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US Crypto Regulations Between a Rock and a Hard Place

US Crypto Regulations Between a Rock and a Hard Place

In the midst of the delay for the approval of Bitcoin exchange-traded fund (ETF) applications after several rejections, and current uncertainty regarding regulatory framework, US Securities and Exchange Commission (SEC) Commissioner Hester Peirce provided insights into the matter as an opportunity for better industry development.

Last week, Heister made comments on the issues of state regulation at the University of Missouri School of Law where she opined that “entrepreneurship and innovation do not have the happiest relationship with innovation”, which may be the core reason why crypto ventures have suffered in the hands of most regulatory systems.

The SEC’s clamp down on non-compliant ICOs (issuing securities disguised as utility tokens), its rejection of Bitcoin ETF applications, and somewhat deliberate delay in providing a regulatory framework as regards the industry may have a more logical than malicious intent behind it. Innovations, while they make life easier most of the time, always come outside the norms, especially those of the regulatory system and often times drives regulators to accept changes despite skepticism.

“Regulators, for their part, tend to be skeptical of change because its consequences are difficult to foresee and figuring out how it fits into existing regulatory frameworks is difficult,” she said, implying that it’s not an easy task for the SEC to reject what seemingly looks like a financial innovation in an attempt to weigh and understand the situation correctly.

The last financial crisis has made it easier for trust issues to thrive, especially on the part of the regulator, given that some ascribe the crisis to be due to “financial innovations”. Peirce pointed out that “…every innovation — even one that almost everyone agrees is good — carries with it some risk”, something currently agreeable with the cryptocurrency system.

Accordingly, since innovations can be unpredictable, so caution must be applied when drafting regulatory frameworks, especially for a new industry such as blockchain and its underlying assets. Peirce continues by saying that “as regulators, therefore, we must allow innovation to proceed, even as we put in reasonable safeguards and watch for unanticipated consequences”, and still, it has to come with no comprise to the securities laws in place. It behooves one to imagine where the true line of trade-offs will be drawn, seeing that the core structure of the crypto industry lies in decentralization, which by implication makes it harder for any regulator.

Still, the regulatory polarity has created distinct shades of gray areas around the world. With the Chinese government adamant with its crypto ban, the Indian government chose a rather bizarre stance — first with a ban on banking services to crypto related ventures, and then planned to develop a state-backed cryptocurrency, which it shelved later on. Meanwhile, other jurisdictions have launched out to attract the “rejected”, by providing a safe haven to crypto ventures, and a few nations are developing their own state-backed crypto to augment their economies.

In the UK, the principal regulator has extended an invitation to the public through its consultation paper to better assess a possible way forward for industry regulations. It said in late January: “We are consulting on Guidance for crypto assets to provide regulatory clarity for market participants.” Meanwhile, in the Middle East, the United Arab Emirates (UAE) has also hinted on possible ICO regulations to be introduced later this year.

So far, the crypto industry has had checkered developments and have more recently been in a stalemate (regardless of minor spikes in market dynamics), and many have been waiting eagerly for the next bull-run trigger. It’s basically what most crypto enthusiasts talk about these days, consequently, dialing down tech innovation, development and mass adoption of crypto products — at least, for the innovations that they stand for — and are relying on adjuncts gunning for more institutional involvement that would supposedly propel the market further.

While the US SEC does recognize the potential this innovative technology may provide, as Peirce says. “the United States has benefited greatly from the relative importance of non-bank financing”, supposedly placing them on par with the capital market. This further buttresses the point made by SEC boss Jay Clayton who viewed crypto as a “promise for adding efficiency to our [capital] marketplace”.

However, the regulatory watchdog maintains a stance of balance that involved protecting the interests of investors as market volatility, manipulation, hacks, frauds, exchange illiquidity, and a host of other unforeseen consequences from the unstandardized cryptosystem remain legitimate concerns.

Perhaps, when the SEC, as well as other financial regulators, have finally regulated the industry, these problems will be adequately tackled. Meanwhile, the regulator itself is waiting for the maturity of the industry marked by improved oversight on market surveillance, definitive asset classification, and airtight custody solutions, before embracing the industry wholeheartedly. But it still remains to be known at what cost?

