The Breakdown - Narrative Watch: Regulators Get Rowdy (aka Why You Might Owe Money On BSV)

Episode Date: October 14, 2019

Last week was apparently "government says get rekt" week in crypto. The SEC kicked things off by disapproving a bitcoin ETF proposal from Bitwise and closed things out by taking emergency action against Telegram's $1.7B ICO. In between, the IRS dropped its first crypto guidance in 5 years, indicating that forked tokens could create a tax liability, whether you want them or not. What's more, two Senators sent threatening letters to the CEOs of Visa, Stripe, and Mastercard who, along with eBay, dropped out of the Libra Association by the end of the week. The one bright spot was the CFTC saying that ETH is a commodity.  Watch: https://www.youtube.com/nathanielwhittemorecrypto

What's going on, guys? Welcome back to Narrative Watch. It is Monday, October 14th, and this week we are looking at the crazy amount of regulatory interaction last week across multiple agencies, across actual governing bodies like the Senate, all around crypto. It's like everyone coordinated. And so let's actually start with the SEC, who kind of bookended the week with action at the beginning and then major action at the end, as we'll see. So the early part of this was BitWise, right? So BitWise is one of the groups that has been putting forth Bitcoin ETF proposals. And if you'll remember, Vanek withdrew their ETF proposal a couple weeks ago, basically probably, you know, they have much more background information. They're in constant conversation with regulators. A withdrawal probably means that they didn't believe that it was going to get through and that it would be worse to push it through for some reason. reason. So the outstanding proposal at that time was this Bitwise proposal that was floating around. And basically the SEC hit it down pretty hard, right? So you can see here, Bitwise is saying that the SEC issued a 112 page order, disapproving the filing for the Bitcoin ETF trust. Though disapproved doesn't seem positive, this is a productive step in the journey towards a regulated crypto product. So exchange traded product. So basically, they then go on to talk about why they

didn't withdraw it. And so Jake Schrovinsky, one of the crypto legal core, crypto Twitter legal core, had a couple of things to say. First, he thought that this outcome wasn't surprising, right? If you've been watching the SEC actions, it doesn't seem like this has been, it doesn't seem like this is going to happen, right? Chances seem pretty low. He did say that he said this excruciatingly detailed was his words to describe the 112 page order. And he says it reads like a damning indictment of Bitcoin's market structure. Now, others you can see Nomad down here says reading the comments end there's only a single person out of 40 right-ins. The rest read like crypto-Twitter whining on both sides of the argument.

I think the only way something is going to pass at this rate is if somebody believes enough to sue. Frank from the block says, damning, yes, but amazing they are giving this space, this level of brain space. So saying that, you know, the fact that they have 112 pages to pull up is still potentially positive. But where Jake really lands on this is he says at this point, it's reasonable to assume that Jake Clayton's SEC will never approve a Bitcoin ETF. His term ends on June 5th, 2021, but could go another 18 months. Usually we'd see new ETF proposals filed immediately after rejection, but it might be time to take a year off. And then he goes on and he says to get ETF approval anytime soon, the SEC would have to change its views on how sponsors can satisfy the Exchange Act. Chairman Clayton supports the current

view that Bitcoin is susceptible to manipulation and surveillance sharing agreements with regulated markets are required. So basically the idea here is that there seems to be a fundamental belief that the markets are too susceptible to manipulation. And so that's kind of a big deal. So that's where we started the week, right? SEC, maybe not surprisingly, but still robustly denying the latest ETF proposal. Then we got kind of a surprise. You can see here, NIRAS from Coin Center, IRS cryptocurrency guidance. And basically, this is the first time that we've gotten guidance from the IRS around

tax and crypto policy for like five years since 2014. So the quote that NIRAS grabbed is, quote, If a hard fork is followed by an air drop and you receive new cryptocurrency, you'll have taxable income in the taxable year you receive that cryptocurrency. So this is the real what the real point of debate and contention is around this guidance, is that it seems to be indicating that if you receive tokens in an air drop from a fork, right? So when Bitcoin cash forks Bitcoin, you have a tax liability for those tokens, whether you wanted them or not, whether you approved them or not.

Now, obviously, this has a lot of people kind of freaking out, right? So you have Marco Santory from blockchain, did one of his threads on this. And he points out, he says, me, I'm not a tax lawyer. But I do think it's patently unfair to force individuals to liquidate hard to liquidate coins just to pay taxes on income. They never had control over receiving, and it's probably not worth that much that much anyways. But the real question is this one. have I exercised dominion and control, right? This is the phrase.

I think someone else said, I don't have the tweet pulled up, but someone else made the joke that this idea, people were all Googling, dominion and control, because that is what it comes down to. Coin Center in their kind of formal write of this said that new IRS guidance is like, quote,

owing income tax when someone buries a gold bar on your property and doesn't tell you about it. And there were a few others. James and Lop also came out hard again. this IRS guidance is a hot mess. What if you have keys but no software for much to spend the asset? What if you never sell or transfer the asset and it drops 90% in value? What's the value if the asset isn't even trading at the time of the fork? So, you know, the people who were less suspicious, less skeptical basically said like unless this shows up in your Coinbase account,

you know, that you can immediately sell it. You're not going to have that liability. But I still think that it creates this very weird dynamic, right? And like take the, take the, you know, BSV or Bitcoin cash, that shows up in your Coinbase account, like, well, one, you have to know to go look for it. Two, by the time that you realize, let's say you're on vacation for two weeks, in this market, the value of the asset could have gone down 50% in that time, especially for kind of like, you know, one of these forks that has a bunch of hype going into it, but is really almost a pump and dump type of thing. You are you going to owe on the liability of when it hits your account?

