Major banks team up to test network for tokenized money and U.S. Treasurys: CNBC Crypto World

Today, Bitcoin falls to $62,000. FTX says that almost all customers of the bankrupt crypto exchange will get all their money back. And Alma and Gotti, who worked for the SEC for about a dozen years, weighs in on the agency’s recent actions against crypto firms. Welcome to CNBC’s crypto world. I’m Mackenzie Sagalos. Crypto prices are back in the red this morning, with Bitcoin dropping more than 2% by noon Eastern, that cryptocurrency traded at around $62,000. Meanwhile, ether also down more than 2%, trading just above $3000. Ed Solana down 5.7% to $145.00. OK, let’s talk about the top stories. FTX says that most of its customers will get all their money back and then some. In a reorganization plan published late yesterday, FTX estimates that it owes creditors more than $11 billion and the company says that it has between 14 1/2 billion dollars and 16.3 billion to distribute to creditors. Now the plan says that customers whose claims amount to $50,000 or less will get about 118% of the amount of their allowed claim. Around 98% of creditors will receive that compensation now. Importantly, this is based on the value of those assets in U.S. dollars. As of November 2022 and back then, Bitcoin was trading at around $16,000. The reorganization plan still needs to be approved by the bankruptcy court. FTX customer money has been locked up with the exchange since it filed for bankruptcy protection back in November 2022. Next, major financial institutions are teaming up to test a shared distributed Ledger. Nearly a dozen firms, including JP Morgan, Citi, MasterCard and SWIFT, will test a regulated settlement network to tokenize commercial bank money, central bank money, U.S. Treasuries, and more. Now, this project is led by the Securities Industry and Financial Markets Association, and right now it’s just a test. The transactions are just simulations, but the goal of the network is to allow 24/7 settlement of multiple assets, something that Wall Street has seen as a major promise of blockchain technology. Raj Damadaran, executive vice president of blockchain and digital assets at MasterCard, said in the press release that a shared Ledger could unlock the next generation of market infrastructures. All right, for our main story, Crypto World’s Talia Kaplan spoke with Alma and Gotti, partner and Global Legislative and Regulatory risk leader at the consulting firm Guidehouse, about recent actions that the SEC has taken against crypto companies, including the Wells Notice sent to Robin Hood earlier this week. You have a law background and you worked with the SEC for about 12 years. And so I want to start off by asking you about the most recent developments as it pertains to potential enforcement action tied to the SEC. We learned this week that Robin Hood received a Wells Notice from the agency it’s tied to its crypto operations. So what do you make of that development and how do you think that will ends up? This is just one more case in the progression that the SEC has been focusing on in their crypto enforcement, right? And so it’s it’s just like a lot of the other exchange cases. And if the SEC is correct and some or all of these crypto assets are securities, then as a practical matter all of these exchanges should be registered as broker dealers. That’s how the law works. Now Robin Hood has a registered broker dealer entity. They they sell securities as everyone knows and so they may have a leg up because they have that regulated infrastructure that may or may not be in place in their crypto asset part, right. They have that governance and framework and and infrastructure. So if again this all of this comes down to the SEC saying many of the products that you are selling are securities and if they are then they all have to be registered and that’s what these cases involve is the failure to register as a broker dealer. Now the SE CS lost a couple of these cases and expanding on that, SEC chair Gary Gensler was actually on CNBC this week and he was asked about the Wells notice to Robin Hood from the agency and he didn’t answer the questions directly. He said he can’t comment on specific cases, but he did say that unlike traditional assets, crypto assets don’t offer the same protections and investors don’t get the same disclosures as traditional assets. And he did say that many of them are deemed securities. So what is your reaction to that argument? Well, I mean, he’s right. Crypto assets, whether they’re securities or not, if you’re not, they’re not being sold through a regulated entity like a broker dealer, even though they’re regulated in other ways. These exchanges are regulated as money transmitters. They don’t have the consumer protection requirements, They don’t have the market safety and market integrity requirements. And a lot of folks are investing in these products. That’s what they’re using them for now. The other side of the argument is people invest in a lot of things that aren’t securities. Gold bars, old comic books, all sorts of things. Art, antique cars. And they buy them hoping that they’ll go up in value. The only question is not whether people are investing in them. The the question is whether they’re investing in them expecting that the activity of others will increase the value and that’s really the question. And I think in the absence of clear legal guidelines, the SEC sees a vacuum of authority and they’re stepping in before something bad happens, like that’s the that’s the view kindness to them overall. What is your take on the SE CS approach, a regulation by enforcement? We have seen a lot of enforcement actions against several crypto firms, including Coinbase. In March, the SEC scored a major win in its lawsuit against the Crypto Exchange when a judge ruled that the agencies claim that Coinbase engaged in unregistered sales of securities could be heard by a jury at trial. So do you think that this is an effective approach or do you think there’s a better way? So if I were king of the world or queen of the world, I probably and in the absence of legislation defining these things, probably would have tried to give more guidance or or warnings. Now they might say they had been giving warnings saying these are securities bringing the cases against in the IC OS, but many of those involved fraud, which is different. And there there’s a lot of criticism coming from the industry that they try to work with the Commission that they try to get guidance from them even on a one-on-one level through their Office of of Innovation and things and they’re not getting the feedback that they need. So I think a little bit more cooperation with the industry while still moving forward to protect people that are investing in these assets. It’s probably more productive overall now. But philosophically you always have to regulate by enforcement a little bit, right, because you cannot have regulations that outline every single possible thing that can happen. Now, you also have experience with anti money laundering cases. I do. And recently, just last week, former finance CEO Sheng Peng Zhao was sentenced to four months in prison after pleading guilty to money laundering violations back in November. He was ordered to pay a $50 million fine. And so I’m wondering, given you advise and you consult government agencies, regulators, and the financial services industry around the world on money laundering and how to combat terrorism, what is the answer there? How can you combat money laundering in the crypto space? So it’s interesting because the the money laundering rules in crypto are the most buttoned up because in 2018 or 19, the office of the Treasury Department where I started the enforcement program, Financial Crimes Enforcement Network said we’re just going to say if you’re doing business in crypto, you’re a money transmitter. And so the AML laws have applied for a very long time and so they’re not in bad shape like the US finance. Their issue is the SE CS unregistered broker dealer. They haven’t been charged with not having a good anti money laundering program, right. And then as talking about the special mitigants of blockchain, it’s traceable so you can actually identify the risk of transactions on the blockchain, sometimes more easily than cash transactions now. And Gotti also discussed regulatory developments in crypto here in the US in greater detail and weighed in on the lawsuit the crypto firm consensus filed against the SEC after receiving its Wells notice from the agency. You’ll be able to watch more of her interview over at cnbc.com/crypto World. OK, that’s all for Crypto World today, but we’ll be back again tomorrow and we’ll see you then.