Značka: Opinion

Powers On… Summer musings after two particularly bad months in cryptoland

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.

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Are expiring copyrights the next goldmine for NFTs?

Although non-fungible tokens (NFTs) are most commonly known in the form of digital art, they exist in many other forms and represent much more than just art. In the creative industry, NFTs have been used by musicians such as Kings of Leon to release their latest album. In the sports industry, NFTs are created to record the highlights of major sporting events such as the NBA. In the consumer product industry, Nike, Gucci and many others are selling their digital branded products in the form of NFTs. A lot more real-world applications of NFTs are still to be explored and one of them is the digital publishing industry. The game-changing implications of publishing and promoting books with NFTs have already been discussed extensively by many. For example, the Alliance of Independent Authors are helping indie authors to promote their latest books using NFTs. Other associated items for the fans club such as character cards are also made into NFTs. Tezos Farmation, a project built on Tezos network, even uses the complete text of George Orwell’s Animal Farm book and slices it up into 10,000 pieces to use as titles for the NFTs. NFTs created from existing books are normally bound to copyrights. However, in the case of Tezos Farmation, the copyright had already expired. The text from the book can be used by any party for free. This triggers a very interesting question – how can NFTs preserve copyrights and royalties for books with expired copyrights? The NFT application in the publishing industry is so far mostly focused on books that still have royalties and within their copyrights lifespan. But there are authors whose work lives on long past both their mortal existence and that of their copyrights; can NFTs provide their estates a means to extend the life of the book and its royalties?The journey from copyright to public domainCopyright laws are complex and vary widely throughout the world. Although few countries offer no copyright protection in line with international conventions, most jurisdictions work on the premise that copyright is protected for the author’s life plus a minimum of 25 years after their death. In the European Union, copyright is protected for 70 years after the death of the latest living author. It is the same in the U.S, with the exception that books originally published between 1927 and 1978 are protected for 95 years after the first publication. No matter how long the copyrights are protected for, given enough time, anything will end up free in the public domain.When celebrated literature enters the public domain the future value of the work is essentially reduced to zero. However, there often remains a disconnected community who intrinsically value the work. Estates holding copyrights that are about to fall into the public domain have a unique opportunity to create a tangible asset in the form of NFTs from the intangible goodwill embedded in the disconnected community.A good example would be Winnie-the-Pooh, a fictional anthropomorphic teddy bear created by English author A. A. Milne and English illustrator E. H. Shepard is loved by fans all over the world. The first collection of stories about the character was created in 1926. After almost 96 years, the copyrights had expired and the book moved into the public domain on Jan 1, 2022. The estate holding the copyright will receive no future value from Winnie-the-Pooh even though the commercial value of such a world-wide famous cartoon character will remain high for a long time.Just prior to the copyright expiring, the controlling estate has the window of opportunity where no one else is legally entitled to do anything with the works. If the estate had spent time connecting fans with an interest in NFTs, building or collaborating with a project that resonates with them, and launching the NFT collection prior to the completion of the copyright period, the outcome would have been very different. There could have been a much longer copyright lifespan for Winne-the-Pooh.Related: Experts explain how music NFTs will enhance the connection between creators and fansExtending the value of an expiring copyright Currently, publishing houses have no incentives to collaborate with the estate of copyright holders that are about to enter the public domain because the work will soon be free. A certificate of authenticity represented by a tradable NFT might provide an incentive for such collaborations. After the copyright expires and the work goes into the public domain, the NFTs will carry the royalty further into the digital world. Royalties can be generated through sales in the NFT marketplace on the blockchain, or through even more complex smart contracts created for specific use cases for first edition, limited edition or signed vintage copies. The estates holding expiring copyrights have credibility, which is a precious asset in the NFT world, and they have nothing to lose. They are in the box seat to capitalize on their current ownership, and potential for a digital community. Beloved characters and the worlds they inhabit can be a solid foundation for not only NFTs that can extend copyrights, but also extended creativity across mediums like literature, gaming, Metaverse, charity, education and many more to come.The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.

