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Former CFTC Chair Calls For More Cryptocurrency Regulations

CFTC Cryptocurrency Regulation 2019

A report published by the Brookings Institution and authored by Harvard University fellow Timothy Massad calls for improved regulation of cryptocurrency.

Massad, who served as chairman of the United States Commodity Futures Trading Commission (CFTC) during President Barack Obama’s administration, outlined the need for regulations on digital currencies, including their use in illicit activity, as well as providing a way to reduce the risk of cyber attacks.

In the report, Massad explains that the current landscape of cryptocurrency leaves the market open for fraud due to the absence of traditional market standards imposed on securities and derivatives, a feature which only serves to hurt investors via the lack of protection. Massad also targeted cryptocurrency exchanges and their lack of oversight, which has led to repeated instances of fraud, market manipulation and conflicts in interest. He then stressed the need for regulations imposed on exchanges in order minimize operational risk while putting into place measures to safeguard investors.

“Crypto exchanges are not required to have systems to prevent fraud and manipulation, nor are there rules to prevent or minimize conflicts of interest. Crypto exchanges can engage in proprietary trading against their customers, something the New York Stock Exchange cannot do. Regulations to minimize operational risk and ensure system safeguards are needed, just as with securities and derivatives intermediaries.”

The 60 page report also took a shot at the shortcomings of Bitcoin, namely the failure of cryptocurrency to fulfill its original intention. Instead of providing trust, Massad wrote that Bitcoin and other cryptocurrencies have created “regulatory distraction” which has contributed to an even greater problem in lack of accountability,

The hype surrounding Bitcoin and other crypto-assets has contributed to regulatory distraction. Bitcoin’s creators promised it would solve the “trust problem” and reduce our reliance on centralized financial intermediaries. However, it has not reduced our reliance on financial intermediaries or eroded the power of our largest institutions. Indeed, crypto-assets have created new financial intermediaries that are less accountable than the big banks.

The former CFTC Chairman called upon the powers of the U.S. Congress to address the issues related to crypto market fraud and the looming problem cybersecurity and potential illicit use through digital assets. As for handling the lack of regulation in cryptocurrency exchanges, Massad is not alone in advocating for reform.

The Winklevoss Twins, who recently made headlines for their comments about Facebook’s stablecoin, have been a driving force for cryptocurrency regulation through their crypto exchange Gemini. While the twins have previously been denied in their attempt to create the first U.S. Securities & Exchange Commission approved Bitcoin ETF, they believe self-policed and self-generated regulation to be the surest path to enticing institutional investment.

However, some community members have continued to embrace the lack of regulation for the cryptocurrency industry. While diminished oversight does allow for manipulation and fraud, it also prevents coin projects from making concessions in their decentralization, thereby fulfilling the original promise of crypto as an alternative to government-run fiat. In addition, the fear is that greater regulation will make the industry no different than that of the traditional financial markets, including the uneven influence imposed by established banking players.

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US CFTC Chair: Blockchain and Crypto Are Two Key Phenomena Transforming Today’s Markets

Chairman Giancarlo says blockchain and cryptocurrencies are two key phenomena that are transforming today’s markets.

United States Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo has said the agency’s fintech innovation hub LabCFTC is the regulator’s internal stakeholder in a landscape of exponential technological change and market evolution.

Giancarlo made his remarks during his last appearance as CFTC chairman before the 44th Annual International Futures Industry Conference on March 14, in an address entitled “Improving the Past, Tackling the Present, and Advancing to a Digital Market Future.”

Giancarlo is expected to be replaced this year by the U.S. president’s nominee for the CFTC chairmanship, Heath Tarbert, assuming the latter’s confirmation.

In his remarks, Giancarlo identified “the disintermediation of traditional actors and business models” as a key factor that challenges existing regulatory models, isolating blockchain and cryptocurrencies as two key phenomena that are transforming today’s markets.

