It’s a fair bet that from this point forward, when America’s securities and commodities regulators get together, digital asset guardrails are gonna fall.
History was made on September 29 as the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) held their first joint meeting in over a decade. The meeting, held at the SEC’s Washington, D.C. headquarters, fulfills a requirement of the Senate’s still-pending digital asset market structure bill that called for a joint advisory committee to ensure no regulatory’ turf war’ over crypto oversight.
SEC Chair Paul Atkins and CFTC acting-chair Caroline Pham kicked off the event with individual remarks to their invited stakeholders. Atkins ruled out talk of the two regulatory agencies merging, focusing instead on harmonizing their respective (and increasingly hands-off) crypto views.
Pham echoed Atkins’ views, while taking the opportunity to “dispel some of the FUD (fear, uncertainty, and doubt)” that the CFTC no longer gives a damn about crypto operators behaving badly. Pham cited statistics that show the CFTC “has taken almost the same number of regulatory and administrative actions, and more enforcement actions, in about three weeks compared to the over seven months prior.”
The meeting consisted of three panels, the first focusing on the collective history of the CFTC/SEC and their seeming inability to harmonize their efforts. The second panel focused on how harmonization will benefit platforms, with representatives from the Kraken digital asset exchange and the Kalshi and Polymarket prediction markets detailing the historic ‘regulatory uncertainty’ surrounding crypto having forced them to ‘innovate’ overseas rather than in the U.S.
Both Terrence Duffy, CEO of the CME Group derivatives marketplace, and Craig Donohue, CEO of Cboe Global Markets, wondered why the SEC planned to offer an ‘innovation exemption’ for some crypto products/services while traditional financial platforms didn’t appear to enjoy the same freedoms. Duffy called for a “level playing field” for all participants, ensuring they could compete equally.
That prompted pushback from Kraken co-CEO Arjun Sethi, who claimed tradfi platforms hadn’t faced the same regulatory barriers that Kraken and its ilk have endured in recent years. Sethi also wondered why his tradfi counterparts hadn’t been advocating for a level playing field when firms like theirs were enjoying benefits unavailable to crypto operators.
The final panel focused on how harmonization will benefit both companies and investors, with much of the discussion centered on the always thorny question of when a token is or isn’t a security. There was also the suggestion that harmonization efforts might need to include the National Futures Association (NFA) and Financial Industry Regulatory Authority (FINRA), the self-regulatory organizations that govern the derivatives sector and brokers/exchanges, respectively.
Another discussion focused on the ability of platforms to offer 24/7 trading, with blockchain-focused platforms holding a distinct edge over their tradfi counterparts due to blockchains’ ability to operate outside of normal banking hours.
While the event was primarily a matter of everyone agreeing with each other on their desire for reduced guardrails, SEC commissioner Caroline Crenshaw—the lone Democratic commissioner left standing following Donald Trump’s return to the White House—said in her opening remarks that harmonization “sounds like a laudable objective,” but it “should never be an end in itself.”
Crenshaw noted that “one way for our agencies to harmonize our approaches would be to eliminate all regulation in our respective markets.” Crenshaw said that would be absurd, “but I fear that less obvious absurdities might creep into our regulatory regimes if harmonization becomes the goal in and of itself.”
Following the meeting, SEC chair Atkins told reporters that “crypto is job #1 right now,” adding the need to ensure there is no “risk of arbitrage between the two systems.”
SEC keeping the guardrail-dismantling tools at the ready
On the subject of unlevel playing fields, the day after the meeting, The Information reported that the SEC planned to “provide exemptive relief for blockchain-based trading” of publicly listed shares. Sources reportedly claimed that “some rules governing stock trading wouldn’t apply” to the platforms—like Coinbase (NASDAQ: COIN) or Robinhood (NASDAQ: HOOD)—offering these tokenized trades.
Tokenized stocks are already being traded by many of these platforms, but not within the U.S. Proponents cite their ability to trade 24/7 and settle trades much more quickly than traditional stock exchanges. Atkins previously directed the SEC to “work with firms seeking to distribute tokenized securities” as part of the regulator’s ‘Project Crypto’ deregulatory effort.
