28th September 2022 > > More regulation!

tl;dr

Regulation gets ever more interesting.

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Market Wrap

Yesterday’s wrap suggested that we would soon see 4% for 10 years. I didn’t expect it this quickly.

Curious Cryptos’ Commentary – Regulation

I have been told in the past that the CCC spends too much time looking at the news, issues, and events around the legislation and regulation of cryptocurrencies.

This may in part be due to a quarter of a century’s work on a trading desk, during which one could not help but appreciate the value in some of the regulations and feel despair at the rest of it.

The GFC (global financial crisis) of 2007/2008 was absolutely due to misguided rules, though of course some individuals (notably Kareem Serageldin whom I sat next to for many years and who was sent to jail) committed heinous criminal acts. And before someone jumps on me, I use heinous in the context of the financial world.

There are crypto maximalists, often seen and heard chanting the mantra “not your keys, not your cryptos” (wake up buddy, that just aint true) who wish for a regulation free world, probably accompanied by the downfall of the dollar.

I got news for these people. There is zero chance of mainstream adoption of cryptos by retail or institutional clients without regulation, and more of it than we have today.

And the world does need mainstream adoption of cryptos.

We need it to fight against the controlling ambitions of politicians, aided and abetted by organisations such as the IMF (International Monetary Fund) and big tech. These centralising forces have the support of august institutions like the BBC and the Financial Times, who probably unknowingly are helping to propel the world into an illiberal and unfree societal model.

If we want to retain our personal privacy, liberty, and dignity in a digital world, we need cryptos to work.

And for that to happen, we need appropriate and targeted legislation and regulation.

…

Rant over, cracking on, here are two conflicting, but interesting and informative stories on this very subject.

Curious Cryptos’ Commentary – Tornado Cash

You will recall from the CCC dated 10th August, and some subsequent musings, that The Office of Foreign Assets (OFAC) announced that it had sanctioned Tornado Cash, a computer code that acted as a crypto mixer.

Mixers are a means of disguising the exact trail for a crypto coin, or any piece thereof.

There are legitimate reasons for doing so, but like almost all human inventions, from learning how to make fire (though of course some still believe it was a gift from Prometheus, whose eternal fate despite the efforts of Heracles is one of the most gruesome imaginable) to the swift conduct of trade by using coins and paper as a representation of value, mixers can be used for illegitimate purposes.

And that was the reason why OFAC sanctioned Tornado Cash, an act of such outrageous regulatory overreach, that defenders of personal liberty and privacy made their voices heard.

OFAC has now rolled back its sweeping sanctions. The code for Tornado Cash is back on GitHub, and individuals will no longer be personally sanctioned.

OFAC has stated: "U.S. persons would not be prohibited by U.S. sanctions regulations from copying the open-source code and making it available online for others to view" (source Twitter, buy hey, my research team has limited resources).

The CCC is all in favour of preventing money launderers and terrorists from using cryptos as a minor addon to their use of the $100 bill and the EUR500 note to move around their illicit funds, but Tornado Cash was a bit player at most.

This seemingly small gain is a major setback to those of a centralising and controlling instinct.

Curious Cryptos’ Commentary – Ooki DAO (Decentralised Autonomous Organisation)

Ooki DAO is again just a piece of computer code, as is Tornado Cash, but its purpose is aimed squarely at illegal activities.

It offers margin trading and lending services around the world, without respecting any of the laws and regulations in place.

For example, in the UK, leveraged trading of cryptos is not only a regulated activity, but is banned for retail by the FCA (Financial Conduct Authority):

https://www.fca.org.uk/publication/policy/ps20-10.pdf

I quote:

“We are prohibiting the marketing, distribution and sale in or from the UK to all retail clients, of derivatives and ETNs that reference certain types of unregulated, transferable cryptoassets.“

For clarity, this prohibition relates to derivatives of cryptos, not cryptos themselves.

As a DAO, interaction with Ooki involves simply connecting your wallet (probably MetaMask protected by a Ledger Nano X) with no KYC (Know Your Customer) or AML (Anti-Money Laundering) protections in place.

Clearly, Ooki DAO is an illegal operation, but there are bad guys out there.

…

The Commodity Futures Trading Commission (CFTC) has served a lawsuit against the anonymous members of Ooki:

https://storage.courtlistener.com/recap/gov.uscourts.cand.400807/gov.uscourts.cand.400807.11.1.pdf

What is interesting about this lawsuit is the means by which it was served, and upon whom it has been served.

Posted in a chat room set up to discuss governance issues for Ooki DAO, it is aimed at every voting member of the DAO, which includes all owners of its native coin OOKI. In effect, retail owners of this coin can now be fined by the CFTC and will be rapidly heading for the exit once they know this news.

As full disclosure, the CCC has no financial interest in OOKI, but I have been privately warning some people of the risks of being involved in this DAO. Those warnings have not been heeded

In contrast to Tornado Cash, this is a fine example of using regulatory power to enforce market rules.

Going forward, anyone investing in a coin whose provenance is derived from illegal activities now knows that penalties will follow.