The Working Group.

Uncategorized

Headline: What is the “Working Group on Financial Markets?”

Date: 8/15/2022

Body:  Ok, the background on this is that there is a current struggle within the U.S. Government; Agencies are battling to see who will have chief responsibility to regulate cryptocurrency.     The IRS seems to want to just tax the transactions as a capital gain, when they see the currency one way.  The CFTC wants to have more control over regulation.  The SEC (the big dog on this block) wants their pound of flash too.  (Sorry, bad cyber pun, won’t happen again.)  The  very serious point here is that  not only does the right hand not know what the left hand is doing… in point of fact, the left hand is actively waving off the right hand.  For this reason, the President convened a Working Group on Financial Markets, chiefly made of personnel from FDIC and OCC.  (No, the other OCC.  The non-motorcycle-riding one, as far as I know.)  This group just released a report on stablecoins.

These stablecoins are considered “stable” because their value is tied to the value of the USD or a commodity such as gold.  Said Secretary Yellen, “Stablecoins that are well-designed and subject to appropriate oversight have the potential to support beneficial payments options.  But the absence of appropriate oversight presents risks to users and the broader system,”   So, the working group put together a few recommendations.   First, everybody remembers pictures of the Bank runs in the 1930s, there are copies in every history text to date.  To ensure that this does  not happen to stablecoin users, law should be written such that issuers have to be insured depository institutions.    This would seem like a win for the little guy, AND the FDIC.  Second, they were concerned with payment system risk.   To address this, they called for new law to require digital custodians to have federal oversight, and allow issuers of stablecoins to require these custodians to pass pretty strict risk-management standards.  (This sounds to me like a “stress test” administered by the private companies… personally, I am rather, err… umm… dubious about this.)  Hope for the best here.  The third set of concerns focused on systemic risk and concentration of economic power  OK, let’s take some time to look at this complicated-looking requirement.

In essence, they want a few things:

  1.  Issuers of stablecoins should not be economically entangled with any other  commercial entity.  This is important because if there is a too tight alliance, that one entity could artificially control that  entire currency, regardless of market forces.
  2. There should be interoperability between and among stablecoins.  This is important because, if you are invested in one stablecoin currency (let’s say, pegged to the dollar) but there is a large move in the currency market, you might want to convert to a currency pegged to the price of gold.
  3. Congress may consider other standards for custodial wallet providers.  Ok, this is important too.  First, they want Congress to limit the strength of association of the wallet providers with any other commercial entity.   The reasoning is much the same as #1,   If one entity  gets to economically control a wallet provider, people could be wiped out instantly with the stroke of a pen (or stylus.)  They also want to limit how much use of your data can be made by the wallet providers.   Let’s face it: You are entrusting these companies with a LOT of data about your purchasing power, your purchasing patterns, even the charitable contributions that you make.   This would be PLATINUM in the devious hands of marketers, and believe me, they are salivating over this right now.  Congress wants to limit the amount of personal data that can be sold.

OK, in the next section of the report, they do a VERY governmental thing, and say that for the near future, the Financial Stability Oversight Council has to straighten out these thorny issues.

I  give up, who is the Financial Stability Oversight Council?

Isn’t it interesting that “oversight” usually means mistake, unless you are speaking of lawmakers?

Sorry, got side-tracked there.  Well, they certainly need help in the UX department of website development. (It is terribly difficult to read anything.)   That aside, they are a very important group within the Treasury Department.  Interestingly, the council seems to have authority to select non-bank entities for oversight.   This is important, given how large the shadow banking industry is, and how quickly the definition of currency is changing.  The Secretary of the treasury sits at the big seat, and the others include other federal and state regulators as well as an insurance expert appointed by the President.  They are important to seeing potential financial changes first, and then working to ensure that they are regulated adequately.   (Think of them as the high-beams of the financial vehicle’s headlights.   They shine a light on issues in the future, then engineer solutions to manage them with existing regulation.)  Interestingly, the Dodd-Frank Act further enabled them to enact risk-management standards on any Payment Clearing or Settlement activities.   They are also empowered to recommend closer oversight by any number of federal agencies, over these “systemic” entities.

They are required to present to Congress, every year, an Annual Report on their activities, and upon request, do other presentations in front of Congress.  In fact, large portions of the meetings are open to the public.  (I only spend so much time here because it seems likely that the “intermediate future” as enunciated by Congress could be a lot longer than we anticipate.  So, these committee members are VERY important to the regulation of cryptocurrency.)

Are they concerned about anything other than fairness within the market?

Yes.   Namely, the regulators are concerned that stablecoins could be used in an attempt to launder money.  To combat this, the Treasury Department has the Financial Action Task  Force looking at these money laundering issues and working with international partners to make things harder on the cybercriminals.

The Verdict

Reports of government instituted “Working Groups” are rarely spell-binding reads.   But, they are important to understand if you wish to be an informed citizen.    I think we should probably float the feds a little credit here, because we are all dealing with extremely new areas of finance here.  When mutual funds started up, it took government a little bit of time to learn how to regulate them.  And these were holding normal stocks and bonds.    Cryptocurrency wallets hold substantially nothing, but a stake in a very high-stakes experiment in behavioral finance.  It seems prudent that rule-makers be deliberate.  

 REFERENCES

https://home.treasury.gov/news/press-releases/jy0454

https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/fsoc/about-fsoc

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Give cryptocurrency some credit.

Uncategorized

Headline: What is involved in a retail establishment deciding to accept cryptocurrency

Date:8/12/2022

Body:  I can’t tell you how many little “Square” devices I have seen at small businesses.  These hardy folk just plug them into a smartphone, and begin taking credit card orders.   The adoption of this technology was very fast, so, it must’ve been a pretty easy decision to make.   This made me curious to ask what it would take for a small business to begin to take cryptocurrency as payment.  Up to now, only the larger organizations like AT&T, Microsoft and Overstock (among others) have decided to take Bitcoin and other cryptocurrencies as payment.  Now is when the smaller players begin to dip their toes in the liquidity offered by cryptocurrency.

What are the options to accepting cryptocurrency?

One option is to use a 3rd party to do the exchange for you.   2 of the largest companies to play this role are BitPay and Coinbase Commerce.  BitPay will usually charge about 1% of the transaction total as a fee.   CoinBase Commerce doesn’t have a similar reference, but is likely quite similar.  CoinPayments is another payment processer and has a processing fee of only .5%.     GoCoin will charge a 1% transaction fee, but it works with so many services, that fee might be worth it for some people. Paypal is getting into something similar, but, they will also allow you to convert  some of the larger cryptocurrency into fiat currency.  TripleA appears to also have a function where Bitcoin is use for invoicing and  remittances as well.

Pros and cons of accepting Bitcoin at a business (or any cryptocurrency.)

ProsCons
No chargebacks to be concerned with.Regulations are changing quickly, and keeping up with new policies could be cumbersome.
Might attract some crypto-fans who might otherwise go to a competitor.Bitcoin has HUGE volatility in price.  You could incur large losses.
The currency might appreciate in value over time.Tax preparation will be more complex, and likely more expensive.

 

How will crypto affect your operations?

Operational questions you might want to think through include:

  • What training will staff need?
  • Will you be prepared to answer customer questions?
  • Are there elements of customer service — like issuing refunds — that need to be rethought?
  • How will your crypto payments tool work with your current inventory or reporting practices?
  • Do we sell a few units of expensive merchandise or many units of less expensive merchandise?  If the former, accepting bitcoin, with all of the extra time needed at POS, might make sense.   On the other hand, if you have a coffee shop where people spend $5-6 at a time, this cost might not make a lot of sense.