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Is there a way for the crypto sector to avoid Bitcoin’s halving-related bear markets?

There is good reason to be afraid. Previous down markets have seen declines in excess of 80%. While tightfisted hodling might hold wisdom among many Bitcoin (BTC) maximalists, speculators in altcoins know that diamond handing can mean near (or total) annihilation. Regardless of one’s investment philosophy, in risk-off environments, participation flees the space with haste. The purest among us might see a silver lining as the devastation clears the forest floor of weeds, leaving room for the strongest projects to flourish. Though, doubtlessly, there are many saplings lost who would grow to great heights themselves if they had a chance. Investment and interest in the digital asset space are water and sunlight to the fertile ground of ideas and entrepreneurship. Less severe declines better serve the market; better a garden than a desert.A brief history of crypto bear marketsIn order to solve a problem, we must first understand its catalyst. Bitcoin and the wider digital asset space have survived a number of bear markets since its inception. By some accounts, depending on one’s definition, we are currently in number five.The five Bitcoin bear markets. Source: TradingViewThe first half of 2012 was fraught with regulatory uncertainty culminating in the closure of TradeHill, the second-largest Bitcoin exchange. This was followed by the hacks of both Bitcoinica and Linode, resulting in tens of thousands of Bitcoin lost and dropping the market by some 40%.¹ But, the price rebounded, albeit briefly, finding new heights above $16 until further hacks, regulatory fears and defaults from the Bitcoin Savings and Trust Ponzi Scheme collapsed the price yet again, down 37%.¹ The enthusiasm for the new digital currency did not stay long suppressed, as BTC rose again to find equilibrium at around $120 for the better part of the next year before rocketing to over $1,100 in the last quarter of 2013. And, just as dramatically, the seizure of the Silk Road by the DEA, China’s Central Bank ban and the scandal around the Mt. Gox closure sank the market into a viciously protracted retracement of 415 days. This phase lasted until early 2015, and the price withered to a mere 17% of the previous market highs.¹From there, growth was steady until the middle of 2017, when enthusiasm and market mania launched Bitcoin price into the stratos, peaking in December at nearly $20,000. Eager profit-taking, further hacks and rumors of countries banning the asset, again, crashed the market and BTC languished in the doldrums for over a year. 2019 brought a promising escalation to nearly $14,000 and ranged largely above $10,000 until pandemic fears dropped BTC below $4,000 in March 2020. It was a staggering 1,089 days — nearly three full years — before the crypto market regained its 2017 high.² But, then, as many in the space have memed, the money printer went “brrrrrr.” Global expansionist monetary policy and fears of fiat inflation fed an unprecedented rise in asset values. Bitcoin and the greater crypto market found new heights, topping out at nearly $69,000 per BTC and over $3 trillion in the total asset class market capitalization in late 2021.²The total crypto market cap decline. Source: TradingViewAs of June 20, the pandemic liquidity has dried up. Central banks are hiking rates in response to worrying inflation numbers, and the greater crypto market carries a total investment of a relatively meager $845 billion.² More worrying still, the trend indicates deeper and longer crypto winters, not shorter, befitting a more mature market. Doubtless, this is primarily caused by the inclusion of and speculative mania around the high-risk start-ups that comprise some 50% to 60% of the total digital market cap.² However, altcoins are not entirely to blame. The 2018 crash saw the Bitcoin price drop 65%.⁴ Growth and adoption of crypto’s apex asset have raised regulatory alarms in many countries and questions about the very sovereignty of national currencies have followed. How to mitigate risk in the market?So, it is risk, of course, that drives this undue downward volatility. And, we are in a risk-off environment. Thus, our young and fragile garden wilts first among the deeper-rooted asset classes of convention.Portfolio managers are acutely aware of this and are required to balance a sliver of crypto investment with a larger slice of safe-haven assets. Retail investors and professionals alike often drop their bags entirely at the first sign of a bear, returning to conventional markets or to cash. This reactionary strategy is seen as a necessary evil, often at the expense of incurring short-term capital gains tax, and at risk of missing significant unpredictable reversals, which is preferred to the devastating and protracted declines of crypto winter.Must it be so?How does an