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.