Ben Strack

<div id="highlights-block_630fad1d7ad5e" class="highlights">
 <ul>
 <li>The District’s attorney general is trying to recover taxes on what the offices alleges could amount to more than $100 million of income from Saylor</li>
 <li>Saylor stepped down as CEO of MicroStrategy, the largest public holder of bitcoin, to become its executive chairman earlier this month</li>
 </ul>
 
</div>



Just weeks after<a href="https://cms.blockworks.co/microstrategys-saylor-to-step-down-as-ceo-to-double-down-on-buying-bitcoin/"> stepping down as MicroStrategy’s long-time chief executive</a>, noted Bitcoin bull Michael Saylor — and his company, the largest publicly traded bitcoin holder — is facing legal accusations that allege systemic tax fraud with penalties that could amount to more than $100 million.



The attorney general for Washington, DC. said in a statement that Saylor has lived in the District for more than a decade, but has never paid local income taxes — despite earning hundreds of millions of dollars in cash and MicroStrategy equity options over that period.



Attorney General Karl Racine alleged Saylor personally illegally avoided more than $25 million of DC taxes by pretending to be a resident of other jurisdictions with significantly lower personal income taxes.&nbsp;



Filed in the Superior Court of the District of Columbia’s civil division, <a href="https://oag.dc.gov/sites/default/files/2022-08/Tributum%20v.%20Saylor%20-%20DC%20FCA%20Complaint_0.pdf" target="_blank" rel="noreferrer noopener">the complaint</a> also names MicroStrategy, the Virginia-based business intelligence platform Saylor founded in 1989, as a defendant, alleging the firm conspired to help him evade taxes.



Saylor resides in a multimillion-dollar waterfront penthouse in the DC neighborhood of Georgetown, according to the complaint. His selection of having a vacation home in Miami was “carefully planned,” it adds, noting that Florida does not levy a personal income tax on residents.&nbsp;



“DC residents and their employers are now on notice that attempts to evade the District&#8217;s income tax laws by falsely claiming that they reside in another jurisdiction will be investigated and, if substantiated, held accountable,” Racine said.



This lawsuit is the first such litigation brought under the authority of the District&#8217;s recently passed False Claims Act, <a href="https://twitter.com/AGKarlRacine/status/1565033774085468161" target="_blank" rel="noreferrer noopener">Racine tweeted</a>. The office is looking to recover what could amount to more than $100 million in unpaid income taxes and penalties from Saylor and MicroStrategy.



MicroStrategy has the largest bitcoin (BTC) stash of any public company. It held 129,699 BTC — currently worth about $2.6 billion — as of June 30.



Patrick Feeney, a former quantitative hedge fund portfolio manager and founder of the proprietary algorithm-based <a href="https://feeneyfactor.com" target="_blank" rel="noreferrer noopener">Feeney Factor</a>, called the allegations “a pretty big deal” that will not go away anytime soon.



“Whatever the [amount is] —&nbsp; assuming they’re correct — you have to pay it,” Feeney said.&nbsp;



“[Saylor’s] going to have to probably peel off some bitcoin, depending on where bitcoin is when the eventual judgment comes down. Almost nobody beats [tax fraud allegations], but we’ll see.”&nbsp;



The nearly 130,000 bitcoins (BTC) that MicroStrategy held, as of June 30, was purchased for an average price of $30,664 a piece. Bitcoin traded around $20,200 by the close of New York stock-trading hours on Wednesday.&nbsp;



The company reported a net loss for the second quarter of nearly $1.1 billion, due in large part to digital asset impairment charges of $918 million. Still, Saylor and newly appointed CEO Phong Le said — during a recent earnings call — that the company would seek to continue acquiring and holding bitcoin long-term, with no plans of selling.



“Everybody knows he’s long bitcoin: If bitcoin continues to decline, MSTR could go down 30% and get absolutely hammered,” Feeney said. “At what point can you turn around to your shareholders with a straight face and say you’re not selling?”



But Dan Weiskopf, a co-portfolio manager of Amplify Investments’ Transformational Data Sharing ETF (BLOK), told Blockworks he does not necessarily expect the lawsuit to impact MicroStrategy’s plan to continue buying more bitcoin. 



BLOK, the largest blockchain-focused ETF with roughly $570 million of assets, had a 4.6% position in MicroStrategy, as of Wednesday. The US-listed equity marks the vehicle’s fourth-highest holding behind only fellow crypto-focused companies Silvergate, Core Scientific and Accenture.



“It could affect things in the short-term, but we’re long-term investors,” Weiskopf said. “So, I don’t see us really changing our position based on what we know today, but we’re going to be watching it closely obviously as things develop.”



Microstrategy’s stock closed Wednesday at $231.56, down about 8.7% on the day.&nbsp;&nbsp;



A spokesperson for MicroStrategy did not immediately return a request for comment.&nbsp;



This is a developing story and will be updated. 



