đ© 'Set a thief to catch a thief'
on Joe Kennedy, FDR and the Howey Test | also: Wyoming takes on China with a "state token"
Dear reader:
Welcome to The New Money Brief, a free newsletter that covers the global revolution brought on by digital currencies and financial settlement - and why itâs so important. Itâs written and edited by me, Marc Andrew.
This week, the SEC filed two separate lawsuits against the worldâs largest crypto exchanges: Binance and Coinbase. There is plenty of reporting and informed analysis out there. You can get caught up here, read Matt Levineâs views here. Informed speculation on the implications is here.
I wanted to offer something different. Namely, what do the SECâs actions have to do with Joseph Kennedy? đ The answer, as it turns out, is a fair bit!
Read on for a journey through FDR & SEC, the "Howey Test", Vitalik Buterin⊠and what it all means for the rules we follow.
Enjoy your weekends! Marc.
The 1920's were a time of wild speculation and, in retrospect, clear market abuse. Innovative new financial products took shape amid lax regulation, booming markets, and insider trading. And, of course, it all end ended in the great bust.
That led to Franklin Rooseveltâs establishment of the Securities and Exchange Commission (SEC) in 1934. Broadly expected by the business community, it was a practical step to clean up an obvious mess.
The great surprise lay in the choice of its founding Chairman: Joseph Kennedy.
Joe Kennedy (father of Jack and Bobby) had worked with FDR on his 1932 presidential campaign. Heâd made a fortune across several industries, from film production through real estate. He was brilliant, successful... and viewed with suspicion.
Kennedy had capitalised on the era's lax regulations, driving whispers of market manipulation and illicit gains (and depending on who you believe: bootlegging).
Which made the message in FDRâs Kennedy's appointment clear: a wolf had been set into the den to clean things up. Or, as the President said of the appointment: "set a thief, to catch a thief."
And it worked! Kennedyâs knowledge of the marketâs dark arts led to effective regulation and a powerful SEC. The influence of his chairmanship and a robust, powerful SEC endures today.
In the mid 30âs, the most important abuse Kennedy and his team took action to break up were called 'investment pools'. These will be familiar to most readers: a small group of speculators would inflate a stock's price. Then they'd dump it to regular investors who were unaware of the behind-the-scenes manipulations. This often left investors holding worthless stocks.
The SEC imposed a series of rules for clear disclosure. It made the 'pump and dump' schemes used by investment pools illegal.
But as things evolved, there remained consistent questions of where regulation should apply. What constituted a security?
In 1946 - a decade beyond Kennedyâs tenure - an important U.S. Supreme Court case clarified the rules, in a case officially termed âthe SEC v. W. J. Howey Companyâ.
Permit a small and illustrative diversion with some historical background:
The defendant in said case - William J. Howey - owned large areas of citrus groves in Florida. He had an idea to raise funds to further develop his land. He decided to sell half of it to investors.
But instead of just selling the land, he offered a deal: he would sell the land, and also offer a service contract. Under this service contract, Howey's company would take care of the cultivation and harvest of the citrus fruits for the investors and new owners.
The investors, then, were not just buying the land. They were buying the land and also expecting to make a profit from the sales of the citrus fruits that Howey's company would cultivate and harvest on their behalf.
While Mr. Howey argued this to be simple real estate investment, the SEC saw it differently. They argued that what Howey was offering was actually a form of investment contractâa type of security. And because it was a security, it needed to be registered with the SEC.
In a unanimous decision, the Supreme Court agreed.
And thus, the now-famous âHowey testâ, a way to determine if a transaction qualifies as an "investment contract", and thus falls under securities law.
For decades, the Howey test established clear terms on what makes up a security, and thus needs to register as such with the SEC.
The test asks whether:
A person invests money
In a common enterprise
With the expectation of profit
From the efforts of others.
If all four conditions are met, the transaction is a security. Itâs now properly seen as one of the 20th century's most important examples of case law. And itâs been seen as effective and applicable. UntilâŠ
Enter crypto.
There is a vast confusion in the âcryptoâ space, and like most sources of confusion, it starts with language.
