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Road to Consensus with CFTC Chair Giancarlo – Regulating the Blockchain

We’re talking to experts in the crypto and blockchain space about the future of the industry. You’ll hear from economists, entrepreneurs, developers, and other speakers from Consensus events.

Chairman J. Christopher Giancarlo of the U.S. Commodity Futures Trading Commission joins host Nolan Bauerle for an exit interview covering his time at the CFTC, the future of blockchain regulation, and the origins of the nickname “CryptoDad.”

Register for Consensus at Consensus2019.com

Chairman Giancarlo can be found on Twitter at @giancarloCFTC

Road to Consensus is a production of CoinDesk.

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HSBC Exec Urges CFTC to Make More ‘Positive Noise’ About Blockchain

A banker from HSBC urged the U.S. Commodity Futures Trading Commission (CFTC) to make more “positive noise” about distributed ledger technology (DLT), in order to encourage adoption by hesitant businesses.

Among other recommendations for the agency, “it would also be beneficial if the CFTC would give some positive words around DLT and DLT adoption,” HSBC senior vice president Jesse Drennan said during the regulator’s Technology Advisory Committee meeting Wednesday.

Adoption of the tech is not exactly “being hindered right now,” Drennan explained, but firms looking to either go live with a DLT platform or otherwise bring the tech into production typically review how regulators are looking at the technology.

Part of their concerns may stem from not being clear about how the regulator may feel about the technology – even outside strict regulatory standards.

“Certainly there is a sensitivity to how the regulator may feel about such technology and supporting the activity that the parties are rolling out,” Drennan said, adding:

“So wherever the Commission could make positive noise, that may accelerate for some firms their ability to bring it to market as it overcomes that bit of due diligence about just having the conversation around how you feel about the use of the technology to support the activity that they are pursuing.”

Crypto Dad’s crew

To be fair, CFTC’s leadership has already been vocally supportive of both enterprise DLT and even cryptocurrency, to the degree that the commission’s chairman, Christopher Giancarlo, earned the nickname “Crypto Dad” after a congressional appearance last year.

Just yesterday, Daniel Gorfine, who heads up the CFTC’s fintech initiative LabCFTC, published an essay analyzing the nature of cryptocurrencies with an eye toward valuing them as traditional currencies – and how doing so may benefit the space more broadly.

Drennan’s comments came near the end of the day-long meeting, which saw representatives from industry lobbyist Coin Center, IBM, the International Swaps and Derivatives Association (ISDA) and DLT builder R3 all meet to discuss the state of the crypto and DLT space.

In his opening comments, CFTC Commissioner Brian Quintenz, who sponsors the committee, noted that the group’s DLT and market infrastructure subcommittee would discuss both the current state of the technology as well as any challenges that may be standing in the way of wider adoption.

“The panel will also explore if there are specific areas where CFTC regulation may be inhibiting the adoption of DLT or additional areas where further guidance from the agency could support further development,” he said.

HSBC’s Jesse Drennan image via CFTC

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Will Fiat-Backed Stablecoins Pass Legal Muster With the SEC and CFTC?

Benjamin Sauter and Jake Chervinsky of Kobre & Kim LLP are litigators and government enforcement defense attorneys who specialize in disputes and investigations related to digital assets. This article is not intended to provide legal advice.

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As we enter the second year of this so-called “crypto winter,” the stablecoin market is hotter than ever.

In recent months, stablecoins – digital assets pegged to the value of fiat currencies like the U.S. dollar – have exploded in size and variety thanks to high-profile offerings from companies like Circle, Paxos and Gemini. Even traditional banks are joining the action, with JP Morgan recently announcing its own stablecoin-like product called JPM Coin.

Thus far, stablecoins have largely avoided public scrutiny and criticism from agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which have focused their attention on the many issues arising out of the 2017 initial coin offering bubble instead. Yet, as stablecoins see greater capital inflows and industry adoption, the SEC and CFTC will likely take a harder look at their compliance status.

Unfortunately for stablecoin proponents, agencies like the SEC and CFTC are often quick to assert their jurisdiction over new financial innovations, even if their intervention may not serve the best interests of an emerging industry.

Stablecoins 101

Stablecoins promise many of the same benefits as other cryptocurrencies – like cheap transactions and rapid settlement – without the price volatility typically found in the crypto markets. Through that combination, stablecoins could satisfy the demand for high-quality fiat currencies in parts of the world with limited access to the global financial system, like Iran or Venezuela.