Like there's a really interesting and challenging set of issues. And this seems to me to just further complicate things. If nothing else, it certainly demonstrates just what a fundamental, what set of fundamental questions remain in terms of just what the hell crypto assets are. It's very clear from last week's action that still absolutely nobody has any goddamn idea what tokens actually are from a regulatory standpoint and how to how to do things with them. But it wasn't just these regulatory bodies that got up in crypto's business. It was also the actual Senate itself.

So the beginning of the week, obviously we've been talking a lot about Libra and the implications of Libra. And in particular, the questions that Libra brings up for governments and the U.S. government in particular about one, what's the future of digital money and two, what's the future of the digital global reserve currency? What's the U.S. dollars role in that? How does it preserve that? And so it's no secret that the U.S. has been relatively hostile to Libra. And it's to some extent that's been for multiple reasons, right? That's been about Zuckerberg in particularly and kind of the unfinished business that I think the U.S. government feels like it has with Facebook. But it's also

about this, the question, the fundamental potential to undermine the US dollar as a global reserve currency. So last week we saw a really kind of intense and threatening letter in a way from two senators, from Sherrod Brown, who's from Ohio and Brian Chats from Hawaii, both of whom were some of the most outspokenly kind of down on Libra when David Mark. is testified before them. And there's two notable kind of parts of this. One is they're very much using the like the criminal element, save the children kind of argument, right? So you can see down here the risks are not hypothetical. The New York Times recently reported a proliferation of online

child sexual abuse due in large part to tech platforms like Facebook. In fact, 12 million of the 18.4 million reports of child sexual abuse photos and videos around the world last year were attributed to Facebook Messenger. It is chilling to think what could happen if Facebook combines encrypted messaging with embedded anonymous global payments via Libra. So there's a whole lot going on here that is way beyond the scope of this, but suffice it to say, the narrative that they're going with is the crime narrative, which has always been there waiting for crypto. It's always been the biggest thing that crypto has to deal with. You know, like energy usage and all those things, forget it. At the end of the day, when it comes to regulators, the biggest fight is about the idea of this is enabling

crime, right? And they're even talking about encryption, right? There's a whole separate battle going on around whether Facebook is going to have to, is going to be able to actually do end end encryption or whether that creates too many barriers for law enforcement. The current Attorney General, William Barr, is pushing them aggressively hard. So Facebook has all these things going on just as it relates to that. So that was the one note, one of the two notable things. The second is this sentence over here. Facebook is attempting to accomplish that objective by shifting the risks and need to design

new compliance regimes onto regulated members of the Libre Association like your companies. And here's the money quote. If you take this on, you can expect a high level of scrutiny from regulators, not only on Libra-related payment activities, but on all payment activities. It's basically a threat, right? And it may be a true threat. It may be more like a promise, but it's still a threat. It's saying, get the hell out of this association or we're going to come after you. And that is an aggressive tone that I think a lot of people had issues with, right? So you have Bruce Fenton over here. Oh, let's actually get to the point. So this happened earlier in the week by Friday. So right as the day was ending on Friday,

there was this massive news dump where all of a sudden eBay and then Stripe and then MasterCard and then Visa had all left the Libra Association. So it worked. Basically, the threat worked, right? And so that letter that we were just reading was sent to three of those people, Stripe, Visa and MasterCard. And of course they're going to leave. Like, do you want that if you're just running a normal business? Like Stripe isn't sure exactly what the hell Libra is going to do for it. Visa and MasterCard certainly aren't sure. In some ways, you had to think Libra is just a hedge for them. And so when two senators, including a very high-ranking senator and Sherrod Brown, are coming after them and saying, we're going to go after you more for this,

they're going to say, right, piss off, Zuckerberg. Sorry, bro, don't care. And sure enough, that's what happened, right? So Bruce Fenton here says, Maxine Waters, who I guarantee could not explain the first thing about financial tech or blockchains, and her cronies in Congress have succeeded in getting some of the most profitable, popular, and innovative companies to leave the Libra project before it even started. Terrible. You know, I think that there's plenty of of ire to go around. I would say that I think that in this particular case, the onus is much more on Shats and Brown there. Then I also really liked this thread from Collins Belton over here, who's an attorney at Atrium. And he says, so as many predicted, looks like Libra is all but DOA

