Early this month, a federal judge in Alabama held the Corporate Transparency Act unconstitutional and granted plaintiffs in a lawsuit summary judgment against enforcement of the wide-reaching law, which went into effect this year. For many Americans this raises the questions: "What in hell is the Corporate Transparency Act? Does it affect me?" The quick answer is that it's a big deal, and if you own an incorporated business, you'll probably still suffer its intrusive requirements even after the ruling.
"When Congress passed the 2021 National Defense Authorization Act, it included a bill called the Corporate Transparency Act ('CTA'). Although the CTA made up just over 21 pages of the NDAA's nearly 1,500-page total, the law packs a significant regulatory punch, requiring most entities incorporated under State law to disclose personal stakeholder information to the Treasury Department's criminal enforcement arm," Judge Liles C. Burke of the U.S. District Court for the Northern District of Alabama's Northeastern Division handily summarized in this month's ruling.
Large businesses are exempt; the law applies to companies with 20 or fewer employees.
Justifications for the law laid out in early versions of the legislation invoked a laundry list of alleged financial horribles including money laundering and tax evasion. The word terrorism appears, too, of course, because that has been the lazy, default justification for legislation for 20-plus years. Basically, the law is targeted at anything that might involve a modicum of financial privacy.
To that end, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) set up an online reporting system through which business owners "are required to report information to FinCEN about the individuals who ultimately own or control them." FinCEN started compiling reports for such "beneficial ownership information" (BOI) on January 1, 2024 with a deadline for compliance of January 1, 2025, or 30 days after creation for companies registered following that date.
Is there a penalty for noncompliance? Of course there is. According to FinCEN, "a person who willfully violates the BOI reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues. That person may also be subject to criminal penalties of up to two years imprisonment and a fine of up to $10,000."
This might be a problem for those many Americans who have established corporations or limited liability companies for making a living, but don't keep track of the federal government's diligent efforts to stamp out the scourge of terroristic money launderers among retail storefronts and Etsy vendors. I received a heads-up from reader Rick Wakefield, who forwarded a memo from his accountant. I dug through my email and found a similar note from my own accountant, dated two days before Christmas. Another accountant with whom I work told me she'd been waiting on the outcome of litigation against the law.
That litigation came in the form of National Small Business United v. Yellen, launched by the National Small Business Association and NSBA member Isaac Winkles against the federal government.
"The CTA will create a cumbersome reporting process for small businesses that are rarely equipped with compliance teams or staff attorneys," argues the organization. The group adds that the feds already have the relevant information supplied via bank due diligence rules, and the law adds a new layer of D.C.-based complexity. "The CTA lays the groundwork for a federal takeover of entity formation and self-governance practices."
Importantly, the plaintiffs argued that the reporting requirement is worse than cumbersome, it's unconstitutional. They say it allows the federal government to usurp roles reserved to the states, imposes unreasonable searches and seizures, and makes up vague terms such "beneficial owners" which are not normally used by businesses or state agencies.
Judge Burke agreed. In dismantling the government's claims that the CTA is justified as an exercise of federal authority over foreign policy, national security, and taxing power; and under the Commerce Clause, and Necessary and Proper Clause; he slapped Congress for sloppy drafting that doesn't even hand-wave a claim of a constitutional basis.
"The text of the CTA is missing a crucial component of valid substantial effects legislation," Burke wrote. "It 'has no express jurisdictional element which might limit its reach to a discrete set of [activities] that additionally have an explicit connection with or effect on interstate commerce.'"
"So commonplace are these jurisdictional phrases," he commented while marveling at the oversight, "that, for purposes of statutory interpretation, courts assume that 'Congress uses different modifiers to the word "commerce" in the design and enactment of its statutes.'"
As a result, he concluded, "the Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress' enumerated powers. This conclusion makes it unnecessary to decide whether the CTA violates the First, Fourth, and Fifth Amendments."
That's good news—but so far, only for the plaintiffs in National Small Business United v. Yellen.
"The government is not currently enforcing the Corporate Transparency Act against the plaintiffs in that action: Isaac Winkles, reporting companies for which Isaac Winkles is the beneficial owner or applicant, the National Small Business Association, and members of the National Small Business Association (as of March 1, 2024)," concedes FinCEN. "Those individuals and entities are not required to report beneficial ownership information to FinCEN at this time."
That means the unconstitutional law is still being enforced against everybody who wasn't party to the lawsuit.
"When coupled with the fact that FinCEN put virtually no effort into informing the public about the obligations of small businesses under the CTA, FinCEN's unwillingness to suspend enforcement shows a clear disregard of America's small-business owners," warns NSBA President and CEO Todd McCracken. "FinCEN should immediately reverse course and suspend enforcement of the CTA for all until these issues are finally resolved."
The American Institute of CPAs also called for suspension of enforcement after the court decision. It had already raised concerns, saying "many remain broadly unaware of their reporting requirement."
For now, though, despite the federal court's finding that Congress had no constitutional authority to impose "beneficial ownership information" reporting requirements on the country's business owners, the rule remains in place, with a deadline of next January 1. You may want to check with an accountant and spread the word to those who haven't yet heard of this dangerous regulatory burden.
The post Feds Enforcing Unconstitutional Reporting Law Against Most Businesses appeared first on Reason.com.
]]>The Securities and Exchange Commission (SEC) has gone rogue. The commission has now finalized a rule that will bully publicly traded companies into reporting environmental information that has no relevance to the financial concerns that matter to investors. As much as environmental activists may want this information to shame companies into embracing their political agenda, it is not the SEC's role to demand financially irrelevant disclosures—much less to demand companies speak on political and social issues like climate change.
The SEC's new rule requires companies to give a public accounting of their annual greenhouse gas emissions. Still worse, the rule strong-arms companies into telling the public whether they are taking steps to combat climate change and forces companies to hazard guesses about how climate change might affect their operations far into the future. But none of that has anything to do with the SEC's statutory mission of helping investors understand the financial risks and rewards of investment.
The SEC was established to regulate public companies in the wake of the financial crisis that triggered the Great Depression. Toward that end, the law requires companies to disclose to investors "material information…as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading." For example, companies must provide information about market volatility, pending lawsuits, and significant management changes, because that type of information could affect a company's financial performance.
Disclosures about whether a company is prioritizing climate change concerns are categorically different from the sort of disclosures the SEC has long required, for at least two reasons. First, the new rule requires disclosures across the board from all large companies. That's a marked departure from the "facts and circumstances" test the SEC has long employed, which requires information that could affect the financial performance of individual companies, not environmental or social conditions.
With its extraordinary unpredictability, and a time horizon crossing decades, climate change's impact on any given company is practically impossible to assess. Requiring disclosure of greenhouse gases thus tells investors nothing relevant to a company's financial situation; it will lead to baseless speculation and reams of information that investors cannot possibly apply to investment decisions now.
Of course, none of this is news to supporters of the rule. Their goal is not to inform investors, but to bludgeon companies into toeing the climate change line. The new rule has nothing to do with financial considerations and everything to do with political considerations. As SEC Commissioner Mark Uyeda declared in dissent, "shareholders will be footing [the] bill" to institutionalize an ESG department in every publicly traded corporation in America.
The SEC's power grab is unprecedented and dangerous. While some investors may care about greenhouse gas emissions, their desires do not justify compelling companies to make disclosures about whether they are prioritizing climate change concerns. If that low bar could trigger SEC regulation, there would be no end to the subjects the agency could require companies to report, including their positions on abortion, gay marriage, and immigration. But forcing companies to parrot the party line on the environment is not the SEC's job.
If the SEC is going to be transformed into the environmental and social thought police, that decision must come from Congress. Our Constitution empowers only Congress to make the law—and, importantly, to take responsibility for the consequences. As SEC Commissioner Hester Peirce stated, "Wading into non-economic issues involves tradeoffs that only our nation's elected representatives have the authority and expertise to make."
The consequences of the greenhouse gas rule are grave. It will fundamentally alter the SEC's mission. It will force companies to play a larger role in politics—something that neither the major political parties nor most companies seem to want. By peppering investors with irrelevant information, it will make them less informed about what actually matters. It will divert companies from their core purpose of maximizing shareholder wealth and creating products that increase everyone's standard of living. And it will violate the First Amendment by compelling companies to disclose information that is not intrinsically linked to their financial performance.
Pacific Legal Foundation, where we work, will file a lawsuit against the SEC in the coming days to block enforcement of this rule and vindicate constitutional principles. Here's hoping that the courts will not allow this rule to stand.
The post The SEC Conscripts Corporate America in Its New Climate Change Fight appeared first on Reason.com.
]]>In this week's The Reason Roundtable, Katherine Mangu-Ward is in the driver's seat, alongside Nick Gillespie and special guests Zach Weissmueller and Eric Boehm. The editors react to the latest plot twists in Donald Trump's various legal proceedings and the death of Russian opposition leader Alexei Navalny.
00:41—The trials of Donald Trump in Georgia and New York
25:04—Weekly Listener Question
33:23—Sora, a new AI video tool
43:55—The death of Alexei Navalny
49:58—This week's cultural recommendations
Mentioned in this podcast:
"How a New York Judge Arrived at a Staggering 'Disgorgement' Order Against Trump," by Jacob Sullum
"Prosecutor Fani Willis Touts the Value of Cash, but What About the Rest of Us?" by J.D. Tuccille
"Trump Ordered To Pay $364 Million for Inflating His Assets in Civil Fraud Trial," by Joe Lancaster
"Alvin Bragg Is Trying To Punish Trump for Something That Is Not a Crime," by Jacob Sullum
"Alexei Navalny's Death Is a Timely Reminder of How Much Russia Sucks," by Eric Boehm
"Why Is Nike Stomping on Independent Creators?" by Kevin P. Alexander
"Bury My Sneakers at Wounded Knee," by Nick Gillespie
"Creation Myth: Does innovation require intellectual property rights?" by Douglas Clement
"A Private Libertarian City in Honduras," by Zach Weissmueller
"The Real Reasons Africa Is Poor—and Why It Matters," by Nick Gillespie
"Justice or persecution? The Trump dilemma"
Send your questions to roundtable@reason.com. Be sure to include your social media handle and the correct pronunciation of your name.
Today's sponsor:
Audio production by Ian Keyser; assistant production by Hunt Beaty.
Music: "Angeline," by The Brothers Steve
The post Goodbye, Navalny appeared first on Reason.com.
]]>It's quite a turn when a prosecutor defends the use of cash for financial transactions. After years of authorities treating mere possession of physical money as sketchy and grounds for seizure, this week a law enforcement official claimed there's nothing to see in her alleged cash reimbursements to her boyfriend for an enviable lifestyle arguably funded by the taxpayers. Either Fani Willis and company were right in the past and she should be subject to scrutiny for anonymous transactions, or she's right today and she and her colleagues owe the rest of us a pass on our taste for financial anonymity.
If you haven't kept up on the details, Fani Willis is the Fulton County district attorney overseeing the Georgia election interference case, which has been described as potentially the strongest and most consequential case against former (and maybe future) president Donald Trump. At least, it was described that way until defense attorneys revealed that Nathan Wade, a special prosecutor in the case, is unqualified for the job, was romantically involved with Willis, and is being paid much more than any of his colleagues (around $654,000 in all)—money from which Willis seemingly benefited in the form of expensive vacations and other pleasures of life with Wade.
Well, she benefited unless she reimbursed Wade for her share. Whether or not she did is among the issues raised in a hearing investigating her alleged misconduct in the case.
"I didn't ever make him produce receipts to me," Willis said in response to questions about the couple's significant expenses. "Whatever he told me it was, I gave him the money back."
"You gave him cash before you ever went on the trip?" she was asked to clarify about one vacation.
"Mmm-hmm," Willis replied.
But she not only had no receipts, she also had no ATM slips or evidence the cash existed. It supposedly came from a substantial stash she kept at home on her father's urging.
"I was trained, and most Black folks, they hide cash or they keep cash, and I was trained you always keep some cash," her father, John Floyd, confirmed. "I gave my daughter her first cash box and told her, 'Always keep some cash.'"
That's great advice. Cash is essential in emergencies, useful when electronic payments systems are down, and (importantly for this case) it's private and anonymous. When central-bank types floated the idea of abolishing physical money in favor of digital currency a decade ago, prominent German economist Lars Feld retorted that cash is "printed freedom" which helps people escape state control.
But that anonymity, which Fani Willis cited as the reason she had no evidence that she'd compensated Wade for his expenses, is exactly why government officials so despise its use by mere mortals.
"It just was not credible," CNN legal analyst Michael Moore, a former United States Attorney, commented of Willis's testimony about "things as nebulous as cash payments so there's no way to track it." He added: "It reminded me of watching a criminal defendant take the stand."
Cash is increasingly assumed by officialdom to be nefarious in and of itself.
"Cash can play a role in criminal activities such as money laundering and allow for tax evasion," notes Investopedia. "Since 2016, global policies have been implemented to thwart the use of cash in favor of digital currency transactions."
The mere presence of physical money triggers official suspicion and the urge to confiscate.
"It's the presence of paper legal tender—U.S. currency—that underlies nearly all of the thousands of police interactions we reviewed," The Greenville News reported in a 2020 story on civil asset forfeiture, under which money and valuables are seized, often with no charges brought against their owners.
Like Fani Willis, CNN's Moore is from Georgia and served there at both the state and federal level, so his attitude is illuminating. Georgia gets a D- grade from the Institute for Justice (I.J.) for its forfeiture laws.
"Across 15 states for which we have reliable property data for 2018,38 currency—primarily cash—predominates, accounting for an average of nearly 70% of forfeited property," I.J. revealed in the 2020 report, Policing for Profit. Georgia was among those states and "between 2015 and 2018, Georgia law enforcement agencies forfeited more than $51 million under state law. Between 2000 and 2019, they generated an additional $388 million from federal equitable sharing, for a total of at least $439 million in forfeiture revenue."
The 2023 budget for Fani Willis's Fulton County government includes Fund 442, Federal Equitable Sharing, for "proceeds of liquidated seized assets from asset forfeitures."
Willis may have taken her father's excellent advice about keeping cash on-hand. But her office is among those putting the screws to members of the public who abide by similar counsel and rely on physical money for its utility and anonymity. To keep large amounts of cash in Fulton County, Georgia, is to risk its seizure by the authorities. Yet Willis (assuming we believe her) does much business in cash.
So, which is it? Was the Fani Willis of the past, along with most of her profession, correct in considering cash to be inherently sketchy and evidence of some sort of criminal activity? If so, the court should view her claims of cash transactions as suspicious in themselves, just as she would treat regular people.
Or is the Fani Willis of last week correct that using cash is just good sense and evidence of homey wisdom handed down through the family? If that's the case, her office should have been treating people with the same light touch she hopes to receive.
The powers-that-be should abide by the same policies they inflict on the rest of us. If they want the freedom and privacy inherent in using cash, they can't keep it as a private privilege; we all get to benefit.
My sentiments are with John Floyd and Lars Feld on this. Cash is freedom and we should always keep some on hand. If that applies to Fani Willis, it must apply to everybody.
The post Prosecutor Fani Willis Touts the Value of Cash, but What About the Rest of Us? appeared first on Reason.com.
]]>Strange bedfellows make for good First Amendment warriors in a case concerning guns, financial institutions, and free speech. Last week, the American Civil Liberties Union (ACLU) announced that it will represent the National Rifle Association (NRA) in National Rifle Association of America v. Vullo, which the Supreme Court recently agreed to hear. The case is an interesting one, with more than a bit of relevance beyond the NRA—particularly for entities related to sexuality or tolerant of sex work.
"We don't support the NRA's mission or its viewpoints on gun rights, and we don't agree with their goals, strategies, or tactics," the ACLU posted on X (formerly Twitter) on December 9. "But we both know that government officials can't punish organizations because they disapprove of their views."
Some might bristle at all this throat-clearing, but it's good to see the ACLU—which has been accused (not unfairly)of putting politics before principles in recent years—loudly embrace civil liberties issues regardless of whether the victim is palatable to progressives. The ACLU knows (even if it seems to have some selective amnesia on this point) that letting government officials abuse authority against groups you disagree with or dislike only makes it easier for officials to abuse you and groups involved in the causes you do like.
The case involves actions taken by Maria Vullo in the wake of the school shooting in Parkland, Florida, in 2018. Vullo was superintendent of the New York State Department of Financial Services (DFS), which has regulatory and enforcement power over banks and insurance companies in the state.
In April 2018, DFS issued a "Guidance on Risk Management Relating to the NRA and Similar Gun Promotion Organizations" to banks, insurance companies, and other financial institutions. The guidance mentioned "several recent horrific shootings, including in Parkland" and noted the "social backlash" that these had produced against the NRA. They then encouraged institutions "to continue evaluating and managing their risks, including reputational risks, that may arise from their dealings with the NRA or similar gun promotion organizations, if any." DFS also urged companies to think of their own "codes of social responsibility" and "to review any relationships they have with the NRA or similar gun promotion organizations, and to take prompt actions to manag[e] these risks and promote public health and safety."
That same day, New York Gov. Andrew Cuomo's office put out a press release crowing that Cuomo had told DFS "to urge insurance companies, New York State-chartered banks, and other financial services companies licensed in New York to review any relationships they may have with the National Rifle Association and other similar organizations."
The press release quotes Vullo saying that "DFS urges all insurance companies and banks doing business in New York to join the companies that have already discontinued their arrangements with the NRA, and to take prompt actions to manage these risks and promote public health and safety."
Vullo's actions echo those of Cook County, Illinois, Sheriff Tom Dart. In 2015, Dart urged credit card companies not to do business with Backpage. Dart suggested that if credit card companies didn't sever ties with Backpage, they could be complicit in sex trafficking and money laundering (despite the fact that Backpage had not even been charged with any such crimes).
Backpage sued, and the U.S. Court of Appeals for the 7th Circuit eventually declared Dart's actions unconstitutional.
You might think the Backpage/Dart episode would dampen enthusiasm for political figures coercing finance companies into dropping disfavored entities or groups. But in recent years, it appears to be an increasingly prevalent tack.
Advocates and politicians seem not just to want to beat ideological foes in the battle of ideas but to destroy their ability to exist at all. And one way to go about that is to strike at a company or group's ability to access banks, payment processors, and other financial services.
There are probably a lot of folks who think, "I don't care if the NRA has access to financial services," just like a lot of people have said the same thing about Backpage, porn websites, and other sex-work-friendly businesses. But even those who can't bring themselves to care on principle should worry about the kinds of precedent this sets.
Remember, we're not talking about people and groups convicted of crimes, nor about authorities using official channels to sanction them. We're talking about authorities attempting a backdoor route to getting what they want.
In this case, Vullo alleges that there was nothing improper about any of this because she didn't directly threaten anyone. "Neither the guidance memoranda nor [the] quote in Governor Cuomo's press release ordered or directed any regulated entity to take any action," states Vullo's June brief to the Supreme Court. "They did not invoke any law or regulation that any regulated entity risked violating" nor "threaten that DFS would take any action against any entity" that didn't ditch the NRA.
But this is weasel talk. Because there was pretty clearly an implicit threat in Vullo's guidance and statements.
"DFS directives regarding 'risk management' must be taken seriously by financial institutions, as risk-management deficiencies can result in regulatory action, including fines of hundreds of millions of dollars," suggested the NRA in its petition to the Supreme Court. "Thus, Vullo's phrasing was deliberate, implicitly threatening enforcement risk."
The NRA also alleged that Vullo "secretly offered leniency to insurers for unrelated infractions if they dropped the NRA" and "extracted highly-publicized and over-reaching consent orders, and multi-million dollar penalties, from firms that formerly served the NRA."
These firms—Lockton Companies, Chubb Limited, and Lloyd's of London—were all associated in some way with the NRA-endorsed "Carry Guard" insurance, which covered expenses related to the use of a gun (including criminal defense and personal injury) and, according to Vullo, violated New York insurance law. DFS issued a $7 million fine to Lockton, a $1.3 million fine to Chubb, and a $5 million fine to Lloyd's.
Subsequently, Chubb and Lockton "agreed to cease underwriting, managing, or selling affinity-insurance programs for the NRA in perpetuity, regardless of the legality of the program," according to the NRA's petition. Soon thereafter, Lloyd's did similarly. "Privately, these companies stated that the decision to sever ties with the NRA arose from fear of regulatory hostility from DFS," states the NRA's petition to SCOTUS. "The NRA has encountered similar fears from providers of corporate insurance, and even banks contacted for basic depository services."
The NRA sued Vullo and Gov. Cuomo, arguing that they violated the First Amendment by instituting an "implicit censorship regime" and retaliating against the NRA because of its gun rights advocacy. The NRA also argued that they violated the 14th Amendment by selectively enforcing state insurance law. The district court dismissed the latter claim but sided with the NRA on the free speech issue.
Vullo appealed, sending the matter to the U.S. Court of Appeals for the 2nd Circuit. This time, the court rejected the NRA's arguments. "Vullo acted reasonably and in good faith in endeavoring to meet the duties and responsibilities of her office," held a three-judge panel of the circuit court.
The NRA appealed and, in November, the Supreme Court agreed to take up the case.
The 2nd Circuit ruling "creates a circuit split with the Seventh Circuit's decision in Backpage.com, which held that a government official violated the First Amendment in circumstances closely comparable to these," stated the NRA in its petition to the Court.
In addition to the Backpage/Dart debacle, the NRA points to Bantam Books, Inc. v. Sullivan, a 1963 case in which the Supreme Court held that Rhode Island's Commission to Encourage Morality in Youth violated the First Amendment by attempting to use "informal sanctions"—including the "threat of invoking legal sanctions and other means of coercion, persuasion, and intimidation"—to suppress the publication of materials deemed unfit for kids. In the present case, Vullo "applied similar pressure tactics-including backchannel threats, ominous guidance letters, and selective enforcement of regulatory infractions-to induce banks and insurance companies to avoid doing business with…a gun rights advocacy group," noted the NRA.
Allowing the 2nd Circuit's decision to stand gives "gives state officials free rein to financially blacklist their political opponents—from gun-rights groups, to abortion-rights groups, to environmentalist groups, and beyond," the organization argued.
That seems exactly right. I don't know enough about insurance law to determine whether the Carry Guard coverage really was breaking some technical rules about what kinds of things can be insured. But even if it was, issuing millions in fines seems excessive and at least potentially designed to deter other businesses from doing business with the NRA. What's more, Vullo and Cuomo's statements and the DFS guidance in this case make clear that this was about more than just a particular insurance program or type of coverage. This was clearly about trying to dissuade companies from doing business with Second Amendment advocacy groups at all, in part by hinting that there may be negative consequences for those that do.
As with the porn industry, there are a lot of people disinclined to care when the NRA's rights are violated. But if politicians can get away with pressuring financial institutions to shun the NRA (or Backpage, or porn producers, or whatever entity it is the next time), then they can get away with doing it to any disfavored or marginalized group. And do you really think that politicians won't try to do the same thing to groups you like?
No doubt there are conservative politicians itching to shut off funding for groups that engage in racial justice demonstrations, help women obtain abortions, or advocate for transgender rights. There are progressive politicians who would love to take down platforms that give voice to right-leaning voices. And there are probably folks on both sides who wish they could shut up groups that challenge government authority.
I'll leave the last word to the ACLU: "If the Supreme Court doesn't intervene," it commented, "it will create a dangerous playbook for state regulatory agencies across the country to blacklist or punish any viewpoint-based organizations—from abortion rights groups to environmental groups or even ACLU affiliates."
The post This NRA Supreme Court Case Has Big Implications for Porn appeared first on Reason.com.
]]>Dealing with big businesses whose services you need to conduct the basics of everyday economic life can be frustrating when those businesses make seemingly arbitrary decisions that cripple your ability to function in a modern economy. In general, the incentives of businesses are to, well, do business with customers.
It's not surprising, then, that a recent New York Times story giving infuriating details of innocent Americans being cut off by their banks reveals that the real cause of the banks' seemingly arbitrary behavior is government rules designed to make sure it knows everything it can about citizens' banking business, to discourage big cash transactions, and to ensure businesses the government disapproves of have as difficult a time as possible without being explicitly banned.
As the Times puts it, when citizens suddenly find their banks exiling them, it's because "a vast security apparatus has kicked into gear, starting with regulators in Washington and trickling down to bank security managers and branch staff eyeballing customers."
The Times story highlights specific aggravating stories of Americans losing their banking and credit card services over such nonsense as regularly having cash deposits that are near, but below, the government's legally mandated $10,000 limit that triggers filing special paperwork with the feds (despite those same businesses also frequently going over that limit and filing the necessary paperwork when they do); for getting direct deposit income from a cannabis company; for receiving frequent cash wires from your parents in Nigeria to help with your rent; for making frequent cash withdrawals in the multiple thousands to pay a contractor who wanted cash; for having a past criminal conviction for using counterfeit money; and for using a bank account to move money among a small private community loan pool for those less able to access the normal loan market.
J.D. Tuccille reported for Reason back in August about House committee investigations into how government pressure might have led banks to provide the feds with private information about January 6 protesters. As Tuccille wrote, the problem of banks conspiring with government against its customers is wider than any one incident:
"jawboning" is easily applied to any heavily regulated industry, including finance. It can also be used to encourage more than snooping, such as outright denial of service.
"According to our data, nearly 2 out of 3 people who earn money in the adult industry have lost a bank account or financial tool, and nearly 40% have had an account closed in the past year," the Free Speech Coalition, an adult-industry trade group, reported of the results of a survey earlier this year.
While the report didn't speculate as to the cause of the closures, the problem looks very much like a continuation of the Obama administration's Operation Choke Point, under which federal agencies including the Department of Justice and the Federal Deposit Insurance Corporation leaned on banks to deny services to businesses which government officials just didn't like.
Read more Reason reporting on Operation Chokepoint here.
The post How Vexatious Government Demands Can Lead Your Bank To Refuse To Do Business with You appeared first on Reason.com.
]]>The Commodity Futures Trading Commission (CFTC) announced yesterday it had both filed and settled charges against three "decentralized finance" operations, Opyn Inc., ZeroEx Inc., and Deridex Inc.
In the agency's own language, the charges included "failing to register as a swap execution facility (SEF) or designated contract market (DCM), failing to register as a futures commission merchant (FCM), and failing to adopt a customer identification program as part of a Bank Secrecy Act compliance program" and "illegally offering leveraged and margined retail commodity transactions in digital assets."
The companies have to pay fines ranging from $100,000 to $250,000 and refrain from further such law violations. The full CFTC press release gives some of the technical details of the sort of decentralized "smart contract" operations the companies performed that the agency insists violated the law. Opyn, CFTC acknowledges, seemed aware it was legally questionable to offer its services to U.S. residents and tried to block them, but not hard enough in CFTC's eyes.
The use of DeFi and smart contracts allows people to make sophisticated financial dealings involving buying, selling, trading, or swapping commodities, crypto, or derivatives more or less automatically without specific human entities having to make decisions and act. CFTC Director of Enforcement Ian McGinley says in the press release that, "somewhere along the way, DeFi operators got the idea that unlawful transactions become lawful when facilitated by smart contracts. They do not. The DeFi space may be novel, complex, and evolving, but the Division of Enforcement will continue to evolve with it and aggressively pursue those who operate unregistered platforms that allow U.S. persons to trade digital asset derivatives."
In an intriguing Twitter thread yesterday, Delphi Labs general counsel Gabriel Shapiro, said this CFTC action ratifies what he's long believed: DeFi is likely to be judged illegal in nearly all contexts interacting with U.S. citizens.
Shapiro advises that "if you run any kind of interface etc. for a DeFi credit protocol, block the U.S.," adding, "I also always told you the CFTC would be an even worse regulator for crypto than the SEC."
The underlying theory of this enforcement action, Shapiro says, is inherently anti-DeFi: "The purpose of DeFi is disintermediation. There is no way of making DeFi 'comply' with a mandatory intermediation regime—then it would not be DeFi, just intermediaries who use permissioned, KYC-gated etc. smart contracts as part of their tech stack."
One CFTC commissioner, Summer K. Mersinger, filed a dissent to his agency's actions. Among his complaints were that "we are asked [in this action] to find liability and impose sanctions based on a novel technology that was decentralized in conception and operation—an area that has not previously been the subject of a CFTC enforcement action." Mersinger points out that "the Commission's Orders in these cases give no indication that customer funds have been misappropriated or that any market participants have been victimized by the DeFi protocols on which the Commission has unleashed its enforcement powers."
He thinks this represents a shift from a previous CFTC vow to use more "stakeholder engagement" and less out-of-the-blue enforcement actions in the DeFi space. "Yet, today's actions do not promote responsible innovation—they shut it down, banishing innovation from U.S. shores."
Mersinger points out that it would be often difficult or impossible for DeFi operations to legally register under CFTC rules as those rules "were written for centralized entities—are they fit for purpose if FCM activity can be performed in a decentralized manner?" He also asks, relevant to some of the specific charges at issue this week: "If a DeFi protocol is developed for lawful purposes but is used for purposes that violate the CEA [Commodities Exchange Act], should the developer be held liable? Must the deployment and the illegal use be close in time, or is the developer of a DeFi protocol forever liable if its technology is used for illegal purposes by others?"
Overall Mersinger thinks these sort of enforcements "creates an impossible environment for those who want to comply with the law, forcing them to either shut down or shut out U.S. participants."
As I wrote back in Reason's January issue, "DeFi's ability to move value and make investment decisions via automatic, unregulated programming makes it harder for the government to rely on the old system whereby it drafts financial intermediators such as banks and brokers to spy on their customers." The CFTC is acting on the eternal state imperative to crack down on anything that widens spaces where citizens can act without government knowledge and supervision.
The post The Federal Government Is Trying To Shut Down Decentralized Finance appeared first on Reason.com.
