SEC targets Gemini Earn
On January 12, 2023, the United States Securities and Exchange Commission (SEC) accused leading cryptocurrency firm Genesis Global Capital along with crypto exchange Gemini Trust Company of allegedly participating in the unregistered offering and sale of securities to retail investors through the Gemini Earn crypto asset lending program. Gary Gensler, the SEC chairman, said:
We allege that Genesis and Gemini offered unregistered securities to the public, outside of disclosure requirements designed to protect investors
The SEC alleges that this unregistered offering made it possible to raise billions in crypto assets from hundreds of investors. In December 2020, Genesis entered into an agreement with Gemini to offer US customers an opportunity to lend their crypto assets to Genesis in exchange for interest paid by Genesis. Gary Gensler noted that:
Today’s charges build on previous actions to make clear to the market and investors that crypto-lending platforms and other intermediaries need to comply with our time-tested securities laws. This best protects investors. It promotes confidence in the markets. It is not optional. That is the law.
In February 2021, Genesis and Gemini began offering the Gemini Earn program to retail investors, who had the option of offering their crypto assets to Genesis with Gemini acting as an agent to facilitate the transaction. The SEC alleges that Gemini would earn an agency fee, from the returns Genesis paid to Gemini Earn investors, which at times were as high as 4.29 percent. Genesis would then use its discretion in how to use investors’ crypto-assistants to generate income and interest for investors in the Gemini Earn program. Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said:
The recent collapse of crypto asset lending programs and the suspension of Genesis’ program underscore the critical need for platforms that offer securities to retail investors to comply with federal securities law
In November 2022, Genesis informed Gemini Earn investors that it would not allow them to withdraw their cryptoassets due to Genesis lacking sufficient liquidity to meet withdrawal requests due to volatility in the cryptoasset market. At this point, Genesis is alleged to have approximately $900 million in investor assets from 340,000 Gemini Earn investors. In early January 2023, Gemini ended the Gemini Earn program.
The SEC maintains that additional investigations into other securities law violations and alleged misconduct are ongoing. To date, the Gemini Earn investors have still not been able to withdraw their crypto assets.
US Congress Creates Crypto Subcommittee on Regulation
The US Congress has announced the launch of its newest subcommittee, one to monitor and focus on the crypto and fintech industries. The Subcommittee on Digital Assets, Financial Technology and Inclusion will be part of the House Financial Services Committee.
U.S. Representative for Arkansas French Hill will chair the committee following his work with the Task Forces on Financial Technology and Artificial Intelligence and the Financial Services Committee. In a statement, Hill acknowledged the change taking place in the fintech sector and hinted at future regulation:
In an era of great technological advancements and changes in the financial sector, it is our job to work across the aisle and promote responsible innovation while encouraging FinTech innovation to flourish safely and efficiently in the United States.
2022 was a turbulent year for the crypto industry full of cratering prices, ASIC stop orders, liquidation and ended with the arrest of FTX CEO and founder Sam Bankman-Fried.
While the bad seemingly outweighs the good, 2022 also saw increased calls for action to implement regulation and legislation to protect the industry and encourage participation.
Now, as we navigate the start of 2023, this subcommittee can help provide the United States with the kind of crypto literacy and sensible regulation that has been lacking to date. Rep. Hill has a reputation for being crypto-friendly, and at the very least, he’s clearly knowledgeable about the challenges and opportunities posed by blockchain and crypto, which can only be a plus for the industry.
BlackRock sees a tokenized future
In recent comments, the chairman and CEO of BlackRock, Larry Fink, the world’s largest asset manager, has repeatedly supported the prospects and benefits of tokenization in financial markets. In an interview with Aaron Ross Sorkin at the New York Times Dealbook Conference in late November, Fink said:
The next generation for markets, the next generation for securities, will be the tokenization of securities.
The term tokenization refers to a digital representation of an asset, which is minted and tradable on a blockchain. Tokenization allows for a different way of trading assets compared to traditional stocks, bonds or real estate. The transaction is recorded on a ledger that is secure and decentralized.
Fink noted that distributed ledger technology offers the advantage of instant settlement and dramatically reduced fees by eliminating middlemen.
Fink also believes that tokenization could have benefits for investor participation and governance, commenting to CNBC last week:
We want to democratize voting. This is one of the reasons why I am focused on the whole idea of blockchain for securities. I look forward to the day when we can tokenize stocks and bonds that every stock and every bond we can immediately identify who is the beneficial owner, and that’s why we work on it, and every beneficial owner from an individual to an institution has the ability to vote, to democratize every single vote, and that’s where we want to take this and we’re leading that effort.
Tokenization has received increasing attention from financial titans and venture capitalists. Last May, Flowcarbon, which symbolizes carbon credits, raised $70 million in funding from prominent investors such as General Catalyst and Samsung Venture Investment. In November 2022, JPMorgan worked with Polygon to trade tokenized cash deposits.
While JP Morgan CEO Jamie Dimon has been a longtime critic of cryptocurrencies, the bank has been a prominent supporter of blockchain technology and tokenization through its Onyx platform. The entity’s head, Tyrone Lobban, trumpeted the prospects of institutional DeFi at last year’s Consensus conference:
Over time, we believe tokenization of US Treasuries or MMF shares, for example, means that these can all potentially be used as collateral in DeFi pools…The overall goal is to bring these trillions of dollars of assets into DeFi so that we can use these new mechanisms for trade, loans [and] lending, but with the extent of institutional assets.
This development indicates strong institutional interest in the use of blockchain technology in the financial markets. The application of these technologies to Australia’s markets is likely to be considered further as part of the government’s proposed payments and market infrastructure reforms which it has promised to take forward this year.
NAB launches AUDN stablecoin
National Australia Bank (NAB) is set to join big four competitor ANZ in launching its own stablecoin called AUDN by mid-2023.
AUDN will be minted on the Ethereum blockchain and will be backed one-to-one with fiat currency, in this case Australian dollars held by NAB. The AUDN stablecoin will offer NAB customers the ability to settle transactions in real time, including when sending money abroad or trading carbon credits.
NAB’s Head of Innovation, Howard Silby said:
We certainly believe that there are elements of blockchain technology that will form part of the future of finance… It continues to be the source of some debate. But certainly, from our point of view, we see [blockchain] has the potential to deliver immediate, transparent, inclusive, financial results.
Stablecoins are a sensible entry point to blockchain and Web3 for large financial groups, as they are well positioned to offer reliable asset-backed tokens. NAB’s launch could spur further investment and research as customers are exposed to the benefits of blockchain technology.
Although blockchain technology and cryptographic tokens have yet to reach their full potential, it is significant that two of the “big four” banks in Australia have seen the benefits of adopting stablecoins in some capacity. NAB intends to use AUDN as a settlement token so that transfers and transactions can be settled instantly.
Digital asset specialist DigitalX has promised to use AUDN to prove reserves in digital asset funds and make real-time settlements.
The governor of the Reserve Bank of Australia (RBA), Phillip Lowe, has previously endorsed the benefits of stablecoins describing them as:
the one part of the crypto landscape where I think there is real promise
Meanwhile, late last year, the RBA confirmed that Australia’s Council of Financial Regulators (CFR) are working on options to incorporate stablecoins into the regulatory framework for stored value facilities. NAB and ANZ are reported to be working closely with financial regulators on the regime.
With two of Australia’s major banks now supporting stablecoins, the future of stablecoins as part of Australia’s evolving payments landscape looks bright.