To respond to the challenge that this exponential change poses for federal regulators, the chairman noted that a cornerstone of the CFTC’s approach was the establishment of its own internal stakeholder: LabCFTC.

According to Giancarlo, LabCFTC —  which launched two years ago — has had over 250 separate interactions with both big and small innovators, conducting lab hours across the U.S. and internationally.

The chairman stressed that the lab is not a regulatory sandbox and does not exempt firms from CFTC rules, but rather aims to provide an “internal and external technological focus.” He said:

“Internally, it means explaining technology innovation to agency staff and other regulators and advocating for technology adoption. Externally, that means reaching out and learning about technological change and market evolution, while providing a dedicated liaison to innovators.”

Among its activities, Giancarlo highlighted the lab’s fintech cooperation agreements with global regulators — in London, Singapore and Australia — as well as its publishing of technology primers and public feedback solicitations.

Giancarlo notably aligned the hub’s creation and work as part of a nationwide trend across agencies, stating that “every US federal financial regulator has either created or is creating a program similar to LabCFTC.”

Aside from the Lab, the chairman noted that the CFTC is embracing market-based solutions for innovation, as with its authorization of Bitcoin (BTC) futures, and is striving to become a quantitative regulator — one that is “able to conduct independent market data analysis across different data sources, including decentralized blockchains and networks.”

As previously reported, LabCFTC’s two fintech educational primers have been devoted to virtual currencies (October 2017) and smart contracts (November 2018). In December, the lab solicited public and industry comments on the Ethereum (ETH) blockchain as part of its evaluation of prospectively authorizing Ethereum futures contracts.

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CFTC Requires Trading Platform to Pay $990K for Illegal Bitcoin-Related Transactions

The U.S. Commodity Futures Trading commission fined a Marshall Islands-based startup and its owner for illegally trading with U.S. customers.

The United States Commodity Futures Trading Commission (CFTC) has announced Monday, March 11, that international securities dealer 1pool Ltd. and its CEO Patrick Brunner must pay a total of $990,000 for illicit Bitcoin (BTC) transactions with U.S. customers.

The Marshall Islands-based startup, which was offering BTC-funded security-based swaps, and its owner have been fined for illegally offering BTC-margined retail commodity transactions to U.S. investors. Moreover, the CFTC states that 1pool Ltd. failed to register as a futures commission merchant and did not comply with the required Anti-Money Laundering (AML) procedures.

The CFTC imposed a civil penalty of $175,000, while also obliging 1pool Ltd. to reimburse $246,000 of gains. Moreover, the company has to return approximately 93 BTC, valued by the CFTC at approximately $570,000, to all known U.S. customers.

CFTC Director of Enforcement James McDonald has additionally warned intermediaries that the watchdog will hold them accountable in case they fail to comply with licensing requirements and U.S. trading policies.

As Cointelegraph previously reported, the U.S. Securities and Exchange Commission (SEC) and Federal Bureau of Investigation (FBI) were also involved in prosecution.

During the investigation an undercover FBI agent purchased security-based swaps on the Marshall-based platform from the U.S., though he did not comply with the discretionary investment thresholds required by the U.S. securities laws. According to SEC, the users could also open accounts on the platform with their email address and a user name only, without providing additional information, which does not comply with U.S. customer identification regulations.

The two parallel actions were filed by CFTC and SEC in September 2018. The chairman of CFTC Christopher Giancarlo explained that the CFTC charged the portion of the activity involving derivatives, the SEC charged the portion relating to equities, and the Department of Justice and the FBI secured an order to seize platform’s website and shut it down.

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Coinbase, R3 and Other Major Firms Respond to CFTC’s Request for Input on Ethereum

More than 30 major crypto and finance companies, including R3 and Coinbase, have filed comments in response to the CFTC’s request on Ethereum.

Several major crypto and traditional finance companies have replied to the United States Commodity Futures Trading Commission’s (CFTC) request on crypto asset mechanics as late as Feb. 25.

