Brian Nibley

<div id="highlights-block_62bdbf2c4696b" class="highlights">
 <ul>
 <li>The Responsible Financial Innovation Act could provide the regulatory clarity that investors have been looking for</li>
 <li>Under the current proposal, bitcoin and ether would likely be labeled as commodities, while most altcoins would be considered securities</li>
 </ul>
 
</div>



By and large, blue-chip institutions have been forced to wait on the sidelines when it comes to entering crypto markets. There’s no global consensus on a regulatory framework or rules of the game that provide the necessary clarity for a large institution to deploy capital.



Fortunately, we are seeing signs that this appears to be changing.



US Sens. Lummis and Gillibrand have introduced a bill that would provide much of the needed regulatory clarity that investors have been hoping for. The Responsible Financial Innovation Act would define many crypto-related terms such as smart contract, digital asset, and virtual currency. Most importantly, the bill would classify some cryptocurrencies as commodities and others as securities.&nbsp;



Under the current proposal, bitcoin and ether — which account for the majority of crypto’s market capitalization — would likely be labeled as commodities, while many other coins would be considered securities. Because regulators across the globe have differing opinions on the question of classification, this bill could be instrumental in settling the debate. Once this framework has been established, it would provide a basic foundation for regulators, making it easier for other nations to replicate rather than starting with a blank canvas.



<h3 class="wp-block-heading">Global crypto regulatory landscape</h3>



Looking around the globe, there’s no clear agreement on how to regulate crypto. Nations span the spectrum — from making bitcoin legal tender to attempting to ban crypto outright and everything in between.



Central America’s El Salvador declared bitcoin to be legal tender in September 2021, with the Central African Republic following suit less than a year later. By embracing bitcoin, these nations hope to spur innovation, boost tourism and empower their largely unbanked or underbanked populations.



In the US, the muddy waters of regulation are gradually becoming clearer. The IRS classified crypto as property in 2014, with relatively minor regulations coming in since then. Some of these include the Financial Crimes Enforcement Unit, or FINCEN, <a href="https://complyadvantage.com/insights/cryptocurrency-regulations-around-world/" target="_blank" rel="noreferrer noopener">imposing</a> new data collection rules on exchanges. Biden’s infrastructure bill also included a provision to <a href="https://cms.blockworks.co/infrastructure-bill-advances-in-senate-crypto-amendments-await-vote/" target="_blank" rel="noreferrer noopener">classify exchanges as brokers</a>, making them subject to anti-money laundering and combatting the financing of terrorism (AML/CFT) reporting and record-keeping.



The state of New York recently instituted a partial ban on proof-of-work mining, while states including Wyoming, Florida and Texas have become more lenient, with Texas now hosting approximately <a href="https://www.cnbc.com/2021/10/09/war-to-attract-bitcoin-miners-pits-texas-against-new-york-kentucky.html" target="_blank" rel="noreferrer noopener">14% of America’s total bitcoin hash rate</a>.



And now, with new legislation on the horizon, some long-awaited regulatory clarity could be within reach.&nbsp;



<h3 class="wp-block-heading">The Lummis-Gillibrand and CFTC solution</h3>



As mentioned, the Commodity Futures Trading Commission, or CFTC, will likely gain regulatory authority over the majority of crypto’s market capitalization if the Responsible Financial Innovation Act passes. For further insight on the implications of this, we spoke with David Mercer, CEO of <a href="https://bit.ly/3I1cIJq" target="_blank" rel="noreferrer noopener">LMAX Group</a>, the operator of <a href="https://bit.ly/3NJHQ1z" target="_blank" rel="noreferrer noopener">LMAX Digital</a>, the leading institutional crypto currency exchange:



“The fact this is a bipartisan proposal is a positive and important step forward for the entire global crypto community. A well-considered framework from a renowned regulator will support the institutionalization and growth of the crypto market which is currently stymied by the offshore nature of trading and regulation. It is a demonstration that policy makers are taking crypto seriously.”



As far as the CFTC vs. SEC debate is concerned, LMAX Group is decidedly agnostic:&nbsp;



“Whilst we have no strong view on the particular regulator, it is good news that globally respected ‘non-island’ regulators are considering their approach to regulating this nascent asset class.”



