on crypto companies recently.

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Furthermore, the U.S. SEC has recently set its eyes on the rapidly emerging decentralized finance (DeFi) space. A few months back, SEC Chairman Gary Gensler warned that unregulated crypto markets “will not end well”.

Gary DeWaal, a former senior trial attorney at CFTC told Bloomberg: “It’s a clever effort to try to quash this subpoena, but I’m not aware of a case like this being successful”.

Even if Terraform’s efforts are successful, the SEC can pursue the information by working with foreign government wherein Kwon and the company is based. DeWaal also said that the courts are usually sympathetic to SEC subpoenas.

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Crypto Regulation

Commissioner Peirce suggests SEC to work with crypto businesses to build a “reasonable framework”

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Commissioner Hester Peirce, aka “crypto mom” strikes back at the SEC for not working with crypto businesses in carving out a reasonable framework for the securities laws. Peirce spoke remotely at the Wall Street Journal’s Tech Live conference on Wednesday and continued to criticize SEC Chief, Gary Gensler on his anti-crypto stance.

Furthermore, Peirce suggested that the commission should decipher a system to work with cryptocurrency firms, given the inevitable growth of the decentralized industry. The Commissioner noted that the sooner regulators understand the importance of crypto, the better it will be in foreseeable future for the nation’s financial markets.

“I think it’s safe to assume that crypto is going to grow in size…And so what we can do now to invest in building a reasonable framework, I think, will pay off down the line.”, said Peirce.

SEC rules are affecting small businesses

The Commissioner highlighted the authorities’ perspective, noting that the conservative approach is to steer clear of accusations if anything goes south. However, Peirce also emphasized that this conservative approach negatively targets start-ups and smaller businesses, as they get caught up in the “tremendously hard” and time-consuming process of complying with SEC rules.

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“Regulators tend to be very conservative for a reason…If something doesn’t get approved, we’re not going to get blamed; if something does get approved and something goes wrong, we will get blamed. But that hesitation is really costly for smaller entities.”, Peirce added.

SEC failure to draw up a clear legal framework

Earlier this month, Commissioner Peirce was seen in her ‘crypto mom’ form, criticizing the government for its inability to finalize a clear legal framework for virtual currencies in the United States. At Yahoo Finance Live, Peirce noted that “it’s a real shame” that the US regulators’ are consistently failing at drawing up a clear legal framework for cryptocurrencies and securities.

“It is disconcerting to me that for three years now I’ve been asking for regulatory clarity, and we can’t seem to provide any…I think this is really becoming a huge barrier to this industry being able to develop in a way that’s safe, but also in a way that allows innovation to happen. And it’s a real shame to me that we are not just taking up the mantle as regulators to develop a regulatory framework.”

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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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