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AB Researcher: @Whitetail
On June 28, 2024, the US Supreme Court overturned the 1984 Chevron ruling that courts defer to federal agencies interpretation of ambiguous statues (all statues are laws but not vice versa). The 6-3 decision means the courts must exercise independent judgement when interpreting laws. The Chevron Doctrine, established by the U.S. Supreme Court in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (1984), dictates that courts should defer to a federal agency's interpretation of ambiguous laws that the agency administers, provided the interpretation is reasonable. This ruling has been one of the key drivers for the expansion of the administrative state. It is no more.
The effect this has on crypto is it limits the power of the SEC, CFTC, and forces issues to the legislative and judicial branches where this current SEC has a poor track record. This is what the Founding Fathers wanted. If one branch got too much power, in this case the administrative state appointed by the executive branch, there was a way to stop it. I expect in the future that there will be many lawsuits around federal programs or agencies who based their expansion on the Chevron rule and if those actions were constitutional.
It is important to understand the regulations around owning, investing, and using digital assets in the United States. Crypto has many forms, some can be grouped as commodities or securities. A commodity is a raw material or primary agricultural product that can be bought and sold, such as copper or coffee. A security is a tradable financial asset. In the U.S. there are definitions that separate an asset into either classification.
The Commodity Futures Trading Commission (CFTC) was established in 1974 to regulate U.S. commodity futures and options markets, aiming to ensure their integrity and protect participants from fraud and manipulation. Originally focused on agricultural commodities, its jurisdiction expanded over time to include a wide range of financial instruments and derivatives. Key legislative acts, such as the Commodity Futures Modernization Act of 2000 and the Dodd-Frank Act of 2010, further broadened its regulatory authority to encompass over-the-counter derivatives and swaps markets. The CFTC has classified Bitcoin and Ethereum as commodities. CFTC Chairman Rostin Behnam confirmed this on January 2022 in front of the U.S. Senate. This means that the CFTC should have regulatory jurisdiction over these assets. The current SEC did not get that memo. Sometimes it seems like these agencies are having a turf war. C'est la vie.
The U.S. Securities and Exchange Commission (SEC) was established in response to the stock market crash of 1929 and the subsequent Great Depression. The crash revealed significant weaknesses in the financial markets and the lack of oversight over securities trading. The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.
Throughout its history, the SEC has done a great job to help establish the United States as the world’s leading financial markets. That being said, it increasingly seems that the current SEC is acting as a rogue agent with an agenda separate from the mission statement above. Prior to the current SEC, there seemed to be consensus market views forming around major crypto assets. The first Bitcoin futures product was approved in December 2017. The CFTC's jurisdiction over Bitcoin futures contracts means Bitcoin itself is considered a commodity, not a security.
The first Ethereum futures product was approved by the CFTC in May 2019. This approval allowed the trading of Ethereum futures contracts on regulated exchanges. Jay Clayton, the former chairman of the SEC, made notable remarks regarding Ethereum. In November 2020, he confirmed that Ethereum is not considered a security under U.S. law, aligning with the analysis provided by SEC Director William Hinman.
I agree with Director Hinman's explanation of how a digital asset transaction may no longer represent an investment contract [a security] if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts
This was the view left by the outgoing SEC administration. Ethereum and Bitcoin were commodities and most crypto assets were not securities. The current SEC upended all of this and has taken a completely different approach. This creates tremendous uncertainty in the market. From an investor perspective, uncertainty equals risk. This lack of clarity prevents capital from entering the industry. Taking a step further, unelected bureaucrats have been downright hostile towards our industry via schemes such as Operation Chokepoint 2.0. Enough is enough. There is a reason Fairshake is the #3 PAC in 2024 US Presidential Election. Just because you do not take an interest in politics does not mean politics will not take an interest in you.
The current Chair of the SEC is Gary Gensler. Before joining the SEC, Gary Gensler worked at Goldman Sachs for nearly two decades until the late 1990s. From 1997 to 2001, he served in the U.S. Treasury Department as Assistant Secretary for Financial Markets and later as Under Secretary for Domestic Finance. He was the Chairman of the CFTC from 2009 to 2014. After his tenure at the CFTC, Gensler joined MIT teaching classes on blockchain technology, financial technology, and public policy. He was also CFO for Hilary Clinton’s failed presidential campaign and was a key part of the Steele Dossier incident. Doesn’t exactly scream high character.