<h3 class="wp-block-heading">Is crypto a commodity, security or currency?</h3>



Law makers behind the Lummis-Gillibrand bill classify bitcoin as a commodity because its supply and network have no central governing body or team behind them. The profit potential for bitcoin isn’t tied to “the efforts of others,” meaning it could fail the <a href="https://www.investopedia.com/terms/h/howey-test.asp" target="_blank" rel="noreferrer noopener">Howey Test</a>, ruling it out as a security. It’s much harder to make a similar case for other coins.&nbsp;



Classifying bitcoin as a commodity would provide some much-needed regulatory clarity. Still, some claim that the CFTC doesn’t hold the same regulatory oversight powers as the SEC, making it more difficult for regulators to clamp down on fraud and scams.



The vast majority of altcoins would likely be classified as securities, given that most of them pass the Howey Test, which the SEC uses to determine whether or not something is a security. The Howey Test has four key metrics:



<ul class="wp-block-list"><li>An investment of money</li><li>In a common enterprise</li><li>People buy it with the expectation of profit</li><li>The profit potential is derived from the efforts of others</li></ul>



In contrast, Mercer said the LMAX Group views bitcoin differently.



“BTC is a currency whilst Ethereum and other layer-1 blockchains such as Litecoin could well fall under a securities or commodities umbrellas; the tokenized, or DeFi economy including staking would appear to be securities but they are also diverse in nature so some may differ in the rights and returns they demonstrate.”



<h3 class="wp-block-heading">What nations need to reach regulatory consensus</h3>



If North American and European nations could all reach similar agreements on crypto regulation, that could be the catalyst for significant amounts of capital to enter the space. Other large economies, such as the BRICS nations and others in South America, Asia, and Africa, could then easily follow.&nbsp;



Or, as an alternative, it’s possible that an increasing number of nations could adopt bitcoin as legal tender, sidestepping the need for regulation altogether, at least when it comes to the world’s largest cryptocurrency.&nbsp;&nbsp;



David Mercer had the following to say on the matter:



“Ultimately our view is that the CFTC, or other renowned global regulators, would be excellent stewards and supervisors of this new asset class and bring greater stability and integrity to&nbsp; crypto market structure. We do not believe there is a need for any new regulatory body and all products and participants can be accommodated broadly within existing frameworks.



A well-considered initial framework from renowned regulators will lend credibility to crypto and only aid the institutionalization of the market.



Crypto and DeFi cross a wide cross section of traditional finance, and it’s likely that all regulators, SEC, CFTC and the Fed will have to create a framework in the long term.”



This content is sponsored by <a href="https://bit.ly/3I1cIJq" target="_blank" rel="noreferrer noopener">LMAX</a>.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



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Can Nations Agree on Crypto Regulation?

David Canellis

<div id="highlights-block_dbdd9835e194a0b5d8c4e1b776fdd5da" class="highlights">
 <ul>
 <li>LMAX Group CEO David Mercer believes crypto could overtake gold within the decade</li>
 <li>The firm’s institutional clientele showed strong conviction in bitcoin and ether during the recent chaos</li>
 </ul>
 
</div>



Institutional crypto exchange LMAX Digital just recorded its largest trading day for the year —&nbsp; fueled by bullish sentiment among the world’s top traders.



According to LMAX Group CEO <a href="https://twitter.com/mercerdavid?lang=en" target="_blank" rel="noreferrer noopener">David Mercer</a>, the exchange’s whale-like clientele appear relatively unscathed, despite chaos triggered by the <a href="https://cms.blockworks.co/terra-halted-again-exchanges-delist-spot-trading/" target="_blank" rel="noreferrer noopener">collapse</a> of algorithmic stablecoin UST and its sister token, LUNA.



Mercer told Blockworks $3.3 billion in trades flowed through LMAX Digital last Thursday.



“My institutions traded more than ever,” Mercer said. “They&#8217;re the biggest proprietary trading firms in the world, in Chicago, New York, Amsterdam and London. Their conviction in bitcoin for certain remains undented, with their belief in ethereum apparently the same.”



Mercer declined to specify the firms in question. But the likes of Jump Trading and DRW’s Cumberland fit the profile.



