Weekly Update

TFU | Jan. 29 – Feb. 4

The U.S. House heard testimony on fintech and regulation; Zelle is adding 100,000 new customers per day; Lightning Network could mean much more efficient crypto transactions; S. Korea is not banning crypto exchanges; and Alibaba is taking a 33% stake in Ant. Also: what’s the Big Idea with the SEC and CFTC stepping up crypto scrutiny?

Leading Off

The SEC and CFTC are increasing their scrutiny of cryptocurrency activities; payments network Zelle is adding 100,000 new customers per day; Lightning Network could dramatically increase the efficiency of cryptocurrency transactions; South Korea clarifies that it is not banning crypto exchanges; and Alibaba is taking a 33% stake in its financial services spinoff, Ant Financial.

The Big Idea

The Regulators are coming! The Regulators are coming!

Last week, Securities and Exchange Commission (SEC) chairman Jay Clayton and Commodity Futures Trading Commission (CFTC) chairman J. Christopher Giancarlo penned a Wall Street Journal op-ed [full text] describing their agencies’ increasing efforts to monitor and curb unlawful cryptocurrency activities.

But the J(ay)s are more than tough talk. Details also emerged that the CFTC subpoenaed Bitfinex, which markets tokens pegged to the U.S. Dollar, for not providing “conclusive evidence of its holdings . . . or [audits of] its accounts.” Meanwhile, the SEC sued a crypto banking firm for “alleged fraud and issuing unregistered securities” in its recent ICO — only the latest SEC action targeting ICOs.

The CFTC and SEC have typically been among the most vocal and active regulators when it comes to crypto and blockchain (see, e.g., here and here), but they’ve kicked things into higher gear recently (e.g., Clayton puts SEC on “high alert” for ICOs and CFTC files charges in crypto Ponzi scheme). Their joint op-ed is perhaps the most public declaration to-date of their intentions in the space.

And not without reason. Aside from the dizzying rise of Bitcoin’s valuation in 2017 (which might have been fraudulently propped up by Bitfinex), the rapid growth of the ICO market and the increasingly mainstream nature of blockchain and digital currencies has increased both the opportunities for and potential gains from hacking, fraud, and other activities by bad actors.

It is a common refrain that ‘regulation is always one step behind innovation,’ but few things motivate prompt regulatory response more than money and attention. Right now, DLT and digital currency have both, and the SEC and CFTC are capitalizing on their early interest in the space to make moves. Expect others to follow, and for increasing regulatory pressure to further spook the market.

In the News…

House hears testimony on fintech.  The U.S. House Subcommittee on Financial Institutions and Consumer Credit held a hearing to discuss regulating fintech “to create an environment that fosters certainty and responsible innovation while maintaining consumer protections.”

Zelle claims 100k new users per day.  The bank-backed payments service said it averages nearly 100,000 new consumer signups each day. Zelle processed over $75 billion in P2P payments last year, up from $55 billion in 2016.

Lightning Network speeds up bitcoin payments.  Wired profiles the Lightning Network, a next-generation crypto payments network conceived by Silicon Valley engineers Joseph Poon and Thaddeus Dryja. The network, now in a “1.0 version” years of development, offers a way to execute “far more [bitcoin] transactions” per second than the three to seven currently possible.

Global insurers offer crypto theft protection.  With crypto investors already victims of billions of dollars of losses due to hacking, technical errors, and fraud, some global insurers are offering protections to digital currency enthusiasts.

Korea says no crypto exchange ban, finds millions in crypto crimes.  The South Korean government confirmed that it has “no intention to ban or suppress cryptocurrency,” though it will regulate crypto exchanges. The customs office also disclosed that it has found “about 637.5 billion won ($596.02 million) worth of foreign exchange crimes” resulting from crypto trading.

Alibaba takes 33% stake in Ant Financial.  The Chinese technology giant is taking a 33% stake in its financial services spinoff, its first ownership of the company since founder Jack Ma separated the businesses in 2011. Alibaba will “acquire newly-issued equity from Ant Financial in exchange for certain intellectual property rights.” The move is seen as “a useful step” toward an Ant IPO.

Facebook bans cryptocurrency ads.  As part of a broader strategic overhaul of its advertising policy, the social network announced it will ban all ads promoting cryptocurrencies and other “financial products and services frequently associated with misleading or deceptive promotional practices.”

Kodak makes a curious move into crypto.  The New York Times profiles Kodak’s recent decision to release “a photo-centric cryptocurrency” called KodakCoin to help photographers “take greater control in image rights management.” The Times calls the move “a bold gamble” that has “perplexed” some investors.

Long Blockchain, we hardly knew ye.  Remember the iced tea company that rebranded as a blockchain firm and raised several million dollars? Remember when they said they’d buy a $4M bitcoin mining facility? Yeah, that’s not happening. (Color us shocked.) As the old saying goes, ‘when life gives you lemons… probably don’t try to turn them into a high-tech financial business.’

A very special TFU editorial:  To all you fans of the *Super Bowl Champion* Philadelphia EaglesGO BIRDS!

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