President Donald Trump said he was “not a fan” of Bitcoin in 2019. But overall his administration has been relatively helpful to the digital currency.
The Commodity Futures Trading Commission approved exchange-traded futures products in 2017 that tracks Bitcoin, and financial regulators have gradually allowed banks and fund providers to get more involved in cryptocurrencies. U.S. Securities and Exchange Commission chairman Jay Clayton even spoke at a major cryptocurrency conference in 2018.
But in the past few days, cryptocurrency entrepreneurs have been surprised by regulatory and legal actions that take more direct aim at the industry. The Treasury Department filed a notice on Friday about a proposed rule that could force exchanges and other companies to collect more information on customers, and the SEC filed a lawsuit on Tuesday against fintech company Ripple.
The Treasury rule would make banks and other financial businesses verify customer information when transferring money to and from unhosted wallets, or apps that allow people to store their own cryptocurrencies outside of an exchange or broker. The department says that cryptocurrency is used extensively in malicious ways, including to finance terrorism, launder money, and buy drugs and false documents. It has also become the financing of choice for ransomware attacks that have been “increasing in severity” and have targeted critical areas, like organizations conducting Covid-19 research, the department says.
Forcing more organizations and people who deal in cryptocurrency to reveal their identities could make it harder to convert anonymous currencies into cash, the Treasury proposal says. The rule is a way “to protect United States national security from a variety of threats from foreign nations and foreign actors,” it says.
But some companies in the industry have pushed back. Coinbase, the largest U.S. cryptocurrency exchange, has been vocal in its opposition. “This sounds like a reasonable idea on the surface, but it is a bad idea in practice because it is often impractical to collect identifying information on a recipient in the cryptoeconomy,” Coinbase CEO Brian Armstrong wrote on Twitter before the rule being released.
Paul Grewal, Coinbase’s chief legal officer, wrote a letter to the Treasury Department taking aim at the shorter-than-usual 15-day window for public comment and bemoaning what he argued is a change in how this part of the Treasury Department has operated. “There is no emergency here; there is only an outgoing administration attempting to bypass the required consultation with the public to finalize a rushed rule before their time in office is done,” he wrote. The order is a break with the past, he asserted.
“Because we have historically enjoyed and valued a productive working relationship with [the Financial Crimes Enforcement Network], this recent development is an unfortunate and disappointing departure,” he wrote.
The Treasury Department did not respond to requests for comment from Barron’s on the criticism. But in its proposed order, the Treasury Department noted that it did not have to allow public comment on this order. That’s because it addresses foreign affairs and “undue delay in the implementation of the proposed rule would encourage movement of unreported or unrecorded assets implicated in illicit finance from hosted wallets at financial institutions to unhosted or otherwise covered wallets.”
The SEC suit against Ripple also marked a shift in sentiment, according to an executive there. The SEC alleged Ripple executives sold cryptocurrency XRP without registering it as a security, a claim the company denies. In an interview Tuesday, Ripple general counsel Stuart Alderoty said he was taken aback by the SEC’s move, which he called “a bit of a head scratcher” given the discussions Ripple had been having with regulators for years.
“My initial reaction is that it’s disappointing that the SEC would file a lawsuit that talks about the conduct of Ripple that began in 2013, even though we had been in discussions with the SEC for more than two and a half years about Ripple, the company, our operations and our use of XRP,” he said, adding that he found the timing odd given that SEC chairman Clayton had already announced he would resign on Wednesday.
Mike Venuto, the chief investment officer of Toroso Investments, told Barron’s that the lawsuit appears to be an attempt to set a wider-ranging precedent in cryptocurrency regulation. Toroso keeps a close eye on cryptocurrency companies—it created an exchange-traded fund called
Amplify Transformational Data Sharing ETF
(BLOK) that tracks public companies involved in the technology behind Bitcoin. Venuto thinks the SEC is trying “to scare off” companies looking to raise money through a cryptocurrency offering.
Those companies are focusing now on whether the Biden administration will take a similar approach to the new industry.
Write to Avi Salzman at [email protected]