The Breakdown - A Regulatory Reckoning for the Crypto Industry?

Episode Date: October 10, 2020

On this week’s Breakdown weekly recap, NLW looks at a cross-section of regulatory news, including: CFTC and DOJ action against BitMEX and its leadership The U.K. Financial Conduct Authority’s ban of crypto derivative products for retail investors The DOJ’s new cryptocurrency enforcement framework  NLW discusses why these might reflect a new moment in crypto history, what it means for current builders in bitcoin and DeFi, and why recruiting corporate allies like Square will become more important than ever.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and elliptic, and produced and distributed by CoinDess. What's going on, guys? It is Saturday, October 10th, which means it's time for the weekly recap. And when I look back over the last week, really the last couple weeks, it's very clear to me that there is one major theme, and that is the rise of the regulatory dogs of war. Are we facing a regulatory reckoning coming for the crypto industry? So what do I mean? For the past year or so, most of the regulatory action has felt like simply catching up with ICO-era crypto. Since

since many in the space feel they've moved on from that, no one has been all that concerned when X or Y ICO is forced to settle and pay back its earnings because whatever, that was from 2017, that's a million years ago. The last 10 days or so, however, have felt markedly different. So let's walk through them. First was the action against Bitmex. On the one hand, this wasn't a complete shocker. We've known since early summer 2019 that the CFTC was looking into Bitmex,

and weren't particularly pleased with them. They had also announced this as Bitmex had announced that after a six-month grace period, everyone was going to need to be K-YC'd. Well, whatever was going on behind the scenes with Bitmex trying to make nice, it didn't seem to work. Last Thursday, the CFTC announced

just an absolute slew of accusations against the company, but that wasn't all. The Department of Justice actually filed criminal complaints as well around violations of the Bank Secrecy Act. The CTO of Bitmex was even arrested. I had Stephen Paley and Preston Byrne both lawyers on my show last week, and they both thought that this marked a pretty significant escalation. Fines and fees are one thing, but jail time is absolutely another.

Subsequently, we just got news in the end of this week that Arthur Hayes and the other leadership had stepped down as this all plays out. Next up, we jump across the pond to the UK, where earlier this week, the Financial Conduct Authority banned all crypto derivatives for retail users. The claim was basically that retail investors aren't really able to price crypto derivatives because effectively crypto is valueless, or at least it isn't based on anything, so derivatives then are just gambling. In other words, although it's a focus on crypto derivatives, it's really an indictment of crypto itself in many ways. The irony is, of course, that even though they're so upset about crypto being like gambling, gambling itself isn't banned,

so who knows there. Patronizingly, the order said that it would save UK retail investors the equivalent of 53 million pounds. In terms of response in the crypto industry, there are plenty who are no big fans of derivatives. They feel like they threaten things like the 21 million hard cap on the supply, of Bitcoin. They feel like they add unnecessary complexity. They feel like they do turn it too much into a casino game rather than something that's about understanding and pricing and valuing the underlying collateral and assets. But at the same time, most in crypto are fans of choice. And these two actions taken together, the CFTC and the DOJ in the US, as well as the UK's Financial Conduct Authority, suggests a pattern of governments going after derivatives.

Then, when it seems like there can't possibly be anymore, Attorney General Bill Barr announced the new Department of Justice tongue-in-cheekly named white paper called Cryptocurrency and Enforcement Framework. It is an 83-page document that comes after two years of study from the Cyber Digital Task Force, and there is a lot to unpack. Jerry Brito, the example, the executive director of Coin Center came out with hot takes very quickly after the release. He pointed out a few different things. He said, first, the introductory essay by the task force seems to pass the, quote, ideological Turing test, in that it fairly describes what and why this tech is being built. Basically, he's saying that the report does seem to understand the way that

