Autor Cointelegraph By Marc Powers

On March 9, United States President Joe Biden issued a quite comprehensive executive order that directs no less than two dozen cabinet members, departments and agencies in the government to study the benefits and detriments of blockchain technology for various aspects of the American economy. There has been a considerable amount already written about the implications of the executive order. I will add to this discourse and also offer some predictions, which few have done, on what the industry might expect to arise from the various governmental studies and reports over the next year.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.” President Biden issued his executive order in a surprising act of executive power. No one quite expected it to occur the way it did, with most thinking that legislative action would be proposed sometime this year. I do not recall reading anywhere that an executive order, particularly without legislative action, would be proposed. Rather, our president instantly outtrumped — pardon the poorly crafted pun — former Vice President Al Gore, who under President Bill Clinton in the 1990s became a point man in the administration’s adoption and support of the internet. By the very act of issuing the executive order, President Biden will forever be recognized as the U.S. president who materially advanced the technology and its various use cases.An overarching theme running through the executive order is the direction that various government departments and agencies coordinate, and that they do so in a relatively tight time frame by way of presenting reports. The president even ordered that each of the various governmental bodies investigate specific topics to be covered in the report. For example: “Within 180 days of the date of this order, the Secretary of the Treasury, in consultation with the Secretary of State, the Attorney General, the Secretary of Commerce, the Secretary of Homeland Security, the Director of the Office of Management and Budget, the Director of National Intelligence, and the heads of other relevant agencies, shall submit to the President a report on the future of money and payment systems, including the conditions that drive broad adoption of digital assets; the extent to which technological innovation may influence these outcomes; and the implications for the United States financial system, the modernization of and changes to payment systems, economic growth, financial inclusion, and national security.”Remarkably, we also see an official acknowledgment of concern over, and a direction that the report consider, the fact that China has been seeking to disrupt the U.S. dollar’s global dominance as the world’s reserve currency with its digital yuan projects over the past several years. The executive order requests that the report discuss ways “foreign CBDCs could displace existing currencies and alter the payment system in ways that could undermine United States financial centrality [emphasis added].” In other words, what should the U.S. be doing to protect the dollar’s reserve currency status?The president also encourages the chairman of the Board of Governors of the Federal Reserve System, Jay Powell, to continue to research and report on CBDCs and develop “a strategic plan […] that evaluates the necessary steps and requirements for the potential implementation and launch of a United States CBDC [emphasis added].” Then, in consultation with the attorney general and the secretary of the Treasury, Powell is asked to within 180 days offer “an assessment of whether legislative changes would be necessary to issue a United States CBDC.” If this does not make clear that this administration wants action in implementing an American CBDC — and in short order — then nothing will. As my friend Troy Paredes, a former SEC commissioner, observed during Inveniam’s excellent “Data 3.0 For Web 3.0” conference in Miami this month, the executive order not only recognizes the risks of digital assets but also the benefits of blockchain technology.The executive order directs certain cabinet members and agencies to study and report on relevant issues under their jurisdiction. The attorney general is to report on the role of law enforcement agencies in detecting, investigating and prosecuting criminal activity related to digital assets. The Federal Trade Commission is to consider the effects the growth of digital assets could have on competition policy, privacy interests and consumer protection measures. The Securities and Exchange Commission and Commodity Futures Trading Commission — in consultation with the Fed chair, comptroller of the currency and Federal Deposit Insurance Corporation — are encouraged to consider the extent to which investor and market protection measures within their respective jurisdictions may be used to address the risks of digital assets and “whether additional measures may be needed.” You can be sure current SEC Chair Gary Gensler will have plenty to say and recommend in this regard.The Financial Stability Oversight Council — which is comprised of various agencies, including the SEC, CFTC, CFPB and federal banking agencies — is to produce a report within 210 days “outlining the specific financial stability risks and regulatory gaps posed by various types of digital assets and providing recommendations to address such risks.” Here, too, expect the SEC to be front and center in new proposals.The final item in the executive order to mention is what the Biden administration sees as the core principles and policies that are to guide the government’s further actions. These include:“Strong steps to reduce the risks that digital assets could pose to consumers, investors, and business protections; financial stability and financial system integrity; combating and preventing crime and illicit finance; national security; the ability to exercise human rights; financial inclusion and equity; and climate change and pollution.”This hits me as sound. The executive order identifies a very thoughtful, systematic, comprehensive set of factors to inform policies that a government would or should be concerned about, and would or should like about, the use of blockchain technology, digital assets and currencies. I would not be surprised if a significant and comprehensive piece of legislation regarding blockchain, its regulation and a U.S. CBDC is proposed by the administration within the next 12 to 18 months. Even more comprehensive than SOX of 2002 ( mostly related to public companies) and Dodd-Frank legislation of  2010 (seeking to reign in excessive risk taking which led to the financial crisis) in ways it will affect the U.S. economy and our daily lives. I have less confidence that such a sweeping law will actually pass. It seems more likely that individual parts of our government will propose and adopt new rules and regulations addressing the findings and issues in the various reports they are directed to produce for the president.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.

