23rd July 2022 > > US regulation.

tl;dr

Regulatory battles between the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) are likely to intensify.

Market Snap

Market Wrap

30bps tighter in two day for 10-year yields with 2-10s now inverted by 22bps. Recession risk is increasing for Q1 2023, which remarkably suggests we will see interest rate cuts next year as the one-off fuel shock to headline inflation numbers moves out of the year-on-year comparison.

Curious Cryptos’ Commentary – Are cryptos commodities or securities?

The Responsible Financial Innovation Act (see CCC 8th June 2022) has the laudable objective of clarifying whether a coin is a commodity or a security.

The former is regulated by the Commodities Futures Trading Commission (CFTC) and the latter is regulated by the Securities and Exchange Commission (SEC.

There is documented agreement by all interested parties that BTC is a commodity, and everyone except Gary Gensler, chair of the SEC, agrees that ETH is also a commodity, thus opening a clear regulatory path towards spot-based BTC and ETH exchange traded funds (ETFs).

But not until the new legislation is enacted which is now unlikely to be this year.

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The regulatory battle to determine the categorisation of all the other cryptos is heating up, as demonstrated in the following proxy war.

On July 21st, the U.S. Department of Justice (DoJ) filed an indictment against three employees of Coinbase for insider trading, the first such action in the crypto world.

Their positions and roles in the company gave them advance notice of listings on Coinbase for new coins. A listing on Coinbase almost inevitably results in a rapid and substantial price rise on the day of the listing.

The three employees could not resist the temptation to buy coins pre-listing to sell post-listing.

That is as clear cut a case of insider trading as one could imagine.

Facing conspiracy charges, and wire fraud, one should not be surprised if the maximum sentence of 20 years is handed down to all three, as a warning to others.

U.S Attorney, Damian Williams had this to say:

“Today’s charges are a further reminder that Web3 is not a law-free zone. Just last month, I announced the first ever insider trading case involving NFTs, and today I announce the first ever insider trading case involving cryptocurrency markets. Our message with these charges is clear: fraud is fraud, whether it occurs on the blockchain or on Wall Street.”

Bully for Damian.

All crypto enthusiasts should be very pleased with the law enforcement response to this illegal activity.

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The SEC has filed its own case against all three perpetrators, in which the SEC states unambiguously that nine of the coins out of the twenty five used to make illicit gains are securities:

MP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, and KROM.

This has not been well-received by the CFTC Commissioner Caroline D. Pham, who has publicly chastised the SEC for not working with the CFTC:

“Major questions are best addressed through a transparent process … Regulatory clarity comes from being in the open, not in the dark”.

In effect, the CFTC is accusing the SEC of underhand methods in trying to claim regulatory supremacy.

We can expect many more such spats in the future.

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It is interesting to note that the DoJ is siding with the CFTC on this one, as their indictment contains no reference to securities laws, which is surely a deliberate omission.

It is hard to know how this will pan out, and how much it will affect the Responsible Financial Innovation Act, but if you pushed me to make a choice, I would prefer the CFTC to be the lead regulator for the entire crypto world.