Autor Cointelegraph By Marc Powers

This column’s goal has never been to provide investment advice on cryptocurrencies or other digital assets, nor has it been to provide individualized legal advice. It has mostly been about my desire to freely set forth in writing my thoughts on the state of the crypto market and the legal affairs surrounding it.Powers On… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches a course on “Blockchain & the Law.” So let me state the obvious: It has been a particularly bad past two months in cryptoland. Both in activities relating to digital assets and crypto prices. However there are silver linings to consider. And when considered, perhaps readers will gain a greater perspective and not act in a reactionary way with their digital assets or blockchain business. It has been a particularly bad past two months in cryptoland. However there are silver linings to consider. As I have alluded to in prior columns, I believe Bitcoin, Ether and other cryptocurrencies are here to stay. No one country, or group of countries or regulators, can stop their use and development — nor can a series of failures or freezing of assets by a stablecoin issuer, other large crypto lenders like Celsius, or crypto hedge funds such as Three Arrow Capital which filed bankruptcy proceedings here in the United States last Friday. I also believe, like many blockchain and crypto experts including Dan Morehead at Pantera Capital, that over time, the prices for many of these cryptocurrencies, which are backed by solid blockchains or blockchain businesses, will recover and go higher.First, there was the complete collapse of the stablecoin TerraUSD — now known as TerraUSD Classic following a rebranding — in early May. When I reported on this in my last column, I cautioned that crypto investors needed to better understand their stablecoin investments’ lack of protection, both in their failure to be tied and backed exclusively or even partially by a reserve currency like the U.S. dollar and by the lack of clear, guaranteed redemption rights in one’s ability to convert the stablecoin to dollars. In addition, there was no government backstop for when the issuer of a stablecoin failed, such as SIPC insurance provided for securities at traditional SEC-registered brokerage firms and FDIC insurance at traditional OCC-licensed banks.I also made the point in my column’s takeaways from the debacle that investors should not take comfort in other stablecoin issuers with BitLicenses from New York state. That license does not create federal SIPC or FDIC protection for investors in stablecoins issued by the likes of Circle, with USDC, and Tether, with USDT. Moreover, nothing required them to provide redemption rights or be fully collateralized by the dollar.The response from Congress and regulatorsSo, what happened within two weeks of my column? A very welcome development. Indeed, it seems that New York State Department of Financial Services Superintendent Adrienne Harris read my concerns and those of others. On June 8, Harris announced new regulatory guidance for BitLicense holders regarding stablecoins. In relevant part, the new regulations require all stablecoin issuers to have their coin “fully backed” by a reserve of assets, which are limited to U.S. government instruments and bank deposits. Equally important, investors must have clear redemption rights into U.S. dollars. Finally, the reserve assets must be segregated from the other proprietary assets of the issuing entity and not commingled with its operational capital.The New York guidance came a day after another significant event for crypto. On June 7, United States Senators Cynthia Lummis and Kirsten Gillibrand introduced new legislation, the Responsible Financial Innovation Act. This is important in its bipartisanship and the breadth of areas covered involving digital assets. Of particular significance is a provision providing primary regulatory oversight to the Commodity Futures Trading Commission, not the Securities and Exchange Commission, and the effort to provide legal clarity around the Howey test. This is done by defining certain assets that would be deemed “ancillary assets” and reducing their reporting obligations to twice per year. Given the importance of this proposed legislation, I likely will devote another full column to it and its implications. Suffice to say for now, it is an encouraging, thoughtful piece of legislation for the nascent industry that protects it and investors without overbearing regulation and costly requirements.Finally, it is worth emphasizing a May 3 announcement from the SEC. On that day, Chairman Gary Gensler announced that the SEC would double the size of its newly renamed Crypto Assets and Cyber Unit to 50 staff members. The release notes that the unit was created back in 2017 and has brought over 80 enforcement actions, obtaining monetary relief of over $2 billion. To me this was a clear “land grab” effort by Gensler to assert wide-ranging jurisdiction for the SEC — perhaps aware that the soon-to-be-announced Lummis–Gillibrand legislation would make the CFTC the primary crypto regulator. The release stated that the focus of the unit would be on investigating possible securities law violations related to crypto offerings, crypto exchanges, crypto lending and staking providers, DeFi platforms, NFTs and stablecoins. It seems like that covers pretty much the entire space for blockchain financial uses, no?What these moves actually meanAs I wrote back in early 2021 when he was initially nominated to be SEC chair, Gensler in my view is ambitious — overly so — and could be dangerous for the industry, as he is focusing on enforcement efforts by the SEC rather than ways to assist the industry in its healthy growth. Even Commissioner Hester Peirce was displeased by this expansion of enforcement staff at the SEC. On the same day as the announcement, she tweeted:The SEC is a regulatory agency with an enforcement division, not an enforcement agency. Why are we leading with enforcement in crypto?