Crypto Regulations under the Biden Administration

 The approach to regulating crypto is ambiguous at the moment. Here are some fundamentals to understand how things are now and how it might change under the Biden Administration.   

The Securities and Exchange Commission (SEC) is the agency tasked by Congress to maintain orderly and fair capital markets. The SEC has a Chairperson and 5 Commissioners appointed by the President. President Biden appointed Gary Gensler as SEC Chairperson. Gensler taught courses on digital currencies at Massachusetts Institute of Technology, making him at least knowledgeable about crypto and possibly able to clarify the path for how it will be regulated.       

HOWEY TEST

If you were a student in my business law class, you would learn that one of the basic questions asked by securities regulation is whether something is a security or not. This is because if the thing is not a security, then the securities regulations do not apply and compliance with those regs is not necessary. A "test" was created by the US Supreme Court in the case of SEC v. Howey, Co. A "test" from the US Supreme Court provides a rubric that courts apply to future similar cases. The Howey test provides guidance for courts and the rest of us understand what is and is not a security.  

Securities are an 1) investment of money, 2) in a common enterprise, 3) with the expectation of profit, 4) through the efforts of a third party. In Howey, purchasers of units in an orange grove were deemed to be purchasing securities because they were buying the managerial efforts of others along with their piece of the orange grove. The specific security involved was an investment contract. 

SEC efforts to apply this simple test to token networks have not proven to be clear cut. The regulations do not fit crypto. Opting completely into securities regulation for crypto would require broker-dealers and exchanges to handle digital assets creating unique challenges. SEC Commissioner Hester Peirce  proposed a Token Safe Harbor Proposal 2.0. The safe harbor provides network developers with a three-year grace period within which they facilitate participation in and the development of a decentralized network, exempted from the registration provisions of the federal securities laws. 

REGISTRATION under the Securities Exchange Act of 1934

Exemption from registration is a very big deal as my biz law students can explain to you. Allowing networks to develop and grow without the administrative burden of form filing, SEC oversight, and information sharing that registration requires truly provides space for any industry - including crypto - to figure itself out and create value for investors/traders/crypto entreprenuers.    

We all stay posted as to how the new SEC Chair may handle the proposed Token Safe Harbor Proposal and crypto in general.     

What’s the fuss with GME earnings? Very few had an awesome 4thQtr of 2020.

 Why is the financial press putting poor fourth quarter 2020 GME earnings on blast?? Analysts predicted in early 2020 that company earnings for 2020 would suffer due to Covid. The financial press have consistently missed the mark with the revolution of GME. People please watch The Big Short and see how complicit the mainstream financial press are with entrenched Wall Street. For a demonstration of what “Earnings calls” are check out The Smartest Guys in the Room. Let’s break some of this down.

Earnings Season

All publicly traded companies disclose (report) earnings. Publicly traded companies report how well they did 3 months AFTER they did it. (Earnings = doing) Companies tell investors what they think they will DO (make money, lose money, remain flat), then they try and DO that. Later (the next financial quarter), they have a meeting or call (used to be on the phone) and tell everyone if they DID that. If the earnings report is good, bad, neutral – then investors decide what they will do next (buy, hold, sell)

Do good companies sometimes report bad earnings?

All the bloody time.  

In 2019, Pfizer lost market value of between $33-218 billion in 2019. That same year, Walgreens Boots Alliance lost between $13-52 billion in market value.  Pfizer’s 2020 earnings were better than 2019 and 2021 looks substantially better. Walgreens has really amazing projections for earnings (profitability) in 2021 And I loved Boots when I lived in London!

  

Let GameStop make its adjustments!

If this experiment with GME is a simulation, what are we learning?

We are learning how the enemy protects its advantage. We are learning that there is DEEP dislike with the GME revolution - prompting bad press and sell trades on GME. Okay and the fundamentals may call for that. However, many, many other companies have been through this cycle and recovered. Focus on the changes GME (or any company) is making and ask if it is enough to change the trajectory of its profitability or earnings.  

Time travel: if Robinhood had more friends, would the DTCC event never take place?

Before and after the Senate hearings, there was a great deal of scrutiny about the owners of Robinhood. There are ways for you to find out about all financial services professionals. No one is hiding.    

