Wishful Thinking? Regulating Crypto To Bring Offshore Onshore

Onshore Offshore

Amidst the most recent crypto cataclysm, hopeful narratives have emerged suggesting that the U.S. government and other jurisdictions could have prevented the implosion of offshore firms such as FTX.

The argument offers two similar threads related to regulatory guardrails:

    • Stay in the U.S. instead of leave: Better crypto-specific regulation in the United States would have encouraged companies to stay local and therefore discouraged unregulated development elsewhere to “infect” unsuspecting U.S. consumers.
    • Grow in the U.S. instead of nothing: Clear regulation in the U.S. presumably grows the crypto industry by inspiring entrepreneurship in the United States. Lack of clarity does not promote risk-taking for which U.S. entrepreneurship is known.

FTX’s international unit presumably would not be experiencing bankruptcy today if it was required to adhere to current United States banking laws let alone anything crypto-specific that may bubble up someday. Of course, a CFO might have helped, too.

It’s fair to ask, would FTX’s founders ever founded anything in the U.S.? Were they only interested in exploiting unregulated environments? Maybe so. And so… does that need to be “onshored”? Doesn’t seem like it.

The European Union (EU) is thinking about how to take a crack at regulating offshore entities but is still far from pulling the trigger. The European Securities and Markets Authority (ESMA) will be on the hook in the EU once Markets in Crypto-Assets (MiCA) regulation takes effect in 2024 or thereafter.

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Are Modifications Needed to the Howey Test? It’s Time for the Digital Asset Test

SEC Chair Gary Gensler

At The Financial Markets Quality Conference, hosted by Georgetown McDonough’s Psaros Center for Financial Markets and Policy in D.C., Securities and Exchange Commission Chair Gary Gensler participated in a virtual fireside chat covering everything from payment for order flow to crypto.

Gensler offered no surprises in his crypto-related answers. See the interview on YouTube.

He remains convinced all the regulation is in place with the Howey Test whose foundation was laid by securities laws created in 1933 and 1934 and then “tested” in a case in front of the Supreme Court in the 1946 focused on land sales of Florida orange groves. Ever since, it has served as the basis for understanding “What is a security.”

But, Chair Gensler was talking to a peer with interviewer and Georgetown professor Reena Aggarwal, who Gensler said volunteered as part of President Biden’s transition team for financial regulatory agencies. The dynamic seemed to allow for Ms. Aggarawal to press a bit further. With her crypto questions centered on regulatory needs, she drilled down to the baseline of the Howey Test which required a crisp answer from the Chair.

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The Fed Wants A Stablecoin Law From Congress

The Fed Wants A Stablecoin Law

Stablecoin legislation is on the minds of DC policymakers this fall as it remains among the lowest of the low-hanging legislative initiatives in crypto which could ultimately result in a law.

Given the widespread agreement on its need, the only question seems to be – is it this year or next?

As Congress began its return from recess last week, The U.S. Federal Reserve brought its lens to stablecoins. Fed Chair Jerome Powell and its new Vice Chair for Supervision, Michael S. Barr, participated in D.C. think tank events.

Mr. Barr presented at the Brookings Institution conference and provided a broad overview of his priorities which center on maintaining the stability of the U.S. banking system which seemingly puts him front-and-center in the stablecoin debate.

The Vice Chair position Barr now holds was originally established due to passage of the Dodd-Frank Act and addressed the need for a financial watchdog given the extreme risk-taking by banks that led to the Great Financial Crisis of 2008.

Prior to joining the Fed, Barr was in academia as dean of the University of Michigan. He’s also very familiar with crypto having served as an advisor in 2015 to Ripple Labs.


In his speech, Barr aligned himself with the urgent calls in favor of stablecoin rulemaking saying, “Stablecoins, like other unregulated private money, could pose financial stability risks. History shows that in the absence of appropriate regulation, private money is subject to destabilizing runs, financial instability, and the potential for widespread economic harm.”

Vice Chair Barr added that he believed Congress needs to work quickly on legislation that brings stablecoins “inside the prudential regulatory perimeter.”