— Hester Peirce (@HesterPeirce) May 3, 2022Well said, Crypto Mom!I believe Gensler is, over time, further and further revealing himself to be in the mode of former SEC Chair Mary Jo White, a former criminal prosecutor, rather than a civil regulator. This is not a good thing, in my humble opinion. It’s not good for blockchain. It’s not good for innovation in technology. It’s not good for more efficient, less costly financial services. It’s not good for financial inclusion for all. And it’s not good for those citizens in parts of the world where their governments are corrupt, repressive or irresponsible and they need to protect the value and ownership of their assets and wealth without government interference or involvement.Marc Powers is currently an adjunct professor at Florida International University College of Law, where he is teaching “Blockchain & the Law” and “Fintech Law.” He recently retired from practicing at an Am Law 100 law firm, where he built both its national securities litigation and regulatory enforcement practice team and its hedge fund industry practice. Marc started his legal career in the SEC’s Enforcement Division. During his 40 years in law, he was involved in representations including the Bernie Madoff Ponzi scheme, a recent presidential pardon and the Martha Stewart insider trading trial.The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph nor Florida International University College of Law or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.

Stablecoins provide a false sense of security. They give the impression to the uninitiated and/or uncaring that a particular coin is pegged to the U.S. dollar, or an equivalent of the dollar in terms of value and stability, and that if you want to convert your stablecoin to dollars, you can do so easily and instantaneously. Yet, they do no such thing, as demonstrated by the recent collapse of Terra and its TerraUSD stablecoin and LUNA token and also made clear in September 2008 by the collapse of the Reserve Primary Fund money market fund during the height of the global financial crisis.Powers On… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches a course on “Blockchain & the Law.” So, I now unequivocally state what is obvious: If you are an owner of or investor in any cryptocurrencies, you need to understand this lack of protection and safeguard the portion of your wealth held in digital assets. You can protect these assets by keeping them in cold digital wallets, on exchanges registered with the United States Securities and Exchange Commission, or with another entity regulated by the SEC, CFTC or Treasury. Even entities and exchanges with BitLicenses, such as Coinbase and Gemini, may not provide sufficient protection. As I write this column, UST has a value of about $0.07. One month ago, it was one of the top 10 cryptocurrencies by market cap and maintained a steady value of $1. It was perceived as a reliable, “safe” cryptocurrency for trading activities, where transaction risks were eliminated and liquidity was provided to the trading parties, both for trading occurring on centralized exchanges and decentralized platforms. Not anymore.Although some may disagree, cryptocurrencies are speculative in both value and utility. Their prices are volatile, and they are best understood when considered a nascent alternative economic, capital markets and financial system — backed by a new technology that is still being developed and tested in innumerable ways. Crypto is tested by criminals wanting to hack vulnerable blockchains for illegal gains, studied by governments seeking to regulate or ban its use, and continually worked on by developers seeking to improve its public-source codes. Hence, it falls within the class of “alternative assets.”Those involved with investment management and analysis have been led to believe that stablecoins are a viable solution to avoiding the risks associated with cryptocurrencies — no differently than the SEC-registered Reserve Primary Fund touted its money market fund, with over $60 billion in assets at its peak, as a safe haven to park money and earn interest. The Reserve Primary Fund, and most of the other money market funds in the early 2000s, promoted themselves as an alternative to keeping cash in bank deposit accounts and a way to earn better interest rates than banks were providing. Its share price was supposed to always maintain a $1 net asset value (the measure by which mutual funds are publicly traded) because it was supposedly backed one-to-one in U.S. bonds, which are guaranteed by the full faith and credit of the U.S. Treasury. Yet amid the financial crisis, on Sept. 16, 2008 — the day after the venerable investment firm Lehman Brothers filed for bankruptcy — the Reserve Primary Fund “broke the buck.” Its NAV fell to as low as $0.97 from its $1 peg.Why? Well, for reasons parallel to the UST collapse. As it turns out, a portion of the Reserve Primary Fund was not invested in U.S.-backed bonds and treasuries but instead in commercial paper issued by corporations, not the government. This was done to boost the money market’s return — to offer a higher competitive interest rate to investors willing to park their money in the fund rather than a traditional bank. However, this approach had two fundamental problems, as Reserve Primary Fund investors would learn. At that point in time, money market funds were neither insured and protected by the Federal Deposit Insurance Corporation like bank accounts nor covered for losses by the Securities Investor Protection Corporation like stocks held in brokerage accounts.Second, as previously noted, over half the fund’s portfolio was invested in commercial paper rather than U.S.