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Earlier this week, we considered the challenges of creating viable long-term regulations for decentralized finance (DeFi) protocols. These systems can ostensibly remove intermediaries from the trading of any asset represented on a blockchain, but those intermediaries have been the ones enforcing rules on behalf of regulators for the better part of a century. That means workable DeFi regulation will likely be much different in substance, and enforced differently, than current securities and finance rules.

That rethink may be years away from occurring, but U.S. regulators aren’t sitting idly in the meantime. With Securities and Exchange Commission chief Gary Gensler signaling that he’s paying attention, there’s significant expectation that enforcement actions could target DeFi well before any new regulations become official. Those enforcement actions will likely prioritize instances of clear lawbreaking, such as fraud or money laundering, taking place on DeFi systems.

This op-ed is part of “Policy Week,” a forum for discussing how regulators are reckoning with crypto (and vice versa). David Z. Morris is CoinDesk’s chief insights columnist.

They will be significant tests for the legal implications of decentralization. And they could get very, very ugly – particularly for individuals running “DeFi” systems that aren’t very decentralized at all.

Here, based on conversations with lawyers, former regulators and DeFi executives, are three key points about how things are likely to play out over coming months and years.

1. Enforcement will come before new rules.

The first ugly truth about DeFi regulation is that it will inevitably come too late. Systems like UniSwap and Celsius were built in ways that challenge the fundamental premises of conventional financial regulation, but regulators will not be quick to shift their models to conform with the reality on the ground. Meanwhile, DeFi systems continue to grow, guaranteeing they’ll face increasing scrutiny.

Jai Massari, a partner focused on trading and markets at the law firm Davis, Polk and Wardwell, predicts a three-step process of reconciling those conflicting truths. Call it the Stages of Regulatory Grieving.

“I think it starts off with enforcement,” she says, “because enforcement is easier than regulation.” Those enforcements could be similar to recent actions that have led to large fines for crypto exchanges like Kraken or services like Tether. But they could also go further to include criminal charges against individuals, on which more below.

Then we’ll begin to “see an effort [by regulators] to push these DeFi activities into existing regulatory categories,” Massari says. “But I don’t think that’s going to go well. I think it could be quite messy.”

In other words, she doesn’t expect serious consideration of a new regulatory framework that actually fits how DeFi works until after regulators spend time trying to hammer square pegs into round holes. In the U.S. context that could include jurisdictional fights between the SEC and other financial regulators.

Plenty of crypto operators will rightly view putting enforcement ahead of regulation as shutting the barn door after the horse is loose. To some extent, it’s a consequence of the shifting priorities of a new administration. Trump administration regulators, for better or for worse, made only incremental progress on laying out rules for crypto, much less DeFi, as crypto and DeFi grew from marginal to meaningful between 2016 and 2020.

There are signs regulators see things as running out of control. “It appears [Gary Gensler is] aligned with people like [Massachusetts Sen.] Elizabeth Warren that it’s the wild west, that it’s under-regulated,” says Katherine Kirkpatrick, co-chair of the Financial Services working group at the law firm King & Spalding.

Gary Gensler and Co., in other words, see themselves as trying to lasso a galloping stallion. That may lead to particularly strong enforcement tactics.

“They’re operating from the perspective of trying to solve something that’s the most egregious thing going on using traditional law enforcement tools,” Duane Pozza, a former Federal Trade Commission staffer who is now a partner at Wiley Law. “Because it means there will be fewer limits.”

2. Investigators will “Pierce the Veil” of decentralization.

In principle, DeFi protocols run without owners, leaders or managers. Much like Bitcoin, the protocols are in principle just software run by a collection of node operators or validators who neutrally facilitate transactions while collecting liquidity yield and fees.

Governance decisions, including changes to the protocol itself, could also in principle be managed by users. But there are still few examples of this in practice today; instead, the reality of “DeFi” in the present is often that it’s a fig leaf for a very clear group of core leaders who are actually in charge. The clearest evidence of this is instances where accounts, tokens or entire “decentralized” systems have been frozen or shut down.

“One of the design decisions in an autonomous system is whether there’s a kill switch,” says Stephen Palley, a lawyer focused largely on crypto regulation at Anderson Kill. “The problem with a kill switch is, what’s the liability or exposure of the person who controls it? To be truly autonomous, you can’t have a kill switch. The absence of that is a way to say you’re not responsible.”

It’s a grim irony of DeFi’s coming collision with legal reality: DeFi administrators who have been taking direct action to control problematic activity may have given law enforcement clear evidence that they’re actually the ones in charge, making themselves targets.

Particularly in cases where there is no legal entity affiliated with a DeFi platform, experts say this could lead to regulators and investigators “piercing the veil” in their DeFi enforcement actions. “Piercing the veil” is a legal term of art normally applied to prosecutions of corporate wrongdoing that target individual officers of the company, not just the legal corporation itself.

At least two recent crypto prosecutions have shown the willingness of the SEC and others to pierce the veil of crypto organizations, even those that have conventional corporate structures. One was the SEC’s charging of individuals at Ripple, including CEO Brad Garlinghouse, with an unregistered securities offering. The other was the filing of money laundering-related criminal charges against officers of BitMEX, including CEO Arthur Hayes.

