Welcome to our new series, Node Notes, where we’re spotlighting topics from our bi-weekly research piece, The Node Ahead. Check our blog tomorrow for the full published piece, The Node Ahead 38, or sign up to receive The Node Ahead straight to your inbox.
Congress wants answers from the SEC
It was a busy week last week for crypto on Capitol Hill. On March 7th, the Senate Committee on Environment and Public Works hosted a hearing on crypto mining. I particularly enjoyed this exchange from Senator Cynthia Lummis, who continues to prove she is one of the most well-educated politicians and first principle thinkers in Washington when it comes to crypto.
That same day also kicked off oral arguments in Grayscale’s lawsuit against the SEC. Last July, we covered the history of GBTC and why Grayscale decided to sue the agency that regulates them. As a quick recap, Grayscale is arguing that the SEC’s decision to deny the $14 billion trust’s conversion to an ETF was “arbitrary,” given the regulator’s prior approval of a futures-based bitcoin ETF back in 2021. The data shows that the SEC’s alleged concerns about manipulation of bitcoin’s price are inconsistent and possibly in violation of the Administrative Procedure Act.
The SEC’s defense didn’t seem to go over very well, as judges questioned the agency’s logic in drawing a distinction between bitcoin spot and futures market prices. During SEC senior counsel Emily Parise’s argument, Judge Neomi Rao interrupted Parise saying the SEC needs to better explain the difference the agency sees between bitcoin futures and the spot price of bitcoin. “It seems to me…one is essentially a derivative of the other,” the judge said. “They move together 99.9% of the time, so where’s the gap in the commission’s view?” Judge Rao also said that the SEC had unfairly placed the burden on Grayscale to disprove the chance of fraud in spot markets. Though judgment isn’t expected until Q3, the market reacted positively to the development as shares in GBTC climbed in the hours following the end of the hearing.
“Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem.”
On March 9th, the newly formed House Digital Assets Subcommittee, which we highlighted in our January 31st issue, held its first hearing titled “Coincidence or Coordinated? The Administration’s Attack on the Digital Asset Ecosystem.” Last issue, we analyzed a number of the recent actions by regulatory bodies against several crypto companies and highlighted why some of these actions are problematic. It seems that Congress is also noticing the issues these actions are causing and held a hearing specifically to address U.S. regulators’ policing of crypto companies. Even prior to the hearing, several committee members had publicly criticized the SEC for being heavy-handed. In a recent interview, Gary Gensler claimed that under the Howey test, a Supreme Court case often used to define a security, he believes every token other than bitcoin is a security. However, in January of this year, the committee suggested the nearly 80-year-old standard was not fit for purpose, and new definitions were needed for cryptoassets. Then, just weeks before the hearing, two U.S. lawmakers sent a letter to the Federal Reserve and other U.S. banking agencies criticizing the SEC’s accounting policy, arguing that it will deny millions of Americans access to safe and secure custodial arrangements for digital assets. Then on March 9th, another group of 4 republican senators sent a letter criticizing a number of regulatory actions against crypto, saying the increasing regulatory crackdown on crypto banking is “punishing an entire industry.”
During the hearing, the committee made a point of expressing that they considered many of the recent actions to be an overreach of jurisdictional authority. There were also a lot of questions regarding the risk of pushing the digital asset ecosystem overseas. “This administration is weaponizing the banking sector to debank legal crypto activity here in the U.S., using scare tactics to run an entire industry out of the country,” said Tom Emmer. “And the collapse of FTX should warn us of the vulnerable position we are putting American consumers in when we don’t compete to keep crypto firms onshore.” While the SEC is regulating by enforcement and driving talent and capital overseas, the UAE, Brazil, Switzerland, Singapore, Hong Kong, the UK, and European Union already have or are in the process of creating clear rules for companies.
There was also testimony from BitGo co-founder and CEO Mike Belshe and Coinbase chief legal officer Paul Grewal. Mike Belshe made a poignant argument about the predicament crypto-related companies find themselves in within the US at the moment: “Regulators can either declare that digital assets are regulated in the same way as other assets, and thereby apply the same rules, or regulators can say that they are different and create new rules. But what regulators cannot be allowed to do is to claim that assets are different and also claim that the rules are already understood.”
Tomorrow’s edition: Silvergate, Silicon Valley Bank, proof of reserves, and more.
Stayed tuned for more tomorrow in the full Node Ahead, and sign up here to receive our research newsletter bi-weekly.
Disclaimer: This is not investment advice. The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All Content is information of a general nature and does not address the circumstances of any particular individual or entity. Opinions expressed are solely that of Brett Munster and do not express the views or opinions of Blockforce Capital or Onramp Invest.