]]>The House Judiciary Committee is investigating banks for sharing Americans' financial information with the FBI without regard for privacy concerns. In fact, there's no doubt about the threat to civil liberties posed by the government's leverage over the financial industry; that's long established. At question in this investigation is whether the danger to our freedom inherent in that cozy relationship is being wielded in political warfare between the country's political factions. But the larger problem should be fixed no matter what lawmakers discover.
"Today, Chairman Jim Jordan (R-OH) subpoenaed Citibank for documents and communications related to the Judiciary Committee's and Weaponization Select Subcommittee's investigation into major banks sharing Americans' private financial data with the Federal Bureau of Investigation (FBI) without legal process for transactions made in the Washington, D.C., area around Jan. 6, 2021," the House Judiciary Committee announced August 17.
The subpoena followed June 12 queries to Citigroup, JPMorgan Chase & Company, PNC Financial Services, Truist, U.S. Bankcorp, and Wells Fargo after testimony by FBI whistleblowers that Bank of America voluntarily handed the FBI records on people who had used its services in the Washington, D.C. area around the time of the January 6 Capitol riot. "Individuals who had previously purchased a firearm with a BoA product were reportedly elevated to the top of the list," according to a May report.
If the banks in question surrendered private financial information to federal officials based on little more than "please," that's disturbing. It's also believable since financial institutions have long operated as surveillance arms of the state, tracking transactions and movements, making assumptions about what they might mean, then turning that information over to government officials under regulatory pressure.
"The mission of the Financial Crimes Enforcement Network is to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence," boasts the federal agency, which operates under the umbrella of the U.S. Department of the Treasury. To that end, it administers a host of rules including customer due diligence mandating that banks "identify and verify the identity of customers," larger "know your customer" rules specifying that financial institutions profile clients once they're identified, the misnamed Bank Secrecy Act which requires "financial institutions to, among other things, keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount)," and suspicious activity reports which banks must file on "suspicious or potentially illicit activity."
As it did in many areas, the USA PATRIOT Act tightened the screws of surveillance when it came to financial activity.
"The National Security Letter provision of the Patriot Act radically expanded the FBI's authority to demand personal customer records from Internet Service Providers, financial institutions and credit companies without prior court approval," notes the ACLU.
The financial industry is heavily regulated by government officials. That gives them the ability to torment private businesses based on idiosyncratic interpretations of vague laws and regulations.
"The SEC staff told us they have identified potential violations of securities law, but little more," Paul Grewal, chief legal officer for the crypto exchange Coinbase, complained in March about a nastygram from the Securities and Exchange Commission. "We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so." Grewal went on to detail his company's efforts to comply with rules and regulators' refusal to respond, except with threats.
Unfortunately (but probably not accidentally), such power creates incentives to over-interpret activity as "suspicious" and to snitch on customers to stay on the good side of federal agencies.
"Government officials can use informal pressure — bullying, threatening, and cajoling — to sway the decisions of private platforms," the Cato Institute's Will Duffield wrote regarding federal efforts to strong-arm tech companies into suppressing disfavored speech. Such "jawboning" is easily applied to any heavily regulated industry, including finance. It can also be used to encourage more than snooping, such as outright denial of service.
"According to our data, nearly 2 out of 3 people who earn money in the adult industry have lost a bank account or financial tool, and nearly 40% have had an account closed in the past year," the Free Speech Coalition, an adult-industry trade group, reported of the results of a survey earlier this year.
While the report didn't speculate as to the cause of the closures, the problem looks very much like a continuation of the Obama administration's Operation Choke Point, under which federal agencies including the Department of Justice and the Federal Deposit Insurance Corporation leaned on banks to deny services to businesses which government officials just didn't like.
"Operation Choke Point was created by the Justice Department to 'choke out' companies the Administration considers a 'high risk' or otherwise objectionable, despite the fact that they are legal businesses," summarized a 2014 House Oversight Committee report. "The sheer breadth of industries affected – including firearms and ammunition sales, adult entertainment, check cashing, and payday lending – has generated significant concern with the objectives and scope of Operation Choke Point."
While Operation Choke Point officially ended in 2017, the Free Speech Coalition survey is only part of the evidence that government still cuts off disfavored individuals and industries from financial services. And if the feds are willing to lean on banks to deny service to targeted customers, they're certainly willing to use their tools to conscript bankers as informants.
So, did the FBI squeeze banks for information on people who were present in Washington, D.C. on the day of a riot, without providing evidence that they participated in the violence or even went near the related and perfectly legal election protests? That would certainly be a dangerous escalation in the abuse of government officials' leverage over the financial industry. If House Judiciary Committee Chairman Jim Jordan finds evidence to support his allegations, heads should roll.
But even if he finds no evidence to support those charges, government regulatory power is too intrusive and arbitrary, and easily abused. Just as politicians have leaned on the tech sector to muzzle speech, they have long pressured banks to spy on customers and deny services to people whose existence offends officialdom. That power is a problem in itself, no matter what this investigation uncovers.
The post Did Banks Hand Private Financial Data to the FBI Without Legal Process? appeared first on Reason.com.
]]>After 22 years on Wall Street, Caitlin Long got intrigued by bitcoin and the blockchain in 2012. From 2018 through 2020 she served as a member of the Wyoming Blockchain Task Force, which made the Cowboy State the most welcoming for blockchain companies.
Long is the founder and CEO of Custodia Bank, a bitcoin-focused "full reserve" bank proposing to keep 108 percent of customer deposits on hand. The Federal Reserve has denied its application for membership, claiming that "the firm's novel business model and proposed focus on crypto-assets present significant safety and soundness risks." Custodia is currently challenging that decision. Reason's Zach Weissmueller interviewed Long about the ongoing lawsuit and the future of bitcoin in May, at the Bitcoin 2023 conference in Miami.
Q: Why did you start Custodia Bank?
A: The proposal was to be a 100 percent reserve bank that would keep all of our cash at the Fed. Basically, a pure service provider. There's no reason why your bank needs to be a counterparty.
It's just like the law of bailment, which is how a valet parking works or a coat check. When you park your car, you're not turning legal title to your car over to the garage. And if the garage happens to go bankrupt while your car is parked there, you can still get your key and drive your car away. Let's just turn this into a basic money warehouse to the maximum extent possible within the law.
Q: Why were you seeking a master account with the Federal Reserve?
A: We wanted to be able to keep cash directly at the Fed. Like any depository institution, federal law says the Federal Reserve shall provide services to depository institutions.
We actually did apply for FDIC insurance and they were not interested in anything related to digital assets. And as I've said before, I agree with them. We saw how fast the money can move in the digital asset world. The traditional banking system is not set up for that yet. I mean, holy cow, just online banking movement is enough to take down a bank in today's day and age. Crypto moves so much faster than traditional payment rails.
Q: What was your reaction to the Fed denying your application?
A: We were blindsided. We had been making a lot of progress with the Fed. And then something clearly changed.
Q: Wyoming approved your charter but the Fed is basically vetoing that. What worries you most about a future where banking becomes more nationalized?
A: The degree of control that the federal government has tried to exert. Cleaning up fraud is not political. Banking should not be political either. We—we collectively, all the people—should not be using the banking system as a political hammer. And it shouldn't be against abortion clinics as much as it shouldn't be against oil and gas companies. Either side should stay out of this.
We should just let financial services happen and fight out the policy fights in the legislatures, including Congress at the federal level. But the bureaucrats in Washington discovered that they had power they didn't know they had.
This interview has been condensed and edited for style and clarity.
The post Caitlin Long on Why Politics Should Stay Out of Banking appeared first on Reason.com.
]]>In a Financial Services Committee hearing this week, Rep. Brad Sherman (D–Calif.) had some choice words for bitcoin bros:
JUST IN: ???????? US Congressman says #Bitcoin creator "Saratoshi Nagamoto" was not innovative. pic.twitter.com/3i0AhKOcSN
— Watcher.Guru (@WatcherGuru) July 26, 2023
"We are told that cryptocurrency is very innovative," said Sherman. "Look at the incredible financial innovation of Enron and WorldCom," he continued, implying that bitcoiners are fraudsters. "I don't believe that Saratoshi Nagamoto was innovative," he added.
He is, of course, butchering the name of Satoshi Nakamoto, the pseudonymous person (or group of people) who 15 years ago released the nine-page bitcoin white paper sketching out a "peer-to-peer electronic cash system" which would bypass financial institutions and be fully censorship-resistant.
Though bitcoin today is not yet used as a medium of exchange to the degree that many had thought, due to the long processing times of transactions, the Lightning Network is beginning to solve this scalability problem. And the promise of bitcoin delivering financial freedom to all who want it—"an escape hatch from tyranny," in the words of the Human Rights Foundation's Alex Gladstein—is being borne out as it becomes more widely adopted, fulfilling Satoshi's vision.
Sherman has previously compared crypto to cocaine and organ harvesting. "There's this fear of missing out that we gotta keep up with other countries," he told Bloomberg back in May. "Peru is way ahead of us in cocaine production. China is way ahead of us in organ harvesting. We don't need to keep up on those things, and we don't need to keep up on crypto."
Brad, did the EU pass comprehensive cocaine legislation? Is Hong Kong encouraging the domiciling of cocaine firms? Are Bermuda and UAE regulators trying to get cocaine firms onshore?
Do you think perhaps your metaphor isn't apt?
— nic ???? carter (Orb #2) (@nic__carter) May 10, 2023
Sherman, like Sen. Elizabeth Warren (D–Mass.), who compared buying bitcoin to buying air, seems to fundamentally misunderstand the features of the technology he seeks to regulate (an all-too-common tale for our ancient legislators). In 2021, Sherman said cryptocurrency, which he believes should be considered a security, is considered by advocates to be "an attack on the powers of society" when in fact "the advocates of crypto represent the powers in our society," saying that J.P. Morgan, BlackRock, and Goldman Sachs have made so much money off of crypto that it undermines the fundamental proposition. (Tell that to Senegalese app developer Fodé Diop, who correctly calls bitcoin "a weapon for us to fight oppression.")
Sherman has also said that bitcoiners' political contributions to lawmakers would result in regulators going easy on it, which has not turned out to be true.
Here's a hint: If you're getting Satoshi's name wrong, chances are you might not know very much about bitcoin. What else might you be getting wrong?
For more on U.S. legislators' war on bitcoin, check out this documentary Reason produced last month:
The post Congressman Talks Smack About Bitcoin Creator 'Saratoshi Nagamoto' appeared first on Reason.com.
]]>In this week's The Reason Roundtable, editors Matt Welch, Katherine Mangu-Ward, Nick Gillespie, and Peter Suderman critique Florida Gov. Ron DeSantis' plan to investigate the inclusion of Bud Light's parent company AB InBev in the state's pension funds.
00:40: Gov. Ron DeSantis politicizes Florida pension funds.
20:38: The summer of strikes
32:50: Weekly Listener Question
38:50: Robert F. Kennedy Jr. appears before the House Subcommittee on the Weaponization of the Federal Government.
43:53: This week's cultural recommendations
Mentioned in this podcast:
"Ron DeSantis Bullies Bud Light Like Elizabeth Warren Bullies Amazon," by Joe Lancaster
"How Corporations' Good Social and Environmental Intentions Undermine the Common Good," by Samuel Gregg
"DeSantis Unironically Frets About 'Criminalizing Political Differences,'" by Eric Boehm
"Politically Motivated Investment Guidelines Making Bad Public Pension Programs Worse," by Scott Shackford
"Three Reasons to Fix Public Sector Pensions Now," by Nick Gillespie and Todd Krainin
Is ESG a threat to capitalism? Live with Samuel Gregg, Russ Greene, and Zach Weissmueller
"Don't Expect Unions To Make a Comeback," by Nick Gillespie
"America Needs a Better Kind of Capitalism," by Veronique de Rugy
"UPS vs. FedEx: Ultimate Whiteboard Remix," by Nick Gillespie and Meredith Bragg
"Artifact: War's Nightmare Landscape," by Nick Gillespie
"Why Color Atom Bomb Footage of Hiroshima & Nagasaki Was Censored by the Government for Decades," by Nick Gillespie
"Obama, Trump, and the Nuking of Hiroshima," by Steve Chapman
Send your questions to roundtable@reason.com. Be sure to include your social media handle and the correct pronunciation of your name.
Audio production by Luke Allen; assistant production by Hunt Beaty.
Music: "Angeline," by The Brothers Steve
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]]>This week, amid a flailing campaign for the Republican nomination for president, Florida Gov. Ron DeSantis threatened to legally punish a beer company over its constitutionally protected speech. It's the sort of activity—micromanaging a private company using the coercive power of the state—we've long expected from big-government Democrats. And yet despite being completely contrary to traditional conservative principles, it's increasingly in fashion among Republicans as well.
In April, brewing company Anheuser-Busch InBev sent some personalized cans of Bud Light to TikTok influencer Dylan Mulvaney as part of a promotional campaign. Conservatives protested because Mulvaney is a transgender woman. Boycotts ensued, unseating Bud Light as America's most popular beer. In June, Bud Light sales were down 28 percent compared to the previous year, and the New York Post reported that AB InBev had lost $27 billion in value through the end of May.
In a letter to the State Board of Administration of Florida, which manages the state's retirement pension fund, DeSantis requested a formal "review" into AB InBev's "conduct." As DeSantis told Fox News' Jesse Watters, "We had over $50 million worth of InBev stock" in the state pension fund, and the dip in value impacted "hard-working people [like] police officers, firefighters, and teachers."
"We believe that when you take your eye off the ball like that, you're not following your fiduciary duty to do the best you can for your shareholders," DeSantis continued, "so we're going to be launching an inquiry about Bud Light and InBev" that could result in legal action. "At the end of the day," DeSantis cautioned, "there's got to be penalties for when you put business aside to focus on your social agenda at the expense of hard-working people."
Of course, AB InBev has worked with social media influencers for years. Its current financial woes singularly stem from a boycott over the fact that one of those influencers was transgender. DeSantis even contributed to the pile-on himself, telling conservative commentator Benny Johnson in April, "Pushback is in order. I'll never drink Bud again."
More to the point, it's particularly galling for DeSantis to threaten legal action against a private company for speech protected under the First Amendment. It's the sort of activity—micromanaging a private company using the coercive power of the state—we've long expected from Democrats like Sen. Elizabeth Warren (D–Mass.). In 2021, Warren called on the federal government to use its antitrust powers to break up Amazon for having the audacity to think that it could criticize her on Twitter. The following year, Warren said the feds should break up large grocery store chains, famous for their low profit margins, for "raking in record profits."
And yet despite being completely inimical to traditional conservative principles, Republicans are joining in on this trend as well.
Earlier this month, seven Republican attorneys general issued a warning to Target Corporation. The letter complained about the retailer's sale of "Pride" merchandise. Similar to Bud Light, conservatives boycotted Target for the sale and display of Pride-themed items online and in stores. Citing the company's 16 percent drop in stock price and $12 billion market loss, the A.G.s accused the company of violating its "fiduciary duties to its shareholders to prudently manage the company and act loyally in the company's best interests."
As First Amendment attorney and legal counsel at TechFreedom Ari Cohn wrote on his Substack, in language that could directly apply to DeSantis as well, the A.G.s are "using the coercive authority of the state to silence views they disagree with. Whether the states are shareholders is irrelevant…. State governments cannot simply purchase stock in a company and declare that they now have the right to threaten the company over their protected expression."
Unfortunately, for all DeSantis' talk about the importance of freedom, he's just as willing as any of his ideological opponents to weaponize state power to punish people who disagree with him. As Reason's Eric Boehm wrote in April, DeSantis is "not merely redefining freedom to mean something other than the absence of restrictions. It's an affirmative argument for those restrictions, wrapped in a promise that the right kinds of people…will continue to enjoy freedom even while it is denied to others."
As DeSantis competes to be the standard-bearer of the Republican Party—whose 2016 presidential platform declared, "We believe political freedom and economic freedom are indivisible"—it's worth keeping in mind that in his ideal world, each would be reserved only for those he favors.
The post Ron DeSantis Bullies Bud Light Like Elizabeth Warren Bullies Amazon appeared first on Reason.com.
]]>New bipartisan crypto bill would "create a federal regulatory framework." Sens. Cynthia Lummis (R–Wyo.) and Kirsten Gillibrand (D–N.Y.) have introduced a proposal to regulate cryptocurrency, called the "Responsible Financial Innovation Act." It's a reintroduction of a bill proposed last year, with some new sections added.
"This bill is a whopping 274 pages and covers most of the waterfront of crypto, from securities and commodities regulations to taxation of crypto, broad interagency coordination, and regulation of 'payment stablecoins,'" noted Justin Slaughter, policy director at the tech investment firm Paradigm.
The likelihood of this bill passing is low, predicted Slaughter. But it could be important for "how it influences the House's McHenry Thompson bill," which does have a chance of passing. The latter bill is slated for a markup later this month. (See Slaughter's Twitter thread for explainers of key parts of the Senate bill that might make it into the House measure; see a discussion draft of the House bill here.)
One key part of the bill attempts to clarify when crypto assets are securities and when they are commodities. In so doing, it "undercuts the SEC through classifying most of the fintech industry as commodities overseen by the Commodity Futures Trading Commission (CFTC)," noted journalist Matt Laslo. And this, he suggested, could be a good thing:
In the wake of crypto collapses, the SEC has used ambiguities in current law—coupled with congressional inaction—to amass sweeping new regulatory powers. Congress wants that power back; well, at least some of the most vocal, angry and well-versed crypto-concerned lawmakers in Washington.
"I think the SEC has been trying to regulate through enforcement, and that's typically very unwise," Gillibrand tells me.
In this sense, the congressional crypto regulation could be the lesser of evils. More from Laslo:
Even as industry leaders, investors and their congressional allies accuse the SEC of crippling crypto, what's become clear in recent months is, if Congress fails to act, again, securities regulators will aggressively go it alone….
Like other federal agencies, senators Lummis and Gillibrand gave SEC officials seats at their re-drafting table—asking for input, running revisions by the regulators and even accepting some of the agency's recommendations.
"They have seen it. We asked them to tweak it, and we've incorporated some of their changes," Lummis told me for WIRED.
After taking the SEC's concerns seriously over the past year, the senators have been left astounded-to-angered watching the heavy regulatory hand of the SEC clamp down on the likes of Coinbase and Kraken, et.
"The Binance thing I understand, because it is offshore," Lummis says. "But the domestic industries really are trying to comply for the most part and they're just getting the cold shoulder, and that's not how we regulate in this country. You know, they're not the enemy."
You can find the full Lummis-Gillibrand bill here.
It seems to set up reams of regulatory hoops for digital currencies and assets and their exchanges to jump through. For instance, it requires a bunch of new mandatory disclosures to consumers. And "each year, the chief executive officer of a crypto asset intermediary shall, under penalty of perjury, certify compliance" with these consumer disclosures, as well as "applicable anti-money laundering, customer identification, prevention of terrorist financing, and sanctions laws," and more, the bill's text states.
"So if a company says it's disclosing certain consumer protection information & then doesn't do that, the CEO can be criminally charged with perjury," notes Slaughter.
Theoretically, this is meant to deal with the Sam Bankman-Frieds of the world. But it seems like the sort of intervention that could ensnare people for simple oversights, too.
Some of the bill's provisions certainly could have positive and protective effects for consumers. Or they could be time- and resource-wasting bureaucratic nonsense that would, at worse, give the government more leeway to play gotcha with crypto businesses and invade the privacy of crypto users. The new bill just dropped, so we're still in the period of puzzling out what it will really mean for the crypto industry.
One red flag: The bill would change the Federal Deposit Insurance Act to make money-laundering offenses involving crypto assets punishable by up to five years in prison—which could have a big effect, considering how broad some money laundering statutes reach.
The bill's establishment of an interagency law enforcement working group to combat illicit crypto use also seems ripe for inviting government snooping and overreach.
In other sections, the Lummis-Gillibrand bill includes tax provisions, some good and some bad. "Token sales with a gain below $200 aren't taxed," notes Slaughter. And "trading crypto counts as capital gains income, not regular income, just like in commodities/securities."
"One major criticism from the [crypto] community…was the fact that the Act intends to uphold the Howey test," notes FXStreet. "The test is used to determine whether a transaction qualifies as an investment contract in the US which in turn labels the assets involved in the process as Securities….This test has been criticized by many for being outdated and is also the subject of controversy in the ongoing SEC vs. Ripple lawsuit."
Steep drop in confidence in higher education. A new Gallup poll finds a sharp drop in Americans' confidence in higher education. In the most recent poll, conducted in June, just 36 percent of those surveyed said they had "quite a lot" or "a great deal" of confidence in higher education, down from 48 percent in 2018 and 57 percent in 2015.
In the most recent poll, 40 percent of those surveyed had "some" confidence in higher education, while 22 percent said they had "very little" confidence. In 2018, just 15 percent of folks surveyed had very little confidence and, in 2015, just 9 percent said the same.
Confidence has dropped across the board, "but Republicans' sank the most—20 points to 19%, the lowest of any group," notes Gallup. "Confidence among adults without a college degree and those aged 55 and older dropped nearly as much as Republicans' since 2018."
The drop is part of a larger disillusionment with U.S. institutions. Gallup's June poll "also found confidence in 16 other institutions has been waning in recent years. Many of these entities, which are tracked more often than higher education, are now also at or near their lowest points in confidence," Gallup points out. And, "although diminished, higher education ranks fourth in confidence among the 17 institutions measured."
Institutions with the highest confidence rankings were small business (65 percent), the military (60 percent), and the police (43 percent). People had the least confidence in television news (14 percent), big business (14 percent), and Congress (8 percent).
What The Bear can teach us about dynamism and "the regulatory nightmare of opening a restaurant." Hulu TV series The Bear centers on a talented chef named Carmy Berzatto who returns home to Chicago after his brother's* death to help save his family's flailing sandwich shop. It's also a testament to dynamism and "the regulatory nightmare of opening a restaurant," Scott Lincicome writes. Owning a restaurant is challenging in many ways, but "the industry brings many benefits for those willing to put in the work—and, importantly, regardless of their background."
That mobility's owed in part to the industry's common prioritization of results over credentials – for restaurants and their staff. A nice (expensive) degree from culinary school can open some doors and hone some skills, but the real litmus test is talent, experience, and dedication (just ask these famous chefs). And, while starting and even median compensation often isn't great, excellence pays off: Top performers—waiters, bartenders, chefs, etc.—can make surprisingly good money, even if they never went to college or end up on TV or a shiny cookbook cover.
Having some family in the biz, I've seen this all firsthand: a head waiter who started as a Spanish-only busboy, an award-winning sommelier who dropped out of college and learned wine while waiting tables at a suburban bar & grill, an owner who started as a host, and multiple food trucks that have become packed brick-and-mortar establishments. The work (and the livin') was hard, and plenty of folks burned out, but for those who could hack it—even ones with sordid pasts or messy presents—the rewards were solid.
The Bear nails this dynamic.
It also nails how "public policy can make success even harder," notes Lincicome:
Of everything standing in our heroes' way—the menu, the construction, the staff, the personal stuff—it's the government that's their biggest and most omnipresent threat. The crew estimates (optimistically) that just "permits, the inspections, and the licenses" will cost them $10,000, but the bigger cost is time: In seemingly every scene inside the restaurant, their actual work is interrupted by a deflating mention of some new bureaucratic hurdle.
More here.
• "Inflation fell to its lowest annual rate in more than two years during June," reports CNBC, "the product both of some deceleration in costs and easy comparisons against a time when price increases were running at a more than 40-year high."
• The Federal Trade Commission is appealing a judge's order denying the agency's request for it to block Microsoft's acquisition of Activision Blizzard.
• Planned Parenthood and the American Civil Liberties Union of Iowa are suing over Iowa's new fetal heartbeat bill. "By banning the vast majority of abortions in Iowa, the Act unlawfully violates the rights of Petitioners, their medical providers and other staff, and their patients under the Iowa Constitution and would severely jeopardize their health, safety, and welfare," states their complaint.
• Meta doesn't want Threads to be the new Twitter. "If Meta executives have their way, Threads will not be where people turn to debate policy issues, or catch up on local political developments and learn about breaking news that could affect their lives," reports NPR.
• "In April, Idaho lawmakers passed legislation requiring any person under 18 to get permission from a parent or guardian before traveling out of state to get an abortion," notes The Guardian. A new lawsuit claims this statute is unconstitutional.
• Get your politics out of my pickleball, writes Reason's Jason Russell.
*CORRECTION: This post previously misstated which The Bear character had died.
The post New Crypto Bill Aims To Circumvent SEC's Regulation-by-Enforcement Strategy appeared first on Reason.com.
]]>The European Union's recent adoption of the Markets in Crypto-Assets Regulation (MiCA) into law represents a huge, and foolish, step in how Europe approaches the regulation of crypto. Given recent regulatory actions by the Securities and Exchange Commission (SEC) aimed at crypto exchanges in the United States, many are wondering what effect, if any, MiCA will have on the crypto ecosystem in the U.S. and worldwide. How will it change financial innovation in Europe? Will a similar framework be adopted elsewhere?
MiCA makes two mistakes at once. It undermines the privacy of E.U. residents while triggering a departure of financial technology talent from Europe to other jurisdictions—most likely Hong Kong, El Salvador, and the United States.
These new European regulations have sparked intense debate surrounding privacy and the erosion of personal freedoms, especially because of its requirement to verify the identity of recipients when sending crypto worth over 1,000 euros to private wallets.
This follows a trend of diminishing financial privacy in the E.U., as the European Central Bank has been reducing the size of cash transactions that do not require mandatory reporting. However, the 1,000 euro limit for crypto is much lower even than cash reporting requirements. Want to buy a new laptop for your small business? Or perhaps you purchased some farm equipment from your neighbor? European Central Bank president Christine Lagarde must be told about it.
Such a sweeping violation of privacy is harder to establish in the U.S. because there is a stronger expectation of personal freedom here. Still, even U.S. regulators have shown they believe their obsession with anti-money-laundering measures is more important than its citizens' financial privacy. Financial surveillance, especially related to cryptocurrencies, does threaten to ratchet higher in the U.S. unless financial privacy advocates speak up effectively.
Beyond privacy concerns, MiCA puts Europe at risk of losing its competitive edge as a hub for financial innovation. Regardless of whether the multitude of "crypto" projects has a future, it's clear that bitcoin will play a central role in the future of digital finance. The jurisdictions that can attract this talent will benefit from the small but growing bitcoin infrastructure sector of the world economy.
Hong Kong has positioned itself as a crypto innovation hub, carrying forward the city's legacy as a world leader in free capital markets. On the other hand, the Chinese Communist Party's crackdown on Hong Kong's Umbrella Movement casts a shadow over the future of Hong Kong that will be difficult for long-term investors and tech nomads to ignore.
El Salvador, for its part, has made remarkable strides in embracing bitcoin, including making the virtual currency legal tender in 2021. Last month, its president approved the Innovation and Technology Manufacturing Incentives Act (ITMIA). Instead of trying to stamp out innovation, El Salvador is aggressively building a robust bitcoin and A.I.-driven economy. The ITMIA eliminates taxes—yes, all taxes—on companies that are creating or importing most kinds of technology.
This is the kind of power move that underdogs can afford to make. The E.U. clearly believes it's immune to a permanent loss of tech talent to upstarts like El Salvador and that increasing taxes on the existing economy will pay off more than creating a regulatory environment that encourages growth in the technology sector. Time will tell if the E.U.'s risky bet pays off.
Mairead McGuinness, an E.U. commissioner, has said that regulating crypto is "a little bit like climate change" in that merely addressing the topic "in the E.U. is not enough, we need to have global engagement and sharing of experience." This is a fascinating window into the thinking behind MiCA. Regulators in Europe believe that their environmental targets should be adopted globally. In recent decades, however, it has become clear that the E.U. lacks the leverage to compel the world's largest economies and most populous countries to fall in line.
Like with the E.U.'s green deal, European regulators believe the whole world should fall in line with them and that MiCA should serve as a global standard for how crypto is dealt with legally. But this dream of theirs fails to account for a lack of incentive alignment. Countries that wish to grow their technology sectors would never willingly adopt a regulatory framework like MiCA.
There is also a certain irony in European lawmakers attempting to suppress bitcoin particularly, which stands out as a digital asset with the potential to protect the vulnerable. Its decentralized nature, consistent demand, and growing acceptance by institutions show that its value proposition is understood by more people each day.
As the world embraces the possibilities presented by bitcoin, people who live in jurisdictions with hostile regulatory environments will lose privacy and prosperity relative to those who live in places that recognize and encourage financial innovation.
The post Europe's Bitcoin-Busting Mistake appeared first on Reason.com.
]]>Fifteen years after Satoshi Nakamoto dropped a nine-page white paper on an obscure email list sketching out an idea for a new peer-to-peer digital currency, bitcoin has become a global phenomenon. And nowhere is its pomp and promise more on display than at the blockbuster annual conferences put on by Bitcoin Magazine in Miami Beach.
But it's also had a disappointing couple of years.
Bitcoin was supposed to be an inflation hedge. But after the Fed fired up its money printer during the pandemic and the dollar lost value, bitcoin went in the same direction.
Bitcoin was supposed to be a way to transfer money "from one party to another without going through a financial institution," to quote Satoshi. But 15 years later, a lot of users are still trusting regulated financial institutions to manage their holdings.
Bitcoin was supposed to be above politics, but the community around it has seen bitter in-fighting, and some worry that bitcoiners' intolerance of dissenting ideas has turned it into something akin to a cult.
"It's certainly not the only secular religion out there, but it's a particularly pernicious breed," says Nic Carter, a writer and crypto investor who cited security concerns as his reason for not attending the conference.
But despite the disappointing price drop and ongoing internecine squabbles, the bitcoiners Reason talked with in Miami seemed convinced that its value proposition—a decentralized money that governments can't censor or destroy—is as strong as ever.
