Wakeup Call To the SEC

How the SEC is trying to drive crypto innovation and investment overseas

Ric Edelman: It's Tuesday, April 18th, and we need to have a serious conversation about crypto because I am increasingly concerned. Let me tell you what's going on around the world regarding crypto. And contrast that to what's going on here in the United States.

First, let's take a look at the Bank of England. They've just announced that they're now hiring 30 more people to develop its own CBDC, a central bank digital currency. The Bank of England is working on creating a digital pound to complement the paper version of its currency in the United Kingdom. The Finance Ministry has proposed broad rules for crypto and it's now asking for industry feedback. The Treasury Department in England has also given crypto companies permission to operate until the new regulations are written. Andrew Griffith, the economic secretary to the Treasury in Great Britain, said, "We remain steadfast in our commitment to grow the economy and enable technological change and innovation. And this includes crypto asset technology. Clearly the United Kingdom is strongly supportive of crypto. So is the European Union. They're about to approve its new landmark rules called MICA: Markets in Crypto Asset Regulation, that will allow crypto companies to get licensed in order to do business in the European Union.

And it's not just Great Britain and the EU. Japan has also started a test program to create a digital version of its yen, its currency. Japan says they're trying to catch up with China, which has already launched a digital version of the yuan, the Chinese currency. 

Even Russia, in the middle of its war with Ukraine, is getting engaged. Russia's central bank is doing a test for a digital ruble. Clearly, governments around the world are all working on this. Banks in Hong Kong are welcoming crypto companies as customers. The Hong Kong Securities and Futures Commission is finalizing regulations for crypto exchanges. These new regs will take effect in June, and they're attracting banks from all over the world. Seba Bank, which is based in Switzerland, is applying for a license in Hong Kong so it can operate not only there but also in Singapore.

And the crypto craze is spreading worldwide. In Africa, there is some of the biggest activity going on. You see in Africa; half of all African citizens don't have access to bank accounts. If you want to send money to another person or make a payment, you've got to use a payment service because you don't have a bank, a payment service like Western Union. But these payment services charge anywhere from 6% to 20%. And there are a lot of currencies in sub-Saharan Africa that are unstable. The economy is bad or the government is corrupt. Inflation is often a big problem. And so people in Nigeria, Ghana, Sudan, Ethiopia, they're turning to Bitcoin as a solution.

And it's not just governments that are doing this. It's major corporations worldwide as well. LVMH. Ever heard of them? They are the owner of 75 ultra luxury brands. We're talking companies like Tiffany's, Christian Dior, Fendi, Givenchy, Loro Piana, Celine, Sephora and Bulgari. All of these companies are owned by LVMH. They've just now created the Aura Blockchain Consortium. Along with other luxury brands like Prada and Cartier, they're releasing NFTs, non-fungible tokens, not merely as art or digital clothing or jewelry, but to fight counterfeiting. When you buy one of their luxury products for thousands or tens of thousands of dollars, you'll not only get the product, you’ll also get an NFT of the product. Think of it as a digital receipt and this digital receipt confirms for you that, you know, you've bought the real thing and not a fake, not a copy. This digital receipt tracks the entire history of the product from manufacturer in the factory all the way to the retail. And if you buy a used one, you know that the product is real and not fake. You can also track the repair history. The CEO of LVMH says blockchain technology is going to, "change the way we interact, consume, socialize and communicate.

And it's not just luxury brands that are all over this. Mastercard has launched a bitcoin rewards card in Brazil. Users get 8% cash back on bitcoin and zero fees on ATM withdrawals. Brazil's Congress has made crypto payments legal, and in a survey of a thousand marketing executives, half of them say they're going to spend more on Metaverse marketing this year. 

There’s also Mastercard, Japanese cosmetics giant - Shiseido company and Ben and Jerry's. The list goes on and on. In fact, at Meta, the parent company of Facebook, they're very busy building out the technology, and they've paid software engineers salaries of $1 million. That's how big the market is for people who know how to code in the metaverse.

Contrast what's going on with countries around the world, with companies around the world. Contrast all of that to what's happening here in the United States with our own Securities and Exchange Commission. The SEC isn't developing regs to foster the innovation of crypto the way that Great Britain and Europe are doing. Instead, the SEC is hiring more lawyers for its crypto enforcement division, and the SEC has now proposed a rule that would effectively ban advisors from recommending or investing client assets in crypto. The SEC's rule would require advisors to store crypto with a "qualified custodian".

What's that? Well, that's a technical definition. Under the law, a qualified custodian are banks, trust companies, broker dealers and futures merchants registered with the CFTC. So if you're an advisor, you wouldn't be able to tell a client to open an account at Coinbase, even though they're a public company registered with the SEC. They are not a qualified custodian. You would have to go to a bank. The problem is that banking regulators have been telling banks not to custody crypto. 