Similar direct action against individuals with control over DeFi systems may not be far off. SEC chief Gensler has already made clear that he views most claims of decentralization in DeFi with skepticism. In addition to use of kill switches, law enforcement may look for evidence of control and responsibility in public representations of a protocols team, or and control of multisig wallet keys.

3. Clarity will not come soon.

It will be extremely tricky to craft regulation that controls risks like fraud and money laundering through DeFi while preserving technological advantages like open access, self-custody and democratic governance. That could be worth the trade-off in the long term if new rules are truly crafted carefully.

“We’re at a moment where a bit of enlightened thinking about regulation, a little creativity, a little open-mindedness would result in a much better outcome,” says Jai Massari. “I think the best approach is to take a step back and think about the policy objectives we’re looking for.”

That process could easily take years. In the meantime, enforcement actions will likely ramp up, perhaps leaving DeFi creators and administrators in the difficult position of defending themselves for breaking rules that simply can’t be fairly applied to the new technology.

Even then, there’s no guarantee that competent and well-considered regulation will be the end result. As we saw over the summer with the poorly crafted reporting requirements in the U.S. infrastructure bill, there is still a large technical deficit in technical knowledge among legislators and regulators, and it can have serious consequences.

“The technological shortfall is pretty significant,” says Duane Pozza. “The lawmakers have a million other things going on. We’re far away from getting to the point of understanding DeFi. I do think the infrastructure bill was a wakeup call – at least some influential people on [Capitol] Hill had to learn, had to think through this new technology.”

That leaves an uncomfortable status quo, at least for those in the world’s largest financial market. For a period that could stretch for years, there will be no changes to U.S. financial regulations to accommodate the way DeFi really works. But at the same time, law enforcement and regulators will likely be making life very uncomfortable for anyone who could be seen as having authority or control over DeFi systems.

Unless something changes very soon, that will almost certainly push innovation in DeFi out of the United States, much as huge, centralized crypto exchanges including Binance and BitMEX found it more comfortable to center their operations elsewhere. It’s a message that at least some would-be creators are getting directly from their legal advisers.

“I might not agree with the application of certain laws to what my clients do, but I’m not the [Commodity Futures Trading Commission], I’m not the SEC,” says Palley. “I’m just a simple country lawyer and I have to call balls and strikes.

“So I spend a lot of time just telling people to stay out of the United States. I hate it, but it’s good advice.”

More from Policy Week:

Some NFTs Are Probably Illegal. Does the SEC Care?

Stablecoins Not CBDCs: An Interview With Rep. Tom Emmer

Crypto Learns to Play DC’s Influence Game

Kristin Smith: Crypto Is Too Big for Partisan Politics

Lyn Ulbricht: Put America’s Geeks to Work, Don’t Cage Them

Preston J. Byrne: Decentralization’s Challenge to Policymakers Is Coming

Bitcoin ETFs Aren’t New. Here’s How They’ve Fared Outside the US

The View From Brussels: How the EU Plans to Regulate Crypto

Raul Carrillo: In Defense of OCC Nominee Saule Omarova

DeFi Is Like Nothing Regulators Have Seen Before. How Should They Tackle It?

Bennett Tomlin: What Stablecoins Might Become

Gensler for a Day: How Rohan Grey Would Regulate Stablecoins

Alex Adelman & Aubrey Strobel: Kill the BitLicense

Opinion: How to Do Business as a DAO

WASHINGTON – Within a 36-hour period, the first bitcoin futures exchange-traded fund (ETF) began trading, the underlying cryptocurrency hit a new all-time high and federal lawmakers dusted off their 2019-era concerns about the Facebook-linked stablecoin project Diem.

I spent most of DC Fintech Week in the U.S. capital to reconnect with people I haven’t seen in two years and put faces to folks I’ve emailed during the pandemic but never actually met. In these conversations, I found that the policy/legislative landscape around crypto has greatly matured since my last visit. Lawmakers who couldn’t care less in 2019 are planning to propose legislation regulating different aspects of the industry in the coming months.

This feature is part of CoinDesk’s “Policy Week,” a forum for discussing how regulators are reckoning with crypto (and vice versa).

There’s also a better understanding of crypto. A lot of the regulatory reaction in late 2019 was focused on the then-Libra project, which was announced by social media giant Facebook that summer. Libra, at the time, was a pretty visionary project that policymakers saw as having the potential to destabilize the financial system. The project, now named Diem, has been fairly quiet over the past 10 months (this week’s news notwithstanding), and we’re seeing lawmakers focusing on broader swaths of the industry.

What happens in 2022 will depend on how the industry handles these issues and how regulators react to the industry.

It’s still early

You’d be forgiven for thinking that all of Washington is focused on crypto issues right now. There’s been no shortage of regulators and policymakers revealing new work around crypto, whether that’s the President’s Working Group for Financial Markets’ pending stablecoin report, the Fed’s pending central bank digital currency report, Securities and Exchange Commission (SEC) Chairman Gary Gensler’s increased comments on registration and regulation of crypto exchanges or the Commodity Futures Trading Commission’s (CFTC’s) recent spate of enforcement actions against industry businesses.