Are bitcoin's troubles a sign that the project is failing, or just the inevitable bumps on an upward trajectory that will one day result in monetary freedom for the entire world?
Reinventing the Financial System
This year's conference attracted about 15,000 attendees, a drop from more than 35,000 in 2022, according to the organizers. One attendee described a "noticeable, dramatic difference" in the energy and crowd from the previous year, during which bitcoin's price was about $15,000 higher.
Those in attendance this year were more likely to be bitcoin's true believers.
"I'm not a fan of the mania bull run phases because of the type of people that it attracts," says Jameson Lopp, a developer who co-founded the bitcoin storage company Casa. "We might call them the tourists or the LARPers or, in many cases, the scammers."
Caitlin Long, founder of a bank aiming to serve bitcoin-holding customers, agrees with Lopp that "scammers" and "grifters" pervade the space, saying: "There's a big chunk of crypto that needs to burn on a raging funeral pyre."
Just a few miles away from this year's conference is home court for the Miami Heat. The venue changed its name to FTX Arena after the crypto platform paid $135 million for the naming rights back in 2021. In January, when FTX collapsed into bankruptcy and its founder, Sam Bankman-Fried, was charged with fraud, the signage was removed.
Many bitcoiners believe that any cryptocurrency other than Satoshi's original creation should be referred to as a "shitcoin," and that the "crypto industry" is a cargo cult run by scammers, who have the mainstream media and much of Silicon Valley fooled.
Exhibit A: Sam Bankman-Fried.
"He's a criminal. He should go to jail," says Peter McCormack, host of the What Bitcoin Did podcast. "People who conflate what [FTX] did with bitcoin have got it entirely wrong."
Bitcoiners also see the FTX collapse as a reminder that you can't trust bankers or tech-founder media darlings, like Bankman-Fried, to take care of your savings, whether they're outright scammers or not.
"Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve," Satoshi wrote in 2009.
The message: Trust nobody, and become your own bank—which bitcoin makes possible.
Another reason to be your own bank is to avoid financial censorship, so that everyone from third-world dictators to D.C. regulators is prevented from telling you how you should spend your money. The fall of FTX precipitated a crackdown in Washington that was meant to send a "very strong anti-crypto message," in the words of former Rep. Barney Frank (D–Mass.).
"FTX certainly gave [financial regulators] political cover to do this," says Nic Carter, who coined the phrase "Operation Chokepoint 2.0," a reference to the Obama-era policy of bullying banks into denying accounts to payday lenders, pornographers, firearms dealers, strippers, and other fully legal industries that regulators would rather see disappear.
"They opened up the toolkit and they went to their favorite tool, which is politicizing the instruments of finance."
Operation Chokepoint 1.0 was carried out by the Consumer Financial Protection Bureau, which was the brainchild of Elizabeth Warren—and now she's become the Senate's most vocal bitcoin critic.
"Rogue nations, oligarchs, drug lords, and human traffickers are using digital assets to launder billions in stolen funds, evade sanctions, and finance terrorism," Warren said in December when promoting a bill that would extend the state's power to surveil people's finances.
Warren "doesn't understand bitcoin," says McCormack. "She's part of the corrupt political structure you have in the U.S., and she's anti-human. She's anti-freedom."
Caitlin Long, who spent 22 years in corporate finance, says she's been "trying to clean up" the crypto industry because it's full of "affronts to private property rights." She founded Custodia Bank to be the antithesis of the company run by Sam Bankman-Fried, whom Long clashed with onstage at the same bitcoin conference back in 2021.
FTX allegedly squandered a lot of its customers' deposits by leveraging it to make risky crypto investments. Custodia, in contrast, plans to go a much farther than even a regulated retail bank by keeping 108 percent of its customers cash and bitcoin on hand at all times as a "full reserve" bank. Thus, it won't have any need for federal deposit insurance.
"Leverage is never good in crypto. Period," says Long. "All of those crypto lenders, I knew were going to fail. Why? Because there's a finite number of bitcoin. All you're doing is creating fractional reserve bitcoin, and that's all going to come back to haunt you when inevitably there's gonna be a price correction and everybody wants the real thing."
And yet the Federal Reserve rejected Custodia's application to become a member of its network, on the grounds that its "crypto activities are highly likely to be inconsistent with safe and sound banking practices."
"So the crypto industry was proposing a solution to the inherent instability of the banking sector, and yet that solution was denied because the Federal Reserve didn't want to give a crypto-focused bank access to the payment system," says Carter. "It's extremely perverse."
Long is suing the Federal Reserve to force it to reconsider. But part of Satoshi's vision was to create a system in which regulatory approval wasn't necessary. Bitcoin is the first digital currency you can hold yourself, so why do we "need to trust a third-party middleman" at all?
"Read what Satoshi said: Trusted third parties are security holes," says Lopp, whose company Casa helps customers safely self-custody the secret passwords, or keys, necessary to spend their bitcoin. If you lose them, the money is as good as gone. But if you're not holding them yourself, are they really yours?
The bitcoin writer and evangelist Andreas Antonopoulos coined a popular saying in the space: "Not your keys, not your bitcoin."
Lopp acknowledges that because of the work and risk involved "most people don't want to be their own bank." But he insists that it's crucial for anyone worried about financial censorship to "self-custody" their bitcoin.
"If you want to be able to operate in such a way that you don't have to ask permission from a third party, then you do have to take on some responsibility," says Lopp.
Self-custody especially appeals to bitcoiners worried about Operation Chokepoint 2.0 and the plight of the Canadian truckers who occupied Ottawa last year to protest a cross-border COVID vaccine mandate.
Prime Minister Justin Trudeau responded to those demonstrators by using emergency powers to force financial institutions to freeze all funds sent to support the cause.
So a group of activists used bitcoin as it was meant to be used, getting the equivalent of about $630,000 to the truckers. Since the funds didn't go through the traditional banking system, they were hard for Trudeau to stop. An activist filmed himself handing out seed phrases—the code words used to access self-custodied bitcoin. This grassroots solution was imperfect, laborious, and in need of improvement, but in the end…it worked.
A world where most people hold their own bitcoin keys would be a world far more resistant to financial censorship and surveillance, but is it really possible? Lopp says universal self-custody is unlikely and unnecessary for bitcoin to succeed.
"I think we will have a diverse ecosystem and range of custody," says Lopp. "What really worries me is if too much of the Bitcoin goes into too few hands, especially if they're, like, regulated companies that can be easily targeted by nation-states."
And that, for many at this conference, is the entire point of bitcoin: effective resistance to authoritarian government action.
The Bitcoin Religion
Walking around the conference, all of the elements of the bitcoiner's creed were on full display, a creed which Carter says has turned into a religion with its own heroes (Ross Ulbricht), doctrines ("bitcoin, not crypto"), saints (Satoshi Nakamoto), and heretics.
Carter was in Miami this year during the conference but says he didn't attend any of the sessions because of safety concerns. Much of the community turned on him when it was revealed that his investment fund had a stake in cryptocurrencies other than just bitcoin. So he penned a "eulogy for bitcoin maximalism," declaring that "there's an awful sickness pervading" the space.
"I have been full-time bitcoin for 10 years, and I've dedicated my professional and personal efforts to the sector tirelessly that whole time," says Carter. "And yet, because I'm more of a bitcoin moderate, a lot of the hardline bitcoiners don't like me. But I think what we need to realize is our enemy is not inward."
Carter was also troubled by bitcoin maximalists he's seen praising Securities and Exchange Commission chief Gary Gensler for cracking down on crypto exchanges that offer so-called "shitcoins" as he parroted one of their favorite lines.
"Bitcoiners should be trying to win in the free market," says Carter. "They should not be trying to utilize instruments of state power to suppress their perceived adversaries."
Lopp has also been on the receiving end of bitcoin-maximalist rage, after Casa made the business decision to expand its service to help owners of the cryptocurrency ethereum self-custody their holdings.
And in 2019, a teenager called in a SWAT raid on Lopp's home, according to Lopp, because the kid didn't like his opinion about how the bitcoin protocol should function. In response, Lopp shared a video of himself firing an AR-15 on Twitter. Then he took extraordinary steps to make himself practically invisible, impossible to track down in meatspace.
"It's a result of social media," says Lopp. "You can instantly go from being essentially a nobody…to being someone who has attracted the ire of millions of people."
An art gallery at the conference displayed work demonizing Bill Gates, Anthony Fauci, and the World Economic Forum's Klaus Schwab. Most of the religious imagery present in the gallery was shrouded in irony, but as with so much of digital life, it was hard to tell where the joke ended.
"I don't believe that there's any moral status in your portfolio. And there is a faction within bitcoin that believes that the only moral asset to hold is bitcoin itself," says Carter. "The bitcoin religion is not a universalizing one. It actually just concentrates the membership and they become increasingly radical and disconnected from the real world."
Lopp isn't so sure that bitcoin's increasingly strident subculture is entirely negative.
"There are certainly a lot of people who get turned off by some of the vitriol, whereas other people get interested and sucked into it," says Lopp. "But if anything, I think it may be overblown. The vast majority of people who use bitcoin don't know about any of that. They just see bitcoin as a thing that they're using. It's not something that they have adopted from a cultural standpoint."
As the quasi-religious fervor around bitcoin has grown, so too has the potential for a bitcoin voting bloc that could help counter Operation Chokepoint 2.0 and other government attacks on the industry. Ronald Reagan once courted the religious right; in 2023, a parade of once and future presidential contenders made the trek down to Miami to pander to the bitcoiners. Tulsi Gabbard, the former Hawaii congresswoman, showed up, as did longshot presidential candidate Vivek Ramaswamay.
Perhaps nobody better captured the mood than Democratic presidential candidate Robert F. Kennedy, Jr., who in his keynote speech repeated the anti-elite, populist messaging that's central to the bitcoin creed.
"Control of the population starts perhaps as a means but becomes an end: perfect control over society," says Kennedy. "Bitcoin is a bulwark against this expansion and intrusion."
Is It Money?
"Bitcoin has many purposes, but to me the simplest is the most basic, which is that it's an honest ledger," says Long. "Why do people save? They want a store of value that's honest and cannot be manipulated."
In the original white paper, Satoshi described bitcoin as "a peer-to-peer electronic cash system." But 15 years later, it still isn't widely used as a medium of exchange. At first, the problem was technical; the network couldn't process more than about seven to 10 transactions a second. Now a decentralized payment technology called the Lightning Network is endlessly scalable and has made paying for a cup of coffee with bitcoin fairly seamless—but not a lot of people are doing it yet.
Chris Hunter is the founder of Bitcoin Beach Wallet, a Lightning-based wallet that launched in El Salvador shortly before another politician who's capitalized on his association with this community—President Nayib Bukele— announced here at the 2021 conference that his country would become the first in the world to adopt Satoshi's invention as legal currency. Hunter says the implementation was rushed, leading to a bad product launch that left many Salvadorans suspicious of bitcoin.
"There [were], understandably, technical missteps, and that was quite unfortunate because the average person in El Salvador or anywhere around the world doesn't really understand Bitcoin," says Hunter.
Salvadorans—like the residents of most poor countries—prefer to hold and spend the U.S. dollar, which despite the recent spike in inflation still has a much more stable value than bitcoin. Hunter says it's unlikely that a government will be able to mandate bitcoin use from the top down, as El Salvador's government attempted.
"In terms of adopting bitcoin as legal tender, what really matters is: Do we get bitcoin in the hands of people? Do they use it as everyday money?" says Hunter. "The only way that bitcoin is going to move forward and get mass adoption is through bottom-up, grassroots movements."
So will bitcoin ever become a commonly accepted medium of exchange? That's partly a bet that technologies like the Lightning network will continue making it easier and easier to use—and it's also a bet against the dollar, as exploding U.S. debt puts increasing pressure on the Federal Reserve to inflate the money supply.
For 15 years, bitcoin has been eulogized hundreds of times by mainstream journalists, and yet it has always come back, surviving exchange collapses, government antagonism, and bitter wars within the community. As the drama unfolds, roughly every 10 minutes a new block of transactions is broadcast to this decentralized, unstoppable, censorship-resistant, global software network that anyone can use. Which is just as Satoshi envisioned it.
"This is really supposed to be a neutral technology and platform where anyone who follows the rules can use it regardless of if anyone else disagrees with who they are and what they're doing," says Lopp. "There is a saying, which is, 'Bitcoin is for enemies.'"
Photo Credits: Silas Stein/dpa/picture-alliance/Newscom; Camilo Freedman / SOPA Images/Si/Newscom; Camilo Freedman/ZUMAPRESS/Newscom; Michael Debets/ZUMA Press/Newscom; Chedly Ben Ibrahim/ZUMAPRESS/Newscom; Camilo Freedman/dpa/picture-alliance/Newscom; John Lamparski/ZUMAPRESS/Newscom; Ryan Walter Wagner/ZUMAPRESS/Newscom; Tom Williams/CQ Roll Call/Newscom; Ken Cedeno/UPI/Newscom; Rod Lamkey—CNP / MEGA / Newscom/RSSIL/Newscom; Tom Williams/CQ Roll Call/Newscom; rollcallpix152307; Olivier Douliery/ABACAUSA.COM/Newscom; OwenDB/Black Star/Black Star/Newscom; Graeme Sloan/Sipa USA/Newscom; VENEZUELA'S PRESIDENCY / Xinhua News Agency/Newscom; Graeme Sloan/Sipa USA/Newscom; Kevin Dietsch/UPI/Newscom; Michael Brochstein/ZUMAPRESS/Newscom; Chris Kleponis—Pool via CNP/Newscom; MIGUEL LEMUS/EFE/Newscom; Danita Delimont Photography/Newscom; Matias J. Ocner/TNS/Newscom; MATIAS J. OCNER/TNS/Newscom; Omar Marques / SOPA Images/Sipa/Newscom; MEGA / Newscom/TANAS/Newscom; Andre M. Chang/ZUMAPRESS/Newscom; Tom Williams/CQ Roll Call/Newscom; John Angelillo/UPI/Newscom; Louis Lanzano/UPI/Newscom; MICHAEL M. SANTIAGO / GDA Photo Service/Newscom; AP Photo/Ira Schwarz
Music: "El Monte" by Luke Melville via Artlist; "Still Need Syndrome" by Yarin Primak via Artlist; "Out of Flux" by PUNKD via Artlist; "Notize" by Density Wave via Artlist; " Elevation" by Stanley Gurvich via Artlist; Vuelta al Sol by Tomas Novoa via Artlist; Civilization by Icarus via Artlist; "All STar" by ANBR via Artlist; "Ultra Light" by The Cliff via Artlist
The post Bitcoin's Greatest Test appeared first on Reason.com.
]]>On Tuesday, the Securities and Exchange Commission (SEC), headed by Gary Gensler, sued crypto exchange Coinbase for not registering as a securities broker. The day prior, the SEC filed charges against Binance for operating an unregistered securities exchange, also accusing CEO Changpeng Zhao of civil fraud.
The core issue that's long been in dispute is whether cryptocurrencies are different from securities like stocks and bonds. If they are securities, as the SEC claims, firms like Coinbase and Binance have been illegally operating unregistered exchanges. In Coinbase's case, the SEC alleges that it has sold 13 crypto-assets (of the roughly 250 on offer) that ought to be registered with regulators, as they deem them to be securities. Coinbase's staking products are also deemed securities by the SEC, which the company disputes.
Many people within the crypto industry have long maintained that such digital assets should not be considered securities and that the regulatory framework surrounding crypto has been kept needlessly vague.
"I don't feel like there's a clear rulebook," Coinbase CEO Brian Armstrong told The Wall Street Journal this week. "The only sort of high-level statements they've made is that everything other than bitcoin is a security which, that's just not what it says in the law. By the way, that would also kind of mean the end of the crypto industry in the U.S."
The Coinbase news comes as no surprise. Back in March, the exchange was sent a Wells notice by the SEC, as Reason's Brian Doherty reported at the time, which informed the company that the agency had made a "preliminary determination" that it might be seeking enforcement action against Coinbase for purported securities law violations. "We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so," Paul Grewal, Coinbase's chief legal officer, wrote at the time.
"In its filing on Tuesday, the S.E.C. detailed the ways in which Coinbase's leaders had demonstrated that they knew how the marketing and sale of digital assets should be governed under U.S. laws, even while failing to follow them," reported The New York Times.
But Coinbase disputes this characterization and contends that the legal framework just isn't clear, nor has it been established that cryptocurrencies are securities or ought to be treated as such. Armstrong argues that the crypto-assets Coinbase works with do not pass the securities-defining Howey test—(1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of profits; (4) earned through the efforts of others—which is how securities are defined in the U.S., per a 1946 Supreme Court ruling. "All four of those things have to be true," Armstrong told The Wall Street Journal this week. "So there's various ways that you could imagine a crypto asset would not be a security, right; if it's sufficiently decentralized there's no common enterprise, right? If there's some specific utility surrounding it, it's not just for the purpose of the value going up, right?"
"Meanwhile, our industry continues to see new, conflicting statements from regulators instead of actual rules," wrote Grewal in March (emphasis in original):
"The Chair of the CFTC recently testified to Congress that Ethereum is a commodity, which the public has long understood to be the case. Then-CFTC Commissioner Quintenz has said that 'the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets.' Current SEC Chair recently opined that perhaps BTC is the only digital asset commodity, which is entirely at odds with the position of the CFTC. If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed. Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules."
The SEC's case against Binance has some crucial differences from its case against Coinbase. Binance issues its own tokens, while Coinbase doesn't. Coinbase is a publicly traded company, thus subject to certain disclosure rules, but Binance isn't. And Coinbase's chief executive has not been accused of fraud by the agency the way Zhao has.
Armstrong, Grewal, and others emphasize that U.S. regulators' vagueness—or outright antagonism—will just drive the crypto industry out of the country.
Many industry insiders interviewed by Reason at the Bitcoin 2023 conference several weeks ago said much the same. With Bittrex shutting down U.S. operations, Gemini looking to operate in the United Arab Emirates, and Coinbase opening a derivatives exchange in Bermuda last month, tons of exchanges seem to see the regulatory writing on the wall and are eyeing the exit.
The post Gary Gensler's SEC Cracks Down on Coinbase and Binance appeared first on Reason.com.
]]>Another Silicon Valley bank fails. The California Department of Financial Protection and Innovation (DFPI) took possession of San Francisco–based First Republic Bank, accusing the institution of conducting business "in an unsafe or unsound manner." It appointed as receiver the Federal Deposit Insurance Corporation (FDIC), which then sold the bank to JPMorgan Chase Bank.
JPMorgan Chase will "assume all deposits, including all uninsured deposits, and substantially all assets of First Republic Bank," per a press release from the California DFPI. As part of the sale deal, the FDIC "will share losses with JPMorgan on First Republic's loans," reports The Wall Street Journal. "The agency estimated that its insurance fund would take a hit of $13 billion in the deal. JPMorgan also said it would receive $50 billion in financing from the FDIC."
As of mid-April, First Republic Bank held about $103.9 billion in deposits and $229.1 billion in total assets. Its failure marks the second-largest failed bank in U.S. history, following Washington Mutual, which collapsed in 2008.
The good news is that this isn't necessarily another 2008-style situation.
Yes, First Republic got caught in the Silicon Valley Bank (SVB) failure spiral. (In March, First Republic lost $100 billion in deposits after SVB collapsed.) And yes, the collapse of SVB and New York-based Signature Bank (which also failed in March) reverberated widely.
But Steven Kelly, a senior researcher with the Yale Program on Financial Stability, argues that "this is the last stages of that initial panic," according to the Journal. And "First Republic's failure seems unlikely to spur another crisis of confidence in the Main Street lenders that serve a large chunk of America's businesses and consumers," the newspaper suggests. "Regional lenders uniformly lost deposits during the first quarter, but the declines were modest compared with First Republic's $100 billion outflow."
While First Republic's immediate problems may stem from the failure of SVB and Signature, the roots of its problems go deeper than that. Like Silicon Valley Bank, First Republic's managers made poor decisions that failed to account for changing interest rates.
"Ultralow interest rates and a pandemic savings boom supercharged the bank's growth," comments the Journal:
When the Fed began raising interest rates last year to cool inflation, customers began demanding higher yields to keep their money at First Republic. Rising rates also dented the value of loans the bank made when rates were near zero.
First Republic's badly damaged balance sheet left it with few good options.
In a dismal quarterly-earnings report last week, the bank disclosed the extent of the deposit run and said it had filled the hole on its balance sheet with expensive loans from the Federal Reserve and Federal Home Loan Bank. An untenable future, in which it earned less on its loans than it paid on liabilities, appeared all but certain.
The earnings report sent the bank's stock down nearly 50% in one day.
Today, "First Republic Bank's 84 offices in eight states will reopen as branches of JPMorgan Chase Bank," according to the FDIC. "All depositors of First Republic Bank will become depositors of JPMorgan Chase Bank, National Association, and will have full access to all of their deposits….Customers of First Republic Bank should continue to use their existing branch until they receive notice from JPMorgan Chase Bank, National Association, that it has completed systems changes to allow other JPMorgan Chase Bank, National Association, branches to process their accounts as well."
Twitter complies with government censorship requests. Twitter CEO Elon Musk claims that he is bringing more free speech to the platform. But "Twitter's self-reported data shows that, under Musk, the company has complied with hundreds more government orders for censorship or surveillance—especially in countries such as Turkey and India," reports the tech news outlet Rest of World.
The data, drawn from Twitter's reports to the Lumen database, shows that between October 27, 2022 and April 26, 2023, Twitter received a total of 971 requests from governments and courts. These requests included orders to remove controversial posts, as well as demands that Twitter produce private data to identify anonymous accounts. Twitter reported that it fully complied in 808 of those requests, and partially complied in 154 other cases. (For nine requests, it did not report any specific response.)
Most alarmingly, Twitter's self-reports do not show a single request in which the company refused to comply, as it had done several times before the Musk takeover. Twitter rejected three such requests in the six months before Musk's takeover, and five in the six months prior to that.
More broadly, the figures show a steep increase in the portion of requests that Twitter complies with in full. In the year before Musk's acquisition, the figure had hovered around 50%, in line with the compliance rate reported in the company's final transparency report. After Musk's takeover, the number jumps to 83% (808 requests out of a total of 971).
These numbers are drawn from the Lumen database, which is maintained by Harvard's Berkman Klein Center for Internet & Society. The public database keeps track of "legal complaints and requests for removal of online materials."
Judge allows antitrust suit against Google to go forward. A federal court nixed Google's motion to dismiss a lawsuit that claims it has an illegal monopoly in online ad sales. (Find more on that lawsuit, filed by the U.S. Department of Justice and eight states, here.)
Google contended that the case should be dismissed, in part because the government's complaint defined the relevant market too narrowly. "Google's lawyers contend the lawsuit does not account for advertisers' ability, for example, to advertise on huge social media platforms like Facebook and TikTok that run their own advertising platforms independent of Google," reports the Associated Press.
Judge Leonie Brinkema of the U.S. District Court for the Eastern District of Virginia doesn't agree. She said Friday that the suit against Google may move forward—the second ruling in the government's favor from Brinkema in this case. Last month, she ruled that the case could be heard in Virginia and rejected Google's request to consolidate the case with similar lawsuits being heard in New York.
• How pro-lifers in Nebraska and South Carolina pushed too far and doomed two pieces of anti-abortion legislation.
• David French explains "why Gov. Ron DeSantis of Florida should lose in his quest to punish Disney for the high crime of publicly disagreeing" with him.
• Mike Masnick writes about the Senate's moral-panic-fueled "unconstitutional age verification bill."
• Kansas lawmakers voted last week to decriminalize fentanyl test strips.
• Oregon's HB 3501, introduced last week in the state House of Representatives, would decriminalize homeless encampments by allowing homeless people to use public spaces "without discrimination and time limitations." The bill would also allow homeless people to sue if they were told to leave a public space.
• "A bill to decriminalize marijuana in Louisiana was short-lived, swiftly dying in committee Tuesday before ever reaching the House floor for debate this legislative session," reports the Associated Press.
• "Ideas like 'racial justice' and 'creating a more equitable world'" are not "inherently leftist concepts," writes Matt Zwolinski. "There has always been a significant (albeit inconsistently applied) egalitarian streak to libertarian thought, especially in its 19th century origins."
• A home baker shouldn't have to make a choice between her dog and her work.
The post Regulators Seize First Republic Bank and Sell It to JPMorgan Chase appeared first on Reason.com.
]]>Want to support small business growth and expand investor opportunities? Then you should want to reform the "accredited investor definition," a federal rule that largely limits investment in certain private securities offerings to those who are comparatively wealthy.
Private securities offerings are a substantial portion of the capital raised by businesses. From July 1, 2021, to June 30, 2022, twice as much money was raised in this way than by all public offerings. But the Securities and Exchange Commission (SEC) prevents individuals from investing in these offerings unless they qualify as accredited investors by having a net worth of at least $1,000,000 or an annual income of at least $200,000. The SEC estimates that about 13 percent of U.S. households qualify.
There seems to be bipartisan agreement that this rule is broken. This was evident during a February hearing dedicated specifically to the accredited investor definition, and it came up again during last week's House Financial Services Committee hearing on "encouraging capital formation and investment opportunity for all Americans."
It's long past time to translate that agreement into action. It's bad enough to paternalistically give the SEC the authority to decide how individuals invest their own money. But even when judged against the SEC's own goal of limiting private offerings to the financially sophisticated, the accredited investor definition is a failure.
Being wealthy is no proxy for financial sophistication. The current cutoff gives an investing green light to lottery winners and to elderly folks with substantial retirement savings; it excludes people with smaller nest eggs but lots of investment knowledge. A bright-line wealth test fares no better at limiting investment to those who can "afford" to take a loss. Such generic metrics cannot capture individualized loss tolerances that vary with many factors, including age, diversification needs, and investing goals.
Eli Velasquez, founder of the Investors of Color Network, testified at the February hearing that despite having "evaluated thousands of deals, vetted hundreds as viable investment opportunities, and partnered with dozens of angel and venture investors"—obvious hallmarks of financial sophistication by any reasonable standard—he was unable to make such investments himself because he didn't meet the definition's wealth thresholds. Similarly, David Olivencia, CEO of Angeles Investors, detailed how he couldn't invest in startups even though he had studied that asset class when he earned his MBA, because he had no family wealth to rely on. Both Brandon Brooks, founding partner of Overlooked Ventures, and Rodney Sampson, executive chairman and CEO of Opportunity Hub, gave similar testimony at last week's hearing.
This mismatch between wealth tests and investor sophistication makes it harder for those who are not already wealthy to make gains. Most Americans depend on the public markets for investment, but there are fewer public companies to choose from today. Companies that do go public these days tend to be more mature and likely past their high growth phase, leading to lower potential returns. But even if there are no better returns, most investors are missing out on the different opportunities available in the private markets, including startup investments and diversification options.
These impacts are felt more acutely by black and Hispanic Americans and those who don't live in relatively wealthy locales. Due to existing wealth divides, those who qualify as accredited investors are disproportionately white and are concentrated on the country's coasts.
And these impacts are not limited to investors. The accredited investor definition limits entrepreneurs' ability to turn to those they know best for business funding. The SEC itself has recognized that minority-owned businesses and businesses in lower-cost-of-living areas may benefit from increased access to accredited investors.
The accredited investor definition also places major hurdles on the path of both entrepreneurs and investors to have an ownership stake in a private business, an important way to accumulate wealth.
Those skeptical of increasing access assert that private securities offerings are too opaque for those who have less to lose. But while private offerings don't make the same mandatory disclosures as public offerings, disclosure is commonplace in practice. Such disclosures—which vary based on the complexity of the transaction and the sophistication of the investors—are subject to anti-fraud rules, just like public securities offerings.
Private market investment is risky, but that is no good reason for this barrier to investment. Risk is a part of both the public and private markets, and investors are compensated for risk by a chance at higher returns. Prohibiting investment eliminates exposure to the potential downside, but it also excludes realization of the potential upside.
There are a number of ideas for reforming this rule, including those scheduled for consideration at committee mark-up today. Congress should, at the very least, find a way to expand access for investors who are financially experienced or can obtain sophisticated advice from regulated financial advisers. You shouldn't have to be wealthy to deserve a chance to invest.
The post This SEC Rule Makes It Harder To Invest—Unless You're Already Rich appeared first on Reason.com.
]]>At the end of March, a long-lasting and prominent cryptocurrency exchange, Bittrex, announced it would no longer do business with U.S. citizens because "it's just not economically viable for us to continue to operate in the current U.S. regulatory and economic environment."
Then on Monday, the Securities and Exchange Commission (SEC) hit Bittrex with a lawsuit in U.S. District Court in the Western District of Washington.
Among the charges: "Bittrex has been operating as an unregistered broker (including by soliciting potential investors, handling customer funds and assets, and charging a fee for these services) and an unregistered clearing agency (including by holding its customers' assets in Bittrex-controlled wallets and settling its customers' transactions by debiting and crediting the relevant customer accounts).
The company has "operated the Bittrex Platform as an unregistered exchange by providing a market place that, among other things, brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders," the SEC asserts. In doing so, Bittrex has met the demonstrated market needs of thousands of Americans, some of whom, given the rise in some crypto asset values in the past half-decade, have undoubtedly changed their lives enormously for the better.
Bittrex is accused of clearly knowing they might run afoul of the SEC, with the suit citing "Bittrex's coordinated campaign, going back to 2017, to direct issuers of crypto assets to 'scrub' their public statements of any language that could raise questions from the SEC as to whether these crypto assets were offered and sold as securities, while allowing those securities to be traded on its platform….Bittrex knew what statements to ask issuers to 'scrub' because it understood the test to determine whether a crypto asset was being offered and sold as a security."
The SEC wants Bittrex to stop violating the various securities laws it insists it has been breaking, and to "disgorge on a joint and several basis all ill-gotten gains," with interest.