-backed securities. When Lehman Brothers filed for bankruptcy, investors became concerned that money market mutual funds held Lehman Brothers’ commercial paper. So, the next day, a run on those funds began. And although the Reserve Primary Fund reportedly held less than 1.5% in Lehman Brothers paper, the NAV fell below $1. Ultimately, the fund was closed and liquidated, but not before the U.S. government stepped in with two forms of legislation: the Temporary Liquidity Guarantee Program and the Debt Guarantee Program. Both combined protected investor money in mutual funds and guaranteed short-term debt issued by participating banks. (These programs and protections ended in 2012.)With TerraUSD, Terraform Labs created a so-called algorithmic stablecoin — one not backed by assets like cash or U.S. government bonds but instead relying upon trading and treasury management to maintain the value of the NAV at $1. This reportedly included collateralizing UST, in part, with Bitcoin. However, the actual assets backing UST were apparently less than its market capitalization by severalfold. So, when there was a run on UST, the whole thing collapsed.Now, other stablecoin issuers, like Circle with USD Coin and Tether with USDT, will say this cannot happen to their coins. The problem was because UST was an undercapitalized, algorithmic stablecoin, while they are backed one-to-one by dollars and U.S. government securities. But that is not entirely true. An investigation of Tether by the New York State Office of the Attorney General revealed that a good amount of the collateral was not dollars but loans or commercial paper.This is the same sort of collateral that took down the Reserve Primary Fund in 2008 in a run. It is also true that neither Circle’s nor Tether’s stablecoins are protected against investor loss by a government-backed agency like SIPC or FDIC. So, what are some takeaways from the UST/LUNA “break the buck” price collapse?What happened to UST/LUNA is neither new nor unique. It happened before with the Reserve Primary Fund in 2008 in spectacular fashion and with much hand-wringing at the time. And just as investors in the Terraform Labs stablecoin product were not insured by any government assistance, the same was true for the Reserve Primary Fund’s money market.There will likely be several U.S. government investigations into and/or hearings around this recent debacle. For those opposing crypto, there will likely be calls to regulate the entire nascent blockchain industry to protect investors. Yet it is important to remember that the Reserve Primary Fund was regulated by the SEC as a mutual fund. That fact did not prevent the run on the fund. So, knee-jerk over-regulation is not a panacea.Yes, there should be some regulation of and a regulator for stablecoins and their issuers — if not the SEC or CFTC, then perhaps the Treasury. The role these coins currently play for capital markets and financial transactions in the crypto ecosystem is enormous and important. Investors should feel that when they use a stablecoin, it is properly and fully collateralized and that they have clear, unequivocal redemption rights to the collateral if requested.Terraform Labs and its founder, Do Kwon, will face both criminal and civil investigations and proceedings stemming from the UST/LUNA collapse. Kwon will likely end up before criminal prosecutors both in South Korea, where he is located, and in the United States. There will be class actions filed. It will not be pretty, and the cases will drag on for years. Last fall, the SEC began investigations into another Terraform Labs project, Mirror Protocol. In February 2022, a judge in the Southern District of New York held that Terraform Labs and Kwon had to comply with the SEC’s investigative subpoenas in that matter. Now, with UST/LUNA, things will get much, much worse for both.It was reported a few days after the UST/LUNA run that Coinbase added a risk disclosure in its filings. The centralized exchange noted that its customers could be considered “unsecured creditors” in the event of its bankruptcy. This puts front and center what I wrote about last year: Coinbase and Gemini are not registered with the SEC as an exchange — they are only licensed under New York state’s BitLicense regime. The significance is manifold. Most importantly, it means that customer accounts are not protected by SIPC for up to $500,000 in cash and securities and that neither exchange is subject to the SEC’s segregation rules for customer assets and funds.What this all means is that you, and only you, are responsible for protecting your crypto assets and wealth. So, be careful and thoughtful where you choose to hold digital assets and when deciding whether it is wise to hold significant value in stablecoins.Marc Powers is currently an adjunct professor at Florida International University College of Law, where he is teaching “Blockchain & the Law” and “Fintech Law.” He recently retired from practicing at an Am Law 100 law firm, where he built both its national securities litigation and regulatory enforcement practice team and its hedge fund industry practice. Marc started his legal career in the SEC’s Enforcement Division. During his 40 years in law, he was involved in representations including the Bernie Madoff Ponzi scheme, a recent presidential pardon and the Martha Stewart insider trading trial.The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph nor Florida International University College of Law or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.

