Ooki DAO Hearing
Yesterday, Judge Orrick heard arguments in CFTC v. Ooki DAO.
We, as well as the other amici, continue to assert that the CFTC has failed to demonstrate that appropriate notice was served and that the CFTC’s theory of liability is unsound and cannot be stretched to encompass individual token holders.
We look forward to Judge Orrick’s ruling.
RAWA: Defining Crypto as a Security? JK
On Friday, it was reported that the Senate Finance Committee is considering applying the traditional wash-sale rule to digital assets to offset the $1.4 billion “Recovering America’s Wildlife Act” (RAWA).
Under the traditional wash-sale rule, investors must wait 30 days before repurchasing a security they sold at a loss before the loss can be considered tax deductible. The purpose of this is to prevent investors from selling and repurchasing the same or a substantially similar security solely to collect the tax deduction.
If the Senate decides to adopt this rule for digital assets, the same rule will apply to crypto by including it under the definition of security in this portion of the tax code.
Funding has been the main obstacle standing in the way of RAWA passage, so a pay-for provision like this is exactly what Congress is looking for to move the needle.
What does this mean?
While the security designation may seem problematic on its face, its implications do not extend beyond this narrow taxation issue.
If adopted, the only affected parties are those who speculate on the price of digital assets, who will now have to wait the traditional 30 day period before buying back an asset to collect the deductible on their loss.
FSB Discusses DeFi and Crypto-Assets
On Monday, the Financial Stability Board (FSB) Plenary met in Basel, Switzerland to discuss a variety of topics concerning global financial stability, one of which was DeFi and crypto-assets.
The Plenary expressed concern over the “risk of spillovers” from crypto-asset firms into the traditional markets and institutions. They also expressed concerns about financial activities being done under one firm, stating in their press release that it can lead to “concentrations of risk, conflicts of interest, and a misuse of client assets.”
According to the press release, the FSB will continue improving its crypto-asset monitoring framework by including “DeFi-specific vulnerability indicators” and exploring “approaches to fill data gaps to measure and monitor interconnectedness of DeFi with traditional finance.”
What does this mean?
From the looks of the press release, it seems regulators are still having a difficult time distinguishing CeFi and DeFi. For instance, many of the Plenary’s cited concerns addressed counterparty risks in the crypto ecosystem (i.e., conflicts of interest, commingling of customer funds, corporate governance, etc.).
While these concerns are legitimate and particularly important in the wake of FTX’s collapse, we encourage regulators and policymakers to draw a distinction between CeFi and DeFi before addressing the regulatory concerns of the space as a whole.
With respect to CeFi, there is no need to reinvent the wheel. The same risks we see in traditional financial intermediation exist in crypto financial intermediation. Hence, the same general regulations should apply.
With respect to DeFi, we have consistently advocated for a novel regulatory approach that recognizes the fundamental and structural differences of DeFi protocols and the risks associated.