the builders of Web3 envision the world. Brito points out that this report shows that the Department of Justice is fully aware. of defy. Brito suggests that the epigram at the top of the report conveys a balanced approach. And basically what he's saying is that on the one hand, the report acknowledges that this technology could change the world for the better, but on the other hand, that doesn't mean it won't be used by criminals, terrorists, and rogue states along the way. Brito takes issue with a part about anonymity in cryptocurrencies. The report says that the, quote, acceptance of anonymity enhanced cryptocurrencies or AECs such as Monero Dash and Zcash,

by money service businesses and darknet marketplaces has increased the use of this type of virtual currency. As discussed above, because AECs use non-public or private blockchains, use of these cryptocurrencies may undermine the AML CFT controls used to detect suspicious activity by MSBs and other financial institutions, and may limit or even negate a business's ability to conduct AML-CFT checks on customer activity to satisfy BSA requirements. Brito's response is, I think this is just plain wrong. There is nothing about anonymous cryptocurrency that would prevent an MSB from fully meeting its BSA obligations. Indeed, FinCEN has said as much. And it seems like a lot of the tension and a lot of the place where

people in the crypto industry are going to have umbrage with this report is around this idea of anonymity enhanced cryptocurrencies. Brito even points out that there's a very weird mention of a policy where the Department of Justice, quote, does not liquidate seized or forfeited AECs as doing so allows them to reenter the stream of commerce for potential future criminal use. Brito points out that this would be as strange as warehousing all dollar bills that are seized in criminal investigations. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place, and earn up to 8.5% per year on your Bitcoin.

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Scale your business. Visit elliptic.co slash coin desk to talk to a crypto compliance expert today. That's elliptic.com slash coin desk. The question I think becomes, is this a larger trend? It feels like to me that on the one hand, there is an acceptance by government that these assets, Bitcoin and the rest of the cryptocurrency world that it enabled, are not going anywhere. The language suggests that there is a perhaps begrudging acceptance,

and you can see this telegraphed in all of the, of course these are full of potential type language. At the same time, they are now clapping back hard and saying, if you continue to exist, you are going to exist with our rules. I believe that you have to take the source into account. Attorney General Barr is leading the Trump administration war on end-to-end encryption. This is a person and an administration who do not believe in rights

to financial privacy if they can get any terrorists or any criminals out of the deal. And that may seem overly harsh, but I think that the encryption fight is an extremely important battle and one that we should be paying much more attention to. So it's not at all surprising that anonymity enhanced cryptocurrencies are under the gun in a big way. One other note that I would point out is it seems to me that the cycle times between them cracking down are decreasing. The explicit connection between the ICO boom and Defi should not make people in Defi feel good, given that, as I said at the top of this conversation, the last year or so has been spent just systematically going through the offenders of the ICO boom and taking them to task.

Finally, I think it makes for an interesting discussion about where Bitcoin and Crypto find, allies. I've long thought that when it comes to crypto's place in the world, there's almost a power triangle. You have, of course, all of us, the Bitcoin and Crypto Native Industries, but then you have governments and then you have corporations and mainstream finance. This is sort of a triangle, corporations, crypto, and government. I think that we want to be on the side with two rather than one of the three. We want to be on the two versus one, because if corporations and finance and governments really didn't want crypto to exist, it could create very difficult times for us. If, on the other hand, there are strong vested interests in the corporate sector that has lots of

lobbying power, then governments have to play ball in a different way. In that light, moves like squares this week to put Bitcoin on the balance sheet as a reserve asset become even more important and timely. It's an affirmation from these corporations to the world that this is a thing that matters to them and is not something that they're going to just let go away without a fight. So anyways, guys, that's my take. The theme of the week is a regulation reckoning on the way. It's already here in some ways. I don't think it's an existential threat, at least as it's defined now. In fact, I think it shows how deeply entrenched crypto and specifically Bitcoin actually is. However,

I do want more people to have more and better and easier access to Bitcoin, not for it to be much harder. So as much as we can rant and rave about how Bitcoin can survive pressure from nation states, I don't really want it to have to. So with that, let's pay attention, let's pick our battles, and let's make this safe space for technology that's about human freedom. All right, guys, that's it for me today. I hope you're having a great weekend. I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.