Chamath Reports Stablecoins Taking Off
Plus, CoinDesk is in the pain cave and the DeFi Education Fund writes another banger.
I started Brogan Law to provide top quality legal services to individuals and entities with legal questions related to cryptocurrency. Cryptocurrency law is still new, and our clients recognize the value of a nimble and energetic law firm that shares their startup mentality. To help my clients maintain a strong strategic posture, this newsletter discusses topics in law that are relevant to the cryptocurrency industry. While this letter touches on legal issues, nothing here is legal advice. For any inquiries email aaron@broganlaw.xyz.
SpaceX uses Stablecoins
Cryptocurrency, for a long time, has had more speculative real world use than, well, real world use. Everyone loves gambling on tokens, of course, but there is a sense that the industry is missing its “killer app.” Commentators have historically identified cross-border remittances as being a candidate for this title, and so it was a watershed moment this week when the podcaster Chamath Palihapitiya broke news that SpaceX uses stablecoins for cross-border transfers.
"SpaceX uses Stablecoins. They collect payments from Starlink customers and when they aggregate them in long-tail countries, they don't want to take the FX risk or deal with sending wires, so they'll swap into stablecoins, send it to the US, and then swap back to USD."
This is quite interesting because it is the first example I have encountered of stablecoins being used in this way on an enterprise level. Anecdotally, I have heard all over the world that individuals use stablecoins to avoid currency risk (this is sometimes called foreign exchange, forex, or FX risk). In Argentina, where inflation was once hundreds of percent annually, individuals accept pay and turned it into USDC or UST as quickly as possible, thereby preserving it against inflation risk.
Companies have the same issue. They accept payment denominated in local currency all over the world (by law in many places), but don’t want significant exposure to the fluctuation of this currency relative to USD. Traditionally, corporate entities hedged this risk with a variety of financial products like forward contracts, currency options, and cross-currency swap. This practice effectively ameliorated the risk, but, in general, you have to pay someone for these products. Maybe it's better to just buy USDC?
Of course, this only solves the issue with respect to cash revenue, and many businesses that need to hedge risk in this way have forex-denominated accounts receivable, which this practice does nothing for. But even so, this is a big idea!
Mr. Palihapitiya highlighted another interesting use case for stablecoins in the same breath—cross-border remittances. Generally cross-border banking is quite cumbersome and slow. This is because banks, despite operating electronically, are tethered to physical locations and encumbered by historical operational practices. They aren’t open all the time, and you have to arrange for the money to cross a border. A public blockchain, on the other hand, is completely geographically agnostic and runs autonomously, which makes sending stablecoin from a foreign to domestic wallet seamless. At least in theory.
There are of course some other risks involved. It is relatively unlikely Wells Fargo will lose your USD (and if they did, they would probably have to indemnify you), however, it is plausible that an in-house USDC transaction could be lost in any number of ways. You can hire a vendor to manage this for you, but then you start to encounter bank-like problems again. The net is, this practice will likely facilitate faster, easier cross-border transfers, but the progress might be more incremental than revolutionary.
While there may be any number of legal regimes implicated by this practice, tax is probably the most important one. International transfers have to be managed carefully for tax purposes, but this is outside of my area of expertise. In the new year, I hope to have a tax expert on the newsletter to discuss these issues. If you know one who you think would be interesting, please send them my way.
CoinDesk Woes
Some sad news this week as industry outlet CoinDesk appears to be having some issues. From following Leo Schwartz coverage in Fortune, here is basically what happened:
In 2022, CoinDesk’s then-owner Digital Currency Group (DCG) also owned the firm Genesis Trading. Genesis Trading was a substantial counterparty of Three Arrows Capital (3AC) and FTX, had significant exposure to the 3AC and FTX bankruptcies, and so went bankrupt itself.1
This caused DCG to become less well capitalized overall, and so it looked to sell CoinDesk to improve liquidity. In November 2023, it sold CoinDesk to the cryptocurrency exchange Bullish for $75 million.