For scale, LMAX Digital saw $1.5 billion daily on average last year, with its top day reaching $6.6 billion on May 19, when bitcoin collapsed from $59,000 to $34,600.



In any case, Mercer said uncertainty and fear pushed LMAX Digital volumes higher. Mercer saw institutions “fleeing to quality,” as his platform “doesn’t dabble in some of the more experimental coins.”



Last Thursday, both bitcoin and ether — the largest cryptocurrencies by market capitalization — rose about 6% during intra-day trading, although some native tokens of crypto exchanges <a href="https://cms.blockworks.co/native-crypto-exchange-tokens-hint-at-first-sign-of-broader-market-recovery/" target="_blank" rel="noreferrer noopener">performed</a> better.



Mercer believes <a href="https://cms.blockworks.co/cryptocurrency-luna-lurches-as-terra-usd-volatility-continues-erasing-billions/" target="_blank" rel="noreferrer noopener">Terra’s demise</a> has a hidden silver lining.



“I might have a slightly different view to most people,” Mercer said. “I mean, people use crypto in a very wide framework. To me, bitcoin is half the market, because as a currency, it’s very stable and robust.



On the other hand, Mercer dubbed decentralized finance (DeFi) an ecosystem of science experiments.&nbsp;



“Pegs generally break, especially if they&#8217;re flawed,” Mercer said, citing sudden devaluations of numerous currencies over the course of history, including George Soros’ successful “attack” on the British pound in 1992, the Euro-Swiss franc collapse in 2015 and the Argentinian peso in 2002.



Still, Mercer wouldn’t call algorithmic stablecoins such as Terra dumb ideas. It was a good idea, backed by some very great minds, he reasoned, “but it didn’t work, and it was upset by normal market dynamics.”



<h3 class="wp-block-heading">The case for collateralized (and audited) stablecoins</h3>



Instead, Mercer is a fan of collateralized stablecoins, such as Circle’s offering, USDC. LMAX Digital accepts USDC.



LMAX Digital combines USDC with USD in one order book and handles margin trade in the stablecoin.



“Don&#8217;t get me wrong, probably 97% of my trading is crypto-to-fiat,” Mercer said. “But some customers arrive and they say, ‘Look, I&#8217;ve got this USDC. It’s easier if it’s in USDC, rather than US dollars.’ That’s fine — I accept USDC and can transfer it immediately, to the extent that those order books are the same.”



But why not USDT? Mercer cited Circle attestations via accounting giant Grant Thornton, which states that every USDC is backed by a US dollar or US Treasury. This doesn’t make USDC a “particularly sexy stablecoin,” Mercer said, but it is collateralized, liquid, and “one is equal to one.”&nbsp;



USDC’s well-documented collateralization allows LMAX Digital to confidently merge its fiat dollar order books with its USDC books.&nbsp;



“We don&#8217;t offer Tether today for one simple reason: that one-to-one ratio is not guaranteed,” Mercer said.&nbsp;



Tether constantly assures the market each USDT is properly backed by a mixture of money market deposits, corporate bonds and the like, but Mercer doesn’t have full faith in the reports Tether produces.&nbsp;



The LMAX chief said Tether needs more transparency before he would accept USDT.



“I&#8217;m a simple guy,” he said. “I’m in traditional markets. Tether is telling me there’s $70 billion USDT in circulation? Just show me the portfolio. I don&#8217;t understand why that can&#8217;t happen. I just want $1.”



As such, Mercer said he would happily embrace <a href="https://blockworks.co/tag/cbdc">CBDCs</a>, or central bank digital currencies  — digital fiat issued by central banks. Fiat is too clunky for crypto markets, and he considers reducing friction in the ecosystem to be the primary use case for stablecoins and CBDCs, saying “it should oil the wheels.”



<h3 class="wp-block-heading">Bullish on crypto’s future</h3>



Finicky stablecoins aside, Mercer is remarkably bullish on crypto’s future, although digital asset trade makes up a small percentage of LMAX Group’s revenue.



Six exchanges fall under the LMAX Group umbrella. LMAX Digital, the institutional crypto platform, represented 15% of LMAX’s total volume, but 40% of revenue last year.



