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Commentary: We can have effective crypto regulation without stifling innovation. Here’s how



Commentary: We can have effective crypto regulation without stifling innovation. Here's how

The only constant about the crypto markets over the past few weeks is the speed at which things seem to be getting worse.

Even the most seasoned observers were shocked as Bitcoin lost more than half its value in the space of a few months and the total market cap for cryptocurrencies dropped below the $1 trillion mark after it reached $3 trillion in November.

It’s a chain of events that started with the overnight collapse of algorithmic stablecoin TerraUSD and its companion token Luna. The contagion effects took down Three Arrows Capital, Celsius, and Voyager.

Now, critics are doubling down on their claim that crypto markets are nothing but a “wild west” of costly speculation. The crypto industry and traditional finance await more–and potentially far more aggressive–government regulation.

Only time will tell what that regulation will look like and whether it will be effective. Currently, one thing is clear: The application of traditional regulatory frameworks won’t cut it.

Cryptocurrency is a unique asset class based on a unique technology. For crypto regulation to truly make a difference, it will need to protect investors without stifling financial innovation.

My experience as a regulator for the Treasury, an architect of one of the first crypto compliance functions, and the co-founder of a regtech company has led me to conclude that a strong and comprehensive regulatory framework for cryptocurrency can only be achieved through the prioritization of a few key objectives.

Clear, workable definitions

The SEC has made clear its desire to regulate and oversee cryptocurrencies. The recent, near doubling in size of its Cyber Unit (now renamed the “Crypto Assets and Cyber Unit”) shows that it’s ready to dedicate further resources and personnel to bringing crypto fully under its regulatory umbrella. But while increasing personnel will inevitably extend the SEC’s enforcement capabilities, crypto platforms are still waiting for answers to the question of exactly how cryptocurrencies are to be classified, as well as how regulatory authority will be split or shared between the SEC and the Commodity Futures Trading Commission (CFTC).

It will be up to Congress to step in and sort out these questions. However, decisive legislation in the near term doesn’t seem particularly likely, considering that lawmakers only recently began prioritizing crypto hearings.

When lawmakers brought in Crypto CEOs for a meeting last December, a key presentation was a “level-setting” explanation of the blockchain and the basics of web3 by former acting Comptroller of the Currency, Brian Brooks (notably the first agency head with a background in crypto). This was a good first step, but lawmaker education will be key in closing the knowledge gap to create effective regulation.

To date, potential regulators have defined crypto by comparing it to the closest approximation from the world of traditional finance. This “if-it-looks-like-a-duck” approach has resulted in definitions based on what cryptocurrency has in common with traditional finance, rather than what sets it apart.

Crypto regulators will need to create new definitions–ones that speak directly to the technology and processes unique to crypto. This, in turn, will allow regulators to create a regulatory framework specially tailored to the assets it seeks to oversee.

Some of these definitions have been written into the recent Gillibrand-Lummis bill. Should the bill pass, those definitions would become the literal “letter of the law.” But it remains to be seen whether the language and information provided would be sufficient for the agencies tasked with creating and enforcing regulations.

Develop regulations that are strong yet flexible

It’s an old truism that innovation doesn’t happen in a boardroom. Technological innovation often requires an independent streak that doesn’t play nice with the status quo.

The problem, of course, is when that independent streak runs afoul of traditional legal safeguards. But regulation and innovation can work together if we stay flexible and focused on the end consumer. Insofar as a crypto token fits an existing regulatory framework, the regulation should apply.

However, if a token fits in multiple regulatory frameworks depending on how it is used, individual use cases shouldn’t automatically extend the regulatory scope beyond its purview. A good litmus test for regulators is to ask the question: Is this rule protecting the end consumer? Or am I protecting existing businesses at the expense of new product innovation that could improve consumer outcomes or promote competition?

Regulators cannot be expected to see the future more than anyone else. But by being conscious–not just of the limits that are being set, but of the space left for products and processes to grow–they can write strong, comprehensive regulations while still allowing finance and technology to continue to evolve.

Enforce regulations at the speed of technology–and let the technology help you

Future conversations about 2022’s crypto market crash will inevitably focus on how fast things went wrong. It will be front of mind for lawmakers and regulatory agencies as they develop new policies specifically designed to protect consumers and counter extreme market volatility.

