The Breakdown - ​​Is Kraken's Settlement With the CFTC Actually Bullish?

Episode Date: September 30, 2021

This episode is sponsored by NYDIG. Today on “The Breakdown,” NLW looks at the $1.25M settlement Kraken just finalized with the Commodity Futures Trading Commission, which accused the crypto exchange of offering margin lending products without the proper licensing. Many noted the small size of the settlement suggested a more lenient CFTC. More important, however, was CFTC Commissioner Dawn Stump’s concurring statement, which called upon her colleagues to replace the current guidance - nearly four years old in concept at this point - with real, formalized rules.  Also today on the Brief: Elizabeth Warren lambastes Fed Chair Jerome Powell A positive new crypto mining bill from a bipartisan source Ripple launches a $250 million NFT fund NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Marilyn Nieves/E+/Getty Images, modified by CoinDesk.

That statement from Commissioner Stump could not stand in more opposition to the SEC, who continues to refuse to offer guidance other than in enforcement actions, and which continues to insist that Howie tells you everything you need to know about how securities laws should be applied to cryptocurrencies. The CFTC is basically saying if we're going to regulate people under these rules, we have to explain to them how it's going to work, and we have to figure it out for ourselves first. 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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, September 29th,

and today we are talking about Crackens' just announced settlement with the CFTC and why it might actually be bullish. First up, however, Let's do the brief. First on the brief today, Elizabeth Warren likes Jerome Powell about as much as she likes cryptocurrencies. Powell, along with Yellen, testified before the Senate Banking Committee yesterday as part of a requirement for these main officials to come in and talk to Congress and the Senate at a regular clip in the wake of last year's unprecedented central bank involvement in the economy. There was a lot of discussion, which will probably make it to other shows this week, including Yellen's intent to go after unrealized. capital gains, but the fireworks yesterday were mostly from Elizabeth Warren. Warren accused Powell of watering down post-financial crisis bank regulations. She said, your record gives me grave concerns.

Over and over, you have acted to make our banking system less safe, and that makes you a dangerous man to head up the Fed, and it's why I will oppose your renomination. That dangerous man line is the one that's making all of the press and all of the social media, but this is the first time that Warren has come out publicly and said that she'll oppose Jerome Powell's renomination. As I was discussing yesterday, Powell's term is up in February, and there is rampant speculation about whether President Biden will nominate him for another or perhaps choose someone else, with Lail Brainerd, another Fed official being the most commonly suggested. Warren continued, so far you've been lucky, but the 2008 crash shows what happens when the luck runs out. The seeds of the 2008 crash were planted

years in advance by major regulators like the Federal Reserve that refused to reign in big banks. I came to Washington after the 2008 crash to make sure nothing like that would ever happen again. On the one hand, I suppose it's nice for someone in the Congress or Senate to be sort of holding accountable these unelected officials. At the same time, it's so hard not to see Elizabeth Warren's political questing, especially now that we've seen how she's just willing to apply the same rhetoric, the same narratives to our crypto industry, even though it's such a different space. Either way, this is a thing that happens, so there's the brief on it. Next up on the brief today, a new positive mining bill? Two senators are asking the U.S. Department of the Treasury to look into crypto mining around

the world, but with an eye to U.S. competitiveness. The bill is created by Maggie Hassan, a Democrat from New Hampshire, and Joni Ernst, a Republican from Iowa. If this bill was passed, Treasury would have to write up a report within two years of its passing. focused on mining and the impact of mining on supply chains in areas such as semiconductors. Also, and this is a quote from the block, the study would also assess the political frameworks mining intensive countries used for the industry. To compare, the study would also assess the types and dollar values of cryptocurrency mined within American and Chinese borders from 2016 to 2022, as well as any other countries the Treasury finds relevant.

