Regulators Jointly Speak Out About Crypto

On October 11, the SEC and CFTC released a joint statement on cryptocurrencies.  It’s something but it is not what the broader crypto market was looking for.  The broader market wants to see the shackles taken off.  Right now there are many many companies being held hostage by the painfully slow process each agency has taken with regard to cryptocurrency regulation.  I don’t think it is wise to create an adversarial relationship with regulators.  However, I think there are times to stand up to the regulators to help them see the light.

When I was on the CME board, it took us a year and a half to get a ruling from the IRS on demutualization.  While we were waiting, our competitors were forming their own demutualization plans to catch up to us.  It was frustrating to have a regulator take away a competitive edge that wasn’t damaging anyone or the market.

Here are the mission statements of regulators so you understand their perspective:

Their joint statement was a warning shot to anyone that is using crypto for fraud or illicit activity.  One part of their message was this:

“Among those AML/CFT obligations are the requirement to establish and implement an effective anti-money laundering program (AML Program) and recordkeeping and reporting requirements, including suspicious activity reporting (SAR) requirements.”

If you are running a real ATS or exchange, you should have been doing that already.  That’s the thing, matching trades is not an exchange.  It’s just matching trades.  While a bit more complex it’s not any different than playing the children’s matching card game Concentration.

I used to like to say that the CFTC could watch me trade over my shoulder.  I was squeaky clean.  The majority of all floor traders were clean.  It wasn’t because of regulation, it was because of reputation.  I do think that when businesses run unclean shops, they hurt the entire industry.  That hurts innovation and makes regulators even more suspicious than usual.

Our fund is invested in an ATS, Open Finance which trades digitized securities.  I am personally invested in Bitnomial which is trading crypto futures.  Both operations adhere to the above statement.  Interestingly, both companies have a genuine appreciation for making sure there is no fraud on their platforms and take both the AML/KYC process along with the back end processes like clearing and settlement extremely seriously.  Both are working closely with regulators and trying to create a positive relationship with them.  It’s hard because they are on the bleeding edge of innovation and the regulators are very conservative which is outlined in their broad mission statement.

However, they are able to make progress.  Open Finance has been trading for almost a year.  They have five securities listed and more are coming.  Open Finance just announced that investors can soon buy and sell the media industry’s 1st blockchain-enabled digital security. Current Media’s CRNC Token will list on the Openfinance ATS in Q4.  Current is a reward-based streaming ecosystem with over two million registered users that compensates anyone for attention and data while consuming content. The company’s token offering, $CRNC, gives brands discounted access to ad inventory within the Current network and enables users to earn rewards faster when streaming music from over 100,000 stations.  Just by listening to music, you could earn $600 per year.  

What’s interesting is Current is innovating in the media space.  They are taking a totally different tactic than Spotify or Pandora.

Innovators often do things that big entrenched incumbents won’t.  Banks didn’t want to go virtual, and so internet only banks were started.  Brokerage commissions were too high, and so Robinhood went with a “free” model.  All these innovations survived because they catered to the needs of consumers.  They leveraged new technology and ideas.  At the end of the day, they raise the standards of living for society.  We need innovation to preserve the idea of creative destruction.  Without it, we don’t move forward.

I am hopeful the dam breaks with regulators.  No one wants fraud.  However, the plodding nature of their process is stalling innovation in more areas than just issuance and trading of securities.