asset class so driven by speculative promise de-risk enough to keep interest and investment alive in the worst of times? Bitcoin-heavy crypto portfolios do better, comprising a higher percentage of the least volatile of the major assets. Even so, with a 0.90+ correlation of Bitcoin to the altcoin market, the wake of crypto’s most dominant currency often serves as a churn to smaller assets caught in the same storm. Correlation of BTC to Ether and all altcoins. Source: Arcane ResearchMany flee to stablecoins in dire times, but, as evidenced by the recent Terra disaster, they fundamentally hold more risk than their fiat peg. And, commodity-paired tokens are burdened with the same concerns inherent to any other digital asset: trust — be it in a marketplace or its organizational entity — regulatory uncertainty and technological vulnerabilities. No, merely tokenizing safe-haven assets will not provide the stable yang to the volatile yin of the crypto market. When fear is at a maximum, an inverse price relationship, not merely neutrality, must be achieved to retain investment in crypto and at a return that justifies the adoption of this inherent risk. For those willing and able, inclusion of the inverse Bitcoin exchange-traded funds (ETFs) offered by BetaPro and Proshares does provide a hedge. Much like engaging short positions, however, accessibility hurdles and fees make these solutions all the more unlikely to sustain the average investor through the bear market. Further, increasingly regulated and compliant centralized exchanges are making leveraged accounts and crypto derivatives unreachable to many in the larger retail markets.⁵ Decentralized exchanges (DEXs) suffer from the limitations of anonymity and solutions offered for shorting mechanisms on such have largely required a centralized exchange to work in collaboration. And, more to the point, both solutions functionally do not support value retention in the crypto market directly.Are crypto safe-haven assets enough?The solution to the mass exodus of investment in the crypto bear market must be found in the assets themselves, not in their derivatives. Escaping the inherent risks mentioned above might be, in the medium-term, impossible. But, regulatory clarification is promised and debated around the globe. Centralization and technical risks are finding new mitigations through decentralized autonomous strategies and the engagement of an ever-more discerning crypto-savvy investor. Through many experiments and trials, crypto entrepreneurs will continue to bring real solutions to the forefront. Applications of blockchain technology that find substantial adoption in down-market “defensive” industries such as healthcare, utilities and the purchase or production of consumer staples would provide an alternative to flight. Such development should be encouraged in these uncertain times. Rather, by the wisdom of the market, such uncertain times should encourage this development. However, ingenuity should not be limited to merely tokenizing the feeble solutions of the conventional markets. This is a new world with new rules and possibilities. Programmatically incentivized inverse mechanisms are feasible, after all. Synthetix’s Inverse Synths aspire to do just that, but the protocol sets both a floor and ceiling price, and in such an event, the exchange rate is frozen and only exchangeable on their platform.³ An interesting tool for sure but unlikely to be utilized by the greater crypto market. True solutions will be broadly accessible both geographically and conceptually. Rather than providing merely a dry place to wait out the down-market storm, crypto solutions must provide a return to justify the risk still inherent to our developing asset class. Is there a silver lining to the bear market? Will the survivors of crypto-winter emerge in a market more rewarding for application and adoption than speculation? Healthy pruning may be just what our young garden needs; a protracted drought surely is unnecessary. Down markets are simply a problem and, with the clever application of blockchain technology, hopefully, a soluble one. Disclaimer. Cointelegraph does not endorse any content of product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.
Trevor is a technology consultant, entrepreneur and principal at Positron Market Instruments LLC. He has consulted for corporate planning teams in the United States, Canada and Europe and believes that blockchain technology holds the promise of a more efficient, just and egalitarian future. ¹A Brief History of Bitcoin Bear Markets | by Mosaic – Medium² Crypto Total Market Cap (Ticker: CRYPTOCAP): Calculated by TradingView³ Travers, Garth (July 19, 2019). “Inverse Synths are Back”⁴ Choudhury, Saheli Roy (January 11, 2018). “South Korea is talking down the idea a cryptocurrency trading ban is imminent”⁵ Newbery, Emma (August 3, 2021). “Why are so many crypto exchanges unavailable in the US?”