As part of the deal, Bullish set up an “editorial committee” composed of former editor-in-chief of The Wall Street Journal Matt Murray. The idea, as far as I can tell, was to keep a wall between Bullish and the editorial operations, given the obvious conflict of interest of reporting on the industry while reporting to a cryptocurrency exchange.2
In November, TRON founder Justin Sun bought a piece of art consisting of a Banana taped to a wall3 for $6.2 million. Mr. Sun then held a press conference where he performatively ate the banana.
Shortly thereafter, CoinDesk ran an article written by Callan Quinn that called the event “odd” and mentioned an SEC charge against Mr. Sun for wash trading and reporting from CoinGecko that TRON is allegedly used by terrorists.
Mr. Sun took apparent exception to the piece, and reached out to Bullish requesting that they take it down. The TRON DAO is a major sponsor of CoinDesk’s upcoming Consensus conference in Hong Kong.
Bullish reached down to CoinDesk and forced the publication to take the article about Mr. Sun down.
Mr. Murray resigned in protest.
Certain CoinDesk editors reportedly wrote Bullish a letter detailing numerous complaints and stating “The decision to retract this article was outrageous, crossing every ethical line that we’re taught to observe as journalists. It showed blatant disregard for CoinDesk’s editorial independence and for our profession… If this got out to other media, it would, rightfully, become its own news story, risking the reputation of CoinDesk, Bullish, Block.one [Bullish’s parent company] and our journalists.”
Bullish fired three editors, Editor-in-Chief Kevin Reynolds and Deputy Editors-in-Chief Nick Baker and Marc Hochstein.
Now, the publication’s future is unclear. I haven’t spoken with any of the remaining CoinDesk staff about the situation, but it seems uncomfortable to say the least. It is likely that Bullish’s intervention will end up damaging the brand, as has been the case in the past when non-media companies purchased media properties like Deadspin, Sports Illustrated, and the Village Voice.
But I’m not running this because media commentary is important to the cryptocurrency legal landscape. One of the editors Bullish fired was Marc Hochstein, who I know personally. Marc published my first article on CoinDesk, and has been a hugely generous resource to me ever since. He has a real talent for sussing out eventualities and counterarguments of complicated legal topics that has helped me develop arguments that I have since used in other avenues. Marc’s piece on Shayne Coplan was one of the best of the year, and wherever he ends up writing next, I highly recommend checking out.
While I don’t know Mr. Reynolds or Mr. Baker, I’m sure the same goes for them. It’s a nasty thing to be fired during the holidays, so I am keeping all of them in my thoughts.
There is an ideal of journalism as an independent enterprise driven by truth, but the reality is that it is a business, and a largely unprofitable one. Financial backers like Bullish likely purchase these outlets expecting to find synergies with their core business, and then struggle to realize them without compromising the integrity of the publication. I don’t mean to cast blame here, because for-profit enterprises do have to make money, and cryptocurrency executives didn’t themselves swear a vow of independence in journalism school. Still, the upside is that these media assets are worth less, and, without their reporting, we are all diminished.
United States Code Title 18 Section 1960
I was in Washington D.C. this week at the Blockchain Association Policy Summit. The conference itself was, honestly, an incredible convocation of the sharpest legal and policy minds in the industry. I felt incredibly lucky to be there, and there were more big ideas discussed than I can easily cover here. One came up unusually often, though, so I want to discuss it now.
Section 1960 of Title 18 of the United States Code is the federal criminal statute for unlicensed money transmission. Money transmission is defined on a state by state basis, but generally means the practice of taking money from one person or entity, then either returning it later or passing it on to a third party on the first party's behalf.
To give an illustrative example that does not comply specifically with any particular regime: PayPal is probably acting as a money transmitter when it takes custody of your USD and transmits it to eBay on your behalf, but Amazon is probably not acting as a money transmitter when it takes your money and sends you a product from its own inventory.