SEC Chair Gary Gensler has long mocked people in the virtual currency business who complain of lack of regulatory clarity and how the agency practices what many in the field see as arbitrary "regulation through enforcement," occasionally hitting some market player for some version of dealing in unregistered securities. These have included XRP/Ripple (the subject of a long-ongoing lawsuit), LBRY, Beaxy, Kraken, and Gemini.
The twists and turns and reasonings of how and when one is dealing with a "security" can seem quite opaque. To attempt a simplistic understanding, one needs to go back to the 1946 Supreme Court case SEC v. W.J. Howey.
As explained in an earlier Reason article on the SEC's threats against leading U.S. market crypto exchange Coinbase:
Whether or not a financial instrument, agreement, or coin in the virtual currency space constitutes a "security" under the reigning "Howey test" … continues to be a matter that courts seem to have to sort out on a case-by-case basis. While complex, as most legal definitional principles are, a central element of Howey is that the buyer and seller of the product are involved in a common enterprise involving a monetary investment in which reasonable expectation of profit is derived from the effort of others. Most argue that most virtual currencies are more like commodities whose values fluctuate based on mass market demand, not based on any effort of the original issuer. As Coin Center Director of Research Peter Van Valkenburgh explained in an interesting article assessing whether ether (the second-highest-market-cap virtual currency) should be legally categorized as a security, there is a meaningful distinction between a virtual object that may at some time have been part of some arrangement or offer that might be reasonably seen as a security and a virtual object that is in and of itself always a security.
A December 2022 article published at the Social Science Research Network, "The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are not Securities," makes a similar argument. The authors, lawyers with a firm called DLx specializing in the blockchain space, insist that while "capital raising from investors, whether involving sales of crypto assets or anything else of value, is incontrovertibly subject to the protections provided by U.S. securities laws….Expanding the reach of federal securities law to characterize fungible crypto assets as securities is both unnecessary and misguided" once the virtual currencies are out in the market being bought, sold, and held by entities with no relation to any original issuers to whom they could be said to be in a common enterprise expecting profit based on the effort of others.
Gensler thinks it's simple: with bitcoin an exception (roughly, since it never involved any single entity raising money from the public), and ether maybe as well, pretty much every other virtual currency is to him a security; anyone dealing in them without registering with his agency is a criminal. And he will, maybe, probably, eventually, get around to tossing you against the wall. This week it's Bittrex's turn. The suit against them lists several virtual currencies Bittrex facilitated trading in that the agency asserts are securities, including Dash, Algo, and NCC.
Just yesterday, before the House Financial Services Committee, as the Wall Street Journal reported, Gensler again repeated that "I've never seen a field that is so noncompliant with laws written by Congress and confirmed over and over again by the courts….It's not a matter of lack of clarity," insisting crypto market players should understand "that they are providing exchange services, broker-dealer services, clearing services of crypto security tokens."
Kristin Smith of the Blockchain Association told the committee in a statement that "Gensler's testimony perfectly reflects the SEC's approach to the crypto economy: confusing, unclear, opaque, and ultimately blind to the harm its regulation by enforcement strategy is doing to lawful companies in this country."
Gensler's SEC also this week announced it believed most decentralized finance (DeFi) platforms using virtual currencies and contracts should also be considered "exchanges" regulatable by them. SEC Commissioner Hester Peirce, far softer on crypto than Gensler, said, as Coindesk reported, that the SEC's new scheme regarding DeFi "'articulates confusing and unworkable standards.' Noting last year's destruction of so much of the centralized crypto industry, she added that 'it seems perverse to me that we would be encouraging centralization.'"
Gensler has been known to suggest it's a mystery to him why exchanges don't just step right up and register with the SEC, implying that the legal fact they must is obvious and that doing so is straightforward and easy.
It is, for one thing, remarkably complicated and expensive, though surely Gensler would think that isn't his problem. But as a detailed essay published by crypto investment firm Paradigm explains, the crypto business has qualities that pre-21st century dealers in items that the SEC might consider securities do not:
[Gensler's] suggestion that crypto companies can register by "filling out a form online" fails for a … straightforward reason: until the SEC adapts the registration framework to the unique aspects of digital assets, it is impossible to "come in and register." The current registration forms rely on a set of disclosures that are inadequate for crypto's unique aspects and leave investors vulnerable. Registration also entails a host of additional regulations for the token, the reporting company, and other participants in the ecosystem that makes the functioning of most crypto protocols impossible.
Indeed, the reason there are virtually no registered token offerings in the US is because the SEC has failed to provide any actionable guidance, issue a single rule or constructively engage with anyone in the crypto industry to provide a workable regulatory framework for security tokens.
In another essay from Paradigm explaining exactly how complicated both in application and later functioning it is to simply register with the SEC, for token issuers or exchanges, it is pointed out "tokens that register as securities would not be tradeable on existing crypto exchanges, none of which are registered as a national securities exchange. But there are also no registered national securities exchanges that can trade tokens. … But more fundamentally, the current regulations are incompatible with disintermediated trading." Paradigm gives historical case studies about how tokens that have tried to play ball with the SEC all signed their own death warrants by doing so.
Gensler likely thinks the incompatibility of crypto markets—or the very existence of virtual currency—and existing securities law is appropriate, that in fact none of them should exist.
Some in the crypto space see a set of government actions lately, including the SEC's recent muscle-flexing against exchanges, the closing amid various varieties of government pressure of two banks that were big deals in the crypto space, Silvergate and Signature, denying crypto bank Custodia out of Wyoming membership in the Federal Reserve system, and many other pressures on banks that deal with crypto, as constituting a clear and present conspiracy to just squeeze the entire industry out of existence. Some are calling the situation "Chokepoint 2.0" after last decade's "Operation Chokepoint" aimed at harming various state-disfavored businesses from porn to guns.
Coinbase's CEO Brian Armstrong said this week that bugging out from U.S. jurisdiction is a possibility for his company as well. Many in the crypto-watching space seem resigned that, at least under this administration, the U.S. government actively wants almost no virtual currency business to occur under its jurisdiction or involving its citizens.
The post SEC Sues Crypto Exchange Bittrex Shortly After It Announces It's Leaving U.S. Markets appeared first on Reason.com.
]]>Around the country, people are gearing up to celebrate all things cannabis on 4/20, but banks and other financial institutions are unlikely to have the occasion marked on their calendars. Despite states continuing to legalize cannabis, federal law has remained unchanged, and that means federally regulated financial institutions must keep their distance.
To be clear, financial institutions are legally allowed to do business with the cannabis industry. The catch, however, is that they must deal with a dizzying array of regulatory requirements that often deter them from working with cannabis businesses.
This "regulatory distancing" is not unique to cannabis: Cumbersome regulatory requirements have also been a driving force behind financial institutions leaving the southern border and the Caribbean. As Rep. Patrick McHenry (R–N.C.) noted at a congressional hearing on banking with the Caribbean last year, the problem is the penalty for failing to comply with anti-money laundering regulations "can be so devastating for financial institutions, especially small and medium-sized banks, that they turn to defensive approaches to ensure compliance." One of these defensive approaches is to avoid "risky" markets entirely.
McHenry is right, but it's not just the penalties that are devastating. Complying with the Bank Secrecy Act—the law responsible for much of this financial surveillance regime—cost financial institutions in the United States an estimated $45.9 billion in 2022.
As troubling as these costs may be in general, serving the cannabis industry is another matter entirely. In addition to all of the usual compliance costs associated with the Bank Secrecy Act, the Financial Crimes Enforcement Network (FinCEN) has instructed financial institutions to not just verify that cannabis businesses are licensed by the state, but also review their applications and related documentation to make sure the state did not make a mistake. Going further, the financial institution then needs to request all the information held by the state to cross-check the business again. Once everything is in order and the business gains access to an account, FinCEN then says financial institutions need to maintain ongoing monitoring of each businesses' activity, what they sell, who their customers are, and possible sources for adverse information.
In other words, bank employees are required to act as detectives on behalf of the federal government.
Yet the most egregious part of this story might not be that legal businesses have been kept out of the financial system, that tens of billions of dollars are spent in compliance, or that the financial industry has been deputized as law enforcement investigators.
The most egregious part is that all of that has occurred, and yet, there's no sign criminals are actually being stopped in the process.
FinCEN has been asked for years to offer aggregate statistics regarding the effectiveness of this reporting regime. Yet time and time again, requests have come up empty. Even a mandate from Congress hasn't been enough to make these numbers available.
However, past studies have offered some insights. A 2018 Bank Policy Institute study found only 3.65 percent of suspicious activity reports (SARs) and 0.44 percent of currency transaction reports (CTRs) required some form of follow-up by law enforcement.
In short, financial institutions have been locked out of the cannabis industry because of a surveillance regime that appears to have done little to stop real criminals. The law has only seemed to succeed in targeting CEOs of cannabis companies, storefront employees, and consultants. Even politicians have been caught in the crosshairs after campaign contributions from the cannabis industry marked Florida's agriculture commissioner as too risky.
Something needs to change.
From federal legalization to regulatory carve-outs, there is much to choose from in terms of taking steps forward toward a better financial system. Aaron Klein, a senior fellow at the Brookings Institution, has explained that the Treasury could exempt financial institutions from reporting state-licensed marijuana businesses. Given that the Treasury set the rules of the road after the initial passage of the Bank Secrecy Act, it would be all too fitting to have it fix the potholes.
However, Congress has a role to play as well. To fix the problem for the long term (and for everyone), Congress should repeal the Bank Secrecy Act—or at least, repeal the sections that have required financial institutions to constantly report customers to the federal government.
Taken together, these strategies would ensure that bankers are able to take part in the festivities next year and for many years to come. Between the cannabis industry gaining access to financial services, the banking industry saving billions in compliance costs, and Americans having their financial privacy restored, it's safe to say everyone will have something to celebrate.
The post Unlock the Cannabis Industry for Financial Institutions appeared first on Reason.com.
]]>In this week's The Reason Roundtable, editors Matt Welch, Katherine Mangu-Ward, Nick Gillespie, and Peter Suderman anticipate the historic arraignment on criminal charges of former President Donald Trump this week in New York City, before turning back to the unfolding discussion surrounding potential risks posed by artificial intelligence.
1:07: Former President Donald Trump awaits arraignment on criminal charges.
19:16: Do A.I. systems pose serious risks to humanity and society?
38:48: Weekly Listener Question
43:45: Terrible things about the proposed RESTRICT Act
49:59: This week's cultural recommendations
Mentioned in this podcast:
"The Shaky New York Case Against Trump Reeks of Desperation To Punish a Reviled Political Opponent," by Jacob Sullum
"Trump Indictment Could Be the Jolt His Flailing 2024 Campaign Needs," by Elizabeth Nolan Brown
"Is the Manhattan D.A. Upholding or Flouting the Rule of Law by Prosecuting Trump?" by Jacob Sullum
"Transforming Stormy Daniels' Hush Payment Into a Felony Would Reinforce Trump's 'Witch Hunt' Complaint," by Jacob Sullum
"Elon Musk, Andrew Yang, and Steve Wozniak Propose an A.I. 'Pause.' It's a Bad Idea and Won't Work Anyway." by Ronald Bailey
"Debate: Artificial Intelligence Should Be Regulated," by Ronald Bailey and Robin Hanson
"What Are the Bots Doing to Art?" by Crispin Sartwell
"Introducing AI Progress," by Matthew Mittelsteadt and Brent Skorup
"Mark P. Mills: Get Ready for the Roaring 2020s!" by Nick Gillespie
"Rand Paul Is Right: Banning TikTok Would Be Idiotic," by Robby Soave and John Osterhoudt
"Could the RESTRICT Act Criminalize the Use of VPNs?" by Elizabeth Nolan Brown
"Nobel Prize–Winning Economist: Democrats Are Committed 'To Spending Other People's Money,'" by Nick Gillespie and Justin Zuckerman
Send your questions to roundtable@reason.com. Be sure to include your social media handle and the correct pronunciation of your name.
Today's sponsor:
Audio production by Ian Keyser
Assistant production by Hunt Beaty
Music: "Angeline," by The Brothers Steve
The post Apocalypse Tomorrow: Trump's Looming Indictment appeared first on Reason.com.
]]>The U.S. Court of Appeals for the 2nd Circuit on Thursday ruled that the way in which Congress funds the Consumer Financial Protection Bureau is, in fact, constitutional. The ruling contradicts an opinion published in October by the U.S. Court of Appeals for the 5th Circuit, which held that the agency's funding "violates the Constitution's structural separation of powers." The Supreme Court, which had already agreed to review the 5th Circuit case, will likely resolve the circuit split next year.
The argument against the CFPB's constitutionality is simple. The Constitution's appropriations clause requires that monies drawn from the treasury be authorized by "Appropriations made by Law"—a power vested in Congress. Per statute, however, the CFPB funds itself unilaterally, requisitioning funds from the Federal Reserve (limited to 12 percent of the Fed's operating expenses). The CFPB bypassing the congressional appropriations process is an unconstitutional delegation by Congress of its "power of the purse."
"I hope the justices provide clarity on a number of issues there, because the CFPB has been constitutionally problematic from its inception," Ilya Shapiro, director of constitutional studies at the Manhattan Institute, tells Reason.
Judge Cory T. Wilson, writing for the 5th Circuit panel in October, argued that Congress "double-insulated" the CFPB from the traditional appropriations process: Not only does the agency self-fund, but its funding originates in the Federal Reserve, another entity that lives "outside the appropriations process." Wilson further noted that the Consumer Financial Protection Act "tacitly admits such a distinction in its decree that '[f]unds obtained by or transferred to the Bureau Fund shall not be construed to be . . . appropriated monies.'"
The CFPB has long weathered accusations that its structure violates constitutional separations of powers. More than a decade ago, C. Boyden Gray, who is a trustee for the Reason Foundation, which publishes this magazine, and Adam J. White, a professor at George Mason University's Antonin Scalia Law School, warned that Congress "delegate[d] effectively unbounded power to the CFPB, and couple[d] that power with provisions insulating CFPB against meaningful checks." Indeed, until the Supreme Court's ruling in Seila Law v. CFPB (2020), the CFPB director was largely statutorily insulated from removal by the president. "The bureau is a self-perpetuating body so extra-constitutional that it's really a fifth branch of government beyond even 'independent' agencies like the SEC and FCC that legal wags have dubbed the 'fourth branch,'" Shapiro says.
"Congress relinquished its jurisdiction to review agency funding on the back end," Wilson wrote. "Wherever the line between a constitutionally and unconstitutionally funded agency may be, this unprecedented arrangement crosses it."
Democrats constructed the CFPB as a quintessentially progressive regulatory institution: A partnership of government and big business, helmed by putatively disinterested and de facto unaccountable bureaucrats. Insulation from democratic accountability is, however, incompatible with the Constitution's plain text. "An elective despotism was not the government we fought for," wrote James Madison in Federalist No. 48, "but one which should not only be founded on free principles, but in which the powers of government should be so divided and balanced…that no one could transcend their legal limits, without being effectually checked and restrained by the others."
The post Federal Courts Clash Over Financial Watchdog's Constitutionality appeared first on Reason.com.
]]>Coinbase, which is by trade volume the largest cryptocurrency exchange in the United States, announced yesterday it had been hit by the Securities and Exchange Commission (SEC) with a threat of looming legal action.
As a public Form 8-K filed by Coinbase with the SEC explained, "On March 22, 2023, Coinbase…received a 'Wells Notice' from the Staff…of the Securities and Exchange Commission….stating that the Staff has advised the Company that it made a 'preliminary determination' to recommend that the SEC file an enforcement action against the Company alleging violations of the federal securities laws."
In that 8-K filing, which is required to inform the public about important events that might affect shareholders, Coinbase explained that, based on what SEC staff have communicated to them, "these potential enforcement actions would relate to aspects of the Company's spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet. The potential civil action may seek injunctive relief, disgorgement, and civil penalties." (The news is indeed affecting stockholders, with Coinbase's stock down roughly 13 percent today as of this article's publication.)
Coinbase Chief Legal Officer Paul Grewal went public with a lot of the frustration that has hit market participants in crypto (and even federal bankruptcy judges) as they try to navigate the SEC's approach to virtual currencies. Grewal explained how the SEC under chair Gary Gensler has been reshaping regulatory law and policy via enforcement (and the occasional vague public threat).
Grewal echoed the complaints many have had while trying to understand exactly why and when the SEC believes that a cryptocurrency is a security and able to be regulated as such, and thus that companies facilitating trading in them face certain registration requirements. "We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so," Grewal wrote.
"We continue to think rulemaking and legislation are better tools for defining the law for our industry than enforcement actions," Grewal went on to say. He again echoed a long-term frustration with the SEC's apparent desire to reveal what it believes the law requires not through rigorous understandable written notice—something more like actual law or rule making—but by just bashing certain crypto market players against the wall, seemingly at random.
Grewal defended Coinbase's efforts in trying to understand the law and follow it. In the course of the investigation that led to this week's notice, "the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register."
Grewal said that after trying to get the SEC to give feedback on various registration models that Coinbase proposed, the agency generally stonewalled, was unresponsive, and eventually in January just "told us they would be shifting back to an enforcement investigation." Coinbase insisted "our staking and exchange services are largely unchanged since 2021, when the SEC reviewed our S-1 and allowed us to become a public company," he wrote. "Our core business model remains the same."
Grewal noted that different federal agencies have given conflicting reports on the way to legally categorize certain virtual currencies: "The Chair of the CFTC [Commodity Futures Trading Commission] recently testified to Congress that Ethereum is a commodity, which the public has long understood to be the case. Then-CFTC Commissioner Quintenz has said that 'the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets.' Current SEC Chair recently opined that perhaps BTC [bitcoin] is the only digital asset commodity, which is entirely at odds with the position of the CFTC."
"If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed," Grewal concluded. "Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules."
Whether or not a financial instrument, agreement, or coin in the virtual currency space constitutes a "security" under the reigning "Howey test," based on the 1946 Supreme Court case SEC v. W.J. Howey Co, continues to be a matter that courts seem to have to sort out on a case-by-case basis. While complex, as most legal definitional principles are, a central element of Howey is that the buyer and seller of the product are involved in a common enterprise involving a monetary investment in which reasonable expectation of profit is derived from the effort of others. Most argue that most virtual currencies are more like commodities whose values fluctuate based on mass market demand, not based on any effort of the original issuer. As Coin Center Director of Research Peter Van Valkenburgh explained in an interesting article assessing whether ether (the second-highest-market-cap virtual currency) should be legally categorized as a security, there is a meaningful distinction between a virtual object that may at some time have been part of some arrangement or offer that might be reasonably seen as a security and a virtual object that is in and of itself always a security.
Grewal insisted that nothing on his exchange should qualify as a security, including the staking services that he said the SEC has been familiar with since 2019. "Until this investigation, we had heard no concerns at all from the SEC about" them, he explained.
Grewal believes, as do many in the crypto space who have been watching with dismay as the SEC's wrecking ball swings unpredictably, that SEC actions like this "will only drive innovation, jobs, and the entire industry overseas."
The post SEC to Coinbase: Nice Crypto Exchange You Got There, It'd Be a Shame if Something Happened to It appeared first on Reason.com.
]]>In a dispute with Congress over the proper role of environmental, social, and governance (ESG) in retirement investing, President Joe Biden chose to promote progressive environmentalism. On Monday, Biden vetoed a congressional resolution to nullify a recent Labor Department rule issued that explicitly allows retirement managers to weigh ESG factors in investment decisions.
Congress attempted to employ the Congressional Review Act, a statute that allows legislators to review certain administrative rulemakings with a simple majority in each house. Republicans voted in favor, and all but two Senate and one House Democrats against. Only defections by Sens. Joe Manchin (D–W.Va.) and Jon Tester (D–Mont.) carried the resolution through the Senate.
At first glance, this could seem like a case of anti-ESG Republicans attempting to block deregulation that allows investors more freedom—that's Biden's narrative. But this framing is incomplete. In truth, the president is shrouding the fact that he is acting at the edges of his statutory mandate, consistent with his administration's long-standing commitment to the bureaucratic furtherance of progressive environmental policies.
The Biden administration and Democrats generally argue that ESG-based investing harmonizes market capitalism with social-justice policy preferences; profitable clean energy stocks are a classic example.
Republicans say ESG investing can violate the fiduciary legal obligations of retirement funds, which should maximize returns for their clients, not engage in activism by divesting from lucrative but controversial industries or funding eco-friendly but economically suboptimal companies.
The result is a partisan fight over how federal regulations and case law have defined fiduciary duty and whether investing models that consider nonfinancial criteria satisfy the "prudence and loyalty" requirements of the Employee Retirement Income Security Act (ERISA).
In 2020, the Department of Labor under then-President Donald Trump issued a rule reaffirming that placing "non-pecuniary" interests above pecuniary interests was not prudent. The department published a rule requiring that fiduciaries covered by ERISA—i.e., the firms that manage private defined contribution plans and defined benefit retirement plans—must "select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action." Trump's rule held that if two good investments graded equally on likely risks and potential returns, ESG factors could serve as a tiebreaker, but, like the vice president's vote in the Senate, should have no deciding force absent a deadlock.
Although Trump's Labor Department initially proposed policies outright unfavorable for ESG, it moderated to the neutral final rule, which didn't actually ban ESG investing but made clear that any ESG factors must be coincident with optimal financial gain and risk mitigation.
The Biden administration argues its predecessor had "a chilling effect" on ESG investment, which, it says, "can improve investment value and long-term investment returns for retirement investors." To that end, the 2022 rule "amends the current regulation to delete the (the 2020 rule's) 'pecuniary/non-pecuniary' terminology based on concerns that the terminology causes confusion and a chilling effect to financially beneficial choices," the Labor Department explains.
While it excises the offending terminology, however, the 2022 rule leaves largely intact the definition underlying "pecuniary factor,"—i.e., "a factor that a fiduciary prudently determines is expected to have a material effect on the risk and/or return of an investment" (emphasis added). Instead, the new rule states, fiduciaries must invest "based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis" (emphasis added). The two standards diverge more in intent—and likely application—than in language.
Lest investors mistake the operative political considerations, the 2022 rule clarifies that such analysis "may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action."
"The Biden Rule, like the Trump Rule, confirms the permissibility of ESG investing in pursuit of improved risk-adjusted returns in accordance with prudent investor principles without mandating such an investment strategy," argue Northwestern's Max M. Schanzenbach and Harvard's Robert H. Sitkoff. "ERISA fiduciaries who did not use ESG factors prior to 2022 should feel no greater urgency to begin doing so now. And ERISA fiduciaries who are investing for collateral benefits continue to run the same fiduciary risk as before."
Though much of the partisan debate has centered on these core principles of fiduciary duty, the Biden rule does indeed contain other noteworthy policy changes. "Specific restrictions on making ESG considerations a part of investment decisions have been removed, allowing 401(k) plans under ERISA to insert ESG metrics into their risk and return evaluations," reports Zachary Christensen, a managing director for the Pension Integrity Project at the Reason Foundation, the nonprofit that publishes Reason. "The rule also reverses the restrictions on proxy voting that were applied in 2020, opening up possibilities for retirement plans to use stakeholder positions to shape the decisions of the companies they are investing in, even if the matter is unrelated to economic outcomes."
Nevertheless, politicians—the president among them—have exaggerated the new rule's immediate policy impact. "It simply states that if fiduciaries wish to consider ESG factors—and if their methods are shown to be prudent—they are free to do so. … The Republican rule, on the other hand, ties investors' hands," Majority Leader Chuck Schumer (D–N.Y.) wrote last month in The Wall Street Journal.
Republicans, meanwhile, continue to insist that Democrats are subordinating the primary aim of retirement investments, which is to ensure that investors can securely retire. "In a time when Americans' 401(k)s have already taken such a hit due to market downturns and record high inflation, the last thing we should do is encourage fiduciaries to make decisions with a lower rate of return for purely ideological reasons," Sen. Mike Braun (R–Ind.), the resolution's Senate sponsor, said in a statement.
But the Trump rule did not "tie investors' hands," nor does the Biden rule allow them "to make decisions…for purely ideological reasons." And the president's pretense that the resolution would "mak[e] it illegal to consider risk factors MAGA House Republicans don't like" is flatly mendacious.
"Much of the confusion that the 2022 Biden Rule endorses ESG investing, and that the 2020 Trump Rule opposed it, traces to the original proposals for those rules," Schanzenbach and Sitkoff argue. "The Biden Proposal favored ESG factors by deeming them 'often' required by fiduciary duty. The Trump Proposal disfavored ESG factors by subjecting them to enhanced fiduciary scrutiny. However, following the notice-and-comment period, the Department significantly revised those proposals before finalization."
In the end, the Biden rule does serve, however, a clear, extra-statutory purpose: to promote ESG. The Labor Department is explicit on this count. A quick scan of its Federal Register entry counts 516 uses of the initials ESG. It's an advertisement that the executive branch—for the moment, at least—wants more ideologically progressive investing.
Biden's mandate within the ERISA framework is to protect the citizenry's retirement funds from unscrupulous investors, not advocate his preferred strain of investing. ESG-friendly investments may coincide with optimal investment returns—e.g., innovative, environmentally friendly technological ventures—yet often they don't. Investment decisions are made best by market participants, not technocrats. ESG-focused investing in ERISA-regulated retirement funds is perfectly legal as long as it's profitable.
"Over the past five years, global ESG funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with a 8.9% return," Terrence Keeley, chief investment officer of 1PointSix LLC, wrote in September. "This means an investor who put $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared with $15,250 he would have earned if he had invested in the broader market."
This is due to unavoidable economic tradeoffs: If investors avoid profitable ventures for noneconomic reasons, returns tend to dip. For instance, "Last year, tech stocks fell by more than 30% while the energy sector, including oil and gas firms, gained nearly 60%," Keeley explained last month. "Yet because of their net-zero pledge, ESG funds continue to overweight the former and underweight the latter."
Biden's Labor Department positioned itself as a deregulator. But the new rule has left untouched the ERISA regime itself—which everyday Americans (correctly) assume imposes a fiduciary duty—seeking instead to obscure those underlying economic realities inconvenient to the president's pet causes.
The post Biden's First Veto Protects and Promotes ESG appeared first on Reason.com.
]]>In this week's The Reason Roundtable, editors Matt Welch, Katherine Mangu-Ward, Nick Gillespie, and Peter Suderman consider the recent announcement from former President Donald Trump that he expects to be arrested this week in New York City.
0:32: Impending Trump indictment
17:05: The continued fallout from the banking system bailout
31:16: Weekly Listener Question
43:58: Another Twitter Files on how Stanford's Virality Project encouraged social media companies to police true information
51:57: This week's cultural recommendations
Mentioned in this podcast:
"New York Arrest Would Be a Gift for Trump," by Elizabeth Nolan Brown
"Is the Manhattan D.A. Upholding or Flouting the Rule of Law by Prosecuting Trump?" by Jacob Sullum
"Transforming Stormy Daniels' Hush Payment Into a Felony Would Reinforce Trump's 'Witch Hunt' Complaint," by Jacob Sullum
"New Regulations Won't Stop the Next Bank Collapse," by Elizabeth Nolan Brown
"How the Fed Broke Silicon Valley Bank," by Joakim Book
"Everyone Is Learning the Wrong Lessons From the Silicon Valley Bank Collapse," by Elizabeth Nolan Brown
"Volcker takes control," a Federal Reserve funds rate graph by Reuters graphics
"A Puzzling Bailout and A Perilous Economy," by Gerard Baker
"Researchers Pressured Twitter To Treat COVID-19 Facts as 'Misinformation'," by Christian Britschgi
"Democrats Deride the Twitter Files Reporters as 'So-Called Journalists'," by Robby Soave
"The Defiant Individualism of The Last of Us," by Peter Suderman
Send your questions to roundtable@reason.com. Be sure to include your social media handle and the correct pronunciation of your name.
Today's sponsor:
Audio production by Ian Keyser
Assistant production by Hunt Beaty
Music: "Angeline," by The Brothers Steve
The post Of Course, the Trump Indictment Is Political appeared first on Reason.com.
]]>"I believe in ready, aim, fire—not ready, fire, aim," said Maine Sen. Angus King, an Independent who caucuses with Democrats, in a discussion about passing new financial regulation in the wake of Silicon Valley Bank's (SVB) collapse. Somewhat astoundingly, he's not alone among left-of-center lawmakers in resisting the temptation to rush through new banking rules in response.
Plenty of Democratic lawmakers are angling for new regulations, of course. President Joe Biden, Sen. Elizabeth Warren (D–Mass.), and many others have been quick to blame SVB's problems not simply on poor decisions by private actors but on an alleged lack of oversight of midsize banks. Specifically, they blame a Trump-era rollback of Dodd-Frank regulations that said banks with $50 billion or more in assets were subject to increased regulatory scrutiny. Under the 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act, this threshold for stricter regulation was raised to $250 billion.
"I'm going to ask Congress and the banking regulators to strengthen the rules for banks, to make it less likely this kind of bank failure would happen again," said Biden on Monday. Warren, meanwhile, has introduced legislation that would repeal the 2018 rollback.
But whether SVB's situation would have been different had these regulations remained in place is highly questionable. "You knew just by looking at this bank that it was growing at exceptionally rapid rate, which should have been a red flag to look at," Thomas Hoenig with the Mercatus Center at George Mason University told Marketplace. "So I don't blame it on so much on the rollback of Dodd-Frank. I blame it on the fact that the bank management didn't understand the fact that interest rates change and they need to be managing their portfolio accordingly."
Besides, even without the stricter rules, bank regulators still could have acted but did not. So, the idea that new regulations are needed to stop the next midsize bank collapse is suspect, to say the least.
Of course, it's not surprising that some Democrats are using this debacle to push for giving government more control over banks. (Never let a good crisis go to waste, right?) What is surprising is that some Democrats are resisting calls to blame the 2018 regulatory rollback or to rush through new regulations.
