Interview with CorporateCounsel.Net Re: Proposal for SEC Digital Asset Reg Reform

Enjoyed my interview with Liz Dunshee at CorporateCounsel.Net. We talked about the SEC’s Investor Advisory Committee, which advises the SEC about changes to the federal securities laws to better protect investors. I’ve tried to use my position on the SEC IAC to be an advocate for the digital asset community.

SEC regulations are not designed for the modern era of blockchain. Gary Gensler says digital asset project developers should “just come in and register.” That response is incredibly obsequious, as the 33, 34 and 40 Acts were not designed for this industry.

It would be ridiculous to treat miners as underwriters under the securities laws, but there are projects for which the 33 Act would do just that.

Things digital asset owners may actually want to know about, like tokenomics, distribution, and code audits aren’t covered by Regulation S-K.

And yet the SEC continues to take an aggressive approach to defining the “Howey” test that considers an asset as a security that must register with the SEC.

That’s why I submitted a public proposal to the SEC calling for it to open a call for comment about digital asset regulation, more here. The SEC should be in a posture of learning from the crypto and crypto law communities, not attacking them. CorporateCounsel.net is a traditional securities law forum, so I hope this discussion helps to bridge the traditional securities law community and the crypto law community. Listen here.

The Latest on the Fight Over a US Bitcoin Spot ETF

The SEC has approved a few Bitcoin Futures ETFs. They’re clunky and they have huge intermediary fees. A Bitcoin spot ETF would do a much better job of giving retail investors exposure without having to go through wallets or individual exchanges. I’m sure all the major retail brokerages would love to offer the product. Despite both Canada and Europe approving Bitcoin spot ETFs, the US SEC still drags their heels.

Why? The SEC says it wants to make certain that the underlying markets can’t ever be subject to manipulation. That side of the argument articulated here. Will the spot prices converge as quickly for Bitcoin trades as securities in the NMS system? No.

Is the SEC holding a bitcoin spot ETF to the same standard as prior ETF applications? No, it is holding these applications to a ridiculously higher standard. At this point the regulatory resistance is more a function of political calculus than regulatory due process. Which may lead to legal challenge, the folks at Davis Polk make a good argument that the bitcoin spot ETF application is being ill treated relative to the Bitcoin Futures ETF, this memo would make a pretty good legal filing…

Bitfinex Hack Proceeds Found, Bitcoin Ledger Helps Law Enforcement

The Department of Justice this week announced that it has recovered most of the bitcoin that was stolen in the Bitfinex hack from 2016. The stolen bitcoin was then worth $70 million but is worth $4.5 billion today. A husband and wife were charged with laundering the proceeds of the hack.

The story has a lot of interesting undercurrents, the wife stars in weird rap videos under the name RazzleKahn (her site describes her as being “like Genghis Kahn but with more pizzazz”) and gave a talk about how to use deception in social engineering. She also has a column with Forbes, where one article talks about “experts share tips to protect your business from cybercriminals.” Hmm.

The ultimate takeaway is that the immutable nature of the Bitcoin blockchain helped law enforcement track the proceeds (and made the stolen bitcoin difficult to spend in the first place). Chainalysis has more here.