Losers from Crypto Legal Chaos

also, what about the winners?

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Such a joy to come back to the Soviet States of America this past weekend following a jam packed (and amazing!) trip in Osaka, Japan for Devcon V. As I caught up on the crypto news onslaught that dropped between the time we left Japan and landed stateside, I couldn’t get that iconic opening scene from The Newsroom out of my head.

[Believe me, I wrote and deleted many a tangent in this paragraph, but suffice it to say many US professionals are fed up with the ever darkening political and regulatory fronts, and considering international options. The US is squandering its edge in tech (Silicon Valley), finance (New York), and free market capitalism (ok, maybe this has been declining for a while). The future of financial services will likely be in Asia. In fact, it’s no longer a sure thing to me that holding crypto will even remain legal in the US in a few years.]

We witnessed a four-pronged attack on the US crypto scene in less than 72 hours last week. I’ve got you with the cliff notes below, or you can watch NLW’s terrific breakdown of the events in this week’s Narrative Watch.

Grim, but all is not lost!

Here’s a primer on everything that happened, along with a glass half-full rendition of what went down and who the winners are amidst the recent tumult.

1) The SEC rejected the Bitwise Bitcoin ETF.

What happened: The Commission believes crypto markets are too susceptible to price manipulation to support an exchange traded fund on the New York Stock Exchange. They didn’t buy Bitwise’s assessment of “real” exchange volume, presumably because many of the exchanges the firm relied cited were not registered or regulated in the US.

Kill shot: “Binance, based in Malta and the single largest bitcoin trading platform among the platforms the Sponsor identifies as “real”—representing 39% of the purportedly “real” bitcoin volume—has not registered with either FinCEN or the NYSDFS; four of the ten platforms the Sponsor utilizes—representing 69% of the purportedly “real” bitcoin volume—do not have a BitLicense from the NYSDFS; and half of the bitcoin platforms the Sponsor utilizes lack internal or third-party market surveillance tools.”

Double kill: The SEC said they couldn’t be sure “where price formation occurs”, and whether the market’s tail was wagging the dog. Could price discovery actually be happening on exchanges with fake volumes and minimal surveillance, and then that manipulated spot price was causing movements on real exchanges? This is a question that will not be answered in the near- or medium-term absent major global surveillance-sharing agreements, some of which may require buy-in from foreign domiciled exchanges that don’t want to invite the scrutiny. Do not hold your breath for a US-listed ETF.

Big Losers: Other bitcoin exchange traded products in the US and internationally; non-accredited investors with IRAs and brokerage accounts.

Winners: Crypto brokerage services (Fidelity, Tagomi) who will win clients that may otherwise have waited for an ETF; DCG’s Grayscale.

Grayscale is by far the biggest winner here. It has a medium-term monopoly on access to the public markets given the exotic structure of its “Sidedoor ETFs” quoted on OTC markets. There are structural problems with these products from a retail investor’s standpoint (as we’ve written before), but they will probably swell in AUM as they’re lucrative for institutional investors, who can usually exit their position after a year at a significant premium to spot. Also they are the only public market option in town for retail purchasers. Grayscale now has four of these things in the wild: the Bitcoin Trust, Ethereum Trust, the Ethereum Classic Trust, and as of today, the first publicly traded, market-cap weighted index fund. Beyond that, Grayscale owner Digital Currency Group seems likely to be the first publicly traded U.S. crypto company.


2) The SEC stops Telegram’s $1.7 billion token distribution in the US.

What happened: This happened late Friday afternoon, and will provide entertainment for the next several weeks leading up to Telegram’s October 31 network launch deadline. The company first unveiled plans for its “Telegram Open Network” in early 2018, when it raised a massive round led by blue chip VCs like Benchmark, Sequoia, and Lightspeed. They have stayed quiet ever since while working towards a launch. Lots of schadenfreude around TON to date as no one really knows exactly what the token will be used for or whether its tech actually works.

Why it matters: This would be the largest private token sale to hit the liquid crypto markets…ever. (EOS was a continuous year-long ICO, not a private sale.) It’s also the most aggressive action the SEC has taken against a token project to date. Something that seems to stem primarily from two conclusions at the SEC: 1) Telegram pitched investors on the “chance for 0x-50x returns on their investments” and 2) the company raised massive sums of money from funds that would have no realistic use of that many tokens outside of speculation. So moar clues on what will cause the SEC to crack down on projects vs. let them off lightly. tl;dr: “actually no, the SAFT won’t save you.”

What’s next: Who knows? TON has to launch by October 31, or Telegram will need to return funding or negotiate an extension with its backers, 25% of which are U.S. funds. Telegram allegedly sent a note to investors aiming for the latter, a one year extension to ensure it could continue to work towards a launch and address its legal issues. It’s unclear whether TON could simply return funding to its U.S. backers and launch as originally anticipated.

Winners: The SEC. Swinging the lumber around on a Friday afternoon with two weeks to spare on a $1.7 billion global market event is probably the Super Bowl of regulatory actions for these staffers.

Losers: Filecoin, Dfinity, Polkadot, others? Filecoin and Polkadot each at least have much larger decentralized communities and working code out of the gates. But you can’t be feeling great if you’re a SAFT issuer right now.

Also, Telegram’s private investors. The holding period just got longer, and the investment just got riskier. I suppose they can ask for money back, but that’s still a “loss” in VC. Although, they could very well have caught a break if things get delayed and crypto markets re-surge in 2020 (a more favorable dumping environment).

Stay tuned.


3) The IRS publishes a ludicrous tax guidance update.