"Moderate Senate Democrats who voted to loosen regulations on midsize banks in 2018 are standing by their votes in the wake of Silicon Valley Bank's collapse, joining Republicans in resisting enhanced scrutiny for financial institutions," reports Sahil Kapur at NBC News:
Sens. Tom Carper, D-Del., and Jeanne Shaheen, D-N.H., both said they stand by their votes for the 2018 deregulatory bill.
"It's early. I think we need to complete the investigation of what actually happened at Silicon Valley Bank. All the regulation in the world isn't going to fix bad management practices, and it appears that that's one of the problems at SVB," Shaheen said, while keeping the door open to revisiting the bill if the findings sway her….
Asked whether the 2018 bill was a mistake, Sen. Michael Bennet, D-Colo., responded: "I would say no. The work that I did on it was targeted toward small banks and toward rural banks."
Sen. Mark Warner (D–Va.) also defended the 2018 rollback while appearing on ABC's This Week last Sunday. "I think it put in place an appropriate level of regulation on midsize banks," he said.
Sen. Tim Kaine (D–Va.) told VPM he voted for the 2018 regulatory rollback "because my community banks had been telling me about Dodd-Frank challenges for years, and they strongly believed and still believe that it was the right thing." He suggested that lawmakers should wait for the Federal Reserve review of what happened with SVB before passing any new policies.
"It appears that the leading causes of the failure of Silicon Valley Bank were managers who maintained a woefully under-diversified asset sheet, and a small group of investors who sparked a panic that led depositors to withdraw money at a rate that would be unsustainable for any bank," said Sen. Chris Coons (D–Del.) in a statement. "SVB was subject to federal and state supervision, and it's not clear what additional regulatory requirements might have yielded a different outcome."
Obviously, senators who voted for the 2018 change have self-interested reasons to resist blaming it for SVB's collapse. But for a change, lawmaker self-interest is working out in favor of rationality and restraint.
Republicans, meanwhile, are also highly critical of the idea that the 2018 law is to blame for SVB's problems or that undoing it is necessary to prevent the next midsize bank collapse.
Bank regulators "had the tools that they needed," said Rep. John W. Rose (R–Tenn.). "Based on all of my conversations with the community bankers in Tennessee, had they been doing what Silicon Valley Bank was doing, they insist that the regulators would have been very much on top of them."
To some Republicans, Democrats' zeal to blame deregulation is designed to deflect from the role that inflation, interest rate hikes, and Democratic policies played in SVB's problems.
"I think President Biden and others…are simply trying to distract from the fact that it was the inflation that their policies created that is probably the biggest culprit to driving the run on the bank," said Rep. Bryan Steil (R-Wis.).
Two takes on the Kyle Duncan debacle at Stanford and campus free speech norms. Duncan, a federal judge on the U.S. Court of Appeals for the 5th Circuit, was invited to give a talk to Stanford University law students. Duncan was protested by about 100 students, who first booed those entering the talk and then disrupted it so badly that Duncan couldn't continue.
School administrators eventually intervened, asking everyone to quiet down. But Tirien Steinbach, the law school's associate dean for diversity, equity, and inclusion, asked the judge if he thought speaking on campus was "worth the pain that this causes and the division that this causes," as if he should feel guilty for daring to speak in public because some people might be upset. "Do you have something so incredibly important to say about Twitter and guns and COVID that that is worth this impact on the division of these people who have sat next to each other for years, who are going through what is the battle of law school together, so that they can go out into the world and be advocates?" Steinbach said.
"Of course the educational value of a federal judge outlining his thinking on matters likely to come before him is worth the subjective upset it causes a subset of law students acculturated to feel harmed by the physical presence of people whose jurisprudential values they hold in contempt," writes Conor Friedersdorf at The Atlantic:
Indeed, the educational value might be greatest for the most upset students if the administrators at Stanford stopped indulging their catastrophizing and started showing them that they are perfectly capable of engaging substantively with any and all viewpoints.
Because that's part of the job of lawyers! If they can't handle being on the same college campus as a judge whose views they hold in contempt without experiencing harm, how are they supposed to excel before, say, a judge who sent one of their innocent clients to prison, or to represent a rapist as a public defender, or to sway a Supreme Court justice who isn't totally convinced that torture is wrong? To be good lawyers, they must understand the legal arguments on all sides of issues, particularly the issues that they care about most, and especially when the arguments in question are advanced by someone who decides federal cases.
Lawyer Ken White writes at The Popehat Report that Duncan—who "doesn't have Twitter so he uses Fifth Circuit opinions for pronoun rants"—is no free speech hero. "Judge Duncan is part of a culture of turning the federal judiciary into a conservative grievance LiveJournal. He's also part of a pathetic culture of conservative victimology and free-speech hucksterism."
But White also reserves plenty of criticism for the students who shouted him down:
Students think that they should be able to dictate which speakers their peers invite, who can speak, what they can say, and who can listen. They're not satisfied with the most free-speech-exceptionalist system in the world that lets them respond to speech by assembling, protesting, and reviling people of authority like Judge Duncan. They demand the right not just to speak, but to control the speech of others. That's straight-up thuggish, an aspiration born of a fascist soul. These are law students. They are training to express themselves for a living. If their view is "we can't respond to awful speech, we can only stop it from happening," then they're going to be terrible lawyers.
Law students also persist in imagining that they invented the world. They believe they discovered that free speech laws and norms protect awful speech and awful people. They believe they discovered the plea "yes, but what you don't understand is that this speech is really bad." They believe that they are so self-evidently right, good, trustworthy, and noble that it's obvious that we should let them decide who talks and who doesn't. And they are too hubris-swollen — not too stupid, but too drunk with self-righteousness — to see that exceptions to free speech have always been used most harmfully against the powerless, and always will be. They're too full of themselves to see that "let a crowd decide who is allowed to speak" is a horrific norm to promote with grotesque historic resonance.
Cheese made in the U.S. can be called Gruyere, says the U.S. Court of Appeals for the 4th Circuit. The ruling stems from grievances by Swiss and French cheese consortiums, which argued that the word Gruyere could only be used to describe cheese made in the Gruyère regions of France and Switzerland. They filed an application with the U.S. Patent and Trademark Office to register the word Gruyere as a certification mark. The U.S. Dairy Export Council, Atalanta Corporation, and Intercibus Inc. objected, arguing that the word Gruyere is generic and not eligible for protection.
The Patent and Trademark Office agreed that it could not be registered and the consortiums took the matter to federal court, which also agreed with the Dairy Export Council. The foreign cheese groups appealed, bringing the matter before the 4th Circuit.
"Like a fine cheese, this case has matured and is ripe for our review," wrote Chief Judge Roger L. Gregory in the court's opinion. "We conclude that the term 'GRUYERE' is generic as a matter of law and affirm the decision of the district court."
BREAKING: Federal appeals court says Florida's universities can't enforce the Stop WOKE Act pending appeal.https://t.co/zIVTfp225Y
— FIRE (@TheFIREorg) March 16, 2023
• Poland is pledging to send fighter jets to Ukraine, which would make it the first NATO member to do so.
• A flight attendants union is pressing to end free airplane trips for babies, saying that children under 2 years old riding on parents' laps is too dangerous. As evidence, they cite the death of one lap-riding child in a 1989 plane crash and the death of another child in a 1994 plane crash. But 111 other people (presumably not riding on other passengers' laps) were killed in the first crash and 20 other passengers were killed in the second.
• "North Dakota's Supreme Court on Thursday refused to revive a strict abortion ban previously blocked by a lower court, finding that the ban violates a state constitutional right to abortion to preserve the mother's life or health," reports Reuters. "The ruling means that abortion remains legal in North Dakota for now."
• The Scandinavian prison model "looks at the loss of liberty and separation from community as the punishment. During that separation, life should be as normal as possible so that people can learn to make better choices without being preoccupied by fear and violence," writes Anita Chabria in a Los Angeles Times piece about efforts to bring Scandinavian ideas to California prisons.
• Utah has banned abortion clinics. The state still allows abortions at up to 18 weeks of pregnancy, but they must take place inside a hospital.
• Police found a blunt in their car, so they seized their kids.
• The debate Hugh Hefner won and William Buckley lost.
• Florida Republicans are now pushing a six-week abortion ban.
• "In Oregon, the state's inability to run an accurate drivers license database means people are being locked up even though their vehicles are properly registered," notes Tim Cushing at Techdirt.
The post New Regulations Won't Stop the Next Bank Collapse appeared first on Reason.com.
]]>Many in the virtual currency industry have been confused and bedeviled by the Securities and Exchange Commission's (SEC) gradual and ill-explained encroachment on their world, with frequent claims from SEC Chair Gary Gensler that most cryptocurrencies should be properly seen legally as "securities" that ought to be regulated by his agency. That would potentially make lots of legit businesses suddenly illegal dealers in "unregistered securities."
In a decision last week in an ongoing bankruptcy case of Voyager Digital Holdings, U.S. bankruptcy Judge Michael E. Wiles in the U.S. Bankruptcy Court for the Southern District of New York laid into SEC agents for their perplexing and officious manner of trying to force through their attitudes about cryptocurrencies-as-securities.
Part of the proposed bankruptcy reorganization plan for Voyager Digital Holdings would involve shifting customer accounts over to cryptocurrency exchange Binance.
The SEC objected to this Binance solution, claiming "that in its view the Debtors had the burden to prove that the rebalancing of the Debtors' cryptocurrency portfolios…would not involve illegal purchases and sales of securities."
The SEC did this, as Judge Wiles complains, essentially through innuendo: "The objection did not take the position that any particular cryptocurrencies are securities, or otherwise explain how or why the Debtors' rebalancing activities might be illegal, although it did contain a vague footnote suggesting that the VGX token was one as to which some unspecified issue might exist," Judge Wiles wrote.
"The SEC also suggested that the Debtors should be required to prove that Binance.US is not operating as a securities broker without registering as such," he continued. "Once again, the SEC did not actually take the position that Binance.US is operating as an unregistered and unlicensed securities broker. Instead, it just suggested that the Debtors had the burden to prove the negative, without offering any evidence or even any reason to think that Binance.US actually is doing anything for which it requires further SEC registrations."
Judge Wiles finds this situation highly aggravating, noting that "Voyager operated, and Binance.US currently operates, in a regulatory environment that at best can be described as highly uncertain."
If the present legal environment in which companies such as Binance must operate is unknown, the future into which the judge must hope his decisions will function is even more so: "The SEC has filed some actions against particular firms with regard to particular cryptocurrencies, and those actions suggest that a wider regulatory assault may be forthcoming. The CFTC [Commodity Futures Trading Commission] seems to have taken some positions that are at odds with the SEC's views. Just how this will all sort itself out, how the pending actions relating to cryptocurrencies will be decided, and just what issues might be raised in future regulatory actions, and how they will affect individual firms or the industry as a whole, is unknown."
Judge Wiles is, thus, unhappy with SEC agents' refusal to give any public certainty to the parties in this case or the industry at large about how their views will affect crypto businesses moving forward.
The SEC had not in its objections in this bankruptcy case "offered any guidance at all as to just what it was that the Debtors allegedly were supposed to prove on these issues, or how the Debtors possibly could prove what the SEC wanted them to prove without receiving any explanation at all from SEC as to just why the Debtors' operations, or Binance.US's operations, might raise legal issues," Judge Wiles noted.
And when he insisted on clarification from the SEC, its agents "initially asked if it could state its position only to me on an in camera basis, but I denied that request and ruled that to the extent the SEC wanted to say something further about its objection, it ought to be stated in the public forum, where all other interested parties could hear and understand the SEC's position."
What Judge Wiles got on the record from the SEC folks did not satisfy him. He was merely told that SEC staff thinks that the VGX token "has aspects of a security, but that the Commission itself has not taken any position on that subject." Similarly, the staff "believes that Binance.US is operating as a securities exchange without registering as such, though once again the Commission itself has not taken any position on that subject."
Judge Wiles found this attempt at legal interference based on staff opinion, without the SEC itself or lawmakers having ratified the staff's opinion as regulation or law, unconvincing and vexing. He rejected the idea that it should be his or Voyager's responsibility to figure out what SEC staff meant about the degree to which the VGX token is a security or the extent to which Binance should be subject to SEC registration issues. He griped that vague interference like this from SEC staff was unduly delaying the resolution of this bankruptcy case, costing customers and creditors lots of money and time.
"I cannot simply put the entire case into an indeterminate and expensive deep freeze while regulators figure out whether they do or do not think there is any problem with the transactions that are being proposed," Judge Wiles wrote. "If there is a problem, I expect a regulator to tell me that it has an actual objection (as opposed to saying that there 'might' be an issue), and also to tell me what the issue is and why it is an issue, so that other parties may address it and so that I may make a proper and well-considered ruling."
"I asked the SEC's counsel at the outset of this hearing to explain what the consequences would be if Binance.US were to be found to have been acting as an unregistered broker dealer," Judge Wiles wrote. "I asked if that would just mean that Binance.US might have to stop certain activities while it pursued a license, or if it would mean that Binance.US would have to shut down all of its activities. The SEC said it could not answer that question."
If Judge Wiles feels this way about the SEC's casual but often destructive mystery-shrouded tiptoeing around the issue of regulating virtual currencies as securities in this one case, imagine how the investors and holders and businesses whose careers and fortunes are built on trying to stay legal in this industry feel.
The post Federal Judge Blasts SEC for Poorly Argued Attempts To Claim Cryptocurrencies Must Be Regulated by Them appeared first on Reason.com.
]]>"We have learned over the last few days that many small and mid-sized banks in this country are Zombies," writes Arnold Kling, a senior scholar at the Mercatus Center at George Mason University and former economist for the Federal Reserve system and Freddie Mac.
Following the run on Silicon Valley Bank, former U.S. Treasury Secretary Larry Summers urged the federal government to guarantee the money of all the bank's depositors and warned that "now is not the time for lectures about moral hazard." But Kling insists that "past crises," such as the savings and loan collapse of the 1980s, "were bungled by authorities who were blind to the moral hazard problem."
And Lyn Alden, founder of Lyn Alden Investment Strategies, says "banks are basically highly-leveraged bond funds with payment services attached, and we treat it as normal to keep our savings in them." She argues that the Federal Reserve makes it nearly impossible for banks to hold the bulk of their customers' deposits in cash because "regulators want banks to be reasonably safe, but not 'too safe.' They want all banks to be leveraged bond funds to a certain degree, and won't allow safer ones to exist."
Join Reason's Zach Weissmueller this Thursday at 1 p.m. E.T. for a discussion about the federal government's decision to guarantee all deposits at the failed Silicon Valley Bank with Alden and Kling. Watch and leave questions and comments on the YouTube video above or on Reason's Facebook page.
Photo credit: Shen Hong / Xinhua News Agency/Newscom
The post Blame the Government for the New Banking Crisis? Live With Lyn Alden, Arnold Kling and Zach Weissmueller appeared first on Reason.com.
]]>When COVID-19 sent waves through our financial markets in March 2020, I was the regulator overseeing most of America's mortgage market. When the usual calls for Wall Street bailouts came, others, such as the Federal Reserve, responded generously with the public's money. I was an exception. Despite the dire warnings that our mortgage market would collapse if I did not give in, we gave no bailout—and our mortgage market continued to function well.
The American economy lost 22 million jobs from February through April of 2020. As in 2008, these historic job losses posed significant risks to our mortgage market, as the ability of borrowers to pay came into question. The Federal Housing Finance Agency (FHFA), which I headed, and which supervises Fannie Mae and Freddie Mac, reacted quickly to establish programs to assist borrowers and renters. We expected to be repaid any deferred mortgage payments. Many private lenders voluntarily established programs similar to ours.
These assistance programs did put additional stress on large segments of the mortgage industry—particularly servicers, those entities that collected payments and forwarded them along to the ultimate mortgage investors. Despite having paid these mortgage servicers ahead of time to shoulder this risk, many in the mortgage industry demanded the federal government take over these payments. After all, everyone else, such as the airlines, were being rescued.
I had the advantage of having financial statements for all the servicers that did business with Fannie and Freddie. We knew their financial state. We knew they had liquidity and did not need a public rescue. The decision was ultimately up to Treasury Secretary Steven Mnuchin, but he relied heavily on the FHFA's analysis.
Not surprisingly, these Wall Street firms began a campaign to attack me specifically. A columnist at the Financial Times warned that I would bring down the entire U.S. mortgage market and should be run out of Washington for everyone's safety. He wasn't alone. Calls were made to the president to remove me. If you are ever the one standing between Wall Street and a bailout, the heat will be intense.
Private equity and hedge funds were major investors in a few of the troubled servicers. Now, I am a big believer in the net positive role played by both. I am certainly not hostile to that industry. But I do object to the idea that investors can spend years pulling money out of a company and then, when that company needs funds, request that the government provide them.
Fortunately, when investors came to realize that we would transfer the servicing rights of these companies—their main assets—and that they would have almost no value left, those investors decided to inject funding sufficient to protect their investments. A win all around, without a single penny of taxpayer assistance.
We helped keep just under 3 million families in their homes during a pandemic. In comparison, the federal response to 2008 provided permanent assistance to 1.5 million borrowers, and about a third of those eventually defaulted. The rollout was slow: A year into the program, just over half a million borrowers had received permanent assistance, whereas we helped almost six times that number in the first year of COVID. But the sluggishness didn't keep it from being expensive—it cost taxpayers well over $20 billion.
I have now written a book, Shelter From the Storm, about my experiences at FHFA, in hopes of establishing a model for future responses. My approach was certainly far preferable to the endless subsidies and bailouts that have become the norm. During the 2008 financial crisis, President George W. Bush proclaimed that he had "abandoned free market principles to save the free market system." That premise was continued under President Barack Obama. Both presidents were badly mistaken. There is a better way.
The post Bailouts Should Not Be the Norm appeared first on Reason.com.
]]>In this week's The Reason Roundtable, editors Matt Welch, Katherine Mangu-Ward, Nick Gillespie, and Peter Suderman analyze the fallout from the historic failure of Silicon Valley Bank and deride a recent congressional hearing concerning the reporting of independent journalists Matt Taibbi and Michael Shellenberger on the Twitter Files.
0:52: Silicon Valley Bank collapse
26:30: President Joe Biden's budget proposal
34:22: Weekly Listener Question
41:02: House Democrats vs. Twitter Files journalists
45:52: This week's cultural recommendations
Mentioned in this podcast:
"How the Fed Broke Silicon Valley Bank," by Joakim Book
"Everyone Is Learning the Wrong Lessons From the Silicon Valley Bank Collapse," by Elizabeth Nolan Brown
"Biden's Budget Will Raise Taxes Without Addressing the Federal Government's Spending Problem," by Eric Boehm
"Democrats Deride the Twitter Files Reporters as 'So-Called Journalists'," by Robby Soave
"Twitter Files: Employees Knew the Media's Favorite Russian Bots List Was Fake," by Robby Soave
"FTC Seeks Names of All Journalists With Whom Musk Shared Twitter Documents," by Elizabeth Nolan Brown
"Oscar-Winning Everything Everywhere All At Once Celebrates Individualism, Free Will," by Eric Boehm
Send your questions to roundtable@reason.com. Be sure to include your social media handle and the correct pronunciation of your name.
Today's sponsor:
Audio production by Ian Keyser
Assistant production by Hunt Beaty
Music: "Angeline," by The Brothers Steve
The post Yes, There Are Libertarians During Bank Runs appeared first on Reason.com.
]]>The Federal Reserve is in the unenviable position of achieving its mandate by crashing the economy. It's not something it wants to do, as Fed Chair Jerome Powell meekly admitted in his exchange with Sen. Elizabeth Warren (D–Mass.) last week. But it's something that happens as an unavoidable outcome of slowing down an economy littered with excess money and inflation. Broad money growth has been negative since late November, and interest rate expenses on everything from corporate borrowing to credit cards to the government's own debt have been rising fast.
This hiking cycle, the fastest that the Fed has embarked upon in a generation, was always likely to break something. And break something they did over the weekend, from the regulated stablecoins USDC and Gemini Dollar, which lost their dollar pegs, to Silicon Valley Bank (SVB), which faced the second-largest bank run in U.S. history. If one weren't so hung up on labor markets, inflation figures, and congressional soundbites, presumably these are the sort of things that a monetary authority like the Fed is tasked to manage. Oops.
In Powell's back-and-forth with Warren, the senator pointed to "things you can't fix with high interest rates—things like price gouging, supply chain kinks and the war in Ukraine." Regardless of how little sense those arguments make, our favorite senator is accidentally correct: monetary policy is about money and assets and banks, with only limited (residual) influence over things in real markets.
Barking up the wrong trees—unemployment, market power—Warren missed an opportunity to examine the things that really are breaking. Around the same time she spoke those words and Powell defended the Fed's action, SVB was desperately trying to raise new money. The effort failed, and plenty of tech investors, including Peter Thiel's Founders Fund, pulled their mostly uninsured deposits at the bank as quickly as they could.
According to Bloomberg, bank CEO Greg Becker asked creditors on a call Thursday to "support the bank the way it has supported its customers over the past 40 years"—as if any bank run had ever been stopped by asking nicely.
The losses in SVB's Treasury portfolio—courtesy of the Fed's quick rate hikes, which crashed the bond market last year—amount to billions of dollars in unrealized losses. The accounting rules of "held to maturity" allows banks to ignore mark-to-market losses if the securities are intended to be held until they come due. Of course, holding to maturity requires you to finance the securities in the meantime, something that's pretty much impossible when your customers don't think you'll make it and instead are demanding their deposits back en masse.
If we ignore this accounting trick, Silicon Valley Bank was already "insolvent" by September of last year, when the unrealized bond losses exceeded its equity.
Towards the end of last year, some $25 billion of deposits ran off as SVB's customers drained their bank deposits to withstand the business pressures of inflation and a thriving venture capital industry dying down. Another $10 billion followed in the early months of 2023, and who knows how much managed to escape over the last few days—Fortune reports $42 billion on Thursday alone—before management threw in the towel on Friday and had the bank placed into the Federal Deposit Insurance Corporation's receivership.
Because Treasuries are "risk-free" and therefore carry lower capital requirements for banks to hold against them, banks allocate more of their funds to them. This concentrates banking system risk in a single interest-sensitive security. SVB is just the most extreme and reckless version of a risk present in most American banks. For reference, the rest of the U.S. banking system has unrealized losses amounting to more than $600 billion, some 25 times more than the losses that just brought down SVB.
There's no shortage of blame to place on regulators for having engineered such an unnatural banking market. Far from making banks "safe," the regulatory system concentrates risks, with the alphabet soup of Fed liquidity facilities standing ready to money-print their way out of any trouble.
As Caitlin Long, CEO of Custodia Bank, pointed out on Saturday, this pushes the Fed into a very delicate position: risk systemic bank runs, or roll back the hikes and quantitative tightening that caused this mess, printing money for an even hotter inflation.
6/ * on interest rates—mkt action Thurs/Fri means bond mkt already smells end of Fed QT, which disproportionately sucked deposits out of community banks. Recognize, tho, that a Fed pivot wld keep inflation running hot. Trade-off btwn systemic bank run vs hot inflation—hot potato
— Caitlin Long ???????? (@CaitlinLong_) March 11, 2023
Most awkward of all, here's what Michael Barr, the Fed vice chair for supervision, said in a speech Thursday as the run was in full swing: "The banks we regulate, in contrast, are well protected from bank runs through a robust array of supervisory requirements." Double-oops.
The stablecoins that Barr was railing against did indeed break over the weekend. The kicker is that it was the transparently audited ones—whose sponsors have been cozying up to U.S. regulators in recent years—who broke their pegs. The eternal scapegoat Tether, shrouded in mystery, investigated and fined by the New York attorney general in 2021, traded at a premium of as much as 3 percent on Saturday. Everything, it seems, is upside down.
Through the magic of "held to maturity," perhaps all the other banks can endure the storm and come out the other side without the same losses that SVB was forced to book last week. It certainly gets easier to harbor underwater securities on your books when the Fed stands ready to finance them for you.
Hang on to your hat—or in this case, your bank account. Because Sen. Warren is right about one thing: "The Fed has a terrible track record in containing modest increases in the unemployment rate."
And last week, something already broke.
The post How the Fed Broke Silicon Valley Bank appeared first on Reason.com.
]]>Yes, it's a bailout—and yes, it's unwise. The U.S. government will guarantee all customer funds in Silicon Valley Bank (SVB) after a series of bad decisions and a run on deposits led to the bank's collapse. The decision creates bad incentives for financial institutions and their customers.
The Federal Deposit Insurance Corporation (FDIC) is supposed to guarantee money at insured banks up to $250,000 per depositor, per bank, in each account ownership category.* In this case, however, it will fully protect all depositors with no limit.
"Depositors will have access to all of their money starting Monday, March 13," Treasury Secretary Janet Yellen, Federal Reserve Board Chair Jerome Powell, and FDIC Chair Martin Gruenberg said in a joint statement yesterday. The FDIC will also guarantee funds for customers at New York's Signature Bank, which regulators closed on Sunday. "All depositors of this institution will be made whole," announced Yellen, Powell, and Gruenberg.
The FDIC will sell off SVB assets to cover some costs but, beyond that, depositors will be paid with money from the Deposit Insurance Fund. This fund has been built up by fees collected from banks. Any losses to the fund "to support uninsured depositors will be recovered by a special assessment on banks," write Yellen and company.
A lot of folks are insisting this isn't a bailout and that it comes at no cost to taxpayers. For instance: The joint statement says, "No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer."
But this is misleading. For one thing, banks are themselves taxpayers. And in situations like this, the many institutions who act responsibly must bear the burden of bank fees in order to inoculate less responsible actors. Besides, these fees assessed on banks don't exist in a vacuum that only burdens big businesses; banks pass on the costs of regulatory compliance to customers in a number of ways. So the idea that the government's bailout funds come from some sort of magical pool of consequence-free money is silly.
"The public is always on the hook for any Fed program, no matter how much government insists costs won't be borne by taxpayers," commented former Rep. Justin Amash (L–Mich.) on Twitter, pointing out that "a bailout creates a moral hazard, even if it's *just* a bailout of depositors at a bank; it doesn't fix—but instead exacerbates—the systemic problem."
Moral hazard is one of the major worries when it comes to bailouts like these. Both banks and consumers have less incentive to be cautious with their money if they can plausibly assume that the government will step in and save them from any mistakes. So, a bailout like this uses public money to compensate for risky or bad financial decisions and incentivizes more risky or bad decisions in the future.
What SVB did with their portfolio is either a signal of enormous incompetence or of outright moral hazard at play – gamble away billions as policymakers will rescue you
I can't believe incompetence reaches these levels, & there are some clear hints moral hazard was at play
2/
— Alf (@MacroAlf) March 11, 2023
It's also likely to spur more rules and regulations that could further burden all banks and their customers. People are already calling for the Biden administration to tighten regulations on regional banks in response, laying blame on a supposed lack of government oversight rather than on SVB's myriad bad judgement calls.
It appears this problem stems in part from the fact that SVB was flush with cash from a venture capital boom. "People kept flinging money at SVB's customers, and they kept depositing it at SVB," explains Matt Levine at Bloomberg Opinion. Typically, a bank flush with cash would loan out most of this money. "But [SVB's] customers didn't need loans, in part because equity investors kept giving them trucks full of cash and in part because young tech startups tend not to have the fixed assets or recurring cash flows that make for good corporate borrowers," writes Levine.
So rather than make a lot of loans, SVB put a lot of its money into long-term, fixed-rate interest investments, such as Treasury bonds and 10-year mortgage-backed securities. (At the end of 2022, SVB reportedly had around $120 billion in investment securities and only around $74 billion of loans.) "This was mistake No. 1," argues Andy Kessler at The Wall Street Journal. "SVB reached for yield, just as Bear Stearns and Lehman Brothers did in the 2000s. With few loans, these investments were the bank's profit center."
Then the feds raised interest rates and "SVB got caught with its pants down as interest rates went up," as Kessler puts it:
Everyone, except SVB management it seems, knew interest rates were heading up. Federal Reserve Chairman Jerome Powell has been shouting this from the mountain tops. Yet SVB froze and kept business as usual, borrowing short-term from depositors and lending long-term, without any interest-rate hedging.
The bear market started in January 2022, 14 months ago. Surely it shouldn't have taken more than a year for management at SVB to figure out that credit would tighten and the IPO market would dry up. Or that companies would need to spend money on salaries and cloud services. Nope, and that was mistake No. 2. SVB misread its customers' cash needs. Risk management seemed to be an afterthought. The bank didn't even have a chief risk officer for eight months last year. CEO Greg Becker sat on the risk committee.
Higher interest rates meant having to pay more interest on deposits. But SVB couldn't compensate fully by getting paid more interest on loans, since it didn't have enough loans. Meanwhile, higher interest rates also meant its long-duration, fixed-rate securities were losing value. So instead of profiting off higher interest rates overall, it was losing money.
Meanwhile, higher interest rates also meant that venture capital was drying up for a lot of SVB's startup depositors. That meant fewer customers depositing new money and more customers withdrawing a lot of funds. And because a lot of SVB's money was tied up in longer-term investments, it had to sell securities at a loss in order to pay back depositors, making its short-term financial situation even more precarious.
By January of this year, people were noticing SVB's problems. In February, the tech and finance newsletter writer Byrne Hobart pointed out that "Silicon Valley Bank was, based on the market value of their assets, technically insolvent last quarter." Accordingly, even more depositors started withdrawing more funds, further exacerbating its instability. This, of course, further frightened depositors, who yanked even more funds. "By the time the lender closed for business [last] Thursday, depositors had attempted to withdraw $42 billion," The Wall Street Journal reported.
The situation came to a head on Friday, when SVB collapsed and the California Department of Financial Protection and Innovation took possession of it, appointing the FDIC as receiver.
