Who regulates crypto in the U.S.? It’s complicated.

#Web3Weekly: Feb. 12–18, 2023

“Crazy Quilt” by Peter A. McKay × DALL·E

This post is adapted from the latest edition of my newsletter #Web3Weekly. If you would like to receive it in your inbox every Sunday, subscribe here.

There’s no shortage of speculation about the future of U.S. crypto regulation lately. But I think the ultimate answer is hiding in plain sight.

It’s the status quo. WYSIWYG, folks. This is all there is, at least for the time being: A patchwork of state and federal agencies “creatively” applying existing laws to crypto that were mostly written decades before Satoshi published the Bitcoin whitepaper in 2008. They’re throwing a bunch of cases against the wall and seeing what sticks in court.

Here’s what we don’t have and probably won’t get anytime soon: A comprehensive, modern framework passed by Congress that gives the industry true clarity at the federal level about what’s allowed, what isn’t, who’s really got jurisdiction, and how to comply.

The most obvious obstacle in Congress is many members’ general lack of familiarity with blockchain technology. But the underrated one, in my opinion, is the body’s general paralysis on everything. Crypto is not some magical exception to this.

It’s now considered a major cliffhanger whether Congress can even pass a bill to maintain the full credit of the United States, or an annual budget to keep federal agencies open and running properly.

You think this same set of people will pass a comprehensive crypto bill anytime soon? Good luck.

I know that’s an unsatisfying scenario for most people to hear. But I think the week’s headlines bear it out loudly:

• New York state regulators ordered Paxos to stop minting the stablecoin Binance USD, citing concerns about the reserves backing the token. Paxos told customers it will continue to redeem their BUSD tokens for $1 each through at least February 2024, and that it is cutting ties to Binance, the exchange it partnered with on BUSD. The token is currently the eighth-largest in the world by market valuation, at $13.6 billion, according to CoinMarketCap.
• The Securities and Exchange Commission charged Terraform Labs CEO Do Kwon with fraud in connection with the meltdown of its Luna and TerraUSD tokens last year. The SEC says Kwon moved 10,000 bitcoin out of Terra into an offline wallet and cashed some of them out via a Swiss bank ahead of the fiasco. Kwon’s whereabouts have been unknown since last fall, when Interpol issued a “red notice” for his capture at the request of South Korean authorities.
• The SEC’s complaint also asserts that TerraUSD was an investment contract because users could earn yield on it through the platform Anchor. Combined with the SEC’s recent settlement with Kraken regarding yield-generating accounts, this appears to be a new line of legal inquiry for the SEC that could become a big headache for the broader crypto industry, Forbes reports.
• The chairman of the U.S. House subcommittee on digital assets told CoinDesk that legislation to regulate stablecoins is a big priority for the group in the current congressional session.
• Some relevant context: Bitcoin and Ethereum, which aren’t stablecoins, currently constitute a combined 60% of global crypto market valuation. So the sort of legislation mentioned above, by definition, won’t cover most of the industry, even if it could pass the full Congress and get signed into law. So that brings us right back to what I said earlier about a patchwork…
• Basketball Hall of Famer Paul Pierce agreed to pay a $1.4 million fine to settle an SEC complaint that he didn’t disclose publicly that he was paid to promote EthereumMax. The fine is similar to one paid by Kim Kardashian last year, in a case clearly meant by the SEC to send a message to other celebrity endorsers.
• The judge in Sam Bankman-Fried’s criminal case warned he might revoke the FTX founder’s bail if he continues to use an encrypted virtual private network or contact former exchange employees. Prosecutors complained about Bankman-Fried doing both those things on Super Bowl Sunday. His lawyers argued he was just chatting about the game with former colleagues.
• Wyoming lawmakers passed a bill that prohibits forced disclosure of private keys.
• CoinDesk’s Marc Hochstein suggests it might make sense to have a U.S. law separating crypto custody from exchange. The structure would be similar to how commercial and investment banking used to be separated on Wall Street under the Glass-Steagall Act. Hmmm…
• Off-topic but notable: Apple has a movie about Tetris in the works.

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Best wishes for a healthy and productive week ahead.