‘Transformative’ Uniswap And DeFi Prepare For SEC Battle; TradFi’s Illicit Finance Problem

SEC targets Uniswap, DeFi

Wells Notice alert…

It appears that much like Coinbase and Kraken, decentralized crypto exchange Uniswap, has received a warning – a Wells Notice – that a formal action against the company by the Securities and Exchange Commission (SEC) is imminent.

According to Uniswap, the charge appears to be that the company is running an unregistered exchange. See the Uniswap blog post which provides a full-throated Uniswap defense on why they aren’t culpable: “We are confident that the products we offer are not just legal – they are transformative.”

Fortune’s Jeff John Roberts discusses the news, “The impending Uniswap lawsuit comes at a time when the crypto industry has loudly complained the SEC has been operating in bad faith when it comes to the sector, pursuing enforcement actions despite clear rules while failing to account for crypto’s distinct blockchain-based technology.” Read more.

Uniswap  COO Mary-Catherine Leder commented on X yesterday after the news broke, “Uniswap is an upgrade to the financial system, whether the SEC recognizes it or not. I bought my first bitcoin in 2011, started BlackRock’s crypto efforts in 2015 and left TradFi in 2021 to go all in on DeFi as COO of Uniswap Labs. I did that because I believe onchain markets will be better markets.”

She continued, “The tech can be complex, but the values are simple. Traditional markets rely on who you know. In DeFi, access is equal. $2 [trillion] in volume, no hacks. 16m wallets. Self-serve markets on blockchains are a technical reality, and they aren’t going away. It’s a better system, and we’re going to fight to protect it.” See her tweet.

more tips:

what you should know: This impending enforcement action by the SEC could be introducing a wild card among voters in November – the DeFi vote. It seems inconceivable that this action will incite anyone from the anti-crypto side of voters. But, pro-crypto voters – particularly the subset using DeFi – could be further encouraged to seek favorable candidates and platforms.

settlements and crypto

Top Crypto Exchanges Look to Move Beyond Settlements With U.S. Regulators – The Wall Street Journal

big quotes – Treasury

Yesterday morning on CNBC’s Squawk Box, the Treasury’s position on crypto was put on full view during a Q&A on illicit finance with Squawk Box host Andrew Ross Sorkin and Deputy Secretary of the U.S. Treasury Wally Adeyemo.

Similar to fleeting moments of Tuesday’s Senate Banking Committee hearing, Adeyemo once again admitted in the CNBC interview that there is a larger problem in the traditional finance sector when it comes to illicit finance, but Treasury is deciding to target the much smaller crypto sector.

See the video.

A transcript of the exchange has been lightly edited below for clarity.

Andrew Ross Sorkin, CNBC: “There is a Bloomberg Law opinion piece [which] says the Department of Treasury’s annual report on terrorism financing finds the instances of crypto-related terrorism funding are ‘less prevalent than those involving traditional financial assets.’ The Treasury points out that US banks “remain one of the primary avenues by which terrorist groups attempt to move funds in, or through, the United States. (…)”

“[To Adeyemo] The reason I raised this is ‘crypto bulls’ – those proponents of cryptocurrencies – say, ‘Why are you always worried about cryptocurrencies? It’s a tiny piece of this and the real problem is still in the actual banking system? It’s still US dollars that are being used for illicit purposes.'”

Deputy Secretary Wally Adeyemo: “So, Andrew, that’s true. And, I think the thing that we are signaling to Congress is that we’re afraid that that risk is only growing because as we clamp down on the risk in the traditional banking sector – what you know, well because you’ve covered these issues for a long time – is that people then go to less regulated spaces, because that’s where they think that they can hide out.”

“And what we’re saying is that as we go after terrorist groups, when [we’ve] cut off their access to traditional financial sector, they’re going to use other, new tools like cryptocurrency to try and move their money illicitly. And the best example remains what’s happening when it comes to ransomware attacks -where almost exclusively those attacks today are being done using cryptocurrency. We don’t want that to happen when it comes to terrorism. We don’t want that to happen when it comes to the illegal drug trade. And that’s why we went to Congress to ask for these new tools.”

Also, there is a “strawman” here represented by Adeyemo when he said, “When we’ve cut off their access to traditional financial sector…” Is that really going to happen? It likely hasn’t been cut off since the first U.S. bank was founded in 1791… over 230 years ago.

what you should know: This impending enforcement action could be introducing a wild card among voters in November – the DeFi vote. It seems inconceivable that this action will incite anyone from the anti-crypto side of voters. But, pro-crypto voters – particularly the subset using DeFi – could be further encouraged to seek favorable candidates and platforms.

big quotes – Sen. Warren

Statements at yesterday’s Senate Banking Committee hearing with Deputy Treasury Secretary Wally Adeyemo continue to reverberate including those of Senator Elizabeth Warren (D, MA) who made foreign “validators” a part of her ongoing argument on why crypto should not be embraced by the U.S. financial system.

