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.
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.
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.
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.
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.
Banks Must Meet These Conditions To Deal Crypto, US Regulator Says
The mainstream adoption of digital assets has been one of the main targets that the crypto space set.
More and more moves are taking place in order to achieve this important goal and they continue.
Banks adopting crypto for their clients is one important step in this direction and you can check out the latest news about this below.
US regulator details conditions for banks to deal crypto
It’s been just revealed that the U.S. Office of the Comptroller of the Currency (OCC) is outlining the conditions that national banks and federal savings associations have to mark before engaging in specified crypto activities.
The online publication the Daily Hodl says that according to the regulator, national banks and federal thrift institutions must do the following:
“demonstrate that they have adequate controls in place before they can engage in certain cryptocurrency, distributed ledger and stablecoin activities.”
The OCC also addressed some matters regarding interpretive letters issued in 2020 and early 2021.
The regulator noted that banks can do the following:
“provide crypto custody services, hold dollar deposits that back stablecoins, act as nodes for distributed ledgers to verify payments and engage in particular stablecoin activities to facilitate payments on blockchain networks after notifying their supervisory office.
The same regulator also notes that the bank should not engage in the activity until “it receives a non-objection from its supervisory office.”
The Acting Comptroller of the Currency, Michael J. Hsu stated the following issues:
“Because many of these technologies and products present novel risks, banks must be able to demonstrate that they have appropriate risk management systems and controls in place to conduct them safely.”
The regulator also said that this will “provide assurance that crypto-asset activities taking place inside of the federal regulatory perimeter are being conducted responsibly.”
Breaking: India Likely to Table Cryptocurrency Bill Before Parliament Session
India is reportedly working to table the much-talked cryptocurrency bill before or during the upcoming parliament session. The bill will be reportedly tabled during the upcoming union cabinet meeting while the winter session is set to start from November 29.
The said cryptocurrency bill comprises new regulations on crypto assets, their classification, and intended tax earnings from them. If the bill gets the cabinet nod, it might get approved during the upcoming parliament session. Earlier, inside sources indicated that the government might regulate cryptocurrencies as an asset class and will prohibit their use as a payment.
A top government official indicated that the new regulations would incorporate taxes on crypto gains based on the current rules of capital gains. Tarun Bajaj, Revenue Secretary shed some light on the taxation on crypto assets and explained,
“We will take a call. I understand that people are already paying taxes on it. Now that it has really grown a lot, we will see whether we can actually bring in some changes in the law or not. But that would be a Budget activity. We are already nearing the Budget; we have to look into it at that point in time,”
The Indian crypto ecosystem has strived despite the uncertainty around regulations for nearly four years. According to one report, the Indian crypto ecosystem has become a $6 billion industry with several new unicorns. Now with the government looking set to clear crypto regulations, the Indian crypto ecosystem could reach new highs.
Indian Central Bank Still Sceptic of Cryptocurrency
The Reserve Bank of India (RBI), the Indian central bank is still quite a sceptic about digital assets use and has warned about its potential harm to the financial system. RBI governor Shaktikanta Das has recently warned about the disastrous impact that digital assets could pose on macroeconomic and financial stability.
The infamous banking ban was also imposed by the RBI in 2017 that choked the crypto ecosystem and created many misconceptions among the mainstream. The banking ban was later overturned by the Supreme court of India in 2019.
US Senators Introduce New Bill That Seeks To Amend Crypto Provision in Newly Signed Infrastructure Package
Two United States senators are introducing legislation to amend the crypto provision of the infrastructure bill that President Biden just signed into law.
Reaching across the aisle, Democrat Ron Wyden and Republican Cynthia Lummis seek to revise the new information-reporting rules imposed on the digital asset space.
The proposed amendment intends “to revise the rules of construction applicable to information reporting requirements imposed on brokers with respect to digital assets, and for other purposes.”
As a press release from Sen. Lummis explains,
“Under current law, those who are involved in digital asset mining or staking, providing digital asset hardware or software wallets, or developing digital asset protocols may fall under the definition of ‘broker’ for tax purposes and would be subject to certain Internal Revenue Service (IRS) reporting requirements.
The senators’ bill would clarify that the ‘broker’ definition excludes miners and stakers, as well as wallet providers and developers, and would ensure that only those digital asset intermediaries that actually have access to material customer information are required to report to the IRS.”
Senator Wyden says it is “critically important to protect innovation in the digital asset space.”
“Our bill makes clear that the new reporting requirements do not apply to individuals developing blockchain technology and wallets. This will protect American innovation while at the same time ensuring those who buy and sell cryptocurrency pay the taxes they already owe.”
Lummis, who has been a vocal advocate of cryptos as well as a buyer of Bitcoin (BTC), says digital assets are now a part of the financial system and today’s decisions will have long-term effects.
“We need to be fostering innovation, not stifling it, if we are going to maintain America’s position as the global financial leader. I’m proud to introduce this bipartisan bill to ensure that our tax system reflects the realities of digital assets and distributed ledger technology.”
President Biden signed the Infrastructure Investment and Jobs Act/Bipartisan Infrastructure Framework (HR 3684) bill into law on Tuesday.
Currently, Section 80603 of the law says,
“Return Requirement for Certain Transfers of Digital Assets Not Otherwise Subject to Reporting.
Any broker, with respect to any transfer (which is not part of a sale or exchange executed by such broker) during a calendar year of covered security which is a digital asset from an account maintained by such broker to an account which is not maintained by, or an address not associated with, a person that such broker knows or has reason to know is also a broker, shall make a return for such calendar year, in such form as determined by the Secretary, showing the information otherwise required to be furnished with respect to transfers subject to subsection (a).’”