Why do we now know so much about the CEO of Robinhood? The news seems skewed against the upstarts. Let me give you some tools then I will give you my opinion.

Check out your Broker and other Wall Street professionals

Financial Industry Regulatory Authority (FINRA) is the self-regulatory organization of the broker dealer, brokerages, the brokerage industry. Self-regulatory means it regulates itself. FINRA requires testing, reporting and other compliance requirements. All of it is intended to keep the markets fair. How successful do you think FINRA has been so far, at keeping markets fair?

Broker Check is a tool for checking who has the licenses and registrations necessary for the brokerage industry. FINRA provides this service so customers can check their broker's history. I checked out the background of Jamie Dimon. The truth sets us free. 

Robinhood has started a dialogue across America and the globe. Watching how the narrative unfolds reveals privilege and a desperate attempt to maintain it. Wall Street does not like upstarts unless they are funding it. 

As far as DTCC, all I can see is that in black swan events it helps to have friends willing to save you. 

Citadel and others funded Melvin in return for a type of share in the company.  Robinhood is a disrupter so maybe it has fewer friends?

As far as Depository Trust - that is the process working to protect the investor

When stocks are bought and sold in the secondary market like a stock exchange, like the New York Stock Exchange (NYSE), each buy must be match with a sell. For example, a Robinhood customer buys 100 shares of GameStop (GME) someone must sell 100 shares to them. That one transaction must be cleared, matched and everyone gets paid. The buyer pays for the shares and owns the shares the seller gets money for the shares and those shares leave her account. The company that helps manage the details of the matching and clearing is the Depository Trust and Clearing Corporation (DTCC).

 Everyone pays to play. Brokerage firms must pay to be part of the DTCC clearing system. Robinhood stopped trading in certain stocks and sought a cash infusion in order to meet other obligations to DTCC due to the volatility. Think about the subprime credit crisis and the domino effect of bank and investment bank failures. Cash infusion was necessary to manage volatility that creates insecurity. DTCC asked for more money. Robinhood did not have the money and could not afford to have clients continue trading in case their clients ran out of money - stopgap measure.   

Those obligations of Robinhood and DTCC are part of the system. They are not a weakness. 

This seems to me to be more about Robinhood inexperience or truly a completely unexpected event - most likely the former.

         

Internal Control and the Federal Police

Scenes from Portland are frightening. This weekend I began to wonder just who these federal agents were because the feds were never meant to ever have a police force. The prohibition of a federal police was fundamental to the founding fathers (and mothers) view of the new version of federalism created by the US Constitution. We all are learning more as the media uncovers more. The “fourth estate” may be redeeming itself, imho, as journalists begin to unearth who these agents are in order to help us grapple with the legal legitimacy of the federal interference. Also, recent federal court decisions concerning the police and federal agents in Oregon create a one step back, two steps forward scenario. If the federal government has the legal right to enlist federal agents, then court decisions and new laws are permitted to check that power.         

 

THE COURTS

While a federal judge recently refused to grant the State of Oregon a restraining order against the deployment of federal agents in Portland, the ACLU has been successful obtaining a restraining order against the use of force by police and federal agents against the press and legal observers. In all the situations cited by the ACLU, the press and legal observers were 30-40 feet away from protestors, wearing press badges as well as vests clearly identifying them as NOT protestors. The order stops federal agents from dispersing, arresting, threatening to arrest, or targeting force against journalists or legal observers at the Portland protests for 14 days. A restraining order stops temporarily an activity, until a full hearing or review of the matter is possible. Seattle erupted in sympathetic protests this weekend and a federal in Seattle judge ruled that a recent ordinance approved by the Seattle City Council that bars police from using tear gas, pepper spray and other crowd control devices COULD go into effect on Sunday hopefully reducing harm to any and everyone. Black Lives Matter organizers in Chicago, joined journalists and civil rights attorneys to file a preemptive suit in federal court against the Trump Administration to prevent federal agents from being utilized Portland-style in Chi-town.   

 

FEDERAL POLICE?

