Crypto faces existential threat as crackdown grows

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Cryptocurrency firms are fighting for lobbyists and issuing subpoenas in what could be an existential fight over how the multibillion dollar industry should be regulated.

Over the past month, lobbyists have been inundated with companies seeking representation in Washington, as regulators threaten cryptocurrency companies with lawsuits or cease and desist orders. Current and former authorities say these warnings are probably just the beginning.

Over the past decade, the cryptocurrency market has grown from a little-known project shared between technologists and libertarians to a massive and largely unregulated industry. But while the industry has found innovative ways to digitally register property and transfer money cheaply, it has also launched savings accounts and investment funds, products that regulators say , should follow the same rules as those of traditional financial networks.

As the cryptocurrency industry braces for a regulatory battle, some lobbyists, who asked not to identify themselves to discuss customer issues, said they were so overwhelmed with crypto firms that were looking to hire them in August that they had to turn down some potential clients. Some of the crypto firms have said they are being targeted or should be targeted by regulators, lobbyists said.

Earlier this month, the Securities and Exchange Commission sent a notice to Coinbase Global Inc. that it could be sued for offering high interest rate accounts.

“Absolutely, these companies should be prepared if they aren’t already,” said Owen Tedford, analyst at Washington-based Beacon Policy Advisors. “It would not be at all surprising to see the Coinbase notice in some ways be a wake-up call to the entire industry.”

Almost a third of new registrations of financial industry lobbyists in August and September were from crypto companies or advocacy groups, according to documents filed in the Senate. Coinbase hired two new companies in August, doubling its presence in Washington, with additions including Andrew Olmem, deputy director of Trump’s White House National Economic Council. A subsidiary of the Diem Association, a group of companies including Facebook Inc. that is considering launching a new cryptocurrency, has hired new lobbyists, as has the Digital Currency Group, a crypto-focused venture capital firm.

SEC Chairman Gary Gensler drew the first blood last week. Coinbase quietly ditched the loan product on Friday, announcing the move in a short update to a months-old blog post.

“Lending cryptocurrencies is perhaps the easiest way for the SEC to gain a foothold in the industry, but it’s very clear that they are looking at cryptocurrencies themselves,” Tyler Gellasch said. , a former SEC attorney who heads the Healthy Markets Association, whose members include large asset managers. While many cryptocurrencies are considered securities, exchanges like Coinbase and the rest of the crypto industry “won’t be able to make money like they do today.”

Incumbent crypto lending operators, such as BlockFi Inc. and Celsius Network Inc., have already raised more than $ 35 billion in deposits of traditional cryptocurrencies such as Bitcoin, as well as stablecoins, whose value is fixed. at $ 1 and is considered a replacement for fiat money. .

Crypto industry executives have said they suspect rival companies in the traditional financial sector, such as the big banks, are responsible for pushing regulators.

At an “Ask Me Anything” event with customers in September, Celsius Network CEO Alex Mashinsky said he believed bank executives called the SEC and state regulators to complain crypto lending companies.

“We have to work twice as hard because these guys have the biggest lobbyists working for them both at the state level and at the federal level,” Mashinsky said. “We will win. The fight is all about all the money in the world, isn’t it? “

The latest battle is with crypto lending companies, which sometimes offer depositors double-digit returns. The companies say they are able to do this by lending the deposits at even higher rates to institutional investors, who need to borrow crypto for their own trading.

Regulators believe that many companies should have registered their products as securities, subjecting them to additional disclosure and scrutiny. The products are sometimes marketed as alternatives to bank savings accounts, and some regulators have said investors could be fooled into thinking they were taking little risk.

The dispute came to a head earlier this month when Coinbase CEO Brian Armstrong in a series of tweets accused the SEC of “summary behavior” and disputed that the accounts offered by Coinbase were securities.

Gensler said in a Senate hearing last week that Coinbase had not registered with the SEC, even though “dozens of tokens” on its exchange could be securities. A spokesperson for Coinbase said the company does not expect to offer any securities on its platform.

Crypto executives say they are frustrated that regulators are threatening to sue them, rather than giving them advice on how they can comply with the law.

BlockFi CEO Zac Prince at the SALT conference in New York last week said the SEC and other regulators need to clarify what is allowed to his industry. Five states have already taken action against his company, accusing it of offering unregistered titles to their residents. Prince at the conference said federal guidance is needed, rather than state actions. BlockFi announced on Wednesday that New Jersey has agreed to extend its order to stop offering the accounts until December.

Even some companies with similar products that have filed with the SEC need more agency advice. Circle Internet Financial Inc., for example, offers high-yield deposit accounts to corporate clients and has notified the SEC under an exemption for accredited investors, CEO Jeremy Allaire said.

“We would like to understand if regulators in the United States want to regulate crypto lending and work with the industry to define what they care about and define the rules of engagement,” Allaire said. “The United States has been extremely reluctant to provide any clarification on digital assets. “

Enforcement officers, for their part, believe the law is already clear. During the banking hearing, Gensler pointed to long-standing court rulings that helped define the agency’s jurisdiction, and said many crypto products and even cryptocurrencies likely fell within its jurisdiction.

Gellasch, the former SEC attorney, said if it turns out that the exchanges are offering securities, it could force them to register with the agency.

Some crypto advocates in Washington have said they hope disputes such as the one between the SEC and Coinbase will go to court, so that a judge, rather than agency employees, can determine what is in. business boundaries.

“I want them to have the courage of their convictions and fight it if they really think their product isn’t security,” said Jerry Brito, executive director of Coin Center, a think tank on crypto advocacy.

Joe Rotunda, director of the Texas State Securities Board’s enforcement division, said other cryptocurrency lenders shouldn’t expect his agency or other states to hold back even when the SEC is starting to move.

“I am very relieved to see that federal regulators are taking a close look at cryptocurrency deposit accounts,” said Rotunda, who said his agency and others are still investigating other companies with similar products. “At the same time, they still haven’t done anything.”

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