Those tradfi exchanges/brokerages—some of which have sought to ensure that tokenized stocks are subject to the same rules/restrictions as the tradfi originals—could seek to delay implementation of tokenized shares through legal challenges of the SEC’s plans. However, that could result in blowback from Trump, whose decentralized finance (DeFi) platform World Liberty Financial (WLF) has just announced plans to tokenize Trump’s family’s real estate portfolio (really).
Meanwhile, on September 29, the SEC’s Division of Corporate Finance issued a ‘no-action’ letter to DeFi platform DoubleZero, assuring them that “programmatic transfers” of their 2Z token don’t qualify as securities transactions. Thus, the SEC wouldn’t recommend an enforcement action against the company.
DoubleZero, which offers access to fiber optic networks in order to boost the performance of blockchain transaction validators, plans to unveil 2Z on Friday, October 3. Company co-founder/CEO Austin Federa characterized the no-action letter as “proof that U.S. founders and innovators can work with regulators to achieve clarity, and still move fast.”
SEC Commissioner Hester Peirce issued a statement on the letter, saying DoubleZero’s token distributions are “designed to facilitate the programmatic functioning of a decentralized physical infrastructure network” (DePIN), making them “distinguishable from more traditional fundraising transactions.”
Peirce said DePIN projects “enlist participants to provide real-world capabilities, such as storage, telecommunications bandwidth, mapping, or energy, through open and distributed peer-to-peer networks.” Tokens are distributed to participants—”the person who runs a node, provides storage, or shares bandwidth”—as “functional incentives designed to encourage infrastructure buildout.” As such, “these tokens are neither shares of stock in a company, nor promises of profits from the managerial efforts of others.”
The SEC issued another no-action letter on September 30 that clears the path for state-chartered trust companies to serve as digital asset custodians for registered financial advisers or regulated issuers of crypto-focused funds. The move will allow crypto operators such as Coinbase, BitGo, Ripple Labs’ Standard Custody & Trust (which is seeking a Federal Reserve master account) and others to serve as qualified custodians.
Peirce issued a statement on the decision, noting that the decision “does not expand the definition of a permissible custodian” but instead simply accepts the use of what Peirce contends “already are permissible custodians.” The new approach applies not only to tokens but also to tokenized securities.
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House GOP fumes over deleted Gensler texts
In yet another SEC-related development, some prominent Republican members of the House of Representatives want the SEC’s Atkins to answer for the agency’s recent admission that technical gremlins resulted in the permanent loss of nearly a year’s worth of text messages to/from former SEC Chair Gary Gensler.
Rep. French Hill (R-AR), chair of the House Financial Services Committee, was joined by the heads of several other subcommittees—including Bryan Steil (R-WI), chair of the House Subcommittee on Digital Assets, Financial Technology, and Artificial Intelligence—in raising their “concerns regarding the SEC’s treatment of information technology, particularly as it relates to its most senior officials.”
Coinbase led the charge to obtain Gensler’s private communications, but the SEC’s Office of the Inspector General (OIG) reported last month that confusion over a new data policy led the SEC’s IT staff to (a) fail to collect/maintain message log data, and (b) wipe the memory of Gensler’s government-issued mobile device.
The reps’ letter notes that the Gensler-led SEC collected “more than $400 million” in 2023 alone from more than two dozen firms the agency accused of “widespread record keeping failures.” The pols claim that “[i]t appears that former Chair Gensler held companies to a standard that his own agency did not meet.” The Committee is “engaging with the OIG to learn more about their report, seek clarity on outstanding questions, and discuss additional areas that require further oversight and investigation.”
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Quintenz out of CFTC race, Winklevii’s partisanship has some worried
Turning back to the CFTC, Brian Quintenz’s quixotic quest to become the regulator’s new chairman has officially come to a disappointing end (at least, for Quintenz). The White House, which announced Quintenz’s nomination in February, formally withdrew its endorsement on September 30.
A White House official confirmed the withdrawal to Politico but insisted that Quintenz “remains a trusted ally” of President Trump and suggested that Quintenz might have a role elsewhere in the government down the road. Quintenz told the outlet that being nominated “was the honor of my life,” but he was now looking forward to “returning to my private sector endeavors.”
