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Another Wyoming Crypto Company Hits Brick Wall With SEC

in News/cryptocurrency
Photo illustration by Tim Mandese/Cowboy State Daily
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By Renée Jean, Business and Tourism Reporter
renee@cowboystatedaily.com

Another Wyoming-based digital asset company appears to have run into an SEC brick wall. 

American CryptoFed DAO is facing a second administrative action from the U.S. Securities and Exchange Commission, which says the company’s attempt to register its two tokens, Ducat and Locke, is missing an array of basic financial detail.

The SEC has set a hearing time of 10 a.m. Dec. 1 to determine whether the federal agency, which regulates securities, will issue a stop order against the company.

Frictionless Payments

American CryptoFed DAO was Wyoming’s first legally recognized decentralized autonomous organization. It was hailed by the crypto sector at the time as the first legal DAO in the world.

Decentralized autonomous organizations in general use blockchain technology to encode membership decisions into smart contracts, which then govern how the digital assets will function.

In American CryptoFed’s case, it’s using the DAO concept to create a frictionless payment system for businesses and individuals that the company says will eliminate costly transaction fees, like those merchants pay when customers use a credit card. 

The Tokens

As part of this system, American CryptoFed describes two digital assets, the Ducat stablecoin for everyday exchanges, and the Locke token for governance, on its website.

The Ducat stablecoin’s exchange rate will adjust using data like the PCE price index to eliminate deflation and inflation to protect the monetary value of the coin between exchanges.

The Locke token, meanwhile, would have a finite number, which members would use to both ensure the Ducat’s stability and participate in network rules and decisions.

American CryptoFed has already lined up support for its DAO from the Merchant Advisory Group, representing 165 of the largest U.S. merchants, which between them have over $4.8 trillion in annual sales at more than 580,000 locations across the U.S. and online.

The group recently submitted a letter supporting the concept to Wyoming’s Select Committee on Blockchain, Financial Technology, and Digital Innovation Technology.

SEC Complaints

American CryptoFed initially tried to register both of its digital assets as securities last year under Section 12 of the Securities Exchange Act of 1934, but tried to withdraw the application in June of this year.

The Securities and Exchange Commission, however, rejected the withdrawal and issued a subpoena seeking additional details about the company’s finances, how its tokens work and other materials it says were omitted from the initial registration statement.

SEC also said statements within the registration documents conflict with each other. In one place, for example, the company says it’s two digital assets are not securities, but then says they are securities to be registered in another. The entire process, meanwhile, is intended for registering securities, the SEC pointed out.

“Regardless of whether the tokens are securities, one of the statements used (is) false,” SEC wrote in its administrative order.

Frustration With SEC 

In an email to Cowboy State Daily, American CryptoFed Chief Operating Officer Xiaomeng Zhou told Cowboy State Daily he believes the SEC actions are fundamentally unfair.

“The SEC has no legal basis to bring any legal actions against any entity and against any individual with allegations of ‘Unregistered Securities,’ when the actual pathway to registration with the SEC did not ever and does not currently exist,” he said. “All the pending SEC cases with allegations of ‘unregistered securities’ should be unlawful.

“American CryptoFed will make this point loud and clear during our public hearing and legal documents.”

Zhou also indicated that American CryptoFed has many times asked the SEC to provide “precision and guidance” as mandated by the U.S. Supreme Court.

“If CryptoFed prevails, the Crypto Industry will have a better future because American CryptoFed will force the SEC to provide ‘precision and guidance,’ to complete Form S-1 Statement registration,” Zhou said.

Custodia Case Proceeds

American CryptoFed is not the first Wyoming digital asset company expressing frustration with the current regulatory climate.

Custodia, a special purpose depository institution, has filed a lawsuit against the Federal Reserve for what it says has been an inordinately long slow-walk of its application for a master account as a state-regulated bank.

A Wyoming federal judge recently ruled that Custodia can proceed with some of its claims in the case. 

It is rare that cases of this type against the Federal Reserve are allowed to proceed and is a key win for legitimate digital asset companies that are fighting for the right to exist inside existing legal and regulatory frameworks.

The outcome of the case will be precedent-setting for Wyoming’s three special purpose depositories. A win in Custodia’s case will set the stage for more special purpose depositories to exist within the Wyoming’s regulatory space.

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Wyoming Could Be Global Crypto Leader, But Nobody’s Paying Attention

in News/Legislature/cryptocurrency
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By Renée Jean, Business and Tourism Reporter
renee@cowboystatedaily.com

Wyoming has developed one of the most comprehensive regulatory frameworks for digital assets in the world, a kind of red carpet that lawmakers hoped would be attractive to companies that want to do things right in a rapidly evolving business sector.

So far, the strategy is working to attract such companies to the state. Several of them in fact, noted during testimony to lawmakers Friday. Officials said they brought their companies to Wyoming because of the laws the state has created that protect business and consumers from fraudsters and con artists. 

But there’s one problem with what the state has done so far.