Overall, the group recorded $110 million in revenue from about $6 trillion foreign currency volume, with crypto contributing about $550 billion.



Remarkably, LMAX Digital’s BTC-to-USD pair was its eighth-biggest currency pair across the entire group — euro-to-dollar was No. 1, dollar-to-yen was second, and sterling-to-dollar was third.



By 2025, Mercer believes it will be possible to trade bitcoin against everything: gold, the S&amp;P, euros, the FTSE, nickel and aluminum, “just the same way you can trade dollars against everything.”



He also predicted crypto will overtake gold within the decade. Crypto is currently worth about $1.5 trillion. Gold is between $10 and $12 trillion.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



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Big Money Crypto Traders Still Bullish on BTC and ETH, LMAX CEO Says

Liz Coyne

In this video, Blockworks&#8217; &#8220;<a href="https://youtube.com/playlist?list=PLvER9nHSRN3wZX2tI3JrCLOAzMBgUJtBo" target="_blank" rel="noreferrer noopener">Forward Guidance</a>&#8221; podcast host Jack Farley sat down with David Mercer, CEO, LMAX Group, at Blockworks <a href="https://cms.blockworks.co/events/das-london/" target="_blank" rel="noreferrer noopener">Digital Asset Summit in London</a> to talk about the &#8220;three Ts and two Cs&#8221; stopping institutions from moving headlong into digital assets.



Mercer is the CEO of LMAX Group, a global, high-growth financial technology company based in London. A former City banking executive and currency specialist, he joined LMAX Group in 2011 and after a successful management buyout, rapidly built LMAX Group into the leading operator of institutional FX and cryptocurrency exchanges with offices in 11 countries and a global client base.



An outspoken industry commentator, David is a long-term champion of the UK’s fintech sector and passionate about supporting entrepreneurship in the UK.



Watch the full interview below.



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Get the day’s top crypto news and insights delivered to your inbox every evening.&nbsp;<a href="https://cms.blockworks.co/newsletter/" target="_blank" rel="noreferrer noopener">Subscribe to Blockworks’ free newsletter</a>&nbsp;now.



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What’s Stopping Institutions from Moving Headlong into Digital Assets?

Ben Strack

<div id="highlights-block_615f0499f2f6b" class="highlights">
 <ul>
 <li>Asset managers putting pressure on banks to adopt crypto so as to help them enter the space, Mercer says</li>
 <li>Executive calls frictionless capital markets that operate seven days a week “incredible”</li>
 </ul>
 
</div>



Cryptocurrencies will be the predominant assets traded in the decades ahead, LMAX Group CEO David Mercer said during an interview at Blockworks’ Digital Asset Summit last month.



LMAX Group is an independent operator of multiple institutional execution venues for foreign exchange and cryptocurrency trading. The London-based company launched the first physical cryptocurrency exchange dedicated to serving only institutional clients in 2018.



Though access to crypto markets is not ideal right now for many asset managers, the executive noted, 70% of LMAX’s 200 biggest institutional customers said in a survey that these players will be the biggest traders of crypto assets three years from now.



“If the asset managers enter the space with just 5% of their portfolio, the market cap has to be $5trn because there’s $110 trillion of assets under management today,” he explained. “That’s just going to be the case, and probably crypto will grow into being 10% or 20% at that stage that it naturally overtakes commodities.”



Watch the full interview below, and watch all of the panel videos from DAS <a href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/#videoslider0" target="_blank" rel="noreferrer noopener">here</a>.&nbsp;



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<iframe loading="lazy" title="DAS NYC 2021: LMAX Group CEO Says Crypto is the Third Industrial Revolution" width="1024" height="576" src="https://www.youtube.com/embed/A9QUZaoFIXw?feature=oembed" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe>
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Are you a UK or EU reader that can’t get enough investor-focused content on digital assets?&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/das-london/" rel="noreferrer noopener">Join us</a>&nbsp;in London on November 15th and 16th for the Digital Asset Summit (DAS) London. Use code ARTICLE for £75 off your ticket.&nbsp;<a target="_blank" href="https://cms.blockworks.co/events/das-london/" rel="noreferrer noopener">Buy it now</a>.



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