A Senator from NY and a Senator from WY have recently presented Congress with a draft proposal for a crypto regulatory scheme which is a mixed bag from this Firm’s perspective. Wyoming is possibly the best state for crypto ventures and banking, and for good reason, hence one of the senators (Lummis) has been and remains definitively pro-crypto. Nonetheless the bill could have been much better.

Firstly, crypto-assets would, for the most part, be under the regulatory imprimatur of the Commodities and Futures Trade Commission; as mentioned in other posts, this is a positive development as crypto-assets are, for the part closest in their nature to commodities and should reasonably be under the CFTC’s control. The SEC has done a decent job of bringing enforcement actions against some of the largest fraudulent players, rug pulls, and pyramid schemes, to date, numbering about 80; though this is just a tiny part of the total fraudulent activity in this market. The SEC is not the proper agency to regulate crypto and forcefully shove some crypto assets under the ‘securities’ definition, when such an interpretation is unwarranted. CFTC may be a smaller and lesser funded agency, but congress can certainly provide additional funding or mandate that its expansion into crypto regulation be funded by various crypto industry actors.

It appears the SEC will share some regulatory control with the CFTC over crypto-assets when it is clear that a particular digital asset is acting as a security; this is totally reasonable, as digital assets such as crypto token, coins, and NFTs can act as commodities and securities, though the top 10-20 crypto-assets are almost certainly more akin to commodities.

Crypto transactions below $200 will be exempt from tax reporting/payment obligations. This is a start; however, this amount is far too low. $1k would be a better number, and will likely cause buyers/sellers to split transactions into multiple segments to avoid the threshold. If crypto-assets are a store of value then if two parties exchange vehicles of equal value there are no reporting obligations, as it should be with crypto-assets.

Stablecoin regulation is proposed that would require 100% backing by either US Dollars or high-quality liquid assets, it is unclear at this point. In any case, a 100% reserve is unheard of in the banking industry, as US banks presently have a 0% reserve requirement; though historically the reserve has been set at 10%. How are banks better capable handling a run on the dollar than stablecoin issuers? Is it merely FDIC’s guarantee and backing by the federal gov’t? While reserve requirements are certainly reasonable to require of any institution issuing financial instruments, such requirements should be equally applied. Why not require a minimum of 50% backing, for example and the remainder covered by private insurance, similar to FDIC? Insurance companies must be state licensed and are strictly regulated, hence that should be a sufficient safety lever in the event of a stablecoin run.

Finally, the bill lacks the creation of a self-regulatory agency, similar to FINRA which regulates brokers, whereby membership for exchanges and other financial actors would be required. The bill merely mandates a study/report by the SEC with respect to the creation of a new regulatory body to oversee crypto exchanges/brokers.

Such a new body is essential to the future of the crypto industry, and the crypto industry should create one of its own accord if one is not mandated by the government. The days of the wild west of rug-pull ICO’s are hopefully over; the markets are maturing, and clearer regulation and investor protection measures are mandatory in order to restore the faith lost after the tremendous volatility and financial losses we have seen recently.  

Legal counsel should have a greater role in ensuring that full disclosure is provided to investors; until a new agency and regulatory system are created, attorneys should be mandated for all new issuers and crypto projects. Particularly where venture capital is involved. This Firm’s experience has been that the vast majority of crypto players have absolutely not the faintest idea of the regulatory status with respect to crypto and believe their activities are perfectly legal when in fact they are in violation of clear established law, whether by issuing unregistered securities, by failing to disclose material risks, by conducting an unregistered offering, or by attempting to act as a broker without proper licensing/registration, among other significant legal missteps. If a venture can’t afford the service of legal counsel, then that venture should not proceed until it does. The risks are too great.  

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