Cointelegraph By Turner Wright
Executives from companies involved in the recent controversy between hedge funds and retail investors from Reddit may be testifying at a House Financial Services Committee hearing next week.
According to a Reuters report, two people familiar with the matter said executives from trading app Robinhood, investment manager Melvin Capital, and hedge fund Citadel are expected to testify in a congressional hearing scheduled for Feb. 18. Bloomberg reported that Citadel founder Ken Griffin is likely to be in attendance, as is Robinhood CEO Vlad Tenev.
However, it is unclear at this time whether Melvin founder Gabriel Plotkin or anyone else from the hedge fund will participate. Reddit CEO Steve Huffman said on Friday no one had asked him to speak at the hearing, but other social media figures connected to the GameStop trades will come. Committee chair Maxine Waters said in a Feb. 4 interview that Keith Gill, better known by his Reddit username DeepFuckingValue, will speak.
The virtual hearing will explore allegations of market manipulation from Robinhood and major hedge funds in response to Redditors’ short squeeze of GameStop stock and others. Prominent House members including Alexandria Ocasio-Cortez and Rashida Tlaib were some of the first lawmakers to call for Robinhood to answer to the Financial Services Committee after the trading platform suspended buys for GameStop stock on Jan. 28.
The timing of the restricted trades was suspicious given Robinhood’s financial ties to both Melvin and Citadel, leading to speculation by many that the platform had acted to protect hedge funds’ financial interests at the expense of retail investors on Reddit. Tenev reportedly said that the decision about restrictions was made by a clearinghouse and was based on the capital requirements.
Though Robinhood later lessened restrictions for buys of GameStop stock and others, the price of GME has fallen almost 90% from a high of $469.49 on Jan. 28 to $49.50 at the time of publication.
Closing remarks on the future of crypto law, March 5
Cointelegraph By Kollen Post
Ladies and gentlemen, it is bittersweet to welcome you to the final installment of Law Decoded, at least with yours truly at the helm. Though someone may pick this newsletter back up at some point, there are no plans to do so now.
Taking advantage of the rose-tinted glasses or maybe the graduation goggles that are in effect for this final newsletter, I will be shaking up the format. As last week’s Law Decoded focused on a few long-standing stories in crypto, this week, I wanted to get thematic.
As I will no longer be guiding you through the weekly changes in crypto law, I wanted to give you some idea of how I see the overall situation shaping up. There are plenty of major laws in motion and courts in session, but I’m going to be zooming back from those to present you with what I find to be the three issues to watch in crypto law. These are also predictions and opinions, so bear in mind that they are mine, not those of Cointelegraph as a whole. And, as always with the future, I could very well be wrong.
Certainty and securities
Prediction: The role of securities regulators, especially the U.S. Securities and Exchange will continue to determine the fate of new token issuance. And, it may take a while, but the SEC and other securities regulators are going to start kicking back at some but not all DeFi projects, as soon as they can figure out how.
Situation: High-profile legal actions against firms like Telegram, block.one and Ripple has scared many would-be token issuers out of the market. Less dramatic than these clampdowns have been the quiet tentative successes. Developers like the Filecoin Foundation and Blockstack seem to have found ways of not only raising money to develop tokens according to SEC exemptions but also of decentralizing those tokens to the point where the SEC has, for now, not stepped in when those firms stopped filing registration statements for those tokens.
Formalizing the process of token decentralization will help new developers enormously, whether it is by classifying tokens in statute or adopting a safe harbor à la Hester Peirce. Likely incumbent chairman Gary Gensler will not indulge securities issuance masquerading as decentralized tokens. We will not see another 2017. Optimistically, however, Gensler is clearly interested in formalizing the market, which means clear rules of the road.
Meanwhile, publicly traded companies like Square, Tesla and Microstrategy are increasingly becoming oblique means for stock market investors to get exposure to Bitcoin’s price movements. BTC ETFs in Canada and vast market interest in the U.S. mean that it’s only a matter of time before the SEC greenlights one in the U.S. Slowly but surely, tokenization of securities continues.
As for DeFi? The commission is going to be hashing that out for years. I predict with low confidence and the hope of being wrong that there will be attempts to hold programmers legally accountable for DeFi code.
The wealth of CBDCs
Prediction: Central bank digital currencies are going to move forward. Some will launch more quickly, but the ones that have actual significance as peer-to-peer payment mechanisms will take significantly more time, if they ever happen at all. Distributed ledger technology will need to do some serious upgrading if it’s going to play any role in this transformation, which I am not confident it will.