The CFTC published its inquiry in late December 2018. In it, the regulator’s LabCFTC initiative, focused on fintech innovations, sought public comments on the main principles of the Ethereum network. The watchdog’s reported aim was to understand similarities and distinctions between different cryptocurrencies and the “technology, mechanics, and markets for virtual currencies beyond Bitcoin.”

In particular, the request for input focuses on Ethereum (ETH), along with opportunities and risks associated with its ecosystem.

As of press time, 35 crypto and traditional finance companies have provided detailed comments on the matter to the CFTC. Blockchain consortium R3, the non-profit Ethereum Foundation, U.S. crypto exchanges Coinbase and ErisX, blockchain tech company ConsenSys, crypto finance company Circle and Weiss Cryptocurrency Ratings were among the companies that submitted responses.

In his comments, R3’s managing director Charley Cooper also commended the CFTC for its initiative. He gave some predictions on the evolution of digital assets in 2019, saying that he believes that asset-backed tokens, such as those pegged to gold or real estate objects, along with native asset tokens, will form the future of the industry.

Gus P. Coldebella, chief legal officer at Circle, wrote that the Ethereum network, which supports different types of digital assets, can contribute to the global tokenization of value. Tokenization can also make assets more accessible online and internationally, as the internet makes information transfer easier and more accessible.

Brian Brooks, chief legal officer at Coinbase, focused on the risks and regulations surrounding the Ethereum ecosystem. For instance, the company believes that the CFTC’s intention to properly oversee the spot and derivatives markets for ETH can be negatively impacted by the fact that the majority of trading happens outside the U.S.

As Cointelegraph reported earlier in February, Chicago-based ErisX also filed a comment in response to the CFTC’s request. The exchange believes that “the introduction of a regulated futures contract on Ether would have a positive impact on the growth and maturation of the market.”

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Launch Timeline for Bakkt’s Bitcoin Futures to Be Clarified Early 2019: ICE

The operator of the New York Stock Exchange posted an update for the launch of Bakkt’s physically settled daily Bitcoin futures contract.

 

The Intercontinental Exchange (ICE) announced an update on the launch of the Bakkt Bitcoin (USD) Daily Futures Contract in an official notice Dec. 31.

The document from ICE — the operator of the New York Stock Exchange (NYSE) and creator of digital assets platform Bakkt — states that “[f]ollowing consultation with the Commodity Futures Trading Commission [CFTC], ICE Futures U.S., Inc. expects to provide an updated launch timeline in early 2019 for the trading, clearing and warehousing” of Bakkt’s Bitcoin (BTC) futures contract.

The document reiterated that previously the firm had been targeting Jan. 24, 2019 as a launch date, but that the date “will be amended pursuant to the CFTC’s process and timeline.”

The statement also outlines the particular nature of Bakkt’s futures contracts, stating:

“The Bakkt Bitcoin (USD) Daily Futures Contract is a physically-settled daily futures contract for bitcoin held in Bakkt Warehouse, and will be cleared by ICE Clear US, Inc. Each futures contract calls for delivery of one bitcoin held in Bakkt Warehouse, and will trade in U.S. dollar terms.”

As Cointelegraph also reported today, Bakkt has completed its first funding round, raising $182.5 million from 12 partners and investors.

ICE initially announced the intention to create an “open and regulated, global ecosystem for digital assets” powered by the Microsoft cloud infrastructure this past August.

The founder of Galaxy Digital — a crypto investment firm that invested in Bakkt — cited Bakkt’s pending launch as one of the industry developments that could help turn around the downward trend in crypto markets this year.

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NYSE Operator’s Crypto Platform Bakkt Completes $182.5 Million Funding Round

The digital assets platform Bakkt — created by the NYSE’s operator — announces the completion of their first funding round.

Digital assets platform Bakkt — created by the operator of the New York Stock Exchange (NYSE) — has announced the completion of its first funding round in a blog post today, Dec. 31.