See the video (starting at 1:24:40).

Senator Warren: “So, if I wanted to send $1,000 worth of crypto to you, Mr. Secretary, is it possible that when I just send it, that Iran could be our validator, and would be collecting a fee processing, our crypto -all of that without either one of us knowing it?”

Deputy Secretary Adeyemo:  “So transactionally? That is certainly possible.”

Senator Warren:  “OK, so Iran, which is subject to all kinds of sanctions, is moving money through crypto and actually making millions of dollars validating crypto transactions for Americans and for everyone else -all because we don’t have the right anti money laundering rules in place. One more quick question…. If the crypto market grows and the number of crypto transactions increases, does that mean more money would likely end up in Iran’s pockets.”

Deputy Secretary Adeyemo:  “Everything that we’ve seen says that when markets grow, threat actors use them more and we should expect that that is what will happen here as well.”

Senator Warren: “Okay, and more activity, more money. You know, currently the House is working on a bill to create a regulatory framework for stablecoins, stable coins, make it easier to convert dollars into crypto and crypto into dollars. So they are an on-ramp into the crypto world. If we’re going to create new on-ramps, increasing traffic, which is exactly what the House bill does, then we need a regulatory framework that will put the rules for anti-money laundering in place so that we do not have more opportunities for Iran and terrorists and drug lords and human traffickers to make more money. We’ve got to get those AML Rules in place.”

Hard statistics would provide a better argument for Senator Warren and Deputy Secretary Adeyemo rather than the generalities suggested at the hearing.

In response to the caution about validators, policy executive Cody Carbone of industry organization Digital Chamber responded on X, “The proposed policy to make validators operate as banks will kill individual contributions & centralize control in big players (I thought we didn’t like that [Senator Warren]?) stifling US innovation and actually increasing illicit activity.”

more tips:

    • What is a blockchain validator – Ledger

stablecoin stability

A new report (below) from Bank for International Settlements’ (BIS) Financial Stability Institute looks at stablecoin law in different countries. Ledger Insights reviews the news and says, “At a high level, many national regulations address the same general topics but differ significantly in detail, creating scope for regulatory arbitrage.” But, Ledger Insights points out that traditional banks have their own issues, too -an interesting piece. Read more.

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what you should know: Like anti-money laundering legislation, digital assets and stablecoins are vilified by the anti-crypto camp as part of the crypto scourge, but the fact of the matter is TradFi isn’t doing it better.

“legislative vehicle”

So, what does a “legislative vehicle” look like, Chair McHenry?

House Financial Services (HFS) Chair Patrick McHenry (R, NC) has repeatedly said that in order to pass stablecoin legislation in the House, he wants a “legislative vehicle” on which his “Clarity For Payment Stablecoins Act [H.R.4766]” can ride along.  (See comments at last month’s Coinbase Update The System event and Punchbowl News’ Payments Summit.)

Well, it’s not stablecoins, but Politico’s Jasper Goodman reported this week that McHenry has found a legislative “vehicle” for his financial data privacy bill – “The Data Privacy Act of 2023” [H.R.1165] which passed out of the HFS committee and in a vote largely along party lines at a February 2023 markup .

The vehicle is the current data privacy bill sponsored by House Energy and Commerce Chair Cathy McMorris Rodgers (R, WA) and Senate Commerce Chair Maria Cantwell (D, WA)Read more in Politico’s Morning Money.

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what you should know: A bipartisan vehicle makes sense for stablecoins. Most Senate Democrats, who have been public about their digital assets opinions, have been anti-crypto. A bipartisan “vehicle”  assumes broader Democratic support than the currently narrow stablecoin support (likely Gillibrand and maybe senators such as Sens. Debbie Stabenow (MI) and Cory Booker (NJ) of DCCPA-bygone-days).

But, what will the vehicle be? It’s still unclear. Only The Shadow knows.

thoughts, comments

Opinion: This Bitcoin halving will be different — the institutions are here – Blockworks

Opinion: The legal system is closing in on crypto, and things may only get worse – LA Times

still more tips

Crypto mining bills potentially an additional focus of fiscal session in Arkansas – Fox 16, Little Rock, Arkansas

A promise to remake the web with blockchain – Politico

Made (or lost) money on bitcoin or other crypto last year? The IRS wants details – CNN

South Korean Elections & Crypto: Parties Pledge Digital Asset Proposals to Win Over Voters – CCN.com

Deutsche Bank Says Consumers are ‘More Positive on Crypto’ – Decrypt