Crazy Regulatory Week in the U.S. as Fed, NYAG, SEC & CFCT Target Crypto and DeFi; The End of U.S. Crypto Hedge Funds? Binance Exec Hostage Update

Powered by Xapo Bank

1. U.S. Fed Goes After United Texas Bank?

The U.S. Federal Reserve issued a cease and desist order to United Texas Bank, likely due to the banks’ crypto links.

For anyone outside the crypto ecosystem, this news may seem irrelevant.?

But this matters as United Texas Bank (UTB) is one of the very last U.S. banks acting as USD correspondent banks for crypto firms and non-U.S. crypto-friendly banks.

Many other banks that were offering such services were also closed down (Signature Bank, Silvergate) or faced similar actions (Customers Bank)

It is almost certain that this action is due to their crypto involvement and is part of Operation Choke Point 2.0, where the goal is to kill the crypto industry in the U.S.??

The big question here is whether there is a constitutional violation due to the arbitrary nature of these actions and a lack of due process.? I recorded a podcast episode on this issue last year that is equally relevant now.

Definitely a development to follow.

2. NYAG and SEC Going After Uniswap?

The NYAG has allegedly sent subpoenas to DeFi platform Uniswap. This is interesting as it comes only days after the SEC was reported doing the same.?

This is important from various angles.?

First, it shows the ongoing uncertainty for anything DeFi in the U.S. It would not be surprising to see the SEC take action against Uniswap for operating a nonregistered exchange. I really don’t understand why any crypto entrepreneur would set up anything DeFi-related in the U.S. anymore.?

Second, subpoenas were also sent to the investors in Uniswap, including a16z and Union Square Ventures, showing that the AG is trying to not only get more data (including pitch decks, which is often the goal) but also to send a message to the investor community that is looking at funding crypto ventures.?

And finally, there is a political angle here.?

Going after the crypto industry is an easy one for the NYAG as there is still limited political support for the industry in the current administration. Crypto is also an easy target for the NYAG to look tough. For example, many (including me) have been critical of previous statements from the NYAG about enforcement cases against crypto firms as they spent a couple of lines talking about the enforcement in question and then spent the majority of the statement going at length about how the NYAG has been tough on crypto in a quasi reelection campaign or marketing tone. This is like a bully going after a weak student in the playground just to look tough in the short term without thinking long term.?

The big loser here, unfortunately, is the U.S. crypto ecosystem and web3 innovation in the U.S.

[NEWSLETTER CONTINUES BELOW]

—

My Latest Podcast Episode

Why Bitcoiners Still Need a Bank with Xapo Bank CLO Joey Garcia?

Xapo Bank’s Joey Garcia joins the show and shares the challenges of running a # Bitcoin-focused bank and why even die-hard Bitcoiners still need a #bank, from yield on Bitcoin to access to #fiat.

A must-listen episode if you're interested in the conversations that industry leaders, policymakers and regulators need to have to start building the infrastructure for thriving crypto hubs globally.

Catch the full episode on your preferred platform:

YouTube: https://bit.ly/3Xj8mqg

Spotify: https://spoti.fi/47ZCF8F

Apple Podcast: https://apple.co/3PM4eKh

—

3. SEC Charges Crypto Hedge Fund For Not Using Qualified Custodian?

The SEC charged fund advisor Galois Capital Management with failing to properly custody client assets.

I am surprised this piece of news is not getting more attention. Basically, the SEC has de facto made any complex DeFi or web3 asset management very difficult in the U.S.?

Current regulations permit a range of financial institutions—including state and federally chartered banks and trust companies, registered broker-dealers, futures commission merchants, and foreign financial institutions (FFIs)—to serve as qualified custodians.

However, very few can handle crypto assets, and when they do, only a handful of assets. And this forces players to only use a small number of players not only reducing competition but also increasing risk.

In this case, Galois Capital was allegedly using Fireblocks, which is a tech provider allowing fund managers to hold the private keys with various controls and governance processes. Many crypto hedge fund managers, especially those looking at DeFi, use such solutions.?

The main impact here is that you will see US crypto hedge fund managers either leave the U.S. (somewhat likely) or set up a basic presence in the Cayman Islands and pretend they are based there (very likely).?I don't see how this better protects U.S. investors.

Once again, the loser here will be the U.S. crypto ecosystem and Web3 asset management in the U.S.??

4. CFTC Issues Order Against Uniswap

In addition to the SEC and the NYAG, Uniswap is also dealing with the CFTC, which charged the firm with illegally offering leveraged or margined retail commodity transactions in digital assets via a decentralized digital asset trading protocol.

The order requires Uniswap Labs to pay a $175,000 civil monetary penalty and to cease and desist from violating the Commodity Exchange Act (CEA).?