It is unfortunate that the United States Securities and Exchange Commission has chosen to send a message to the crypto industry by extracting a huge $100 million settlement from the lending platform BlockFi in an administrative proceeding publicly announced on Feb. 14. It was quite a Valentine’s Day kiss — $50 million for the SEC and $50 million for some 32 states that piled on because they saw an easy target.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.” Don’t misunderstand: I agree with the SEC that as a part of its lending activity, BlockFi likely offered products that could be characterized as “securities” under their definition in the Securities Act of 1933 in Section 2(11). Regular Cointelegraph readers may recall me talking about a similar lending program planned by Coinbase that would likely be a “security” given that the loaned assets were all pooled together for lending purposes. The legal analysis by the SEC takes a somewhat different approach, with the lending program presented as both an “investment contract” and “note” under Section 2(11). Thus, the fact that the SEC commenced an action for that federal securities law infraction does not surprise me. What is somewhat troubling, though, is both the size of the penalty and the assertion that BlockFi operated as an unregistered investment company under the Investment Company Act of 1940.Indeed, I am not the only one disturbed by this. SEC Commissioner Hester Peirce publicly dissented by way of issuing a “Statement on Settlement with BlockFi Lending LLC” the same day the SEC proceeding commenced. In the statement, she asks: “Is the approach we are taking with crypto lending the best way to protect crypto lending customers? I do not think it is, so I respectfully dissent.”Bravo to Commissioner Peirce! For both her fearless boldness in advocating for a more reasoned regulatory approach to advancing the nascent crypto industry and for her being, at this time, the sole shining beacon the industry can count on to question the knee-jerk reactionaries in government — reactionaries that care little about whether they throw the proverbial baby out with the bathwater. The U.S. regulatory landscape There was a time when “Crypto Mom” had at least one ally on the commission who, like her, sought to protect blockchain from over-regulation. Elad Roisman, a fellow Republican appointed by former President Donald Trump, joined Peirce in advocating for reasonable regulation for the industry. But he resigned from the SEC in January, having served for little more than three years as a commissioner. Peirce was nominated to the SEC by Trump and confirmed in January 2018, so she has one more year of her five-year term. Let’s all hope she is reappointed by President Joe Biden, as once she is gone from the SEC, the actions of Chair Gary Gensler will go unchecked, and we can expect many more efforts by him to, in the name of investor protection, impose disproportionate “telephone book” settlement numbers.As I have previously written, Gensler is an aggressive government regulator, having demonstrated his tenacity in imposing regulation while at the Commodity Futures Trading Commission. His deep knowledge of blockchain and crypto, as demonstrated by having taught the subject at MIT, is both a blessing and a curse. While chair of the CFTC, he pushed through hundreds of rules and regulations to implement Dodd-Frank legislation, including regulating swaps transactions. He has spent the better part of the last 25 years in and out of the U.S. government, so he has political instincts. From his bio, it does not seem he has worked in the private sector since the mid-1990s.In the SEC press release announcing the BlockFi settlement, Gensler states: “​​It [the settlement] further demonstrates the Commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws [the Securities Act and Investment Company Act].”Really? I don’t believe or accept that for one minute. How is