The thing about all of these questions is that they all require time.  And, as they say, time is money, and both are in very limited supply.   So, all of these questions, and others, must be thought through to consider the effect of cryptocurrency upon your day-to-day operations within a small business

Isn’t accepting Bitcoin just like accepting credit cards, like you were speaking of in the beginning?

Cryptocurrency is different from accepting payment from credit cards.   I really like this chart, so, it is repeated from the article below:

CryptoCredit card
PaymentsPayments not required to run through a payment tool.Payments must run through a payment processor.
Fees0% if done directly with customer. Can be 1% or so using a payment tool.Standard flat rate is 2.9% plus 30 cents per transaction, but varies by processor.
Safety and securityLittle to no responsibility for compliance or fraud.Responsibility for compliance and (via fees) for fraud.
Resolving customer issuesNo legal protections or chargebacks to manage, but you’ll likely need to make clear your own policies.Decisions often in the hands of card networks, and they often favor the customer.
SettlementFlexible and fast, but also can be volatile.Slower, but likely more stable.
Regulatory oversightNot much now, for better or worse, but stay tuned.Stable and uniform, and comes with lots of compliance effort.
ConvenienceTransactions are comparatively fast, but there are some learning curves.Transactions are quick and how-to is well known, but underlying processes can be hairier.

Just as in the Old West, there was a lot of opportunity, but, that was tempered by a whole lot of risks, the crypto is the new opportunity.  But, while reaping the benefits, one must be very conscious of the risks one is taking.  Banditos are everywhere, rattlesnakes are numerous, and dying from thirst is a real possibility. 

What are the tax ramifications regarding acceptance of bitcoin?

There are many tax ramifications.  Three particular issues come to mind:

  1.  The IRS sees the cryptocurrency exchanges as property transactions, so for each one, records must be kept of how much the bitcoin was received at, AND at what price the bitcoin was converted to cash.  The paperwork to track this can be voluminous and the effort can be cumbersome.   So, systems must be designed to  accommodate these.
  2. Sending data to your accountant can be difficult, as you are not sure that the data from your point-of-sale system is in the same format that your accountant likes.  If conversion of data is necessary (either by you or by them) there is significant cost related to this activity.
  3. In all honesty, we are still not sure of all of the regulatory and tax ramifications concerning bitcoin and other cryptocurrency.   Future bad news on this front is very possible, and the uncertainty makes planning very difficult.

Should we accept ETH as well as Bitcoin?

This is a good question.   Bitcoin is better established, but ETH might attain much wider acceptance in the near future because of 3 features:

  1.  The ETH blockchain allows you to execute smart contracts.
  2. The ETH ecosystem is the one chosen by many gaming metaverses.  This is especially important if your main customers are going to be college-aged men and women, people who are demographically more likely to obtain value from this more flexible currency.
  3. Transactions executed in Bitcoin are irreversible.   ETH transactions are a little more flexible in this regard.

The Verdict

“We anticipate that further partnerships with regulated and established institutions in the industry will help deliver the benefits of digital currencies (e.g., convenience and support) and will continue to build the necessary foundation of trust,” This was the conclusion of a PWC report about retail businesses accepting forms of cryptocurrency as payment.  Two things about this quote seem important.  First, adoption of bitcoin and cryptocurrency seems like a fait accompli, in the future.  When this is accepted by more retailers, the conversations will become more robust, and the systems needed to  negotiate this currency will become MUCH more available.   Second, they bring up the concept of trust.   Several times in this blog, I have discussed the role of faith in a currency.  Faith and trust are truly the coin of any realm, and as the adoption of cryptocurrency goes up, more and more regular consumers will use it because they have faith in it.  Whether or not that faith is well-placed, is something that we will all see, as the future rolls out.

 REFERENCES

https://www.uschamber.com/co/run/technology/how-to-accept-bitcoin-payments

https://www.nerdwallet.com/article/small-business/accepting-bitcoin-crypto

https://www.inc.com/amrita-khalid/cryptocurrency-bitcoin-payments.html

https://www.cnbc.com/2022/07/29/deloitte-75-percent-of-retailers-plan-to-accept-crypto-payments-in-2-years.html

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

What is Stealth Wealth?

Uncategorized

Headline: What is Stealth Wealth?

Date: 8/4/2022

Body:  I was in High School at the early portion of the 1990s, gasp, I know.   One thing I well remember is in Economics, we learned about “conspicuous consumption.”   As an example, you might walk into Lord & Taylor and get a few bags, and use these to place all of your household trash into.  The whole concept was to advertise to your neighbors how wealthy you were.  But, what if you WERE really wealthy, could this backfire?  Yes, it could easily backfire, and you would be instantly covered in requests for money.  You might even turn up as a target of a kidnapping.  Hence, the concept of “stealth wealth.”

Wealth is going stealth.

Isn’t it interesting that the first part of stealth is “steal?”   Ok, that’s as political as I will get.

The number of billionaires is small and largely concentrated in the U.S.   But, the number qualifying for this elite status has been decreasing.  In 2012, there were 87 billionaires minted and in 2014, there were only 53  minted.  Hedge funds not doing so well is part of it, but UBS suggested that they might have become harder to find.  Based upon the pandemic, I would suspect that this decrease might continue.

U.S. wealth may be underestimated,” says John Mathews, the head of ultra-high net worth Americas at UBS—meaning that there could be more billionaires in America, or billionaires that are richer than we know. Mathews says this is due to two phenomena: the tendency to keep companies private for longer, and an increasing desire among the uber-wealthy for privacy.  Some of the billionaires are flying under the radar simply because they want to.   One gentleman owns roughly $12 Billion in property including the Plaza Hotel and Union Station in Washington, D.C.  Yet, even with these flagship properties, many within the real estate industry have never heard of him.  One gentleman owns a company making vodka, and his company is worth more than $2.5 Billion.  These are just 2 of many.   

Why is stealth wealth so attractive?

Reasoning for Stealth WealthComment
You become the underdog.People are much more likely to help you if they think you are struggling as much as they are.
You deflect attention.Any time you attract attention, there are likely going to be scammers.  Even more than that, if you bring attention to yourself, some will do everything they can to bring you down to their level.
People’s expectations of you decline.There was a guy on my swim team, named Eric.  Eric won most of his races, to such an extent, it almost became expected.   When he didn’t win, he would come out of the pool, head down, and hole up in a corner of the area.  The pressure on him was very intense.   For a billionaire, I think it’s safe to say that this kind of pressure is multiplied by a great factor.
You don’t always have to pay the bill.If you are extremely wealthy, people might begin to expect you to pay for events.    Regardless of your capacity to afford the price, it is nice to have somebody else contribute to group fun.
You’ll be much happier, overall.If people think you’re struggling like they are, they are much more likely to want to hang out with you.  Having true friends is something money cannot buy.

What are their techniques?

The article spoke of one woman who owns a defense contractor with offices in 30 U.S. states, Germany and Turkey.  She named her company the same name as a very popular beer brand.  Perhaps she is just a fan of the beverage, but I suspect it is a kind of camouflage.  If she mentions the company name at a cocktail party, somebody looks up the name, and they see the beer concern, NOT her very profitable company.   If this was her intention, I contend that it was a very smart move.

The  article also points out another billionaire, owner of a cheese-making company.   Not cheesy at all, this company makes over a billion pounds of cheese per year, and that means a lot of cheddar.  (Sorry.)  But, this billionaire really likes his anonymity.  So much so, that his picture does not ever appear on his company’s website.  The author suggests that finding a picture of the man is nearly impossible.

