Headline: What is the Crypto Council for Innovation?
Date: 9/24/2022
Body: I keep seeing references to the Crypto Council for Innovation, and I have no idea who they are and what they do. I like to picture them arrayed around a dark wood conference table in some stone tiled basement, and the head sits in a bigger chair with dragons carved on the sides, with 2 Doberman pinschers at either side. But, probably not. Let’s investigate.
Who are they and what do they do?
The Crypto Council for Innovation is a lobbying group to influence regulation. There are some heavyweights on this Council including a former CIA Acting Director. These individuals write reports in favor of their members and present these findings in report form, to Congress and potential regulators. Said one member, “We have a lot of policy makers who are becoming aware of crypto and at the same time might harbor some misconceptions about it.” Just recently, they published a report on Bitcoin. It seemed to be “common knowledge” that Bitcoin represented a major money laundering threat, and the report was written to investigate that thesis and either debunk it or provide support for it. They make it quite clear on their website that education of the investing public is also key to their purpose.
Who were the founders?
Fidelity Digital Assets, Coinbase, Square and Paradigm are the founding members. These have been joined by many former government officials.
Why do they exist?
There is already a Blockchain Association and a Chamber for Digital Commerce, so, one might rightly ask why add a third body? They focus more on international regulation than regulations that arise in America only.
Do all experts agree with them?
In a word, no. No less than Jamie Dimon said, “Something that’s not supported by anything, I do not believe has much value,”
Why do we need such a group?
The securities Acts were passed in 1933 and 1934, and thus could not envision the changing financial landscape of today. A central part of this act is Rule 3b-16 which defines an exchange. The exchanges that we have today are far from the physical buildings thought of in 1934. They occur on websites, which are somewhere in cyberspace, so, the rules have to be updated. The update requires such an exchange to register as a broker-dealer. Even the President seems to be onboard with these ideas, saying, “we must reinforce United States leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets.”
The CCI is concerned about the ramifications of the new rule. They suggest that a traditional definition of finance is used to define non-traditional finance, and no accommodations seem to have been made to provide for the special nature of cryptocurrencies. Their recommendations are as follow:
- Limit the applicability of the new rule to a small number of cryptocurrnecies.
- Evaluate the risk of the new rule to place the U.S. at a competitive disadvantage as compared to other countries.
- The Commission should clearly define “communication protocol system.”
The remainder of the letter is pretty much focused on #3. So, we’ll look there next.
So, what is a communication protocol system?
It appears that the communication protocol system is the manner in which willing buyers and willing sellers are brought together. In the past, this was a trading floor and telephones. But, given the fact that decentralized finance was not mentioned by name, the SEC appears to be trying to be aggressively expanding its portfolio. As I mentioned in a previous post, there were many different government agencies battling for a place in regulation of cryptocurrency, and it seems that this is the SEC’s attempt to jump into the fray. The agency’s rationale for introducing the amendments is that the definition of “exchange” must be updated in light of recent technological developments, most notably digitization of securities marketplaces. The proposal states that the new definition is supposed to be “flexible enough to accommodate the evolving technology.”
Not everybody is drinking the same Kool-aid, however. Pro-crypto SEC Commissioner Hester Peirce was among the first opinion leaders to ring the alarm over the proposal. She offered a dissenting statement in which she called the document “too wide-ranging.” At stake here is the very presence of crypto exchanges, as per the verbiage in the amended rule, they probably wouldn’t meet the new definition, and might be regulated severely. Patrick Daugherty, partner at law firm Foley and Lardner and the leader of its blockchain taskforce, calls the SEC’s initiative a “stealth rulemaking proposal,” agreeing with Commissioner Peirce on its potential to be used in targeting crypto industry players. If the new rule takes effect, the exchanges would have to register as a broker-dealer and as an “Alternative Trading System”, a slightly less regulated entity.
The Verdict
Given that there is an intense battle within the government to see which agency will take the lead in regulating crypto, it seems like a good counter-balance to have an entity like the Crypto Council for Innovation. I understand that most people hear the phrase “lobbying group” and immediately think of back room deals and people with suitcases full of cash. Given that many of the people on this Council are former government officials, I understand where this comes from. But, really, it’s just like what the IRS does: When they suggest a change in rules, they write an Exposure Draft, and then the professionals within the field review it and suggest alterations during the “comment period.” Given this similarity in , procedure.I have to think that the CCI is a good counterweight to a potential government over-reach. What do you think?
REFERENCES
https://www.sec.gov/comments/s7-02-22/s70222-20124040-280166.pdf
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.