Situation: CBDCs had been mostly on the back-burner for some time. To crypto advocates, they were a hypothetical use case. To monetary authorities: unnecessary techie mumbo jumbo. Interest waxed and waned at various points, with the involvement of tech giants in digital payments adding brief moments of pressure to central banks to update old systems. But those moments would fade.
The COVID-19 pandemic, however, exposed the flimsiness of existing payment rails in a way that everyone could see. The need to get money into the hands of citizens alongside the sudden fear of spreading disease via in-person contact and, especially, the contaminant of cash pushed the CBDC concept to the top of the agenda for many of the world’s largest central banks.
CBDC development is going to remain a critical subject of conversation and development for the foreseeable future. It is, however, riddled with misconceptions and unconfirmed assumptions. None of the five great monetary powers — the issuers of the dollar, the euro, the yen, the yuan and the pound — have committed to specific features of their prospective digitization, nor even whether they will launch at all. Will CBDCs be bearer instruments? How anonymous will they be? Where will transaction data go? Will they be accessible to banks, businesses, citizens, or the world? Will they run on distributed ledger technology?
People are touchy to any changes to their money. If true self-settling currency ever hits the market, it will do so slowly. Of those five major currencies, the Chinese yuan has seen the most “digitization,” which has attracted the crypto world’s attention. But to all appearances, that currency bears none of the hallmarks of what the crypto world professes to want to see. The digital yuan seems designed to be just another third-party payment app except that the Chinese government is that third party.
CBDCs will be an interesting trend to watch in coming years. But don’t hold your breath. The public’s memory of not getting their checks for months will fade as the pandemic subsides. Along with it, so will broad political pressure.
All about AML
Prediction: Smart anti-money laundering rules are good for the world. The next few years of AML may not be good for crypto. The biggest economies have either tried to ban crypto entirely or have made major strides in deputizing fiat gateways — namely exchanges. The crypto industry has largely accepted this. But coming rules are going to get more intrusive.
Situation: In its much-repeated origin story, Bitcoin emerged when the global financial system was unraveling. Satoshi’s timing in pushing a means of moving power away from monetary authorities and financiers alike was perfect.
On the flip side, the subsequent decade saw a surge of attention on all of the devilish ways the powerful and corrupt have squirrelled away illicit gains all over the world, using financial instruments. The 2010s saw successive waves of mass leaks of dirty finance and offshoring — and this was after the U.S.’s “War on Terror” had expanded authority to pursue financial flows in the name of countering terror financing.
In response to, say, the Panama Papers, the public rightly reacted with outrage. Policymakers rightly set out to cut down on interjurisdictional money laundering. And crypto got rolled into these massive policy shifts and legislative packages, despite never coming close to UBS or Mossack Fonseca or Vancouver’s real estate market as a vehicle for money laundering.
But while it is not fair to slur Bitcoin as a money laundering mechanism, it’s obvious that lack of KYC has been extremely lucrative for a number of not-good actors in the crypto world. This is especially true of exchanges. It was the Paradise Papers that exposed that BitFinex and Tether are run by the same people, a fact they would clearly prefer to have kept hidden. It was only as Malta was trying to get its corporate registry in line with EU expectations that it outed Binance for lying about its registration on the island. Which is not even to mention how reckless the executives at BitMEX were.
As the EU rolls out AMLD5, and the U.S. starts demanding owner names for firms registered anonymously, the crypto world has already shifted its party line. Fewer and fewer industry voices are arguing in favor of fully law-agnostic Bitcoin, likely because many of these big players and, especially, exchanges profit by replicating the sins of the traditional financial world. Speaking in generalities, the consensus has been to center legal responsibilities like know-your-customer on fiat gateways. Which is what the Financial Action Task Force is already asking for, so in some ways this is just accepting the inevitable.
As governments have gotten more comfortable with managing exchanges, there have been pushes to go further. Most famous is the U.S. Treasury’s attempt to get info on transactions between exchanges and self-hosted wallets. Those rules are still in process and, pessimistically, some are going to stick.
I don’t foresee governments having any power over fully peer-to-peer transactions on, say, the Bitcoin network unless there has been some major operator error on the part of the wallet owner. But, pessimistically, I can envision a world of whitelists and blacklists, where it gets harder and harder to move between fiat and crypto without giving up all kinds of personal identifying information along the way. It’s not what I would call likely, at least not for several years, but it’s not impossible.
