Crypto is ringing the alarm over the SEC’s ‘securities vendor’ rule

Good morning, and welcome to Protocol Fintech. This Tuesday: crypto and the dealer-trader rule, the CFTC’s budget request, and a digital dollar that’s not a CBDC.

Off the chain

Another strand in the financial web connecting Russia to the rest of the world fell last week, when Apple Pay and Google Pay stopped working for holders of Sberbank cards on the Mir network. Was this the closing of a “loophole,” as Reuters reported? I think it’s more likely Apple and Google following the letter of the law. The White House announced sanctions against Sberbank on Feb. 24 to take effect within 30 days.

— Owen Thomas (email | twitter)

Crypto picks its battles with Biden

Crypto is under fire on many fronts in Washington. The latest developments underline how the industry is carefully choosing where it spends its political capital, while keeping a watchful eye for the latest surprise regulation or bill.

Top lobbyists mostly shrugged at President Biden’s whopping $11 billion tax bill proposal, which could eat into the profits of crypto investors, including HODLers. But insiders quickly raised a furor over the SEC’s plan to expand the definition of “securities dealer,” which could mean hefty penalties for some crypto companies.

Biden wants crypto to pay up. The proposed $5.8 trillion federal budget would raise revenue in part by changing the rules which would generate more revenue from taxing crypto.

• A key proposal is to extend “mark-to-market” rules to cover more digital assets, which would mean crypto that appreciates in price could be taxed even if it’s not sold.
• That could mean a major change for HODLers who typically have to don’t pay taxes until they sell their assets. “Taxes on unrealized gains on such a volatile asset is absurd in my opinion,” Melody Brue of Moor Insights & Strategy told Protocol.
• But how have major crypto players reacted? Meh. The Blockchain Association said it would “continue to study the budget and provide guidance as needed,” a spokesperson told Protocol. A Coinbase rep said the company had “nothing to share.”

The SEC’s proposal, meanwhile, is an “all-out attack on decentralized finance.” That’s how Gabriel Shapiro, general counsel of Delphi Labs, described the new rule proposal, which would expand the definition of a “dealer-trader.”

• The change would require those who use “automated, algorithmic trading strategies” and “employ passive market-making strategies” to register with the SEC.
• The new rule could render many entities in crypto trading as “unregistered dealers” and could “kill the tech,” Shapiro said. The SEC proposal “could by definition deem them to be operating illegally,” Brue said.
• Jake Chervinsky, head of Policy at the Blockchain Association, accused the SEC of introducing “massive confusion and uncertainty into the very same market it seeks to regulate.”

Crypto companies do “need to pick their battles,” Brue said. A “more aggressive stance” on the SEC rule “makes sense” given how it “affects their business model directly,” she said. The budget proposal, on the other hand, is “Biden’s wish list rather than actual law.” The crypto industry has “both the luxury of not responding and the burden of preparing for an any-case scenario,” she said. The companies, she speculated, “are playing their cards close to their chests at the moment.”

— Benjamin Pimentel (email | twitter)

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On the money

The Central Bank of Sudan is warning consumers against crypto. The central bank labeled cryptocurrencies as “high risk” for financial crime, electronic piracy and loss of value, and said that they were largely unregulated.