In the end, "the culprit" in SVB's collapse "wasn't the kind of exotic derivatives and risk-taking that doomed banks in the 2008 financial crisis. Rather, it was a mismatch between deposits and assets—the building blocks of the vanilla business of commercial banking," the Journal writers explain. "The episode has exposed a new set of vulnerabilities for the financial system. Bankers that grew up in the easy-money era following the 2008 crisis failed to ready themselves for rates to rise again. And when rates went up, they forgot the playbook."
Still, SVB should stand as a lesson about making this same kind of mistake in the future. And perhaps as a lesson to depositors about putting too much into one financial institution, especially one trendy with startup businesses and overly focused on serving them.
Instead, it's teaching that risk really doesn't matter, because if things go sour the government will step in and bail you out.
The moral hazard here is we've greatly reduced the incentive for depositors of any size now (250K my ***) to actually give a moments thought to the riskiness of where they're putting their money.
It's not as bad as if we also let SBF off the hook.
But it ain't ok. https://t.co/4ZQaJi31dq
— Clifford Asness (@CliffordAsness) March 13, 2023
Media columnist Jack Shafer takes a look at Tucker Carlson's troubles. Carlson's mask is slipping thanks to filings in a defamation lawsuit Dominion Voting Systems filed against Fox News. "In the filings—text messages and emails authored by Carlson (and other Foxies)—he reveals that the wildly pro-Trump stance that he and his network long cultivated has been a theatrical performance," writes Shafer:
Carlson, who has long defended and promoted Trump, as well as advised him on national security issues, has never been a genuine Trumpie, he has just played the role on TV. His support of Trump and many Trump-adjacent issues has been one of convenience, and when not a matter of convenience, a measure of his fear of Trump.
"We are very, very close to being able to ignore Trump most nights," Carlson texted an unnamed Fox co-worker on Jan. 4, 2021. "I truly can't wait." When Carlson's colleague responded, "I want nothing more," Carlson texted back, "I hate him passionately."
Carlson continued: "What he's good at is destroying things. He's the undisputed world champion of that. He could easily destroy us if we play it wrong." Elsewhere, Carlson said of the Trump presidency, "That's the last four years. We're all pretending we've got a lot to show for it, because admitting what a disaster it's been is too tough to digest. But come on. There isn't really an upside to Trump."
How did Carlson—once "one of the most talented Washington-based journalists of his generation"—get here? "Carlson's slide into the dark side" came after a number of serious journalistic ventures of his failed to really take root, Shafer suggests. More here.
In related news: "Fox News braces for more turbulence as second defamation lawsuit advances."
Junk statistics. The Atlantic takes a look at the proliferation of junk statistics. "Through endless repetition, numbers of dubious origin take on the veneer of scientific fact, in many cases in the context of vital public-policy debates," lament the Boston University economist Raymond Fisman, the Columbia political scientist Andrew Gelman, and the Harvard law professor Matthew C. Stephenson.
One prevalent category of junk statistics is purported measures of the size of illicit economies:
For years, the three of us have been tracking the origins of numbers that claim to measure illicit activities, which are by their nature hard to measure. You may have heard that more than $1 trillion in bribes is paid each year, or that corruption costs the world economy $2.6 trillion annually. The $1 trillion figure comes from a set of extrapolations from a handful of surveys conducted by the World Bank and the World Economic Forum in the early 2000s in a variety of countries. These calculations produced a wide range of estimated annual-bribe payments—from about $600 billion to $1.7 trillion. The $1 trillion figure is roughly the midpoint of that range. The problem with taking just the average is that doing so strips the data of the enormous uncertainty in already-questionable estimates. And yet, the figure keeps resurfacing—the World Bank's website, for example, cited it as recently as 2020—as if the annual amount of bribery were constant.
The $2.6 trillion corruption estimate, meanwhile, traces back to a one-sentence bullet point in an advocacy brief from a group of respected organizations, including the World Economic Forum and Transparency International. The brief cited no source, and, as far as we can tell, the number was likely based on a careless misreading of an earlier study. But the figure was later cited by the heads of prominent international bodies, including the United Nations and the Organization for Economic Co-operation and Development.
These numbers are what we might call "decorative statistics." Their purpose is not to convey an actual amount of money but to sound big and impressive. That doesn't keep them from being added, subtracted, divided, or multiplied to yield other decorative statistics. Some organizations and news outlets combine the bribery and corruption estimates and declare that the planet experiences $3.6 trillion in graft year after year….
We recently came across a study by two respected researchers that put the scale of illegal bets placed each year at $1.7 trillion. Where did such a precise figure for hard-to-measure, clandestine activities come from? Their paper cited a document published by the UN Office on Drugs and Crime. That document, however, actually gives a range of $340 billion to $1.7 trillion, cites no source, and rightly warns about the inherent difficulty of measuring the underground economy. But the $1.7 trillion figure has taken on a life of its own.
See also: "The false claim that human trafficking is a '$9.5 billion business' in the United States."
• A new report details how plea bargaining hurts defendants and warps justice.
• Here's a complete list of the 2023 Oscar winners.
• Reason's science correspondent, Ron Bailey, looks at the new obesity-curbing drugs.
• Meta is considering creating a decentralized social network.
• Kentucky is the latest state to advance a bill that would limit drag performances.
• The criminal charges that Manhattan District Attorney Alvin Bragg wants to pursue against former President Donald Trump "are so iffy that they reinforce Trump's reflexive complaint that he is, as always, the victim of a long-running Democratic 'witch hunt,'" writes Reason's Jacob Sullum.
*UPDATE: This post has been updated to offer more details about FDIC insurance coverage.
The post Everyone Is Learning the Wrong Lessons From the Silicon Valley Bank Collapse appeared first on Reason.com.
]]>Former Sen. Pat Toomey's time in Congress, which began in 1999 after he won a House seat in eastern Pennsylvania, officially ended on January 3 when the new Senate session began.
Toomey was described in a 2004 New Yorker profile as "a conservative Republican of rigorous doctrinal purity: anti-abortion, anti-taxes, anti-spending (except for defense); a fiscal hawk, appalled by big deficits, a crusader for school choice, tort reform, Social Security privatization, and a smaller federal government." He's still that guy, but the Republican Party has changed—so Toomey declined to run for reelection this year.
Toomey was one of a handful of senators to take an informed interest in the issues around cryptocurrency. As he prepared to exit office in December, Toomey sat down with Reason's Eric Boehm to discuss the topic.
Q: Some of your colleagues have called for new regulations on cryptocurrencies after the collapse of the FTX trading platform, but you disagree. Why?
A: We owe it to each customer to get to the bottom of the FTX implosion, and any violations of the law should be aggressively prosecuted. The Department of Justice and other enforcement agencies should expeditiously investigate the unseemly relationship between a company that was effectively a hedge fund, and an exchange entrusted with customer funds. While all the facts have not yet come to light, we've clearly witnessed wrongdoing that is almost certainly illegal.
But the wrongful behavior that occurred here is not specific to the underlying asset. What appears to have happened here is a complete breakdown in the handling of those assets. I hope we are able to separate potentially illegal actions from perfectly lawful and innovative cryptocurrencies.
To those who think that this episode justifies banning crypto, I'd ask you to think about several examples. The 2008 financial crisis involved misuse of products related to mortgages. Did we decide to ban mortgages? Of course not. A commodity brokerage firm run by former New Jersey Sen. Jon Corzine collapsed after customer funds—including U.S. dollars—were misappropriated to fill a shortfall from the firm's trading losses. Nobody suggested that the problem was the U.S. dollar and that we should ban it. With FTX, the problem is not the instruments that were used. The problem was the misuse of customer funds, gross mismanagement, and likely illegal behavior.
Q: Don't consumers need to know that they won't lose their investments if they decide to buy crypto? Is there some role for the government to play in ensuring that?
A: If Congress had passed legislation to create a well-defined regulatory regime with sensible guardrails, we'd have multiple U.S. exchanges competing here under the full force of those laws. It's not clear that FTX would have existed, at least at its scale, if we had domestic guidelines for American companies. The complete indifference to an appropriate regulatory regime by both Congress and the [Securities and Exchange Commission] has probably contributed to the rise of operations like FTX.
Congress can and should offer a sensible approach for the domestic regulation of these activities. This episode underscores the need for a sensible regulatory regime that, among other things, ensures a centralized exchange segregates and safeguards customer assets.
We could start approaching sensible regulations for cryptocurrencies by addressing stablecoins. This is an activity that my colleagues can analogize to existing, traditional finance products. There's clear bipartisan agreement that stablecoins need additional consumer protections. There are virtually none now. I've proposed a framework to do that, and I hope this framework lays the groundwork for my colleagues to pass legislation safeguarding customer funds without inhibiting innovation.
Q: As you're stepping away from Congress, what are you optimistic about?
A: I'm most optimistic about the incredible resiliency of the American economy. When I look around at the rest of the world, we wouldn't want to change places with anyone for anything.
This interview has been condensed and edited for style and clarity.
The post Sen. Pat Toomey on Cryptocurrency and FTX's Collapse appeared first on Reason.com.
]]>The first credit card processor to announce plans to track purchases at gun shops is Discover Financial Services. The company hints that its competitors, specifically Visa, MasterCard, and American Express, are on the same schedule to implement a controversial gun-specific merchant category code announced last year. Given that the ideologically charged bank behind the new code has big plans for targeting gun purchases you can expect more fireworks to follow.
"Discover Financial Services, a provider of credit cards, told Reuters it will allow its network to track purchases at gun retailers come April, making it the first among its peers to publicly give a date for moving ahead with the initiative, which is aimed at helping authorities probe gun-related crimes," the news service reports. "Discover's announcement came after the International Organization for Standardization (ISO), which decides on the classification of merchant categories used by payment cards, approved in September the launch of a dedicated code for gun retailers."
Merchant category codes (MCCs) are an IRS-developed scheme for tracking transactions. Behind the push for the gun-specific merchant category code is Amalgamated Bank, which boasts that it "supports sustainable organizations, progressive causes, and social justice." It's basically a political operation that uses its presence in the financial industry to advance political goals, and it joined with Democratic politicians to urge adoption of the new MCC. Why? Because at a time when everything is politicized, an ability to monitor buying and selling is enormously important to those who want to restrict or control whole areas of life.
"We all have to do our part to stop gun violence and it sometimes starts with illegal purchases of guns and ammunition," Priscilla Sims Brown, president and CEO of Amalgamated Bank, gloated when the ISO approved the new category code last September. "The new code will allow us to fully comply with our duty to report suspicious activity and illegal gun sales to authorities without blocking or impeding legal gun sales."
When the code was approved, firearms-specific payment firm GunTab warned that it was a step towards filing government-mandated Suspicious Activity Reports with the authorities on gun purchases.
"Your bank files a Suspicious Activity Report with your name for every day your cash activity exceeds $10k," the company noted. "Anti-gun advocates want to apply this same ambiguous approach toward preventing gun violence."
It didn't take long for advocates of the code to confirm that suspicion.
"Banks are developing technology to identify potential mass shooters, according to a CEO backing the push to get credit-card companies to more closely track gun purchases," Bloomberg reported last November. "'Detection scenarios' are in the works that, if triggered, would prompt banks to file a Suspicious Activity Report to the Treasury Department's Financial Crimes Enforcement Network, Amalgamated Bank Chief Executive Officer Priscilla Sims Brown said at the New York Times DealBook conference Wednesday."
But the code applies to stores that deal in firearms, not just to gun sales. That means ringing up trail cameras or camping gear might land you on the naughty list. Or the purchase might be entirely blocked.
"Credit card companies may be changing how they process gun store sales, but it's still up to banks to allow purchases coming in with that MCC," cautions DirectPayNet, which works with merchants tagged as "high risk"—a category including adult entertainment, dating, and e-cigarettes as well as firearms. "Banks can see what companies are higher risk, extraneous, or essential (especially during a recession). They control what a cardholder can purchase, basically. So the pushback might not be from credit cards or processors, but from banks. The question is, should banks hold that much power over the decisions of individual cardholders?"
If you're Amalgamated Bank the answer is an obvious "yes" since the outfit uses finance as a political tool. But it's hardly alone in weaponizing finance for political purposes as we've seen in the aftermath of the U.S. Justice Department's Operation Choke Point, which leaned on the financial industry to shun payday lenders, adult entertainment, gun dealers, and other politically disfavored enterprises.
"The general outline is the DOJ and bank regulators are putting the screws to banks and other third-party payment processors to refuse banking services to companies and industries that are deemed to pose a 'reputation risk' to the bank," George Mason University law professor Todd Zywicki wrote in 2014. "Most controversially, the list of dubious industries is populated by enterprises that are entirely, or at least generally, legal."
That program to marginalize legal businesses formally ended in 2017. But American Banker reported in 2019 that financial institutions were still pressured to deny services to "politically divisive clients" and that "efforts to use banks as a lever for broader social change are just getting underway."
Inevitably, if one political faction is willing to lean on private industry to implement harassments and restrictions that can't be achieved through the legislative process or aren't permitted by the Constitution, its opponents will enter the battle.
"Credit-card companies could face fines up to $10,000 per violation for tracking firearm and ammunition sales in Florida, under a measure approved Tuesday by a Senate committee," reports the Orlando Weekly. "The Republican-controlled Senate Banking and Insurance Committee voted 7-3 along party lines to approve a bill (SB 214) that would target yet-to-be-enacted plans by some credit-card companies to create a separate 'merchant category code' for sales at firearm businesses."
With Republican majorities in the state's Senate and House, and Gov. Ron DeSantis very comfortable in a world in which everything is political warfare, SB 214 looks likely to pass. Mississippi, Oklahoma, Texas, and West Virginia may approve similar laws. Then the fight will really begin.
"A Discover spokesperson said following the publication of the story that other payment network companies had already decided to implement the new code in April, and that Discover was following their lead," Reuters added of the credit card industry's adoption of the gun-specific MCC code.
Ultimately, the key to staying out of political conflicts over guns or any other transactions that authoritarians want to restrict is to use payment systems that don't require a third party's approval. Cash is always good. Cryptocurrency, despite its recent tribulations, may ultimately fill this role. Freedom can only survive if we are able to spend our money on things government officials don't like.
The post Banks Increasingly Back Political Scheme To Track Gun Purchases by Credit Card appeared first on Reason.com.
]]>Can Congress give away its power of the purse to a regulatory agency? That's the important constitutional question the Supreme Court decided it will take on earlier this week. Regrettably, the Court can't answer the obvious follow-up question: Why would a legislature give away its own core authority?
Congress created the Consumer Financial Protection Bureau (CFPB) in 2010, in the wake of the Great Recession. The agency wields sweeping authority over "consumer finance," including everything from credit cards and car payments to mortgages and student loans. To this end, the agency writes and enforces rules imposing even billion-dollar penalties. Thus, the CFPB regulates millions of private citizens and businesses.
In this manner, the CFPB is no different than scores of other alphabet-soup agencies—the EPA, the SEC, etc.—with similar powers over different sectors of the economy (alas). With the CFPB, however, Congress tried something new: They gave a blank check to the regulatory powerhouse.
Rather than pleading with Congress for appropriations, like other agencies of its ilk, the CFPB simply takes what it wants from the Federal Reserve (up to 12 percent of the Federal Reserve's operating expenses, or $734 million in 2022). The CFPB, moreover, may roll over any unused funds into the next year. Last year, the CFPB took $641.5 million, and the agency has another $340 million in rollover money. Indeed, the CFPB's architects believed it was "absolutely essential" that the new regulator be "independent of the Congressional appropriations process."
But does the Constitution allow this sort of bureaucratic "independence" from Congress?
The Constitution's appropriations clause gives the power of the purse exclusively to Congress. On this, the Framers were quite deliberate. "The legislative department alone has access to the pockets of the people," explained James Madison in The Federalist Papers: No. 48. The general idea was that the people, through their representatives, should have a say in the disposition of their money. In addition, the appropriations clause also plays an important role in the separation of powers. As George Mason put it in Philadelphia in 1787, "the purse and the sword ought never to get into the same hands." Among other benefits, making agencies dependent on Congress for their annual budget allows elected representatives to police bad behavior by taking away money when the agencies act contrary to congressional intent.
In 2018, a group of lenders challenged the CFPB in federal district court, arguing that the agency's funding mechanism contravenes the appropriations clause. Although the district court sided with the government, the 5th Circuit reversed that decision, holding that "Congress's decision to abdicate its appropriations power … violates the Constitution's structural separation of powers." Subsequently, the government sought review by the Supreme Court, which was granted earlier this week. Next term, the Court will consider the constitutionality of the CFPB's blank check from Congress.
For more than a century, Congress has given away, or "delegated," much of its lawmaking authority to the federal bureaucracy. Last year, for example, regulatory agencies issued 3,168 final rules, while Congress passed 247 bills, according to regulatory scholar Wayne Crews.
Throughout much of the 20th century, lawmakers tempered these delegations through oversight and control of the purse strings. In the last few decades, however, an increasingly polarized Congress has abandoned meaningful engagement with the federal bureaucracy. In part, this decline is owed to the ascension of political party over institutional pride, such that half of Congress loses interest in runaway executive power whenever "their guy" occupies the Oval Office. And in part, it's due to electoral calculus: By avoiding hard decisions, lawmakers can evade political accountability. Adding it all up, the result is a modern Congress that does something as feckless as yielding its power of the purse to the CFPB.
Congress' hands-off approach to the CFPB reflects a fundamental breakdown in the Framers' design. A Congress that gives away its most important authority may be said to lack ambition. That's a big problem, because the Constitution's structure assumes that lawmakers would act the opposite. To prevent a dangerous concentration of power, the Framers divided government into three branches (legislative, executive, and judicial) and gave each the means to check the others. The animating principle, as James Madison famously explained in The Federalist Papers: No. 51, is to let "ambition … counteract ambition." A supine Congress undermines the separation of powers, which is a crucial bulwark for liberty.
Congress must rediscover its ambition, period. A good place to start would be for lawmakers to proactively retake the power of the purse from the CFPB, regardless of how the Supreme Court rules.
The post Congress Should Not Give Any Government Agency Financial Free Rein appeared first on Reason.com.
]]>Today's Reason Interview podcast has double the hosts and double the guests.
Every Thursday at 1 p.m. Eastern, Zach Weissmueller and I host a live interview on Reason's YouTube channel. Today's episode is pulled from our recent conversation about government regulation of cryptocurrency and related matters that we had with Hester Peirce, a renegade commissioner at the Securities and Exchange Commission (SEC), the Depression-era agency whose task it is to supposedly "protect investors," "maintain fair, orderly, and efficient markets," and "facilitate capital formation."
When the SEC recently fined the cryptocurrency exchange Kraken for supposedly offering an unregistered security, Peirce publicly broke with her colleagues, denouncing the decision as "paternalistic and lazy" and sadly representative of the government's unwillingness to issue clear regulations governing bitcoin and other cryptocurrencies. We talk with Peirce, who used to work at the Mercatus Center at George Mason University, about why she believes the SEC is overreaching when it comes to crypto regulations and what good regulations might look like.
In the second half of the show, we're joined by Nic Carter, a partner at Castle Island Ventures and a leading proponent of blockchain technology and the crypto future. He talks about why he didn't invest in Sam Bankman Fried's FTX and how the crypto industry needs to do more to police itself from fraudsters, whose inevitable collapse makes it more likely government will step in with terrible, soul-and-commerce-crushing rules and restrictions.
Today's sponsor:
The post Hester Peirce, Nic Carter: The Government vs. Cryptocurrencies appeared first on Reason.com.
]]>A recent Netflix documentary series called Madoff: The Monster of Wall Street by Emmy Award–winning filmmaker Joe Berlinger tells the story of the largest Ponzi scheme in history.
Besides the infamous character mentioned in its title, the series' other villain is the Securities and Exchange Commission (SEC), which received complaints about Bernie Madoff starting in the early 1990s, and yet, it not only failed to catch him but helped enable his fraud. During one investigation, all SEC investigators had to do was check an account number to verify trades had actually occurred, which they hadn't, of course, because all of Madoff's trades were fake.
The Netflix series acknowledges that the SEC was complicit in Madoff's scam and that he could have been caught if one investigator assigned to the case had done about 30 minutes of checking. But then it also blames deregulation and free market capitalism for making the fraud possible. The first episode sets the stage with a speech by Ronald Reagan.
"That's our economic program for the next four years; we're going to turn the bull loose," the episode shows Reagan saying on the floor of the New York Stock Exchange in 1985.
In episode 3, journalist Diana Henriques makes the connection explicit.
"Resources that had been in New York City, on Wall Street's doorstep, devoted to white-collar crime, to fraud, were being steered away [from Wall Street]," says Henriques of the George W. Bush administration era during which Madoff's operation reached its peak. "For the SEC, this was an exacerbation of an existing problem, as a result of a deregulatory campaign that began with the election of Ronald Reagan in 1980."
And yet, nothing in the series leads the viewer to the conclusion that the SEC needed a bigger budget to catch Madoff. In fact, outsiders were sounding the alarm without access to government funding or regulatory muscle. In 2001, Barron's journalist Erin Arvedlund reported that many Wall Street investors were suspicious that Madoff was engaged in foul play.
And the SEC received its first complaint that Madoff was running "an unregistered investment company" "offering '100%' safe investments" in 1992. In 1999, a derivatives expert named Harry Markopolos, who worked at a competing firm, started to alert the SEC that Madoff's investment returns were virtually impossible. In 2005, Markopolos sent the agency an infamous 25-page memo explaining why "The World's Largest Hedge Fund is a Fraud." The SEC opened an investigation in 2006, and then closed it the following year because the "uncovered violations" were "remedied" and "those violations were not so serious as to warrant an enforcement action."
So how is this tale of epic failure on the part of a government agency the fault of deregulation?
Instead of making lazy allusions to the evils of free market capitalism, to better understand the lessons of the Madoff saga, director Joe Berlinger should have consulted the work of the free market economist George Stigler, who won the Nobel Prize in part for his work on "regulatory capture."
In a 1971 paper, "The Theory of Economic Regulation," Stigler argues that while many people believe that "regulation is instituted primarily for the protection and benefit of the public," in fact, it mainly serves the purposes of the largest companies being regulated, which form a symbiotic relationship with their regulatory overseers.
"My thesis is that the industry body in the long run must act by and for the industry," said Stigler in a 1971 speech before the American Enterprise Institute. "The political realities of life dictate that the regulatory bodies become affiliated with and help in what it believes to be the necessary conditions for the survival of its industry."
Stigler's essay focuses mainly on how regulators help existing companies by protecting them from competition, but his theory can also be used to better understand the SEC's failure to catch Madoff. In a 1972 essay, Stigler writes that "the regulating agency must eventually become the agency of the regulated industry…. each needs the other." That's because the career lawyers at the SEC making the decisions have much more to gain personally from having a positive relationship with big industry players than antagonizing them.
This also pertains to the case of Sam Bankman-Fried, who was close with politicians and regulators and actively lobbied for regulation of the crypto industry in a bid to elbow out competitors right up to the moment that his crypto exchange FTX collapsed under the weight of its own alleged fraud.
The cozy relationship between industry and regulators helps explain why the SEC continually missed what was right in front of them in the Madoff case.
Madoff even spread the rumor that he was being considered as a future chairman of the SEC, and the series notes that internal emails revealed SEC bosses joking with the young agents investigating Madoff that maybe they could become his aides when he takes over the agency one day.
Can this all be pinned on Ronald Reagan, deregulation, and the free market?
"One guy led you to this pile of dung that is Bernie Madoff, stuck your nose in it, and you couldn't figure it out!" a Congress member screams at SEC officials during a hearing at one point in the series.
The documentary also makes a strong case that the SEC didn't just fail to catch Madoff; investors were emboldened by the agency's investigation and failure to find serious violations.
"The fact that the SEC found no evidence of wrongdoing was to me putting a stamp of approval on Madoff," says one man who handed Madoff almost all the proceeds from the sale of his small business.
It's a commonly held view "that regulation is instituted primarily for the protection and benefit of the public at large or some large subclass of the public," Stigler writes. But that view is not the reality. SEC investigators didn't want to be overly combative with Madoff because they thought doing so could hurt their careers. Regulation, as Stigler argues, exists largely to serve the interests of the most powerful players being regulated.
The illusion of competent regulation gave investors a false sense of security that drove them to make colossal mistakes. Is the answer really more regulation?
What if Harry Markopolos' warnings hadn't been filtered through the SEC? The average person might be better equipped to spot a con man than we give him credit for. But the myth that regulators are primarily motivated to protect the interests of the public causes many to suspend their better judgment.
"The individual consumer, if he is not hampered, is in general capable of a large measure of self-defense against fraud, mishaps, bad luck, and the like," said Stigler in his 1971 speech. "Not all consumers are intellectually competent and well-informed, but most consumers know how to build up defenses against the many vicissitudes that lie in real life. And it is primarily because we have socially so often hampered these effects that we have injured the consumer."
The big takeaway from Madoff: The Monster of Wall Street is that regulators unwittingly facilitated his fraud, just as they may have done with Sam Bankman-Fried and his alleged con. As you watch the Netflix series, think about whether we should really be giving these regulators more time or power. Are they helping us or themselves?
Produced by Zach Weissmueller. Edited by Danielle Thompson. Additional graphics by Lex Villena.
Photo Credits: Tom Williams/CQ Roll Call/Newscom; Bill Clark/CQ Roll Call/Newscom; joe Marino/ABACAUSA/Newscom; CD1/Mandatory Credit : Carrie Devorah / WENN/Newscom; Keystone Pictures USA/ZUMAPRESS/Newscom; Graeme Sloan/Sipa USA/Newscom; Bryan Smith/ZUMApress/Newscom; CD1/Mandatory Credit : Carrie Devorah / WENN/Newscom; J.B Nicholas / Splash News/Newscom; Lev Radin/ZUMAPRESS/Newscom
Music Credits: "Clockwork" by Borden Lulu via Artlist; "The Dark (GOOD Remix)—Instrumental Version" by WEARTHEGOOD via Artlist; "Identify" by Or Chausha via Artlist; "Time Machine" by Twin Signals via Artlist; "Abstract Emotion" by Stefano Mastronardi via Artlist; "The City of Hope" by Bortex via Artlist; "Cartagena Pt. 4" by James Forest via Artlist
The post What the Madoff Series Left Out appeared first on Reason.com.
]]>What little financial privacy you have when trading stocks is about to get even smaller next month. When you make a stock trade, your broker already is required by the Bank Secrecy Act to maintain records of it, monitor your trading activity, and report any suspicion of illegal activity to the federal government. But, starting in March, your broker will be required to directly report all of your trades, including your personal information, to a massive government database. If the Bank Secrecy Act concerns you—and even if it doesn't—just wait until you hear about the Consolidated Audit Trail (CAT).
The Consolidated Audit Trail is intended to collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and options across all U.S. markets, allowing the Securities and Exchange Commission (SEC) to track orders and identify who made them.
The SEC ordered the CAT to be created in 2012 after regulators had difficulty identifying the causes of the 2010 "flash crash." At the time, then-SEC Chair Mary Schapiro described the CAT as providing regulators with the "data and means to exponentially enhance [their] abilities to oversee a highly complex market structure." And in years since, the CAT has been championed as necessary for the SEC's enforcement efforts.
The CAT began collecting trading data in 2020, after years of development replete with challenges and controversies. It is scheduled to begin collecting customer information on March 17, 2023. Although the SEC has limited the scope of customer information to be collected—initial plans called for Social Security numbers, dates of birth, and account numbers—brokers must still provide customer names, addresses, and birth years which allows for easy identification of individual investors.
This massive surveillance database is a financial privacy nightmare.
Most of the criticism leveled at the CAT has focused on data security. The CAT will absorb information about tens of billions of trades daily, making it quite possibly the largest database in the world. Its sheer size will be an invitation for criminals, who then-SEC Chair Jay Clayton recognized in 2017 "could potentially obtain, expose and profit from the trading activity and personally identifiable information of investors."
The government is hardly immune from hacking; indeed, the SEC itself was hacked in 2016. Thousands of users (not just at the SEC) will have access to the CAT, with vague standards guiding their use of the data accessed, creating even more security gaps. And while the SEC proposed a rule to address some data security concerns in 2020, the agency has taken no action to finalize that rule or anything similar (despite a flurry of other rule making).
But these criticisms seem to assume that if the government had good enough data security, this type of intrusion into Americans' financial privacy would be acceptable. That's simply not the case. Personal and financial privacy are key components of life in free societies, where individuals enjoy a private sphere free of government involvement, surveillance, and control. As SEC Commissioner Hester Peirce recognized:
Our purchases and sales of securities, particularly when aggregated together as the CAT would do, are a rich form of value expression. They might express a view of how markets work, a determination on the efficiency of markets, expectations about the future, or even a moral philosophy.
Trading is thus an expressive activity, and the CAT raises the same types of civil liberties concerns as any other mass surveillance program. It doesn't matter if the SEC has good intentions, seeking only to use the CAT to understand our markets better and to enforce existing laws. Financial privacy is vital because it can be the difference between survival and oppression for those who hold disfavored views.
In this way, the CAT burdens not only Americans' First Amendment rights of speech and expression but also their rights under the Fourth Amendment to be free from unreasonable government searches and seizures. Although a 1976 Supreme Court case about the Bank Secrecy Act found that information shared with a third party—there, the bank—is not protected by the Fourth Amendment, that doctrine is ripe for revisiting given the ubiquitous role of intermediaries in modern life. But even if the CAT's surveillance isn't constitutionally deficient, its data collection is troubling and should be treated no differently than other areas of American life where people reject broad-based surveillance of their activity.
