State and federal regulators are opposing a billion-dollar deal between the cryptocurrency exchange Binance.US and the bankrupt cryptocurrency lender Voyager. The regulatory intervention is part of an ongoing struggle between Binance, the ultra-dominant cryptocurrency exchange, and U.S. regulators. Tensions between the two appear to be nearing a boiling point. The dispute also highlights an American regulatory environment that is increasingly hostile toward the cryptocurrency industry writ large, particularly in the wake of the FTX cryptocurrency exchange collapse.
From “How are institutions and companies investing in crypto” and “Sequoia Capital launches $500 million fund to invest in crypto” to “FTX files for bankruptcy” and “Sequoia Capital marks down its $210 million crypto investments to $0” – the crypto market capitalization skydived from $3 trillion in November 2021 to $881 billion, experiencing a 71% freefall in just one year.
Major household names such as FTX, BlockFi, Celsius, Genesis, TerraLuna, Three Arrows Capital, and Voyager all evaporated within days after public recognition of corporate issues including capitalization and intra-firm lending. Last summer’s TerraLuna and Voyager bankruptcies foreshadowed the debacle to come. However, enthusiasts remained naively optimistic until the shockwave of FTX’s evaporation led to the collapse of an entire market. Investors rushed to withdraw their investments only to see their accounts already frozen or funds already missing. Before it is too late, either the Commodities Futures Trading Commission (CFTC) or the U.S. Securities and Exchange Commission (SEC), or the agencies jointly together, should take action on this volatile decentralized market.
New investment vehicles and opportunities have flooded the financial services industry over the past few decades, but arguably none have grown in popularity at a rate comparable to cryptocurrency. A cryptocurrency is a digital or virtual currency typically based on a decentralized network that utilizes blockchain technology. In other words, this decentralized feature allows a network of users to verify and record transactions without relying on any central authority, which permits the cryptocurrency to exist without government interference.
Recently the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) added Tornado Cash to its Specially Designated National List. As part of enforcement efforts, the list contains individuals and companies that have been owned or transacted with targeted countries or organizations that may prove to be a threat to the United States. This action gives rise to questions regarding “secondary” sanctions/designated risk, and the effect this policy has on smart contracts and other protocols.
While over 10 years have passed since Satoshi Nakamoto first introduced Bitcoin, digital currencies continue to remain unregulated by financial authorities despite a number of challenges that have plagued consumers and the government: the Silk Road, fraud, and various other financial crimes. Additionally, many consumers invest in cryptocurrencies because they are not controlled by any central government monetary policies. However, cryptocurrency investors are also at risk of their money losing its value when the market takes a tumble, as evidenced by the recent current cryptocurrency downturn. Despite these continued challenges, imposing regulations on cryptocurrencies has proven to be difficult. Until President Biden’s Executive Order, issued on March 9th of this year, the White House steered clear of recognizing digital assets as a valid form of currency. The President’s Order explicitly recognized the need for research and policy implementation across various government agencies in order to shape the way cryptocurrencies are regulated.
On June 22nd, ten-year-old Yuna was reported missing by her teachers. Just one week later, the police discovered a sedan in the southernmost coast of South Korea, two hours away from Yuna’s home. The three bodies recovered belonged to Yuna and her parents, both in their thirties. The police suspected suicide. Among the parent’s last online searches included “LUNA,” “sleeping pills,” and “how to commit suicide.” Evidence further suggested that Yuna’s parents were unemployed, invested their lives savings into the cryptocurrency market, and struggled from financial debt of $100,000.
While a new category of digital assets has become mainstream in Europe, regulatory concerns in the U.S. have largely kept American sports enthusiasts out of the market for now. These new digital assets are referred to as “fan tokens”, a blockchain-based technology that allows teams to enhance their fan engagement.
On Wednesday, April 6, 2022, Senator Pat Toomey of Virginia released a discussion draft of the Stablecoin Transparency of Reserves and Uniform Safe Transactions Act of 2022, also known as the Stablecoin TRUST Act (“the TRUST Act”). This new legislation, introduced in the United States Senate, aims to create a three-pronged regulatory framework for the issuers of stablecoins in the United States. Like similar bills on the topic of stablecoin, such as the Stablecoin Innovation and Protection Act of 2022, the bill is short at only fourteen pages long. Where the bills differ is immediately noted in the more robust definitions section of the TRUST Act which lays out a six-part definition of “payment stablecoins” that covers the design intent of a stablecoin, who can issue a stablecoin, whether the holder can inherently earn interest, and where the stablecoin transactions are recorded.
The popularity of NFTs has been rapidly increasing over the past year, but regulations and guidance relating to the tax consequences of buying and selling NFTs has been slow to keep up. Despite also living on the blockchain, NFTs and cryptocurrencies are not created equally in the eyes of the IRS. The IRS has addressed the rising popularity of cryptocurrencies and published guidance for crypto-investors but has not yet published any specific guidance for NFTs. This leaves many investors in a position of uncertainty regarding the tax consequences of their investments.
On Tuesday, February 15, 2022, Congressman Josh Gottheimer released a draft of the Stablecoin Innovation and Protection Act of 2022 (“the bill”). This legislation attempts to both define stablecoins as well as provide a legal framework in which the issuers and users of stablecoins can safely and legally operate. The bill is surprisingly brief, only nine pages long, but Gottheimer claims that it will provide greater direction and certainty to the marketplace in order to boost innovation while also protecting consumers.