The SEC vs. Crypto

February 20, 2023

When elephants are in a state of panic, even if rampaging the wrong way down the street, it’s usually best to get out of the way and wait for them to settle down.

The last couple of weeks have been extraordinary, with the SEC issuing several actions affecting the crypto industry. These relate to asset custody, stablecoins and staking. Let’s unpack these…

1. Stablecoins:

The SEC took action against BUSD (the Binance US Dollar-denominated stablecoin) and its issuer, Paxos, contending that BUSD is a security and therefor needs to be shut down. Paxos adamantly disputes this, however it has shut down all new issuances of BUSD and is redeeming coins. Binance, on the other hand, has shrugged and said “okay, we’ll move that $15 billion offshore to Tether (USDT) and create a new stablecoin of our own based in the Middle East.”

Result? Our regulators have not shut down crypto, but instead they have successfully moved over $15 billion out of a regulated US financial institution (Paxos) where the inflows and outflows can be watched for terrorist financing, money laundering and other bad actors, and pushed it all into the murky world of offshore banking. Brilliant move, I’m sure FinCEN, the Secret Service, FBI, Homeland Security and other regulators and law enforcement agencies are thrilled to see this happen (obvious sarcasm). That’s not serving national interests and the public good. We all know the adage that “when you’re a hammer, everything looks like a nail“, which is what seems to be happening here.

2. Custody:

The SEC has issued a proposal to update the ’40 Act to require all assets, including digital assets (crypto, stablecoins, NFTs) to only be held by Qualified Custodians (trust companies, clearing brokers, and banks). This is awesome, and much needed. 100% of investor losses from bankruptcies have come from assets being held by money transmitter-“licensed” entities, including exchanges and unqualified custodians. Exactly zero (0%) losses have come from trust companies and clearing brokers where all customer assets are held off balance sheet, not comingled with company property, cannot be used by the firms for their own purposes, have regulatory oversight, audits & examinations, and not subject to third-party claims.

Result? Great first step. Money transmitters need to be put back in their lane of just moving cash/assets from someone’s account at Bank A to someone else’s account at Bank B. They should NOT be permitted to hold cash, digital assets, or anything else as unqualified custodians of other peoples assets.

Nobody should do business with money transmitters where they hold any assets. Period. It should be prevented by regulation since people can’t seem to stop themselves from using firms like FTX, Voyager, Gemini, Celsius, Wyre and others who hold assets on their balance sheets, use those assets for their own profits & purposes, and expose them to third-party claims. This is easy to stop, and the SEC is spot on here.

3. Staking:

The SEC says that staking is a security. They got Kraken to raise the white flag, pay them a $30M fine and promise to never again permit anyone in the US to use their staking services (they still do this for non-US persons, of course).

So…is staking a security? This is a hot topic that is disputed both externally and internally at the SEC.

SEC Commissioner Peirce disagrees and filed a public dissent.Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and therefore dissent.”

Coinbase disagrees, and will continue its staking services.Staking is not a security under the US Securities Act, nor under the Howey test. Trying to superimpose securities law onto a process like staking doesn’t help consumers at all and instead imposes unnecessarily aggressive mandates that will prevent US consumers from accessing basic crypto services and push users to offshore, unregulated platforms.”

The IRS may also disagree, as staking may be Unrelated Business Taxable Income (UBTI). It isn’t generated from passive activities such as dividends, interest and royalties…and thus the argument would be that if it’s from your efforts and workproduct, like buying a house to fix and flip, then it fails the Howey Test and isn’t a security.

Result? It’ll be interesting to watch the SEC vs. its own commissioners plus heavyweights like Coinbase and another elephant like the IRS. In the meantime, lack of regulatory clarity continues.

Navigation – how is Fortress Trust proceeding?

Payments will transition from the archaic legacy of Fed-wire, SWIFT-wire, ACH, push-to-card and other mechanisms over to blockchain rails. This is happening and will transform finance. Gig-businesses are the first as they have the most pain, but the lineup of others is forming fast as wallet, compliance and liquidity rails take shape.

Tokenization will continue to accelerate, not just in art and music but in event tickets, inventory control & tracking, anti-counterfeiting, healthcare records, DMV car titles, real estate, securities trading, and everything else where ownership records are held electronically. This is happening and will transform…well…pretty much everything. We’ve even partnered with Google to responsibly secure this data.

With regulatory sands shifting daily we need to proceed respectfully while at the same time continuing to press forward to serve people in payments and tokenization with regulated (qualified) custody, BSA-subject compliance, secure payment rails, and secure financial technology.

In creating a B2B infrastructure firm I’ve been careful to staff Fortress Trust with a team that has deep regulatory and banking backgrounds, including my CEO (banking commissioner who resigned to join me in building Fortress), my head of state licensing & relationships (another banking commissioner who resigned to join Fortress), my Chief Regulatory Officer (former Deputy Banking Commissioner), my Chief Compliance Officer (CAMS executive from UBS and Goldman Sachs), my CFO (career banking executive), and my General Counsel (NY securities attorney and former broker-dealer CCO, as well as former trust company GC). I’ve also got excellent outside counsel with regulatory chops from state banking offices to federal agencies to Deputy GC at FINRA and head of enforcement at the NYSE. We deeply respect regulators and law enforcement, and are happy to engage with them and assist them in helping steer the course…while at the same time continuing to innovate and be a foundational part of this fast emerging, technology-driven world.


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