The good news so far is that earlier this year, a bill was introduced in the House to help with asset classification, that partly takes care of one problem. Nasdaq introduced its SMARTS Market Surveillance solution which may have provided precedence in the direction of play towards controlling market manipulation. On the subject of custody solutions, crypto ventures are urged to ensure best cybersecurity practices. Fidelity, Coinbase, Gemini, BitGo, Ledger, ItBi and even Goldman Sachs are among many reportedly racing toward that end.

Peirce’s overall sentiment in a manner of speaking, perhaps one shared on both sides of the tussle is that the delay in drawing clear lines may actually allow more freedom for the technology to come into its own.

 

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Seven Crypto Exchanges Use Nasdaq Surveillance Tech for Clean Trading

7 Crypto Exchanges Use Nasdaq Surveillance Tech for Clean Trading

Nasdaq’s cryptocurrency exchange guidelines are continuing to offer technical support for seven cryptocurrency exchanges, paying to use its tech to help them ensure trading activities are kept free from manipulation.

Nasdaq’s team of specialists monitor all exchanges wishing to use the surveillance technology for both technical capability and ethics. To date, seven crypto exchanges have satisfied Nasdaq’s stringent guideless although only the connection with Gemini and SBI Virtual Currency has been made public so far.

Nasdaq’s head of exchange and regulator surveillance team, Tony Sio, explained the company’s thinking on allowing access to tech support: “Historically, we don’t do such a large vetting process for our clients because they are much more well-known… But as we started working with less well-known names, startups, then we realized we needed to do this check process.”

At yesterday’s Nasdaq briefing, the company’s surveillance head broke down the process of vetting crypto exchanges to members of the press, clarifying that not everyone makes the cut. Such is the rigorous nature of their prerequisites, which have separate criteria: a business model, KYC/AML, and exchange governance and controls.

Until recently, Nasdaq’s primary interest in this area has been in blockchain. In September 2015, it joined a USD 30 million investment round in Chain, a blockchain startup that then partnered Nasdaq to launch Linq, a private equity platform. Last week, Nasdaq also hooked up with Symbiont with a USD 20 million investment.

One key factor in allowing access to Nasdaq tech has been the company’s interest in how exchanges use their assets and exactly who is using them, and what they may have been used for in the past, illustrating the high level of ethical standard exchanges must demonstrate before passing muster, gaining access to the technology.

 

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Monero Devs: Privacy in Bitcoin “A Fundamental Human Right”

Monero Devs: Privacy in Bitcoin

The issue of privacy has been one issue that has frustrated cryptocurrency detractors over the years, claiming that such a factor simply encourages illegal activity and tax evasion, but strong advocates of Bitcoin claim it to be simply an inalienable right and one of the advantages of decentralization.

One of the most vocal mainstream critics of Bitcoin has been JPMorgan Chase’s CEO Jamie Dimon, who has frequently asked for more government intervention in the regulation of cryptocurrencies, subscribing to one argument that such assets are easily concealed from taxation.

Riccardo Spagni and Cayle Sharrock, who are currently involved in projects related to the privacy-focused Monero altcoin disagree with this view, arguing that privacy is not only here, but should be here to stay when it comes to cryptocurrencies such as Bitcoin and Monero. Spagni hopes that the private cryptocurrency space will become the norm in the years to come. He commented:

“Between Bitcoin having enhanced privacy through something like Lightning and TumbleBit, between Monero and the work being done on ZK-STARKs by Starkware, between Grin and Beam and Tari [working on MimbleWimble]… I’m hoping that it’s just going to force a reckoning where everyone will have to go: ‘Okay, privacy is here. It’s accessible. Strong privacy is here.’”

Spagni draws parallels to the war on certain drugs which consume lawmakers energy only to be eventually legalized such as the case in Canada in 2018. People will use cryptocurrencies, claims Spagni, whatever regulation comes into play; a fact which is borne out by numerous prohibitive crypto jurisdictions around the globe, many of which have vibrant crypto communities despite government clampdowns.

There is no doubt that cryptocurrencies need rules and standards, and clearly, there are major players in the industry such as Gemini’s Winklevoss Twins who, despite industry criticism, are prepared to make a stand for considered and sensible legislation of the space, preferably through bodies within the industry itself.

“Over time, they’ll start to realize that actually, you can still do proper law enforcement without needing to see everyone’s transactions,” added Spagni. “You can still do proper tax collecting without needing to see into everyone’s bank account.”