The venture capitalists and angel investors — who hold the purse strings — do not know very much at all about what Wyoming has done, or why they should want the companies they are capitalizing to locate in the Cowboy State.

Trucker Friendly

TruckCoinSwap is among digital asset companies that have located in Wyoming recently because of its favorable and clear regulatory framework. 

The company has created a utility token with the Etherium and Polygon blockchains that truck drivers can use to more quickly clear their invoices to not only get their payments sooner, but without the transaction fees that are cutting into drivers’ margins and that shipping companies ultimately pass on to consumers. 

At FreightWaves Future of Freight Festival in Tennessee, TruckCoinSwap recently demonstrated a mobile and web app for freight documents to what CEO and co-founder Todd Ziegler described as “thunderous applause.” They were approached by key transportation industries that represent access to more than 3 million American truck drivers.

What About Wyoming?

But Jacob Centner, chief technology officer and co-founder for TCS, told Cowboy State Daily that he was dismayed to learn not long after that most of the venture capitalists, angel investors and other parties that TruckCoinSwap’s CFO and co-founder Phillip Schlump talked to do not know anything about what Wyoming has done.

“Wyoming is, we have a lead right? We’ve got this legal framework established so that companies like ours can come here and build,” Centner said. “We talked to over 20 venture capital funds, and all of them asked where we were based, and we told them Wyoming, and they all asked why. 

“We had to explain to them that our legislators have passed dozens of bills, and that our Legislature actually understands this industry, and that’s why we are here.”

State Needs Marketing

Centner, Ziegler and Schlump brought their concerns to lawmakers in Cheyenne on Friday during hearings of the Select Committee on Blockchain, Financial Technology and Digital Innovation Technology.

“This is the blockchain world where half of everything is marketing,” Schlump testified. “And tremendous work will go to waste if you don’t get out there and actually build this list (of major venture funding organizations) and start like contacting these people to actually make certain they and the world understand why Wyoming is unique and special and has something to offer this market that no one else does.”

State Needs A Plan

Sen. Chris Rothfuss, D-Laramie, co-chairs the committee and said that TruckCoinSwap’s point is well-taken.

“Marketing is not something Wyoming does very well, honestly,” he said. “It is one of the reasons why Delaware leads. They have a marketing plan for corporations.”

In prior discussions, state officials and lawmakers have focused on getting all the attorneys who are working with digital asset companies to recognize Wyoming’s strengths in the sector.

“But it’s not just the attorneys that make that decision,” Rothfuss acknowledged. “It’s literally the angel investors.”

The Wyoming Business Council is likely where such a message would come from, Rothfuss suggested.

“They should have the resources already to do that,” he said.

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Lummis: Wyoming Laws Would Have Prevented FTX Meltdown

in News/Cynthia Lummis/cryptocurrency
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By Renée Jean, Business and Tourism Reporter
renee@cowboystatedaily.com

The recent meltdown of cryptocurrency exchange FTX is not something that could have happened in Wyoming, Sen. Cynthia Lummis told Cowboy State Daily.

She believes the demise of FTX — which filed for bankruptcy and reports more than $1 billion of clients’ money is missing — could breathe new life into a federal bill she has cosponsored that models Wyoming’s regulatory system. 

“What the nation should do is take stock of what Wyoming has done so well and adopt a regulatory regime that is a lot like Wyoming’s,” Lummis said. 

Wyoming laws already forbid the commingling of customer assets that ultimately caused FTX to go belly up, Lummis said.

“Since 2019, we’ve known that affiliate transactions with digital assets are dangerous,” she said. “And that’s why it is illegal in Wyoming. 

“In Wyoming, there are strict limits on affiliate transactions such as occurred between FTX and its sister organization called Alameda.”

What Happened With FTX?

What happened to FTX is not something inherent to crytpocurrencies or digital assets. 

Instead, it’s fueled by one of the oldest human motivations – greed.

Or, as Steve Lupien, director of University of Wyoming’s Center For Blockchain and Digital Innovation puts it, Enron again.

“We’ve seen the same thing happen with companies like Enron, which commingled funds and went bust,” he told Cowboy State Daily. “Because you can’t. When you commingle funds and you have a situation like we had in crypto — which can happen any time the market goes down.

“What the exchange lost wasn’t their money. It was customer money. And when customers go and want their money back, it’s not there.”

Reminiscent Of Mobsters

Lupien believes many of the leveraged products being offered in the crypto sphere today are nothing less than fraud on a grand scale.

“I’m gonna be honest with you, some of these leveraged products that companies like FTX are offering would have made Bugsy Siegel jealous,” Lupien said. “I mean, the mobsters of the ’50s weren’t able to run, you know, leverage schemes as big as 150 to or 100 to 1. 

“And Bitcoin wasn’t designed to be leveraged. So personally, I think we needed to flush out these margin players.” 

Cryptocurrency may feel exotic and unfamiliar to many, but these types of risky investment practices have been happening for a long time, Lupien said.