The  Secretary of Homeland Security justifies the use of federal agents in Portland under 40 U.S. Code § 1315, which is most commonly used to enlist help for the Federal Protective Service, to protect federal property. The Department of Justice also has power under federal criminal law to protect government property.  U.S. Marshals, Federal Protective Service, U.S. Customs and Border Protection and Homeland Security Investigations (ICE) have alternated officers through Portland. The U.S. Marshals Service appears to be the lead agency. Department of Justice Office of Inspector General is reviewing federal agent activity in Portland. The administrative agencies that house these agents are under the direction of the President or an appointed leader. Some of these agencies are under the direction of interim presidential appointees because they never completed the congressional review of those appointments which is the norm. Perhaps that plays a part in the ease with which the federal agents appeared at protests. Perhaps a more qualified appointee would have refused the request to use federal agents. Some have argued that the agents are poorly trained because they were never meant to police civilians or civil unrest. What if all of this is perfectly legal?

 

THE Constitution

“The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce; with which last the power of taxation will, for the most part, be connected. The powers reserved to the several States will extend to all the objects which, in the ordinary course of affairs, concern the lives, liberties, and properties of the people, and the internal order, improvement, and prosperity of the State. The operations of the federal government will be most extensive and important in times of war and danger; those of the State governments, in times of peace and security.” (James Madison, Federalist Paper #45)

If the above was TL;DR,  et me break it down. The Federalist Papers are newspaper articles written by James Madison, John Jay, and Alexander Hamilton, published in New York newspapers during the debates over the drafting of the Constitution. The helps us understand what the framers were debating and how THEY understood the powers they incorporated into the Constitution. The above says, federal power is greatest during time of war. Otherwise, federal power is limited and small and must defer to the states. For the state’s main concern should be the lives and property of the people and “internal order.” It does seem that while the letter of the law may allow the presence of federal agents the spirit of the law does not. And perhaps the letter of the law also does not. A court will need to declare that or a new law must be passed to ameliorate the situation.      

 

Author Michael Lewis, in his 2018 book The Fifth Risk: Undoing Democracy, describes the danger to America of poor appointments to important agencies. The current administration has not appointed competent leaders for critical agencies. Agency directors who are incompetent (lack of experience) create all types of insecurity over legitimacy. Poor leadership decisions have caused great harm in the past – Waco.

The civil unrest of today is extraordinary. We were legally unprepared. It is time to catch up.   

Civil Rights Report Card for Facebook

Laura Murphy was the first African American and first women to head the Washington D.C. Office of the American Civil Liberties Union (ACLU). Laura recently worked with lawyers from the Washington Civil Rights law firm Relman Colfax to conduct a civil rights audit of Facebook. The audit was not just limited to racial justice but also included possible instances of discrimination in education, employment, as well as protected classes including sex, sexual orientation, gender identity, disability, national origin, religion, and age.

The audit was called for by civil rights organizations, advocates, and a few members of Congress. Facebook agreed to it and chose the auditors themselves.  Facebook was being taken to account for perceived failures during the 2016 Presidential elections and other failures to balance the safeguarding of free speech with hate, discrimination, and inequality.

The auditors began by interviewing over 100 civil rights organizations and members of Congress. The first preliminary audit report was release in 2018 with a second update in 2019. The focus of the audit was the Facebook app and no other Facebook products.

The audit found that civil rights organizations were most concerned about the failure of Facebook concerning race-based hate, voter suppression, advertising targeting and practices, and civil rights implications of privacy practices. Even with some noted positive changes at Facebook currently, the report found Facebook’s dealings regarding civil rights reactive and piecemeal. The report found it ironic that Facebook had no qualms about stopping anti-vaccination proponents and misinformation surrounding COVID-19 but was reluctant to take on board firm rules limiting misinformation regarding voting and voter suppression.

                Facebook Community Standards are what guides its decisions regarding posts. Here is the May 2020 Community Standards Enforcement Report.  The report only covers activity until March. Instagram was included in this report noting a concerning rise in Hateful Speech, Adult Nudity, Violence and Cyberbullying. Drug-related content surged during the months from January to March 2020. Despite improving tools and technology, Facebook estimates there are over 130 million fake profiles active on the platform. Also increasing is the number of governments seeking public data, which is concerning.

