Cryptocurrencies were created to ensure that people had full control over their assets, without depending on the State, centralized entities and intermediaries to be able to enjoy them. The objective was to escape the interference of the institutions that determine the course of monetary policy and the world economy, taking advantage of their dominant position to control and manipulate the market.
We all know that this transition will not happen overnight, requiring a lot of commitment, education, discipline and raising levels of adoption to fully achieve this goal. However, at the relatively advanced stage in which blockchain technology is found, including at the level of adoption, it is unacceptable that there are still so many people who leave their crypto assets and relevant equity positions in the custody of third parties.
Today I want to tell you what is happening with some of the main players in the crypto market.
Exchange is not a wallet!
We have had many opportunities over the last few months to learn once and for all the lesson that we should never trust any centralized entity. This does not mean that you cannot use a centralized brokerage, of course, but that you need to know how to manage your risks.
When you have a bear market, it is natural for brokers to suffer. The FTX crisis triggered great concern, which led to greater caution and attention from investors and market players. With this, it was discovered that several brokerages are experiencing serious problems.
Unlike the stock exchange, for example, where if you acquire a certain share of a company via a brokerage, the custody is the regulatory entity (and not the brokerage), in the crypto market, when acquiring assets in centralized brokerages, the custody is of the brokerage and that's where the danger lives.
Centralized exchanges have the characteristic of custody. They require your tokens to be deposited in them, just like real money in banks. This is extremely risky. When you need or want to withdraw your funds, you may be in for a surprise.
This is what has happened and has been happening to users of some centralized exchanges in recent months. After the collapse of FTX there was a run for withdrawals at several exchanges, exposing the insolvency of many of them. This has caused several CEXs to freeze withdrawals or impose limits.
In addition, to use the services of centralized brokers, you need to provide your data, in the procedure known as KYC (Know Your Customer), or know your client in free translation. This way you expose yourself to issues related to inspection, fees and taxes on your tokens.
Regardless of the risk that exchanges pose, there are some services offered by them that make them still used frequently by cryptocurrency investors. Among them are: trading of different types of derivatives, withdrawals in local currency and deposits in the users' bank account.
There are alternative decentralized solutions for all these cases. You don't necessarily need to use the services of a CEX, but if you do, make sure you only leave the funds necessary for the transactions, and not make your brokerage wallet a savings account where you leave your most valuable assets.
In the domino effect initiated by the FTX crash, there is a chance that several important players will be affected. Authorities are determined to prevent more people from being harmed by the incompetence or bad faith of exchange managers, and several measures are being taken.
This includes the criminal investigations currently underway to identify the possibility of fraud, money laundering and other serious allegations against certain relevant exchanges. It is important to keep an eye on these situations to anticipate possible repercussions and also to understand some practices that are at least doubtful.
One of the consequences of the collapse at FTX was the stoppage of withdrawals from one of its major creditors, Genesis, which is a cryptocurrency (mainly Bitcoin) lending and trading platform, belonging to the DCG Group, which also owns Grayscale and Coindesk.
This stoppage put Genesis in the sights of regulatory bodies, especially the SEC (Securities and Exchanges Commission), the American equivalent of the Securities and Exchange Commission. The entity has the function of regulating and supervising the market, in order to guarantee that the offers of securities (securities) meet the criteria established in the legislation.
Securities, or securities, are any publicly offered securities or collective investment contracts. Its regulation and classification method may vary in each country. Stocks, debentures and investment fund shares are good examples of securities.
In the crypto market, it is very common for some tokens to be included in the definition of securities, especially when they are characterized as collective investment contracts, publicly offered, generating the right of participation, partnership or remuneration to the token holder.
And the most important point: this return on investment will always depend on the effort of the entrepreneur or third parties who maintain some degree of connection with that project.
Defining what is and what is not a security is important because, when classified as such, these investments need to comply with certain regulations and this also obliges the companies and stakeholders who are receiving the investment to comply with various rules related to the correct collection of taxes, prior registration with the SEC/CVM, transparency in fiscal balances and governance, in addition to ensuring that investors are not harmed.
The difference between the two types of assets basically lies in the expectations of those who buy them. As I said, the value of securities is tied to a return made on a particular initiative or company, while a commodity has an inherent value of its own, which is not tied to any future return and does not depend on the efforts of others.
When buying a security, the investor expects a certain return on his investment, depending on the performance of the entrepreneurial company. In addition, he may also have the possibility of influencing the management of the business, as in some cases the ownership of that security will represent a fraction of the ownership of the enterprise.
When he acquires a commodity, he has the prospect of profiting only from the appreciation of the asset, through free market speculation. The variation in the value of your asset has nothing to do with the success or failure of a company or an enterprise itself. And that makes a big difference.
Bitcoin, for example, is considered by both the SEC and the American CTFC (Commodity Futures Trading Commission) to be a commodity. When buying it, the investor is only interested in its market value. It can be freely negotiated and its price is not related to any company, entrepreneur or third party performance. In this sense, it can be compared to meat, soybeans or ore, while securities would be comparable to the shares of companies that produce these products.
This difference has extremely relevant tax, legal and accounting repercussions. To offer a commodity, companies need to meet less restrictive requirements. Commodities are regulated in the US by another regulatory agency, the CTFC, not the SEC.
In 2021, Gemini began offering an investment option to its customers called Gemini Earn, which consisted of intermediating loans to Genesis made by its investors, who received interest on borrowed amounts. In return, Gemini kept part of the money (about 4.5%).
Both Genesis and Gemini came under investigation, as the way loans were made on the platform could fall under the definition of security, and neither entity complied with the legal requirements to make such a security offer.
The investigation and the proceedings brought show that by lending money to Genesis, investors would be acquiring securities, represented by the tokens issued by Gemini. The product would have the intention of masking the real nature of the business, to avoid SEC regulations and inject money and liquidity into Genesis without proper supervision, characterizing an irregular offer of securities.
Thus, the SEC alleges that the program should have been registered as a security, as in its view this would bring much more protection to investors, due to the barriers necessary to offer a security in the US, raising the level of information to users, management and governance, which would translate into more confidence on the part of the market.
The lawsuit filed seeks a permanent precautionary measure to prevent the Earn program from resuming, the restitution of ill-gotten gains, in addition to civil charges and penalties.
The Winklevoss twins, owners of the Gemini brokerage, allege that the SEC investigation is political in nature, as they had been negotiating with the agency for about 18 months to classify the product as a security. Still in the view of the brothers, the process triggered is much more likely to disrupt the restitution of funds than to help injured investors.
It is worth remembering that during the FTX crisis, Genesis first denied that it could be hit. Soon after, he admitted a shortfall of about 140 million dollars. Shortly afterwards, it was discovered that the amount needed to get the platform out of the hole would be something around 2 billion dollars.
With this new chapter, it is not known how serious the problem can be and how far the DCG is threatened. The collapse of this cryptocurrency giant, which holds a significant part of all Bitcoin on the market, could lead to serious consequences. The fear is that he will be forced to liquidate his assets in a disorganized manner to pay off his debts.