So if you have to use a qualified custodian and qualified custodians can't custody crypto, then in effect, you can't invest in crypto. This is a clever way of essentially shutting down access to crypto by every investor who uses a financial advisor. And we're talking two thirds of all investors in the US.

In fact, just last week, SEC Chair Gary Gensler said, "Make no mistake, based upon how crypto platforms generally operate, investment advisors cannot rely on them as qualified custodians. Though some crypto trading and lending platforms may claim to custody investors crypto, that does not mean they are qualified custodians". So that means advisors cannot use any crypto platform for any client. They can't open an account at Coinbase or Gemini or Kraken anywhere.

Well, this creates a Catch-22. SEC Commissioner Mark Eweida said if the SEC is trying to force advisors to use banks for their clients, crypto assets and bank regulators are telling banks not to engage in crypto activity, the end result is that it's impossible for advisors to invest in crypto for their clients. SEC Commissioner Hester Peirce last week wrote a scathing dissent about what the SEC is proposing. The link to her statement is in the show notes. You really ought to read it. Peirce says that the new SEC proposal, "articulates confusing and unworkable standards rather than embracing the promise of new technology, as we have done in the past. Here we propose to embrace stagnation, force concentration, urge expatriation and welcome extinction of new technology". 

Wow, that's pretty powerful language. In the past, Commissioner Peirce said when faced with the choice of fostering innovation versus stifling it, the SEC always chose innovation. Today, though, the SEC, led by Chair Gary Gensler, no longer cares about what she says, "are the real-world effects of its exercise of authority," Commissioner Pearse wrote, "No longer does this commission worry that regulatory bullheadedness often produces absurd consequences. Rather, today's commission aggressively expands its regulatory reach to solve problems that do not exist. That's Commissioner Hester Peirce in her dissent over the SEC's new proposal to regulate crypto.

Clearly, the SEC chair, Gary Gensler, doesn't get it. Crypto is a global phenomenon. The SEC can try to stop US advisors from engaging. The SEC can even try to stop US consumers from engaging. But the SEC cannot stop crypto bitcoin. In the face of all of these new proposals, bitcoin is up 80% so far this year. 22% of Americans own bitcoin. 400 million people worldwide do. You can shut crypto out of the US. That won't kill crypto. It'll just move all the crypto companies and jobs offshore. When China banned bitcoin a few years ago, all the bitcoin companies in China came to the US, creating thousands of high paying jobs here in this country.

If Gary Gensler kills crypto, which by the way, Congress says he doesn't even have the authority to do, all those US jobs will just go somewhere else. They'll go back to Europe; they'll go to Asia. Think about it. There are 320 million Americans out of 8 billion people in the world. The US has only 4% of the world's population. Everybody else, everywhere else can pretty much still buy bitcoin. Even US institutions will still be able to buy it. They don't care. They have a global reach. They have no problem buying investments overseas. It's only US retail investors. That means you, who are going to lose - you and your investment advisor.

How do Gary Gensler's proposals make any sense? Remember when I said that Gary Gensler doesn't have the authority to ban crypto? Yeah, that's what members of Congress are saying. Patrick McHenry is the Chair of the House Financial Services Committee. He has called Gensler's actions a blatant power grab and says that the SEC's proposal would actually create greater risks for consumers rather than protecting them. And now there's a bill in Congress to fire Gary Gensler because of his crypto overreach.

Clearly, a lot of members of Congress are in a disagreement with how Gary Gensler is handling crypto at the SEC. So yeah, there's a big buzz going on about crypto. What you need to realize is that there's more buzz than there has been in years and this isn't going away. That's why you need to learn what all this is all about. And I want to help you.

We've just created a new track in our certificate program for blockchain and digital assets. We have a track specifically for investors, consumers and students. That's in addition to a separate track for financial advisors, a track for financial professionals working in the back office, and a fourth track for crypto professionals. Now you as an investor and consumer and student can get the education you need, so you can cut through the nonsense and understand what everybody's actually talking about. You can learn about this new certificate in blockchain and digital assets from my sister company, DACFP, the Digital Assets Council of Financial Professionals at DACFP.com. The link is in the show notes. Oh, and one final commentary non crypto. It's about taxes.

Tonight at midnight is the deadline for filing your tax return. If you can't finish, just file for an extension. It's automatic. It does not increase your risk of being audited. The IRS actually loves it when people extend because it spreads out their workload. So file an extension if you must. But remember, you still owe the taxes by midnight. The extension is for filing the return, not for paying any tax you owe. And when you send in your return or your extension request, be sure to mail everything “return receipt requested” so you've got proof that you mailed it on time.

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