What happened: What the actual fuck, man. Come on. The agency says forks or airdrops can create taxable events once a user exercises “dominion or control” over the new assets. They define this as having clear custody of a forked asset accessible via a private key or a hosted wallet. The amount would be taxed as ordinary income, which would be recognized at the fair market value of the new cryptocurrency when it’s actually received.

So. Many. Questions. What if I don’t know about the airdrop? What if it’s a minor fork? What if it’s a major fork, but it causes a significant loss of an investor’s principal a la a corporate spinoff? How do you redo your tax basis? What if you never sell or transfer the asset? How and when do you assess fair market value? What happens if the value of the forked currency tanks as people rush to sell to cover their tax gains? Do you owe more than you ever even knew you had?

What they should have done: It would have been clearer to say that holders should recognize ordinary income only upon the movement of their assets rather than the fair-market value upon a fork or airdrop (when they are highly illiquid, or when price discovery is difficult or impossible). Or, you know, not tax every single crypto transaction that ever occurs and create impossible tax reporting requirements. We like the French model here.

Big Losers: funds, exchanges, anyone that custodies client funds

Winners: Coin Center, The Blockchain Association, tax lawyers, who will be tasked with un-screwing this whole thing.

I guess they got Al Capone on tax evasion, so that’s probably the route they’ll take to behead everyone in the US crypto scene as well. (Ugh, that’s a bad comparison…)


4) Libra partners get threatened, defect, but Libra keeps chugging.

What happened: Senator Sherrod Brown of Ohio and Senator Brian Schatz of Hawaii sent love letters to Visa, Mastercard, and Stripe as well as some of the other major participants in Facebook’s Libra, basically saying: “That’s an awful nice business you have. Be a real shame if something happened to it [if you follow through and join the Libra Association].” Seven of the original 28 committed partners dropped out including nearly all of the major financial players (PayPal, too.)

Crystallized reaction (good thread):

What’s Libra again? It hasn’t launched yet, but its the Facebook-incubated stablecoin to be comprised of USD, Euro, Yen, GBP, and Singaporean dollars. Libra is to be governed by a consortium of 100 companies who vote on technical decisions in return for earning interest on the underlying deposits. Basically a bona fide decentralized central bank with 2 billion+ citizens out of the gate. (They’re recruiting former Central Bankers to lead the association according to The Information.) It’s been a shitshow ever since the unveiling. Regulators in France, Germany, India, and (ding, ding, ding) the good ole USA have pushed back sharply. Odds of a 2020 launch seem low, but they are trekking forward regardless.

Losers: Anyone delusional enough to believe in the U.S. Congress; Facebook - you have to believe this criticism will be relentless and ongoing.

Winners: U.S. Treasury Secretary Steven Mnuchin (a modern day Dr. Evil); Libra?; all crypto holders.

Libra! Twenty-one organizations still signed the Libra Association charter earlier today, despite the high-profile defections and not-so-veiled threats from the Senate. They also have a monster board in David Marcus (Calibra, ex-PayPal), Katie Haun (a16z, former federal prosecutor); Wences Cesares, (Xapo, Silicon Valley’s Bitcoin “Patient 0”); Patrick Ellis, (PayU); and Matthew Davie (Kiva). They also claim to have 180 eligible entities interested in taking spots as validators, and replacing the seven defectors. I cannot wait to watch Zuck testify next week. 10/23. (Mark your calendars.)

Everyone wins! Aside from getting to watch Zuck on a booster seat in front of Congress again, everyone wins from Libra’s fight. The optimal outcome for the industry is for Libra to ultimately die a hero’s death. They and their partners must go to the mat fighting for regulatory approval in the coming years, and somehow find a way to survive and advance until bitcoin gets through its next phase of growth. We need Facebook - the big bad wolf of tech - to take every bullet possible on behalf of the broader industry. The longer Libra survives, the longer bitcoin and other decentralized platforms are truly out of the limelight.


This was a meaty one. Shorter one tomorrow.

Have a great week. Viva la revolucion.


P.S. Have questions? Want to troll us? Let us know on Twitter.

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Quick Bits (Don't read that, I read it for you)

  • ✋ Telegram ($GRAM) has responded to a recent court order by the Securities Exchange Commission in a letter to its token investors. The team said they are "surprised and disappointed that the SEC chose to file the lawsuit." The SEC claims the company sold unregistered securities, but Telegram says that it has tried to communicate with the regulator and solicit feedback over the past 18 months regarding its TON blockchain project.

  • 🤔 The SEC, FinCEN and the CFTC issued a rare three-party joint statement on Friday regarding digital assets, which emphasized that people who engage in digital asset activities must abide by their anti-money laundering and countering terrorism financing obligations via the Bank Secrecy Act. The Agencies stated that digital assets for the purposes of the statement "include instruments that may qualify under applicable U.S. laws as securities, commodities, and security- or commodity-based instruments such as futures or swaps."

  • 🇮🇪 Cryptocurrency exchange Coinbase has been granted an e-money license by the Central Bank of Ireland, CoinDesk reports. Coinbase UK CEO Zeeshan Feroz said the exchange is one of the very first firms to receive the license from the central bank, following a Dublin office opening a year ago.

  • 🎁 Over the next six months, the Zcash ($ZEC) community will be developing a wrapped token to be used on Ethereum ($ETH). Josh Swihart, VP of marketing and business development at the Electric Coin Company (ECC) noted,"If you want to do lending, if you want to do DAOs [decentralized autonomous organizations], all of that stuff could be done with zcash as well. … Ultimately, we want zcash shielded [addresses] to be usable in ethereum smart contracts."

Did I miss something?

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