Ripple’s Asia expansion unaffected by SEC lawsuit, says CEO
Cointelegraph By Osato Avan-Nomayo
Despite being in the middle of a $1.3 billion lawsuit with the United States Securities and Exchange Commission, it appears that it is still business as usual for Ripple.
Speaking to Reuters on Friday, Garlinghouse revealed that the company has not suffered any negative blowback in the APAC business theatre amid the current SEC lawsuit:
“It (the lawsuit) has hindered activity in the United States, but it has not really impacted what’s going on for us in Asia Pacific.”
In December 2020, the SEC charged Ripple and its principal executives of violating securities laws in the sale of XRP tokens since 2013.
Garlinghouse attributed the absence of any fallout to the company’s good standing with regulators in the region, stating, “We have been able to continue to grow the business in Asia and Japan because we’ve had regulatory clarity in those markets.”
Indeed, Japan and other APAC countries have historically been favorable for Ripple and XRP. Ripple is even part of a joint venture with Japanese conglomerate SBI Holdings to form SBI Ripple. The JV firm is at the heart of numerous projects aimed at creating a Ripple-powered payment corridor in Asia.
In March 2020, the blockchain payments firm expanded further into Southeast Asia, inking a partnership with DeeMoney, a Thai fintech outfit.
Garlinghouse also played down the effects of U.S. exchanges delisting or halting the trading of XRP tokens. According to the Ripple CEO, over 200 platforms across the world list XRP trading pairs.
Apart from U.S. crypto exchanges, asset managers and cryptocurrency funds like Bitwise and Grayscale have also liquidated their XRP holdings.
Back in December, the Ripple chief revealed that only 5% of the company’s customers were domiciled stateside. Garlinghouse has even stated previously that the company was mulling a move outside of the U.S. if the regulatory environment fails to improve.
Meanwhile, both Garlinghouse and Ripple’s executive chairman, Chris Larsen have moved to file separate motions for the case to be dismissed. Attorneys for both company executives say the Treasury Department’s Financial Crimes Enforcement Network has previously classified XRP as a virtual currency.
Co-founder of Floyd Mayweather-promoted ICO sentenced to 8 years
Cointelegraph By Samuel Haig
Sohrab Sharma, the co-founder of the notorious celebrity-spruiked initial coin offering of 2017, Centra Tech, has been sentenced to eight years in prison for his leading role in the fraudulent scheme that duped investors out of more than $25 million.
Shama had previously pled guilty to conspiring to commit wire fraud, securities fraud, and mail fraud for material misrepresentations made by him and his co-conspirators to solicit investors to participate in the scheme.
United States attorney, Ilan Graff, described Sharma as having “led a scheme to deceive investors by falsely claiming that the start-up he co-founded had developed fully functioning, cutting-edge cryptocurrency-related financial products.”
“In reality, Sharma’s most notable inventions were the fake executives, fake business partnerships, and fake licenses that he and his co-conspirators touted to trick victims into handing over tens of millions of dollars.”
The court found that Sharma and co-defendants Robert Farkas and Raymond Trapani founded Centra around July 2017, claiming that the firm offered a crypto debit card and other digital asset-related products. The group conducted an ICO from July 2017 until October 2017, distributing unlicensed securities in the form of CTR tokens.
To promote the offering, the group issued materials falsely claiming the team had partnerships with Visa, Mastercard, and Bancorp, money transmitter licensing in 38 U.S. states, along with an entirely fictional CEO boasting more than 20 years experience in the banking sector and a master’s degree from Harvard University.
While the team raised $25 million at the completion of the ICO, authorities found those crypto assets were worth more than $60 million at certain times during 2018.
The U.S. Marshals Service seized 100,000 Ether from Centra which it sold for roughly $33.4 million earlier this year. The proceeds will be made available to potential use in a remission program to compensate victims of the fraud.
Sharma was also sentenced to three years of supervised release and ordered to forfeit more than $36 million.
In December, Centra co-founder Robert Farkas was sentenced to one year in prison for his role in the scheme. Trapani has also pleaded guilty.
Celebrities DJ Khaled and Floyd Mayweather, who promoted the offering on social media in 2017, agreed to six-figure settlements without admitting to wrongdoing in 2019 after Centra’s investors filed a lawsuit against the pair.
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