There are so many inconsistencies here that it’s difficult to know where to start. And I am not the only one who thinks so. Two CFTC commissioners publicly dissented as well.?

First, the order is another example of regulation by enforcement.

No clarity is provided, and allegedly, Uniswap was fined, although it tried its best to comply with existing regulations and collaborated with the CFTC. This sends the wrong message to the market where you are being penalized even if you are trying to do the right thing.?

Second, this enforcement provides zero clarity to the market.

For example, no clarity is provided on what the term? “leveraged” token means. And this is an issue that makes it difficult to comply with regulations in the first place.

As Commissioner Pham writes in her dissenting statement: “For example, I am puzzled how we can charge the Respondent based upon no evidence beyond the word “leveraged” appearing in the names of these tokens.”

Third, the penalty here is just $175,000. The goal of the CFTC here seems to have Uniswap Labs simply settle (as any serious litigation will have cost more) and use this as a precedent for other cases and as part of their marketing efforts to show their crackdown against the DeFi and crypto space.?

Fourth, this raises serious allocation of resources questions at the CFTC. As Commissioner Mersinger pointed out in her dissenting statement, there was no victim, fraud or complaints here, whilst there are over $75 billion in damages from pig butchering scams annually alone.

Why spending time on this issue and not others where Americans are being affected daily is a serious question.?

Finally, Uniswap Labs has, in practice, very little to do with the Uniswap Protocol. This is a bit like suing your IT support provider for violations of the internet.

And it’s a serious blow to anyone trying to build Web3 ventures in the U.S., as Commissioner Mersinger says more eloquently than me:

“But, imagine if J. Edgar Hoover had charged Henry Ford with liability for the crimes of John Dillinger and Bonny and Clyde because the Ford V8 was central to their ability to commit crimes. This result is the natural endpoint of the Commission’s logic that is at play in this settlement.”

The loser here is the U.S. crypto ecosystem as it, once again, brings up the question of why any reasonable entrepreneur would set up any type of DeFi business in the U.S.??

The official CFTC statement is here.

But I also highly recommend you read the dissenting statement from both Commissioners Mersinger (available here) and Commissioner Pham (available here).

5. Binance Executive’s Nightmare Hostage Situation Worsens

Binance’s Tigran Gambaryan’s nightmare hostage situation is getting worse by the day.?

Nigerian authorities are refusing to give him access to a wheelchair or any type of medical care despite his suffering from a herniated disc in his back and pneumonia, malaria and tonsillitis. They have also refused to release his medical records for months.?

Last week, as he went to court, guards once again refused to give him a wheelchair, directed prison staff not to help him and told the media that “he is fine.”?

Once again, Tigran went to Nigeria at the request of Binance and Nigerian authorities to provide crypto training before being held hostage.??

Anyone from Binance or in crypto could have been in his situation.?Its time to #bringtigranhome

Found this content useful? Make sure to subscribe!

—

Powered by Xapo Bank

Experience the future of banking with Xapo Bank - the first fully licensed and regulated Bitcoin-enabled banking group.

With Xapo Bank's all-in-one app, you can grow, transact, and secure your Bitcoin.?

Earn Bitcoin daily with annual yield on your savings for both BTC and USD, as well as cashback on your card spending.

Send BTC instantly with the Lightning Network or transact with USDC, USDT, USD, EUR, or GBP.?

Enjoy rock-solid security - including military-grade Swiss bunkers, cutting-edge digital protocols, and strict regulatory oversight.

Sign up now at https://www.xapobank.com/capsule.

—

Join My WhatsApp Community

Interested in getting daily curated crypto news updates and hearing my point of view on major developments?

You can join my WhatsApp Announcement Group community here.

Enjoyed this content? Make sure to subscribe or share it with a friend! A new Future of Money newsletter will be in your inbox each week!

See you all next week!!?

Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only, and none of its content should be construed as investment or financial advice of any kind.?

Who is Henri?

Henri Arslanian is the co-founder and managing partner of Nine Blocks Capital Management, an institutional-grade hedge fund focused exclusively on digital assets, with a market-neutral crypto fund focused on generating alpha from inefficiencies in crypto markets using relative value, arbitrage, and quantitative strategies.?

Henri was previously a partner and global crypto leader at PwC. In that role, he advised many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their crypto initiatives and numerous governments, regulators, and central banks on crypto regulatory and policy matters.

With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author, and is regularly featured in global media, including Bloomberg, CNBC, CNN, BBC, The Wall Street Journal, The Economist, and the Financial Times.?

Henri was named by LinkedIn as one of the 2022 global Top Voices in Finance and is the host of the CryptoCapsules? social media video series as well as The Future of Money podcast and newsletter.