In life, there are times when things are going well in your business affairs but not your personal ones. Other times, the things you are doing and enjoying in your personal life are great but your professional or business matters are suffering. Sometimes, you also don’t realize or understand that the good times you are experiencing will not last forever and may soon end. So, I have always tried to recognize when things are going well, savor and mark the moment, and thank my lucky stars for it. The first week of April was such a time.Powers On… is a monthly opinion column from Marc Powers, who spent much of his 40-year legal career working with complex securities-related cases in the United States after a stint with the SEC. He is now an adjunct professor at Florida International University College of Law, where he teaches a course on “Blockchain & the Law.” For those who personally know me or are regular readers of my monthly column, you know I am a securities lawyer who had the privilege of representing clients on some amazing matters, a number of which were high profile. I started my legal career 40 years ago at the United States Securities and Exchange Commission in its Enforcement Division. For the final 20 years of my law firm career, I was a partner at two AMLAW 50 law firms, BakerHostetler and Reed Smith. I moved from Reed Smith to BakerHostetler in 2004 to build and lead a national securities litigation and SEC defense practice. I led that new practice team for over 13 years, and I also built BakerHostetler’s hedge fund industry practice beginning in 2012. In 2017, I turned my professional and personal focus to the exciting world of blockchain and crypto.Since retiring from law firm practice in December 2020, I haven’t once looked back at my decision to shift my focus toward contributing ideas and leadership to the laws, regulations and other considerations needed to promote the sentiments of altruism and decentralization that Bitcoin and blockchain allow or encourage. Some of the ways I seek to have an impact include writing this monthly column, accepting a position as an adjunct professor of law to teach law students about blockchain, and being an early and active member of Global Digital Finance — an international association of blockchain-based businesses, lawyers and former regulators who regularly meet with government officials worldwide in an effort to standardize global protocols and regulations for blockchain and its financial applications.SEC Commissioner Peirce’s Q&A with students at FIUGiven my background, I experienced one of the highlights of my career when I had the honor and pleasure of hosting SEC Commissioner Hester Peirce, affectionately known as “Crypto Mom,” in the “Blockchain & the Law” class I created and teach at the College of Law at Florida International University in Miami. The commissioner was kind enough to accept my invitation to a fireside chat with me, attended by FIU faculty and students and followed by a Q&A with my law school students.It was quite a memorable hour, with wide-ranging topics of conversation. Commissioner Peirce was quite open with us in describing her career path to the SEC, acknowledging that early in her legal career, she had no plan to focus on securities laws or regulation. But while serving as the senior counsel to Senator Richard Shelby — formerly the ranking member of the Senate Committee on Banking, Housing and Urban Affairs — she began formulating ideas about the effects of regulation and how the intended effects of legislation do not always turn out as planned. She crystallized these ideas in her 2012 book, Dodd-Frank: What It Does and Why It’s Flawed.When asked about her December 2021 public statement with former Commissioner Elad Roisman criticizing SEC Chair Gary Gensler’s proposed agenda to not focus much attention on regulation changes for blockchain technology advancement, Commissioner Peirce was unwilling to criticize his current SEC agenda. Instead, she acknowledged that the SEC has vast areas of jurisdiction, some of which Gensler has chosen to emphasize over blockchain. If Peirce were the SEC’s chair, her priorities would include updating custody, bookkeeping, settlement and clearing operations at financial institutions with new technological improvements that can now accommodate digital assets. She would also focus hearings and proposals on the powers Congress has given the SEC to exempt certain aspects of federal securities laws for digital assets and transactions from compliance, including registration and disclosure requirements.One of the more interesting, but not surprising, comments by the commissioner was related to crypto exchange-traded funds. On this, she said it was indefensible for the SEC to allow a futures-based ETF but not a spot ETF. Unfortunately, she is alone in that belief, given the current composition of the commission. But the good news is that she confirmed during our chat