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5 metrics to monitor before investing in crypto during a bear market

Cryptocurrency bear markets destroy portfolio value and they have a dangerous tendency to drag on for longer than anyone expects. Fortunately, one of the silver linings of a market-wide pullbacks is that it gives investors time to re-focus and spend time researching projects that could thrive when the trend turns bullish again.Here’s a five areas to focus on when deciding whether to invest in a crypto project during a bear market.Is there a use case?The cryptocurrency sector has no shortage of flashy promises and gimmicky protocols, but when it comes down to it there are only a handful of projects that have delivered a product which has demand and utility.When it comes down to determining if a token should continue to be held, one of the main questions to ask is “Why does this project exist?” If there is not a simple answer to that question or the solutions offered by the protocol don’t really solve a pressing problem, there is a good chance it won’t gain the adoption it needs long term to survive. Identify a competitive advantageIn the cases where a viable use case is present, it’s important to consider how the protocol compares against other projects that offer solutions to the same problem. Does it offer a better or simple solution than its competitors, or is it more of a redundant protocol that doesn’t really bring anything new to the table? A good example of unnecessary redundancy is the oracle sector of the market, which has seen a handful of protocols launched over the past three years. Despite the growing number of options, the oldest and most widely integrated oracle solution Chainlink (LINK) and it remains the strongest competitor in the field. Does the protocol generate revenue, and how?“If you build it, they will come,” is a cliche expression tossed around in tech circles, but it doesn’t always translate into real-world adoption in the cryptocurrency sector. Operating a blockchain protocol takes time and money, meaning that only protocols with revenue or sufficient funding will be able to survive a bear market. Identifying whether a project is profitable and where the revenue comes from can help guide investors who are interested in buying DeFi tokens.Projects with the highest protocol revenue. Source: Token TerminalIf a project shows limited activity and revenue, it may be a good time to start evaluating whether it’s undervalued or a investment that should be avoided.Are there cash reserves?Every startup is meant to have a war chest, treasury or runway and prior to investing it’s important to identify whether or not the project has sufficient funds to survive downtrends, especially if providing yield on locked assets is the primary incentive for attracting liquidity.As mentioned earlier, running a blockchain protocol isn’t cheap, and a majority of the protocols out there might not be liquid enough to survive a lengthy bear market.Every successful NFT project should bring in a crypto financial manager/treasurer to properly diversify/hedge their war chest, not just keep everything in ETH. A project needs to know how to take profit too.— $trawberry Sith (@StrawberrySith) May 10, 2022Ideally, a DeFi-style project should have a large treasury containing a variety of assets like Bitcoin (BTC), Ether (ETH) and more reliable stablecoins like USD Coin (USDC) and Tether (USDT). Having a well-funded and diversified treasury that can be pulled from during touch times is crucial and as $trawberry Sith suggests, projects need to learn when to take profit, and not leave a majority of the protocol treasury in Ether or the platform’s native token.Related: Major crypto firms reportedly cut up to 10% of staff amid bear marketAre roadmap deadlines kept and met?While past performance is not necessarily an indicator of future results, a project’s history of following its roadmap and meeting important deadlines can offer valuable insight into whether it is prepared to endure tough times.In addition to keeping track of roadmap milestones, sites like CryptoMiso and GitHub can help investors peer behind the curtain to see the frequency of development and developer activity for a protocol. If a team is displaying little to no signs of activity as roadmap deadlines come and go, it might be time to consider the possibility that a slow rug pull is occurring and that it may be time to get out before further losses are realized. This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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Powers On… When will we learn from recent history to protect our crypto and ourselves?

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.

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Powers On… It’s been a wonderful life (week): SEC Commissioner Peirce, Bitcoin 2022 and more

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.