For all that, it’s still pretty early for the industry. A lot of lawmakers have heard of crypto, but it’s not a pressing concern for them. And this is even after the industry helped delay a massive, bipartisan infrastructure bill due to a single provision that impacted it.

The crypto industry is ramping up its engagement with Washington. In a feature for CoinDesk’s Crypto 2022 Policy Week coverage, Rob Garver wrote that companies and trade groups are increasing the number of lobbyists tasked with pushing for crypto-friendly regulations.

This engagement, however, is sort of mixed. At least one congressional staffer described interacting with newer lobbyists as being “painful,” an observation I’ve heard echoed by other industry participants.

We’re also seeing an increase in angry tweets and other social media messages directed at specific lawmakers or regulators. I’m told that these are extremely unhelpful in terms of communicating policy concerns. Great for engagement, though.

Crypto has arrived

Even if it isn’t top of mind, lawmakers and regulators are thinking more about crypto than in years past. We’re seeing this in the fact that aspiring ETF issuers are securing regulatory approvals to list retail-accessible trading products and that we are awaiting no less than three different government reports on aspects of the crypto industry that will inform policy.

One of the biggest issues may just be the differences in how different regulators or lawmakers perceive crypto. Individuals focused on consumer protection may be concerned that exchanges shut down every time the crypto markets grow volatile, while securities/commodities-focused regulators may be more worried with the quietly growing turf war between different agencies over who can regulate what.

And there is a huge amount of attention focused on the use of crypto in criminal activity such as ransomware payments.

The industry, as a collective, has to address all of these issues. Regulations are going to come regardless of whether industry acts or not. How severe these regulatory actions are may depend on how proactive the industry is.

Concerns about stablecoins are real

The concern around Libra has morphed into concern over stablecoins at large. The revelation that neither tether (USDT), the largest stablecoin by market cap, nor USDC, the second most-issued U.S. dollar-backed stablecoin, are fully backed by U.S. dollars held in regulated bank accounts, did little to help.

But while regulators seem to agree that something should be done to rein in stablecoin issuers, we don’t yet have a clear picture of how that might be done. The president’s working group will publish a report that may recommend creating a special purpose bank-like charter to oversee stablecoin issuers.

This charter would likely benefit stablecoin issuers and the exchanges that list dollar-pegged tokens by granting some level of legitimacy to the projects.

However, the working group will ask Congress to enact a law creating this charter, and I’m told that is not likely to happen.

The alternative is asking the Financial Stability Oversight Council to create a rule around this issue, which lawmakers and industry participants alike have opposed.

Another train of thought centers around treating stablecoins backed by commercial paper and short-term securities as money market funds, meaning something the SEC would regulate. This would likely not be great for crypto exchanges that list stablecoins like USDT and USDC (Coinbase, for example) as these firms would have to register with the SEC as a securities trading platform and abide by a specific set of rules.

This also seems to be an issue of the industry’s making, but there’s too much in flux to see how these regulations will actually develop.

I joked about how much has happened in 2021 with every person I spoke to. And yet, 2022 is shaping up to be an even more eventful year for crypto policy on several fronts. Watch this space for more heated debate in the coming months.

More from Policy Week:

Some NFTs Are Probably Illegal. Does the SEC Care?

Stablecoins Not CBDCs: An interview with Rep. Tom Emmer

Crypto Learns to Play DC’s Influence Game

Kristin Smith: Crypto Is Too Big for Partisan Politics

Lyn Ulbricht: Put America’s Geeks to Work, Don’t Cage Them

Preston J. Byrne: Decentralization’s Challenge to Policymakers Is Coming

Bitcoin ETFs Aren’t New. Here’s How They’ve Fared Outside the US

The View From Brussels: How the EU Plans to Regulate Crypto

Raul Carrillo: In Defense of OCC Nominee Saule Omarova

DeFi Is Like Nothing Regulators Have Seen Before. How Should They Tackle It?

Bennett Tomlin: What Stablecoins Might Become

Gensler for a Day: How Rohan Grey Would Regulate Stablecoins

Alex Adelman & Aubrey Strobel: Kill the BitLicense

Opinion: How to Do Business as a DAO

It’s Policy Week here at CoinDesk!

We’re diving deep into Washington, D.C., lobbying, DeFi regulation, how non-fungible tokens (NFT) could be seen as securities, and much more through a series of feature stories, op-eds, interviews, research and video.

For the “Opinionated” podcast, co-hosts Ben Schiller, Anna Baydakova and Danny Nelson discuss some regulatory hot topics.

First up: Is crypto a threat to financial stability?A senior Bank of England official recently suggested as much, comparing crypto to the subprime mortgage securities that blew up the world economy in 2008.

Similarly, the International Monetary Fund said the other day that digital assets could cause as much disruption as COVID-19 and climate change.

If the high priests and priestesses of finance once ignored crypto, no longer! This once-insignificant industry is now firmly on the agenda.

Next: The SEC is looking at NFTs.

Non-fungible tokens have been one of the big stories of 2021. Artworks and collectibles have sold for many millions and the NFTs have served to bring many new faces into the crypto sector.

But will 2022 raise compliance issues for NFT platforms and makers as regulators step in?