Bitcoin uses cryptography for security, so it's accurate to call it a cryptocurrency. But many bitcoiners actively disassociate from 'crypto'. They argue that bitcoin itself is completely different from the rest of the crypto market, which has seen vast action and notoriety in the past few years.
Why? For reasons the Howey Test illustrates. But first, permit one more small digressionâŠ
Not long after Bitcoin's launch, a young Russian-Canadian developer, Vitalik Buterin, launched a new project: Ethereum.
Ethereum takes Bitcoin's idea - the blockchain - and adds to it a programming language. That make it - stay with me - a "virtual machine" - or a "world computer".
Ethereum offers a programming language that makes âsmart contractsâ possible, which can then be used to set up automated decision-making on a vast scale. Think of it like a new distributed governing mechanism for novel projects, that us new forms of digital organisation.. )still with me?)
Typically, these projects issue a token, which can also be considered a âcoinâ. Thatâs the crypto. That token, in combination with smart contract rules, incentivises people to work together on a given project. And if that project is successful it will attract more users, who buy the token, and that token's value will rise. Thatâs the idea..
This 'world computer' has sparked a myriad of new concepts under the crypto umbrella. Close to 20,000 new tokens now exist, tackling a vast range of use cases, from extending internet to all through improving google maps. And theyâre almost all traded on exchanges like Binance and Coinbase.
Itâs all triggered a market craze every bit as huge as the roaring Twenties. These new tokens - which could all be traded, both among each other and for dollars - have been governed by next to no regulation.
And guess what: many of these schemes turned outright fraudalent. It became extremely typical for a group of individuals to issue a token, perhaps hire a celebrity to promote it, and sell out as retail investors load up. Just like the investment pools of old. Nice âbusinessâ, if you can got it.
Sound familiar?
Thatâs not to say all crypto tokens are a scam. Itâs a technology of vast new potential. According to their champions, these crypto projects represent a new tool of digital organisation. And perhaps theyâre right! Weâre still in the first inning of the internet age.
But, and hereâs the several hundred billion-dollar question of the week: are these tokens a security? Does the Howey Test apply:
According to the comments of SEC Chair Gary Gensler, Bitcoin is not a security. Is value doesn't rely on the efforts of a centralized third party. It's more like a commodity than a share in a company. Precedent has now established bitcoin quite clearly as a tradable commodity, like gold, or wheat.
Ethereum's case is less clear, and not yet official, but sentiment seems to lean away from it being a security either.
But the rest of those 20,000 crypto tokens? According to the SEC, they fail the Howey test.
This week, the SEC took its position. And argued several significant versions of crypto are indeed securities. And if they are, exchange platforms like Coinbase and Binance have been trading unregistered securities. That opens the floodgates to legal challenge.
It's important to note that the SEC's challenge indicates no clarity yet - only Congress or the courts can offer that. Coinbase CEO Brian Armstrong welcomed the action, on the grounds that a court decision will finally offer clarity.
But he canât be too happy. His firm was cleared as a public company with a clear business prospectus, only for the SEC to indicate that his business is effectively illegal.
And thus the table is set for a new litigation of the Howey Test.
This (quite long) walk thru history indicates a few lessons. First: human greed is a constant. In every era, and amid every innovation, there are swindlers. Clear rules on issuance that prevent insider knowledge used for gain are needed.
That said, a 1946 ruling on citrus groves may be an ill-fitting lens through which to view the transformative potential of digital collaboration.
Weâre living through a profound institutional adjustment, and it seems time we rewrite the rules for the 21st century.
Oh, and a closing thought⊠which thief to catch todayâs thieves? Who knows crypto well enough to police crypto today, and be the Joe Kennedy for a new era?
Itâs definitely not him. If you wanted to choose the wiliest, it could be him.
But the whole premise of the technology is to establish rules beyond the need for rulers. Thereâs one clear visionary for what crypto represents, and itâs this.
Happy Saturday! On to the clips.
Turkeyâs lira plunged to a record low as state-run lenders temporarily halted dollar sales, in a sign the new economic team is abandoning a costly intervention strategy as part of an expected turn toward more conventional policies.
The Treasury and Finance Ministry, under its newly appointed chief Mehmet Simsek, asked the central bank to ease off on currency-market interventions via the state banks, people with knowledge of the matter told Bloomberg on Wednesday, asking not to be named because the discussions were private.
