This Week in Policy (12/26)

This Week in Policy (12/26)

Merhaba fintech dostları!

Need a hint? Think of the “home country” of Santa Claus!

Last week, the extradition of Sam Bankman-Fried (SBF), the former CEO of FTX, from the Bahamas to the U.S. captivated everyone’s attention both in the crypto world and beyond. Criminal law discussions, as well the regulatory reactions to the implosion of FTX last month, were the main focus of crypto debates this past week.

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1.       FTX

Let’s start with the extradition. On December 21, SBF was extradited from the Bahamas to the U.S. after his extradition was approved by a Bahamian judge. On the following day, SBF appeared before the U.S. District Court for the Southern District of New York where he will face eight criminal charges. After U.S. Magistrate Judge Gabriel Gorenstein set January 3, 2023 as the start date of SBF’s trial, SBF was released on a secured bail bond of $250M—the largest in the history of white-collar crimes. Upon his release, SBF flew to California to join his family for the holidays.

Meanwhile, SBF’s top partners, Caroline Ellison, former CEO of Alameda Research, and Gary Wang, FTX co-founder, both pled guilty and are collaborating with the Department of Justice. In her guilty plea transcript, Ellison claimed that “[f]rom 2019 to 2022, [she] was aware that Alameda was provided access to a borrowing facility on” and that “executives had implemented special settings on Alameda’s account that permitted Alameda to maintain negative balances in fiat currencies and cryptocurrencies.” According to Ellison, this “permitted Alameda access to an unlimited line of credit without being required to post collateral, without having to pay interest on negative balances, and without being subject to margin calls or’s liquidation protocols.” Put simply, Alameda was given special treatment that allowed it to borrow from even when it was making losses, which is different from how every other borrower on FTX was treated. Ellison added that “if Alameda had significant negative balances in a particular currency, it meant that Alameda was borrowing funds that customers had deposited on the exchange.” Even more, she acknowledged that between July 2022 and October 2022, SBF agreed with her to “provide materially misleading financial statements to Alameda’s lenders.” Under Ellison’s plea agreement, prosecutors agreed to not prosecute her for any further FTX-related charges, except for tax violations, and to petition the court when sentencing her to take her cooperation into account.

In another major development, the Securities and Exchange Commission (SEC) filed a civil complaint against Caroline Ellison and Gary Wang, asserting for the first time ever that FTT, FTX’s token, is a security. The complaint notes that "[i]f demand for trading on the FTX platform increased, demand for the FTT token could increase, such that any price increase in FTT would benefit holders of FTT equally and in direct proportion to their FTT holdings." Practically, the SEC is saying that FTT meets the requirements of the Howey test, which defines contracts that are considered securities. Despite the fact that FTX was a crypto exchange, holders of its token did not mainly derive their expectation of profit from the trades they could do using FTT (at the end of the day, most FTT holders did not do trading themselves) but from the increase in the value of FTT itself, which resulted from the efforts of the administrators of FTX. In other words, FTT holders could reasonably expect profits to be derived from the efforts of others (FTX administrators in this case), which is one of the main characteristics of securities under the Howey test.

Can you see what this security classification could mean for all centralized crypto exchanges that work like FTX, which currently are the majority of crypto exchanges?

2.   The SEC

One of the major changes announced by crypto exchanges after FTX’s implosion was the introduction of proof-of-reserves reports through which crypto exchanges aim to assure investors that they have sufficient liquidity to honor withdrawal requests. Last week, SEC’s Acting Chief Accountant Paul Munter indicatedthat these reports are insufficient and that investors should be wary of the claims crypto companies may make using such reports. The official added that the SEC will closely scrutinize the work that audit firms do for crypto companies given the false sense of security their reports may induce.

3.       Crypto Regulation

Days before his retirement, Sen. Pat Toomey (R-PA) introduceda new bill titled “Stablecoin TRUST Act,” which he hopes would guide the debates over stablecoin regulation in U.S. Congress in 2023. This, of course, is the second major stablecoin bill to be proposed this year after the Waters-McHenry bill that was introduced in July.

Internationally, the Chamber of Deputies, the lower house of the National Congress of Brazil, approved a regulatory framework that authorizes the use of cryptocurrencies as means of payment on December 21, which was approved by Brazil’s outgoing President, Jair Bolsonaro, on the following day. The new regulation allows government entities to hold cryptocurrencies and would establish a regulator for the sector, which many expect to be the central bank. So, next time you go to Brazil, you may not have to worry about getting reals!

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See you next week!