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In Georgia, crypto is a crucial tool for refugees escaping the war

I arrived in Tbilisi, Georgia, near Russia’s southern border, in late February — just a few days after Russian forces invaded Ukraine. I had been reporting on crypto and blockchain from St. Petersburg, but after the war started, staying there had become untenable. During my first week in the city, I searched for an apartment to rent and for ways to set up a basic bank account.I went to a major branch of the Bank of Georgia, the second-largest private bank in the country, next to Liberty Square in the city center. The bank had only been open for an hour, but it was already full of people waiting to meet with a banker.As I entered, a visibly frazzled teller at a help desk asked me point blank, “Russian?” I said no but that I wanted to open a bank account. She handed me an application form, a piece of receipt paper with a number on it, and told me to wait my turn.While I waited, filling out the bank application, I noticed that no one who was holding a red passport — i.e., a Russian passport — had been handed application forms. I watched Russian clients approach the bank windows. Each was invariably handed a long list of required documents they must produce in order to open a standard bank account with a debit card. The list included six months’ worth of transaction records, translations of passports, and a copy of a work contract.I began to worry because, as far as I was aware from my own research, none of this was previously required. As I approached the window, the banker reflexively reached for a copy of the list of required documents — until I showed my American passport. Within a half-hour, my application was processed, and the banker told me to stop by the next day to pick up my card.Your papers, pleaseMoney issues are further complicating the lives of Russians and Belarusians who have come to Georgia to escape draconian crackdowns at home. Telegram channels devoted to Russians relocated abroad are flooded with questions about how and when people were able to move their money.Sanctions from major banks, payments firms and card issuers such as Mastercard and Visa, in addition to strong capital controls at home, have left Russians in Georgia with little means to access their savings in Russian banks. They face further difficulties at Georgian banks, where once relatively lax requirements for opening a bank account have been replaced by intensive Know Your Customer procedures for hopeful clients. Reports surfaced on social media of some banks requiring Russian and Belarusian applicants to make sworn statements that Russia is the aggressor in an illegal war on Ukraine, recognize Abkhazia and South Ossetia as parts of Georgia, and swear to counteract propaganda.Given recent laws about “anti-Russian propaganda” and disseminating misinformation about the “special operation” in Ukraine, signing such a statement could constitute a crime if the signatory returned home to Russia.Crypto without questionsSome Russian friends who know I work in crypto media asked me if there was any way to use crypto to access their funds.Buying crypto is still largely unregulated in Russia, with small exchanges requiring only very basic KYC procedures, if they require them at all. And since any transactions via bank card still happen within Russian territory, residents needn’t worry about sanctions on credit card companies when buying crypto on a local exchange.These small exchanges were quick to catch on to the spike in demand, and many were selling major coins like Bitcoin and popular dollar-based stablecoins like Tether at premium prices, some well above their adjusted value in dollars.But smaller, less popular coins like Litecoin were still relatively fairly priced in the first two weeks following the onset of the war. One friend shifted the majority of their savings into Litecoin via a Russian online exchange. Once their phone-based wallet pinged them with a notification that they had received their LTC, they went straight to one of several physical crypto exchanges in Tbilisi to sell their coins for dollars.I, myself, ventured to one such exchange to sell some Ether for cash. On its website, the firm maintained its apolitical status and compliance with Georgian law. I’m not really sure what I expected to see when I arrived, but what I found was a rather humble affair.The small room in the crowded office building in the city center had two desks and a few chairs for clients to relax while block confirmations went through. In the single window, neon Bitcoin, Litecoin and Tether signs glowed. Miniature Georgian and Ukrainian flags were stuffed into the potted plants.As I arrived, a small group of clients speaking Russian were leaving, thanking the two staff who sat at their respective desks. The staff asked how they could help me, and I said I would like to sell some crypto.What kind? Ether. How much? About $2,500 worth.They gave me an address, and