As these new laws solidify, it will be crucial that these groups consider an often overlooked policy objective: the development of an enforcement framework that will allow regulators to move as fast as the crypto market itself.

Speed is not traditionally a regulator’s strong suit–and intentionally so. Regulators are, by nature, thoughtful, prudent, and measured. But in contrast to the opacity of the traditional finance industry, crypto-specific regulations have the potential to take advantage of crypto’s own native characteristics, such as its digital-first format and inherent transparency.

This not only means that blockchain-enabled tools can be put to use helping enforce regulations, but future regulations will also stand to gain from the technological advancements that have sprung up as part of the larger crypto ecosystem. 

This, like the work of setting clear definitions and writing flexible policy, will require work on the part of both lawmakers and regulatory agencies. But the reward for doing so may be a regulatory enforcement framework that paves the way not just for crypto regulation, but for the next generation of traditional financial market regulation as well.

A path forward

The silver lining to periods of crisis and difficulty is that they often spur action from those with the power to enact lasting change.

However, there is always a danger that the desire to “fix what’s broken” will lead to decision-making that is overly conservative and shortsighted, stifling growth in the long term.

Crypto regulation is needed–and the time to write and implement it has clearly arrived. Policymakers would do well to remember that to ignore what makes cryptocurrencies unique and valuable is just as foolish as never regulating them at all.

Matt Van Buskirk is the co-founder and CEO of Hummingbird Regtech.

The opinions expressed in commentary pieces are solely the views of their authors and do not reflect the opinions and beliefs of Fortune.

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Coinbase’s near-term outlook is ‘still grim’, JPMorgan says, while BofA is more positive about firm’s ability to face crypto winter



Coinbase's near-term outlook is 'still grim', JPMorgan says, while BofA is more positive about firm's ability to face crypto winter

Coinbase is well positioned to successfully navigate this crypto winter and take market share, Bank of America said in a research report Tuesday. It maintained its buy recommendation following the exchange’s second-quarter results.

The results warrant “a muted stock reaction,” the report said. Net revenue of $803 million was below the bank’s and consensus estimates, while its adjusted $151 million loss before interest, tax, depreciation and amortization was better than the street expected. Importantly, the company remains “cautiously optimistic” it can reach its goal of no more than $500 million of adjusted EBITDA loss for the full year, the report added.

Coinbase shares fell almost 8% in premarket trading to $80.74.

Bank of America notes that Coinbase had no counterparty exposure to the crypto insolvencies witnessed in the second quarter. The company also has a “history of no credit losses from financing activities, holds customer assets 1:1, and any lending activity of customer crypto is at the discretion of the customer, with 100%+ collateral required.” These rigorous risk-management practices will be a “positive long-term differentiator” for the stock, the bank said.

JPMorgan said Coinbase had endured another challenging quarter, while noting some positives.

Trading volume and revenue were down materially. Subscription revenue was also lower, but would have been much worse were it not for higher interest rates, it said in a research report Wednesday.

The company is taking steps on expense management, and in addition to the June headcount reductions, is scaling back marketing and pausing some product investments, the note said.

The bank says the company’s near-term outlook is “still grim,” noting that the exchange expects a continued decline in 3Q 2022 monthly transacting users (MTUs) and trading volumes, but says Coinbase could take more “cost actions” if crypto prices fall further.

JPMorgan is less optimistic than Bank of America about the company in the near term, saying pressure on revenue from falling crypto markets will have a negative impact on the stock price. Still, it sees positives including higher interest rates, from which the firm will generate revenue. It also sees opportunities for the exchange to grow its user base, leveraging almost $6 billion of cash. The surge in crypto prices in July, and the forthcoming Ethereum Merge are also seen as positive catalysts, it added.

The bank maintained its neutral rating on the stock and raised its price target to $64 from $61.

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Elon Musk sold $6.9B in Tesla stock in case he’s forced to buy Twitter



Elon Musk sold $6.9B in Tesla stock in case he's forced to buy Twitter

Elon Musk sold $6.9 billion of his shares in Tesla Inc., the billionaire’s biggest sale on record, saying he needed cash in case he is forced to go ahead with his aborted deal to buy Twitter Inc.

