- 2 trillion dollars.
That's how much wealth has been wiped out
by the recent crypto crashes.
Luna, Celsius, Voyager we've seen them all,
and so did the regulators.
That's why all throughout the world, crypto laws are
being discussed and voted on as we speak.
They're setting up licenses, limitations, and,
I'm sure, a few loopholes.
But there's something that concerns me.
These laws are just proposals, and we're
still far away from any formal decision.
What's the reason for this delay?
Should we expect something bad here?
Nietzsche said that time is circular
and history repeats itself.
And that's certainly true, at least for finance.
Let me give you an example.
Last month, the CEO of Celsius said,
"Don't worry about it. We have plenty of money in deposits."
And then two days later, they shut
everything down, freezing every last account.
Customers are owed nearly $5 billion and
may never see that full amount.
And this is just one in a series of crypto cracks.
So are we doomed here? Maybe not.
Look at 1907, back then, the US was becoming
a superpower, and there was a craze in finance.
The country was on a major lending spree.
With over 22,000 banks, it was extremely
easy for institutions to lend money.
Problem is, it was way too easy to lend money.
So in 1907, a number of
shady, speculative investments initiated the crack, and
it rapidly sparked a systemic crisis.
Boom. Gone.
People were in total panic and queued on the
streets to get their money back from banks.
But the banks were just sending them away.
There was simply no money to give.
And this is why you might have an elderly relative
who wouldn't be caught dead keeping money in a bank.
All trust was lost. In those days,
they didn't have a central bank to hold
the system together and prevent it from collapsing.
And the government just assumed that
financial institutions could survive independently.
Wrong.
It was then that people like JP Morgan stepped up by
pumping millions of dollars and tried to save the day.
And it worked.
There was some pain, but it did work.
And this is why, right after the crisis,
we saw the birth of the Federal Reserve,
the ultimate lender to keep things together.
And that's the key lesson here.
Our financial system doesn't exist despite crisis.
It exists because of them.
Shocks and cracks create most of the tools,
laws, and institutions that we have today.
It's like those oddly specific signs we're like.
There's got to be a story behind this.
1929, when the Great Depression brought the US
to its knees, people again rushed to the banks,
but there was again no cash to give.
So what happened?
In 1933, they invented the FDIC, the
Federal Deposit Insurance Corporation, basically an agency
that ensures your bank deposits.
This means no one is left holding the bag, and
trust for the system slowly comes back over time.
Except for your great uncle Ronald.
He probably still doesn't trust the bankers.
It's unfortunate, but that's how we learn.
Bad things happen and then we
prevent them in the future.
At least we try to.
Now, in these crypto bank runs, we don't have
a Federal Reserve, an ultimate lender, nor the FDIC.
So what do regulators learn from the crypto meltdown?
Well, here's where we have problems.
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Now, this regulation storm is
getting bigger and it's hitting Washington.
Senator Elizabeth Warren lost her patience recently.
She called out the SEC for not doing
enough and doubled down by saying she wants
enforcement and regulation and she wants it now.
So the laws are coming.
Now the question is, who's going
to take charge and why?
Because of course, there's a power problem.
Are crypto securities or commodities?
If they're securities like stocks or bonds,
then they belong to the SEC.
But if they are commodities, then
the CFTC has jurisdiction here.
And that's a whole different story.
And the answer is, it depends.
Some cryptos are securities, others are commodities.
And the line between the two are pretty damn blurry.
This has caused all kinds of
confusion and delays across the board.
Remember that scene from Narcos where the DA and
Colombian police argue about who gets to catch Escobar?
It's exactly like that.
Both the SEC and CFTC want to be
the ones to catch the crypto bad guys.
They know there's power, fame,
and funding on the table.
And this leads us to the guy who changed the game,
Gary Gensler, the current chair of the SEC.
Gary knows that Congress is unhappy with these crypto
failures and he's afraid of being the scapegoat.
So for start, he nearly doubled
the size of his cyber unit.
He has 50 people focused on crypto,
DeFi, stablecoins and NFTs right now.
But there's more.
Gensler used to be the chairman of the
CFTC before switching to the other side.
He knows that the sector will be regulated ASAP.
And that's why he just went to the
CFTC and said, Hey, let's make a deal.
Let's put competition aside and agree
on one rulebook for both agencies.
In other words, we'd have the SEC and the CFTC
united, working together to hunt down scammers and frauds.