This is especially true where the benefit of surveillance seems marginal. The SEC isn't without the ability to analyze trading information absent the CAT, although it's understandably tempting for the agency to want to see every trade in close to real time. Some have suggested alternatives to prohibit personal information from the database, leaving the SEC to make case-by-case requests of brokers when warranted. This is the minimum the agency could do to protect customer privacy (especially where the SEC is touting enforcement cases brought with CAT data prior to including personal information). But such solutions leave the surveillance machinery in place; Commissioner Peirce's suggestions of a more limited database focused on institutional investor trading or improvements to already existing systems are better choices to protect the privacy of individual investors.
The CAT threatens American investors' privacy. Knowing that the SEC is watching your every trade is too great a cost for easier SEC enforcement. Despite the years of planning and expenses already incurred, the SEC should put the CAT back in the bag—or let it out only when declawed—to protect the liberties of American investors.
The post The SEC Is Starting a Massive Database of Every Stock Trade appeared first on Reason.com.
]]>The Securities and Exchange Commission (SEC) charged Kraken—America's third-largest cryptocurrency exchange by volume—with offering an unregistered security last Thursday. As part of a settlement, Kraken agreed to immediately cease offering interest-bearing "staking" services to U.S.-based customers and pay a $30 million fine.
But one SEC commissioner, Hester M. Peirce, published a forceful dissent, calling the SEC's action "paternalistic and lazy" and questioning "whether SEC registration would have been possible" given the murky framework the agency offers.
Join Peirce and Reason's Nick Gillespie and Zach Weissmueller for a live discussion of the regulatory threats to cryptocurrency this Thursday at 1 p.m. ET. Watch and leave questions and comments on the YouTube video above or on Reason's Facebook page.
This week's The Reason Livestream is produced by Adam Sullivan.
Show notes:
SEC press release on Kraken enforcement action
SEC Commissioner Hester Peirce's dissent
CNBC: "SEC commissioner Peirce publicly rebukes her agency, Gensler on crypto regulation."
SEC Commissioner Gary Gensler on crypto staking
CNBC: "SEC's Gary Gensler on Kraken staking settlement: Other crypto platforms should take note of this"
Kraken CEO Jesse Powell responds to SEC head Gary Gensler
FTX Meltdown and the Future of Crypto. Live With Kraken's Jesse Powell
"Operation Choke Point 2.0 is Underway, and Crypto is in its Crosshairs," by Nic Carter in Pirate Wires
Coin Desk: "SEC Proposal Could Bar Investment Advisers From Keeping Assets at Crypto Firms"
The Block: Total value locked into DeFi projects
The post Renegade SEC Commissioner Wants To Save Crypto: Live With Hester Peirce, Nick Gillespie, and Zach Weissmueller appeared first on Reason.com.
]]>If you've sent or received money to or from somebody in Mexico, law-enforcement agencies have probably tracked your transactions.
In fact, if you've sent money across American borders at all, Big Brother is likely watching. In what began as an Arizona-led effort before going nationwide, a not-so-independent nonprofit organization has been indiscriminately compiling sensitive financial information and making it available to law-enforcement agencies across the country.
Last year, Sen. Ron Wyden (D–Ore.) revealed that "Homeland Security Investigations used a form of subpoena power to order two companies to turn over every money transfer over $500, to and from California, Arizona, New Mexico, Texas and Mexico. This data was shared with hundreds of federal, state and local government agencies, who can search it without any court oversight, through a non-profit created by the Arizona Attorney General."
His office subsequently discovered the surveillance was worse than originally believed.
"The program included far more states and foreign nations than the government disclosed in briefings," Wyden's office announced this week. The government demanded data from many other companies, including Euronet (RIA Envia), MoneyGram and Viamericas, and "included records for transfers of $500 or more between any U.S. state and 22 foreign nations and one U.S. territory." Agencies demanding data included not just the Department of Homeland Security (DHS) and Arizona, but also the FBI and Drug Enforcement Administration (DEA) under the Department of Justice.
The American Civil Liberties Union (ACLU) also dug for information and has published more than 200 documents revealing details of the program which fed a vast database of sensitive data.
"The database, run by an organization called the Transaction Record Analysis Center (TRAC), contained 145 million records of people's financial transactions as of 2021, and we have reason to believe it's still growing," reports the ACLU.
The surveillance dates to 2006, when Arizona's attorney general sought details from Western Union about money transfers to and from the Mexican state of Sonora. That led to a legal battle settled in 2010 when "Western Union agreed to turn over records of all money transfers exceeding $500 to or from the Southwest border states and to or from Mexico for the next four years," notes the ACLU.
TRAC was established in 2014 as a nominally independent repository for intercepted financial records. While supposedly a separate organization, it was originally funded by Western Union and under the control of the Arizona attorney general's office.
That agreement expired in 2019, at which time DHS took over funding TRAC and joined the arrangement to compel financial disclosures with customs summonses, a type of subpoena badly abused by this mass application. By this time many companies were being forced to surrender data on private transactions for perusal by a large number of law enforcement agencies.
Ironically, while the original 2006 effort targeting transactions between Americans and Sonora had been rejected by Arizona courts as "overbroad," that didn't prevent the surveillance operation from growing vastly broader. In addition to federal subpoena power, Arizona continued to gather money transfer records using the same authority originally rejected by the courts under much narrower circumstances.
Once compiled by TRAC, the extensive collection of financial records was available to a wide array of local, state, federal, and military law-enforcement agencies.
"The database of people's money transfer records grew from 75 million records from 14 money service businesses in 2017 to 145 million records from 28 different companies in 2021," reports the ACLU. "By 2021, 12,000 individuals from 600 law enforcement agencies had been provided with direct log-in access to the database."
Rather than investigations of past crimes, many demands for financial records could best be described as speculative fishing expeditions. A June 2021 subpoena from the Arizona attorney general's office demanded data "relating to each send and receive transaction of $500 and greater, sent to or from the states of Arizona, California, New Mexico, Texas and to or from the country of Mexico, on a bi-weekly schedule as each such period becomes available, beginning with July 1, 2021 and ending with June 30, 2022."
While many of the demands originated with Arizona authorities, TRAC board minutes from 2021 report that the organization "has provided or is currently providing assistance to the Financial Crimes Task Force, the Special Operations Division of DEA, and has been assisting with complicit agent investigations in PA, FL, OH, OK, CO, and CA. TRAC is in discussion with FBI in Boston, MA and is collaborating in a sex trafficking investigation in Camden, NJ."
The surveillance operation has tried to stay current with evolving financial technology. Among the 28 money service businesses surrendering data to TRAC as of 2021 were four Bitcoin ATM companies.
A decade after Edward Snowden revealed mass interception of communications by the National Security Agency, it's obvious that government officials are still very comfortable with bulk surveillance. Without trying to narrow their focus to specific suspects or crimes, they hoover up the details of our financial relationships. Coupled with recent efforts to extend such surveillance to cryptocurrencies, which were explicitly developed to enable private, permissionless transactions, they clearly want everything involving money under their scrutiny and control.
Wyden has asked the DHS inspector general to look into the financial surveillance operation and "investigate the program's origins, how the program operated, and whether the program was consistent with agency policy, statutory law, and the Constitution." More recently, he also asked the Justice Department's inspector general to "examine the role that DOJ-component agencies, including the FBI and DEA, have played in forcing companies to turn over customer data to TRAC and the querying and use of TRAC data by DOJ component agencies."
That's a nice start, but it's not enough. Whether or not federal officials conclude that other federal officials were wrong to violate Americans' financial privacy, government agencies should not be permitted to engage in bulk surveillance, period. TRAC and related operations should be shut down, as well as any other operation that engages in similar abuses.
The post Arizona-Led Effort Spies on Americans' Financial Transactions appeared first on Reason.com.
]]>"The social responsibility of business is to increase its profits," proclaimed Milton Friedman in a famous 1970 New York Times essay.
The view that the primary aim of a business is to increase profits and shareholder value is one that's been challenged in business schools and by economists, politicians, and in the marketplace. The rise of the theory of "stakeholder capitalism," which posits that business should also aim to achieve certain environmental and social goals, has led to the increasingly widespread adoption of Environmental, Social, and Governance (ESG) investing in the financial sector. The SEC has proposed regulating ESG standards, a move that would allow the federal government to further define what constitutes a "socially responsible" company.
Join Reason's Zach Weissmueller at 1 p.m. ET on Thursday for a discussion of ESG and its effects on corporate America and the global economy with Samuel Gregg, a Distinguished Fellow in Political Economy at the American Institute for Economic Research and Contributing Editor at Law & Liberty as well as Russ Greene, a senior fellow for economic progress at Stand Together, which is a supporter of Reason Foundation, the nonprofit that publishes Reason.
Watch the stream above or by visiting Reason's Facebook page here.
The post Is ESG a Threat to Capitalism? Live with Samuel Gregg, Russ Greene, and Zach Weissmueller appeared first on Reason.com.
]]>Beyond politically connected scammers and frothy valuations, the attractiveness of cryptocurrencies lies in their potential for doing what cash does, but across distances. When governments inflate money, people turn to other stores of value, including crypto. When politicians and their financial-sector accomplices block transactions of which they disapprove, people look for alternative means of doing deals without permission, crypto among them. So, when officials talk of stripping privacy and autonomy from cryptocurrencies such as bitcoin, you know they would do the same to cash if they could.
"Rogue nations, oligarchs, drug lords, and human traffickers are using digital assets to launder billions in stolen funds, evade sanctions, and finance terrorism," Sen. Elizabeth Warren (D–Mass.) huffed this week. "The crypto industry should follow common-sense rules like banks, brokers, and Western Union, and this legislation would ensure the same standards apply across similar financial transactions. The bipartisan bill will help close crypto money laundering loopholes and strengthen enforcement to better safeguard U.S. national security."
The bipartisan bill to which Warren refers sports the tendentious moniker, Digital Asset Anti-Money Laundering Act of 2022. Stripped of grandiose claims, it attempts to extend the financial surveillance state cooked up by drug warriors and anti-terrorism fearmongers to cryptocurrencies. Warren and company picked an opportune moment to do just that, while the public is occupied with a headline-grabbing financial scandal that taints crypto's already sketchy reputation.
In fact, Sam Bankman-Fried's shenanigans at FTX, perhaps concealed by generous political donations, look old-school, including mingling personal and corporate funds in ways that would have raised red flags long before digital tokens. But they cast further shade over a crypto sector that had yet to gain acceptance by the American mainstream. After years of breathy warnings that cryptocurrency is shady, and speculative values detached from reality, many people are prepared to believe the worst.
"Crypto is an interesting technology that had one terrible piece of bad luck: its standard-bearer, bitcoin, went up in value 10,000x over a few years," wide-ranging commentator Scott Alexander wrote earlier this month. "When something goes up in value 10,000x, it's hard to think of it in any other context. Whatever it was before, now it's 'that thing which went up in value 10,000x'."
Alexander points out that, despite the shellacking the crypto sector is taking in the press and from politicians, it remains popular in countries where it's used for its intended purpose as a store of value and a means of exchange in defiance of authoritarian controls. "Vietnam uses crypto because it's terrible at banks," he notes. "There's a history of the government forcing banks to make terrible loans, and then those banks collapsing." In socialist Venezuela, "cryptocurrency provides a hard-to-ban alternative which has caught on among Venezuelan hustlers and small businessmen."
This played out in Turkey when the government got serious about turning the lira into toilet paper and people bought gold, foreign currency, and bitcoin. Bitcoin also became a means for Canadian protesters to work around government attempts to financially isolate their protest movement.
"Of course a technology centered around avoiding governance and banking failures will be centered in the countries with the most governance and banking failures!" Alexander adds.
But any technology that can be used by good people can also be used by bad people. That's as true of window curtains as it is of crypto (or cash). The same privacy sought by a family going through evening routines might serve a terrorist building bombs, just as businesses and activists evading a hostile state might use the same currency that purchases bomb parts. Politicians love playing up potential abuses.
"Following the September 11, 2001 terrorist attacks, our government enacted meaningful reforms that helped the banks cut off bad actors' from America's financial system. Applying these similar policies to cryptocurrency exchanges will prevent digital assets from being abused to finance illegal activities without limiting law-abiding American citizens' access," insists Sen. Roger Marshall (R–Kan.), co-sponsor of the Digital Asset Anti-Money Laundering Act of 2022.
When politicians hold up the post-9/11 panic that supercharged the surveillance state as their model, take them seriously. The legacy of that time is widely recognized as an over-powerful government that intrudes into Americans' lives, subjecting our activities and communications to monitoring and diminishing our liberty. With their bill, Warren, Marshall, and company want to extend that surveillance to financial technology that was explicitly developed to empower individual liberty and privacy.
"The bill first seeks to classify self‐hosted wallets as money service businesses," cautions the Cato Institute's Nicholas Anthony. "For those unfamiliar, self‐hosted wallets are merely the digital equivalent of a wallet in your pocket or purse. … Where much of the financial surveillance in the United States depends on what's known as the third‐party doctrine, self‐hosted wallets offer individuals protection from government surveillance and censorship. Yet Senator Warren's bill would put an end to that protection."
The bill, says Anthony, would "classify cryptocurrency miners, validators, and network participants as money service businesses." It "also sets its sights on cryptocurrency mixers" who "offer individuals the opportunity to enhance their privacy when using cryptocurrencies on public blockchains."
In fact, the bill's language specifies that "the Secretary of the Treasury shall promulgate a rule that prohibits financial institutions from … handling, using, or transacting business with digital asset mixers, privacy coins, and other anonymity-enhancing technologies."
Senators Warren and Marshall talk about "terrorism" and "drug lords," but their clear goal (whether or not its within their reach, which is another matter) is to strip crypto of its ability to be used privately and without permission in the same way we use cash. Their objections to digital money also apply to banknotes and coins. Ultimately, it's not crypto they fear, but our liberty to earn, purchase, save, and donate without being impoverished, scrutinized, or stopped by government officials.
Bitcoin and other digital tokens have their flaws, but they're an attempt to fulfill a widespread desire for reliable stores of value and means of exchange independent of control. And while all such forms of money are vulnerable to fraud and theft, that's already illegal. The Digital Asset Anti-Money Laundering Act of 2022 doesn't even attempt to address such crimes, instead, it's an attack on financial privacy and liberty. For all the reasons politicians are coming after crypto, you can bet that cash is next.
The post Elizabeth Warren's Crypto Bill Targets Financial Freedom, Not Fraud appeared first on Reason.com.
]]>Disgraced crypto king faces criminal charges and SEC lawsuit. Sam Bankman-Fried, founder and head of the popular cryptocurrency exchange FTX, has been arrested in the Bahamas at the behest of U.S. prosecutors, who have filed charges against him. Bankman-Fried also faces charges from the U.S. Securities and Exchange Commission (SEC).
Bankman-Fried's arrest follows revelations that FTX lent customer assets to Alameda Research, which he also owned, and that FTX had filed for bankruptcy.
"Earlier this evening, Bahamian authorities arrested Samuel Bankman-Fried at the request of the US government, based on a sealed indictment filed by the [Southern District of New York]," said U.S. attorney Damian Williams in a Twitter statement on Monday night. "We expect to move to unseal the indictment in the morning and will have more to say at that time."
It's unclear precisely what charges Bankman-Fried faces, but authorities were looking at him for potential fraud charges.
"The SEC has authorized separate charges relating to his violations of securities laws, to be filed publicly tomorrow," said Gurbir Grewal, director of the SEC's Division of Enforcement, in a Monday night statement.
This morning, the SEC alleged that Bankman-Fried had been diverting customer funds from FTX to Alameda Research "from the start," and that he had also used customer assets to fund venture investments, real estate purchases, and even political donations.
Bankman-Fried was known to be a major donor to Democratic politicians (the second-largest in the 2022 election cycle, according to Forbes). Bankman-Fried has also stated that he secretly gave a lot to Republicans, too, though this hasn't been verified. "I've been their third-biggest Republican donor this year as well," but it's "not generally known," because "all my Republican donations were dark," he said in a recent YouTube interview.
Bankman-Fried "orchestrat[ed] a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the crypto trading platform of which he was the CEO and co-founder," alleged the SEC in a press release, stating that he "commingled FTX customers' funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations."
Bankman-Fried has blamed incompetence for any crimes he may have committed. "I didn't knowingly commit fraud," Bankman-Fried told the BBC last weekend. "I didn't want any of this to happen. I was certainly not nearly as competent as I thought I was."
John Jay Ray III, who has been appointed CEO of FTX to oversee its bankruptcy case, said in court filings: "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information."
Virginia Postrel offers a fascinating history of how department stores helped liberate women—and moral panic. From her Wall Street Journal essay:
Urban shopping districts were where women claimed the right to dine outside their homes, walk unescorted and take public transportation without loss of reputation. Thousands of female sales clerks flowed out of stores in the evenings, when downtowns had previously been male territory. Department stores provided ladies' rooms that gave women places to use the toilet and refresh their hair and clothing. They offered female-friendly tearooms. Directly and indirectly, modern shopping enlarged women's public role.
Of course, this led to new levels of contact between men and women and that freaked a lot of people out:
Men known as "mashers" gathered in shopping districts to ogle and chat up women. Some were no more than well-dressed flirts, violating Victorian norms in ways that few today would find objectionable. Many contented themselves with what an outraged clubwoman termed "merciless glances." Others followed, catcalled and in some cases fondled women as they strolled between stores, paused to look in windows or waited for trams.
Postrel offers more details in her newsletter:
Newspapers launched anti-masher crusades and prominent women demanded stricter law enforcement and stern punishment.…The crusade against mashers, while based on a real problem, had a strong element of moral panic.
The obvious cause of homelessness: not enough housing. Jerusalem Demsas with more in The Atlantic:
In their book, Homelessness Is a Housing Problem, the University of Washington professor Gregg Colburn and the data scientist Clayton Page Aldern demonstrate that "the homelessness crisis in coastal cities cannot be explained by disproportionate levels of drug use, mental illness, or poverty." Rather, the most relevant factors in the homelessness crisis are rent prices and vacancy rates.
Colburn and Aldern note that some urban areas with very high rates of poverty (Detroit, Miami-Dade County, Philadelphia) have among the lowest homelessness rates in the country, and some places with relatively low poverty rates (Santa Clara County, San Francisco, Boston) have relatively high rates of homelessness. The same pattern holds for unemployment rates: "Homelessness is abundant," the authors write, "only in areas with robust labor markets and low rates of unemployment—booming coastal cities."
[…] America has had populations of mentally ill, drug-addicted, poor, and unemployed people for the whole of its history, and Los Angeles has always been warmer than Duluth—and yet the homelessness crisis we see in American cities today dates only to the 1980s. What changed that caused homelessness to explode then? Again, it's simple: lack of housing. The places people needed to move for good jobs stopped building the housing necessary to accommodate economic growth.
And why don't many cities have enough housing? In large part because regulations have made it difficult:
Few Republican-dominated states have had to deal with severe homelessness crises, mainly because superstar cities are concentrated in Democratic states. Some blame profligate welfare programs for blue-city homelessness, claiming that people are moving from other states to take advantage of coastal largesse. But the available evidence points in the opposite direction—in 2022, just 17 percent of homeless people reported that they'd lived in San Francisco for less than one year, according to city officials. Gregg Colburn and Clayton Aldern found essentially no relationship between places with more generous welfare programs and rates of homelessness. And abundant other research indicates that social-welfare programs reduce homelessness. Consider, too, that some people move to superstar cities in search of gainful employment and then find themselves unable to keep up with the cost of living—not a phenomenon that can be blamed on welfare policies.
But liberalism is largely to blame for the homelessness crisis: A contradiction at the core of liberal ideology has precluded Democratic politicians, who run most of the cities where homelessness is most acute, from addressing the issue. Liberals have stated preferences that housing should be affordable, particularly for marginalized groups that have historically been shunted to the peripheries of the housing market. But local politicians seeking to protect the interests of incumbent homeowners spawned a web of regulations, laws, and norms that has made blocking the development of new housing pitifully simple.
Read the rest here.
Bari Weiss has released the latest installment of the Twitter Files, for which Twitter CEO Elon Musk has granted access to internal documents to a small group of friendly reporters. Now on installment five, the "files" reveal more about Twitter's internal deliberation processes regarding things like de-amplifying accounts, the Hunter Biden laptop story and Hunter Biden dick pics, misinformation reports from law enforcement, and Donald Trump's account suspension. So far, the dispatches have contained some interesting and notable information, and also a lot of Musk-friendly spin and culture war hyperbole. Some other perspectives…
David French's take on the Twitter Files: "The picture that emerges is of a company that simply could not create and maintain clear, coherent, and consistent standards to restrict or manage allegedly harmful speech on its platform. Moreover, it's plain that Twitter's moderation czars existed within an ideological monoculture that made them far more tolerant toward the excesses of their own allies. In other words, Twitter behaved exactly like public and private universities in the era when speech codes ruled the campus."
Mike Masnick's take on the Twitter Files: "They are all written by people who appear to have (1) no idea what they're looking at (2) no interest in talking to anyone who does understand it and (3) no concern about presenting them in an extremely misleading light in an effort to push a narrative that is not even remotely supported by what they're sharing."
Yasha Levine's take on the Twitter Files: "One of the saddest things about them is that the people on both sides of this holographic media fight really are horrible, and yet we're supposed to get all emotionally involved in it and pick one oligarchic faction—either TEAM LIB or TEAM MAGA—and root for it like it's our lord and savior. All the while, nothing about this drama will have any real impact on anyone in America. It's just feeding the political-entertainment complex and the rich assholes and their hanger-ons that feed off of it."
WARNING: GRAPHIC A cop in Florida shoots a man in the woods holding an axe. The officer ran up to a man described as mentally ill, attempted no de-escalation, and shot him despite not being in danger. pic.twitter.com/jbWcHdoQsZ
— Fifty Shades of Whey (@davenewworld_2) December 12, 2022
• A Senate investigation suggests that "the Federal Bureau of Prison's deeply flawed, backlogged system for investigating sexual assault fails to protect female inmates from rape while protecting employees who commit sexual assault."
• The Supreme Court won't hear a case concerning California's ban on flavored tobacco.
• Lawmakers have tucked a bill called the Judicial Security and Privacy Act into the national defense spending authorization bill and it presents several First Amendment concerns, says Chamber of Progress counsel Jess Miers:
We seriously need to talk about this Judicial Security and Privacy Act currently shoved into the NDAA. Let's start with where we're at WRT #Section230
Follow along with me on page 2487: https://t.co/t3wxUQnXao
— Jess Miers ???? (@jess_miers) December 12, 2022
• How ChatGPT might impact the U.S. economy.
• "State TikTok bans are a dumb performance and don't fix the actual underlying problem," suggests Techdirt.
The post FTX's Sam Bankman-Fried Used Customer Assets to Fund Political Donations, Says SEC appeared first on Reason.com.
]]>App-based financial service firms like PayPal and Square have revolutionized how American consumers and businesses move money around—and now, they're being blamed for COVID-19 relief fraud.
Yes, really. In a congressional report published last week, lawmakers on the Subcommittee on the Coronavirus Crisis say widespread fraud in the Paycheck Protection Program (PPP), which was supposed to pay shuttered businesses to keep employees on the payroll during the pandemic, should spur calls for new regulations on so-called "fintech" companies.
"While the PPP delivered vital relief to millions of eligible small businesses, at least tens of billions of dollars in PPP funds were likely disbursed to ineligible or fraudulent applicants, often with the involvement of fintechs, causing tremendous harm to taxpayers," the report reads, in part.
That's a bit like blaming a bank robbery on whichever company manufactured the getaway car.
And when it comes to the PPP, there were a lot of robberies. Between a quarter and a third of the $835 billion distributed via the program is suspected of having been stolen by fraudsters, in part because of lax oversight over the PPP's loans and in part because, well, that's what always happens when the government starts throwing money around in a crisis.
Was some of that fraud facilitated by some fintech firms? Yep. As the congressional report details, a pair of fintech companies—specifically Womply and Blueacorn—were responsible for a larger share of shady transactions related to PPP loans. Both "failed to implement systems capable of consistently detecting and preventing fraudulent and otherwise ineligible PPP applications."
Another fintech, Kabbage, which has subsequently filed for bankruptcy, "missed clear signs of fraud in a number of PPP applications," according to the report.
Do you know who else failed to implement systems and missed clear signs of fraud in much the same way? The Small Business Administration (SBA).
But, OK, maybe that's beside the point. Let's accept the congressional committee's premise that some fintech firms were unwilling or unable to vet users in a way that made the PPP fraud mess even worse than it would have been with only government incompetence in the equation. Calling out those bad actors in a government report might have some value to the rest of the industry or to consumers. Maybe there could be law enforcement actions to track down the fraudsters who used those services, and maybe the specific services themselves could be hauled into court if they failed to meet contractual obligations that came along with being trusted to disseminate those PPP loans.
Those, of course, are not the conclusions that the committee reached.
"Based on these findings, Congress and the SBA should consider carefully whether unregulated businesses such as fintechs, many of which are not subject to the same regulations as financial institutions, should be permitted to play a leading role in future federal lending programs," the committee concludes.
In other words, an entire industry that has emerged to compete with traditional financial institutions like banks ought to be banned from being involved in federal lending programs because a few members of that industry engaged in some bad behavior—behavior that was rampant within the same government that now should regulate them. Does this make any sense at all?
To carry the getaway-car metaphor forward, this would be like banning all cars from driving on public roads because Bonnie and Clyde drove a Ford. The horse-drawn carriage and bicycle makers of the time might have loved that idea, of course.
A similar thing could be happening here. "The report will be cited to justify putting more roadblocks before the fintech industry and more protections for the legacy banking system, neither of which is warranted," warns Nicholas Anthony, a policy analyst for the libertarian Cato Institute. That wouldn't only be unfair to those businesses and their investors; it would be unfortunate for the millions of people who use those services for nonfraudulent activities.
Again, PPP fraud should be almost entirely blamed on the federal government's own actions, which included removing safeguards designed to prevent fraud so loans could be distributed as quickly as possible. The PPP program clearly overloaded any capacity the SBA may have had for reviewing loans, as the agency was charged with distributing more than 20 times as much as it had handled in any full year in the span of just 33 days in March and April 2020. As the SBA's inspector general pointed out in a report published in May, the agency did not have "a centralized entity to design, lead, and manage fraud risk" until February 2022—nearly two years after the PPP loans began being distributed and long after the bulk of them had been forgiven.
But, yeah, the fintech industry is definitely to blame.
The post Congress Has a New Scapegoat for COVID Fraud: Banking Apps appeared first on Reason.com.
]]>On January 15, 2022, the Canadian government closed its borders to unvaccinated American truckers and began requiring domestic truckers to show proof of COVID vaccination when crossing northward, infuriating drivers and snarling North American trade. Within two weeks, thousands of "Freedom Convoy" protesters filled the capital city of Ottawa, demanding the requirement be lifted. Officials responded by branding them "extremists," even "terrorists," and quickly began treating them as such. On February 4, the Canadian government pressured the crowdsourcing service GoFundMe—the truckers' seemingly decentralized source of financing—into abruptly stopping further transfers.
Ottawa was just getting started. On February 14, the federal government invoked the Emergencies Act, which let it freeze any bank account or legal financial instrument that could be traced to the truckers. So convoy supporters turned to bitcoin, the decentralized, peer-to-peer, blockchain-enabled digital currency whose whole raison d'etre—maintaining a separation between currency and government—seemed designed for moments like this.
Or not. Most bitcoin transactions—75 percent, according to an October 2021 working paper published by the National Bureau of Economic Research—are conducted through cryptocurrency exchanges. These, being legally licensed businesses (at least in theory), are vulnerable to the same interference as old-school financial institutions. The Canadian government demanded that the exchanges block all crypto wallets that could be linked to the protesters, and it initially seized the contents of some outright. "We will be forced to comply," tweeted Jesse Powell, then-CEO of major crypto exchange Kraken. "If you're worried about it, don't keep your funds with any centralized/regulated custodian. We cannot protect you. Get your coins/cash out and only trade p2p."
States around the world are chipping away at the freedom-enhancing qualities of the purportedly permissionless virtual currencies that have proliferated since the pseudonymous Satoshi Nakamoto unleashed bitcoin in January 2009. Governments are cracking down on third-party exchanges, seeking to hoover up all transaction data to enforce tax and other laws; they are trying to classify virtual currencies as "securities" in order to tighten the regulatory grip; they are sometimes banning software and digital addresses used to transfer ownership of them. Most ominously of all, some governments are trying to get into the crypto business themselves.
By the end of 2021, according to the industry tracking service Chainalysis, global adoption of crypto had "grown by over 2300% since Q3 2019 and over 881% in the last year." Institutional investors in 2021 traded $1.14 trillion worth of cryptocurrencies on the leading exchange Coinbase alone. Digital currency commercials so dominated the 2022 Super Bowl that advertising insiders dubbed it the "Crypto Bowl." And while the market capitalization of the crypto space plummeted to $957 billion as of early October 2022, down from a $2.8 trillion high in November 2021, that's still nearly triple the value at the start of October 2020.
The industry has grown too big for governments to ignore. In August 2022, the U.S. Treasury Department's Office of Foreign Asset Control (OFAC) made it a crime for any American to receive or send money using digital addresses associated with Tornado Cash, a crypto "tumbling" service that pools both source-identifiable and fully anonymous cryptocurrency together in order to make it harder to forensically trace ownership of particular virtual currency from sender to eventual recipient. Tornado Cash, the government claimed, had illegally laundered more than $7 billion, some of it stolen.
In response, pranksters began sending tiny bits of the digital currency ether to many prominent figures via Tornado Cash addresses, to hit home the absurdity of treating the mere interaction with a service as a crime. (The U.S. Treasury did trouble itself to say it would not go after mere recipients of Tornado-tainted ether.)
This wasn't the first time OFAC had made interacting with such a tumbler illegal for Americans, but Tornado Cash's distinct nature raises unique questions about the government's claimed power over increasingly sophisticated crypto markets and the sometimes autonomous software that such markets have come to use.