I sent the crypto. After the transaction was confirmed, a cash counting machine whirred, spitting out the exact amount in U.S. dollars, which the staff carefully counted again on the desk in front of me. The whole process took about 10 minutes.I was not once asked about my nationality, ID or business in Tbilisi.Dollars in hand, I made small talk with the staff. The operators of the exchange, who prefer to remain anonymous, said that the vast majority of their customers in recent weeks had been Russian or Belarusian and that the flow of clients had been more or less nonstop.This was just one of several physical crypto exchanges in the capital of Georgia, which maintains laissez-faire laws on cryptocurrency. It has no licensing scheme for crypto trading, and crypto traders do not have to pay tax on income or gains. The sale of crypto and hashing power both abroad and domestically is also exempt from the country’s value-added tax.No RussiansThe capital city of just over 1 million residents has found it difficult, both materially and politically, to absorb the thousands of new arrivals from Ukraine, Belarus and especially Russia.And while many of the city’s cryptocurrency-centric businesses observe a live-and-let-live approach to their clientele, many other businesses and services are outright discriminatory.Take one example: Much of the city’s residential rental property was snatched up in the weeks leading up to and following the start of the conflict. Now, well over a month into the war, there’s little to choose from for the crowds of Russians who are still arriving.Supply issues aside, Russians also face discrimination from landlords. When contacting real estate agents in the city, the first question I invariably faced, even as an American, was, “Are you Russian?” — followed by something like, “We will need to see your passport before we can move forward.” Several real estate agents I spoke to said landlords have a “no Russians” policy.In a local cafe, I overheard an exasperated Russian man talking on his phone to someone I assumed was a real estate agent. He rattled off a list of requirements — like the number of bedrooms, the price range, needing a stove and washing machine — that he’s desperate to find:“My wife and I are renting a room in the city center right now, and she is hysterical. She says there’s nowhere to cook, no washing machine to clean our clothes. She says she wants to go back. I say, ‘What do you mean go back? We can’t go back, not for anything. We’re here…’”While I can’t approve of such outright discrimination, I can understand how it came about.In 2008, Russia supported separatists in the Georgian breakaway regions of Abkhazia and Tskhinvali, now known by many as South Ossetia. The subsequent war in August 2008 lasted 12 days and left many areas bombed out and scarred. Years later, the conflict has given the Georgian people a strong sense of solidarity with Ukraine, and bitter resentment toward Russia.An instrument, not a solutionAlmost all of the Russians I have met in Tbilisi have used crypto to move at least some part of their savings. And while this initially seems like a success story — a time for crypto to shine as the decentralized future allowing people to control their own savings — I think it is important to zoom out.Cryptocurrencies, like any other technology, are only as good or as useful as the people and human institutions who surround and implement them. While many libertarian-minded crypto-maximalists will no doubt laud the technology and its apolitical design amid this Russia-Georgia context, the only thing allowing it to be successful is the people and businesses on both ends of the transaction connecting traditional financial systems to blockchain-based, decentralized ones.If the Russian government required exchanges to implement more robust KYC protocols — as they do with bank accounts and foreign currency transactions — citizens could not buy crypto, or they’d be severely limited in how much they could buy and subsequently save.If the Georgian government required exchanges to follow the same robust, almost impossible KYC measures that private banks are currently implementing, it would be incredibly difficult for Russian immigrants to sell their crypto in order to pay rent, buy food and organize transportation.If the exchange operators allowed their political stance to determine their clientele, the crypto-owning public could find their options for buying, selling and withdrawing assets further limited.Crypto, like most other new tech praised upon its creation as apolitical or neutral, becomes political in the hands of the people who use it and regulate it.Aaron Wood is an editor at Cointelegraph with a background in energy and economics. He keeps an eye on blockchain’s applications in building smarter, more equitable energy access globally.The opinions expressed are the author’s alone and do not necessarily reflect the views of Cointelegraph 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.

