💡Regulate Crypto as Gambling, not Financial Services?

Crypto Is Money Without a Purpose

When you have a hammer, everything looks like a nail. That’s why everyone in Washington seems to think that federal financial-services regulators are the natural overseers of crypto trading. This is wrong. Crypto trading should be regulated for what it is—a form of gambling that emulates finance—and not what its advocates tell you it is.

That means the separated crypto-trading system should be excluded from financial-services regulation by the Securities and Exchange Commission, the Commodity Futures Trading Commission, banking agencies, and the Consumer Financial Protection Bureau. Consumers won’t go unprotected. State laws specifically regulating crypto activities, such as New York’s bit license law, will still apply, as will state fraud and consumer protection laws. The Federal Trade Commission’s jurisdiction over any unfair and deceptive advertising or other practices crypto traders and their enablers engage in won’t be affected. Where these laws prove inadequate, state legislatures and Congress can add targeted consumer protections specific to crypto trading. Expanding the reach of state gambling laws to cover crypto trading is also a possibility.

With Binance, Everything Is Not Fine

This is a classic scenario for crypto exchanges, everything is fine … until it’s not.

If the stablecoins in Binance’s reserves hold to their peg, everything will be fine.

If it can provide true proof of reserves, everything will be fine.

If there’s no run on the bank, everything will be fine.

If it can deliver fully audited financials, everything will be fine.

If the U.S. Department of Justice decides not to strike with criminal charges (something we didn’t even get to in this essay), everything will be fine.

For each day that passes without specific and verifiable evidence to address all its issues, these “ifs” grow bigger for Binance.

Until that happens, everything is Not Fine (and deteriorating).

SEC Charges Honeywell with Bribery Schemes in Algeria and BrazilThe Securities and Exchange Commission today announced charges against Honeywell International Inc. for violations of the Foreign Corrupt Practices Act (FCPA) arising out of bribery schemes that took place in Brazil and Algeria. The company has agreed to pay more than $81 million to settle the SEC’s charges.

The SEC’s order finds that Honeywell, a U.S.-based global manufacturer of aerospace, building technologies, and automation products, engaged in a bribery scheme involving intermediaries and employees of its U.S. subsidiary to obtain business from the Brazil state-owned entity Petrobras. Specifically, the order finds that, in 2010, Honeywell offered at least $4 million in bribes to a high-ranking Brazilian government official in connection with the bidding process at Petrobras. The SEC’s order also finds that, in 2011, employees and agents of Honeywell’s Belgian subsidiary paid more than $75,000 in bribes to an Algerian government official to obtain and retain business with the Algerian state-owned entity Sonatrach.

Binance’s books are a black box, filings show, as crypto giant tries to rally confidence

The exchange said it dealt with net outflows of around $6 billion over 72 hours last week “without breaking stride” because its finances are solid and “we take our responsibility as a custodian seriously.” After the collapse of rival exchange FTX last month, Binance’s founder Changpeng Zhao promised his company would “lead by example” in embracing transparency.

Yet a Reuters analysis of Binance’s corporate filings shows that the core of the business – the giant Binance.com exchange that has processed trades worth over $22 trillion this year – remains mostly hidden from public view.

Binance declines to say where Binance.com is based. It doesn’t disclose basic financial information such as revenue, profit and cash reserves. The company has its own crypto coin, but doesn’t reveal what role it plays on its balance sheet. It lends customers money against their crypto assets and lets them trade on margin, with borrowed funds. But it doesn’t detail how big those bets are, how exposed Binance is to that risk, or the full extent of its reserves to finance withdrawals.

Elsewhere in Crypto Auditing

If you are a public accounting firm, you are in the business of signing your name to a piece of paper saying “this company’s financial statements are basically true,” and charging for it. Before signing your name, you will do your best to confirm that the financial statements are true, but there is always a risk that you’re wrong. If you are wrong you might get sued or fined; also, though, if you are wrong too often your signature will lose its value and people will stop paying you for it. Your high-level goal is to (1) minimize that risk while (2) maximizing your revenue. Broadly speaking, you minimize risk by being conservative, by only auditing the statements of simple trustworthy companies in stable industries, and you maximize revenue by being aggressive, by auditing the statements of companies in fast-growing industries and by being, uh, customer-friendly about your audits.

The tensions here are all very obvious and hard, but sometimes there are easy calls. Like if you got into aggressively auditing statements of companies in a complicated and risky industry because you were betting on its rapid growth, and then people lose confidence in the finances of companies in that industry and it starts shrinking, then (1) the risk of auditing that industry has gone way up and (2) the potential revenue has gone way down. Why bother?

SEC Awards More Than $37 Million to Whistleblower

The Securities and Exchange Commission today announced an award of more than $37 million to a whistleblower whose information led to a successful SEC enforcement action and a related action.

The whistleblower was the initial source of the company’s internal investigation, as well as the source for investigations by the SEC and another agency. While the company reported the alleged conduct to the SEC and the other agency, the whistleblower receives credit for the investigations being initiated because the whistleblower provided the same information to the SEC within 120 days of providing it internally.

Opinion | Celebrity Crypto-Hawkers Should Get a Close Look

More vulnerable to investigation are those celebrities who may have exposed themselves to the possibility that they knew, or were reckless in not knowing, that the crypto firm they had partnered with was allegedly deceiving investors. In several ads Mr. Brady and his then-wife, Ms. Bündchen, didn’t distance themselves in the same way that Mr. Curry and Mr. David did; Ms. Bündchen also served as an environmental and social initiatives adviser for FTX.

Then there are Kevin O’Leary and Mark Cuban, high-profile businessmen who both star on CNBC’s “Shark Tank,” where they evaluate pitches for investment opportunities. Both Mr. O’Leary and Mr. Cuban are famous because of their business savvy, so investors arguably take their endorsements more seriously than other celebrities.

Rise in Crypto Securities Filings Could Persist

Increased regulatory oversight and recent turmoil in the digital asset market have led to a rising number of securities litigations focusing on cryptocurrencies. Sixteen cryptocurrency-related class actions have been filed this year — more than in any single year since the first such filing was recorded in 2016, according to Stanford Law School’s Securities Class Action Clearinghouse.

Suits against cryptocurrency exchanges in particular are up significantly, according to Cornerstone Research, accounting for almost half of all cryptocurrency-related class action filings since the start of 2020. This stands in contrast to filing activity between 2016-19, when less than 10% included exchange-related allegations.

Despite recent turmoil in the cryptocurrency market, it is unclear whether the pace of filings will continue. It may slow due to lack of investor interest, but on the other hand, securities litigation is often driven by decreases in the underlying asset’s value. (Consider, for example, the number of mortgage-backed securities cases in the wake of the 2007-09 global financial crisis.) If the cryptocurrency sector remains turbulent, and if enforcement ramps up as expected, 2023 could be another record-breaking year.