Impossible Finance Crypto Regulations Update — 2023 Week 8
Top Stories of the Week
EC and Binance
Earlier this week, the SEC issued a Wells Notice to Paxos (issuer for the BUSD stablecoin) informing them that the SEC is planning enforcement action against Paxos. The SEC alleges that the BUSD stablecoin is an unregistered security.
What is Binance and Paxos’ response to this?
CZ took it on Twitter to assure that Paxos is a company regulated by the New York Department of Financial Services (NYDFS) and that funds are SAFU. Paxos is regularly audited and funds are redeemable. Binance will continue to support BUSD but could move away from BUSD in the future.
CZ also looking at stablecoins of other currencies. “I think given the current pressure and current stances taken by the regulators on the U.S. dollar-based stablecoins, I think that as you said the industry will probably move away to non-U.S.-dollar- based stablecoins […] as a result of this we probably will see more euro based or other Japanese yen, Singapore dollar based stablecoins, so it’s actually prompted us to look for more options in different places.”
On 13 February, Paxos announced that they will halt the minting of BUSD tokens but ensured that all BUSD minted by them are backed 1:1 and customers will be able to redeem or exchange their BUSD for USDP (Paxos Dollar). In a separate statement, Paxos said that they do not believe that BUSD is a security and “will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary.”
What’s Next?
A Wells Notice is not conclusive that litigation will follow. Paxos will have a chance to respond to the Notice through a “Wells Submission” to explain why a lawsuit shouldn’t follow.
What are the lawyoors saying?
Nathan from OndoFinance agreeing that stablecoins are securities. Maybe in self interest?
A New Qualified Custodian Rule?
On 14 Feb, it was reported that the SEC is preparing a new draft proposal which makes it more difficult for crypto companies to hold digital assets on their clients’ behalf as a “qualified custodian”. This may affect hedge funds, private equity firms and pension funds that work alongside such crypto firms.
Read Gensler’s full statement here:
Current definitions of a qualified custodian under the US Rule 206(4)-2.
TLDR of Rule 206(4)-2
What does this new proposal mean?
What industry players are saying?
What are the people saying?
- Winners and losers of the Custody Rule
- S. Brennan
- Impact of proposed custody rule on foreign financial institutions and how it will restrict the ability of US investment advisors to interact with them
- Gabriel Shapiro
- Potential unintended consequences of the new SEC custody rule
- Jake Chervinsky
To stake or not to stake?
Earlier this month, Kraken responded to the SEC’s charge by discontinuing its staking program and to pay $30million to settle the charges. The SEC’s position is that providing staking arrangements constitutes an “investment contract” and therefore a security. Paul Grewal, Coinbase’s Chief Legal Officer makes the argument that merely serving as an intermediary does not render the underlying economic relationship an “investment contract.” There is a distinction between staking and lending. Lending invokes the entrepreneurial and managerial skill (or lack thereof) of the people to whom you lend. This is a distinctly human enterprise. One does not necessarily know what the borrower is doing with the money; one simply hopes to get it back with a return. This counterparty risk is in part what the securities laws are intended to address. There is nothing to suggest that Coinbase or Kraken’s services use entrepreneurial or managerial ability.
The SEC’s point of view was that: “Kraken knew how to register, others know how to register. It’s just a form on our website. They can come in, talk to our talented people on disclosure review teams. And if they want to offer staking, we’re neutral. Come in and register, because investors need that disclosure.” Lawyers were not satisfied with this reasoning.
Gabriel Shapiro also highlighted how protocols and projects who tried to “register their crypto” with the SEC have historically failed.
So what now?
It is important to note that settlements do not equal to law.
The issue of this ban on staking is the potential effects on decentralised staking services. The SEC emphasized that the Kraken staking program was a custodial, pooling of investor assets together which was what makes it a security. Liquid staking derivatives (LSD) protocols has similar mechanics whereby assets are pooled together. J.W. Verret, an associate professor at the George Mason Law School commented that some aspects of Kraken’s staking rewards program increased the risk of it being deemed a security, particularly some of the advertising communications. Gensler also highlighted that Kraken was advertising big returns, up to 21%.
In this regulatory landscape, it is hard to predict whether or not decentralised LSD protocols will be subject to the SEC’s enforcement actions. However, standing at the forefront of the SEC’s regulatory fire would be US based centralised entities providing staking services: Coinbase. Coinbase takes a clear stance that staking services are not securities and “will happily defend this in court if needed.”
SEC sues Do Kwon and TFL for fraud
TLDR of the SEC’s case
Why is this bad for the crypto industry?
Global Regulatory Updates, Legislation and Policy
12/02/2023
15/02/2023
- Crypto regulation decided by Congress, not the SEC: Blockchain Association
- Sen. Warren vows reintroduction of AML bill that extends to DAOs and DeFi
- South Korea to examine crypto staking services following the Kraken case
- EC launches blockchain regulatory sandbox for 20 projects annually through 2026
16/02/2023
17/02/2023
- Oman to establish regulatory framework for virtual assets
- HK’s new licensing regime for VASPS does not mean that crypto is going “fully legal” in the city
- SEC chair issues warning to celebrities promoting crypto amid latest enforcement action
Twitter Threads
- Why Sen. Warren’s crypto bill is unworkable and unconstitutional
- Regulatory Development thread from Degen Lawyer
- State of crypto policy- 15/02/2023
In the Courtroom
- Blockchain Association files amicus brief in Wahi case, says SEC exceeded authority
- Celsius bankruptcy judge authorizes the sale of $7.4M worth of Bitmain coupons
- Mango Markets exploiter seeks to keep disputed funds paid as ‘bug bounty’
Adoption
- Crypto Payments Firm Wirex and Visa Expand Partnership to 40 Countries
- European Union discusses using zero-knowledge proofs for digital IDs
- UK guide on how to practically issue blockchain securities under English Law
FTX Related News
14/02/2023
15/02/2023
- Sequoia Capital, Paradigm among VCs facing ‘tricky’ FTX investor lawsuit
- SBF and FTX fraud ‘aided and abetted’ by Silvergate Bank, alleges lawsuit
- FTX bankruptcy judge denies US trustee’s motion to appoint independent examiner
- Judge allows release of identities of guarantors behind Sam Bankman-Fried’s bail
16/02/2023
- SBF’s Bail Conditions
- Federal judge hints at denying Sam Bankman-Fried any internet access as condition of bail: Report
17/02/2023
- FTX’s Bankman-Fried could ‘conceivably’ have bail revoked, says judge
- Former FTX exec will plead guilty to federal charges with a deal: Report
FTX Threads
Listen
Others
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