The problem with regulating cryptocurrency. Like any currency, it is speech. Why regulate its movement?

Currency is more than just paper authorized by the government to be put in circulation around a country. Currency says something about the value of the issuer. A currency tells its holder that the issuer brings to the market a level of economic value. That value is captured in the goods the issuer produces. The value is reflected in the laws that protect the markets within which the products are bought and sold. Currency communicates a message as to how well its underlying economy is doing and the prices paid for currency reflect how well these messages are received by other countries and potential holders.

Currency is speech …

The United States, by law, puts restraints on its government by a constitutional requirement that its Congress make no law “abridging the freedom of speech.” Article 19 of the United Nation’s Universal Declaration of Human Rights provides that:

“Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers.”

And I would argue that currency is such a medium for conveying information and ideas. As discussed prior, it conveys information, thoughts, ideas about its underlying economy. Its use tells us that someone has decided to use it as a store of wealth, as a unit of account, and is willing to use it as a medium of exchange for the aforementioned reasons.

Cryptocurrency does the same thing that the paper currency we are used to does. Rather than an analog-based paper currency, crypto is digital created and transmitted or exchanged digitally. The information it conveys is written in encrypted code. Unlike paper currency, cryptocurrency is not yet accepted as ready for prime time even though recent moves by individuals e.g., Elon Musk tweeting support for bitcoin and Dogecoin; corporations e.g., Subway accepting bitcoin as payment for sandwiches; and investment banks, e.g., Goldman Sachs starting a bitcoin trading desk, indicate investors are warming to the idea of cryptocurrency as a store of value or even a medium of account.

It is taking a little longer for the public to see bitcoin as a medium of exchange. The general public has to get its head around the idea that a sandwich can be bought with bitcoin or services rendered can be compensated with Ethereum. When it comes to mainstream use as a medium of exchange, the speech we are hearing is more like the babbling of an 18-month old, but we are reminded that the leap from toddler chat to adult yak and the move from cowry shells to paper currency was eventually made.

In the meantime, I believe that proponents should head off increased regulation of cryptocurrency by making the argument to regulators such as the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the U.S. Treasury with the speech argument for starters. Individuals should be able to convey how they value their wealth by being able to finance and trade cryptocurrency. Currency is merely a medium and just like the American broadcast and communications systems have abandoned analog and have embraced digital for its flexibility and data capacity, so too should the American public by embracing crypto as a way to express wealth, value, and economy.

How the regulator’s mindset may impact cryptocurrency …

An article today in Bloomberg discussing how a Biden administration would address the regulation of cryptocurrency has me putting myself in the place of the regulator. What is the U.S. Securities and Exchange Commission’s world view of digital assets? How will the Commodity Futures Trading Commission’s view toward regulation of exchanges evolve? Will the Board of Governors of the Federal Reserve System view the payment system aspect of cryptocurrency as a threat to the current national and global payment system regime or as a welcome supplement that brings more efficiency and transparency?

Clarity on what may happen on the regulatory side of cryptocurrency requires that the trader first take a top-down view of how governments view the world and especially how they view markets. You will never hear a regulator utter the term “free markets.” That phrase is best suited for the rhetoric of politicians who inherit worn out campaign slogans and reboot them for the latest run for office. I doubt they themselves, a significant number of whom are not trained in economics, truly understand what a market is or can likely identify threats to it. Compound markets for digital assets with the mechanics of payment systems and the politician’s eyes glaze over and she falls back to what she knows best: sloganeering tainted with tropes that appeal to individualism, consumerism, collectivism, or whatever narrative they believe their constituency will buy into.

The professional regulator, on the other hand, uses law and regulatory code as a front or an excuse. Statutes and codes give the professional regulator cover for their underlying philosophy and narrative. Unlike the elected official who only spends minutes on issues of markets and their regulation, the professional regulator is the expert spending years developing her own philosophy and transitive narrative and reconciling that philosophy and narrative with at times archaic statutes that the elected official has dumped on her to interpret. With archaic statutes and codes as cover for the regulator, it is the trader’s task not only to generate returns from holding a digital asset but to best understand what that regulator’s philosophy is.