The White House said a new nominee would be announced “in the near future” but offered no further details. A smorgasbord of potential candidates has circulated in recent weeks, with Crypto in America journo Eleanor Terrett recently adding two new contenders—former CFTC commissioner Jill Sommers and National Credit Union Administration chair Kyle Hauptman—to this derby.
There has been no reaction yet from Cameron and Tyler Winklevoss, the brothers behind the Gemini (NASDAQ: GEMI) exchange, who are largely responsible for tanking Quintenz’s nomination. The pair admitted lobbying Trump to turf Quintenz, based on their belief that Quintenz held views antithetical to Trump’s crypto embrace. Quintenz released some private text exchanges he claimed showed that the Winklevii were motivated by more selfish reasons, but it matters little now.
The Winklevii wholeheartedly embraced Trump over the past year with fawning public statements and millions of dollars in campaign donations. The twins recently launched the Digital Freedom Fund (DFF), an emphatically pro-Trump political action committee (PAC) that they funded with $21 million of their own cash.
On October 1, Politico reported that the twins’ full-throated endorsement of Trump and public disdain for all things Democrat isn’t sitting well with some crypto operators. Anonymous critics expressed unease at the possibility of the GOP one day losing power and the Dems launching a revenge tour on the entire crypto sector.
While some crypto-focused PACs, such as the still mysterious Fellowship PAC and America First Digital, appear similarly aligned with Republican causes, the Fairshake PAC at least pays lip service to the notion of nonpartisan support for any candidate who advances the digital asset cause.
One anonymous ‘crypto official’ told Politico that if blockchain becomes “a Republican-only issue, crypto is just going to get killed.” Crypto investor Nic Carter claimed that it could be “political crypto winter” if the sector becomes too closely identified with one party.
Others claim the Dems fired first in this war by bringing crypto prosecutions during the Biden era, and are now reaping what they sowed. Sen. Cynthia Lummis (R-WY), a staunch crypto booster, expressed satisfaction that “some in the industry recognize that it’s the Republicans that are supporting their industry, that are bringing these issues to the table, that the Democrats have been much more resistant to helping onshore the digital asset industry.”
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A taxing situation
While the U.S. government may have shut down at midnight Tuesday, the Senate Finance Committee adhered to its Wednesday schedule by conducting a hearing on Examining the Taxation of Digital Assets.
That didn’t sit well with ranking member Ron Wyden (D-OR), who qualified the rage in his opening remarks by noting that “crypto’s treatment under the tax code is a subject that deserves consideration.” Nonetheless, he added that instead of helping people negatively impacted by halted government services, “Republicans are making their warped priorities clear” by focusing on how to make life easier for “crypto firms that, for all intents and purposes, are essentially just sports gambling companies.”
Committee Chair Mike Crapo (R-ID) noted in his remarks that a couple of years ago, he and Wyden jointly sought stakeholder feedback on “how Congress could address the tax challenges and opportunities presented by digital assets.” Crapo said the crypto ecosystem is “diverse in its products and functions, and our tax code must appropriately adapt to reflect a more comprehensive and durable approach.”
The hearing was a relatively brief (as these things go) affair, lasting only 90 minutes. And in truth, not much of real substance emerged during the back-and-forth with the invited witnesses from Coinbase, the Coin Center advocacy group, ASKramer Law LLC, and the American Institute of CPAs.
Among the primary concerns of crypto operators is a ‘de minimis’ rule that would eliminate taxation on capital gains of $300 or under on digital asset transactions, as well as delaying taxation of gains from certain ‘reward’ programs, such as staking digital assets or the tokens issued to successful block reward miners, until those assets are unstaked or sold. Sen. Lummis has proposed such exemptions in legislation that has yet to advance, but which has the support of most of the industry.
However, Sen. Elizabeth Warren (D-MA) got attorney Andrea Kramer to confirm that the exemption would mean crypto investors paid less in taxes than investors who bought less than $300 worth of gold or shares in Apple (NASDAQ: AAPL). Citing Joint Committee on Taxation estimates, Warren said granting crypto this exemption would deprive the government of $5.8 billion in annual tax revenue.