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Powers On… Biden accepts blockchain technology, recognizes its benefits and pushes for adoption

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.

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Powers On… The SEC takes reactionary moves against crypto lending

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.

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Powers On… The Fed endorses cryptocurrency — Kind of

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.

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Powers On… Top 5 crypto legal and regulatory developments of 2021

While still leading the securities litigation, hedge fund and SEC defense national practices at my last law firm, BakerHostetler, my practice team members and I would prepare an annual list of key developments and cases in the area each December. It was usually a top 10 list that was then published by Wolters Kluwer in one of its CCH publications and by BakerHostetler as a separate publication to our law firm clients. Now that I am officially “retired” from law firm practice and these days devote most of my professional attention to the blockchain and crypto space, my editor, Max Yakubowski, and I thought it made sense to do something similar for Cointelegraph’s readers.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.” So, here is my top five list for 2021. It has some caveats attached. For one, the blockchain space has so many dimensions, some implicating finance and many that do not. The use cases for this ledger technology expand each year, constrained only by human ingenuity. This list focuses on developments this year that affect financial transactions and systems. It also focuses on what I perceive as key regulation, legislation and litigation affecting the ecosystem. Next, this is a top five list, not a top 10 one. While yes, there are dozens of issues and items that are transformative, that would be a much longer piece. Finally, some of the items on the list I have already written about in prior columns, so they will be familiar to regular readers. As a result, I don’t feel the need to provide lengthy explanations as to why an item made the list. 1. El Salvador adopts BTC as a national currencyBack in June, at the Bitcoin 2021 conference in Miami, Salvadoran President Nayib Bukele announced he would seek to have El Salvador adopt Bitcoin as a national currency. At the time, the country had used the U.S. dollar as its official currency since 2001, abandoning at the time its local currency, the colón. In short order, the country’s legislative body adopted laws mandating that beginning in September, all commercial establishments must accept Bitcoin as legal tender, with some exceptions. Wallets containing $30 in BTC have also been made available to citizens by the tiny country’s banks. This was not a voluntary choice for businesses; rather, it was required, which makes this event so significant.It was a watershed moment for sovereign nations, as other countries have begun efforts to do the same, including Panama and Ukraine. While other countries have adopted blockchain technology for parts of their financial and governmental systems — such as Georgia mandating that government real estate auctions occur on a blockchain — this is different and more significant. It is for the entire country’s economy.2. The United States’ “woke” legislation on blockchain transactionsIn November, Congress finally passed the Biden administration’s $1.2 trillion infrastructure legislation— at least the piece of the proposed legislation that actually was directed at building and rebuilding our bridges, roads, rails and telecommunications. As part of the bill, formally called the Infrastructure Investment and Jobs Act, there is an amendment to Section 6045 of the tax code, which requires the reporting to citizens engaged in securities transactions, with an overly broad definition of “brokers.” It mandates tax reporting information by traditional brokerage firms of their customers. However, the bill arguably could be interpreted to impose this significant reporting requirement on blockchain miners and developers, which many in Congress believe is bad for crypto and overbearing.The importance of this tax provision is that it is one of the first efforts of the federal government “to better incorporate digital assets, like virtual currency, into our nation’s tax code,” according to a Dec. 14 letter from six senators to Treasury Secretary Janet Yellen, whether Yellen does as they ask or not. These senators are Rob Portman, Mark Warner, Kyrsten Sinema, Cynthia Lummis, Pat Toomey and Mike Crapo — members of both major political parties. It is also significant that not only is there support for the technology in the Senate, there is now also a Congressional Blockchain Caucus. The caucus is a bipartisan group of members of the House of Representatives dedicated to advancing the technology with “a light touch regulatory approach,” according to its mission statement. Back in August 2020, it wrote to the Internal Revenue Service seeking clarity on how the agency would be taxing the block rewards arising from the proof-of-stake validation process. As of this writing, the caucus website lists 35 members of the House, a significant number.3. Federal