Under Gary Gensler’s leadership, the SEC has repeatedly abused its power and refuses to give clarity to the market. It is a modern day Mafia. The pattern is that the SEC issues a wells notice to the company then the company usually is forced to accept a settlement. It is hard for a startup that is focused on surviving to be funding litigation against the US government, which is why many settle. This behavior makes it a risk to start a crypto business in the USA. It does not make sense why the US government would want to drive this industry offshore where investor protections are even lower!
Since 2021, the SEC has targeted most major brand in the space - Coinbase, Kraken, Uniswap, Consensys, Binanace, Robinhood etc. Know what they haven’t done? Issued any guidance or clarifications.
The last time the SEC issued a rule on crypto was in February 2023 with SAB121 which basically prevents public banks from taking custody of any crypto assets. This isn’t a law passed by Congress but an arbitrary ruling from an unelected bureaucrat. One side effect is that Coinbase is the custodian for 90% of Bitcoin ETFs and Ethereum ETFs. Poor market structure.
Luckily, there are checks and balances. When the SEC has to prove their case in court, their record is poor. Two high profile court losses were Ripple and Greyscale. The Ripple case was in July 2023 when the courts ruled that secondary sales of Ripple were not investment contracts. This sets the precedent that selling tokens on secondary markets are not a security if its through an exchange. Second was Greyscale in October 2023 in which the SEC was trying to prevent the GTBC from converting into an ETF. Additionally, in early 2024 the SEC Salt Lake City office closed due to what the agency deemed “significant attrition”. A federal judge called their conduct “a gross abuse of power”. There seems to be a pattern here. The SEC is abusing its power and the truth comes out during litigation. Unfortunately most startups are just trying to survive and can’t afford to take cases to court.
For all the critiques of the SEC, there are good, hardworking people trying to move US Crypto regulation forward. The Good guys.
Hester Pierce is a Commissioner at the SEC and long time crypto advocate. On multiple occasions she has written statements dissenting from the agency’s overall decision (5 commissioners so need majority to pass rules). She’s been advocating for a Bitcoin ETF since 2018! Hester did not believe Ethereum is a security and was against the SEC shutting down staking programs. Hopefully she is the next SEC Chair if Trump wins the presidency.
JD Vance is a Senator from Ohio and potential Vice President. He does not like Gary Gensler. He knows the SEC is being politicized against the current administration’s enemies and made a great argument for it in front of Congress. The potential Vice President was working on a digital asset bill. This is big news. I did not expect 2024 to be the first crypto election but here we are.
Tom Emmer is a Congressman from Minnesota and House Whip. He is the third most powerful republican in the house. This is from his website:
The emergence of cryptocurrency presents a tremendous opportunity for our country. The technology could help restore our national values of privacy, individual sovereignty and free markets back into our financial system
He is also pro crypto and anti Gary Gensler. Starting to see a pattern here. Tom spoke at Consensys in 2024. Makes me cautiously optimistic about future regulation. The Un S Congress passed FIT21, the first standalone crypto regulation, in May 2024. Key provisions of FIT21 include:
Clarifying the regulatory jurisdictions of the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).
Granting the CFTC authority over decentralized digital commodities like Bitcoin.
Assigning the SEC authority over digital assets associated with functional but not fully decentralized blockchains.
Establishing comprehensive disclosure, asset safeguarding, and operational requirements for entities registered with either the SEC or CFTC.
Crypto has become a core part of the Republican Platform. Polymarkets is breaking the news faster than anywhere else. Crypto has thrust itself into the center of this election.
The Future is Bright. Regulation is being worked on. Stablecoins are exporting the US Dollar. StandwithCrypto sent me $50 in pizza to watch the first debate. It’s exciting to see this happening in real time.
AB Researcher: @Whitetail
AB updates are for informational purposes only. Do not construe any of the following as investment, financial, or other advice. You make your own decisions.