That’s the belief of many lawyers and NFT execs. Fractionalization, where works are split into pieces and sold off to investors, seems particularly likely to interest our overseers.

Finally: Will Russia embrace crypto as a way around the dollar’s domination of international oil markets? Recent comments from Russian President Vladimir Putin have raised hopes on this one. But, speaking from Moscow, Anna says it’s not likely, at least in the short term.

Listen to the episode for more on the big policy questions of the moment. And subscribe to the podcast via your favorite podcast service.

This episode was produced, announced and edited by Michele Musso. Our theme song is by Elision.

The independent news organization The Associated Press (AP) announced Thursday that it has partnered with the decentralized blockchain oracle network Chainlink to put its journalism on a blockchain. 

The move is designed to help developers writing blockchain-based applications implement AP’s data and information through AP’s Chainlink node, which connects the off-blockchain sources to blockchain-based smart contracts. Such information could include financial data, sports data or election race calls integrated into blockchain-based apps.

“Because AP is such an important source for fact-based and trusted information around the world, we see this as an opportunity to provide blockchain users with data and info they can trust. We believe that blockchain networks are a fundamentally important technology because they not only allow but demand veracity,” wrote Dwayne Desaulniers, AP’s director of blockchain and data licensing, in a statement. 

AP had partnered with the blockchain startup Everipedia to place its national and state race call information for the 2020 U.S. presidential election on a blockchain back in October of 2020. 

AP is not the only news publication that that has explored decentralized ledgers. The New York Times’s created The News Provenance Project in 2019 to create immutable records of its photos’ origins. Reuters collaborated with the blockchain-focused research center The Starling Lab to document the presidential transition of Donald Trump to Joe Biden in 2020.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Bitcoin’s price slipped to the $62,000 area on Thursday as indicators suggest bullish sentiment is near extreme levels, which typically precedes a price pullback.

The cryptocurrency’s price was down about 5% over the past 24 hours after failing to sustain an all-time high of almost $67,000 on Wednesday.

The crypto Fear & Greed Index remained elevated in “extreme greed” territory, suggesting that investors who accumulated positions around the $30,000 BTC price could start to take profits.

Analysts also noted signs of excessive optimism in the bitcoin futures market, although some expect price pullbacks to be short-lived.

“Despite the recent setback, we remain very bullish about the current crypto cycle for at least another five to six months,” James Cox, CEO of Taipan Trading and Investments, wrote in a Thursday investment memo. The firm reduced trading during the September crypto sell-off and later deployed a large cash position to BTC in October.

Looking ahead, traders and analysts will be monitoring Valkyrie Investments’ bitcoin futures exchange-traded fund (ETF), which will begin trading in the U.S. on Friday under the ticker BTF.

Latest prices

• Bitcoin (BTC): $62,700, -5.54%
• Ether (ETH): $4,079, -0.69%
• S&P 500: $4,549, +0.30%
• Gold: $1,784, +0.17%
• 10-year Treasury yield closed at 1.67%

BITO trading activity surges

The ProShares Bitcoin Strategy ETF (NYSE: BITO) had significantly higher trading volume over the past two days relative to other large exchange-traded funds (ETF). This reflected strong investor demand for BITO, an ETF focused on bitcoin futures, and achieved nearly $1 billion in assets in just its second day of trading.

“The introduction of this product is a net positive for the [crypto] industry. Since ETFs are traded in all traditional brokerage accounts, BITO creates a frictionless avenue for thousands of professional financial advisors to achieve liquid exposure to bitcoin without needing to endure a learning process,” global advisory firm FundStrat wrote in a Thursday newsletter.

Nice look at just how ridic $BITO‘s first two days of volume were. Here it is vs the next most successful ETF launches of all time. It did double any of them, and is in good co w/ second day growth (see $QQQ, $GLD) via @tpsarofagis pic.twitter.com/WLzQt7yD3t

— Eric Balchunas (@EricBalchunas) October 21, 2021

Indicators show extreme market optimism

The crypto Fear & Greed Index reached a six-month high over the past week, which signaled “extreme greed” among market participants.

“It’s not unusual to see the index fluctuate at such high levels,” Arcane Research wrote in a Tuesday newsletter. “Throughout the bull market from November until April, the index mostly remained in this area [current levels], with periods of decline into the fear area during sudden sharp sell-offs,” Arcane wrote.

Excessive optimism is also evident in the bitcoin futures market. For example, the average BTC funding rate, or payments to long or short traders, is at the highest level since August. Elevated funding rates often lead to temporary price pullbacks, according to CoinDesk’s Omkar Godbole.

“Although a positive funding rate represents an upbeat market mood, a very high reading indicates that the leverage is heavily skewed on the bullish side and often paves the way for price pullbacks,” Godbole wrote.

Traders anticipate an ether ETF

Options traders are betting big on ether’s turn for an ETF, reported CoinDesk’s Muyao Shen.

Data reveals strong purchase activity on ether’s $15,000 call options (the right to buy the underlying asset in the future at a predetermined price) expiring March 25, 2022 – a far cry away from the current spot price around $4,000.

