For US citizens, the importance of these latest developments in regulations is obvious. For non-burgers, this might seem like a distant issue. You could not be further from the truth. As everything in this world, anything that happens in the US will arrive in your country in a matter of semesters/years. From sjw, to the dollar extraterritoriality or exporting democracy to people sitting on oil reserves, if you don’t go to Uncle Sam, Uncle Sam will come to you.
This summer, there have been 2 important developments in terms of regulation:
- The Infrastructure Bill
- BlockFi’s Interest Accounts (BIA) being investigated as securities
All of that is especially complicated and boring, I promised that I will do my best to make this simple and interesting!
The infrastructure Bill
Context
The US Senate is trying to pass a “$1 trillion dollar bipartisan infrastructure bill” to update America’s roads, bridges and broadband networks.
The core matter of the bill regarding cryptocurrencies, is to clarify the tax reporting standards for cryptocurrencies and associated businesses. Like it or not, it’s still the far west out there, and such regulations are, of course, going to happen.
In the bill, law makers are placing requirements on “digital assets* and require for example “brokers” to more strictly report gains and transactions (of over $10,000 for example). The issue? Well, the text definition of “digital assets” and “brokers” is unclear. You usually don’t like unclear texts, because it could be used to create some crazy case laws. Depending on the definition of brokers and digital assets, it could affect DeFi platforms, crypto miners, node validators, crypto hardware and software developers and so forth.
Now, this probably won’t affect directly the retail, us, who hold our crypto on exchanges for quick degen gains or passive income generation. However, if it affects the DeFi platforms, crypto miners, node validators, Crypto hardware and software developers, this could seriously slow down the innovation in this space or push the innovation out of the US (it would be just a matter of time before such legislation is copy-pasted by other countries).
What now ?
Currently, it is a mess to understand what’s happening in the Senate. Everything changes so fast. Pro-crypto senators (Wyden-Lummis-Toomey), are trying to define brokers as not miners/developers/wallets while anti-crypto senators (Portman-Warner-Sinema and THE Janet Yellen) do not want to clarify the terms. Lately a compromise amendment between the two parties has just failed.
I won’t go into the amendments’s details that are introduced until a consensus is reached, so stay tuned. Meanwhile, this Twitter thread shows actionable steps if you want to try to affect the outcome.
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BlockFi
Howey test
The reason of the latest investigation on BlockFi is the “Howey test” in U.S law. It comes from a 1946 Supreme Court case.
Briefly, this Howey test is used to define what is a security. You will have trouble believing it, but it is based on investors that had bought rows of orange trees in Florida and had let the Howey Company manage the harvests. The company was selling the fruits, and investors were collecting a yield from the profits.
Having some bitcoins, and then letting a company like BlockFi manage them and turn some profits out of them, while redistributing to the original bitcoin owner some profit, is kind of a similar situation. Surely there will be a lot of debates/play on words to define if pool management of cryptocurrencies are securities or not.
Securities
But what’s the issue of having things labeled as securities ? Well, if a crypto thing is a security, it needs to be:
- registered with the U.S. Securities and Exchange Commission (the famous SEC)
- only sold to “accredited investors” (with $1 million net worth or $200,000 of annual income) or not offered in the U.S.
If it’s not a security, then there’s a lot more flexibility to sell it and trade it widely.
Interestingly, Celsius updated their terms of service, just after the news of BlockFi being investigated. It seems this update may be an attempt to avoid the same investigation. They redefined people’s deposits on their platform as loans. They legally separated the rewards from the income generated from the loans (sly, very sly).
Now, 3 different states (New-Jersey, Alabama, Texas) are investigating whether or not BlockFi‘s interest accounts are unregistered securities. You can’t really blame them, as they are just trying to have some regulatory clarity. Also, don’t toss this issue as being only BlockFi’s issue. The very same thing can and will probably happen to all centralized crypto interest yielding platforms.
What now ?
So, what is going to happen? I don’t know, and certainly BlockFi doesn’t know. Could there be a redefining of the BIA as some kinds of loans? Discussions are ongoing, and I will try to update you if anything comes out of it. We all hope that BlockFi will have a large enough war chest to fight all these legal actions. Unpleasingly, people from these states are already blocked from opening a new BlockFi’s account. I don’t know what will happen if this happens nationally, nor can’t I vouch that they won’t prevent people from leaving BlockFi.
I had 50% of my USDC on BlockFi, because it was easy to sleep on that decision as they were more trustworthy than Nexo. Well, I feel unease with this investigation, and have withdrawn 75% of these 50%. I abide by one of the rules of Nassim Taleb “if you must panic, it pays to panic early”. Especially with the 1-business day withdrawal lag, it could turn very ugly. It could be interesting to look around for possible self insurance for CeFi.
Source:
This part is largely inspired by the Matt Levine’s post in Bloomberg. Subscribe to its newsletter if you want to follow him. Here are the Bureau of Securities press release and order.
Conclusion
Stay tuned, interesting times are ahead in terms of regulations! Both the infrastructure bill and BlockFi’s investigation will shape the future of crypto space regulations.
In case you liked my take on the latest crypto regulations, learnt interesting things, or want to support me, please feel free to send me a coffee over.
