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The Coming Battle Over Cryptocurrency Regulation

The creators of “Unicorn Hunters”, an online reality show where budding entrepreneurs pitch their business ideas to a panel of celebrities, are launching a new cryptocurrency.

It may sound fanciful, but the next “Unicoin” could come with a layer of accountability that most crypto tokens lack. Indeed, TransparentBusiness, the majority owner of the show, has announced its intention to register Unicoin with the Securities and Exchange Commission.

Unicoin is said to be one of thousands of digital assets backed by distributed ledger technology known as blockchain, but one of the few to voluntarily comply with securities laws. It’s partly a bet that the SEC will expand its oversight of the $2 trillion crypto industry.

“We anticipate that they will start having a regulatory presence at some point,” Unicoin co-creator Moe Vela, a lawyer and former senior adviser to Joe Biden when he was vice president, said in an interview. “I think you’re going to see guidelines and regulatory metrics coming next year.”

The SEC led the charge in the budding battle over crypto regulation in Washington, after accusing dozens of crypto players of using cutting-edge technology to violate old-fashioned securities laws against the investor scam.

U.S. Securities and Exchange Commission Chairman Gary Gensler testifies before a Senate Banking, Housing, and Urban Affairs Committee oversight hearing on the SEC on September 14, 2021 in Washington, DC

Crypto proponents view it as one of the many potential utopian applications of blockchain technology, while its critics see fraud, speculation, and criminal activity. Crypto transactions go through peer-to-peer computer networks rather than through a central intermediary such as a bank, and criminals have used them for illicit transactions such as ransomware attacks; the International Monetary Fund has warned crypto could undermine monetary policy and financial stability.

In an executive order last month, Chairman Joe Biden instructed the SEC and other regulators, such as the Commodity Futures Trading Commission, Federal Reserve, Federal Trade Commission, and Consumer Financial Protection Bureau to help develop a set of government’s approach to making the industry safe.

In Congress, most lawmakers seem oblivious to crypto and intimidated by the endless jargon associated with the technology. Among the few observant legislators are fans; a small bipartisan group of House members proposed exempt crypto from SEC oversightarguing that the federal government should not pursue “regulation by enforcement”, echoing the industry advocacy for Congress to intervene.

“We really should recognize that our banking and securities laws – some of which date back to the 1930s – are not equipped to provide a framework to regulate something that no one could even have imagined 20 years ago,” top Republican on the Senate Banking Committee, Sen. Pat Toomey (R-P.), told HuffPost.

Partisan battle lines haven’t settled, but Democrats are a bit more skeptical. Banking Committee Chairman Sen. Sherrod Brown (D-Ohio), for example, described digital assets as primarily beneficial to criminals, leaving “money launderers, hackers and rogue regimes to invent new ways to hide and move money in the dark,” he told a hearing last month.

Brown told HuffPost that Republicans calling for new legislation want to coddle the industry rather than crack down on fraud.

“They say they’re for regulation, but they won’t do anything substantial that anyone in the industry would object to,” Brown said.

For now, Brown is happy to let executive agencies try to enforce existing laws. The SEC has filed more than 70 lawsuits against digital asset market participants over the past decade, including an ongoing lawsuit alleging Ripple Labs violated securities laws by failing to register its XRP digital asset with the commission, thereby depriving investors of disclosures about XRP and Ripple’s activities.

Commissioner Gary Gensler spoke vehemently about crypto, likening the industry to the “Wild West”. He said exchanges where people buy and sell crypto are illegal if they are not registered. “It’s a question of whether they are registered or whether they operate outside the law and I’ll leave it at that,” he said. said last month.

Republican SEC appointees have complained The commission’s enforcement actions are a piecemeal approach that leaves the crypto industry uncertain as to when its crypto coins qualify as securities or another type of asset not subject to securities laws. The Commodity Futures Trading Commission, for example, has stated that the most well-known cryptocurrency, Bitcoin, counts as a commodity, not a security. There is no central company or entity behind Bitcoin, making it one of the most decentralized digital assets in existence.