Altcoin roundup

• Associated Press taps Chainlink for elections, sports data: The Associated Press (AP), the 175-year-old news agency, will provide economic, sports and elections data to Chainlink, a system that provides information feeds to blockchains and triggers digital contracts to carry out transactions. The partnership, announced Thursday, is another example of an iconic, mainstream brand embracing blockchain technology, while also showing Chainlink’s plans to expand the reach of decentralized finance (DeFi) into new areas.
• Worldcoin, now valued at $1B, has grand plans to get you to gaze Into the orb: Worldcoin announced Thursday it raised $25 million from investors including Andreessen Horowitz (a16z), Coinbase Ventures, Digital Currency Group (the parent company of CoinDesk) and angel investors, including crypto billionaire Sam Bankman-Fried and Reid Hoffman, the co-founder of LinkedIn. The company is currently valued at $1 billion. The Orbs are handled by independent entrepreneurs Worldcoin calls “Orb Operators,” who take the devices into the world – say remote villages and metro stations and university campuses – and convince people to sign up for free worldcoin with an eye scan. Orb uses the eyescan to create a unique identifier, called IrisHash, which ensures the signee is human and has not collected worldcoin before.
• NFT artist Brian Frye wants you to steal his intellectual property: Brian Frye, a conceptual artist, film maker and law professor, encourages people to plagiarize everything he’s ever created or said, reports CoinDesk’s Daniel Kuhn. This pro-plagiarism stance is part of Frye’s continuing campaign against copyright, the legal instantiation of the idea that ideas can and should be owned. This contrarian opinion has brought him to the world of non-fungible tokens (NFT), the blockchain-based technology often credited with bringing “scarcity” to digital goods.

Relevant news

• Bitcoin Tumbles to $63K in Quick Retreat From All-Time High
• Bitcoin 87% Price Flash Crash on Binance.US Attributed to Trader Algorithm Bug
• FTX Raises $420,690,000
• Houston Firefighters Pension Fund Makes Bitcoin, Ether Purchase
• FATF to Publish Crypto AML Guidance Next Week
• Andreessen Horowitz Invests in New Meta4 NFT Fund
• Swedish Financial Watchdog Investigating Two Local Crypto Firms

Other markets

Most digital assets in the CoinDesk 20 ended the day lower.

Notable winners as of 21:00 UTC (4:00 p.m. ET):

• The Graph (GRT): +7.74%
• Chainlink (LINK): +3.35%
• Ethereum Classic (ETC): 1.37%

Notable losers:

• Dogecoin (DOGE): -5.60%
• Polkadot (DOT): -5.60%
• Filecoin (FIL): -4.84%

CORRECTION (Oct. 21, 21:07 UTC): Corrects bitcoin’s all-time high price.

This episode is sponsored by NYDIG.

Download this episode

Last year, Paul Tudor Jones wrote a paper called “The Great Monetary Inflation” that would end up creating narrative motivation for many traditional retail and institutional investors to allocate to bitcoin as an inflationary hedge. On today’s episode, NLW looks at the rising discussion of inflation in the media and in mainstream American society. He discusses why the inflation conversation, even more than the ProShares bitcoin futures ETF, might be driving bitcoin’s current rise. He also shares Paul Tudor Jones’ latest comments from “Squawk Box” on CNBC regarding the inflation issue.

See also: Bitcoin’s Inflation Narrative More Compelling Than ETF Fever, JPM Says

“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Michael Nagle/Bloomberg/Getty Images, modified by CoinDesk.

Bitcoin’s price briefly crashed 87% and then recovered within the span of a single minute early Thursday on Binance.US, in a fleeting but very real flash crash that the cryptocurrency exchange attributed to a “bug” in an institutional customer’s trading algorithm.

At 11:34 coordinated universal time (7:34 a.m. ET), the price fell from around $65,760 to as low as $8,200, then quickly bounced back up to almost exactly where it was before.

“One of our institutional traders indicated to us that they had a bug in their trading algorithm, which appears to have caused the sell-off that was reported this morning,” a Binance.US spokesperson told CoinDesk.

“We are continuing to look into the event but understand from the trader that they have now fixed their bug and that the issue appears to have been resolved,” the spokesperson said, declined to comment on further details about the crash.

On other cryptocurrency exchanges, bitcoin’s price dropped around the same time, but nowhere near as much. On Bitstamp, for example, the price fell about 2.3% at 11:34 UTC but never got below $63,600.

Omkar Godbole contributed reporting.

Earlier today, the price of bitcoin suffered a flash crash to $8,200 on crypto exchange Binance.US — falling 88% in a matter of seconds.

In an email to The Block, Binance.US said the flash crash was tied to a bug in the trading software of one of its clients. “One of our institutional traders indicated to us that they had a bug in their trading algorithm,” the firm said. 

The trading firm, according to Binance.US, has fixed the issue. “We are continuing to look into the event, but understand from the trader that they have now fixed their bug and that the issue appears to have been resolved,” the firm said. 

Trader sources The Block spoke to expressed surprise at the event. They said typically trading firms have systems in place to avoid this kind of issue. Those systems lockdown when certain conditions are met, such as when too much money is lost on a trade or when the price used in a trade is too far from the best price. 

Exchanges also typically have this kind of system in place. Coinbase, for instance, implemented so-called price protection points. If an order tries to fill outside of certain parameters, it will be canceled by the engine. 