Practical Stealth Wealth Tips

TipComment
Drive a conventional car, and leave the exotics in your 7-car garage at home.My buddy is a director at Morgan Stanley, and he is quite wealthy.  He has an Audi R8 and on the weekends, enjoys wearing the roads out.   But, during the week, he can be seen driving his reliable Toyota.
Avoid easily identifiable high-dollar value  clothing.If you are always wearing distinctive shirts/blouses or shoes, people will begin to suspect that you have more money that maybe you could share…
Always say that you purchased your clothing at a discount store.  (e.g. Target, Kohl’s or Marshall’s.)If you mention a high-end store (e.g. Lord & Taylor) people are going to know that you are earning a lot of money, somehow.  Claim that your clothes come from Marshall’s or TJ Maxx, who get the high-end fashions just after the height of their popularity.
If they are persistent, make a joke to steer the conversation to a new topic.If people comment on your watch, and it is a Patek-Philippe, claim that  there is a company that makes knock-offs of fancy watches, and start a conversation on that brand, instead of the small fortune attached to your wrist.
Never engage in conversations about your salaryIf you speak concretely about your salary, people can begin to have a really good idea of how much money you have available.   Allow them to assume that the bulk of your income is from your paycheck.
Never admit to having a trust fund or a large inheritance.The presence of a Trust Fund is one of the neon sign that “something unusual is afoot” in your financial life.
Keep a bus pass in the outside part of your wallet.If you open your wallet, and somebody is looking, you want them to see the bus pass that confirms that you’re one of the common crowd. 
Do not brag about your expensive vacations.People (like me) are used to flying coach, and being jostled by the flight attendants in the aisle.  If your stories differ a lot, your listeners will begin asking questions about your level of wealth.

The Verdict

I am lucky because I will never have to worry about these techniques.  I suspect that if you are reading my blog, you won’t have to worry about this either (Unless, my blog is being read to you by a Shakespearian-trained actor, in which case, you’re welcome.)  But, every time there is a lottery, somebody does have to win, and sometimes lightning does strike repeatedly when you open a business.  I guess the point here is, money is a taboo topic within our society, which is odd because all the time, we are reminded how important it is.  This strange juxtaposition will make the life of the wealthy, sometimes less carefree than we might imagine.  So, if somebody seems to be especially touchy about revealing how much they earn, please consider backing off and showing them the respect that you might want for yourself.   I promise you; this gesture of kindness will not go un-noticed. 

 REFERENCES

https://www.barrons.com/articles/whats-behind-the-rise-of-stealth-wealth-in-the-u-s-1541102361

https://www.personalcapital.com/blog/family-life/the-benefits-of-stealth-wealth/

Living a Stealth Wealth Lifestyle

https://www.marketwatch.com/story/5-ways-to-tell-if-you-belong-to-the-aspirational-class-2017-06-26

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Does “Flip a Coin” have a new meaning?

Uncategorized

Headline: What do comedians say about cryptocurrency and NFTs?

Date: 8/5/2022

Body:    Ok, this one is just a little different, and fun I hope.   In the Middle Ages, there were castles, knights and Kings.   And those Kings lived apart from their people, so, there had to be a way for these Kings to learn more about what the common folk were thinking and feeling. Enter, the Fool: dressed in ridiculous motley, carrying a beat-up lyre or something similar, it was his job to tell the King what the masses were thinking and feeling.  But, if he is just a little too blunt, then, the sword that kills him soon after will not be so blunt.  So, to keep his head, he came up with amusing songs that spoke of what was happening beyond the castle walls.  In this way, the King would be entertained and hopefully learn a balancing truth or 2 about the outside world.  Would you be surprised to learn that a straight(ish) line can be drawn from this character to the professional comedian?  It is for this reason that we will now look at what some current day comedians say about cryptocurrency.  Surely, my goal here is to entertain, but, if not careful, you might learn a few subtle truths too.

Comedians and Currency Events.

Joe Rogan has spoken of Bitcoin more than a few times on his podcast.  Rachel Feinstein bought her Bitcoin several years ago.  On the other hand Stephen Colbert has been warning younger investors of the dangers of cryptocurrency, certainly in his own characteristic manner.  “If Gen Zs want to stay safe online, they should invest in this new, amazing cryptocurrency token — it’s called Colbert Coin,” said Colbert. “With Colbert Coin, you give us your savings, and then we cryptocurrency it. After that, you never have to worry about it any more, my stans.”  He began talking about cryptocurrency back in 2013, when he described the value proposition of cryptocurrency.    He opined that cryptocurrency has value, “just because a bunch of people on the Internet have agreed that it is worth something.”

Colbert Coin, from The Late Show with Stephen Colbert

Jon Stewart (of The Daily Show fame) has launched his own version of cryptocurrency.   Once again, each comedian started their own coinage to show that something with no intrinsic value, when promoted by a celebrity, still has no intrinsic value.    So, essentially, the joke currency is not really a laughing matter. 

OK, but have they gotten into NFTs?

In a word, yes.   Love him or loathe him, Steve Harvey is a really well-known comedian, on both radio and television.  Now, it appears that his objective is a little different.  The proceeds from his NFT sales go toward a non-profit with his name on it.  Sounds like a good deal; people with excess cash, give it to charity and in return, receive an NFT.   I have a few questions, though.   Namely:

  1.  What are the NFTs on offer, and how are they expected to retain their value?
  2.  If Mr. Harvey is an executive of the foundation, how much is he compensated?
  3.  What percentage of the proceeds go toward a charitable purpose?

Now, I have never met Mr. Harvey, but I suspect he’s a pretty smart man.  He claims to own some Bitcoin and some Ethereum.  (Were I to directly purchase cryptocurrency, this is the mix I would be buying as well.)  But, I would question just how charitable this NFT idea is because, within the interview that I read, there was a very obvious plug for one of the online sites where one can purchase NFTs.   I won’t say which one, but if you read the interview you’ll know right away.  It’s not subtle.  In turn, they gave a plug right back to Mr. Harvey.   Given this obvious advertisement, I have to wonder if some fiat currency also changed hands.

Martin Lawrence (Blue Streak fame, amongst others) is also releasing a series of 30 NFTs timed to coincide with his reunion tour.  So, it would appear that these NFTs, or the minting thereof, is primarily an effort to promote his reunion tour of the Martin TV show.

A Farce for Good.

There have been a couple of very interesting projects.  One of them is by Comic One which started Comic Coin in an ICO.  The objective of this project was to support international independent animators and also to support the creation of new comics of their own.    They are largely in Asia and making deals with publishers in Vietnam and other Asian nations.  The timeline to their creation of Comic Coin is shown below.

Familiar characters and scenes have been turned into NFTs.  They have all sorts of animated content and they are even working on a metaverse.  They offer a 3-D mode and they are working on adding VR capabilities.  Said one official, speaking of the project, “It will revolutionise the comic industry because it has the potential to reach millions of artists, content owners, and comic fans who want to publish, share, and enjoy great content anywhere. In addition, Comic Coin will bring comics and the crypto community into one place,”

On the other paw…

Meme coins are all the rage… especially when one loses a lot of money on them.  Dogecoin was started as a joke.  That joke began appreciating and appreciating, and many people have invested in it.  Then, on SNL, Elon Musk makes one joke, and the price drops 30%.  Despite this, many people have purchased the coin, mainly thinking of it as something funny, then spending serious money on it.  In this case, the joke might have a terrible punchline.  Said one expert, “The supply is essentially unlimited [for Dogecoin], and so unsustainable long-term. It’s a question of who will sell first and who will be left holding the bags.”