The ACLU audit’s primary concern is that Facebook do better during November’s 2020 Presidential election. The #StopHateforProfit and #HitPauseonHate campaigns’ ask advertisers to pause their ads on Facebook until it changes how the platform meets certain standards – establish a civil rights infrastructure, regular independent audits of identity-based hate and misinformation, find  remove groups focused on white supremacy, climate denialism, and antisemitism, to name only a few. 970 groups, advocates, and corporations such as The North Face, Verizon and Microsoft have joined the boycott. Facebook has met with the campaign organizers but no specific answers regarding the recommendations were clearly articulated.

Mark Zuckerberg owns a special class of shares that grant him 57% of the voting rights at board of directors meetings of the company = powerful. Moreover, hate speech is protected by the First Amendment. Neither, Zuckerberg’s power (and ignorance) nor hate speech’s protections can be viewed in isolation from our society and our own responsibilities. Assuredly, Facebook can do better and so can the rest of us.

At the end of the day more civil discourse and dialogue at all levels of each of our communities would go a long way toward improving things. My community is the California Community College system with its own struggle with Free Speech. I hope civil discourse is healthy enough to face #CancelCulture. There is a place for the social and societal pressure to act better that we are seeing  yielding positive change. However, we still need to be capable of standing in the same space with someone who does not believe the same things as us but we listen, learn, and rebut them if they are wrong.

  

Parenting during COVID

 

California is peaking when it comes to COVID. I am currently located in Southern California.   

My family lives a bike ride away. As California has relaxed restrictions, COVID case have gone up. My family of a 27 year old working disabled son and an 81 year old mother does not want to get together in person. They want to FaceTime and Facebook (FB) video message.

My son wants to FB video message and leave it on while we do other things. Sometimes we connect and he watches a movie while I play Animal Crossing New Horizons. Sometimes I do work while he watches something after work. I listen to it and continue to work.

This new COVID behavior is very interesting to me. Previously, he would never connect like this. He was busy working and being social. These days he works at a company that makes hand sanitizer. He is amazingly social on Zoom in a way that I envy.

My Zoom calls are all about work. Sometimes they are "Happy Hours" but usually not. 

We, as a family, have met up on Google Meet. But Zoom and FaceTime are our go to. What fascinates me is the sitting on zoom or messenger while the other person does something else. This is new and fascinating. 

During these sessions we are relating and not relating. We are watching each other. Responding when things require it but mostly keeping each other company.

There are multiple realties related to COVID. At home with too many people. At home alone. And maybe at home with intermittent people coming and going.

My son is truly connecting with me in ways we have not before. I am feeling less alone. Maybe he is too. It took me awhile to get used to this. Previous to COVID, I would have disconnected if he was watching something while video calling me.

Now I stay connected to him and I feel relief. I feel less alone. I feel more motivated to connect to others by video as well. Very strange and exceedingly relevant. I hope to evolve while the virus does. I hope to stay current and responding to changes as they appear to me and as my circle reveals them to me.       

Death and Inheritance

This summer I am teaching Wills, Trusts, and Estates to/with my amazing paralegal students. I have 60 students in my class this summer which is taught online due to COVID 19 . We are seeing a surge of students in classes this summer. We believe it is related to COVID19. I have never, ever had 60 students in a summer class before. The norm is 45. This class is 8 weeks long and very compressed. IN light of Black Live Matter and the diversity of my students, I am infusing more equity in my course this summer.

“Infusing Equity” is all about understanding that the people who wrote the textbook I am using for the class are most likely of white descent. Last names Hower, Walter, Wright for the textbook but that does not reflect my students who want to and will work for a local law firm.

In an effort to make the class more accessible for them, I make sure my examples when I lecture are not only about white privilege. White persons in Orange County, California inherit. Men inherit wealth and land. While the RIGHT to inherit or own land has become more equal the ability has not. Women and persons of color just have so much less wealth and own less land.

My journey this summer continues and I will update. In other news, the American Bar Association no longer has FW de Klerk as its keynote speaker for its annual conference.  Important voices are needed as the globe moves forward. I have no opinion about this event. I ask are voices with experience necessary? I want success so I only seek that success. How can we move forward successfully? Who leads that success movement?