 

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Winklevoss Twins Hit Back at Critics of NYC ‘Crypto Needs Rules’ Advertising

The co-founders of Gemini Trust Company, Tyler and Cameron Winklevoss have been responding to criticism of their ‘Crypto Needs Rules’ advertising campaign, launched for their New York-based digital asset exchange.

The concept of new rules surrounding cryptocurrencies, for many, is proving difficult to tolerate in the industry. The “crypto needs rules” placards can now be seen on the New York Subway and on the back of Yellow Cabs, promoting Gemini along with other slogans such as “money has a future” and “crypto without chaos.”

Many industry players feel that rules such as AML and KYC security measures go against the grain of Bitcoin’s purpose, conflicting with the original idea of a decentralized crypto economy. Messari co-founder Dan McArdle was so incensed by the advertising material that he closed his Gemini account in objection to the ads. Chris Roan head of Gemini marketing was quick to defend the advertising, telling the Wall Street Journal:

“We believe that investors coming into cryptocurrency deserve the exact same protections as investors in more traditional markets, adhering to the same standards, practices, regulations and compliance protocols.”

The Winklevoss twins have argued that their advertising is aimed at “…regulation oversight on how people use the technology and how people build the technology and how companies, like Gemini for example, custody assets and what kind of oversight.” The Gemini CEOs deny that financial regulations have a “big brother” element, but can effectively prevent crime, arguing that most people are fine with having their transactions monitored. They commented:

“Terrorist financing is a real thing. Being a New Yorker and living in New York, you know, September 11, is a real thing and that’s really, that’s the overarching goal of [the Bank Secrecy Act and anti-money laundering laws].”

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Kraken Bucks the Trend Regarding IRS Request For Users’ Crypto Details

Cryptocurrency exchange Kraken, the world’s largest bitcoin exchange in euro volume and liquidity, has said that it does not hand its client details to the Internal Revenue Service.

It has become common for some cryptocurrency exchanges to share their clients’ details with the IRS for tax purposes; a practice that continues to annoy many investors in their quest for true decentralization and increased anonymity.

The IRS requested details including transaction history of 1300 users last year from exchange giant Coinbase, an accusation which was also aimed at Kraken in terms of their readiness to pass on client details for tax purposes. The accusation has since been denied by the California-based exchange, assuring their users on Reddit that they don’t alert the IRS of clients’ crypto holdings, stating:

“We cannot provide advice in relation to inquiry on taxes. (It is also probably not advisable to take tax advice from any Reddit post or comment – and certainly not from twitter either, but you may wish to consult your own CPA, tax advisor, or tax attorney individually and privately.)”

Kraken’s response, suggesting that taking advice on Reddit was possibly a poor source of information for tax purposes, may have been aimed at an earlier post via social media by “Crypto Tax Girl” who commented on Twitter:

“For 2018, Coinbase, Kraken, and Gemini will be reporting to the IRS, so you may receive a 1099-K. A 1099-K doesn’t have any specifics about your transactions (like a 1099-B does), but it does signal to the IRS that you hold crypto.”

Kraken’s support team confirmed that this was, in fact, untrue and that they do not send end of tax year statements to the IRS and leave any tax dealings totally in the hands of their clients

The support team further clarified that they do not send end-of-the-year statements to their clients and that the clients of the platform are responsible for their own reporting. This had Reddit abuzz with attacks on the US government. One Reddit writer expressed his irritation at the likes of Coinbase handing over user details to the IRS

“There was no way the US would allow these exchanges to operate and let their customers not pay US taxes. Hell, the US forced Swiss banks to give up tax info.”

Another writer saw Kraken’s stance as a wakeup call arguing:

“Good, the faster we have exchanges getting onboard with centralized entities the faster and harder people will work to make Decentralized Exchanges a thing, we need them sooner or later and if this does not light a fire under people’s asses then I do not know what will.”

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Bitcoin ETF Approval Would Give EU Legislators More Confidence Over Crypto

In a change of stance on cryptocurrency adoption by EU legislators, who until now have been mainly fence-sitting on the subject, are indicating that ETF acceptances may create more positive interest towards easing regulation.

European legislators have recently stated that a Bitcoin ETF green light by the SEC could ease the current pressure felt by cryptocurrencies across Europe.