unless David Marcus and Facebook pull off a minor miracle. I'm going to say something that will probably get me shun by some. I think this should have said a lot of people, not because the result is great for crypto, but because the manner in which governments achieved this. I've been struggling to articulate just why I got this sinking feeling seeing this play out. But weirdly seeing other shadow government action curtailing innovation globally more recently has helped crystallize things with me. And basically, he goes on to describe how this pressure, this way that the government can assert itself vis-a-vis new technology innovation, it just leaves this weird feeling, right? this weird frustration. And I think, you know, the concern that he comes down to is,

is over here. Yeah, I mean, basically, democracies are meant to stymary, arbitrary, and capricious treatment, not encourage it. And I think that the worry here is like, doesn't this just happen to Bitcoin at some point, too, if it ever should become such a threat? This is kind of exactly the point that Sabo is making. So he's, Nick Sable commented on David Marcus's thread. And he says, you might want to ask yourself why the pressure has been so intense and read some history that Bitcoin pioneers were aware of, for example, the failure of Egold. Your failure to learn from history has caused you to, at great cost, recapitulate the failures from the past. And Marcus basically says, like, listen, I had a lot of appreciation for Satoshi

and Bitcoin before, but I have to say that appreciation is growing. You know, it still is this crazy singular moment, right, of such a powerful thing in what Bitcoin has become, not having a founder and a central point of failure in a founder and not even having an organization. That's what makes it such a different phenomenon. And so that was, I think for a lot of people, that was what was reinforced last week. But there's still, even though it was like Friday at 450 at this point, things weren't done. So Haley Lennon earlier in the week had said, why can't we chat and telegram have cryptocurrency, but Facebook can't? This is coming after the letter before all this, the actual members left. And then she followed that up,

because at basically Friday at like 455 Eastern Time, she says, wow, the SEC answered, they can't. SEC to halt telegrams $1.7 billion token offering. So basically, like I said, the SEC started and ended the week. The second round was SEC actually coming in and saying basically that the telegram's offering was an unregistered digital token offering. It has filed an emergency action, obtained temporary restraint. training order against two offshore entities. And it's doing this before those tokens get distributed,

right? So they were supposed to be distributed at the end of the month. That's why it was, that's why it was the action happened now, why it was an emergency action. So there's tons of ramifications for this. Again, a little bit beyond the scope of this because we're kind of just looking at the full overview. But the one thing that's worth noting is so Brian Fabian Crane, he said, I don't get this. Didn't Telegram sell using a saff like thing under Reg D exemption to accredited investors only. Any thoughts? And he tagged in a bunch of people. And realistically, this is a, this is a brutal moment for the idea of SAFs, the safe agreement for future tokens, which is kind of the framework that was set up to hopefully allow people to do these kind of token securities

offerings without them being securities offerings. This seems to be a rejection of that on some level. So I would say it's worth going through and reading more about this, but to the extent that we are wondering what the SEC thinks about even compliant token sales that are through this new version of compliance, which is kind of self-invented, i.e. the saft, it seems not to be really a thing. So through all this, obviously, a lot of kind of aggressive action against crypto. There was one positive note from a regulatory body, which was that. The CFDC here, Heath Tarbert, the CFTC chair, or not in an interview yet, an interview at a conference, he basically said that the CFT considers ETH a commodity, that ETH they anticipate futures

products soon. So you can see Riot Adams coming in, but so what is, what does this actually mean? This means that they, it's kind of reinforcing what they, what we heard last year from the SEC that maybe Ethereum or Ether was a security when it was being sold, but they, but they, that they didn't think it was a security now, right? That it did no longer constitute a security. And that creates lots and lots of more space for it to operate, right? For people to build derivative products

and things around that. And that's a, so Ethereum is kind of being granted that status in the view of the CFTC, you know, as of last week. Now, I will say, so I think there's obvious positives there. I will say that, as many folks pointed out, that that doesn't mean that you can just launch another Ethereum now, right?

And we keep coming back to this idea that tokens may be a security at the time of sale, that a token sale is a securities offering, even if they become not securities later. And that kind of creates a damned if you do, damned if you don't thing, where, you know, people just can't go out and sell tokens anymore because it's pretty clear that basically all of those offerings are considered by the SEC to be securities offerings, even if the SEC doesn't consider them securities later on. And so it's kind of there's this challenge where basically it may be that from a regulatory standpoint, only thing that have existed for a sufficiently long time and whose kind of token distributions were sufficiently far in the past are kosher.

So that's kind of what Preston is saying here. He says the CFTC chair declared Ethereum a commodity today, all but driving a stake through the heart of Bitcoiners who had hoped it would be declared a security. Here's why lawyers shouldn't advise their clients to go out and launch Ethereum 2.0. Lots of stuff this week, right? A huge amount of action. It's clear that crypto is on the agenda. It is clear that crypto is a big part of the conversation. It's clear that crypto is still has a long way to go before most people at these agencies, in these bodies, are ready to accept it into the system.

For some, that's going to mean a lot more patience, a lot more continuing to work with regulators. For others, it's going to be a reaffirmation of assets like Bitcoin that really function entirely outside of the normal system. Either way, always fascinating to watch, certainly deserving of one of these narrative watch slots to just see just how much is happening right now. And thanks guys for hanging out. I'll be back tomorrow with Crypto Daily 3 at 3 as every weekday, and I will see you then. Peace.