Todd Phillips, a financial regulation and corporate governance expert at the progressive Center for American Progress, said it’s clear enough that current laws already cover a lot of crypto activity, they’re just being ignored.

“Many crypto token issuers fail to register their offerings with the SEC,” Phillips said. “If you want to sell tokens to the public and do it properly, federal law requires you to register.”

Phillips said the reason the crypto industry remains essentially unregulated is because the SEC lacks the resources to enforce the law on the scale needed to bring the necessary number of lawsuits.

Lawmakers have already been bamboozled by new financial technologies. If Congress exempted the crypto industry from regulation, Phillips argued, it would be making the same mistake as in 2000, when lawmakers excluded financial derivative contracts from commodity regulation. At the time, members of Congress talked about derivatives the way many are now raving about crypto, complaining that outdated laws were stifling financial innovation and threatening U.S. tech leadership. Unregulated derivatives then played a prominent role in the 2008 financial crisis, amplifying the fallout from subprime mortgages.

The Coming Battle Over Cryptocurrency Regulation
Sen. Cynthia Lummis (R-Wyo.), joined by Sen. Pat Toomey (R-Pa.), speaks on a cryptocurrency amendment to the bipartisan infrastructure bill, at the U.S. Capitol on August 9, 2021, in Washington, D.C.

Kevin Dietsch via Getty Images

A sweeping bipartisan cryptography bill could be drafted this year, the result of a collaboration between Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (DN.Y.). Lummis, herself a major crypto investor, said the legislation would not protect the industry from SEC oversight — developers would have to register their initial coin offerings with the commission.

“It preserves traditional authorities: CFTC on commodities, SEC on securities,” Lummis told HuffPost. “He provides definitions. It deals with stablecoins, banking, privacy and consumer protection.

Lummis stressed that she was working on the legislation with Democrats: “Digital assets are a nonpartisan topic,” she said.

It is unclear whether the industry would pass such a bill. Adelle Nazarian, CEO of the American Blockchain Political Action Committee, issued a skeptical note about requiring initial coin offerings to be registered with the SEC.

“It would be remiss of me to suggest that ICOs may one day be exempt from SEC regulation,” Nazarian said. “Therefore, there needs to be a whole new subset of rules, a deferential language with a more elastic framework for ICOs – with guidance from the SEC – that will fall under the same overarching rubric. [anti-money laundering and know-your-customer] rule-making by following these guidelines so that innovation can continue to thrive.

Industry insiders argue that Congress shouldn’t try to cram crypto into existing regulatory frameworks. Steve Bumbera, the lead developer of a crypto project called the Many Worlds token, said the SEC was on the “warpath” and that Congress should create a new agency dedicated to crypto regulation. Other than that, he said lawmakers could at least come up with a clearer system for determining which regulator oversees different types of crypto products.

“It’s not strictly one asset class or another. Some may be a security first and turn into a utility,” Bumbera said. If the SEC wanted everyone to register as a security, it would destroy 95% of the projects.

In the case of Unicoin, its creators claim the token will pay dividends based on the performance of investments in emerging growth companies, including some of those featured on the show Unicorn Hunters, in which Vela and the co-founder of ‘Apple, Steve Wozniak, and other business luminaries and celebrities are evaluating investment proposals from entrepreneurs hoping to boast billion-dollar “unicorn” status.

In other words, it is obvious that Unicoin would meet the definition of a security – buying the coin means investing in a joint venture with a reasonable expectation of profit from others.

Many other crypto tokens are also securities, but without strict enforcement there is a strong incentive to avoid registering with the SEC, as it is a major hassle.

“It’s expensive and time-consuming,” said Richard Devlin, senior vice president and general counsel of TransparentBusiness, in an interview. “You need a lot of lawyers and it’s a months-long process. And then you’re a public company, which has its own reporting and compliance requirements, so it’s not cheap.

Daniel Marans contributed reporting.

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