A recent report by the EU’s financial advisory group suggested that there was a continued threat to investors trading in cryptocurrencies arguing that, “These issues are not unique to crypto assets trading platforms; they may be exacerbated in the case of crypto-assets because of their high price volatility and often low liquidity.”

In an attempt to regulate cryptocurrencies and provide more safeguards, EU legislators are increasingly looking to organizations such as Gemini who have taken to ETF, despite their own problems in getting them recognized by the SEC, due to the body’s continual reluctance to endorse cryptocurrencies. Gemini’s joint CEO Cameron Winklevoss commented about their own problems with regulation:

“We understand the commission’s concerns. We’ve heard them loud and clear and they are basically calling for more market surveillance and protections in the marketplace to avoid, prevent against manipulative behaviour and stuff like that. So, Gemini has built a market surveillance team.”

CSO of CoinShares, Meltem Demirors, has a more negative approach to the prospect of Bitcoin ETFs being accepted by the SEC due to the current political stalemate in Washington, arguing:

“….in this current sort of stalemate where you have the Democratic House, and the Republican Senate, you see some clashing, there are very different views on financial innovation and what should happen, but I think right now there is no upside to approving an ETF.”

The Winklevoss Brothers have called for the introduction of a Virtual Commodity Association, a self-regulatory organization for the cryptocurrency industry in the United States, similar to the Japanese Virtual Currency Exchange Association (JVCEA).

The JVCEA was founded on April 2018 when 16 crypto exchanges joined hands with the ultimate aim of providing self-regulatory standards for the industry-wide investors. Later in October, it was officially given self-regulatory status by Japan’s financial regulator to supervise the crypto sector.

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Winklevoss Twins Reaffirm Commitment to Bitcoin ETF

Winklevoss Twins Reaffirms Commitment to Making Bitcoin ETF a Reality

The Winklevoss twins have renewed their commitment to bring about the first Bitcoin exchange-traded fund (ETF) in the US. This happened during an Ask Me Anything (AMA) event on Reddit yesterday, the first organized by them since 2015 – around the same time their Gemini crypto trading platform was launched.

In the past year, many investors were overwhelmed by the downtrend in the cryptocurrency markets and focused more on price measures to determine success. However, in the midst of misrepresentation of valued propositions, companies were making progress in their development timeline. One such company was Gemini.

According to Cameron, 2018 was a banner year, as the company was able to hit major milestones and considered it a successful growth period for the industry.

Though Bitcoin – the flagship cryptocurrency and the largest cryptocurrency by market capitalization – had suffered a hit and dropped by approximately 81.98% during 2018, the twins are still confident that the cryptocurrency is “most likely the winner in the long term… Bitcoin is certainly the OG crypto”.

During the AMA session, a Reddit user asked the twins about their previous bullish speculation price of USD 40,000 for Bitcoin in the last AMA, to which Tyler responded saying:

“Our thesis around Bitcoin’s upside remains unchanged. We believe Bitcoin is better at being gold than gold. If we’re right, then over time the market cap of Bitcoin will surpass the [approximate] 7 trillion-dollar market cap of gold.”

For the take-home, the twins did leave the attendees a hint of what cryptocurrency in the future should look like: “Success is a future where the internet looks dramatically different than it does today (i.e., decentralized and open) and your money does things that your current money cannot do (i.e., it works like your email).”

In another response, Cameron said: “I can see a future where everything (including fiat) is crypto (e.g., Gemini dollar).”

With respect to derivative markets like the ETF, the twins said they understand the regulator’s concerns as related to “increased marketplace surveillance”, and are currently taking steps to address those concerns through inclusive surveillance on their platform.

Moreover, they said that efforts are geared towards making cryptocurrency safe and clear of all stigma: “Marketplace Surveillance is commonplace in equities and derivatives markets — so we aren’t re-inventing the wheel here, just bringing best practices into crypto.” They further reassured that they were “committed as ever to making an ETF a reality”.

The Winklevoss twins are not the only ones motivated by crypto adoption. During the past weeks, institutional investment portals have been making appearances, with the likes of Coinfloor’s CoinFLEX, Overstock’s securities trading platform tZERO’s patent, Japan’s Bitcoin ETF, and imminent Bakkt all hitting the headlines.

 

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Winklevoss Twins and Gemini Glimpse Crypto Horizon in UK

Gemini and the Winklevoss twins are looking ahead to the UK as their next lucrative cryptocurrency landscape.