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Suit: Michael Saylor, MicroStrategy Owe $100M+ of Damages From Back DC Taxes

Casey Wagner

<div id="highlights-block_6227b12f93309" class="highlights">
 <ul>
 <li>Efforts are underway in the House and the Senate to regulate stablecoin issuers and oversee reserves</li>
 <li>The escalating conflict in Ukraine has led lawmakers to question how a CBDC might work in the US</li>
 </ul>
 
</div>



As stablecoins and their reserves have been increasingly scrutinized, bills designed to regulate the digital assets will likely be introduced by US lawmakers this month, according to a source familiar with the matter.



Different versions of the bill are expected to be rolled out in the House and Senate this month, the person said. The source was granted anonymity to discuss private information.



Both the House and Senate heard from Jean Nellie Liang, the under secretary for domestic finance at the Department of the Treasury, in February to discuss a recent report on stablecoins from the President’s Working Group on Financial Markets (PWG).



The PWG and Liang recommended that stablecoin issuers must be federally insured depository institutions — more commonly known as banks. More Democrats are starting to disagree with the guidance, the person said, but the upcoming bills, some of which will be bipartisan efforts, will center around creating rules for stablecoin reserves.



&#8220;There seems to be a bipartisan consensus that Congressmen want to prevent another situation like Tether, the stablecoin known as USDT that has been subject to enforcement actions and scrutiny from regulators for holding only a small portion of its reserves in US dollars,” said Ron Hammond, director of government affairs for the Blockchain Association. “The bills may include measures requiring stablecoin issuer audits and clearer guidelines about what assets can make up reserves and whether banks or nonbanks can issue stablecoins.&#8221;



The move comes after <a href="https://cms.blockworks.co/democratic-rep-stablecoin-issuers-dont-have-to-be-banks-with-100-reserves/" target="_blank" rel="noreferrer noopener">Rep. Josh Gottheimer</a>, D-N.J.,revealed in February an <a href="https://gottheimer.house.gov/uploadedfiles/dd._stablecoin_innovation_and_protection_act_of_2022.pdf" target="_blank" rel="noreferrer noopener">early draft</a> of legislation aiming to classify certain stablecoins as “qualified” if consumers can redeem the digital currency on a one-for-one basis with US dollars.



Recent concerns over Russia’s <a href="https://cms.blockworks.co/russia-accelerating-cbdc-efforts-as-us-eu-ponder-swift-ban-of-russian-banks/" target="_blank" rel="noreferrer noopener">central bank digital currency</a> (CBDC), which is currently in pilot, and Canada&#8217;s freezing of crypto addresses have lawmakers rethinking the risks associated with a US CBDC, the person added. It’s not the first time lawmakers have questioned the role a CBDC might play in the current financial landscape.



In January, during Federal Reserve Chair Jerome Powell’s testimony before the Senate Banking Committee, Sen. Pat Toomey, R-Pa., questioned whether a Fed digital dollar would be able to exist alongside a “well-regulated, privately issued stablecoin.” Powell, who <a href="https://cms.blockworks.co/powell-a-cbdc-would-make-cryptocurrencies-obsolete/" target="_blank" rel="noreferrer noopener">previously argued</a> that a CBDC would render private stablecoins obsolete, assured Toomey the two are not mutually exclusive.



While efforts to draft bills related to stablecoins have been in the works for some time, the escalating situation in Ukraine may delay future progress. One lawmaker’s office has already put their stablecoin work on hold, the person said.



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Congressional Action on Stablecoins Could Come as Soon as This Month, Source Says

<div id="highlights-block_62167c1871c86" class="highlights">
 <ul>
 <li>The lobbyist is “optimistic” about the crypto executive order expected this week</li>
 <li>The Blockchain Association, which educates lawmakers and regulators on crypto and blockchain technologies, hopes to further grow its lobbying forces</li>
 </ul>
 
</div>



Blockchain Association Executive Director Kristin Smith expects a pending digital assets executive order from President Biden to set up a roadmap for federal agencies to cooperate on everything from taxation to securities regulations.



The prominent crypto lobbyist talked with Blockworks at ETHDenver to give her take on regulatory expectations this year. Founded in 2018, the association focuses on public policy crypto initiatives, including outreach to lawmakers.



Smith, a former Senate and House of Representatives staffer, is also an independent director at Anthony Scaramucci’s SkyBridge Capital and on the Filecoin Foundation’s board.



The executive order — which reportedly will include a strategy for assessing a central bank digital currency (CBDC) — could come this week, <a href="https://finance.yahoo.com/news/biden-order-on-crypto-oversight-expected-next-week-source-says-173452499.html" target="_blank" rel="noreferrer noopener">according to Yahoo Finance</a>. What else it covers is up for debate.



“I’m sure there will be some mention of illicit finance,” Smith said. “But I think that might be balanced with a more positive message that this is an important area and an important step forward in the evolution of networks.”