There are two types of regulator. One I term as the myopic regulator. This regulator focuses on the black letter of the law and the code. Their focus is primarily on whether the market participants are following the rules on the books. He does not take into consideration any wider view of the philosophy behind markets and regulation. If the rules are skewed more to trader protection, his interest will be in outcomes that favor trader protection. If the rules skew more toward brokerage or platform protection, the regulator’s interest will be in outcomes favoring platform protection.

On the other side is what I term the universal regulator. They have managed to synthesize the role of government, traders, and platforms. They have an interest in maintaining the viability of the market system. Government’s role, in their view, is to provide for an efficient and productive trading post where there is sufficient transparency between traders and where the exchange platform ensures speed, efficiency, and clarity of trade because without these characteristics, the American markets as a whole become less viable, less reliable. Government will expand or contract in order to meet its universal role.

The trader should be mindful of this regulatory environment, particularly the tug-of-war between more or less regulation of exchanges. Eventually the trader pays the price in terms of transparency, price fairness, and the level of fees, especially where trade is her primary means of livelihood and income. After all, trade boils down to an information game and staying informed on government actions as well as on how government itself can disrupt information flow is important to the trader’s success.

As of 4:07 am AST, the price of Ether and Bitcoin per various currencies …

BTC ETH 
BTC/USD=23080.3 ETH/USD=614.193 
BTC/EUR=18,907.8 ETH/EUR=503.158 
BTC/JPY=2,388,500 ETH/JPY=63,560.7 
BTC/CNH=150,898 ETH/CNH=4,015.67 
BTC/DKK=140,642 ETH/DKK=3,742.65 
BTC/CHF=20,477.7 ETH/CHF=544.935 
BTC/GBP=17,232 ETH/GBP=458.564 

Source: OANDA

Legal/Political news impacting cybercurrencies

How not to treat forex traders: CFTC wins order of restitution against Winston Reed Investments

December 22, 2020

Washington, D.C. — The Commodity Futures Trading Commission today announced that Judge Max O. Cogburn Jr., of the U.S. District Court for the Western District of North Carolina, entered a consent order against Mark N. Pyatt, of North Carolina,imposing a permanent injunction and ordering Pyatt to make restitution in the amount of $255,850. The order also permanently bans Pyatt from registering with the CFTC and from trading commodity futures and retail foreign exchange contracts (forex). In the order, Pyatt admitted to fraudulently soliciting individuals to place funds in a commodity pool and to misappropriating most of the funds he solicited.

The consent order resolves a CFTC case against Pyatt that was filed in the Western District of North Carolina on February 10, 2020. [See CFTC Press Release No. 8120-20] The CFTC’s litigation continues against Pyatt’s company, Winston Reed Investments LLC.

The consent order finds that from at least April 2017 to February 2019, Pyatt accepted $276,850 from pool participants to trade commodity futures and forex. The consent order also finds that Pyatt misappropriated most of pool participants’ funds for business expenses and personal use, and to make Ponzi-like payments to other pool participants, while using only a fraction of the funds to trade. In addition, despite overall net trading losses, Pyatt sent reports to investors claiming profits of between 18.8 percent to 86.5 percent per month.

Related Criminal Action

In a parallel criminal action, the U.S. Attorney for the Western District of North Carolina announced that Pyatt pleaded guilty to wire fraud in connection with the scheme. On October 27, 2020, Pyatt was sentenced to 37 months in federal prison and ordered to pay restitution to his victims. [See United States v. Mark Nicholas Pyatt, Case No. 1:20-cr-00016, ECF No. 42 (W.D.N.C. Nov. 5, 2020)]

The CFTC cautions that orders requiring repayment of funds to victims may not result in the recovery of any money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC appreciates the cooperation and assistance of the U.S. Attorney’s Office for the Western District of North Carolina in this matter.

The Division of Enforcement staff members responsible for this case are Michael Loconte, James A. Garcia, Erica Bodin, and Rick Glaser.

* * * * * *

CFTC’s Foreign Currency (Forex) Fraud Advisory

The CFTC has issued several customer protection fraud advisories, including the Forex Fraud Advisory, which provides information about a type of fraud involving the trading of foreign currencies and how customers can detect, avoid, and report these scams.

