Bitcoin Core Developer, Stanley Morgan Executive Write Letter to SEC Warning of Unclear Regulations
Several prominent leaders from across the world of blockchain and traditional finance have teamed up to draft a letter to the SEC. That letter, which includes a Bitcoin Core developer and former Morgan Stanley executive, urges the SEC to modernize its methods and embrace crypto.
You can view the full letter here. It was published online on September 21, although the letter was sent on September 19. The letter is titled, “Re: Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings.”
“We are a group of blockchain and cryptocurrency industry professionals whose expertise and experience extends across the entire cryptocurrency space, with extensive experience in financial services, cryptography, and cryptoeconomics,” begins the letter.
The letter was written in response to the SEC’s staff letter titled, “Engaging on Fund Innovation and Cryptocurrency-related Holdings.”
“Our intent is to assist the SEC by disclosing what we feel are critical considerations for handling cryptocurrency regulation that were not addressed in other comment letters previously made public by the SEC.”
The 7-page letter highlights the qualifications of the authors, then issues several specific recommendations for the SEC to modernize its practices moving forward.
The letter even contains references to Hal Finney and Satoshi Nakamoto. Hal Finney’s forum post from 2010 is mentioned, for example, as early evidence that bitcoin developers recognized the value of third-party custody solutions. Satoshi is referenced to support the claim that:
“bitcoin was developed with the specific intent of allowing individuals or entities to manage and move value without the need for an intermediary or trusted third party.”
Who Wrote the Letter?
The letter was written by five individuals with experience in blockchain, cryptocurrency, and traditional finance. The five authors include:
Allen is one of the most experienced cryptocurrency developers in the world today. He has 26+ years of experience in cryptocurrency because he worked on DigiCash in the early 1990s. Allen co-authored the TLS standard that secures the internet and trillions of dollars of payments every year. Allen most recently served as Principal Architect at Blockstream and now serves as Executive Director of Blockchain Commons.
Bitcoin Core contributor Bryan Bishop has been working on the project since 2013. Bitcoin Core is the reference implementation of the bitcoin protocol. Between 2014 and 2018, Bishop built a software solution for digital currency custody at LedgerX, the world’s first CFTC-regulated bitcoin clearinghouse.
Angus Champion de Crespigny:
Champion de Crespigny established the global blockchain team at Ernst & Young in 2014, leading their financial services blockchain and cryptocurrency strategy until leaving the firm in August 2018. He has 11 years of experience in financial services across regulation, technology transformation, cybersecurity, and performance improvement.
Fearey is an attorney with 17+ years of corporate, investment funds, and regulatory compliance experience. Fearey has spent his career counseling fund managers and entrepreneurs in structuring transactions and navigating compliance issues, but currently focuses on blockchain and cryptocurrencies.
Long is a 22-year Wall Street veteran who most recently served as Managing Director and Head of Pension Solutions and Corporate Strategies at Morgan Stanley in New York. Long became involved with bitcoin in 2012 and served as Chairman and President of blockchain startup Symbiont from 2016 to 2018. She is also a gubernatorial appointee to the Wyoming Legislature’s Blockchain Task Force. Long has made headlines across the crypto industry in recent months for her crypto-related stories on Forbes, including her writeups on the financialization of bitcoin. She is also working to make Wyoming the most crypto-friendly state in the country.
Clearly, the group of authors consists of some of the most experienced and qualified people for discussing crypto regulations. So what do they recommend?
Three Recommendations for SEC Crypto Regulations Moving Forward
The letter mentions three broad strategies the SEC should adopt moving forward in order to clarify crypto regulations in the United States:
“We Caution Against Applying Rules to Digital Assets in Ways Which Do Not Reflect Their Strengths”
The authors of the letter describe that digital assets are bearer instruments developed for direct ownership. They’re not designed to be commingled in omnibus accounts. As bearer instruments, digital assets face much greater risk of theft than other assets traditionally used in exchange-traded products. That means that theft, failures to deliver, or other discrepancies with off-chain balances relative to on-chain assets create heightened potential for investor losses.
This is why it’s a bad idea to apply existing practices, rules, and regulations to cryptocurrencies. We can’t apply modern clearing, settlement, and custody regulations to digital assets.
“Securities laws were initially written to apply to paper securities certificates, later adapted to book entry form, and now to digital representations of security entitlements recorded in centralized databases. They were not written with purely digital assets such as cryptocurrencies in mind.”
Specific recommendations on this topic include:
- No commingling of digital assets in an omnibus account
- No building of uncovered exposure to digital assets via securities lending-type practices, even intra-day
- The optimal fund structure would be a fund where investors have the choice to redeem their shares in the underlying digital asset itself; this “would help impose discipline to ensure uncovered exposures do not build within the financial system.”
“We Should Leverage the Technology of This Asset Class to Protect Investors in Ways Not Previously Possible”
The authors also recommend leveraging cryptocurrencies as an asset class in ways which were not previously possible. Some of the ways in which crypto can be leveraged include:
- Funds that are locked for a certain period of time or until a particular condition is met
- Proof of client holding of digital assets without exposing underlying digital asset balances
Crypto provides an opportunity to do this using multi-sig solutions and key signatures, among other blockchain-based security features.
“Solutions In This Space Might Be Dependent on Technology, Not Policy”
“We believe that current SEC rules surrounding custody do not reflect the risks inherent in managing digital assets and do not use the technical strengths of the technology.”
Crypto’s technical strengths have the potential to lead to a stronger, more robust custody environment.
Allen, Bishop, Champion de Crespigny, Fearey, and Long sum up their letter with this:
“In summary, best practices regarding custody of digital assets should incorporate some of these new technologies to achieve transparent, auditable and provably solvent funds. The new tools are in many ways better for this asset class than existing tools and achieve the same goals without introducing risks that would not otherwise be there.”
You can view the full letter here at SEC.gov.