a $100 million penalty showing the SEC’s “willingness to work with crypto platforms”? It seems to me that this is quite a significant financial penalty.While I am not privy to how this settlement came about, I doubt very much that BlockFi, if and when it approached the SEC to discuss its compliance efforts, thought that by voluntarily coming forward and cooperating it would be hit with a $100 million settlement! Moreover, most startups are not in a position to fork over that spare change, and I think this settlement may deter them from cooperating and self-reporting.The BlockFi settlementIn this case, BlockFi allegedly offered and sold BlockFi Interest Accounts, or BIAs, through which investors could lend their crypto assets to the company in exchange for its agreement to provide variable monthly interest payments. According to the administrative “Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order,” BlockFi generated the interest paid out to investors by deploying its assets in various ways, including loaning crypto assets to institutional and corporate borrowers, lending U.S. dollars to retail investors, and investing in equities and futures. As of December 2021, BlockFi and its affiliates held about $10.4 billion in BIA investor assets and had over 500,000 BIA investors, including almost 400,000 in the United States.Maybe the SEC justifies this huge settlement amount because BlockFi consented to findings, without admitting or denying them, that it made materially false and misleading statements on its website concerning its collateral practices and, therefore, the risks associated with its lending activity. For this, the company is charged with violating the anti-fraud provisions of the Securities Act, Sections 17(a)(2) and 17(a)(3). Yet, as Peirce notes in her dissent: “There is no allegation that BlockFi failed to pay its customers the money due them or failed to return the crypto lent to it.” In other words, there was no financial harm to investors from the purported misstatements. Also, like me, she acknowledged that misrepresentations about over-collateralization are serious — it was less than 24% of the time, according to the order. But to the commissioner, “The combined $100 million penalty nevertheless seems disproportionate.”One final point on the settlement, and the dissent, is noteworthy. The order states that BlockFi has agreed to seek to register as an investment company. (I will leave whether I agree with the SEC’s analysis that the BIA program made BlockFi an “investment company” for another day.) Yet, as Peirce aptly stated, registration “is often a months-long, iterative process,” and “When crypto is at issue, the timeframe is likely to be longer.”Until the registration is effective, BlockFi has agreed to stop offering lending products to U.S. citizens. Also, there are other obstacles the SEC could bring forward to deny registration, such as the fact that BlockFi cannot register as an investment company since it issues debt securities, so an exemption from registration will likely be required. I wonder if BlockFi or its counsel actually thought through a successful path to ever again offer BIAs to U.S. citizens before it settled. According to Peirce, “The investor protection objective of today’s settlement will be poorly served if retail investors are ultimately shut out from participation in these products. Second, our process speaks volumes about our integrity as a regulator. Inviting people to come in and talk to us only to drag them through a difficult, lengthy, unproductive, and labyrinthine regulatory process casts the Commission in a bad light and thus makes us a less effective regulator. […] For the sake of the American public, our own reputation, and the companies that heed our call to come in and talk to us, we need to do better than we have so far at accommodating innovation.” Are you listening, Gensler?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.