A good question might be, “Why did the value of this currency inflate so substantially?  The answer is that there were celebrities who spoke for it.  Both Elon Musk and Mark Cuban spoke in favor of the currency, and Musk went even further.  His company, SpaceX, has just accepted payment for a trip to the moon, denominated in Dogecoin.

Modern Day Humor.

Just like Ye Olde Fool, the modern-day equivalent is the meme, and this one is pretty truthful.

The emperor is often not wearing any clothes these days, and if one allows one’s self to be blinded, the cryptocurrency markets can have a dark sense of humor.

The Verdict

Sorry, it turns out that Mom was right.    Almost anything, in moderation, can be OK.     If you have only a little cryptocurrency in your well-balanced portfolio, you could receive some very good appreciation in price, that is not correlated with the stock market, and that is wonderful.  If the price goes down, then you have only lost a small portion of your investable assets, and this is recoverable.  “A little dab’ll do ‘ya” to coin a phrase.   And that’s no joke.

 REFERENCES

No Joke: These Top Comedians Are Bitcoin Supporters

https://cointelegraph.com/news/comedian-stephen-colbert-spoofs-colbert-coin-in-response-to-rise-in-crypto-scams

https://decrypt.co/71321/comedian-steve-harvey-nft-charity-bitcoin-ethereum

https://www.cryptoglobe.com/latest/2022/06/ada-actor-and-comedian-martin-lawrence-starts-selling-his-cardano-powered-nfts/

https://www.npr.org/2022/06/17/1105343423/cryptocurrencies-winter-crash-bitcoin-celcius

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Jewel of a Trial?

Uncategorized

Headline: Is Africa the next big Market for Cryptocurrencies?

Date: 8/2/2022

Body:  I will always remember one portion of an MPT documentary I saw decades ago.  The subject was Africa, and they mentioned that because infrastructure for copper-wire phones was so incredibly difficult to support, they had effectively “skipped” that generation of innovation, and very quickly embraced cell phones.  The embrace of cell phones was so universal and nearly immediate, that the trading of cell phone minutes had become effectively currency in many places.  So, it seems logical that the use of cryptocurrencies would be similarly embraced.  And, it has been; According to Chainalysis, in the 12 months since July 2020, Africans received $105.6 Billion in cryptocurrency  They seem to already be very accepting of these cryptocurrencies.  The question is; Why are they so ready to accept these currencies? 

The Banking Infrastructure is not well-developed

Cryptocurrencies are designed to be decentralized (peer-to-peer) in nature, and this flexibility allows them to be used in many different environments.   It also makes sending remittances very easy, and this is key; in 2019, roughly $562 Million was sent via cryptocurrencies to their home countries.

These Players mean Business

It did not take long for some entrepreneurs to start businesses to take advantage of this decentralized finance.  Empowa is a business that uses the power of cryptocurrencies to crowdsource financing for development projects.  Pezesha is a business that makes finding a loan easier by instituting a credit scoring system.  This system allows for  easier loan origination as investors can now see much more easily what projects are most likely to succeed.   Prior to this, such a system didn’t exist.  They have now facilitated more than 3,700 loans, and that leads to jobs, and development.  

Corruption is a problem in many places

Corruption is also a common problem that cryptocurrency can help solve, but we must exercise caution here.  Among the Top 10 cryptocurrency adopting states, the first 5 are often seen as corruption-adjacent.   But, #6 is the U.S., so we must face 2 alternatives:

  1.  The U.S. is nearly as corrupt as many other nations on the list.
  2. Corruption is not the main driver of accepting Cryptocurrency.

Are there any nations with particularly interesting approaches to cryptocurrency?

Yes, there are countries like this.  Kenya has setup a regulatory “sandbox” where they can experiment with many different approaches to regulation.    One expert defined this kind of sandbox as a “tailored regulatory environment that allows for the live testing of innovative capital markets related products, solutions and services with the potential to deepen and develop the capital markets prior to launching into the mass market.”   This is a really interesting approach as the transparency afforded by the sandbox could go a long way towards achieving buy-in from citizens. 

In another development, the Central African Republic has begun to accept Bitcoin as their nation’s legal tender.  As interesting as it is, we have to be realistic here.   The Bitcoin ecosystem is very energy-intensive, and the CAR does not have a robust electrical grid to support it.   (The IMF also raised some issues, mainly related to transparency, which is odd given that the blockchain is visible to everybody.) If it could be made to work, the stimulus created by Bitcoin could be support and be supported by the many mineral resources that the nation already has.  Further, there are plans in 2023 to install a vast and robust fiber optic network nationwide that will allow easy access to the Internet and cryptocurrency.   There is even talk of sharing this resource with nearby Cameroon.

But, what about the children?

Believe me, they are being considered, and profitably so.  An industry has sprung up, selling educational materials concerning Bitcoin; This information has to be translated into all of the major languages.  SHAmory is one such company that makes educational games and books.   So, perhaps in the future, citizens there might be more prepared to become involved in Bitcoin and other cryptocurrencies.  In Nigeria, Binance put on a program to educate 400 University students in how to use Bitcoin.  Clearly, they have a vested interest, but, as long as we all have our eyes open…

On the other side of the Bitcoin, children today are seeing some of the darker side of these cryptocurrency too.  There was an exchange located in South Africa, called Africrypt.    This company either went bankrupt or just disappeared, but not before stealing $3.6 Billion.  To make things worse, cryptocurrencies are not classed as financial assets, and  there were no laws broken in South Africa, and prosecution is impossible.   No doubt, the children of today will see and remember these crimes.  The question is, will the forgo the opportunity represented by cryptocurrency?

The World is Never Enough?

Bitcoin is infinitely better for most businesses if only for the clearing time required.   In most international transactions, it takes 3-5 days for a transaction to clear.  Within the Bitcoin ecosystem, transactions are cleared instantly, and this will serve to foster more business development.

The Verdict

Africa has some exciting prospects as it comes to cryptocurrency.  But, please note carefully the word “prospects.”  To my way of thinking, they are not here yet, and perhaps they will never be.  Maybe the electrical power grid needs to be developed before the adoption of cryptocurrency.   Maybe the educational component will prove too much to allow for cryptocurrency to gain scale.  We don’t know.  If you are thinking of investing in this space, I might suggest (for once) going with a specialty (read expensive) mutual fund that is run by a team of knowledgeable professionals; an index fund probably wouldn’t work here.  Look carefully at the credentials and experience of the management team before investing.

 REFERENCES

The role of cryptocurrencies in sub-Saharan Africa

https://www.bbc.com/news/world-africa-61565485

https://www.forbes.com/sites/rufaskamau/2022/04/20/the-scale-and-challenges-facing-bitcoin-adoption-in-africa-today/?sh=4791938862b8

https://www.binance.com/en-NG/blog/all/6-factors-influencing-the-adoption-of-cryptocurrency-in-africa-421499824684903666

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Sock Puppets Aren’t Just for Government any more.

Uncategorized

Headline:  What is a “sock puppet” when it comes to cryptocurrency?

