Exploring transformation of value in the digital age By Michael J. Casey, Chief Content Officer Was this newsletter forwarded to you? Sign up here. |
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Regulatory battles continue to dominate the crypto headlines. On the surface it feels as if the industry is getting hammered by them. But in this week's column I take for a glass-half-full reading of the situation, based on the importance of two key court hearings involving the Securities and Exchange Commission. In this week's edition of the "Money Reimagined" podcast, my co-host Sheila Warren and I talked to Rebecca Liao, co-founder and CEO at Saga, about how gaming will drive us toward a Web3 world. Have a listen after reading the newsletter. |
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US Judges Might Save Crypto from the SEC |
If this year's bruising battle between U.S. regulators and the crypto industry were a prize fight, we might judge the latest round as one in which the latter finally landed some meaningful blows even as the former maintained the upper hand. By the week's end, fallout from the liquidation of Silvergate Bank ensnared institutions such as Signature Bank and Silicon Valley Bank following government warnings about banks' exposure to crypto. But it would be wrong to downplay the points crypto scored between Thursday last week and this past Tuesday, when the Securities and Exchange Commission suffered important setbacks in two separate court cases. Here I'll go out on that all-too-familiar limb and say that if the U.S. continues to be a rule-of-law nation – some might say that's a big assumption – then this week's developments suggest that, when all is said and done, crypto will inevitably win. My confidence comes from two separate courtrooms in which judges, guided by an impartial legal framework, eschewed that popularist mode of judgment and instead considered the SEC's claims against the facts and counter-arguments presented to them. |
- Judge Michael Wiles of the Southern District Bankruptcy Court in New York said last week he was "absolutely shocked" by SEC lawyer William Uptegrove's bid to block Binance's acquisition of failed exchange Voyager on the vague grounds that the agency "might have an issue" with Voyager's VGX token possibly being an unregistered security. Four days later, Wiles approved Binance's deal.
- In this week's case dealing with asset manager Grayscale's challenge of the SEC's rejection of its bitcoin exchange-traded fund application, an appeals court panel grilled the SEC's lawyer over the Commission's argument that spot market-based prices for a bitcoin ETF cannot be trusted whereas those underpinning SEC-approved futures-based bitcoin ETFs can be. (Grayscale is a subsidiary of Digital Currency Group, which also owns CoinDesk.)
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Thank God one of the three branches of government seems to be upholding the separation-of-powers principle. In the U.S, a dysfunctional, divided legislative branch repeatedly fails to reach the consensus needed to enact laws, especially in the divisive, little-understood area of crypto, which desperately needs new rules befitting its decentralized governance structure. That abdication of responsibility by Congress has created a vacuum in which executive-branch agencies such as the SEC are excessively empowered to practice regulation by enforcement. The SEC has thus cultivated a Damocles Sword-like version of raw, discretionary power: it fosters the general expectation among crypto providers that it might one day choose to define their product as a security, but offers no clear guidelines on if and when the blade might drop. It's the threat that's empowering, not the action per se. This capricious, arbitrary practice of regulation by a tripled-headed lawmaker-judge-and-executioner is effective with private-sector companies that cannot fight back – such as crypto exchange Kraken, which was forced to withdraw its staking-as-a-service product after the SEC deemed it an unregistered security. But it won't fly in the courtrooms of judges like Michael Wiles. There, the judiciary branch continues to act as a check on unfettered executive power. It's a satisfying reminder that the United States' decentralized system of government across state and federal jurisdictions ensures that the day-to-day practice of justice across this vast land is, by design, mostly free of capture by the executive branch. This is cause for hope that, in the long run, the legislative branch will be compelled to encode clear legal guidelines that allow the crypto industry to safely innovate on this technology for public benefit. |
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Off the Charts: Ordinary Ordinals |
The Ordinals Protocol, which enables so-called "inscriptions" of images to create de facto non-fungible tokens out of Bitcoin, has sown much angst among the Bitcoin community. Those who believe the most established cryptocurrency should only be reserved for monetary payments fear that the larger amounts of data required by such inscriptions will tax the network's transaction-processing nodes and lead to higher fees.
But that doesn't appear to be the case so far, at least in terms of the impact on transaction fees, according to this observation by the ever-insightful Alex Thorn, head of research at Galaxy (a speaker, by the way, at our Consensus festival in April). Here's the chart he provided with his tweet on the matter:
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Thorn notes that at its peak since February, Bitcoin fees paid to miners for inscription transactions only reached 21% of total fees, and that the average fee per inscription is lower than that related to monetary transactions. Thorn believes that inscriptions will play a role in setting the floor for Bitcoin fees. But, so far, this does not look like the nightmare that Bitcoin "maxis" make it out to be. |
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The Conversation: SEC Takedown |
For a good, blow-by-blow account of the judges' challenges to the SEC lawyer in the Grayscale case, check out this thread from Bloomberg's senior ETF analyst, Eric Balchunass. |
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Relevant Reads: Silver No More |
- Bianco Research President and macro strategist Jim Bianco gave an insightful interview to CoinDesk TV in which he talked of how crypto-servicing banks had a more difficult time managing risk in a difficult financial environment than mainstream banks because regulators required them to be "perfect."
- Even as contagion spread, Daniel Kuhn laid out "four potential winners" from Silvergate's unwind.
- In an op-ed, Rosetta Analytics' Angelo Cavello explained why financial analysts didn't see Silvergate's demise coming.
- Ian Allison broke the news that JPMorgan was cutting its banking relationship with high-profile crypto exchange Gemini, showing how the contagion from Silvergate was spreading. Not only to other banks, but to crypto firms who are now having to deal with mainstream banks wary of dealing with their ilk.
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Check out the Consensus 2023 agenda for a first look at the hard-hitting conversations, workshops and thought leadership that await you at Consensus 2023. Be sure to check back often as updates are being made daily! Take 15% off with code MR15. Learn more and register. |
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