The institutional investor-focused cryptocurrency platform from the Intercontinental Exchange (ICE) has officially raised $182.5 million from 12 partners and investors, according to the post.

The partners and investors reportedly include major names in both traditional finance and crypto-oriented investing, including ICE, Boston Consulting Group, Galaxy Digital, Goldfinch Partners, Alan Howard, Horizons Ventures, Microsoft’s venture capital arm and Pantera Capital.

Bakkt also noted in the announcement that the company is working with United States regulators — namely the  Commodity Futures Trading Commission (CFTC) — to obtain “regulatory approval for physically delivered and warehoused bitcoin,” adding:

“We have filed our applications and the timing for approval is now based on the regulatory review process.”

Also today, ICE separately announced in a notice that the firm “expects to provide an updated launch timeline in early 2019, for the trading, clearing and warehousing of the Bakkt Bitcoin (USD) Daily Futures Contract.” In late November, the long-awaited digital assets platform stated that it was targeting Jan. 24, 2019 as a launch date, pending CFTC approval.

ICE first announced plans to create a Microsoft cloud-powered “open and regulated, global ecosystem for digital assets” in August, as Cointelegraph reported at the time.

Multiple experts and commentators in the crypto and blockchain industry have pointed to Bakkt’s coming launch as a major factor that will help crypto markets rebound from this year’s ongoing bear market.

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Launch of Bakkt Might be Postponed due to Regulatory Delays and current US Government Shutdown

News reaching Ethereum World News indicate that the launch of Bakkt might be postponed for a second time. According to Coindesk, the parent company of both the New York Stock Exchange and Bakkt – Intercontinental Exchange (ICE) – is yet to receive the necessary approvals from the United States Commodity Futures Trading Commission (CFTC). The report by Coinbase went on to cite that the speed at which the CFTC is processing the necessary approvals might not be fast enough for the anticipated January 24th launch date of Bakkt. Initially, Bakkt was meant to go live on the 12th of December but had to be pushed to the January date.

The Delay Might Just Be For a Few Days

However, according to sources privy of the matter, this does not mean the CFTC will not green-light Bakkt. What it means is that the launch of the new market might be pushed a few days forward due to the following two reasons.

  • Bakkts custody solution for Bitcoin is a first for the CFTC
  • Current US Government shutdown due to funding for the US-Mexico border wall

Bakkt’s Custody Solution for BTC Will Need an Exemption from the CFTC

The report by Coinbase went on to explain that the CFTC might have to give an exemption to ICE for their custody solution of Bitcoin.

 [The] CFTC must grant an exemption for Bakkt’s plan to custody bitcoin on behalf of its clients in its own “warehouse,” according to sources familiar with regulatory discussions of the plan. CFTC regulations normally require that customer funds be held by a bank, trust company or futures commission merchant (FCM).

Bakkt’s exemption request has already been reviewed by staff at the CFTC. It has since been forwarded to the commission. The commission will have to vote to decide whether to put the proposal out for public comment. The latter process usually takes 30 days after which the commission takes some time to read the comments and then vote on the proposal for exemption.

U.S Government Shutdown Might Delay it Further

At the time of writing this, the United States government has partially shut down as President Trump attempts to negotiate funding for the wall on the US-Mexico border. As a result of this impasse, over 50% of 15 federal departments, including State, Homeland Security, Transportation, Agriculture and Justice are now partially shut down. The shutdown will most likely affect the functions of the CFTC further delaying any decision on the Bakkt exemption request.

What are your thoughts on Bakkt being postponed for a second time? Do you think this might prolong the bear market? Please let us know in the comment section below. 

Disclaimer: This article is not meant to give financial advice. Any additional opinion herein is purely the author’s and does not represent the opinion of Ethereum World News or any of its other writers. Please carry out your own research before investing in any of the numerous cryptocurrencies available. Thank you.

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