FT Cryptofinance: US regulators vie for crypto control

US regulators draw battle lines in the fight for authority over crypto 

The crypto industry is still reeling from last week’s insider trading charges, filed by federal prosecutors in New York and the Securities and Exchange Commission against a former Coinbase employee and his associates.

The obvious point first: these charges have got people talking about how prosecutors and regulators alike are wising up and cracking down on alleged financial crimes in crypto.

The less obvious but still very important second point is that the SEC’s civil charges also support the Wall Street regulator’s land-grab for jurisdiction over cryptocurrencies. The SEC, as its name suggests, has purview over securities, while the Commodity Futures Trading Commission supervises derivatives (things like futures tracking oil and interest rates).

“The case has a very important role, and it has a lot less to do with insider trading per se than it does with the fact that the charges for insider trading are based on a factual determination that a number of tokens traded at Coinbase . . . are securities,” Peter Fox, partner at law firm Scoolidge Peters Russotti & Fox told me this week.

Coinbase reiterated its long-held position that it “does not list securities on its platform. Period”. Although Coinbase’s perspective will be seriously challenged if the SEC wins its insider trading case.

“If that aspect of the case is sustained, then there will be case law establishing at least at the trial court level that nine tokens that trade on Coinbase are securities. If Coinbase is facilitating the trading of securities, they need to register with the SEC, probably as a national securities exchange,” Fox added.

The pro-CFTC push on the other hand — one which is favoured by many crypto companies — is already well under way in Congress. A bipartisan bill introduced in June by senators Kirsten Gillibrand and Cynthia Lummis would make the derivatives watchdog the lead on digital assets.

The CFTC is also making moves to bolster its ability to scrutinise digital assets markets. A new Office of Technology Innovation is replacing a legacy fintech team — LabCFTC.

Should the CFTC become the principal US crypto regulator, it would come as welcome news for companies such as Coinbase that have hit out at the SEC for “regulating by enforcement” and, in their view, inaccurately describing crypto tokens as securities.

“The regulation by enforcement thing comes up all the time. I think by and large the narrative in the industry is that the SEC is not providing clarity and I think there’s a basis to that view”, Nick Losurdo, partner at law firm Goodwin Procter and former counsel to the SEC, told me.

I’d like to hear from you. If the SEC’s claims stand up, what does that mean for Coinbase? What will it mean for the rest of the crypto industry, as well as rival regulators scrambling for their own slice of the crypto pie? Email me at scott.chipolina@ft.com.

This week’s highlights

• Stablecoin issuer Tether is facing scrutiny over an $840mn loan recovered from now-bankrupt Celsius Network.

• Signature Bank, a low-profile US lender, has been quietly courting deposits from digital asset firms. Its share price surged during the crypto bull run but has now sharply reversed course following this year’s pullback.

• Ark Invest, an investment firm led by crypto evangelist Cathie Wood, added to the pressure on Coinbase after selling $75mn worth of the exchange’s shares this week, having been a reliable buyer since Coinbase’s 2021 direct listing.

• The crypto market is showing some early signs of recovery after a grim start to 2022. Bitcoin has jumped 28 per cent this month, while its smaller rival ether has surged 70 per cent. Overall, the value of the top 500 crypto tokens has risen back to $1.2tn from a low of around $930bn in mid-June, according to the FT’s Digital Assets Dashboard.

If you have made it this far, you will know the US is still getting its house in order when it comes to regulating crypto. In contrast, the EU is moving full speed ahead with a bloc-wide legislative package on digital assets — Markets in Crypto-assets regulation (Mica). That has caught the eye of Georgetown law professor Christopher Brummer:

“That the EU came up with rules before the United States for an entire asset class is noteworthy, and in some ways, remarkable. One way or another, they are sure to inform policy conversations far beyond Brussels.”

PS: You can read up on Mica in last week’s newsletter here.

Data mining

A growing form of crypto crime is still flying under the radar. Governments and law enforcement are focused on ransomware attacks, where hackers hijack computer systems and demand payment — often in crypto.

But cyber security firm SonicWall is sounding the alarm about “cryptojacking”, which involves breaking into someone else’s computer to surreptitiously mine cryptocurrencies.

SonicWall found that the total volume of cryptojacking has been steadily increasing every year since 2018. The 66mn instances of cryptojacking discovered during the first half of 2022 already represent about 70 per cent of last year’s total volume.

The researchers said cryptojacking, by its nature, is lower-profile than ransomware. “Unlike ransomware, which announces its presence and relies heavily on communication with victims, cryptojacking can succeed without the victim ever being aware of it,” SonicWall said.

“It’s still financial crime but it’s certainly not getting the attention from law enforcement,” SonicWall’s president Bill Conner told me, adding that cryptojacking is “every bit as serious as ransomware” and that “law enforcement has to start having a focus on it”.