The entrepreneurial crypto brothers, having recently been knocked back by the SEC after their own ETF submission was turned down, have at least have received some recent success in getting a rubber stamp from the NY regulators for the company’s new stablecoin. Two firms, Gemini Trust Company, and the Paxos Trust Company are the first stablecoin providers to receive the go-ahead to list on exchanges in New York State.

Now it appears that the brothers are “crossing the pond” with their latest venture. Those close to the company have reported that Gemini has already taken the step to hire consultants to advise on an approach to move into the UK. London is currently the European financial epicenter, although many companies are now awaiting the final outcome of Brexit talks, and some have even already moved from London to Germany and France in anticipation of a negative result in which no deal between the UK and Brussels is reached.

This has clearly done little to dissuade Gemini as it plans to file an application with the UK’s equivalent of the SEC, the Financial Conduct Authority (FCA), according to the Financial Times.

If a move does materialize, Gemini’s made competitor will become San Francisco-based exchange giant Coinbase who are now well established in the UK as the main provider of crypto-related services to UK residents. Coinbase has recently expanded the offerings on its UK platform, enabling easier withdrawals from UK Coinbase sterling accounts to English banks and forming a partnership with major English bank, Barclays, to simplify its platform for users.

The UK market is still being monitored by the FCA but there have been recent calls for tighter regulatory measures called for by MPs. The FCA has recently asserted that it would not “rule out roles for crypto-assets themselves”, an approach far from calling for a ban or restriction on trading operations. However, the situation is ongoing without any real decisions taken as yet by the Crypto-Assets Task Force set up earlier this year in May.

The most recent noises out of Westminster concerning cryptocurrencies is that MPs want the FCA to look at digital currencies “as a matter of urgency”, suggesting that no new asset class is structured around the technology but that EU AML laws are enforced along with KYC checks.

The Gemini move may offer challenges in a vibrant and lucrative UK market, but the benefits may be worth the risks. The UK experiment has certainly worked for Coinbase who now plan to move into Ireland. Gemini is currently 61st in global rankings.

 

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Growth Over Time in Crypto Market Could Jumpstart SEC’s ETF Decisions

Asjylyn Loder, writing for the Wall Street Journal, feels that Bitcoin exchange-traded funds (ETFs) will happen; it’s just a matter of time.

After ten rebuffs to date, it must seem to these crypto companies that they are continually banging their heads against a wall. Loder reminds them that history is on their side, although when this history is examined, the time lag may be a bit of a wake-up call for the new players on the block, as she points out, “The first ETF pegged to volatility futures launched five years after the debut of the futures, and the first oil ETF followed oil futures by 23 years.”

However, those early applications have an advantage, which is clearly why they keep on coming. The hope is that at least one successful approval on ETF by the SEC would bring a tidal wave of institutional buyers to the market, picking up prices and moving Bitcoin in a long-awaited upward trajectory. For the hopefuls in the market, the track record so far isn’t good. It could be that the SEC is waiting for Bitcoin to move first.

With Gemini’s failure to become the first-ever cryptocurrency ETF on a regulated exchange came other subsequent rejections by the SEC: five more applications failing in the same week as the second Winklevoss attempt. This latest string of rejections seems to be a cementing of the SEC’s hard-line stance.

GraniteShares, one of the ten unsuccessful proposals to the SEC, sees the agency regarding crypto assets as a high-risk class, one of the issues that may add to the tardiness of any decision. Co-founder Will Rhind says the commission is even tougher on cryptocurrencies than conventional futures because of the risk factor, arguing:

“That risk has always been a disclosure issue… But in this case, we had to go way beyond that and prove that the market is not being manipulated, which is a standard that is impossible to prove.”

Patomak Global Partners chief executive Paul Atkins was on the inside once as an SEC commissioner. He sees time as crypto’s best friend: “Is [the SEC] a merit regulator, or should investors be able to decide for themselves what to invest in?”

With three re-evaluations by the SEC of proposals turned down earlier this year, in part because of the concern that the cryptocurrency market is too small, Loder agrees that time may well become the saving grace for Bitcoin ETFs. But if this is the case, Bitcoin trading would need to take the much-awaited leap forward which the crypto community is waiting for in order for the SEC to sit up and take notice.

 

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