When the liraâs decline exceeded 6% on the day, the Treasury allowed the sales to resume, according to one of the people. The central bank and Treasury declined to comment.Â
Source: Bloomberg
Since the fall of Silicon Valley Bank, many have expressed concern over the risk of deposits leaving community banks for larger institutions. But the risk would be present for all banks, regardless of size, if the Federal Reserve introduced a central bank digital currency, or CBDC.
Bankers should make no mistake: If a CBDC is introduced in the United States, operations are likely to be anything but business as usual.
The "issuance of a CBDC," said Rob Morgan, former vice president of emerging technologies at the American Bankers Association, "would fundamentally rewire our banking and financial system by changing the relationship between citizens and the Federal Reserve." At its core, a CBDC would create a direct connection between citizens and the Federal Reserve â as well as the federal government at large. This rewiring of the system opens up risks to financial privacy, freedom, markets and even cybersecurity.
Source: American Banker
Soros Fund Management CEO Dawn Fitzpatrick is bullish on crypto, even with the recent headwinds including the U.S. Securities and Exchange Commission suing trading platforms Binance and Coinbase amid a prolonged downturn.
âCrypto is here to stay,â she said during a Bloomberg investment summit. âWhatâs happened is clearly a setback. But right now I actually think itâs a huge opportunity for the incumbent financial firms to actually take the lead.â
Fitzpatrick said she expects established financial firms take over as investor confidence in some platforms wanes. She also alluded to the fact that average consumers and traders would likely benefit from such a shift as traditional institutions âsegregate client assetsâ properly.
Source: The Block
JĂłn Helgi Egilsson, a former chairman of the Icelandic central bank, urged his former counterparts to "embrace competition" on CBDCs.
As central bankers all over the world consider issuing their own digital currency, coined CBDCs, a former member of the fold has argued that they should leave it up to the industry.
JĂłn Helgi Egilsson, a former chairman of the Icelandic central bank's supervisory board, said at a conference on Wednesday that central bank digital currencies (CBDCs) need not be issued by the institutions themselves.
"Where private companies compete in the market, in technical and business innovation, a CBDC or CBDC equivalent does not have to be offered by a central bank," he said in a speech at Brussels Blockchain Week.
"It may serve the currency better if the central bank removes itself from competition."
Source: Decrypt
Wyomingâs Stable Token Committee named three new members for its commission, including a prominent figure from Circle, a well-known peer-to-peer payment system that manages the USDC stable coin.Â
It also heard from members of the banking community, some of whom are unhappy with the direction the Wyoming stable token is going.
But if Wyoming wants to lead the way for digital currencies, it needs to continue to evolve its push to be the first U.S. state with its own stable token, said Gov. Mark Gordon.
He also said Wyoming and the United States are in a digital currency arms race with China they canât afford to lose.Â
Flavia Naves, who is the general counsel for Circle, told commissioners sheâll leave her seat with Circle at the end of the month, and that sheâs âkeenlyâ interested in helping support Wyomingâs stable token.
Source: Cowboy State Daily
Circle Singapore has now received its Major Payment Institution (MPI) license for digital payment token services in Singapore, after having obtained in-principle approval last November.
The license issued by the Monetary Authority of Singapore (MAS) allows Circle Singapore to offer digital payment token services, cross-border money transfer services and domestic money transfer services in the city-state, the firm announced on Wednesday.
Circle Singapore is an affiliate of Circle Internet Financial, which is the issuer of USDC, the second-largest stablecoin by market cap.
Source: CoinDesk
The Commodity Futures Trading Commission announced it had approved an application from Cboe, one of the largest U.S. options exchanges, to offer margined futures contracts for Bitcoin and Ether.
At a time when segments of the U.S. crypto industry are retreating offshore amid accusations of âregulation by enforcement,â Cboe Digital president John Palmer described the development as a step forward during a time of uncertainty.
âWeâre seeing expansion in the U.S. framework, not contraction,â he told Fortune in an interview on Monday. âThis is a really good representation of that hard work across both sides of the fence, both on the Cboe Digital side but also on the regulator side.â