Former presidential and New York City mayoral candidate Andrew Yang said at ETHDenver he’s optimistic about the upcoming executive order. Yang <a href="https://cms.blockworks.co/andrew-yang-turns-to-dao-in-web3-lobbying-push/" target="_blank" rel="noreferrer noopener">announced last week</a> a DAO to fund pro-Web3 lobbying.



“No one knows exactly what the approaches are going to be, what the regime is going to be, what the rules are going to be, even who the regulators are necessarily going to be,” Yang said. “If you get clarity on those things…you can imagine the future of this just multiplying over and over again, because people will know what the rules of the road are.”&nbsp;



Check out more excerpts from Blockworks&#8217; Ben Strack&#8217;s conversation with Smith below.



<hr class="wp-block-separator"/>



Strack: How have the focuses of the Blockchain Association changed over time?



Smith: When the Blockchain Association started three and a half years ago, we were pretty focused on the securities clarity issue at the time, and in 2018, it was coming off the [initial coin offering] craze of 2017 and there were a lot of concerns about the pre-sale of tokens at the time.



I think if you fast-forward to today, there are a lot of different ways now for tokens to be issued. There’s still confusion about securities laws, but the issue has changed a little bit. Also on the securities front, there’s questions around secondary market trading and what are the best practices there.&nbsp;



Even further with DeFi being a major force today — I don’t think that term existed in 2018 — just trying to figure out [how] those protocols might be regulated in the future.



The tax policy issues have gotten much more complicated. There’s questions around staking and lending, which were less common activities in 2018. Reserve-backed stablecoins have become a thing.



Strack: What do you make of the recent Congressional hearings on crypto?



Smith: It’s really getting better. I think <a href="https://cms.blockworks.co/crypto-industry-will-move-offshore-if-congress-doesnt-act-executives-warn/" target="_blank" rel="noreferrer noopener">that hearing</a> from the Financial Services Committee back in December was really a great hearing — interestingly not just for crypto, but for all of tech.



It was really thoughtful. There were really well-informed questions, and I think the level of education has grown.&nbsp;



​​We have a lot of inbound [requests] from individual offices on [Capitol Hill], from regulators, from federal agencies, from groups of congressmen that want to learn, and are asking for us to come in and tell them about Web3 or come in and tell them about NFTs. It’s a lot different than when we were sort of begging for anyone to take a meeting with us.&nbsp;



Strack: How has participation from the broader crypto community evolved?



Smith: The Blockchain Association represents the industry perspective, but this space is so much more than a traditional industry. It’s a whole ecosystem of creators and users and developers, and there needs to be a way for those people to participate in the process.



I think that given the communicative nature of the industry — and all of our Twitter chats and Discord channels and everything else — we’ve done a pretty good job when we’ve needed to mobilizing people to weigh in with the Senate or FinCEN [Financial Crimes Enforcement Network] or whatever agency or body of Congress we need to reach. But I think we can take that to a higher level.



I think Andrew Yang’s focus on the poverty alleviation of this is a really important piece of the conversation. I think that what [Messari Founder] Ryan Selkis is trying to do with the Digital Freedom Alliance and giving people information about candidates and finding ways for them to be involved is a great effort.&nbsp;



Strack: What are some areas of crypto that might not be getting as much regulatory attention?



Smith: We need to have a serious conversation about the legal status of DAOs [decentralized autonomous organizations] and giving them legal liability. That’s probably something that has to be done on the state-level.



I also think there’s a really good conversation to be had around privacy — being able to not have to show your entire net worth and transaction history to someone who is sophisticated enough to trace it back to you. At the moment, that’s not really at the forefront of lawmakers’ minds — maybe some regulators’ minds.



If you look at Congress, they’re really into stablecoins, largely because I think they can understand what a stablecoin is, and it’s kind of like banking, and so they sort of get that. And people are interested in the securities laws issues, particularly [SEC Chair] Gary Gensler.



Strack: A spot bitcoin ETF has not yet gained approval in the US. How do you feel about that?



Smith: We think the fact that they have approved a futures ETF but not a spot ETF is an [Administrative Procedure Act] violation, and so we think that they should move quickly. There have been members of Congress that have reached out to us that we’ve educated on the issue and want to learn more.



That’s something that we’re taking a serious look at, and our lawyers are taking a serious look at trying to figure out if there are other actions we could take to help move that along and be productive.



Strack: Do you believe a spot bitcoin ETF will be approved in the US anytime soon?



Smith: I don’t see it happening. Based off what Gary Gensler has said, he wants to see regulation of the spot markets. But that is not an easy thing to do, because I don’t believe that most of these tokens — at least the ones trading in the US — are securities. I think they’re commodities, and there is no clear authority, outside of the [Commodity Futures Trading Commission]’s anti-fraud and anti-manipulation authority, for a spot market regulator.



So, that would take an act of Congress, and I think that’s going to take a little bit of time before we see some momentum on that front.



I don’t think that Gary Gensler is going to approve a spot ETF unless he’s held to by the courts or something. I think it’s going to be awhile.



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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>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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