It Looks Like It’s About Cryptos, But Don’t Think It Stops There

Written by Adam English
Posted June 16, 2022

Tell me what this sentence means to you.

“We have a strong interest in ensuring that innovation does not lead to a fragmentation in international payment architectures.”

It’s dry, it’s vague, and it doesn’t seem like something that’ll affect us day to day. That’s half the point.

As for the other half, it’s also one of the most telling quotes you’ll read as the U.S. government tries to assert unprecedented control over our wealth and assets through a backdoor.

This quote from Treasury Secretary Janet Yellen is something we should fear, it is hardly limited to crypto, and it shows how unelected government officials want to herd us for years and decades to come.

Secretary Yellen said this back in April at her first speech after President Biden signed an executive order that all but laid out the road map for asserting control over digital assets.

Since then the calls for action have only increased.

Before we go any further, I want to make something clear. There is virtue and vice mixed in to all this talk of regulation. That is by design.

Poorly designed exchanges are a scourge on the crypto sector. Billions have been lost to poor digital security. Look no further than the Mt. Gox hack back in 2013.

It lost 740,000 Bitcoin held by clients, and 100,000 held by the company itself. Granted, Bitcoin prices were far lower back then, but that’s equivalent to $17.6 billion with Bitcoin priced at $21,000.

Mt. Gox was built from something that never should have handled such volume or assets. After all, its name was an acronym for "Magic: The Gathering Online eXchange" — it was built to buy and sell cards for a niche, nerdy game (you do you though, Magic fans).

More recently we’ve seen exchanges slammed by liquidity issues. We’ve seen stablecoins collapse or enact crippling freezes for customer accounts. In the case of Luna and TerraUSD, a complete collapse happened virtually overnight.

Just a handful of days ago the Celsius network froze all withdrawals, something that Coinbase admitted it may have to do itself in the future in a sneaky addition to its earnings release.

It doesn’t look good for Coinbase as it just announced it is cutting 18% of its workforce and its stock price hits all-time lows, about 85% down from its IPO price.

These are corporate and exchange issues that could use some more robust security and reserve requirements. 

But these issues are leading politicians to renew calls for sweeping new regulations and executive branch powers that go far beyond just that.

Plus that is not what Yellen was talking about. She is talking about actual control over how you can pay for what they’ll

allow you to buy — the actual flow of assets under complete control and unlimited supervision.

Muddying the waters and making this a wedge issue that conforms to political “us vs. them” biases is extremely useful. At least to those that profit from such division.

For the rest of us it is a Faustian bargain at best, trading a bit more security to grant sweeping powers to the Securities and Exchange Commission and other agencies that have been pushing for near unlimited jurisdiction over anything worth anything.

The SEC deserves particular attention for what it is trying to do.

Much of the SEC’s current power comes from a Supreme Court decision back in 1946 that defined exactly what a security is through the four-part “Howey test.”

For the SEC to have jurisdiction, it must establish that an “investment contract” exists that involves (a) an investment of money in (b) a “common enterprise” with (c) the expectation of profit that is (d) derived from the efforts of others.

The first two criteria are easily met. The last couple, not so much. Other than some particularly structured cryptocoins, like ICOs, cryptocurrencies are largely decentralized.

For something like Bitcoin, there is no basis for saying an investment or expectation of profit is derived from the efforts of others. The blockchain is specifically designed so there is no central control and all participants are involved in the process. It's just one big collective, wildly complex, encrypted ledger sheet of sorts.

In this sense, the SEC has no right to consider most cryptocoins as securities. It has admitted as much in the past.

Back in 2018, then Director of Corporation Finance at the SEC William Hinman outright declared Bitcoin and Ether as non-securities because they are sufficiently decentralized.

This was reinforced by former Chair of the SEC Jay Clayton, who told CNBC, “Cryptocurrencies are replacements for sovereign currencies…[they] replace the yen, the dollar, the euro with Bitcoin. That type of currency is not a security.”

Within a couple years, it appears that view was reversed and the SEC was willing to try to expand beyond its well-defined, and Supreme Court-affirmed, limitations.

In December 2020, the SEC filed a lawsuit against Ripple alleging that XRP was a security even though XRP has been freely traded for nearly a decade and involves no contracts. It went as far as to say that everyone involved with Ripple should have known it was a security going back to 2013.

Ripple was the third largest cryptocurrency at the time. It most certainly is not now as XRP holders jumped ship and $15 billion in value was erased.

Since then there have been more and more warnings and outright threats of lawsuits that have effectively crippled various cryptos. It’s a form of de facto regulation by bullying and out-lawyering.

It will only get worse from here, and it won’t just be the SEC making bold power grabs.

A new bill proposal, the Responsible Financial Innovation Act, introduced last week would put the Commodities Futures Trading Commission in charge of most major cryptocoins by defining them as “ancillary assets” overseen by the agency.

To say this is a bizarre power grab by a part of the Department of Agriculture that regulates markets for stuff like corn, wheat, natural gas, hogs, and cattle would be an understatement.

Oh, and it would also force sweeping transaction data disclosures to the SEC and fees paid to the regulators which, in a decentralized environment, no one knows how they would be collected and routed.

And tucked in the bill is a requirement for the IRS to establish rules for how merchants can accept payment with cryptocurrencies as well (refer to the quote from Yellen above).

This trio of agencies — the SEC, CFTC, and IRS (and others like the FTC and the CFPB looking to expand their powers as well, no doubt) — are setting the stage for the U.S. government to attempt a bold move and establish a digital dollar.

One that is set up in a way that forces everyone to use it. One that they have absolute control over. This is the crux of what is at stake.

That’s what Secretary Yellen was really talking about, and this is the kind of overreach unelected officials heading already extremely powerful agencies are trying to slip into bills whenever they can.

There are some things investors can do now. One of the most important is to make sure cryptocurrency holdings are truly decentralized and private. My friend and colleague, Jason Williams, has a strong pick that he’s shared with readers of The Wealth Advisory that is worth checking out.

This will be a fight for months and years to come, but making the right choices now and continuing to expose and push against these regulatory power grabs can fend off this assault. People just need to realize what is truly at stake and speak out.

Take care,

adam english sig

Adam English
Editor, Outsider Club

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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