“It has happened in financial service companies throughout history, and that’s why (Wyoming has) created (its digital asset) regulations, to prevent that from happening,” he said. 

Good Riddance To ‘Grifters

Caitlin Long, CEO of Custodia, is among those working in the digital asset sphere who believes what happened to FTX could ultimately be good not just for the future of cryptocurrencies, but for Wyoming in particular.

“Where there was no regulatory clarity, a lot of outright criminals filled the vacuum,” she said. “Those of us who are big fans of the technology and hated all the criminals and grifters who have been around it are all saying good riddance to all the criminals and scammers, and we are continuing to focus on implementing the technology that will bring better, faster, cheaper and more secure payments to regular users.”

Custodia is among Wyoming banks working in the digital asset space that have yet to receive a master account from the Federal Reserve. 

Paving The Way

The company has sued over the slow-walk, a case that is still working its way through the legal system. That lawsuit on Friday survived a motion to dismiss and now appears set to proceed on what could be precedent setting for all three of Wyoming’s Special Purpose Depository Institutions. 

Long, who could not comment specifically on Custodia’s case, said she hopes the FTX meltdown in general will help pave the way for regulatory clarity where there has so far been little.

“The good players who are focused on building technology are trying to get bank and broker dealer licenses to be able to do things in a regulated and safe way,” she said. “Neither the FCC nor the Federal Reserve has allowed those players to achieve those licenses to date.”

National Crypto Framework

Lupien, meanwhile, believes the Lummis-Gillibrand bill, which had been taking a backseat to one pushed by FTX founder Sam Bankman-Fried, will get new life. 

“I actually spoke to some folks in Washington about (the Bankman-Fried) bill, and they basically said it’s radioactive now because of FTX,” Lupien said. “It’s so radioactive that it’s glowing on people’s desks. That bill will never, ever see the light of day.”

The bill Bankman-Fried had favored was sponsored by U.S. Sens. Debbie Stabenow, D-Michigan, and John Boozman, R-Arkansas, and contains what Lummis characterizes as “inadequate regulation.”

“I hope to be able to steer the direction of the Senate Ag Committee bill in the direction of the Lummis-Gillibrand bill,” she told Cowboy State Daily. “The Lummis-Gillibrand bill is currently in the Senate Finance Committee. 

“It is a large, comprehensive bill dealing with all kinds of digital assets; everything from cryptocurrency to stable coins, and makes mention of a variety of other iterations within the blockchain.”

Lummis said she anticipates the bill could be sent to committees for consideration early in 2023. 

The Lummis-Gillibrand bill has been heavily influenced by Wyoming laws, but Lummis said it goes a little further in some areas because of the nature of federal agencies involved.

“The Lummis-Gillibrand bill, for example, requires that an exchange not use customer assets for proprietary trading and maintain 100% of customer assets for withdrawal at all times,” Lummis said. “And it requires use of an independent bank or trust company as custodian, similar to what would happen now with securities under the SEC and the Commodity Futures Trading Commission.”

Crypto Not Dead

Cryptocurrency as a sector is a trillion-dollar asset class and is not going anywhere, Lupien told Cowboy State Daily. 

“Bitcoin itself, for example, is still writing a block every 10 minutes,” he said. “Bitcoin is completely unaffected. The technology, the operation of digital assets has not been impacted one bit.”

Banks also can get robbed, Lupien pointed out.

“Do we all go around saying we need to throw away paper money because it’s vulnerable to bank robbery?” he asked. “No, we tighten our regulation. We need to learn from these types of events.”

Long agreed that digital assets are not going away and pointed to Elon Musk as an example of how the sector continues to push forward.

“Last week, in the middle of all the drama, there was a huge announcement, which is that Elon Musk is going to use peer-to-peer payment protocols for allowing payments in Twitter,” she said. “That is an earthquake in the payments industry, because he is going to settle U.S. dollar transactions outside of the traditional payment rails.”

Overshadowed

The furor over FTX obscured Twitter’s move, Long added, dampening blowback that Musk’s announcement would otherwise undoubtedly have attracted.

“I’m sure the banking industry is not happy about Twitter becoming what he called it, the people’s financial institution,” Long said. “And yet that barely made the stories. 

“But it’s important (to Wyoming), because that is exactly what Wyoming Special Purpose Depository Institutions are aimed at doing, bringing the new payment technologies into the banking system. And the fact that Elon Musk is proceeding with those payment technologies is Exhibit A for the fact that crypto is not dead.”

It’s also another exhibit in what is a David and Goliath battle for the financial future of Wyoming, Long suggested, one in which thousands of future jobs are at stake.

“South Dakota, our neighbor, did something similar in the early 1980s when they went after the credit card industry,” she said. “They were able to get the credit card companies to move to Sioux Falls, South Dakota, and there are 40,000 jobs in that industry in Sioux Falls right now 40 years later. 

“That’s what Wyoming is playing for, to bootstrap our financial services industry. We’ve been blocked by Washington, D.C., and the New York banks are trying to get ahead of us now.”

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