Date: 7/31/2022

Body:    Everybody remembers that great Pets.com commercial with the cheesy sock puppet.  Great stuff and the marketing department can be justly proud of their achievement with this very cute little character.  But the sock puppets we are speaking of here are less cute, and adorable.     These sock puppets usually represent fake accounts, set up by somebody connected with a business; An example might help.  Let’s assume you own a doughnut shop.  Every now and then, a nice customer will write a Yelp review, explaining how “the cake doughnuts are fluffy clouds of pastry, and the cream-filled doughnuts explode with rich flavor.”  And they REALLY mean it.  But, let’s just say that you don’t feel that you have enough positive reviews.  What’s to stop you or somebody like you (lacking moral scruples) from opening several free e-mail accounts under fake names, and leaving positive comments on your bakery page, from these fake accounts?   Nothing.  There is nothing stopping you, and the accounts that your doppelganger had to open up, are called “sock puppets.”    Bakeries do this, authors do this to promote their book sales; It happens all the time.    Many claim that this is ok due to a moral relativism argument.   But it seems to me like an undisclosed attempt to sell more units by using a fake identity.   And, that, gentle reader, smells like fraud to me.

But it’s interesting when you see how these fake accounts interact with human nature.    Two different possible arguments come up here.    First, some suggest that when this kind of fraud is done, it is very obvious, and therefore does little damage.  I argue that this is not a cogent point because, often people are rushed during buying decisions, and don’t’ have the mental space to think rationally about such things.   So, only the surface positive content is processed in their brain.  The second use of sock puppets is to leave false information about your competitors.   If you owned that bakery, the local pie shop might be your biggest competitor.   If you were desperate, you might go out and get a number of sock puppet accounts and write very poor reviews of your competitor.

OK, but this could only happen to neighborhood businesses like pie shops, right?

Wrong.  There was a report in an Irish newspaper that a very major hotel chain “encouraged” (yeah, we can all imagine the Tony Robbins like speech here, right?) dozens of employees to provide positive reviews of the chain’s hotels on the site, TripAdvisor.   Per internal communication, the leaders wanted, “a more pro-active management of the reviews on Trip Advisor.”  Wow, that’s pretty blatant.  Per Jayne O’Donnell of USA Today, “Deceptive review sites are among the first things consumers searching for reviews on products including juicers or treadmills would find, but they come and go so fast, ,’it’s difficult for regulators to police them.”

So, what should you consider doing to keep from being suckered?

 Be VERY suspicious of an anonymous review. 

 Confirmed purchasers onlyà Some sites only allow people who have used a product or service to rate it.   This seems like common sense to me.  But, this is not always so.

Book ‘em, Danno

I would dearly love to say this to people who use sock puppet accounts to artificially jack up their popularity and denigrate competitors.    But, being a free society, I cannot.  The best we can do is be aware of how often this happens.   And it happens all the time, especially on Amazon.  (Sorry, Amazon.    You’re awesome for most stuff, praise be to Lord Bezos.  But, alas, you’re not perfect.)  Sometimes it is the mean spirited leaving of glowing feedback for one’s self, and leaving terrible feedback for competitors.  Sometimes, it is more  like teamwork.   Let’s say there was author A and author B, writing in a similar cognate area.  Both have new books about to be published, and A and B have a conversation.  Some sort of “Hey, you write me a good review, and I’ll write you a good review.” Happens.  If both genuinely like the other’s book, then all is well.  However, let’s say that B thinks A’s book is trash and ripped it up to use in her bird cage.  B is still hoping to receive a glowing recommendation from A, so, author B is not about to reveal their true feelings about A’s book.  So, the ratings will be artificially good.

Don’t believe me?   Well, maybe you shouldn’t.    Maybe you should instead, believe the experience of one of the most prolific authors EVER.  Mr. Stephen King is the Lord and Master of horror thrillers.   Even people not “into reading” recognize his name.   It  has become somewhat of a half-joke within the industry that if you could slap his name on the cover of sub-par literary pap, you would still have a spot on the New York Times Bestseller List.   Well, it would seem that this was proven feasible.  Mr. King wrote several books under a pseudonym, Richard Bachman.  Same author, same abilities, but Bachman’s sales numbers foundered until King outed himself as Bachman.  My point is that sock puppets, even when used intentionally concerning one’s self, make a real difference.  King himself commented upon this:

You try to make sense of your life. Everyone does it, but perhaps people who have extraordinarily lucky or unlucky lives do it a little more. Part of you wants to think that you must have been one hardworking S.O.B. or a real prince or maybe even one of the Sainted Multitude if you end up riding high in a world where people are starving. But there’s another part that suggests it’s all a lottery, a real-life game-show not much different from “Wheel of Fortune.” It is for some reason depressing to think it was all–or even mostly–an accident.

Yeah, the Internet is full of trolls, tell us something we didn’t know…

Well, it’s not so much as “you didn’t know” as it is, “you never thought about.”   Sock puppets can be easily involved in cryptocurrencies, and often, the stakes are much higher, so the technical acumen is much higher.   In many cases, hackers will use “bots” to write fake news articles engineered to ensure many clicks.  So, let’s assume that this happened in the books example.  Far too many of one book would be sold, and far too few of the other would be sold.  Good or bad for the individual authors, sure, but pretty harmless to the multitudes.  But, just think if one of these bots (and often thousands are used in concert) is programmed to talk up or talk down about an Initial Coin Offering, people could make lots of money on any such mis-priced currency.  And, where there are winners, there are sure enough losers also.  In fact, if too many trolls get into cryptocurrency, could we begin to lose faith in our fiat currencies?  (In fact, a battalion of bots is called a “botnet.”)  Sometimes, the bots are temporarily taken over by a human controller, and these are called, “cyborgs.”   This hybrid can give nuanced and occasional novel responses, making a bot harder to spot.

So, what can I do to make sure that it’s not a bot I am responding to?

You can do a lot, in fact:

 Check the profile informationà Often, when a bot is controlling, the account name is a random-looking string of numbers and letters.

Check to see when they joinedà If it’s very recent, there is a good chance that this is a bot, designed to fake results.

Check the number of followersà If the account is following thousands, and only followed by a few, it might very well be a bot.

Check the frequency of postingà If they post too often, that is an indication that it might be a bot.

Check the quality of contentà   A bot will often mangle language.

Check the number of hashtags usedàOften, to increase the number of hits, bot accounts will note a tremendously large number of hashtags.

It’s not 100% effective, but, if you see 2 or 3 of these “warning flags” consider carefully whether a sock puppet account might be involved.

The Verdict

In the Old West, it was legal for a sheriff to put together a posse of civilians and temporarily deputize them, for the purpose of capturing one suspect.    Given the people are not trained law enforcement officers, I don’t encourage large groups of citizens to arm themselves in the general public.  But, on this one subject, it will genuinely take collective action of every netizen to keep this suspect at bay.  If you suspect that a source is a bot, report it to Facebook, and identify it in whatever way you have access to.   It might seem like a game of Whack-a-Troll, where one is shut down and two more pop up.  But, each one you report is not there to misdirect a citizen who might not be as careful.

 REFERENCES

https://www.forbes.com/sites/davidvinjamuri/2012/09/12/do-consumer-reviews-have-a-future-why-amazons-sock-puppet-scandal-is-bigger-than-it-appears/?sh=56e20bbf6de6

Sock Puppet Spectacular: Are Online Reviews Completely Worthless, Or Only Mostly Worthless?

https://www.kaspersky.com/resource-center/preemptive-safety/how-to-deal-with-trolling-bots-and-fake-accounts

Amazon Freaks Out About Sock Puppet Reviews And Deletes A Bunch Of Real Reviews

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Home is where the hearth is.