Maggie Hassan's statement on this said, in order to strengthen U.S. competitiveness, our government must get a better handle on the role that cryptocurrency is playing in the global economy and how it is being leveraged by other countries. This I see is out and out positive. It's basically a Democrat and a Republican coming together, bipartisan, to say we should learn more about this, not because we think we probably need to ban it, but because we think it's probably a pretty important thing for the global economy going forward and we want to know where we stand relative to our competitors. I think that the more that Bitcoin and cryptocurrency in general remains a bipartisan issue, something that doesn't easily fit into the old food fights,

the better it's going to be for all of us. Last on the brief today, one that I would not have expected to be bringing to you, but here we are. Ripple is launching a $250 million NFT fund. Now, Ripple, have you been watching these guys for the last four years or whatever it's been, they have always, always, always, always focused on their cross-border payments, their remittances, all that sort of stuff, that sort of infrastructure as they, thing, what they offered that was different. This is something of a pivot or at least an opportunistic expansion into NFTs. They have a few partners for the initiative, including mintable and mint

NFT, as well as the brand agency VSA partners. It seems like they're trying to grab the environmentally friendly NFT narrative, but I actually don't particularly care about the specifics of this deal or this initiative. I think that in the long run, to the extent that NFTs continue to be a thing, they're going to obliterate chain allegiances, and it will be the collector communities that determine legitimacy, regardless of which chains things were initially minted on. I share this ripple news because I think it relates to our main topic, and here's a Travis Kling tweet that connects the dots. We got ripple out here punting 250 bucks into NFTs and crack and catching couch cushion fines, but tell me again about how U.S. regulators are getting ready

to shut all of crypto down. Nidig sponsors this podcast, and they also put out a really good newsletter, focused purely on Bitcoin. If you want insights into what's driving market moves, regulatory changes, and the metrics that deserve your attention, sign up at nidig.com slash nLW. That's NYDIG forward slash NLW. Let's shift to our main story. There has been a ton of speculation that we're going to see some enforcement actions soon. And there's a reason for that. It's the end of a lot of these agencies fiscal years. These agencies seem to be commenting more and more and more. Certainly the SEC is making it a point to talk about crypto more and more and more, and yesterday we actually got one,

although it doesn't really seem that bad. U.S. Exchange Cracken is paying a $125 million fine to the CFTC. Here's what Compound General Counsel and overall crypto-legal expert Jake Trivinski had to say about it. Enforcement actions are usually bad news, but this seems quite positive. Cracken made a good deal and solved an open regulatory issue. CFTC got a win and asserted its authority, and Commissioner Stump a good statement calling for clarity. I have to think everyone's happy with this one. The accusation was that Cracken had violated the Commodities Exchange Act. How? By offering margin crypto products between June 2020 and June 2021 without registering as a designated contract market or DCM or a futures commodity merchant on FCM. From the CFTC, during the relevant period,

Cracken offered potential in existing U.S. customers the ability to enter into margined retail commodity transactions on its exchanges. Margin trading was available to any U.S. person who Cracken approved for a user account. The margining was up to five to one. Under the settlement with the CFTC, Cracken will pay $1.25 million within 30 days. They will cease to offer margin product to U.S. persons, and they waive their rights to hearings and court review. So, what's Cracken's take on this?

Well, Cracken had, quote, sought clarity around CFTC margin trading guidance and began proactively limiting margin products in June 2021. With the settlement they wrote, we appreciate that today's settlement acknowledges our cooperation and engagement on the issue. We are committed to working with regulators to try to ensure the rules governing digital assets create a level playing field globally, one that allows the crypto space in the U.S. to flourish while protecting the interests of individuals and the integrity of the industry. But there is a larger issue, which is that there isn't really a lot of clarity to be had. One of the most interesting things to come out of this is, CFTC Commissioner Don Stump's concurring statement.

Basically, the TLDR of this is that, I agree with this decision, but we've given some guidance, but we need to be clearer. The guidance she's referring to is the final interpretive guidance on retail commodity transactions involving certain digital assets issued in 2020. As she points out, this was adopted two and a half years after proposal, and it's now been another year and a half. In her statement, she writes, in the rapidly developing world of digital assets, two years is a lifetime. And yet now here we are an additional year and a half later still. As the guidance

becomes increasingly relevant to the Commission's enforcement program, I believe it is incumbent upon the Commission to undertake a rulemaking proceeding to supersede the guidance by adopting binding and enforceable rules that will provide certainty to the marketplace and a shared understanding of the quote rules of the road. She goes on to point out that things are just blurry. Here's her statement about Cracken's registration. The Commission finds that Cracken violated CEA Section 4A because it engaged in retail commodity transactions that are prohibited by the CEA unless traded on or subject to the rules of a DCM, a registration designation that has neither been requested by nor granted to Cracken.