Reserve Chair Powell is open to the benefits of blockchain for the financial systemOn more than one occasion this past year, Federal Reserve Chairman Jerome Powell has stated publicly and in congressional hearings that he sees certain benefits for the world and U.S. financial systems in utilizing blockchain and digital assets. Back in March, he stated on CNBC that while Bitcoin was not a very good store of value or currency, it was a speculative asset like gold. Thereafter, he made clear that the Fed has no intention of banning crypto. A few days ago, Powell acknowledged that he does not envision the Armageddon that crypto haters see. He made clear he does not see crypto as a danger to the financial system at this time. Regarding stablecoins, he said they “can certainly be a useful, efficient consumer-serving part of the financial system if they’re properly regulated.”If you think back a few years, cryptocurrencies — and the blockchains from where they come — were verboten in the federal government. No one was allowed to embrace them. So, it seems to me that there has been a clear evolution and maturation of thinking on the part of Powell about these things and the useful aspects of digital assets for our economy and the world’s financial system. Given Powell’s considerable influence over our economy and economic stability, likely even more so than our president, this is a very positive development. All of this talk seems like a precursor to a central bank digital currency being issued by the Fed.4. SEC allows Bitcoin ETF for retail customersThe new Securities and Exchange Commission chairman, Gary Gensler, has a clear bias toward his former employer, the Commodity Futures Trading Commission, where he served as chair from 2009 to 2014. Yet, he is still advancing the ball for crypto, albeit slowly.For several years now, various financial companies have sought to sell exchange-traded funds based upon Bitcoin and other digital assets. ETFs hold a basket of securities or assets, such as the S&P 500 ETF, which holds all of the securities in the S&P 500 Index. ETFs are generally less costly investment products for retail investors than mutual funds. Yet, pointedly during the chairmanship of former SEC Chair Jay Clayton, each time one of the more than a dozen ETFs were presented to the SEC, it failed to approve the effectiveness of the public offering, effectively killing it.In October, however, things changed. The SEC allowed the first Bitcoin-based ETF to trade in public U.S. markets: the ProShares Bitcoin futures ETF. Yet, there was a catch. The ETF approved is based upon Bitcoin futures, not the underlying BTC itself found in the spot market, revealing Gensler’s biases from his years at the CFTC. To me, there is no legitimate rationale for allowing a futures-based ETF but not a spot-based one. Indeed, a futures-based ETF, which requires a rolling over of futures contracts, is more expensive to manage. Also, it is restricted in the number of contracts that can be purchased under current CFTC position limits rules. There is no similar restriction for spot ETFs. The claim that the markets for Bitcoin have been in regulated marketplaces such as the CME for years and thus the futures marketplace is a more stable and orderly marketplace for an ETF is bunk. Nonetheless, at some point, a spot ETF will be approved, and the fact that all retail investors can now buy Bitcoin, even if derivatively, is a significant advancement for both the technology and alternative asset.5. Ripple fights the SEC in courtIn the waning days of the lame-duck Clayton-led SEC in December 2020, the Commission authorized and filed a lawsuit against Ripple and two of its principals, alleging the defendants engaged in unregistered public securities offerings of XRP over a period of years. As discussed in one of my columns earlier this year, it was an ill-advised, overly aggressive action that did not need to be brought. Among other reasons, it is questionable whether the XRP token was a “security” under the federal securities laws. Also, another government regulator, the Financial Crimes Enforcement Network, had previously complained in 2013 to Ripple that its offerings constituted “currency” exchanges, thus subjecting Ripple to register as a money services business “exchanger” with the agency. So, Ripple registered and was fined $700,000 by FinCEN as a penalty for registration and AML violations in 2015, only to have a separate federal agency — the SEC — claim five years later that the same offerings were public offerings of “securities.” Repetitive actions by multiple U.S. regulators for similar underlying transactions are unfair and unnecessary.If I was a betting man, which I am, I would say the SEC will lose this fight — by which I mean the court either will find that XRP is not a “security,” that the sales of XRP by Ripple’s principals were not public offerings here in the United States, or that an injunction against the defendants is neither necessary nor granted. This fight and the subsequent decision by Judge Analisa Torres could be monumental.There you have it, readers — my top five list.Enjoy the holidays, and may we soon defeat COVID-19 worldwide. You will soon be hearing my ruminations again in 2022! 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.

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