In every state, money transmitters require licensure and generally it is a state crime to operate without one. The Bank Secrecy Act (BSA) also creates a federal requirement that money transmitters register with the Financial Crimes Enforcement Network (FinCEN) and implement certain compliance procedures like KYC/AML and filing suspicious activity reports (SARs). Section 1960 is the federal stick on the other side of this coin, saying if you do not register, the government can send you to prison for five years.
This is a big pain, but so is terrorism! Congress chose to implement an extremely restrictive regime through a series of legislation, most notably the 2001 Patriot Act, that collectively allow the enforcement arms of the U.S. Government to monitor and police financial conduct. This may or may not be wise, but it is there.
Historically, this statutory framework has been a major concern for cryptocurrency projects, but a manageable one. Not all states include cryptocurrency in the definition of “money” for the purposes of money transmission, and so projects can operate in limited geographies, obtain no-action letters from local regulators, and generally avoid the need to register from a state law perspective. For its part, FinCEN has said that “the developer of a DApp is not a money transmitter for the mere act of creating the application, even if the purpose of the DApp is to issue a CVC or otherwise facilitate financial activities denominated in CVC” and “if a [crypto] trading platform only provides a forum where buyers and sellers of [crypto] post their bids and offers (with or without automatic matching of counterparties), and the parties themselves settle any matched transactions through an outside venue (either through individual wallets or other wallets not hosted by the trading platform), the trading platform does not qualify as a money transmitter under FinCEN regulations”, creating further avenues for legal operations.
In practice, this means that many projects aim to develop immutable smart contract processes for the exchange or transfer of funds, such that the project itself is merely a software developer or front-end, but never custodies or controls assets.
Recently, however, opportunistic prosecutors have dusted off Section 1960 to put the screws to disfavored operators. Particularly, the government argued in United States v. Storm, No. 1:23-cr-00430 (KPF) (S.D.N.Y. Sep. 26, 2024) that “[u]nder the ordinary meaning of the word ‘transfer,’ there is no requirement that the transferer exercise control over the funds being transferred.” Subsequently SDNY Judge Katherine Polk Failla agreed that “control is not a necessary requirement of the Section 1960 offense.“
Now, this is alarming because, in effect, it makes unregistered DeFi felonious. If Section 1960 applies to anyone who deploys a smart contract on chain, then the “software developer” exception to the BSA no longer pertains. Major projects like Uniswap, dYdX and Hyperliquid would be directly implicated.
Enter the DeFi Education Fund (DEF). We’ve covered DEF here before when they, alongside a number of state attorneys general, filed a really cool complaint against the SEC in November. At the policy summit, DEF chief legal officer Amanda Tuminelli walked through their incredibly comprehensive working paper “Through the Looking Glass: Conceptualizing Control and Analyzing Criminal Liability For Unlicensed Money Transmitting Businesses Under Section 1960.”
In the paper, DEF and the venture capital fund Variant provide, in meticulous detail, the strongest possible argument that “control” is a requirement under fair readings of Section 1960. They also develop other arguments that DeFi projects might be able to use in future litigation, such as examining the meaning of “business” under Section 1960 and the appropriate mens rea requirement.
While it's likely this paper will be a little heady for most non-lawyers, I can’t overstate how useful it is to practitioners. The service of releasing comprehensive, cogent, meticulously constructed arguments to the public for free short circuits the needs for individual attorneys to develop novel applications. In so doing it helps coordinate the strongest legal arguments for the industry across circuits and, eventually, to the Supreme Court.
It is impossible to say if these arguments will find traction anywhere, but whether they do or not, this paper and others like it are a great service to the industry. If you are in a giving mood this holiday season, you can donate to DEF here.
Otherwise, until next week!
Full disclosure I had some assets custodied with Gemini Earn, which was administered by Genesis, and so I lost a (very small) amount of money in this bankruptcy.
I should note that essentially the same conflict existed when CoinDesk was owned by DCG, but I guess Barry Silbert just does it different.
The art is possibly known as “Comedian” and was created by Maurizio Cattelan.
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