Uncategorized

Headline: Home Title Fraud

Date:

Body:  Ok, a bit of a change of pace here this week.    Ever purchased  a home?  One requirement is to ensure that “clean title” can indeed be conveyed by the seller.  In most cases, this goes  without a hitch, but what if it doesn’t?  Is there a condition when the title being passed on is rather murky?     This is happening with more and more frequency.  In fact the frequency is so high, there are services being offered to help you deal with this potential Home Title Fraud.

Is this REALLY a big deal?

In 2017, the FBI reported over 9,600 real estate and rental fraud victims with losses totaling over $56 million. In just two years, this number grew to almost 12,000 victims with losses totaling over $220 million.  Though these are large numbers, they are small compared to the entire housing stock.     That said, when this kind of fraud happens, the real owner’’s life is turned upside down.

What happens in these cases?

Most frequently, the fraudsters decide upon a home that appears to be a second home for the mark, most frequently in an urban environment.  The fraudsters then gather as much information about you as possible.    They gather facts, identification numbers and all kinds of personal data.   They use this data to impersonate you, and transfer your property to themselves or a third party.  They then use this transferred property as collateral on a loan they take out or re-sell the property.   When these transactions go bad (and they WILL) the fraudsters walk away and you could be easily forced into foreclosure.

How big is the problem, really?

The FBI reported that in 2017 there were 9,654 cases of real estate fraud, resulting in more than $56 million in losses. Home title fraud has grown considerably since then, with 11,578 cases of real estate fraud reported in 2021, totaling more than $350 million. This is an increase of 20% in the number of cases and a 525% increase in the value of losses. These numbers however include all real estate fraud, and home title fraud makes up only a small portion of that.

This scam began being seen in 2008, and is most often seen in urban areas of the country.   But, getting a grip on the size of the problem is difficult as the FBI doesn’t break it out  into its own category.    But, you can afford to take a breath.  If somebody fraudulently tries to transfer your title without your agreement, it can easily be “unwound.”  Further, it is necessary that a Notary Public sign these forms, and they shouldn’t until they have concrete visual evidence that you are agreeing to the exchange, and that you are who you present yourself to be.

When we drill down it is clear that the instances of home title fraud are pretty low and usually occur in very specific situations:

  • When there is not a mortgage on the property. If there is an incumbent lender when a scammer tries to retitle the property, the lender is on the deed and will need to approve any transfer of title and the existing loan will have to be paid off. If you have a loan on your property, the chance of this happening is near zero.
  • When properties are vacant and not monitored it is easier to forge a deed and transfer the property illegally.
  • Elderly property owners are more vulnerable as monitoring this may be too difficult for them.

Said  another way, in order to undertake this fraud involves a lot of different verifications and therefore, several well-timed frauds.   Most fraudsters will find this onerous, so many of them look for easier frauds to execute.  But, when it does work for them, the real owner is in for one heck of a surprise, and NOT a good one.

I have seen services that will, for a fee, work to ensure that this doesn’t happen to you.

I have also seen these advertisements.   My advice would be to take a cost-averse DIY approach and check your property record every 6 months or so.  What you are looking for are deeds that were not prepared by you or your attorney, and you’re also looking  for liens that have been placed against your property that you know nothing about.  Many counties automatically notify you about changes concerning your property.  Other than this, be sure that the municipality has your most recent mailing address.  Further, you can get an idea that something untoward is happening when your revenue or expenses change dramatically without apparent cause.

If this were to happen, and the perpetrator was able to take out a loan and receive cash using the property as collateral, the rightful owner would be under no obligation to repay the loan. The deed is fraudulent, the scammer never actually was the homeowner, and the lender has no legal claim on your property to satisfy the fraudulent borrowing. Interestingly, lender’s insurance, which is usually a part of closing costs when a loan is taken out, pays the lender in cases like these making it easier to reconcile the problem, although there may be some legal costs associated with the cleanup.  The important thing to remember here, is that these services offer you monitoring, only.  Said another way, there is no preventative mechanism here, only a detection control once malfeasance has already occurred. 

So, what should I do to avoid this problem?

  1.  Breathe (This occurs #1 more often than I had anticipated.)
  2. Check your ownership documents with the county every year or so.  Most counties have this information online, so, access is not a problem.  If you see a filing that you cannot account for, dispute it immediately.
  3. If you do have land that is largely vacant, or elderly family members, check on them both regularly.
  4. Monitor your credit (Remember, you can get 3 credit reports every year.)
  5. If you are not receiving bills that you normally should, follow up with these vendors to see if a change in title generated a change in billing.
  6. Get title insurance.   (I learned something here.  There are 2 flavors of title insurance.  Type 1 (lender’s) ensures that you and only you have title to the piece of land that the Bank is giving you a loan for.   An owner’s title insurance covers you for problems with the title after you have taken possession of it.   You want to make sure that the second type has been purchased.)

So, what should I do if this problem happens to me?

  1. Call the companies where fraud occurred
  2. Place a fraud alert with your creditors and pull your credit reports
  3. Report identity theft to the FTC
  4. Report the fraud to an FBI field office.
  5. File a report with your local police department

The Verdict

So, we have learned that this fraud is pretty tricky to pull off correctly.    This should make it rare.   But, carefully consider the number of cases cited above.   Then consider that the problem is serious enough that the State of Maryland started The Maryland Mortgage Fraud Task Force in an effort to better coordinate the different agencies that are part of a potential solution.   Given all of this, I guess that the key would be patient action.  Oh, and don’t believe everything that you see on TV.

 REFERENCES

https://www.experian.com/blogs/ask-experian/what-is-home-title-fraud/

https://www.bbb.org/article/news-releases/22679-bbb-alert-home-title-fraud

https://www.kiplinger.com/article/real-estate/t048-c050-s002-how-to-protect-your-home-from-deed-theft.html

https://www.forbes.com/sites/lawrencelight/2021/09/11/the-home-title-theft-baloney/?sh=1924c791242d

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

CFPB, If You Need to Cry Vowel?

Uncategorized

Headline: Who is the CFPB?

Date: 7/23/2022

Body:  Have you ever tried talking with your dog?  You can really vent your feelings, and after that, they lick your face, and things start going towards the right track.  Well, the CPFB won’t lick your face, but they do have some things in common with your steadfast canine companion: They will listen, many bad actors are afraid of them, and they also have teeth.  (Bet you never thought that would make sense, did you?)  Let’s meet them.

The Consumer Financial Protection Bureau(CFPB) advocates for consumers and fights against companies that are trying to fleece the American public.    Despite this noble goal and mission, many Americans don’t know about this agency which was formed just after the 2009 Great Recession as part of the Dodd-Frank Act.   The first director was Ohio Attorney General Richard Cordray, and the crux of the idea was conceived in a 2007 journal article by Senator Elizabeth Warren.

If you think you’ve been a victim of a financial scam, you can reach out and file a formal complaint with the CFPB. In response to illegal actions, the CFPB has generated $12.4 billion in relief for more than 31 million consumers.

What is the CFPB

The CFPB is a new government agency.   The individual missions of the CFPB have long been pursued by many various government agencies.  Now, all of these functions are brought together into one agency.  Further, as it involves consumer advocacy, it has been given powers denied the FTC and other agencies.  This is why the agency could be so incredibly effective and why some fight so hard against it.  It is not a large agency, having only about 1,500 employees.  Their mission seems to center around education of consumers, and enforcement of regulations when there is a complaint.   One goal is to enforce transparency within the financial services marketplace.  The other goal is to enforce the regulations that exist already.  They approach both of these goals with the mindset of interventions being data-driven.