that she intends to fully serve out her current five-year term, which ends July 2025. So, we have her as a clear advocate at the SEC for three more years.Hall of Fame alumni and Bitcoin 2022 conferenceThe interview with Commissioner Peirce occurred in Miami during my class on Monday, April 4. From there, I flew to NYC to attend a gala hosted by my law school alma mater in celebration of its 50th anniversary and the inaugural group of Hall of Fame alumni. That occurred on Tuesday evening, April 5, at the Whitney Museum in the city’s Meatpacking District. It was a magical evening, as I was one of the 75 HOF honorees at Hofstra Law School which I affectionately call “the other H” law school. Given that the school has probably graduated over 15,000 students throughout its history, it was an unexpected, humbling honor. It was an incredibly happy moment to have my immediate family — my siblings and 91-year-old father — and some of my former partners from BakerHostetler there to celebrate this occasion with me. I felt proud and content with my choices in life.The rest of the week was no less memorable, as I attended the Bitcoin 2022 conference back in Miami with 25,000 other attendees. One keynote speaker I very much enjoyed was Peter Thiel. I like and admire people like him who are willing to speak their minds. As has been widely reported, he called out Jamie Dimon of JPMorgan, Warren Buffett of Berkshire Hathaway and Larry Fink of BlackRock as regressive thinkers when it comes to Bitcoin. But what I particularly enjoyed was his diss of the environmental, social and governance movement, calling it out as a cabal that demands groupthink and, in effect, breeds intolerance for anything or anyone that does not conform to the “righteous” thoughts and ambitions of the movement. He called the movement a “hate factory” that loves to “cancel” its detractors and suggested that when one considers ESG, they should think of the Chinese Communist Party. Thiel also described BTC as the “canary in the coal mine,” as it was the first asset to anticipate inflation. While the dollar has devalued due to inflation over these past 18 months, Thiel noted that BTC increased tenfold in price, from $5,000–$6,000 to $60,000.For those in the audience considering investing in BTC, the “Billionaires Club” panel offered some good advice: You don’t need to have up to 40% or even 100% of your investable assets in BTC to get started and make profits, just buy some amount and hold. Stop worrying about daily, weekly or even monthly price fluctuations. BTC as an asset was compared to buying a home. You only follow the price increases of your house maybe every five or 10 years. Instead, you focus on price only after many years and when you’re ready to sell. Another interesting panel discussed the efforts of El Salvador to encourage its citizens to adopt BTC, which is now a national currency. Panelist Eric Gravengaard stated that the president and legislature’s groundbreaking decision has already had positive impacts on the economy and welfare of the small Central American country. The yearly GDP growth had reportedly been 2% but has now been projected to be 10%. Since the formal adoption of BTC last September, there have been over 1 million transactions processed to date. Also, the discussion noted that some of the criticism around the slow pace of adoption has been unwarranted. Panelist Justin Newton reminded the audience that El Salvador is a developing country where about 75% of the population had never been through a KYC process before (which is required to obtain a wallet) because they never had bank accounts before.Other interesting comments by conference speakers included those from Cathie Wood, a well-known ETF manager heavily focused on technology and innovation. Wood saw the “politics around Bitcoin” changing radically in a more positive way. Michael Saylor of MicroStrategy stated that he saw President Joe Biden’s March executive order regarding blockchain as “giving the green light to Bitcoin,” which Saylor now describes as a “risk-off” investment. I agree.Overall, it was a pretty incredible week for me — one I will not forget any time soon.Marc Powers is currently an adjunct professor at Florida International University College of Law, where he is teaching “Blockchain & the Law” and “Fintech Law.” He recently retired from practicing at an Am Law 100 law firm, where he built both its national securities litigation and regulatory enforcement practice team and its hedge fund industry practice. Marc started his legal career in the SEC’s Enforcement Division. During his 40 years in law, he was involved in representations including the Bernie Madoff Ponzi scheme, a recent presidential pardon and the Martha Stewart insider trading trial.The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph nor Florida International University College of Law or its affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice.