Dia dhaoibh a chairde fintech!
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We are back to covering U.S. crypto policy updates after we looked at exciting developments outside of the U.S. last week. Let’s look at this week’s highlights.
1. Crypto Regulation
Democratic lawmakers are raising an alarm about a possible revolving door between various financial regulators and the crypto industry (i.e., the phenomenon of regulators joining the private firms they used to regulate after leaving office or vice versa). On October 25, Sen. Elizabeth Warren (D-MA) and Rep. Alexandria Ocasio-Cortez (D-NY), along with Sen. Sheldon Whitehouse (D-RI), Rep. Jesús G. "Chuy" García (D-IL) and Rashida Tlaib (D-MI), sent letters to seven financial regulators requesting information by November 7 about the steps the regulators are taking to stop such a revolving door.
The seven regulators are the Treasury Department, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve, the Federal Deposit Insurance Commission, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau. How serious is this phenomenon? The letters indicate that over 200 government officials have moved between public service and crypto firms, although no timeframe for such moves was specified. And what are the concerns? Many, but the primary concern is about potential conflicts of interest that may impact the functioning of financial regulators.
Last Wednesday, The U.S. Department of Justice filed a lawsuit against Larry Harmon, the founder of crypto mixer Helix, to recover a $60 million fine. The first-of-its-kind fine was imposed on Harmon in 2020 by the Treasury’s Financial Crimes Enforcement Network (FinCEN) for operating an unlicensed money transmission business. Crypto mixers, which we first covered last August, are open-source codes that operate on a blockchain and are used by some cryptocurrency holders to hide their identity when they use cryptocurrencies in transactions. The enforcement action by FinCEN and the present lawsuit show that it is possible to “sanction codes,” not only for money laundering as we saw last August, but also for performing money transmission services without a license.
Last week, SushiDAO, the governing body of the decentralized cryptocurrency exchange SushiSwap, voted unanimously to change the exchange’s legal structure. The current legal structure is simple and only involves a DAO of community members with voting powers plus an executive team that manages the exchange’s smart contracts and the front end of the exchange’s protocol. The new structure would involve a Cayman Islands DAO foundation, a Panamanian foundation, and a Panamanian corporation.
So, what on earth this is all about, and why does it matter? In the crypto world (specifically, on the blockchain), traditional business entities like corporations do not exist. What exists is basically code running on a network. In this new space, programmers tried to create new business entities that, unlike corporations, are decentralized in the sense that decisions are not made by a small board but rather a decentralized autonomous organization (DAO). DAOs allow all members of a business entity to participate in voting using tokens known as governance tokens. The decisions of DAOs are then implemented using smart contracts (i.e., code) on the blockchain.
The main challenge currently facing DAOs is that, legally, they are not considered limited liability companies (LLCs; like corporations), meaning that the liability of members of the DAO could go well beyond their “investment,” which we can see clearly through the ongoing enforcement action against OokiDAO. The news in the SushiDAO’s story is that DAOs are beginning to rely on existing centralized legal structures, specifically corporations, to limit the liability of their members, which goes against the very purpose of their creation. Also, DAOs are still opting to “incorporate” in classic tax havens because they are dissatisfied with the novel DAO regulations in developed countries like the U.S., such as the new Wyoming’s DAO LLCs law.
See you next week!