☕️ Bitcoin’s Custody Battle 💔 😭

🥊 SEC vs. CFTC on Bitcoin: A House Divided Cannot Regulate 🏛

Hey, Bitcoin, can you come in here for a minute? The SEC and the CFTC want to talk to you.

Yes, they’re divorced. No, they’re not going to stop loving you. Yes, you’ll get two Christmases. But now it’s time for the hard question.

Who are you going to live with? Who gets partial custody? Who gets which major holiday?

The SEC and CFTC are both laying their claim to Bitcoin, and our favorite crypto is stuck in the middle.

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Espresso Shots

☕️ Gensler Doubles Down in Testimony 👩‍⚖️ 🔻

SEC Chairman Gary Gensler testified on SEC oversight before the Senate Banking Committee on Tuesday.

The hearing covered a wide range of topics such as AI and investor protections, but most importantly, Gensler was questioned on his agency’s legal actions against crypto.

If you were hoping for answers as to why crypto regulators have been dragging their feet, you’re going to be disappointed, because Gensler’s remarks were more of the same.

Gensler insisted that the SEC should be responsible for crypto regulation but that in 44 years of financial service, he has “never seen a field that is so ripe with misconduct. It’s just daunting.”

Now that orchards are open and the misconduct trees are ripe, we look forward to the release of Chairman Gensler’s adorkable fall photo shoot.

☕️ CFTC Proposes Fraud Registry ⚖

The Commodity Futures Trading Commission (CFTC) is pushing for a national registry of fraud convictions and civil fines against individuals and entities.

The CFTC believes that a national registry will make it safer and easier for individuals and institutions to navigate the sometimes treacherous waters of finance.

“The damage caused by financial fraud is so devastating that deterring fraudsters and protecting investors is a top priority of law enforcement,” CFTC Commissioner Goldsmith Romero wrote in the official proposal. “There is a more effective and efficient way to achieve this important mission—one that could help prevent fraud, and ultimately save law enforcement resources. Today, I re-propose a National Financial Fraud Registry—a centralized record of all crimes and fines related to financial fraud.”

We’re still waiting for a verdict on the FTX case, but we think it’s very possible that SBF may end up having to go door-to-door and inform future neighbors he’s on the registry.

☕️ AI Is Drinking Up the Water Supply 🤖💧

The processing needs of AI may be causing a substantial drain on power grids, particularly water.

With the massive energy demands required to run AI systems like ChatGPT, the data centers need increasingly large amounts of water to keep the servers cool.

According to a report published by the Associated Press, ChatGPT consumes roughly the equivalent of a 16-ounce water bottle every time a user asks between 5 to 50 prompts.

And as AI grows in popularity, the need for water grows proportionally. Microsoft, one of the industry leaders in AI, revealed that its global water consumption increased by 34% from 2021 to 2022 — a trend researchers believe may be directly linked to AI.

But we already knew AI was thirsty because ChatGPT won’t stop sending us late-night, “u up?” texts.

Spilling the Beans

Bitcoin’s Custody Battle 💔 😭

They say no good marriage ends in divorce.

It’s not a tragedy that, in America, more marriages end in divorce than “till death do us part.”

Deciding to get divorced isn’t the hard part. If anything, it’s a relief. The difficulty lies in custody decisions.

Sometimes that decision lies with a judge, and sometimes with the kids. Do you want to spend more of your time at Mom’s house, where you can sleep in your old bed, or Dad’s spooky new apartment, where you can stay up as late as you want and have take-out every night?

And now Bitcoin is stuck in the same pickle as children of divorce. There are two regulatory bodies warring over custody, both with fairly entrenched claims.

The Securities and Exchange Commission (SEC) wants control over Bitcoin, because, according to the central tenet of their long war with crypto, Bitcoin and crypto should be treated as securities.

The Commodity Futures Trading Commission also wants control over Bitcoin, because they believe that rather than securities, Bitcoin and crypto fall into the commodities category.

Now, let’s examine each regulatory body’s arguments and the legitimacy of their claims.

Both former SEC Chair Jay Clayton and current Chair Gary Gensler have admitted that Bitcoin is not a security.

One would think that would end any veracity to the SEC’s claim over Bitcoin, but that’s not necessarily the case.

The SEC is indisputably in charge of regulating Initial Public Offerings (IPOs) and crypto’s Initial Coin Offerings (ICOs) function very much the same.

What’s more, the SEC has also zeroed in on DeFi’s lending capabilities. Lending intrinsically involves debt, and debt instruments are, by definition, considered securities.

Now, let’s consider the CFTC’s claim.

The CFTC is in charge of regulating commodities, futures, and derivatives.

And though futures and derivatives make up a substantial portion of crypto trading, the CFTC is a body that is intended to prevent fraud and regulation, rather than create the guidelines investors must adhere to.

It’s a frustrating situation because the sweeping, versatile nature of DeFi means there’s always going to be some overlaps in regulatory authority.

We can’t have hopes for regulatory clarity until it’s decided who is going to regulate crypto.

U.S. President Joe Biden has even stepped in, like an exasperated judge in family court, to ask the SEC and CFTC if they can just get along.

Biden signed an executive order in March calling for the responsible development of digital assets and inter-agency cooperation on their regulation.

Despite the White House’s plea for teamwork, the battle has raged on and the question remains. Which regulatory body should be in charge of crypto?

Despite all the regulatory borders, permissions, and guidelines, the answer is fairly simple.

Who wants it more?

And that would have to be the SEC.

As Attorney and Founder of FTI Law John Joy wrote in Jurist, the CFTC simply can’t match the SEC’s appetite for enforcement.

The CFTC certainly fulfilled its role in the lawsuit against BitMEX, but that’s small potatoes compared to the many public enforcement actions taken by the SEC.

The SEC has levied unregistered securities lawsuits against Binance, Kraken, Ripple, and Coinbase, just to name a few.

In terms of enforcement publicity, the SEC is in the lead for the crypto regulation crown, for better or worse.

For now, it looks like the SEC may be doing much of the tough parenting, while the CFTC pays for school supplies and takes Bitcoin bowling on weekends.

Meme of the Day

Crypto’s had a tough upbringing so far. 😅🤦‍♂️

Crypto 101

Smart Contracts: Programs that run on the blockchain that automatically activate when certain, predetermined conditions are met.

Usually, that function is the agreement of a financial contract. With smart contracts, agreements and transactions can take place without the use of a human intermediary.

The Last Sip

60% of restaurants fail within their first year of opening. But darker than that, 80% of restaurants fail within their five years of opening. Turns out the statistics for marriage are pretty similar. Yes, 35% to 50% of American marriages end in divorce, but did you know that 60 to 70% of second marriages also end in divorce? Good luck out there. Remember, kids, love is a battlefield!

Stay Caffeinated,

Coffee & Crypto Team

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DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.