In This Article
The U.S. Securities and Exchange Commission (SEC) has issued a Wells notice to Robinhood, signaling potential enforcement actions against the trading platform because of alleged securities violations. Despite regulatory uncertainty, innovations continue to emerge in the digital finance sector, like Hermetica's introduction of USDh, a Bitcoin-backed synthetic dollar that is aimed at enhancing liquidity. and yield-generating opportunities in Bitcoin-native decentralized finance (DeFi). The synthetic dollar is scheduled to be released in June and promises huge yield-generating capabilities of up to 25%.
Robinhood Targeted by SEC
The United States Securities and Exchange Commission (SEC) recently issued a Wells notice to Robinhood, a widely-used trading platform. This notice is a formal indication that the SEC plans to possibly enforce action and was issued after an investigation into Robinhood's cryptocurrency listings and custodian services. The investigation pointed towards potential securities violations, despite Robinhood's attempts to comply with SEC regulations, including attempts to register its crypto services.
After the Wells notice was issued on May 4, Robinhood’s stock price experienced a drop of about 2.5% in pre-market trading, settling at $17.95.
Responding to the SEC's actions, Dan Gallagher, Robinhood's chief legal, compliance and corporate affairs officer, shared his disappointment with the matter in a blog post on May 6. Gallagher, who is a former SEC commissioner, reiterated Robinhood's view that the cryptocurrencies listed on its platform do not qualify as securities. He also made sure to mention that the company is ready to contest any legal action by the SEC.
This Wells notice from the SEC comes despite the fact that Robinhood has a very selective approach to cryptocurrency offerings, avoiding certain tokens and services like crypto lending and staking, which the SEC had previously classified as securities in actions against other platforms. Gallagher also commented on the broader regulatory environment for cryptocurrencies in the U.S. He compared it to the equities markets before the reforms of 1933. He believes that inconsistent state regulations and the absence of clear federal guidelines is hindering mainstream adoption and fair competition in the crypto market.
As of now, both the SEC and the Commodity Futures Trading Commission have not established definitive regulations distinguishing securities and commodities in the context of digital assets, leaving companies like Robinhood in a very tough position with regards to compliance and operational clarity.
CFTC Chair Predicts More Crypto Enforcement
Rostin Behnam, the chair of the United States Commodity Futures Trading Commission (CFTC), believes there will be continued regulatory scrutiny on cryptocurrency firms as investor interest in the market remains high. Behnam spoke at the 2024 Global Conference on May 6 where he pointed out the resilience of the crypto market despite it having to deal with major downturns and bankruptcies in 2022. He did, however, share his beliefs that there will very likely be an uptick in enforcement actions over the next 6 to 24 months due to increasing asset values and retail investor engagement.
While Behnam did not directly specify whether the CFTC or the SEC would lead these efforts, he did share his thoughts on the necessity of a regulatory framework to curb potential fraud and manipulation in the absence of transparency and regulatory tools. The need for clear regulation was echoed by U.S. lawmakers, who are considering legislation that would define the roles of the SEC and CFTC when it comes to overseeing digital assets. This legislation is currently awaiting a floor vote in the House of Representatives.
The SEC has been especially active recently. In fact, 2023 saw the highest number of crypto-related enforcement cases since 2013, according to a January report from Cornerstone Research. High-profile cases are also pending against major U.S. crypto firms like Kraken, Binance, and Coinbase. The recent Wells notice to Robinhood proves that the SEC does not intend to stop its crypto crackdown any time soon.
The CFTC itself has also ramped up its enforcement actions, with a third of its total crypto-related actions taking place in 2023. These included cases against people like former FTX CEO Sam Bankman-Fried and former Celsius CEO Alex Mashinsky.
Central Banks Must Adapt with Digital Currencies
Despite the crypto industry having a regulatory target on its back at the moment, Joachim Nagel, president of the Bundesbank and a member of the European Central Bank (ECB), believes Central banks have to rethink their business models and swiftly embrace central bank digital currencies (CBDCs) to stay relevant.
Nagel spoke at a panel during the Innovation Summit hosted by the Bank for International Settlements on May 6. Here, he shared some of his concerns about the evolving financial landscape and the decreasing allure of physical money.
Nagel pointed out that twenty years ago he would have never questioned the resilience of the central bank's business model. However, today, he actually sees potential vulnerabilities and believes there is the need for adaptation. He also specifically mentioned distributed ledger technology (DLT) and sees it as a crucial tool that could help central banks in revamping their operations.
Francois Villeroy de Galhau, another ECB member from France, also spoke about the issue at the same conference. Galhau wants to see the inclusion of digital currencies in both wholesale and retail banking sectors. He argued that updating the method of making central bank money available is essential for the 21st century and to ensure that it continues to serve as a stability anchor for the financial system.
The ECB is actively working on a digital euro and completed the investigative phase to finalize its design and technical specifications. The project is expected to be completed by October of 2025.
Hermetica Introduces Bitcoin-Backed Synthetic USD
Meanwhile, Hermetica has introduced USDh, the first Bitcoin-backed synthetic United States dollar that is set to revolutionize Bitcoin-native decentralized finance (DeFi). The synthetic dollar is scheduled to be released in June and promises huge yield-generating capabilities of up to 25%.
Jakob Schillinger, the founder and CEO of Hermetica Labs, explained that USDh is designed to allow Bitcoin enthusiasts to hold and earn yield on U.S. dollars without relying on traditional banking systems or engaging with non-Bitcoin financial products. Schillinger strongly believes that USDh will enhance liquidity and introduce new functionalities in the Bitcoin DeFi sector that will allow people to trade, lend, and transact in a dollar-denominated asset fully backed by Bitcoin.
The launch of USDh comes after the introduction of Ethena’s USDe, which is another synthetic dollar that debuted with a 27.6% yield. This ended up raising some concerns about its long-term viability. USDh could encounter similar concerns, especially considering its high yield in comparison to past stablecoin offerings like TerraUSD, which famously collapsed in May of 2022.
However, Schillinger assures that the high yield offered by USDh is sustainable and is supported by backtest data from January 2021 to March 2024, which shows an average annual yield of 11.71%. He attributes the robust yield performance to the structural demand for long leverage in the Bitcoin futures market, which peaked during the 2022 bull market at an annual return of 26.11%.
As Bitcoin DeFi continues to expand, driven by innovations like Ordinals, Schillinger is very optimistic about its future. In fact, he predicts that Bitcoin DeFi could equal or surpass Ethereum DeFi in scale within the next five years. Just recently. trading volumes in Bitcoin Ordinals have already surpassed those of Ethereum and Solana NFTs.
What is a Synthetic Dollar?
A synthetic dollar is a digital financial instrument that is designed to mimic the value of the US dollar without direct backing by physical dollar reserves. Instead, it maintains its dollar peg through financial derivatives like futures or algorithmic strategies, particularly in the crypto realm.
This innovation is primarily used in international trade, investments, and DeFi platforms, allowing entities globally to access dollar liquidity effortlessly without the actual possession of USD. This is especially beneficial in regions where accessing USD is either restricted or challenging.
The utility of synthetic dollars extends beyond simple transactions. They are pivotal when it comes to providing stability and liquidity in diverse financial environments. They are also crucial in hedging against local currency fluctuations, facilitating seamless international transactions, and boosting the growing digital finance ecosystem by acting as a stable medium of exchange. Their role is increasingly vital in supporting economic activities where traditional financial systems are inefficient or inaccessible.
