Read Time: 4 minutes, 10 seconds

Hey, Crypto Tax Pros!

Welcome to another edition of Chain Reactions, where we analyze only the most relevant developments in cryptocurrency taxation and regulation.

This week, we’re covering:

💼 Terraform Labs & Do Kwon’s $4.47B SEC Settlement (why it matters and industry reactions)
📈 Ether ETFs expected to be fully approved by September (what this means for the market)
🏦 Trump pushes for all Bitcoin mining to be done in the USA (potential impacts and regulatory shifts)

Let’s dive in!

Controversy Erupts Over Terraform Labs & Do Kwon’s $4.47B SEC Settlement

The SEC’s massive settlement with Terraform Labs and Do Kwon leaves many questioning its efficacy and fairness.

The Record-Breaking SEC Settlement

Terraform Labs, the company behind the collapsed TerraUSD (UST) stablecoin, and its founder, Do Kwon, have agreed to a $4.47 billion settlement with the SEC. This settlement follows the catastrophic collapse of Terra in May 2022, which led to over $60 billion in losses and significantly impacted the crypto market.

Announced on June 12, the settlement includes a $1.47 billion disgorgement and a $3 billion civil penalty to resolve allegations of securities fraud and misleading investors. While Terraform and Do Kwon did not admit to any wrongdoing, they have agreed to comply with the settlement terms.

What About the Fraud Victims?

The settlement has drawn mixed reactions from the crypto community. Coinbase’s Chief Legal Officer, Paul Grewal, voiced skepticism, pointing out that the settlement effectively makes the SEC an unsecured creditor in Terraform’s bankruptcy proceedings. “The settlement just makes the SEC an unsecured creditor in the BK and only orders Kwon to hand over $7 million of assets he actually has. There’s zero meaningful relief to fraud victims,” he stated.

Stuart Alderoty, General Counsel at Ripple, echoed similar sentiments, criticizing the SEC’s approach. “This SEC is again touting a big penalty - but the SEC actually will end up a creditor in bankruptcy court (see BlockFi). The SEC has become a show regulator chasing headlines rather than good policy,” Alderoty tweeted.

Where Will Terraform Get the Money?

Ki Young Ju, CEO of CryptoQuant, raised questions about the financial logistics of the settlement. “Terraform agreed to a $4.47B settlement with the SEC, worth 64,824 #Bitcoin. Where does this money come from? Did they actually use it to restore the peg? Sus. $4.47B cash-out is impossible, even with a $40B market cap; Do and Terraform aren’t supposed to hold that much money,” he tweeted.

Zach Rynes also questioned the allocation of the settlement funds, saying, “Assuming Terraform Labs actually has $4.47 billion to pay… why is that capital going to a soulless government agency vs being used to compensate Terra’s victims? Is this what ‘protecting investors’ is supposed to look like? If so, I’d like to opt out, thanks”.

Looking Forward

This settlement raises several questions: Is the SEC genuinely protecting investors, or is it merely seeking to fund government coffers? As Paul Grewal aptly pointed out, this deal does not provide relief for fraud victims.

If the SEC isn’t going to provide adequate protection, the burden shifts to our clients.

We understand the crypto market profoundly and take a practical approach. While it’s not necessarily our responsibility to protect investors from fraud, there’s an opportunity here to step up and offer more support. This could be a chance to differentiate our services and demonstrate our commitment to client well-being in an increasingly complex regulatory environment.

Treasury Trove of Resources

Hand-picked resources to help you dive deeper into our main story, learn crypto without confusion, and master crypto tax:

2024 State of Tax Professionals Report (Thomson Reuters, 10 min read) Comprehensive insights into the current trends and challenges faced by tax professionals.
GenAI Strategy Key to Capitalizing on Opportunities (PwC, 3 min video) Learn how implementing a GenAI strategy can help tax professionals seize new opportunities.
Taxation of Cryptocurrency and Other Digital Assets Portfolio (Bloomberg Tax, 15 min read) An in-depth guide on the taxation of cryptocurrency and digital assets, essential for staying compliant and informed.

Crypto Tax Outsourcing: We constantly get calls from other CPA firms that don’t have the capacity or desire to prepare their clients’ crypto taxes but still want to help by sending them to an experienced crypto tax professional. If this sounds like you, we’d love to chat about how we can help!

Feel free to schedule a free strategic partner consultation Zoom call on our calendar HERE.

Crypto Tax Pro Tip Of The Week

Here’s a quick tip on avoiding crypto scams.

It’s from a recent LinkedIn post, and they’re three simple tips you can pass on to your clients to protect them from fraudulent investments:

Here’s a quick breakdown:

Research rigorously: Scrutinize every detail before investing. Don’t take any information at face value and delve into the background of the investment and its promoters.
Seek professional advice: A seasoned advisor can spot red flags you might miss. Professional insight can often reveal issues not immediately apparent to the untrained eye.
Never borrow to invest: If you need to borrow money to invest, reconsider the investment. As always, never invest more than you’re willing to lose.

Hope this helps!

Curated Crypto News

Want to stay on the cutting edge?

Here's what else is happening in crypto tax, policy, and markets that you should know about:

Want to stay on the cutting edge?

Here's what else is happening in crypto you should know about:

👀 Ether ETFs Expected to Be Fully Approved by September: According to CoinDesk, SEC Chair Gary Gensler announced that Ether ETFs are likely to receive full approval by September. This is a big deal because it marks a significant step towards mainstream acceptance of Ethereum as a legitimate investment vehicle. Personally, we think this will lead to a surge in institutional investments in Ethereum, potentially driving its price and market adoption higher.

⛏️ Trump Advocates for All Bitcoin Mining to Be Done in the USA: According to CoinDesk, former President Donald Trump stated his desire for all remaining Bitcoin to be mined in the United States. This is a big deal because it underscores the increasing geopolitical significance of Bitcoin mining and the potential for regulatory changes. Personally, we think this could lead to stricter regulations and incentives aimed at boosting domestic Bitcoin mining, significantly impacting the global mining landscape.

🤝 MicroStrategy’s Michael Saylor Reaches $40M Tax Settlement: According to Cointelegraph, Michael Saylor, CEO of MicroStrategy, has reached a $40 million tax settlement with the U.S. government. This is a big deal because it highlights the ongoing scrutiny of high-profile crypto investors and the importance of tax compliance in the crypto industry. Personally, we think this settlement could prompt other crypto investors to proactively address their tax obligations, leading to increased regulatory compliance and transparency.