This month, the Board of Governors of the United States Federal Reserve System issued its widely anticipated report on the nation’s possible use and adoption of digital currencies for its financial system. The document is titled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” and true to its name, the paper is transformative.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, Crypto and Regulatory Considerations.” For those who are regular readers of this column, in December, I identified the top five events in blockchain in 2021. One of those was the comments from Fed Chairman Jerome Powell on his openness to digital assets and a possible co-existence of Fed legacy money and financial systems and cryptocurrencies. He stated in public hearings that there was no current need to ban crypto and that he saw value in stablecoins, if properly regulated.I also opined in that column that the Fed’s endorsement and issuance of a central bank digital currency seemed to be forthcoming. Well, that is precisely what the report says, though there is typical hedging with disclaimers and Washington doublespeak. Given the significance of the U.S. creating and adopting its own CBDC, the paper is worth highlighting.The Federal Reserve System and a CBDCBefore getting into the paper’s content, let’s see how the Fed self-identifies: “The Federal Reserve System is the central bank of the United States. It performs five general functions to promote the effective operation of the U.S. economy and, more generally, the public interest.”Those five functions are: 1) conducting the nation’s monetary policy, 2) promoting the stability of the financial system, 3) promoting the safety and soundness of individual financial institutions, 4) fostering payment and settlement system safety and efficiency, and 5) promoting consumer protection and community development.The paper is meant to be the “first step” in a public discussion between the Fed and stakeholders about CBDCs, which it defines as a “digital liability of a central bank that is widely available to the general public.” The paper cautions that it “is not intended to advance any specific policy outcome,” but the publication of the paper itself does just that. Most often, simply raising an issue has the effect of increasing recognition and acceptance of the topic.The paper identifies three forms of money: central bank money, commercial bank money and nonbank money. Fed money has no credit and liquidity risk, bank money has some, and nonbank has the most because it is not subject to rigorous rules and supervision and cannot offer Federal Deposit Insurance Corporation insurance on deposits. Related firms like PayPal conduct balance transfers on their own books using various technologies, such as mobile apps.Central bank money is a liability of a central bank, commonly known as “fiat” or “sovereign” currency, and can exist in physical form like banknotes or as digital balances held by commercial banks at the Federal Reserve. Bank money is generally deposits commonly used by the public and can be in digital form. While there have been improvements in recent years to the traditional, or legacy, financial system — such as the digital real-time payments network and planned debut of the FedNow Service in 2023 — the paper recognizes there are still challenges. One is in the area of cross-border payments, which presently have slow settlement times, high fees and limited accessibility.Another challenge is the significant number of Americans still, in 2022, lacking access to digital banking and payment services. Over 5% of U.S. households, or over 7 million Americans, remain unbanked, even though that percentage has decreased from 8.2% over the past 10 years.Some of the explanations given by unbanked people include that they lack sufficient funds to meet the minimum deposit to open a traditional bank account, distrust banks, have privacy concerns or that bank fees are too high. All of these seem strikingly similar to the reasons given by Satoshi Nakamoto back in October 2008 for creating the Bitcoin blockchain. The Fed’s paper also states that an additional 20% of households have accounts with banks but rely on more costly financial services such as check-cashing services, payday loans and money orders. That totals an astonishing 35 million Americans either unbanked or underbanked!Given the challenges, the paper discusses the recent use of digital assets with money-like characteristics, such as cryptocurrencies and stablecoins. Significantly, it references the President’s Working Group on Financial Markets’ report released last November, which notes that “If well-designed and appropriately regulated, stablecoins could support faster, more efficient, and more inclusive payments options.” Ahem. This is something private businesses and crypto traders have known for maybe five years already! But it’s good that our government officials are at least now realizing these benefits.The paper concludes by laying out how a CBDC might fit into the U.S. money and payments landscape. It raises the design requirements for the protection of privacy, the way a CBDC might interfere with traditional methods used by the Fed to regulate the U.S. economy, its need to be accepted by and widely transferable among various intermediaries and customers, and the need to be able to identify and combat money laundering and the financing of terrorism. To me, some of the most revealing sentences in the paper, showing Powell’s hand, include the discussion in the section “Potential Benefits of a CBDC.”— “A CBDC could potentially serve as a new foundation for the payment system and a bridge between different payment services, both legacy and new.” This is something the international regulatory think tank Global Digital Finance wrote about in its paper “The Age of Public Digital Currency: A Guide to Issuance,” of which I was a contributing author.— “A U.S. CBDC would offer the general public broad access to digital money that is free from credit risk and liquidity risk.”— “Another potential benefit of a U.S.-issued CBDC could be to preserve the dominant international role of the U.S. dollar.” This is a topic and concern I wrote about in February 2021.— “Some have suggested that a CBDC could reduce common barriers to financial inclusion and could lower transaction costs, which could be particularly helpful for lower-income households.” This is certainly a worthwhile benefit and something I can see the Biden administration wanting and getting behind.A final noteworthy fact stated in the paper is the decline of cash and banknotes. Cash use has fallen from over 40% of transactions in 2012 to 19% in 2020. Given all of this, it will be interesting to see and hear more on this from the Fed and other government agencies and officials in the coming months.Marc Powers is currently an adjunct professor at Florida International University College of Law, where he is teaching “Blockchain, Crypto and Regulatory Considerations” 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.