“If a Market or Limit Order would fill against Orders beyond the PPP, the Order will partially fill up to the PPP level and the matching engine will cancel all remaining portions of the Order,” according to its website. 

The flash crash on Binance.US had an impact on the price of bitcoin across the wider market. On other major exchanges, the price initially fell from around $65,500 to $64,200. Despite a slight recovery, it failed to return to pre-crash highs and has continued to slide, sitting at $63,100 at time of publication. Elsewhere, bitcoin fell to $58,555 while it was trading even lower on FTX.US at $51,410. 

For more breaking stories like this, make sure to follow The Block on Twitter.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Brian Frye, a conceptual artist, film maker and law professor, encourages people to plagiarize everything he’s ever created or said.

“I’m the legal academy’s leading plagiarism advocate. I’m also the legal academy’s only plagiarism advocate, which makes it very easy to be number one,” the bespectacled Frye said in a video call yesterday. Well, professor, I’m stealing that joke.

This article is part of CoinDesk’s Policy Week, a forum for discussing how regulators are reckoning with crypto (and vice versa). A version of it published first in The Node newsletter, which you can subscribe to here.

This pro-plagiarism stance is part of Frye’s continuing campaign against copyright, the legal instantiation of the idea that ideas can and should be owned. Over the past decade and a half, Frye has written countless legal reviews and op-eds discussing how copyright is antiquated in a world where the internet eliminates the costs associated with reproduction and distribution.

“Ideas are non-rival,” he told CoinDesk. “You don’t need to value them because there’s no scarcity, so they should be valueless.”

This contrarian opinion has brought him to the world of non-fungible tokens (NFT), the blockchain-based technology often credited with bringing “scarcity” to digital goods. It’s an idea for which lots of people are willing to pay big bucks.

A representative example: Ether Rocks is a series of virtual pet rocks that “live” on the Ethereum blockchain. There are 100 unique tokens – each corresponding to a near-identical cartoon JPEG – that even the creators say serve “NO PURPOSE” beyond speculation. Though the original image was a royalty-free piece of clip art, some people have spent millions of dollars on these tokens.

But, as Frye notes, what people are buying when they buy any NFT is “worthless.” By and large, NFTs do not represent ownership of the digital goods to which they supposedly correspond, do not confer copyright and may, in fact, one day be classified as securities. “So the owner of the NFT gets nothing other than the right to claim ownership of the NFT,” he wrote in August.

That’s not nothing. In fact, Frye is learning NFTs have a lot going for them. For one, there’s a sort of community-wide acceptance that people can sell even things they don’t possess. He sold an NFT of the Brooklyn Bridge for $500 – stealing the idea from an infamous scam artist.

NFTs are the “reductio ad absurdum” of contemporary art markets, meaning they reduce the “concept of ownership to its purest essence, it’s the ownership of ownership,” he said, and of art to pure market functions. Art, he said, has always been more about status than anything, and the blockchain just makes this pecking order more visible and open.

Further, NFTs are a sort of blunt instrument to wield against legacy institutions. In September, Frye minted a series of NFTs tied to a paper he wrote called “SEC No-Action Letter Request,” which raised the question of whether selling shares of ownership in the paper is an illegal unregistered security.

There was the implicit promise of income, which, to his surprise, actually came through. He brought in tens of thousands of dollars worth of ETH in the sale. This proved his thesis: The project called into question standing securities law, which Frye thinks is overly-broad in covering “any investment in a common enterprise that generates profit from the efforts of others,” and lays out a possible argument the SEC could use against him.

Read more: Some NFTs Are Probably Illegal. Does the SEC Care?

It’s easy to call everything meaningless: Art, securities rules, copyright. As part of a series we’ve called “Gensler for a Day,” which is asking informed and influential people to give their ideal crypto policies, CoinDesk reached out to see if Frye has any concrete plans, not just concepts. It’s not too far out there: Frye did once run for public office.

What follows is a condensed version of our conversation, covering NFTs, the SEC and the merits of writing while taking a bath. You can read a full version on CoinDesk.com. And feel free to steal his ideas.

“Break a contemporary museum into pieces with the means you have chosen, collect the pieces and put them together again with glue.” [That’s a line from Yoko Ono’s poetry book “Grapefruit,” which Frye has cited as inspiration.] Does that mean anything to you?

The idea is to just give people something to think about when they think about what they’re doing and why they’re doing it, you know, and also to do it by kind of ostentatiously plagiarizing someone else at the same time. All my good ideas are stolen from someone else.

Is that what you’re doing with NFTs?I mean, I think so. I’m not sure what I’m doing in NFTs, yet. When the NFT thing first hit the public consciousness over the summer, somebody called me from Business Insider and wanted me to talk about what was going on. The first thing I said to her was, “I have no idea what’s happening, but I love it.” That’s still true, I have no idea what’s happening. I don’t think anyone has any idea what’s happening, but something is happening. I’m just trying to do my best to be open to whatever it is that’s taking place enough to help me see even though I can’t figure out what it is.

Are you purposefully goading the SEC to make a determination?

They won’t talk to me, they don’t want to talk to me, they’re terrified of what I’m asking them. This is existential for the SEC.