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A Wave of Regulation Sweeps Digital Europe and The Blockchain Industry

Regulation in Europe

European government officials have been busy the past several weeks as efforts to improve the guardrails around the digital commerce and blockchain ecosystems finally came to fruition. Let’s review.


Regarding the new Markets in Crypto-Assets (MiCA) regulation framework agreed to on June 30, Stefan Berger, a German centre-right lawmaker who helped lead the European Parliament’s negotiations was widely quoted as saying, “Today we put order in the Wild West of crypto assets and set clear rules for a harmonised market.” He added, “The recent fall in the value of digital currencies shows us how highly risky and speculative they are and that it is fundamental to act.”

CNBC described some of the regulation’s most restrictive elements:

“Under the new rules, stablecoins like tether and Circle’s USDC will be required to maintain ample reserves to meet redemption requests in the event of mass withdrawals. Stablecoins that become too large also face being limited to 200 million euros in transactions per day.”

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Grayscale, Bitwise ETF Applications Rejected By SEC; Grayscale Sues

SEC and Grayscale ETF

Late yesterday, the Securities and Exchange Commission (SEC) announced its rejection of applications by both Grayscale (see entire PDF) and Bitwise (view that one) to create first-of-its-kind Bitcoin Spot ETF (Exchange-Traded Fund) investment vehicles.

In declining the Grayscale application, which would have converted the Grayscale Bitcoin Trust (GBTC) to an ETF, the SEC said the company did not show it could overcome the Commission’s concerns around the potential for fraud and market manipulation:

“Because, here, NYSE Arca is seeking to list a spot bitcoin ETP (i.e. Grayscale’s spot Bitcoin ETF) that relies on the CME as the purported ‘significant’ regulated market with which it has a comprehensive surveillance sharing agreement, the assets held by the proposed ETP would not be traded on the CME. Thus there is reason to question whether a surveillance-sharing agreement with the CME would, in fact, assist in detecting and deterring fraudulent and manipulative misconduct affecting the price of the spot bitcoin held by the proposed ETP. The Exchange could have overcome this concern by demonstrating that there is a reasonable likelihood that a person attempting to manipulate the proposed ETP would have to trade on the CME in order to manipulate the ETP because such demonstration would help establish that the Exchange’s surveillance-sharing agreement with the CME would have the intended effect of aiding in the detection and deterrence of fraudulent and manipulative misconduct related to the spot bitcoin held by the proposed ETP. As discussed and explained above, the Commission finds that NYSE Arca has not made such demonstration.”

For Bitwise and its ETP Trust, the SEC rejected its application on similar terms:

“NYSE Arca has not provided sufficient information to establish both prongs of the ‘market of significant size’ determination, and thus the Commission cannot conclude that the CME bitcoin futures market is a ‘market of significant size’ related to spot bitcoin such that NYSE Arca would be able to rely on a surveillance-sharing agreement with the CME to provide sufficient protection against fraudulent and manipulative acts and practices. Therefore, NYSE Arca has not met its burden of demonstrating that the proposal is consistent with Exchange Act Section 6(b)(5),135 and, accordingly, the Commission must disapprove the proposal.”

What’s next

In short, a lawsuit.

Although Bitwise has yet to comment, a statement released last night by Grayscale announced its intention to sue the SEC. Grayscale CEO Michael Sonnenshein added, “… We are deeply disappointed by and vehemently disagree with the SEC’s decision to continue to deny spot Bitcoin ETFs from coming to the U.S. market.”

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More Enforcement Actions To Come For NFTs Says Upstream’s Elenowitz

NFTs and Securities

Mark Elenowitz, an entrepreneur and self-described Wall Street veteran with a resume to back it up, produced one of the few regulatory-related presentations at NFT.NYC last Thursday.

Titled “Innovation And Regulatory Challenges in Digital Securities and NFTs,” not only did Elenowitz provide guidance, but pointed out that certain holders and purveyors of NFTs today may be headed for a meeting with the Internal Revenue Service (IRS) or an enforcement action by the Securities and Exchange Commission (SEC) in the future.