The most important feature (or the most hated feature) is the independence of this agency.   They do not get money from the normal appropriations process.   They request their budget from the Federal Reserve.   Further, when the CFPB does obtain a settlement, they are to use this money to support their financial education goals.  As it regards leadership, the agency is also pretty unusual.  The agency is subject to the oversight of the Financial Stability Oversight Council (FSOC), which can overturn a CFPB rule with the consent of two-thirds of its members. The Federal Reserve’s chairman is a member of the FSOC.   (This is why I lump together the subjects of governance and funding.)  Critics of this agency won a Supreme Court decision against the agency, and the outfall is that the President can fire the Director at any time.

How the CFPB Works

The CFPB is divided into six divisions, which each carry out distinct functions:

DivisionFunction of that Division
Consumer Engagement and EducationCreates resources to educate underserved populations on financial matters that affect them.
Supervision, Fair Lending and EnforcementWhen a company does step out of line with regulation, these are the people who educate and change the behavior of that company.  They take the company to court, if necessary.
Research, Markets and RegulationsThey do research on the consumer markets in an effort to help draft better-informed projects and programs.
Office of General CounselThey make sure that the CFPB is following the Law that they are enforcing within the community.
External AffairsThey speak with Banks, other agencies and the media to fulfill a variety of purposes.
Chief Operating OfficerThis division provides all types of support to the other functions.

 

How do I submit a complaint to the CFPB?

Part of the CFPB’s mission to protect consumers includes a complaint system available to the public. These are the steps consumers can take.

  1.  File a complaint thru the CFPB.  (You can do this online, it’s pretty straightforward.)
  2. The CFPB drafts a letter to the company based upon the contents of your complaint.  So, write this carefully.
  3. The company has 15 days to draft a response to your complaint.  In that response, they should have plans to remediate the situation so that something similar doesn’t happen again, and there should be some attempt to make you whole.
  4. The CFPB publishes your complaint in an online resource called the Consumer Complaint Database, and appends a summary of what happened subsequent to the complaint.   This is really important as another citizen might have had the same problem with the same company.  It also serves as a valuable source of data.
  5. When the company does respond, the CFPB will notify you, and you have 60 days to give them feedback.

This all sounds great.  Why are there so many critics?

Money, duh!!  Ahem, sorry, good question.

  1.  The financial services lobby is VERY powerful and has a lot of money.
  2.  There are some who genuinely believe that the CFPB is too powerful and should be reined in.  Even a gentleman who had previously worked there made note of how powerful the agency is.    In an interview, “The Consumer Financial Protection Bureau bestows a lot of unchecked power on the Director of the CFPB…”  In fact, the language that sets up the CFPB allows them to go after UDAAP (all kinds of consumer-based financial malfeasance) and the FTC was never given a similar explicit power.
  3. There are some who genuinely believe that the  CFPB does not apply transparency demanded of others when considering itself.  For instance, a key resource they follow is “Enforcement Policies and Procedures Manual and Examinations Playbook.”   This was a tightly held resource until there was a FOIA request to make it public.

The Verdict

For so many years, the hucksters (and there are a lot of them) within the financial services industries had little to rein them in or worry about.   Even in the depths of 2009, they had very little to worry about because the government was convinced that only the people who got us into the mess could get us out of it.  When the CFPB came online, all of that changed, quickly.   No longer would a consumer have to search for an advocate, one could easily be found using a simple Google Search.  This certainly did a lot to even the playing field with the hucksters mentioned before, but it is an open question whether it might have gone too far.   For my part, I think the jury is still out.  Any subject related to the law takes decades of litigation to fine-tune into society, and this is probably no different.

 REFERENCES

What is the CFPB?

https://www.investopedia.com/terms/c/consumer-financial-protection-bureau-cfpb.asp

https://www.thebalance.com/what-is-the-consumer-financial-protection-bureau-5191659

https://www.venable.com/insights/publications/2021/07/the-cfpb-at-10-the-past-is-prologue

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

 

Is There a Future in This?

Uncategorized

Headline: Who is the CFTC?

Date: 7/21/2022

Body:  So, we sometimes enter the world of derivatives, and no, I am not hearkening back to calculus class, I promise.  Derivatives have a value that changes based upon the value of another thing.  One type of derivative is the futures contract, where one investor agrees to purchase a certain volume of commodity for a certain price some time in the future.  In another type of derivative, interest rates are swapped.   For instance, there might be a swap between the holder of a 7% fixed mortgage with the holder of a 4% adjustable rate mortgage.  (Essentially swapping certainty for a higher rate of interest.)  All of these agreements and others are regulated by the Commodity Futures Trading Commission.   It is important to get to know this agency because they are pushing hard to be key players in the cryptocurrency environment.

What Is the Commodity Futures Trading Commission?

The Commodity Futures Trading Commission (CFTC) is an independent federal agency that regulates the derivatives markets, including futures contracts, options, and swaps, in the United States.   Often forgotten is that it also regulates the over-the-counter markets too.  Its goals include the promotion of competitive and efficient markets and the protection of investors against manipulation, abusive trade practices, and fraud. The Commodity Futures Trading Commission Act established the CFTC in 1974.  Each of the 5 Commissioners, once selected by the President and approved by the Senate,  serve staggered 5-year terms.

They have a few major responsibilities:

  • They require filings from intermediaries in an effort to maximize transparency.
  • They regulate the clearing procedures  ensuring fair play and timely execution.
  • They maintain data about the swaps already executed, and this helps cut down on fraud.
  • They do market observations to ensure that fraud is not a major problem.                                                                                                                
  • They prescribe  anti-money laundering (AML) procedures and monitor the markets for potential money laundering through derivatives.

Is there an interesting history behind the CFTC?

The CFTC was established in 1974, mainly to oversee selling of futures contracts on the agricultural markets.  It is important to note that the trading of actual commodities has become much less central than the trading of risk and the financial products related to that risk.  The CFTC also has expansive enforcement powers with respect to trading of physical commodities where it is empowered to pursue cases for alleged market manipulation or other potential wrongdoing.  When there is wrongdoing and manipulation, they often work in concert with the DOJ, and from 2017 to 2020 brought 46 cases to Court in such a partnership.

Given the international expansion of U.S. companies and the growing interdependency of global economies—particularly as a result of the increasing digitization of the international markets—the CFTC’s outlook has in turn become more global. The CFTC now seeks to more regularly enforce U.S. laws against U.S. and non-U.S. persons for potentially problematic trading in overseas markets, including when that trading is alleged to have had an adverse impact on U.S. persons and markets.

How is this agency organized?

This Office has 13 divisions, but 5 of them are pre-dominant.  I will introduce them in the chart below:

DivisionWhat do they do?
Division of Clearing & RiskClearing is essentially the matching up of consideration swapped in a transaction, and distributing those assets appropriately.    The 4 divisions of this Division are tasked with decreasing the systematic risk (i.e. due to  market processes, not individual investments) associated with the derivative markets.  They do a lot of compliance work and evaluate applications for regulatory relief.   This division seems to have a large technology component also, and this might relate to cryptocurrency sometime in the future.
Market Participants DivisionOK, this one is a new kid on the block, formed in 2020.  They seem to be largely concerned with financial intermediaries (usually a Bank.)    They maintain standards for registration and oversee some of the industry’s self-regulatory mechanisms.  They also explain the meanings of regulations to these intermediaries. 
Division of Market OversightThis Division has 5 branches, but they all relate to keeping the markets stable and transparent.  As most of these exchanges are now virtual, this would also be a division related to cryptocurrency, if it is added to their portfolio.
Division of DataNot to be confused with the other DoD, this division does everything involved with data.   They collaborate with others to develop good data, they train others to develop good data, and construct many different presentations of the data.
Division of  EnforcementThey develop and prosecute cases involving fraud and false statements.  They sometimes partner with state and  international partners.