What do you mean by that?

OK, look, everyone asks the wrong question. People keep saying, “is it a security?” If the SEC wants to regulate it – that’s the only real question. The SEC transforms things into securities by the magic of regulation. Anything can be a security as long as the SEC decides to characterize it as a security because the definition is overinclusive, it means everything.

I don’t mean I’m agnostic as to how we should go about doing this. Maybe a probationary regime of securities regulation is what we want. Maybe we do want a kind of SEC exercising discretion about what it regulates. But the problem is the SEC. The people there are morons. They have no idea what they’re doing and they don’t actually realize that the term “security” is meaningless.

So this is a problem for them because all of a sudden they’re confronted with something that is terribly, existentially terrifying to them because they don’t know what to do with it.

You’re doing the work for them. They can plagiarize it if they want.

A friend of mine said to me when I did the SEC “No Action” letter requests as a work of conceptual art – the conceptual art consisted of me sending the “No Action” letter request to the SEC asking them to “regulate me baby.” I explained to them, this is a security according to your definition, therefore you should prohibit me from selling it. My friend said this is probably the first ever “Action” letter request. Because nobody sends a letter to the SEC, saying, “I want to do something illegal, please stop me.”

You’ve received broad acceptance from the NFT community, from the media – Business Insider, Bloomberg, CoinDesk. But it seems like your true audience – the SEC – has rejected your work. (They could also just move slowly.) How does that make you feel?

I love it. If the SEC had it in them to respond to what I’m doing I think it would make the art less fun. The whole point is to be trolling the government. The SEC is basically nerd cops. They want to be in the business of being in charge. The one thing you’re not used to is people punking them. No one does this.

Except for Elon Musk.

Fair. He’s got balls of steel to punk the SEC while having something actually on the line. No one questions whether or not it falls within the sphere of securities regulation. He’s playing chicken with them. In my case, there’s no risk. What are they going to do to me? It would be too humiliating for them to prosecute me. Bringing an action against me would be like throwing me in the briar patch.

You said that a lot of people suddenly wanted to spend a lot of money to buy nothing, because that’s what an NFT is – nothing. Are your ideas worth less than nothing?

I mean, ideas are valueless because they don’t need to have a value. Ideas are non-rival. You don’t need to value them because there’s no scarcity, so they should be valueless. What I find most interesting about NFTs is that they sort of are the reductio ad absurdum of the art world in a really beautiful way.

Everyone talks about Walter Benjamin and the “aura of authenticity of the work of art.” You know, God bless him, I think he was actually onto something, but he was totally wrong but it wasn’t his fault that in 100 years there’d be the internet, let alone cryptocurrency or NFTs. The problem is he saw the aura as being attached to the authentic object; but what he missed, I think, was that the aura is really all about ownership. The concept of ownership. The peculiar thing about NFTs is that they reduce the concept of ownership to its purest essence, it’s the ownership of ownership, and that’s it.

Right. You don’t own the object, you own a token that may correspond to an object.

You own a token that the relevant people are willing to accept as corresponding to ownership of something valuable. Something that they care about, that matters, is meaningful. It’s all about status, really, it’s about other people’s recognition. When you buy art, what you’re buying is a spot in some artist’s catalog or resume – sometimes a dirty piece of cloth or a lumpy rock comes along with it.

See also: It’s Time to Talk About NFTs and Intellectual Property Law

You’re sometimes credited, but not always, with the idea that copyright holders are like landlords. Insisting that an idea has value and then charging a type of tithe for people to use it. Who fixes the drain when something is clogged in this analogy?

No one! That’s part of the problem. Corporate owners are the worst landlords because they don’t do any maintenance and they think they’re God’s gift. Regular landlords at least have a bit of humility. The whole point is not to say that there’s anything wrong with landlords, it’s just to say that there is something wrong with idolizing copyright owners and authors by association with their ideas. There’s nothing special about collecting rent and that’s all you’re doing when you assert copyright ownership.

Do you have thoughts about the idea of copyright in NFTs?

The beautiful thing about NFTs is that they might actually solve a problem, at least some of the problems that arise in that landlord scenario. What we’ve done with this technology and various other kinds of internet-based platforms has eliminated entirely all the costs associated with reproducing and distributing works of authorship. That used to be the most expensive part of getting culture out to the public. The whole reason that copyright came into existence in the first place was that the cost of reproduction and distribution had come down slightly when the printing press was invented. When the cost came down a little bit – from manuscripts to printed books – copyright made sense.

The problem is that now the cost of reproduction and distribution is zero. It’s zero. The only cost is associated with producing the work in the first place but we’re stuck with the same mechanism designed for a world where transaction costs associated with reproduction and distribution were significant.

My hope is that NFTs have the potential to actually compensate authors without having to have copyright at all. Imagine two different potential worlds: You can have one world where you own the right to control the use of the works of authorship you create – you can tell people what they can and can’t do with whatever it is that you produce. But you don’t really get any money if no one really cares or wants to give you money for it. In the other world you don’t own anything. You have no right to control how people use the work of authorship that you created, but somebody is willing to give you 100 grand for it. Which do you prefer?