While some tumblers are essentially custodial entities with actual human beings controlling the exchange of digital currency tokens, Tornado Cash uses "smart contracts," a form of self-executing code. This kind of decentralized finance (DeFi) usually involves ethereum (the second-largest cryptocurrency per market capitalization), which was designed to enable the development of decentralized apps on top of a blockchain. Some of the addresses that OFAC sanctioned were code, untethered to individual people.
Because of this architecture, explain Jerry Brito and Peter Van Valkenburgh in an August 2022 paper for the crypto-focused think tank Coin Center, the people who created the "Tornado Cash Entity" have "zero control over the [Tornado Cash] Application today" and "can't choose whether the Tornado Cash Application engages in mixing or not, and…can't choose which 'customers' to take and which to reject." This implies that there is no actual individual who should be legitimately punishable for whatever specific crimes the app might be thought to have facilitated.
Potential First Amendment implications arise from the difference between a human provider and a blockchain-enabled piece of software. If OFAC can bar citizens from using "an ever expanding list of specific open source protocols and applications that are 'blocked,'" Brito and Van Valkenburgh ask, "then isn't that a restriction on the publication of speech?"
"Merely blocking one application is not the intent," the Coin Center authors argue. "The intent is to send a message that any example of this software is to be avoided…to chill speech such that Americans not only avoid interacting with these specific contract addresses, but avoid interacting with any protocol that is substantially similar to the code in those addresses. It's a ban not just on a specific application, but on a class of technology."
This interpretation is supported by an unnamed Treasury official, who told the Financial Times in August 2022 that the department "believe[s] this action will send a really critical message to the private sector about the risks associated with mixers writ large" and that the crackdown was "designed to inhibit Tornado Cash or any sort of reconstituted versions of it to continue to operate." In September 2022, Coinbase bankrolled a legal challenge to the Tornado Cash ban.
Governments are trying to steer cryptocurrency transactions into legally regulated entities with human operators that can be more easily controlled. In May 2021, Marathon Digital Holdings, which at the time used 6 percent of the total worldwide computing power applied to bitcoin "mining" (the computerized process for creating new units of the currency), began accepting only transactions arising from OFAC's list of legally approved entities. But what state pressure can accomplish, market pressure can still reverse—just a month later, after a backlash from customers allergic to state meddling, Marathon began dealing with all comers again.
States could, and might yet, use the carrot of regulatory permissiveness or even subsidy to encourage miners to accept blocks only from registered nonanonymous users, destroying crypto's core attributes of pseudonymity and permissionlessness. (Though governments should remember that mining is a highly movable operation. Restrictions or outright bans just ensure that citizens of other countries are the ones benefiting from it.) The flood of Wall Street money that helped make many initial crypto holders rich brought with it the attendant danger of respectability—the more "legitimate" an industry becomes, the less liberatory it can be.
Governments' reactions to cryptocurrencies have varied widely. El Salvador made bitcoin legal tender in September 2021 (though survey data in mid-2022 indicate that most citizens and businesses are still not using or accepting it), while many other countries ban bitcoin mining and/or the use of crypto as payment. Regulations commonly focus on intermediary businesses that offer custodial, trading, or other services, with the goal of gathering up as much information as possible about their customers.
These efforts, operating under the rubric of AML/CFT (for "anti–money laundering/combating financing of terrorism"), are central to officials' worries about crypto: They cannot tolerate spaces where people can exchange value without the police accessing every detail. The U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) considers even private peer-to-peer buyers and sellers of crypto as licensable money service businesses, with all the requirements and criminal/civil penalties pertaining thereto.
A G-7 body called the Financial Action Task Force wants to unify every nation's regulations to ensure no crypto-asset company on the planet evades governments' prying eyes. But as of June 2022, the group was lamenting that the "vast majority of jurisdictions have not yet fully implemented" its demands to standardize the market in an enforcement-friendly way. The global regulators griped that so far "only 11 jurisdictions have started enforcement and supervisory measures" for what they call the "travel rule," which requires the private sector to obtain and report "originator and beneficiary information," as they put it—meaning, squeal on all their customers to financial authorities.
In the U.S., the President's Working Group on Financial Markets (PWG) was already regretting the lack of international standardization in November 2021. "Illicit actors can exploit these gaps by using services in countries with weak regulatory and supervisory regimes to launder funds, store proceeds of crime, or evade sanctions," a PWG report lamented.
The past couple of years have seen a proliferation of blandly repetitive white papers and statements from governments and international bodies and financial institutions about the promises and perils of virtual currencies. Such cud chewing gives hints, though never total clarity, about where state interference in crypto markets might be heading.
In March 2022, President Joe Biden issued an executive order instructing various federal agencies to come up with policies, protocols, and regulations for cryptocurrencies. The specifics remained hazy under clotted bureaucratic prose about "encourag[ing] regulators to ensure sufficient oversight and safeguard against any systemic financial risks," demanding "coordinated action across all relevant U.S. Government agencies to mitigate these risks," and working "across the U.S. Government in establishing a framework to drive U.S. competitiveness and leadership in, and leveraging of digital asset technologies."
More concretely, the administration slipped into 2021's Infrastructure Investment and Jobs Act a provision that widens legal reporting requirements for dealing in crypto on behalf of other people. Entities that receive more than $10,000 of value in crypto now must collect and report to the government the name, date of birth, and Social Security number of the person they got it from.
This fresh demand is already the object of a lawsuit from Coin Center, which argues the requirement constitutes "a mass surveillance regime on ordinary Americans" in violation of the Fourth Amendment, and that it would often be impossible to satisfy given the way blockchain interactions work. As Coin Center explains on its website, the government is trying to sidestep Fourth Amendment obstacles to financial and telecom snooping via the "third party" exemption—maintaining that users lose their protections against unreasonable search and seizure the moment they volunteer sensitive info to a financial institution or telecom company. But there is no third party in peer-to-peer transactions, just sender and receiver. "If the government wants us to report directly about ourselves and the people with whom we transact," Coin Center argues, "it should prove before a judge that it has reasonable suspicion warranting a search of our private papers."
In autumn 2022 the fruits of Biden's March order began to fall in the form, generally, of more vague white papers. The Treasury Department in September released a 56-page report recommending that "regulatory and law enforcement authorities should, as appropriate, pursue vigilant monitoring of the crypto-asset sector for unlawful activity, aggressively pursue investigations, and bring civil and criminal actions to enforce applicable laws with a particular focus on consumer, investor, and market protection." It also said "regulatory agencies should use their existing authorities to issue supervisory guidance and rules, as needed, to address current and emerging risks in crypto-asset products and services for consumers, investors, and businesses." In other words, the agency says the government should enforce the law and tell us how the relevant laws apply to behavior in crypto markets; no great revelations for an industry fearing the next regulatory or enforcement shoe that might drop.
More threateningly, the Justice Department that same month announced the launch of a new Digital Asset Coordinator Network—"over 150 designated federal prosecutors from U.S. Attorneys' Offices"—and suggested, given how hard it was to investigate crypto crimes, that the relevant statutes of limitation be doubled from five to 10 years.
Much of the regulatory chatter and action in crypto over the past few years has been not in the bitcoin or ether tokens that have delivered wild speculative profits to people who got in at the right times, but rather in "stablecoins": digital currencies pegged to assets such as commodities, government currencies, or algorithmically adjusted baskets of other cryptocurrencies. People use stablecoins as an easier-than-cash means to buy crypto or to invest in or use DeFi projects.
In October 2021, the market cap of the more prominent stablecoins equaled $127 billion—a 500 percent year-to-year rise. DeFi's ability to move value and make investment decisions via automatic, unregulated programming makes it harder for the government to rely on the old system whereby it drafts financial intermediators such as banks and brokers to spy on their customers.
"Stablecoins could well fuel the coming Internet phase known colloquially as Web3. As smart contracts automate back-end management functions, ordinary citizens will benefit," attorney Paul Jossey enthused in a July 2022 paper for the Competitive Enterprise Institute. "In the future, cars will rent themselves, computers will lend their excess storage, and decentralized applications will share videos via predefined criteria—stablecoins will enable these and countless other and currently unimaginable transactions."
Even before the May 2022 collapse of the prominent algorithmic stablecoin Luna, much of the recent regulatory attention in crypto has focused on these widely used tokens. In October 2019, the G-7 warned that stablecoins could "increase vulnerabilities in the broader financial system through several channels." These channels include damaging banks' market share and exacerbating "bank runs in times when confidence in one or more banks erodes." By giving people more choice in where to store their value, stablecoins could also result in "diluting the effectiveness of the interest rate channel of monetary policy." Any escape from state money and state eyes is seen as too threatening to bear.
In its November 2021 PWG report, the Biden administration flatly recommended the end of stablecoins as we've known them, insisting that Congress "should require stablecoin issuers to be insured depository institutions" and impose federal risk-management standards on all custodial wallet providers.
There is no shortage of federal financial laws standing at the ready to ensnare stablecoins in their web—the Glass-Steagall Act, the Electronic Fund Transfer Act, the Dodd-Frank Act, the Bank Secrecy Act, and the Gramm-Leach-Bliley Act, for starters. Federal agencies rubbing their hands in anticipation of ruling the crypto domain include the Department of Justice, the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) as well as OFAC. Even the Federal Deposit Insurance Corporation has been advising banks not to deal with crypto.
FinCEN considers stablecoins "convertible virtual currencies," and the companies that administer them are thus required in the agency's eye to register as legal money transmitting businesses. This would put them on the hook for complying with anti–money laundering programs, reporting when their clients engage in transactions larger than $10,000, and filing "suspicious activity reports" about actions the government wants custodians to consider suspicious.
But there's still a gap between the written regulatory letter of the law and the lived-in experiences of existing crypto. As the PWG explained, "there may be some instances where U.S. sanctions compliance requirements (i.e., rejecting transactions) could be difficult to comply with under blockchain protocols."
With so much potential enforcement hung up on how the new innovations of crypto can or should be crammed into pre–21st century regulatory definitions, various bills to provide definitional certainty are working their way through Congress. One bipartisan bill co-sponsored by Sens. Cynthia Lummis (R–Wyo.) and Kirsten Gillibrand (D–N.Y.) would define digital assets as commodities and therefore put them under the regulatory purview of the CFTC (which most in the field find more congenial than the SEC), unless they were being sold to raise capital for a company, in which case they would count as securities and the SEC would compel disclosure and provide oversight.
Sen. Pat Toomey (R–Penn.) has introduced a bill that would require stablecoins to publicly disclose their backing and redemption policies while otherwise sparing them from the SEC, and another to eliminate taxation on bitcoin transactions (or capital gains appreciations) of less than $50 in value.
Toomey, who did not run for reelection and thus will be out of the Senate in January, sees potential bipartisan support for rationalizing the regulatory structure around crypto in order to encourage more innovation and more U.S.-based development. But the banking industry "leans a little against this whole space; they see it as potentially disruptive to their business model," Toomey says, though "I don't feel like they have been mounting a very aggressive and systematic campaign" against it.
The Toomey and Lummis/Gillibrand bills will almost certainly not pass this session of Congress, so it's still up to the courts to decide a question being hashed out across several lawsuits and enforcement actions: Do most cryptocurrency instruments legally qualify as "securities" and therefore require SEC supervision? The most prominent SEC case wrangling with that question is aimed at a token called XRP, issued by a company called Ripple.
The SEC asserts that XRP was sold in a manner indicating the company "promise[d] to undertake significant entrepreneurial and managerial efforts, including to create a liquid market for XRP, which would in turn increase demand for XRP and therefore its price." The SEC believes that is sufficient to classify the product as an illegally unregistered "security."
Ripple insists that the XRP tokens, marked on a decentralized cryptographic ledger, have been used by millions of people who never had any dealings with the company itself, and thus the parties could not be said to be in a common enterprise, a key definitional consideration flowing from the 1946 Supreme Court case SEC v. W.J. Howey Co.
If the SEC wins the Ripple case, all sorts of crypto tokens will also see themselves as obligated to operate under the SEC's complicated and expensive rules or risk prosecution.
SEC Chair Gary Gensler is prepared to claim full power over crypto. In May 2022, he griped to the House Appropriations Committee that he needed more money and staff to effectively police virtual currencies, insisting the SEC is "really out-personed" at the moment. In September 2022, Gensler scared the crypto world by telling The Wall Street Journal he thinks ethereum should be treated as a security, meaning every buyer and seller should be hemmed in by, and potentially prosecuted for violating, decades' worth of federal securities regulations.
As governments struggle to come to grips with the profusion of private electronic currencies, they are increasingly beginning to wonder: If we can't beat 'em, why not join 'em? A brave new world of central bank digital currencies (CBDCs) lurks around the corner.
Among the countries that have either launched or announced their intentions to launch a CBDC are China, Russia, Uruguay, Ecuador, India, Jamaica, Ukraine, Sweden, South Korea, the United Arab Emirates, Venezuela, the Bahamas, and the eight nations affiliated with the Eastern Caribbean Central Bank. With the alarming amount of knowledge about and power over every transaction that a CBDC could deliver, those dedicated to crypto's liberating promises might wish the state kept on just trying to beat them instead.
A February 2021 paper from JPMorgan Chase found that about "60% of central banks are experimenting with digital currencies, while 14% are moving forward with development and pilot programs." The bank foresees a tangle of future jurisdictional issues, "as policymakers will call for harmonization of legal and regulatory frameworks governing data use, consumer protection, digital identity and other policy issues."
Or, as Federal Reserve Chair Jerome Powell testified to Congress in July 2021, "You wouldn't need stablecoins, you wouldn't need cryptocurrencies, if you had a digital U.S. currency."
Deploying a CBDC as a stablecoin killer makes sense from the government's perspective. As the economist Noah Smith noted in his newsletter in December 2021, "rather than the current environment of unchecked inflation and competitive devaluation, the [DeFi] matrix imposes a new kind of discipline on national currencies, as billions of people make individual choices regarding which currencies to hold—or not hold." States are not comfortable with us choosing to abandon sovereign currencies.
The Fed insists it has no intention of actually replacing cash, but merely wants to improve the speed and efficiency of our overall payments system—banking the unbanked; making the transfer of value easier, faster, cheaper, and so forth.
"The Federal Reserve's initial analysis," the central bank insisted in a January 2022 report, "suggests that a potential U.S. CBDC, if one were created, would best serve the needs of the United States by being privacy-protected, intermediated, widely transferable, and identity-verified."
That last point is the danger zone. To use cash, you merely have to convince your counterparty that the cash is cash; you do not have to convince them you are you. In a digital system whose capacities to surveil and control are nearly unlimited, identity verification looks frightening indeed.
When it comes to China—which has been working on a retail CBDC since 2014, and in the past couple of years has rolled out trials of its own e-currency in more than 10 cities, with at least 261 million Chinese citizens using it—economists, international organizations, and the American press have had no trouble seeing the downside of government-issued digital tokens, with their inherent ability to surveil and record all transactions in real time. But what about America?
If a FedCoin became our official payment system, what you are allowed to pay for legally could be controlled and shifted on a day-by-day basis depending on what services or products the government wants to discourage or quash. This would have a reach far beyond just truckers protesting vaccine mandates.
Authorities could bake in faddish, top-down social goals that you—the sucker who merely wants to spend your money to meet your needs and desires—want nothing to do with. These could concern the environment (do you really need to buy that much carbon-generating stuff in a month?), safety (guns and gun accessories not FedCoin-compatible at this time) or "equity" (let's make sure the right percentage of your spending goes to counterparties with the approved racial or gender mix).
Those who find such scenarios implausibly dystopian need only consider the credit card industry's overnight decision in September 2022 to adopt a special new code for all gun purchases. Or the government pressure, without a legal demand challengeable in court, that certain mavericks be booted from major social networks, such as vaccine skeptic Alex Berenson. The current administration is clearly not afraid to use its powers to restrict our ability to use markets and services—and when it comes to money, the government palpably wants unconstrained law enforcement and monetary policy powers.
We have tools both legal (the Constitution) and technological (paper cash and peer-to-peer crypto) to help us curb or evade government overreach. But both could be overcome by a sufficiently motivated government.
"Protecting consumer privacy is critical," the Fed's January paper assured us. But it also said this: "Any CBDC would need to strike an appropriate balance…between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity." Guess who will be deciding on the appropriate balance?
The notion of shifting to a CBDC may seem unthinkably radical, but standard money usage can change surprisingly quickly. It took only around 10 years for the world to switch from the British pound to the U.S. dollar as its primary reserve currency. The U.S. government has proven itself willing to legally demonetize (and force you to exchange at rates it chose) things citizens had been saving and relying on for decades—see gold in the 1930s.
In a 2021 University of Chicago Law Review article, Gary B. Gorton of the Yale School of Management and Jeffery Zhang of the University of Michigan Law School laid out the issues at stake. "The question," they wrote, is "whether policymakers would want to have central bank digital currencies coexist with stablecoins or to have central bank digital currencies be the only form of money in circulation….Congress has the legal authority to create a fiat currency and to tax competitors of that uniform national currency out of existence."
The CBDC idea is very much on the Biden administration's mind; as the White House Office of Science and Technology Policy wrote in its September contribution to the crypto policy initiative, Biden's order "placed the highest urgency on research and development efforts into the potential design and deployment options of a U.S. CBDC." The office announced "an interagency effort to develop a National Digital Assets Research and Development (R&D) Agenda" to "place a high priority on advancing research on topics like cryptography that could be helpful to CBDC experimentation and development at the Federal Reserve."
Alarmingly, the Treasury Department's "Action Plan" states that "the U.S. government has also been engaging through multilateral fora to establish principles for CBDCs and ensure that they…mitigat[e] illicit finance risks" and "comply with the global AML/CFT standards currently in place…any CBDC needs to integrate a commitment to mitigate its use in facilitating crime." And once an obsession with making sure no one can use a currency to commit crime is a leading concern, there is almost no place the government has proven itself unwilling to go in hoovering up private information and preventing us from using our money in ways it disapproves of.
Powell told CNBC in April 2021 regarding a CBDC that "I think it's more important to do this right than to do it fast." Given that a government-run digital currency is a ready-made machine for the authorities to surveil, skim, manipulate, and control every single exchange of value we make, the only safe way to do it for American liberty is not to do it at all.
The post Governments Scramble To Manage, Regulate, and Throttle Crypto appeared first on Reason.com.
]]>In the wake of the FTX meltdown and crypto price drops, Congress wants to make sure Remy makes good financial decisions…just like them.
Parody of Warren G's "Regulate" written and performed by Remy; video produced by Meredith and Austin Bragg
LYRICS:
It was a clear black night, he was sitting at home
Looking at a JPEG on his trusty iPhone
It was a rare NFT of a hipster mouse
So he did what you do, he mortgaged his house
And he put in a bid, he was getting the itch
He couldn't sit there while he saw those other people get rich
But then the market crashed! The value deflated!
This shouldn't be allowed—they should regulate it!
He saw a JPEG, it looked in demand
So he mortgaged his house, spent 400 grand
We need to pass new laws to prevent this fate
He wouldn't be so dumb if we regulate
It was a cool, crisp day, he was watching the game
That's when he saw a commercial with folks of acclaim
Crypto returns that'll never default!
So he thought what you think—that sounds too good to be false!
Mortgaged his house, researched the rate
Checked out the CEO, nothing seemed out of place
But when he checked one morning, the value was gone
We should make fraud illegal, this is all just wrong!
He did his research and he studied up
Then bought invisible tokens this guy just made up
It was a harsh consequence for an honest mistake
His IQ wouldn't be five if we regulate
It was a lukewarm noon, he's on Capitol Hill
Cuz he got margin called and was facing a bill
You don't understand, I've lost all that I had
You need to pass more laws! This is terribly bad!
Uh, excuse me—thanks for letting me join
But isn't part of the issue him? There's a new dog coin?
Maybe the underlying tech is one we shouldn't forestall
Maybe one day it's—Shiba Inu, it's called
If he hadn't been allowed to be a HODLer
He wouldn't have the impulse control of a toddler
We could end human nature with a pen stroke today
Why do I have a feeling that they're gonna regulate?
You shouldn't prey on folks with financial illiteracy
By the way, have you seen the state lottery?
The Powerball's $1 billion, you better not wait
He's gonna make good decisions when we regulate
The post Remy: Regulate (FTX Parody) appeared first on Reason.com.
]]>Economies are built on trust.
Will the bank keep your money safe and accessible? Will the seller mail you those vintage action figures? Will eBay make you whole if the package never arrives?
Trust is everything. And it depends on reputation.
Sam Bankman-Fried—a.k.a. SBF, the founder and CEO of the now-defunct crypto exchange FTX—earned trust by winning the approval of elite institutions. Then he allegedly siphoned about $10 billion of customer deposits into a hedge fund run by his purported ex-girlfriend who then squandered it on risky bets that didn't pay off.
Sequoia Capital, Silicon Valley's premier venture capital fund, trusted SBF enough to invest over $200 million. Crypto lender BlockFi trusted him enough that it's now facing bankruptcy. And, of course, retail investors trusted him to keep their money safe. They're unlikely to see any of it ever again.
Unlike blue-chip financial institutions that gain trust by being too big to fail—meaning taxpayers will provide a backstop—SBF did it in part by winning the affection of the progressive elite in a way that set him apart from the usual libertarian crypto bros.
The World Economic Forum hosted him as a speaker in Davos, Switzerland, listing FTX as a corporate partner. Journalists fawned over him, including Fortune magazine, which asked if he was "the next Warren Buffett" in a cover story that evoked another infamous profile.
Securities and Exchange Commission (SEC) Chief Gary Gensler is accused by one congressman of helping the company to create a "regulatory monopoly." As the second-largest donor to Democratic politicians in the lead-up to the 2022 midterms, SBF branded himself a new kind of capitalist, a different sort of billionaire.
SBF was an "effective altruist," or part of a movement that encourages its adherents to make as much money as they can so that they can give it all to charities that they deem maximally efficient at alleviating suffering.
"So the ethics stuff—mostly a front?" Vox reporter Kelsey Piper asked SBF via Twitter direct message after FTX filed for Chapter 11.
"Yeah," replied SBF. "it's what reputations are made of, to some extent. I feel bad for those who get fucked by it. By this dumb game we woke westerners play where we say all the right shiboleths and so everyone likes us."
Real effective altruism might be a legitimate method for deciding which charities to support with money that was earned honestly. But SBF is an alleged fraudster who represented the antithesis of Milton Friedman's claim that "the social responsibility of business is to increase its profits," which the Nobel Prize–winning economist wrote about in a 1970 New York Times essay.
It's an especially important message at a moment in which special interest groups are bullying companies to adhere to an investment strategy called Environmental, Social, and Governance—or ESG—which prioritizes social goals over return on investment. The SEC is gearing up to regulate ESG ratings, threatening to turn this trendy "stakeholder capitalism" into a quasi-governmental program.
Friedman believed that philanthropy was a social good but not when it involves corporate executives spending shareholders' money. And he asserted that the "one social responsibility of business" is "to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception fraud."
And deception and fraud are exactly the accusations SBF now faces. Did his claim of prioritizing altruism over maximizing profits allow him to rationalize his alleged theft?
Businessmen who talk about how their companies are "not concerned 'merely' with profit" and about the need for a "'social conscience'…are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades," Friedman wrote.
For SBF, these "shibboleths" were seemingly part of a "dumb game" to dupe progressive elites into helping him win trust. He could have played the same game in a variety of fields, but it's ironic that he chose crypto, an industry derived from an invention that was designed to eliminate the need to trust others with your money.
In the original white paper explaining bitcoin, its pseudonymous founder Satoshi Nakamoto wrote that "what is needed is an electronic payment system based on cryptographic proof instead of trust" and then used the t-word 13 more times.
SBF displayed very little interest in this fundamental proposition at the heart of crypto.
"I think Sam [Bankman-Fried] saw crypto as a means to an end," Jesse Powell, co-founder of the major crypto exchange Kraken, told Reason recently. "Most people in this space see crypto as the end goal. That's what we need to deliver to humanity."
Satoshi wanted to replace trusted third parties with verifiable math, or rules over rulers. The bitcoin network relies on open-source software, and it becomes harder for any single entity to modify as the number of its participants grows and grows.
Bitcoin also made it possible to maintain custody of your own digital money instead of trusting it to a bank or an exchange like FTX.
If anything, this saga shows that Satoshi was right: Don't just trust, verify. And when business owners seem more interested in magazine covers, running in elite circles, cozying up to regulators, and giving away their fortunes instead of making money for their investors, take your money and run the other way.
Produced by Zach Weissmueller; editing and graphics by Regan Taylor; additional graphics by Tomasz Kaye.
The post Sam Bankman-Fried: Trust Is Everything appeared first on Reason.com.
]]>The public is only beginning to understand the full extent of alleged crimes committed by Sam Bankman-Fried (better known as SBF), a cryptocurrency entrepreneur who lost billions of dollars after his exchange, FTX, was revealed to be little better than a Ponzi scheme. SBF's net worth plunged from $10 billion to effectively nothing in the course of a few days. He has declared bankruptcy and was recently questioned by the police of the Bahamas, where he resides.
John Ray III, who was brought in to manage Enron following that company's self-destruction in 2001, is now the CEO of FTX. In a court filing last week, he said he has never seen such "a complete failure of corporate control," including at Enron.
"From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented," he said in a court filing.
SBF engaged in extreme levels of deception to trick people into thinking FTX was worth more than it was. He effectively paid investors, employees, and vendors shares of the company—his token, FTT—and loaned out money to his quantitative investment firm, Alameda Research. It was an elaborate house of cards that apparently fooled investors, celebrity sponsors, and politicians: SBF interviewed former President Bill Clinton and and former Prime Minister Tony Blair at a crypto conference he hosted back in April.
Tony Blair and Bill Clinton on the same stage (and SBF.) You don't see that very often these days, eh? pic.twitter.com/Vt5pn6egHn
— Dan Keeler (@dankeeler) April 28, 2022
SBF was heavily involved in Democratic Party politics: In the 2022 election cycle, he was the second most prolific funder of Democratic candidates after George Soros. But he wasn't just a funder of electoral efforts. He funded both progressive and mainstream media organizations.
I wrote earlier today that there's a huge question over whether SBF will be able to continue funding media going forward.
Grants have gone to:
— ProPublica
— Vox
— The Intercept
— Semafor
— The Law and Justice Journalism Project
— A podcasthttps://t.co/hqeislc8fr https://t.co/cPT1geNoGw— Teddy Schleifer (@teddyschleifer) November 11, 2022
According to the journalist Teddy Schleifer, SBF gave money to Vox, the progressive news web site created by liberal bloggers Ezra Klein and Matt Yglesias. (Vox Media also owns several other outlets, including New York magazine.) SBF made a $3.25 million grant to The Intercept, which at the time of FTX's fall had already received $500,000 and was due to get the rest in the coming years. Acting editor-in-chief Ryan Hodge notes that SBF's bankruptcy will leave The Intercept with a significant hole in its budget.
SBF also gave money to Semafor, a new journalism project created by Ben Smith, formerly the media columnist at The New York Times and, before that, the editor in chief of BuzzFeed. And when FTX crashed, SBF was in the process of giving ProPublica a whopping $5 million. This was ostensibly in support of research to better understand the origins of the COVID-19 pandemic and to prevent future pandemics. And indeed, ProPublica's reporting on these subjects is well worth reading.
But SBF's own attitude toward his funding of these causes seems to be that it's all for show. Here's how he described "ethics" in Twitter DMs with a Vox reporter:
When asked if ethics is "mostly a front", SBF replied "yeah…that's not all of it but it's a lot."
If SBF considered his generous donations to be a "front" for something else, one wonders what about the else. Is it perhaps the case that SBF thought he was actually buying goodwill and favorable coverage? He was, as it happens, the beneficiary of countless gushing magazine profiles and was frequently hailed as the "white knight" of crypto.
Indeed, SBF is still benefitting from some kinder-than-expected coverage from the mainstream media, even in the wake of the revelations about his fraudulent activities—and even from outlets that did not receive his largesse. The New York Times' report on this disaster uses soft, passive language to disguise blame at every turn. This is the outlet that treats nearly every development in the tech sector as an existential threat to democracy, yet its summation lets SBF write his own verdict. Expanded too fast? Failed to see warning signs? He defrauded people out of millions of dollars! The empire didn't collapse of its own accord; it collapsed because its foundations were fraudulent.
Meanwhile, The Washington Post's reporting on this subject has centered on SBF's "pandemic prevention" spending. "Before FTX collapse, founder poured millions into pandemic prevention," writes the paper. "Most of those initiatives have come to a sudden halt."
Neither The New York Times nor The Washington Post were among SBF's beneficiaries, but it is striking how gingerly they have treated him thus far. These are both outlets that have sounded quasi-apocalyptic notes about how tech companies like Facebook and Twitter are ruining journalism, promoting misinformation, and undermining democracy. One hopes they wouldn't treat Bankman-Fried with kid gloves out of admiration for his philanthropy.
Matthew Yglesias, the Vox cofounder, wrote in a recent Substack post that he had previously met with SBF and declined a business opportunity with him, even though he obviously shared SBF's enthusiasm for various causes, including "effective altruism." Yet Yglesias's coverage laments that without SBF's lavish funding of Democratic causes, it is "plausible" that "Trump would still be in the White House."
These are some fairly kind words for a person accused of vast financial misdeeds that rival Enron in scope—a person who has all but confessed that his ethical giving is intended to cloak a win-at-all-costs mentality.
Most of the news figures and outlets mentioned in this piece have produced praiseworthy journalism in the past, and the fact that they took money from a charlatan doesn't change things. But for all the progressive and mainstream fretting about the potential for billionaires like Mark Zuckerberg and Elon Musk to corrupt the news cycle, the coverage of SBF is more than a little blasé.
The post Did Sam Bankman-Fried's Millions Buy the Media's Loyalty? appeared first on Reason.com.
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