 

What Is the Difference Between the SEC and CFTC?

AttributeCFTCSEC
OrganizationIndependent federal agencyIndependent federal agency
What do they regulate?Commodity options, futures and swaps.Stock and bond markets.
How do they add to transparency in the markets?Maintains data on commodity options and futures, and swap contracts.Maintains filings for all public companies, including annual reports (10-K), quarterly statements (10-Q) and statements of significant events (8-K).  Their EDGAR site is really user friendly.
Do they have a complaint filing/resolution procedure?yesyes
What is their budget?$355 Million$3 Billion

 

What is likely to happen in the future?

Well, there are all sorts of federal agencies actively trying to make the case that they are the one  best suited to  regulation cryptocurrencies.   But, given their practice in tracing futures contracts and options, it seems likely that they will figure largely into any regulation of the cryptocurrencies market. (In point of fact, they classified bitcoin as a commodity in 2014.) They already have much experience overseeing exchanges that look a lot like cryptocurrency exchanges, so, it seems like a natural fit all around.  But, not planning to play dead, the SEC, in 2021, said that cryptocurrencies were neither currencies or commodities.   Rather, they were securities.   So, the squabbling continues.

Just recently, the CFTC commissioner launched a program called LabCFTC to study digital assets.    This should be an interesting one.

The Verdict

The CFTC makes several warnings regarding cryptocurrencies. According to the CFTC website: “Several studies and news reports indicate that a large number of Initial Coin Offerings (ICOs) are fraudulent or the underlying products or services fail to live up to their promises. Estimates of fraud range from 5 percent to more than 80 percent of ICOs.”   With statements like this, we can be sure that proceeding with caution is likely a central idea.    That said, the CFTC is charging very hard to begin to regulate the cryptocurrencies, and the 3 vacant commissioner positions are likely to be filled by the President with people familiar with and sympathetic to the power and vicissitudes of the cryptocurrency markets.    The CFTC will certainly be monitoring developments and we should be too.

 REFERENCES

https://www.investopedia.com/terms/c/cftc.asp

https://www.thebalance.com/what-is-the-commodity-futures-trading-commission-cftc-5220077

https://www.jonesday.com/en/insights/2021/07/the-long-arm-of-the-cftc

https://www.coindesk.com/policy/2021/10/19/the-cftc-was-proved-right-on-bitcoin-futures-whats-next-for-the-agency/

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

OCC? Is that something treatable?

Uncategorized

Headline: What does the Comptroller of the Currency Do?

Date:

Body:    Comptroller?    Currency?   What is this?  This is actually a really powerful figure in the federal government.

What does the Comptroller of the Currency do?

The Comptroller of the Currency oversees all of the banks within the nation.   Interestingly, it also oversees the domestic locations of foreign banks too.  This person is appointed by the President and approved by the Senate.  Interestingly, the banks must pay for all administration fees and the taxpayers do not pay a cent.

How the Office of the Comptroller of the Currency (OCC) Works

Founded through the National Currency Act of 1863, the OCC monitors banks to guarantee they operate safely and meet all requirements. The OCC oversees several areas including capital, asset quality, management, earnings, liquidity, sensitivity to market risk, information technology, compliance, and community reinvestment.  The OCC is an independent bureau within the Department of Treasury. Its mission statement verifies it is to “ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.”     For their 5-year term, the Comptroller also serves as director of the FDIC.  The OCC has satellite offices all over the country and an office in London.

Wow, that’s a powerful agency!

It is a powerful agency and I didn’t realize how powerful.   They have the power to approve or disapprove any proposed changes in bank capital structures, and if found to be noncompliant with regulation, they can sanction the bank, up to an including removing officers or directors.  Following the Dodd-Frank Act, the Office of the Comptroller assumed the responsibility for the ongoing examination, supervision, and regulation of federal savings associations and took over many of the functions of the Office of Thrift Supervision. 

How did such an innocuous sounding Office become so important?

In a word, the banks are creating this currency, so to regulate, the currency, the OCC had to be granted very broad powers over banks. 

If the bank approves your application, it is going to trade for your promissory note for cash, cash in an account or instructions to another party to pay you.

History in the microscope

Prior to the Civil War, the banking system within the young nation was not systematic at all.  The National Currency Act was a response to the mishmash of local banks, local money, and conflicting regulatory standards that prevailed before the Civil War.  Prior to this, some states required an Act of legislation before a bank could be chartered, other simply demanded that a certain set of conditions had been met.  In this early system, the idea was that once presented with a bank note, a set amount of precious metal could be withdrawn.  But, when presented with different notes that were treated differently, fear ran rampant and bank runs were not unusual. In addition to this lack of faith, the fragmented system required that a traveler change his or her money at each boundary.

The National Currency Act of 1863 created the national banking system and the Office of the Comptroller of the Currency.    The immediate challenge was the paying for the Civil War, now ongoing.   Congress raised taxes, and they tried to sell war bonds, which was a radically new idea in this nation.  But, the Currency Act would hopefully restore faith in the banks of the nation, and encourage bond sales.  As a result of these new experiences and the force of personality of the first Comptroller, the Currency Act was superseded by the National Banking Act of 1864.  In related regulation, the banks that demanded to remain state-chartered were hit with an additional 10% in tax.   This encouraged the primacy of the National banks.  This struggle between state-chartered and National Banks went on until the Federal Reserve Act in 1913 was passed.

Then came the Great Depression, and in the midst of it, the President declared a “banking holiday” wherein most banking functions would be frozen.  But, behind the scenes, the OCC examiners were VERY busy, involved in a national triage exercise for the remaining banks.  The ones deemed “not bankable” were placed in a book for OCC to equitably dissolve.  WWII demanded an almost insatiable appetite for munitions and other supplies, and the Depression was over.  After WWII, the country was stabilized, as was banking.  Life, for some, was good.   As happens, in this environment, some creative people find ways around the law, and many portions of the “shadow banking” system came of age at this point.   As they were not banks, they were not regulated by Glass-Steagall restrictions on commercial lending.  Banking became more complex.   In response, the OCC changed and began to require a college degree for bank examiners and an international group within the OCC was formed.  Then, in 1999, the final protections afforded by Glass-Steagall were eviscerated, allowing for a bank to seamlessly be a commercial bank and retail bank.

In the Great Recession of 2009, too, the OCC was deeply involved.   After the crisis, the OCC was heavily involved with distribution of TARP funds, and assisted the Federal Reserve in administering the stress tests to the banks.  The Dodd-Frank Act passed and OCC lost many of its’ compliance functions to the new CFPB.  In the most recent period, OCC has been working with Banks and other federal agencies to setup better policies for the use of technology in finance.

 The Verdict

The OCC remains a very powerful office within the Federal Government.  They have a history suggesting an on-going grappling with timely issues in banking and finance.   By partnering with Banks and other federal agencies to work on technology, they appear to be taking the bull by the horns.  But, quite by design, I think, this is a rodeo that most people will not see.  Just be aware that it is on-going.

REFERENCES

https://www.investopedia.com/terms/o/office-comptroller-currency-occ.asp

https://www.forbes.com/sites/rhockett/2021/01/19/what-is-the-comptroller-of-the-currency–and-why-does-it-matter/

https://www.britannica.com/topic/Office-of-the-Comptroller-of-the-Currency

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.