I’m greedy. I want the money, upfront. I don’t give a [care] about control. We don’t need control anymore as long as you can get paid up front. And, to my mind, NFTs might make that possible. A lot of people are still stuck in this controlling mindset.

What are the concrete policy considerations you want to throw on the table? Eliminate copyright?

I think it has to happen on its own. I’m not delusional enough to think anyone gives a [hoot] what I think. All I can do is throw ideas out there and see what sticks. The landlord thing was great: I put it out there, Mike Masnick picked it up, people ran with it, nobody attributes it to me but they use it all the time and I love it. It was viral. No one’s going to listen to me to make copyright policy or any other kind of policy, but if we can shift the window a little bit and help people see that this is something actually positive and potentially liberatory that’s going to give people an opportunity to get outside of our regime of ownership that is not productive.

So plagiarism is productive?

I think creators are very narcissistic and they should get over themselves. I like to say I’m the legal academy’s leading plagiarism advocate. I’m also the legal academy’s only plagiarism advocate, which makes it very easy to be number one.

Why do you write in a bathtub?

It’s comfortable. It’s relaxing. It gives me a little bit of time off. Alan Greenspan used to do it.

A little Randian in the tub.

I like to think he would be horrified by everything I stand for.

Do you still think NFTs have the ability to collapse the traditional art market by siphoning off capital?

I think yes. I mean, ideally, yes. But I would put it a little bit differently. I think NFTs have the potential to make the traditional art market irrelevant, which will be a wonderful thing because I think that there’s a fetishization of objects that I think is unhealthy. Taking the money away lets us think about the art more. Art is a consumer good that consumers don’t understand. Consumers understand money – that’s why we talk about art in terms of money, because that helps people understand it. We talk about law schools in the same way, in rankings. We have stock markets – someone won a Nobel Prize for telling us that price is just a way of communicating information.

[Laughs, Googles Joseph E. Stiglitz, cries.]

The art market is a way of communicating information about consumer preferences. The problem is consumers don’t actually know what they want to buy. All they know is what the price tells them about what they’re supposed to buy. What they’re ultimately buying isn’t the object, it’s the status associated with the object. NFTs make the work available to everyone on the same terms, and make it very clear that what you’re buying and what you’re trading is just the status associated with being the owner.

See also: Nobel Laureate Thinks Bitcoin is an “Amazing” Bubble

Some notable art critics have said there’s little aesthetic value in NFT art.

Most art critics are idiots. I’m in the process of trolling Chris Knight right now – the least-deserving Pulitzer Prize winner in the history of Pulitzer Prizes. I will concede that what people are trading is in many respects not to my aesthetic preferences. But I don’t think that matters. Who cares what my aesthetic preferences are? If people like it, who’s to say?

I also think that it’s too early to really know what people are going to ultimately value and find worthwhile and why they’re going to value it and find it worthwhile. The wonderful thing about NFTs is we don’t actually need them – they’re a technical solution to a problem that never actually existed, but we need to figure out how to solve anyway.

Bitcoin, the world’s largest cryptocurrency by market capitalization, suffered its biggest price pullback in almost a month in a sharp retreat just a day after reaching a new all-time high price near $67,000.

The bitcoin price skidded 6% over the past 24 hours in digital-asset markets and was changing hands around $63,000 as of 17:07 UTC (1:07 p.m. ET) on Thursday.

The record high on Wednesday came as the ProShares futures-focused Bitcoin Strategy Exchange-Traded Fund (NYSE: BITO) started trading on the New York Stock Exchange this week. That launch brought in $570 million of assets and garnered $1 billion of trading volume during its first day, one of the most successful ETF launches of all time.

To some market commentators, Thursday’s price drop looked more like a short-term retreat than the beginning of a prolonged slide. Earlier this week, analysts told CoinDesk they saw bullish indicators in price charts, touting predictions of $80,000, $86,000, even $100,000.

“Long-term holders do not appear to be selling just yet, so this is likely just a short-term pullback,” said Lucas Outumuro, head of research at IntoTheBlock.

After four days of a solid rally, it’s time for a reset before the next ascent, according to Laurent Kssis, director of CEC Capital.

“The market remains bullish overall,” he said.

Kay Khemani, managing director at Spectre.ai, says this volatility is perfectly normal in any asset that has rallied significantly over many weeks to break new all-time highs. He sees the next psychological resistance level at the $70,000 mark.

“Trepidation is bound to set in as investors and traders alike seek to lock in their gains ahead of possible limit orders set at the $70K mark,” said Khemani.

With the launch of more bitcoin futures exchange-traded funds on the horizon, there’s speculation that a warm reception might provide a positive catalyst.

VanEck revealed it had secured approval to launch its bitcoin futures-linked ETF in a post-effective filing with the U.S. Securities and Exchange Commission (SEC) on Wednesday, which could have a similar effect on market sentiment as ProShares’ initial launch. Valkyrie Investments’ bitcoin futures ETF has won the blessing of the U.S. Securities and Exchange Commission and is set to start trading on Friday, under the ticker BTF on the Nasdaq. The crypto-native fund manager is the third sponsor of bitcoin futures ETFs to clear all regulatory hurdles.

“When another ETF is announced, bitcoin will continue this upward movement and momentum,” said Matt Case, analyst at Quantum Economics.