Stablecoins also could be useful for crypto exchanges that want to offer fiat-based trading pairs while reducing their engagement with legacy financial institutions.

To maintain their one-to-one peg with fiat currencies, most stablecoins use either a fiat-collateralized, crypto-collateralized, or algorithmic model. Fiat-collateralized stablecoins are backed by actual fiat currencies held in reserve by the stablecoins’ issuers, whereas crypto-collateralized stablecoins are backed by digital assets locked in smart contracts.

Algorithmic stablecoins, by contrast, aren’t backed by collateral at all. Instead, they use various mechanisms to expand or contract their circulating supply as necessary to maintain a stable value.

It was this type of stablecoin that apparently caught the SEC’s attention last year.

A basis for concern

In April 2018, an algorithmic stablecoin project called Basis made headlines when it raised $133 million from several prominent funds and venture firms. But, only eight months later, Basis shut down unexpectedly and returned its remaining capital to investors. The reason for the shuttering, according to Basis CEO Nader Al-Naji: “We met with the SEC to clarify a lot of our thinking [and] got the impression that we would not be able to avoid securities classification.”

It’s not hard to see why the SEC might view Basis through the lens of a securities offering.

The Basis protocol was designed to maintain stability by auctioning “bond” and “share” tokens to investors who would profit as long as Basis held its peg. Tokens like these could qualify as “investment contracts” under U.S. law, and thus may fall within the definition of a security. Apparently, the Basis team decided that the regulatory requirements imposed by that classification were too onerous to overcome.

Despite Basis’ startling end, there hasn’t been much discussion in the crypto industry about how U.S. securities and commodities laws might apply to stablecoins.

In fact, most industry players seem to take for granted that fiat-collateralized stablecoins are safe from regulatory scrutiny. That assumption may prove dangerous.

Stablecoin regulation under federal law

Most dollar-backed stablecoins are created in roughly the same way: purchasers deposit dollars with a stablecoin issuer, and in exchange, the issuer mints and returns an equivalent amount of the stablecoin. The process also works in reverse: stablecoin-holders can send a stablecoin back to its issuer in exchange for an equivalent amount of dollars.

Given how these stablecoins are redeemed, the SEC might characterize them as “demand notes,” which are traditionally defined as two-party negotiable instruments obligating a debtor to pay the noteholder at any time upon request.

According to the Supreme Court’s 1990 decision in Reves v. Ernst & Young, demand notes are presumed to be securities under Exchange Act Section 3(a)(10) unless an exception or exclusion applies.

For its part, the CFTC might take the position that stablecoins are “swaps” under Commodity Exchange Act Section 1(a)(47)(A). That provision defines swap to include an “option of any kind that is for the purchase or sale, or based on the value, of 1 or more interest or other rates, currencies, commodities, or other financial or economic interests or property of any kind.”

Under that definition, the CFTC might characterize stablecoins as options for the purchase of, or based on the value of, fiat currencies.

Of course, individuals and companies dealing with stablecoins will have good arguments as to why the “demand note” and “swap” classifications shouldn’t apply. For example, issuers could invoke the Reves court’s “family resemblance” test for demand notes, or challenge the CFTC’s jurisdiction over retail foreign currency options, depending on the circumstances. The regulators, however, may take a different view.

What could this mean for stablecoins?

If stablecoins are classified as regulated securities or swaps, there could be serious consequences for a large segment of the crypto industry. For example, stablecoin issuers might have to register their offerings and comply with all the ensuing regulatory requirements. Similarly, a company or fund that conducts or facilitates stablecoin transactions might have to register as a broker-dealer.

Plus, the SEC and CFTC aren’t the only regulators that may take an interest in stablecoins.

Only time will tell how other state and federal entities, such as the New York Department of Financial Services (NYDFS) or the Financial Crimes Enforcement Network (FinCEN), will approach the regulation of stablecoins, particularly if they’re used to evade trade sanctions or other transaction reporting obligations.

For now, it’s clear that anyone who issues or uses stablecoins should give considerable thought to their potential risk under U.S. securities and commodities laws.

U.S. Capitol building image via Shutterstock

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Will The Real Satoshi Nakamoto Please Stand Up – No, Sit Down Craig, We’ve Been Through This Already!

