Former SEC Office of Internet Enforcement Chief John Reed Stark has used his latest blog post at LinkedIn (“The Bitcoin Plague Spreads to Retail”) to strongly advise American retailers not accept cryptocurrency payments:
“Given its complete and utter lack of oversight and meaningful licensure, the cryptocurrency marketplace has spawned a growing global cadre of dangerous criminals, and the risks for retailers accepting cryptocurrency run a perilous gamut of legal, regulatory, financial, ethical and reputational dangers.”
Stark has written his latest tome in response to recent reports that Crate and Barrel, Nordstrom, and Whole Foods have begun accepting cryptocurrency for retail purchases via Flexa, a crypto-payments startup backed by the Winklevoss twins’ Gemini crypto exchange.
By jumping on the crypto bandwagon, writes Stark, retailers are likely hoping to enhance the perception that they are savvy, modern, creative, and avant garde.
While that may be the case, writes Stark, that bit of cachet is, “…just not worth it – and (is) a sad exemplar of commercial ignorance; opportunistic corporate pandering; and sadly, plain old-fashioned executive avarice.”
At issue, writes Stark, is the undeniable “Dark Side of Cryptocurrency.”
Several of cryptocurrencies’ most genuine advocates have publicly admitted that Bitcoin got its legs in Dark Net marketplaces, where it is mostly, but not only, used to enable the purchase of drugs (prostitution, murder-for-hire, child pornography and poisons have also been transacted for crypto on the Dark Net).
When Bitcoin was first invented, it was a novelty and had no value until the first exchanges were formed and began selling it for real-world cash.
Concurrently, a market for Bitcoins developed on the Dark Net when criminal retailers realized that it was easier to use and more secure than other available payment systems, including cash and gift cards.
In 10 years, Bitcoin went from trading for fractions of a cent to $20 000 USD each, and it is very difficult to argue that the demand for Bitcoin was created anywhere other than Dark Net markets and on unregulated exchanges where price manipulation is common.
Stark calls out retailers for indirectly endorsing crypto as an investment:
“In addition to becoming a facilitator for cryptocurrency transactions, by accepting cryptocurrency from customers, retailers are also indirectly endorsing cryptocurrency’s oft manipulated and wholly unregulated farcical valuations…Bitcoin and other cryptocurrency’s anarchistic valuations remain generally unregulated and without any meaningful oversight, leaving them easily susceptible to fraud and chicanery by insiders, management and better-informed traders and market participants.”
By legitimizing crypto for retail payments, Crate and Barrel, Nordstrom, and Whole Foods are acting as “Pied Pipers” harkening consumers to the sphere:
“Enabling retail customers to pay via Bitcoin is a not-so-subtle endorsement encouraging them to invest in Bitcoin – which is replete with too many risks to mention, and seems irresponsible for any U.S. corporation.”
Crypto exchanges and payments processors often use language in promotional materials that suggests that they are regulated or compliant.
In fact, writes Stark, very often they are not
“(F)or the most part, the various financial intermediaries operating within the cryptocurrency marketplace typically…Are not registered with any federal government agency and (have) no liquidity, net capital or other depository or financial requirements of any kind…Are not examined or audited by any federal agency such as the Federal Reserve or the U.S. Securities and Exchange Commission (SEC)..Are not regulated by any quasi-government agency such as the Financial Industry Regulatory Authority (FINRA)… (Are) not insured by any federal agency, such as the Federal Deposit Insurance Corporation…Do not have any federal accounting requirements with respect to their assets…Do not report their financial condition in any form of official SEC filing, such as an annual report or Form 10-K…Do not have any federal record-keeping requirements with respect to their operations, communications or any other aspect of its business, (etc)…”
Interestingly, in it’s recent “Proposed Framework for Crypto Asset Trading Platforms” document, The Joint Canadian Securities Administrators/Investment Industry Regulatory Organization of Canada wrote:
“Currently there are no (cryptocurrency) Platforms recognized as an exchange or otherwise authorized to operate as a marketplace or dealer in Canada. As such, the CSA has urged Canadians to be cautious when buying crypto assets.”
Stark is also correct when he states that most crypto businesses, “…Would assert that they do not have the same federal compliance systems or code of conduct requirements of traditional financial institutions such as banks, investment companies, brokerages, and other financial firms, who spend millions of dollars every year on internal compliance infrastructure and customer-protection-related infrastructure.”
The Kraken exchange has been particularly vocal about calling out “onerous” requirements imposed on financial businesses in the US, for example, and their claims typify the attitude in the sector, which tends towards espousing freedom over responsibility.
“The bottom line,” writes Stark,”…cryptocurrency financial marketplaces tend to believe that they have no federal licensing requirements to meet the bulk of the vigorous federal safeguards historically rooted and associated with U.S. financial institution registration and regulation– and formulated after decades of scrutiny, analysis and enquiry.”
Stark’s latest post includes interesting claims about Ohio, a state attempting to be a haven for the crypto and “digital asset” sector:
“In late November, 2018, Ohio became the first U.S. state and one of the first governments in the world to allow businesses to pay taxes, including sales and public utility taxes, with Bitcoin…Ohio selected Bitpay for the job to convert taxpayer Bitcoin into dollars for the state of Ohio…The only problem? Bitpay is not registered to provide money-related services in in Ohio.”
That is odd, writes Stark, given, “…Ohio’s more exacting and cumbersome financial regulations.”
Stark’s piece offers a comprehensive litany of the staggering criminal applications of cryptocurrencies, including ransom-payments, terrorism, hundred-million-dollar Internet-borne crypto exchange robberies (Mt Gox, Coincheck), election interference (espionage) and terrorism.
Stark asks how the practical (largely criminal) side of crypto jives with Wholefood’s social good campaigns:
“Whole Foods Market…sets an example in its use of wind power, solar power, company-wide recycling programs, green buildings for their stores, etc. Whole Foods markets its benevolence aggressively — and consumers love it.”
“Yet, by profiting from cryptocurrency use, Whole Foods is assisting in the growth of an increasingly sophisticated, dangerous and terrorist-minded gang of global criminals – which to me, seems far more dangerous than the threats posed by genetically-modified seafood or feed containing land animal by-products.”
Not only are “cutting edge” retailers erroneously endorsing crypto, writes the former SEC Internet Enforcement Chief, they are potentially giving criminals a place to launder and expend ill-gotten gains:
“Now, ransomware attackers have a new and better money laundering option: using ransomware proceeds to buy a pint of avocado ice cream at Whole Foods; a Nantucket Rug at Crate and Barrel or a Zegna Quindici Tie at Nordstrom’s.”
…and maybe putting their own operations at risk of enforcement action:
“(F)amed Judge Stanley Sporkin put it best when he said, ‘When you lie down with dogs, you get fleas.'”
Note: Stark has also written recently on the phenomena of IEO’s (initial exchange offerings, warning that issuers of IEOs may also be risking enforcement action.