But it also finds that Cracken operated as an unregistered FCM with respect to those transactions, which begs the question. If Cracken had sought to register with the commission as an FCM, how would it have been expected to operate? Absent these transactions occurring on a DCM, they would continue to be illegal even if Cracken had an FCM registration. Furthermore, how Cracken would be regulated as an FCM is not entirely clear, because many of the commission's rules governing its regulation of traditional FCMs do not fit Cracken's role as an exchange. It would also be unprecedented for an entity to register as both a DCM and an FCM.

So as you can see, they're basically falling over themselves, saying that if they had gone one direction, they would have run a foul of the other direction, if they had gone the other direction, they would have run a foul of the first direction. But it's unprecedented to run in both directions as once, so what the hell is Cracken's supposed to do? She continues. In short, the application of the commission's FCM rules to an exchange on which retail commodity transactions are traded is uncharted territory at this time. I agree that Cracken's activities meet the definition of an FCM set out in the CEA, and that Cracken thus operated as an FCM without registering as such, though I would note this is a rather broad interpretation of the definition beyond the traditional application. I believe that if the commission is going

to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the Commission to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the Commission will apply them in enabling the entity to conduct business with U.S. customers. It's a mouthful, but let's read this last line again. I believe that if the Commission is going to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the commission to explain in a transparent manner the relevant legal requirements for such an entity

that seeks to register as an FCM and how the commission will apply them in enabling the entity to conduct business with U.S. customers. This is why people like Jake Trevinsky are convinced that this is actually bullish. That statement from Commissioner Stump could not stand in more opposition to the SEC, who continues to refuse to offer guidance other than in enforcement actions, and which continues to insist that Howie tells you everything you need to know about how security's laws should be applied to cryptocurrencies. The CFTC is basically saying if we're going to regulate people under these rules, we have to explain to them how it's going to work, and we have to figure it out for ourselves first. A few more takes from Twitter, Alex Kruger wrote,

$1.25 million. What does that princely sum tell you? Ryan Selkis writes, Crack and paying $1.25 million in a CFTC settlement is the regulatory equivalent of putting a quarter in a jar for swearing. You get accused of doing something bad with zero actual harm. Drop a coin, all good. These are the 11th hour regulatory news items? Crypto must not be so bad. Now, lest there's no wood to knock on around you wherever you are, I'm not convinced that this will be the last 11th hour regulatory news item we'll see. But the point still stands that this really isn't that bad, and in fact, it has indications that could be very good. Now, one last note, speaking of the SEC and the CFTC, I mentioned previously that CFTC Commissioner Dan Berkovitz

was leaving the CFTC. My attitude was a bit of don't let the door hit you on the way out, given his attack on the industry over the summer. Well, guess where he's headed? That's right, the SEC. Dan Berkovitz will become the new General Counsel of the SEC starting November 15th. The Office of the General Counsel manages the SEC's litigation efforts. It makes recommendations on enforcement actions, rulemaking, and interagency activity. Listen, the optimist. The Optus, optimistic take is that Dan is very pro-compliance and pro-rules, so maybe he'll actually articulate some of those rules rather than just screaming Howie and Reeves over and over again. At least we can hope. For now, I hope you're having a great week. I appreciate you listening. And until tomorrow,

be safe and take care of each other. Peace. Hello, listeners. If you're a financial advisor, manager, or CFA looking to learn more about Bitcoin, investment strategies, and tools to share with your clients, then you're invited to attend CoinDesk's Bitcoin for Advisors event on October 6th. It's a fully virtual event experience designed for advisors by advisors, who have found ways to get compliance ready in order to add Bitcoin advising to their practices. You can head over to coin desk.com slash events to secure your complementary registration today. That's coindesk.com slash events where you can register for free.

We'll see you on October 6th, and thanks for listening.