Also, CoinDesk is hosting a free webinar this Friday on hybrid public and private blockchain solutions for enterprise use cases. The event is sponsored by Hedera.
Binance Balks
Binance’s France unit is under investigation in the country for the “illegal” provision of digital asset services and “acts of aggravated money laundering,” Paris’ public prosecutor’s office told CoinDesk. The investigation relates to illegally operating as a digital asset service provider before it received regulatory approval from financial regulator Autorité des Marchés Financiers (AMF) in May 2022 and the concealment of funds. France is currently Binance’s “flagship” location in Europe, CEO Changpeng Zhao said. The company is also reportedly pulling out of the Netherlands after failing to acquire a virtual asset service provider (VASP) license from the Dutch regulator two days after Binance announced a departure from Cyprus. This comes as Binance.US, which was named separately in the recently announced U.S. Securities and Exchange Commission’s (SEC) lawsuit, is laying off staff citing the “politically motivated regulator’s” moves.
Real Info
CoinDesk acquired documents pertaining to Tether’s backing in 2021 as part of a Freedom of Information Law request to the New York Attorney General’s office showing the stablecoin issuer held over 80% of its funds in commercial paper. Tether held investible notes issued by Qatar National Bank, Barclays Bank, Deutsche Bank and a number of Chinese banks and financial institutions. In March 2021, Tether kept its funds in four banks, two investment management firms, two gold depositories and a gold broker and on its own sister company Bitfinex. USDT, the world’s largest stablecoin, which the NYAG found was not always entirely backed, has been plagued by criticism over its intransparent business dealings. Separately, the U.S. Federal Deposit Insurance Corp. (FDIC) sent a cease-and-desist demand to crypto exchange OKCoin, accusing it of making misleading statements about the safety of its accounts.
Bitcoin Products
Analysts say Blackrock’s iShares Bitcoin Trust application – thought to be a spot market exchange-traded fund (ETF), a type of asset the SEC has yet to greenlight – stands a better chance of SEC approval in part due to its “surveillance-sharing” features. Blackrock will partner with Nasdaq and Coinbase on the product. The SEC has rejected spot BTC ETFs from Grayscale, VanEck, and WisdomTree based on concerns bitcoin markets could be manipulated. Meanwhile, Jack Dorsey’s FinTech company Block will integrate its new bitcoin hardware wallet Bitkey with financial services platform Cashapp and the cryptocurrency exchange Coinbase. Public beta testing for the multi-signature, self-custody wallet will commence in a few weeks with a global launch expected later this year
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This morning in a sun-dappled conference room high above the streets of Manhattan, a crowd of lawyers and journalists got a preview of crypto’s coming legal Ragnarok. It was the U.S. Securities and Exchange Commission (SEC) vs. Coinbase, months early – albeit slightly more polite and vague than things will be in any coming court showdown.
The fireside chat, sponsored by Rutgers School of Law and the law firm Lowenstein Sandler, ranged well beyond legal formalities to matters of principle and theory. The latter included the question of why, or whether, cryptocurrency should be allowed to exist in the United States at all.
In the end, the forum encapsulated the broader challenge of the crypto-regulatory dialogue: how frequently the two sides seem to be talking past each other.
The law is the law
In one corner was SEC Director of Enforcement Gurbir S. Grewal, who laid out his rationale for the SEC’s enforcement suit against Coinbase in conversation with Rutgers law professor Yuliya Guseva. Grewal characterized the suit as the logical endpoint of a series of clear signals sent over the past five years or more, starting with the 2017 DAO report.
“In any other space, if you’re working incrementally, you’d see increased compliance,” Grewal observed. “[In crypto], we haven’t seen that, so we’ve had to change strategy.” In other words, in Grewal’s view, the SEC lawsuit came down against Coinbase because the exchange didn’t respond to earlier warnings.
Grewal also provided some insight into the decision to pursue exchanges including Coinbase and Binance, rather than continue individual enforcement actions against violating token issuers.
“I have less than 1,300 people” on staff, Grewal said. “Every year I have 700 recommendations we bring to the commission. We can’t be everywhere all at once … When we’re evaluating cases to bring, we have to make judgment calls.”
Grewal also offered insight into other outstanding questions, including the challenge of regulating decentralized exchanges (DEXs). “I’ve seen entrepreneurs and individuals in the center of all of these” supposedly decentralized projects, Grewal said. “Maybe it will present a challenge one day, but we see entrepreneurs at the center of all these projects.” In other words, as Gary Gensler made clear at the outset of his tenure, simply saying you’re decentralized is no defense.
In a final notable comment, Grewal put crypto influencers on notice. In particular, he warned YouTubers and others that he and the agency are watching for attempts to exploit members of minority groups. “They’re [promoting crypto with] the promise of financial inclusion to a segment of the population that has been excluded from traditional finance. That’s offensive to me … I find that conduct to be some of the most egregious conduct we’ve dealt with,” he said.
The loyal opposition
Hot on Grewal’s heels, though, came a conversation with Coinbase Chief Policy Officer Faryar Shirzad, who prior to joining Coinbase in 2021 served as head of government affairs for Goldman Sachs and spent time in the George W. Bush White House.
On the confrontation with the SEC, Shirzad barely hedged his speculation that the SEC is stepping on an ongoing legislative process – an argument Coinbase has also made in legal filings under the Administrative Procedures Act.
“Thenormal dynamic in Washington [D.C.] is that when the constitutional branches of government are [acting], typically regulators will step back and let the political branches figure it out,” said Shirzad. “It’s not typical that you’ll see congressional action moving in earnest, and not just a government department, but a regulatory agency, rush in to redefine facts on the ground to get ahead of that. I don’t know if that’s happening here … but if that were happening, it would be unusual.”
“I don’t know whether there’s a dimension of legislative strategy to this,” Shirzad mused. “And there’s the chairman saying we don’t need more digital innovation, so there may be some of that.”
That gets close to the heart of the matter. While the SEC says it’s enforcing the law, the industry has struggled to make the practical case that existing law doesn’t work for many blockchain-based digital assets.
Shirzad further advanced the case that basing crypto regulation only on existing law will harm U.S. competitiveness and innovation.
“This is not just a convenience issue over whether one industry can operate in the United States. We’re at a critical juncture … blockchain is the value layer of the internet. That has significant implications,” Shirzad said, citing several ongoing blockchain pilot projects by the likes of JPMorgan as evidence.
Even more pointedly, Shirzad highlighted that the SEC’s approach may be counter to the agency’s own goal of investor protection.
“To the extent it becomes part of public policy to push exchanges offshore, you’re pushing that nexus between policy and U.S. law out of the perimeter of U.S. law. That’s a big deal. This has to be a matter of national strategy,” he said.
If there was one clear takeaway from this warm up match, it may be that the opponents each want to fight on a different battleground. For the SEC, it’s all a matter of the law, as written, and strictly interpreted.
For Coinbase, meanwhile, what’s at stake is a future that hasn’t been written yet.
