Cynthia Lummis
Photo: Office of Sen. Cynthia Lummis

Crypto, regulate thyself

Protocol Fintech

Good morning, and welcome to Protocol Fintech. This Thursday: pushing crypto toward self-regulation, Snoop Dogg on Web3 and Napster’s reinvention on the blockchain.

Off the chain

Napster is back, and it’s got a token. The crypto consortium that took over the aging but oft-reinvented digital-music brand envisions using $NAPSTER to sell tickets and experiences. The music industry, which is used to slicing and dicing revenue streams, has generally been friendlier to blockchain ideas than other fields of entertainment, where the arrival of crypto bros with flowcharts and white papers has been met with arched eyebrows. But the notion of a token so closely tied to a particular business highlights the need for regulators to move faster in figuring out when cryptocurrencies are commodities or securities — and if that distinction even really matters, versus figuring out how to protect investors.

— Owen Thomas (email | twitter)

Help us help you

Regulating crypto is complicated. That’s why Sens. Cynthia Lummis and Kirsten Gillibrand want to explore the creation of a private sector group to help federal regulators do their job. Their bipartisan bill would require the CFTC and the SEC to work with the industry to look into setting up a self-regulatory organization.

The idea of creating a government-sanctioned private regulatory association — similar to FINRA, which works with the SEC, and NFA, which works with the CFTC — has been drawing more attention in the debate over how to rein in a fast-growing industry whose technological quirks have baffled policymakers.

A crypto SRO could play an important role. The government can’t do it all.

  • An SRO would help the feds “oversee the burgeoning cryptocurrency industry,” a group of attorneys, including former CFTC Chairman J. Christopher Giancarlo, wrote in February. “Given the infancy of cryptocurrency and the complexity of its underlying technologies, substantial technical input from stakeholders is crucial for the development of sound regulatory policies,” they said.
  • Proponents of a crypto-focused SRO cite the role FINRA plays in regulating the capital markets. The agency, under the SEC’s supervision, writes and enforces rules and makes sure brokers are complying with them. FINRA “plays a critical role in ensuring the integrity of America’s financial system — all at no cost to taxpayers,” according to its website. The NFA fulfills similar responsibilities for the CFTC.

The crypto industry has tried to regulate itself before. In 2018, a group of crypto companies led by Gemini launched the Virtual Commodity Association to serve as an SRO for the “virtual currency industry.” That same year, companies like Paxos and Galaxy Digital formed the Association for Digital Asset Markets.

  • Neither has actually lived up to that promise: The VCA describes itself as “working towards establishing itself as an SRO” and ADAM says it is currently an “information exchange” for the industry.
  • The slow progress is likely because the idea of an SRO for the crypto industry has been controversial. Some crypto groups oppose the idea, Lummis said. “While they're butting heads, it makes it hard for us to move forward on provisions like that,” she told Protocol.

The dispute centers on a contentious point: Which federal regulator is going to take the lead in regulating crypto? The crypto industry clearly prefers the CFTC to take the lead, instead of the SEC, which has been criticized for aggressive enforcement actions.

  • Perianne Boring, founder of the Chamber of Digital Commerce, said self-regulation “doesn’t replace the certainty that regulatory oversight engenders for an industry, particularly one that is quickly evolving.”
  • Kristin Smith, executive director of the Blockchain Association, said “there may be a role for an SRO” but that is not a decision that should be made right now. “What we need to do right now is figure out what agency is going to have the overarching jurisdiction,” she said.

Settling that issue is a key hurdle for creating an SRO for the industry. So is the industry’s youth, said Marc Fagel, the SEC’s former regional director for San Francisco and now a lecturer at Stanford Law School. FINRA dates back to 2007, when the National Association of Securities Dealers merged with NYSE Member Regulation to form a unified stock-markets SRO. NASD itself dates back to 1939, and the NYSE traces its roots back to 1792. “Crypto is still the Wild West,” Fagel said.

A version of this story first appeared on Protocol.com. Read it here.

— Benjamin Pimentel (email | twitter)

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On the money

On Protocol: Three Arrows Capital was ordered by a British Virgin Islands court to liquidate after creditors sued the company over unpaid debt. Partners from advisory firm Teneo will reportedly advise the liquidation process.

The Three Arrows contagion is spreading. Genesis is facing hundreds of millions of dollars in losses from Three Arrows and Babel Finance, according to CoinDesk. The trading firm said it had mitigated those losses already by selling collateral.

The Chamber of Commerce is targeting CFPB director Rohit Chopra. Accusing him of trying to “radically reshape” the financial services sector, the trade group is spending big on a campaign against Chopra, lobbying for more “congressional oversight.”

Coinbase is reupping its international hiring efforts. After its mass layoff of mostly U.S.-based employees and setbacks in India, the crypto exchange seems to be now focusing on its European expansion, hiring its first employee in Switzerland.

The EU decided not to hold AML checks for unhosted crypto wallets. The EU’s lawmakers decided against part of a legislative proposal Wednesday that would have instituted anti-money laundering checks for crypto transactions to private wallets, opting for checks only between two regulated digital wallet providers.

Overheard

FTX CEO Sam Bankman-Fried wants to help save the Web3 ecosystem, but also wants to be smart about it. He said that while his company is “willing to do a somewhat bad deal,” there are “some third-tier exchanges that are already secretly insolvent,” which means that practically, they aren’t worth saving at this point.

Some celebrities have quietly begun to remove their Bored Ape NFT profile pictures on Twitter, but Snoop Dogg is holding firm on his view of Web3 as the future of the music industry. Record labels, he said, are “going to have to [...] understand that catalogs and things they hold onto are better served on the blockchain than sitting in the catalog collecting cobwebs.”

Tether CTO Paolo Ardoino does not appreciate hedge funds trying to short the stablecoin, saying that “it really seemed from the beginning a coordinated attack, with a new wave of FUD, troll armies, clowns etc.” He then went on a Twitter rant to assert that tether is the stablest of stablecoins.

Moves and hires

Nick Fox will take interim leadership of Google's commerce and payments business, Axios reported. The role, as we told you yesterday, has been Google's equivalent to the Defense Against the Dark Arts professorship at Hogwarts. The previous holder of the position, Bill Ready, left to be Pinterest's CEO. Fox has been with Google since 2003, so maybe he’ll last longer.

CEO Whit Gibbs and Chief Finance Officer Jodie Fisher have resigned from Compass Mining. The company is undertaking a restructuring effort in response to what it called "multiple setbacks and disappointments." Compass' board appointed CTO Paul Gosker and Chief Mining Officer Thomas Heller as interim co-presidents and CEOs.

Jonathan Lewis is leaving Twitter. Lewis spent four years as Twitter's head of Monetization Products.

Ryan Miller has joined Fortress Blockchain Technologies as chief revenue officer. Miller was previously head of Sales at MX.

Mitchell Bessey is now business operations lead at Ansible Labs. Bessey spent nearly seven years with Visa, most recently as director of North America B2B Strategy and Operations.

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Thanks for reading — see you tomorrow!

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