He just doesn’t give up, does he? Self-proclaimed creator of Bitcoin, Craig Wright, now appears willing to testify under oath that he is Satoshi Nakamoto. Or that’s the conclusion Ran NeuNer draws, following Wright’s response to a comment request from the Commodity Futures Trading Commission (CFTC).


I Promise To Tell The Truth, The Whole Truth, And Nothing But The Truth

In December 2018, the CFTC published a Request For Input (RFI) on ‘Crypto-Assets Mechanics and Markets.’ This was primarily to understand more about Ethereum, and the differences between Ether and Bitcoin. As the CFTC is a federal agency, responses to RFIs should be… well, not fraudulent, at any rate.

On 15th February 2019, Wright posted his response, introducing himself and stating:

under the pseudonym of Satoshi Nakamoto I completed a project I started in 1997 that was filed with the Australian government… as BlackNet.

He goes on to claim that the amount of misunderstanding and fallacious information around blockchain systems (including Ethereum) has resulted in his decision to become more public.

It isn’t particularly relevant to the RFI, really serving only to repeat the claim to be Satoshi Nakamoto… albeit in a Federal forum.

I am Satoshi Nakamoto, And So Is My Wife

At this point, Wright’s claims are becoming a farce of Monty Python’s Life Of Brian proportions. After he first ‘came out’ as Satoshi Nakamoto, and the crypto-world widely coughed *bullshit* under its breath, he let it lie.

But now frontrunning his own project Bitcoin SV (Satoshi’s Vision), his alleged ‘amendments’ to historical documents seems to be going into overdrive. Only last week he was pulled up by WikiLeaks for altering a 2008 blog-post to make it look like he’d been working on crypto back then.

Mere hours prior, he was accused of using a forged a 2001 research paper as evidence of his lineage. It was a word-for-word copy of the October 2008 Bitcoin whitepaper. It even already had amendments that he (as Satoshi Nakamoto) made from the August 2008 draft of the same document. Oops… Or perhaps incredibly prescient?

Now, it’s alleged that even his 1997 BlackNet project was being worked on by Tim May several years before that.

But What If?…

Just imagine, if all of this time, Wright has been telling the truth. What would the consequences of that be?

Obviously, Wright is such an unpopular figure that we aren’t all going to start believing (and investing) in Bitcoin SV. Although one can only imagine that this is the point of all this alleged forgery.

Why carefully protect your identity only to then come out to the world via GQ – telling the critics to “piss off!” and reminding entire countries that he’s got more money than them?

But would we all eschew Bitcoin if we found out that he had actually been the inventor?

No, of course not. Even Coldplay had a decent single before they sunk into the mire of smug, self-satisfied, insipid, irrelevance that they became. And we can still listen to that… as long as nobody else finds out.

What do you think of Wright’s latest claims? Share your thought’s below!


Images courtesy of Shutterstock, Bitcoinist archives

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Bitcoin Futures Market Bakkt Makes Its First Acquisition

Bakkt may not be able to launch its planned bitcoin futures exchange this month as planned, but that isn’t stopping the company from developing its projects.

CEO Kelly Loeffler announced Monday that the New York Stock Exchange–backed startup was acquiring “certain assets” belonging to Rosenthal Collins Group (RCG), an independent futures commission merchant. RCG had previously announced it was selling its customer accounts and brokerage business to British firm Marex Spectron.

The acquisition will help Bakkt improve its risk management and treasury operations, Loeffler wrote, adding that the deal will also help improve Bakkt’s anti-money laundering/know-your-customer operations.

The transaction is expected to be finalized next month.

Referencing a regulatory delay in launching the company’s anticipated futures exchange, Loeffler added:

“This acquisition underlines the fact we’re not standing still as we await regulatory approval by the CFTC for the launch of regulated trading in our crypto markets. Our mission requires significant investment in technology to establish an innovative platform, as well as financial market expertise to deliver the most trusted fintech ecosystem for digital assets.”

Bakkt previously announced it intention to launch its futures exchange on Jan. 24, 2019. However, the company is still waiting on approval through the Commodity Futures Trading Commission, as it intends to custody bitcoin for clients in its own “warehouse.”

The CFTC must first start a 30-day comment period, allowing the general public to weigh in on the proposal, which the regulator has yet to do.

This means that Bakkt will not be able to launch on Jan. 24. Loeffler’s latest announcement did not include a revised estimated launch date.

Michael Casey, Kelly Loeffler, Jeff Sprecher image via CoinDesk archives