Other concerns focused on the requirements for companies/platforms that receive digital assets over $10,000 to collect detailed personal information on the sender. Lawrence Zlatkin, Coinbase’s VP of Tax, told the Committee that the Internal Revenue Service (IRS) isn’t equipped to handle the volume of data the exchange would be forced to submit if these reporting requirements are upheld.
(Like many federal agencies, the IRS has lost a large number of both senior and rank-and-file staff this year, including Trish Turner, who in August resigned her role as chief of the IRS Office of Digital Assets. As with many federal agencies that have suffered such high-profile departures, Turner’s replacement has yet to be named.)
There was no crypto tax legislation to debate, which left the hearing firmly in the ‘informational’ category for now.
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Artful (tax) dodgers?
Wednesday’s hearing was preceded by the IRS and the Treasury Department releasing interim guidance that allows corporations to ignore unrealized gains/losses on their digital asset holdings for the purpose of determining whether or not the company is subject to the 15% corporate alternative minimum tax (CAMT). Full regulations on this issue will be released at some unspecified date.
The news was immediately celebrated by Strategy (formerly MicroStrategy) (NASDAQ: MSTR), the world’s largest BTC ‘treasury’ firm. The company issued a release detailing its interpretation of the tax change, namely, that Strategy “no longer expects to become subject to CAMT due to unrealized gains on its bitcoin holdings.”
Strategy had previously feared that it might be on the hook for billions in taxes on the unrealized gains on its monstrous BTC stash (640,031 tokens), so this is very good news indeed. And yet, Strategy cites the same unrealized gains as ‘earnings’ in its quarterly reports and as justification for including the company in the S&P500 index (S&P Dow Jones Indices doesn’t see it that way, at least, not yet).
Strategy Founder/CEO Michael Saylor reached a $40 million tax fraud settlement with the District of Columbia in June 2024 after he was accused of misrepresenting his primary residence as being in a lower-tax jurisdiction. If you think we’re picking on Saylor by resurfacing this unpleasant moment, think again, because there might be an even bigger crypto-related tax dodge coming to light.
Wednesday saw Sen. Wyden unveil an investigation into whether Dan Morehead, founder of venture capital group Pantera Capital, “improperly avoided more than $100 million in U.S. taxes by misrepresenting his residency status and abusing a Puerto Rican tax program.” The tech-focused Pantera’s portfolio boasts over 100 blockchain firms, many of them household names in crypto circles.
In a letter to Morehead on September 30, Wyden observes that Pantera sold “a large position and generated capital gains in excess of $1 billion.” The details of the transaction went unmentioned, but Wyden claims the sale occurred shortly after Morehead moved to Puerto Rico and obtained an Act 60 tax exemption eligible to permanent residents of the unincorporated U.S. territory.
Wyden claims that “the lion’s share” of the capital gains in question “accrued while [Morehead] still resided in California.” Moreover, Wyden notes that “gains from dispositions of appreciated property within 10 years after becoming a bona fide resident of Puerto Rico generally are treated as non-Puerto Rican-source income.”
Wyden started digging into Morehead’s alleged tax evasion in January, but while Morehead’s attorneys initially indicated their client’s willingness to cooperate with committee investigators, Wyden claims Morehead’s lawyers have since “all but disappeared, heightening my concerns.”
Wyden’s investigators reportedly identified the attorney who advised Morehead on the transaction in question, adding that the same attorney advised a different client (Suresh Gajwani) on the same Puerto Rico exemption. Wyden notes that Gajwani recently pled guilty to tax fraud for attempting to avoid taxes on $30 million in capital gains.
Wyden claims his understanding was that “federal prosecutors in South Florida are also conducting criminal investigations into attorneys who knowingly provided taxpayers inaccurate legal opinions” regarding Puerto Rican exemptions. Wyden also claims knowledge of “several ongoing investigations by IRS criminal agents” into similar avoidance schemes.
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Watch: Teranode is the digital backbone of Bitcoin
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Source: https://coingeek.com/joint-cftc-sec-meeting-harmonization-meets-deregulation/