Is it going to work? Maybe.
Gensler has a good shot at uniting these agencies.
However, this is politics.
And here's where things get interesting.
The CFTC isn't exactly jumping at Gensler's neck,
giving them kisses and thank yous because they
might have a better deal on the table.
Meet Rostin Behnam,
the current chair of the CFTC, Behnam knows that just
a few weeks ago, a new Bipartisan bill was proposed.
I'm referring to the Lummis-Gillibrand proposal
to create strong federal regulations for cryptos.
This bill would create a clear division of
digital assets and explain what's what and who
rules over which type of crypto.
And there's something juicy in this document.
The bill says that most digital assets
are commodities, and so under section 403,
the CFTC should be in charge. Period.
End of story.
Now, that bill hasn't been voted on yet, but if
it's approved, it will give full power to the CFTC.
And Behnam knows that.
He already claimed that his agency is ready and
they are a natural fit for the job.
Regardless of who's going to be the prom queen,
Washington was clear, the sector
is about to be regulated.
This might be a bill or something else,
but it will happen soon.
And until then, everything stays the same, right?
No, it doesn't.
They can't wait.
These scandals are undermining trust
in causing political problems.
Too many investors are left
with holes in their pockets.
If you're watching this, there's a solid
chance that you personally lost something, either
from Voyager, Celsius or UST.
So what the SEC will do
is sort of regulation through action.
They'll bring in a storm of enforcement.
The word is that the SEC is waiting
for the outcome of the Ripple case.
Basically, it's a case against this platform
for selling these XRP tokens that, according
to the SEC, are unregistered securities, kind
of like selling liquor with no license.
So if everything goes as the SEC hopes, they then
have a solid legal precedent to use as a springboard,
a new weapon they can use in future cases.
But there's more here.
Looking at the numbers, enforcement is
a very, very lucrative business.
The US government has received $3.3 billion
in penalties from cryptos.
And according to Elliptic, more than 70%
of that went to the SEC.
For example, the SEC hunted down the lending platform
BlockFi, and they paid $100 million in penalties, which
is the largest fine ever in the crypto space.
But on what grounds do they intervene?
Despite the absence of a specific framework, the SEC does
have a little bit of an ace up its sleeve.
It's a mechanism that allows them to step in.
It's called the Howey Test.
Basically, the Howey test poses four criteria to determine
whether a transaction is a security or not.
It comes from a 1946 case in the Supreme Court.
And here's what it says,
If you're an enterprise
that raises money from the public, and the public
is expecting a profit based on your efforts, then
this is subject to securities law.
It's a broad definition and not built for crypto.
So that's why it's debated, because it gives
a lot of power to the SEC.
Is this going to change with new regulations? Maybe.
I personally hope so.
But Congress demanded more action and
Gensler will give it to them.
He just claimed that most crypto tokens are in
fact investment contracts under the Howey test, which is
something I personally don't really agree with.
It's really hard to argue something like
Etherium, Cardano or Avalanche are securities.
But exchange tokens, that could be another story.
Now back to the original question, should we
expect something bad with upcoming crypto regulations?
We said that the history of finance laws and
the history of crisis are essentially the same thing.
They're parallel to one another.
Alexander Hamilton dreamed up the central bank concept
in the 1700s, and it took a
century and a half, plus the crisis of
1907 to actually make that thing happen.
So it's trial and error until we learn.
And the same applies to the crypto space.
There's nothing inherently bad about it. It's just new.
And these crashes will teach us how to proceed.
Another thing we learned from all this is that the US.
Has this major fragmentation of regulatory bodies.
There's too many of them and far
too much confusion, especially for new technology.
I mean, if the agencies themselves are confused on who
needs to do what, how can investors feel safe?
The lack of clarity slows things
down and goes against innovation itself.
So perhaps a clear regulation is better
than a ton of new law enforcement.
That's just my opinion, and there are examples of it.
The European Union just agreed on crypto legislation
that should come into force in 18 months.
It applies to all countries, and it
spans from unbacked cryptos to stablecoins,
platforms, and minimum reserve requirements.
It's an option.
So the bottom line is that crypto laws in the US are here.
Washington wants them. They're on the table.
And meanwhile, regulators will create
boundaries through action and enforcement.
This is our chance to build things properly.
Let's not screw it up.
From here, you've got to join our membership group, Finova.
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I'd like to thank you so much for watching,
and I hope you have a profitable day!