The success of Elenowitz’s own business(es) appears to be partially banking on the fact that compliance is no easy task in the current, wider NFT marketplace. He just launched Upstream, a Seychelles-based MERJ exchange powered by another one of his company’s, a FINRA compliance vendor called Horizon.

Upstream seeks to offer access to “IPOs, NFTs, celebrity ventures” according to its website. For example, given the challenges around securities regulations like those in the United States and certain NFT models, his exchange recently provided the ability to “geo-fence” an offering. This solution speaks to increasing wariness of regulators in the U.S. by market participants as well as the need for an easier and less costly way to be a security token.

(Upstream Exchange blog: “Music and film using NFTs to drive the future of fan engagement”)

Notably, there was no talk about whether NFTs should be under SEC or CFTC jurisdiction. In fact, Elenowitz believes many of today’s NFT projects fall under the securities designation unless they are a collectible only or non-fungible utility.

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Not All Stablecoins Are Created Equal – Or Stable


This week’s DC Blockchain Summit from the Chamber of Digital Commerce included a timely panel discussion on stablecoins given the recent Terra Luna stablecoin implosion as well as yesterday’s testimony in front of the House Financial Services Committee by Federal Reserve Vice Chairwoman Lael Brainard.

The Chairwoman was hopeful telling lawmakers that stablecoins and a central bank digital currency (CBDC) could provide a “safe” government-backed settlement layer and “would actually facilitate and enable private sector innovation.”

Panel participants for “Stablecoins and the Future of Money” included:

Are stablecoins innovative?

Moderator Stephen Palley of law firm Anderson Kill led things off by wondering aloud whether stablecoins are truly an innovation.

Caitlin Long, Founder and CEO of Custodia Bank and a well-known, Wyoming-based cryptocurrency advocate, began by saying that they are innovative but not truly crypto. She clarified: “They are not truly crypto in the sense that anything that touches the US dollar – so I’m talking about any sort of backed version of a stablecoin – ultimately has to clear through the Federal Reserve and therefore they’re not decentralized meaning they may be issued on blockchain-like rails, but they are not decentralized. They have an issuer and anything that has an issuer by my definition isn’t decentralized. Ergo, it is quasi-crypto, but not actually crypto.”

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SEC and CFTC Commissioners Reach Out To The Industry at DC Blockchain Summit

DC Blockchain Summit

A collegial chat between regulators from the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) highlighted an impressive day-long agenda attracting 850 attendees to the DC Blockchain Summit from the Chamber of Digital Commerce in Washington, D.C. yesterday.

The Chamber’s Annemarie Tierney didn’t hesitate in her moderation role in the morning session with the blockchain industry’s two most important regulatory bodies and immediately brought to the fore the key differences in jurisdiction between the two agencies – securities vs. commodities – and under which agency do the various tokens and cryptocurrencies land. Commissioner Hester Peirce of the SEC went first and repeated the gyst of her well-known views that do not necessarily sync with the rest of the SEC commissioners and its Chairman:

“A token [that] is sold as part of securities offering does not in my mind necessarily mean that the token continues on in its entire life to have to be treated as a security. That’s one of the areas where I’d like to see us provide more clarity. It has not been our standard practice over the years to identify what are security offerings and what aren’t. It’s pretty broad rules. And we expect that when people are out there raising capital, they comply with our initial offering rules, regardless of what it is. But that’s led to the treatment of certain things – securities offerings that you might not think the underlying object to be sold is [part of the securities offering]. So that’s the distinction – I would like us to deal with it better (…)”

CFTC Commissioner Christy Goldsmith Romero weighed in next saying that she agreed with her counterpart in the SEC on the overall need for greater clarity – particularly around that which is decentralized. Beyond the jurisdictional question, in order to help her create a regulatory framework, Goldsmith Romero appealed to the audience on educating her and the CFTC on how the blockchain community innovates and also protects consumers: Continue reading “SEC and CFTC Commissioners Reach Out To The Industry at DC Blockchain Summit”