Customers can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382) or file a tip or complaint online.

Source: Commodity Futures Trading Commission

As of 12:12 pm AST, Bitcoin & Ether continue their climb …

BTC/USD=23,243.40 ETH/USD=623.883

BTC/EUR=19,040.60 ETH/USD=511.073

BTC/JPY=2,404,680 ETH/JPY=64,544.60

BTC/CNH=151,935 ETH/CNH=4,078.12

BTC/DKK=141,646 ETH/DKK=3,801.95

BTC/CHF=20,604 ETH/CHF=553.038

BTC/GBP=17,408.20 ETH/GBP=467.258

Source: OANDA

Legal/Political news impacting crypto markets

CFTC releases guide on position limits rule for exchange-traded futures contracts

Washington, D.C. — The Commodity Futures Trading Commission’s Division of Market Oversight (DMO) today released a staff workbook to provide guidance to market participants on which exchange-traded futures contracts would be subject to the position limits rule the Commission approved in October. [See CFTC Press Release No. 8287-20]

“DMO is providing this workbook to market participants to promote transparent regulation of the derivatives markets,” said DMO Director Dorothy DeWitt. “DMO staff has worked extensively with our exchanges to identify the right set of contracts that are referenced futures contracts under our new position limits rule.”

The staff workbook provides a list of the core referenced futures contracts, along with a non-exhaustive list of linked referenced contracts (i.e., cash-settled futures contracts and options on futures contracts that are linked to a core referenced futures contract), that would be subject to federal position limits in connection with the position limits final rule.  

Source: Commodity Futures Trading Commission

As of 1:08 pm AST, this is how BTC and ETH are faring in the cryptocurrency markets

BTC/USD = 22,599.70 ETH/USD = 648.854

BTC/EUR = 18,463.40 ETH/EUR = 530.098

BTC/JPY = 2,331,500 ETH/JPY = 66,939.10

BTC/CNH = 147,150 ETH/CNH = 4,224.79

BTC/DKK= 137,367 ETH/DKK = 3,943.93

BTC/CHF =19,980.40 ETH/CHF = 573.653

Source: OANDA

Regulatory/Legal News Impacting Cryptocurrency Trade

December 18, 2020

Washington, D.C. —The Commodity Futures Trading Commission today announced that Jaime L. Klima, the CFTC’s Chief of Staff and Chief Operating Officer, will depart the agency for a role in the private sector next month. Ms. Klima has served in her executive leadership role since joining the agency in July 2019, where in addition to being the lead advisor to Chairman and Chief Executive Heath P. Tarbert on legal, policy, and administrative matters, she has been responsible for managing the daily operations of the agency and overseeing its nearly 1,000 personnel.

“Jaime is a Team Tarbert original, having been with my office from the very beginning of my tenure at the CFTC. From our historic rulemaking and enforcement agenda to our efforts to enhance the agency’s culture and operational effectiveness, she’s been instrumental to every one of our many successes,” said Chairman Tarbert. “I couldn’t have picked a better person, manager, or attorney to help me lead this agency, and I’m confident she’ll excel in her future endeavors.”

“My time at the CFTC has been more rewarding than I could have imagined,” said Ms. Klima. “The pandemic made this year challenging, to say the least, but I’m incredibly proud of how the agency has risen to the occasion. Notwithstanding those headwinds, Chairman Tarbert’s strategic leadership has led us to tremendous success, and I’m grateful to have been a member of the team. I also thank the Commissioners and the agency staff for being such exceptional colleagues.” 

Prior to joining the CFTC in 2019, Ms. Klima spent seven years serving in a variety of senior legal and policy roles at the U.S. Securities and Exchange Commission, most recently as Chief Counsel to SEC Chairman Jay Clayton. She also spent nearly a decade working in private practice on legal and regulatory compliance matters for clients in the financial services sector. Ms. Klima holds a bachelor’s degree from the University of Virginia and earned her master’s and juris doctor degrees from Duke University.

Source: Commodity Futures Trading Commission