Stock traders bear the cost of US crypto enforcement

Hello and welcome to the latest edition of the FT Cryptofinance newsletter. This week, we take a look at how the SEC funds its crypto enforcement cases.

To say that America’s main market regulator, the Securities and Exchange Commission, is kept busy with crypto is an understatement.

The names the SEC has gone after this year would have qualified as most of the industry’s Hollywood A-list a year ago. There have been Coinbase, Kraken, Gemini, Genesis and Terraform Labs Do Kwon, as well as many top executives from FTX. It tried to stop Binance US from buying the assets of bankrupt lender Voyager Digital, until a judge ruled against it this week.

The agency’s approach has struck a chord with many in the crypto industry, who say the regulator has not been clearer on the rules. But traditional financial markets are also getting a little annoyed, because they’re effectively picking up the tab for the SEC’s probe.

“Their funding comes from stock and option investors. These crypto people are running around burning the world down, and our agency, the SEC, which I fund and which my clients fund, has to spend its time on crypto,” Joe Saluzzi, co-founder and co-head of stock trading firm Themis Trading told me.

He points to a section of the Securities Exchange Act of 1934, which, despite its age, remains the cornerstone of modern stock trading in America.

Section 31 describes a small fee that all brokers must pay the US government to pay for the costs of regulating them. It is imposed on the value of shares and options traded, and effectively comes out of the broker’s profit unless they pass it on to the client.

The regulator sets the fee based on how much it needs for its annual spending budget, which is usually a function of how much the US Congress is willing to give it.

The price brokers have to pay bouncing around. At the start of 2021, it was $5.10 per $1 million. It then increased to $22.90 per $1 million, and was back to $8 by the start of 2023. In the past, it has been used to keep regulated companies and brokers in order.

However, a self-funded crypto regulator is a non-starter. Good luck trying to get the money from the companies who aren’t sure where their headquarters are or how much of their trade is genuine.

“The last thing you want every time a new financial product comes out is to create a specialized agency to oversee the product. We already have a very fragmented regulatory structure in the US,” says Dennis Kelleher, of Better Markets.

From a distance, the US regulatory system looks incredibly convoluted, with regulators at the federal and state levels jostling for jurisdiction. However, the SEC stands out. It was created (yes, as part of the same Exchange Act of 1934) to protect investors in America’s capital markets, and its broad mandate is a feature, not a bug.

The obvious answer would be for Washington to increase its budget. “When FTX blew up and all these US politicians who had taken money from FTX wanted to cover their tracks by calling for a crackdown on crypto . . . instead of bloviating, what they should do is immediately increase the resources of the SEC,” added Kelleher to.

However, the chance of that happening is close to zero. SEC Chairman Gary Gensler may be a man who divides opinion on Capitol Hill, but budget constraints are likely to be the same with a different personality representing the agency.

Complaints about regulatory funding are as old as the agency itself, just as brokers scrap over every penny taken out of their pockets and many an SEC executive has seen himself when the sheriff arrived to clean up the Wild West. Equity traders will have to continue to fund the clean-up of a market whose standards they can hardly believe.

What’s your take on the SEC’s relationship with crypto? Email me your thoughts [email protected].

Weekly Highlights:

• Let me flag up FT’s new 30-minute FTX film, featuring Nikou Asgari, Katie Martin, Josh Oliver and yours truly. If you’re new here, it’s especially helpful to take stock of FTX’s short and chaotic lifespan.

• In the spirit of International Women’s Day, I spoke to Aoife Keane, Felicity Potter and Amy Harvey, partners at crypto-focused law firm Ontier, and asked what it would take for women to break into what has been a traditionally male-dominated blockchain party. . The panel told me that a greater regulatory focus on crypto would lead to more equal employment practices that could even the field.

• Silvergate became the first regulated bank to be taken over by the crypto-uro in the past year. It will liquidate its operations after deciding that “a voluntary liquidation of the bank is the best way forward”. It was destabilized by a run on crypto deposits, as customers became concerned about the bank itself. “We see what can happen when a bank over-relies on a risky, volatile sector like cryptocurrencies,” US Senate Banking Committee Chairman Sherrod Brown said on Wednesday.

• Speaking of the US crypto crash, New York’s attorney general on Thursday filed a lawsuit against crypto exchange KuCoin, alleging that the exchange was unregistered as a broker, dealer or commodity broker when it bought and sold cryptocurrencies in the state. of New York. KuCoin told me that they “had not yet received any legal documents regarding this incident,” and would “address this matter through legal means if necessary.”

Soundbite of the week: Perpetual motion

John Ray had a lot to say about the former leadership of FTX when he was parachuted in to steer the crypto exchange and its affiliates through bankruptcy. As he tries to reclaim what’s left, he turns his wrath on others in the industry.

This week, Alameda Research, FTX’s sister trading business, sued crypto investment firm Grayscale and parent company Digital Currency Group over the structure of their large bitcoin and Ethereum trusts.

If Alameda could redeem 28 million shares in the trusts and Grayscale reduced its management fees, the stake would be worth twice that and close to $600 million, Ray estimated. But Alameda can’t and grayscale won’t. The lawsuit alleges that Grayscale and DCG management are “obsessed with self-interest” and have created a “perpetual one-way fee machine”.

“The fact is that there is no commercial justification for the trusts’ extortionate fees. Shades of Gray have simply perverted the trusts by holding investors hostage to a perpetual misdeed of billions of dollars under the guise of ‘management fees.’

Gråtoner described the lawsuit as “wildly deranged”. Read Nikou Asgari’s story here, and my November report on the DCG chief here.

Data mining: Binance’s market dominance reaches new heights

Ever since FTX’s collapse last November, the world’s largest crypto exchange – Binance – has only gotten bigger.

Still, the speed with which it swallows up the rest of the stock market is amazing. Binance has eaten up more than 60 percent of the spot market, not to mention 60 percent of the derivatives market for good measure.

As I said in last week’s edition of this newsletter, the supposedly decentralized crypto market has a key man risk. It is an industry controlled virtually by one company and one man, Binance CEO Changpeng Zhao.

Cryptofinance is edited by Philip Stafford. Send any thoughts and feedback to [email protected].

Your comments are welcome.