BlockFi SEC Regulation Lays Out Broader Crypto Regulation

Hello and welcome to Protocol Fintech. This Monday: BlockFi’s SEC regulations lead by example, Goldman Sachs offers its first bitcoin-backed loan, and the J5 tells you about NFT red flags.

Clear crypto rules, fair markets and innovation. Choose two.

Some hailed BlockFi’s settlement with the SEC as a groundbreaking move to begin regulating the crypto industry through law enforcement. But there is a strong undercurrent of dissent, starting with the commission itself.

There are huge stakes. There was nearly $60 billion worth of crypto locked in DeFi credit agreements in September, according to a recent IMF study. There is also a large amount of lending using crypto as collateral, catering to both hedge funds placing large leveraged bets on digital assets and high net worth individuals who prefer HODL over liquidating and paying taxes on their appreciated coins.

The crypto world needs to be careful. It’s not just lenders who should be concerned, as the rules or precedents set in the BlockFi case could easily be expanded.

  • BlockFi was an easy target for the SEC because it is a third party holding customers’ crypto assets and using them to generate a return, part of which it shares with those customers as “interest”. But crypto lending can also be done on a peer-to-peer basis via smart contracts. If the same regulations are applied to centralized lenders and decentralized exchanges, the consequences could be far-reaching.
  • Costs are also a concern. An ostensible way of lending cryptocurrencies offers better returns by reducing administrative costs. According to Bank exchangethe global financial services industry spent $180 billion on compliance costs in 2020. Crypto could struggle to maintain its rates if it incurs similar costs.

Some sort of regulation is coming. It’s just a question of what it looks like.

  • Policymakers and regulators are seriously considering imposing KYC and AML rules on crypto, and the industry is developing smart and efficient ways to comply using blockchain technology.
  • Rigid Traditional Rules May Well Incentivize Crypto Clients To Be Lured Into High Yields From Crypto Loans return to the Wild West of unregulated peer-to-peer exchanges.
  • The flip side is that with crypto being seen as dangerous – as hackers run amok on poorly secured decentralized systems – could completely sour consumers on cryptocurrency.

Gary Gensler’s “regulation by enforcement” approach draws more and more criticism every day. Some wonder if BlockFi should have settled, rather than fighting like Ripple does.

  • Within the SEC, Commissioner Hester Peirce has emerged as the key voice for a different approach to regulation. She disagreed with the BlockFi decision, ask his colleagues if “the approach we take with crypto lending [is] the best way to protect customers who lend crypto.
  • As noted by Protocol Fintech, a large portion of crypto lending takes place outside of the type of entities the SEC has regulated in the past. Traditional finance – TradFi – occurs on networks operated by a bank, exchange or money transmitter. Chase, the NYSE, and PayPal all have their different regulators.
  • Crypto transactions are often global. International monetary flows are relatively low and highly regulated. How do many national regulators in their geographical silos oversee a global peer-to-peer market that operates 24/7 on automated systems?

There are already examples of the harms of impulse regulation. Do you remember initial coin offerings?

  • Jill Grennan, assistant professor at Duke University’s Fuqua School of Business, observed in a recent article that most regulators ignore or misunderstand the economic objectives of financial innovations, overweighting the risk of facilitating fraud and undervaluing the benefits of a new means of capital formation.
  • Economists Chris Brummer and Yesha Yadav call the situation crypto a “trilemma”. In a 2019 article, they wrote that when regulators try to “provide clear rules, maintain market integrity, and encourage financial innovation,” they typically end up providing two out of three at most.
  • An example: the bank secrecy law requires transaction reports and customer identification to combat money laundering. The crypto industry is struggling to figure out how to apply this to a market where customers can preserve their own anonymity using self-custodial wallets.

It would be wise for the SEC to show publicly that it takes its internal and external critics more seriously. Peirce argues that regulators should work harder to develop a “tailored set of conditions that make sense in this context.” And she asked her agency to do a better job of accommodating innovation. There is a way out of the trilemma: it’s called doing the work.

— Leah Zitter (E-mail | Twitter)

A MESSAGE FROM CHECKOUT.COM

The emergence of DeFi is changing the way consumers think about how they store value. For reference, Visa recorded $2.5 billion in crypto transactions in the first quarter of 2022. We see consumers starting to really use it in a way that even a year ago was rather hypothetical.

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on the money

Samsung plans to list its first crypto ETF in Hong Kong. The list would, it seems, the first ETF listed in Asia to include cryptocurrencies, a major move for South Korea’s largest asset management firm.

Goldman Sachs has offered its first bitcoin-backed loan. the money loan was collateralized using bitcoins owned by the borrower, and is a significant step in traditional banks’ adoption of the digital asset industry.

Coinbase wants to improve its asset listing processes. Most notably, some very smart people looked closely at the company’s on-chain data and API responses, prompting a map to eliminate information asymmetries.

The J5 released a report on NFT red flags. Joint Heads of Global Tax Enforcement categorize warning signs as “strong” or “moderate” indicators of NFT fraud in an effort to warn the public about high-risk NFT activities.

Crypto firms are poaching cops left and right in the UK Top crypto exchanges like Coinbase, Binance, and Chainalysis have hired former cybercrime experts and regulators, often offering them around double or triple the compensation.

Heard

Ophelia Brownfounder of a venture capital firm flower capitalthinks the Bored Ape metaverse project could set a precedent. “I feel like the success of Web3 games ultimately depends on whatever happens with Otherside. If that falls flat, it feels like it was all just a bunch of speculation and hype media”, brown said in an interview with the Financial Times.

the Swiss National Bank does not yet hedge its bitcoin bets. “Buying bitcoin is not a problem for us…we can organize the technical and operational conditions quite quickly, when we are convinced that we must have bitcoin on our balance sheet. We do not believe that bitcoin meets the requirements foreign exchange reserves, President Thomas Jordan mentioned at the annual meeting of the SNB.

Coming

The DeFi Retreat 2022 takes place on Tuesday. Held in San Diego, California, the Event is hosted by Michelle O’Connor, TaxBit’s Vice President of Marketing and Communications, and features speakers from the Celsius Network, Consensys, TRM Labs and others.

Paycom’s earnings call is scheduled for Tuesday. PAYC Estimated average EPS is at $1.42, up 73% from last quarter.

The US Fintech Symposium begins on Tuesday. the two day conference will be held in Orlando, Florida and will feature speakers from Block, Microsoft, Mastercard, Citi Ventures and others.

The US Senate Banking Committee has a hearing on Wednesday. It will be on overdraft fees and their effects on working families.

What does tech regulation look like beyond Big Tech? Join Protocol’s Ben Brody and a panel of experts Thursday, May 5 at 10 a.m. PT/1 p.m. ET to dive into the biggest regulatory priorities of not quite the biggest tech companies.

Earnings calls from Block, Shopify and Bill.com are scheduled for Thursday. SQ Estimated average EPS is at -$0.18, down 64% from last quarter. Stores Estimated average EPS is at -$0.32, down 152% from last quarter. Invoices Estimated average EPS is at -$0.61, down 61% from last quarter. So, it should be a fun week!

A MESSAGE FROM CHECKOUT.COM

Businesses – whether web2 or web3 oriented companies that don’t want to hold crypto but want to be able to interact with crypto holders – want to be able to offer this as a payment mechanism to their communities. The other is convenience, where merchants are comfortable accepting crypto.

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Thanks for reading – see you tomorrow!

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