Equities traders bear cost of US crypto enforcements

Hello and welcome to the latest edition of the FT Cryptofinance newsletter. This week, we’re taking a look at how the SEC funds its crypto enforcement cases.

To say that the US’s main markets regulator, the Securities and Exchange Commission, is being kept busy by crypto is an understatement.

The names that the SEC has gone after this year would have qualified as most of the industry’s Hollywood A-list a year ago. There’s been Coinbase, Kraken, Gemini, Genesis and Terraform Labs’ Do Kwon, as well as many senior executives from FTX. It tried to stop Binance US from purchasing the assets of bankrupt lender Voyager Digital, until a judge ruled against it this week.

The agency’s approach has grated with many in the crypto industry, who say the regulator hasn’t been clearer on the rules. But traditional financial markets are also getting a little irked, because they’re effectively picking up the tab for the SEC’s sleuthing.

“Their funding comes from equities and options investors. These crypto folks are running around wild, burning down the world and our agency, the SEC, who I’m funding and who my clients are funding, has to spend their time on crypto,” Joe Saluzzi, co-founder and co-head of equities trading firm Themis Trading told me.

He points to a part of the Securities Exchange Act of 1934, which, despite its age, is still the cornerstone of modern-day equities trading in America.

Section 31 details a small fee that all brokers have to pay the US government to pay for the cost of regulating them. It is levied on the value of equities and options that are traded, effectively coming out of the broker’s profits unless they pass it on to the customer.

The regulator decides the fee based on how much it needs for its annual spending budget, which is usually a function of how much the US Congress is prepared to give it.

The rate brokers have to pay bounces around. At the start of 2021 it was $5.10 per $1mn. It then ballooned to $22.90 per $1mn, and was back down to $8 at the start of 2023. In the past, it has been spent on keeping regulated companies and brokers in order.

However a self-funded crypto regulator is a non-starter. Good luck trying to get the money from companies coy about the location of their headquarters or how much of their trading is genuine.

“The last thing you want is every time some new financial product comes along, to create a specialised agency to police the product. We already have a very fragmented regulatory structure in the United States,” said Dennis Kelleher, of Better Markets.

From afar, the American regulatory system looks incredibly convoluted, with federal and state-level regulators jostling for jurisdiction. The SEC stands apart though. It was created (yes, as part of that same 1934 Exchange Act) to protect investors in America’s capital markets, and its broad remit is a feature, not a bug.

The obvious answer would be for Washington to increase its budget. “When FTX blew up and all these US politicians who had taken money from FTX were wanting to cover their tracks by calling for a crackdown on crypto . . . instead of bloviating, what they should do is immediately surge resources to the SEC,” Kelleher added.

The chances of that happening though are close to zero. SEC chair Gary Gensler may be a man who divides opinion on Capitol Hill but budget restrictions would probably be the same with another personality representing the agency.

Complaints about regulatory funding are as old as the agency itself, just as brokers scrap over every cent that’s taken out of their pocket and many an SEC chair has seen themselves as the sheriff arrived to clean up the Wild West. Equities traders will have to keep funding the clean-up of a market whose standards they can scarcely believe.

What’s your take on the SEC’s relationship with crypto? Email me your thoughts at scott.chipolina@ft.com.

Weekly highlights:

• Let me flag up the FT’s new 30-minute FTX film, featuring Nikou Asgari, Katie Martin, Josh Oliver and yours truly. If you’re new here, it’s especially useful to take stock of FTX’s short and chaotic lifespan.

• In the spirit of International Women’s Day, I spoke to Aoife Keane, Felicity Potter and Amy Harvey, partners at crypto-focused law firm Ontier, and asked what it might take for women to break into what has been a traditionally male-dominated blockchain party. The panel told me greater regulatory focus on crypto would prompt more equal hiring practices that could even the playing field.

• Silvergate became the first regulated bank to be taken on by the crypto turmoil of the past year. It will wind down its operations having decided that “a voluntary liquidation of the bank is the best path forward”. It was destabilised by a run on crypto deposits, as its customers became worried about the bank itself. “We are seeing what can happen when a bank is over-reliant on a risky, volatile sector like cryptocurrencies,” said US Senate banking committee chair Sherrod Brown on Wednesday.

• Speaking of the US’s crypto crackdown, the New York attorney-general’s office on Thursday brought a lawsuit against crypto exchange KuCoin, alleging the exchange was unregistered as a securities broker, dealer or commodity broker-dealer when it was buying and selling cryptocurrencies in the state of New York. KuCoin told me it had “yet to receive any legal documents regarding this incident,” and would “address this matter through legal means if needed”.

Soundbite of the week: Perpetual motion

John Ray had plenty to say about the previous management of FTX when he was parachuted in to steer the crypto exchange and its associate companies through bankruptcy. As he tries to recoup what’s left, he’s turning his ire on others in the industry.

This week Alameda Research, FTX’s sister trading business, sued crypto investment firm Grayscale and parent company Digital Currency Group over the structure of their large bitcoin and Ethereum trusts.

If Alameda could redeem 28mn of shares in the trusts and Grayscale reduced its management fees, the stakes would be worth double and close to $600mn, Ray estimated. But Alameda can’t and Grayscale won’t. The lawsuit alleges Grayscale and DCG management are “possessed by self-interest” and have created a “perpetual one-way fee machine”.

“The fact is there is no commercial justification for the Trusts’ usurious fees. Grayscale has simply perverted the Trusts by holding investors hostage to a perpetual grifting of billions of dollars in the guise of management ‘fees’.”

Grayscale described the lawsuit as ‘misguided’. Read Nikou Asgari’s story here, and my November take on the DCG chief here.

Data mining: Binance’s market dominance reaches new heights

Ever since FTX’s collapse into bankruptcy last November, the world’s largest crypto exchange — Binance — has only been getting bigger.

Even so, the speed at which it is swallowing up the rest of the exchange traded market is breathtaking. Binance has eaten up more than 60 per cent of the spot market, not to mention 60 per cent of the derivatives market for good measure as well.

As I said in last week’s edition of this newsletter, the allegedly decentralised crypto market has a key man risk. It is an industry controlled virtually by one company and one man, Binance chief Changpeng Zhao.

Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.

Your comments are welcome.