“In the (hopefully unlikely) event that Twitter forces this deal to close *and* some equity partners don’t come through, it is important to avoid an emergency sale of Tesla stock,” Musk tweeted late Tuesday after the sales were disclosed in a series of regulatory filings. 

Asked by followers if he was done selling and would buy Tesla stock again if the $44 billion deal doesn’t close, Musk responded: “Yes.”

Tesla’s chief executive officer offloaded about 7.92 million shares on Aug. 5, according to the new filings. The sale comes just four months after the world’s richest person said he had no further plans to sell Tesla shares after disposing of $8.5 billion of stock in the wake of his initial offer to buy Twitter.  

Musk last month said he was terminating the agreement to buy the social network where he has more than 102 million followers and take it private, claiming the company has made “misleading representations” over the number of spam bots on the service. Twitter has since sued to force Musk to consummate the deal, and a trial in the Delaware Chancery Court has been set for October. 

In May, Musk dropped plans to partially fund the purchase with a margin loan tied to his Tesla stake and increased the size of the equity component of the deal to $33.5 billion. He had previously announced that he secured $7.1 billion of equity commitments from investors including billionaire Larry Ellison, Sequoia Capital, and Binance. 

“I’ll put the odds at 75% that he’s buying Twitter. I’m shocked,” said Gene Munster, a former technology analyst who’s now a managing partner at venture-capital firm Loup Ventures. “This is going to be a headwind for Tesla in the near term. In the long term, all that matters is deliveries and gross margin.”

At the weekend, Musk tweeted that if Twitter provided its method of sampling accounts to determine the number of bots and how they are confirmed to be real, “the deal should proceed on original terms.” 

Musk, 51, has now sold around $32 billion worth of stock in Tesla over the past 10 months. The disposals started in November after Musk, a prolific Twitter user, polled users of the platform on whether he should trim his stake. The purpose of the latest sales wasn’t immediately clear.  

Tesla shares have risen about 35% from recent lows reached in May, though are still down about 20% this year. 

With a $250.2 billion fortune, Musk is the world’s richest person, according to the Bloomberg Billionaires Index, but his wealth has fallen around $20 billion this year as Tesla shares declined.    

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The rent is too d*mn high for Gen Z: Younger generations are ‘squeezed the most’ by higher rents, BofA says



The rent is too d*mn high for Gen Z: Younger generations are 'squeezed the most' by higher rents, BofA says

Most of Gen Z is too young to remember the 2010 New York gubernatorial candidate Jimmy McMillan.

But over a decade later, they would probably agree with his signature issue (and catchphrase): the rent is too damn high.

This July, median rent payments were 7.4% higher than during the same period last year, according to a Bank of America report released Tuesday. 

The national median price for a one-bedroom apartment has been hitting new highs nearly every month this summer. It was $1,450 for July, according to rental platform Zumper. In the country’s largest city, New York, average rent exceeded a shocking $5,000 a month for the first time ever in June. 

But inflation in the rental market hasn’t hit each generation equally, and no one is getting squeezed harder by the higher monthly payments as Gen Z. Those born after 1996 have seen their median rent payment go up 16% since last July, compared to just a 3% increase for Baby Boomers, BofA internal data shows. 
“Younger consumers are getting squeezed the most by higher rent inflation,” BofA wrote.

The great rent comeback

Early in the pandemic, landlords slashed rents and gave significant COVID discounts to entice tenants to stay instead of leaving urban areas. Once those deals started expiring in 2021, many landlords suddenly raised payments once again, sometimes asking for over double their pandemic value. 

Young people across the board have been hit hard, and rent burdens compared to age can be seen even within a single generation. Younger millennials had their median rent payment grow 11% from last year, while the median payment for older millennials rose 7%. Gen X experienced a 5% median rent increase, according to BofA. 

It’s not a surprise, then, that Gen Z feels so strapped for cash. The majority of young people, 61%, said they want to receive their wages daily instead of twice a week, a practice typically reserved for workers living paycheck to paycheck, according to a report from the Center for Generational Kinetics, which specializes in research across the generations. Rising rent inflation has even priced nearly a third of Gen Zers out of the apartment search altogether. Around 29% of them have resorted to living at home as a “long-term housing solution,” according to a June survey from personal finance company Credit Karma.

It’s no wonder—the rent really is too high.

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