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- Pt I: Gary vs. Binance: Ammo Supplied
- Pt II Gary vs. Coinbase: The Final Countdown for Crypto in the US
- Eurozone Enters Recession: How that Helps the US Treasury
- Despite Regulatory Onslaught, BTC Didn’t Budge
- SWIFT Goes Blockchain, Using Chainlink
- US Court Gives Binance CEO 21 Days to Respond to Summons (source)
- SEC Files Emergency Motion to Freeze BinanceUS’ Assets (source)
The Securities and Exchange Commission (SEC) boss, Gary Gensler, has no dry powder left to use. This year alone, the SEC fired its legal guns at Kraken, Gemini, Paxos, BinanceUS, and Coinbase.
This covers the top US crypto players, with Crypto.com left, now too speculated as the next target. Before getting into the nitty-gritty of the SEC’s charges against Coinbase and BinanceUS, as the final US crypto bosses, it bears keeping in mind what this is all about.
Washington DC-based law firm Cooper & Kirk has put forth its view on the situation as Operation Chokepoint 2.0.
In short, the idea is that a series of events are happening in the US right now, designed to prevent banks and established financial institutions from interacting with cryptocurrencies, to ultimately protect the US banking and financial system.
According to the law firm’s paper, the situation results in Americans being deprived of “constitutional protections against the arbitrary exercise of governmental power.”
Specifically, when a regulatory agency stigmatizes an industry, or pressures to block banking access, it acts as a deterrent to capital flows.
Case in point, is it appropriate for Gary Gensler to appear as a public official and say:
“We don’t need more digital currency. We already have digital currency, it’s called the US Dollar, it’s called the Euro, it’s called the Yen.”
Is Gensler a lawmaker, a presidential candidate proposing the country’s vision?
Likewise, is it appropriate for a regulatory official to refer to crypto industry players as:
“hucksters, fraudsters, scam artists, ponzi schemes. The public being left in line at the bankruptcy courts. We’ve seen this story before…”.
Is Gary referring here to FTX, which he failed to investigate despite numerous red flags blowing in the ponzi winds?
What about Caroline Ellison, the daughter of Gary’s MIT boss, who was at the head of Bankman-Fried’s Alameda Research slush fund?
Recently, it even came out that Gary was jousting for a Binance advisor position in 2019, while he was still at MIT. This prompted Binance lawyers, for the second time, to ask Gary Gensler to recuse himself because he “may be a material fact witness”.
With all that said, what about the bare facts — even if the Gary taint wasn’t present? Did exchanges give the SEC ammo to pursue Operation Chokepoint 2.0?
In total, the SEC filed 13 charges against Binance, claiming that the world’s largest exchange created BinanceUS as a shield for the parent exchange, Binance.com. The purpose? To tap into the US investor pool but to insulate Binance.com in order to “reveal, retard, and resolve” the work of regulatory agencies.
In other words, because so many digital assets are interpreted as unregistered securities, the exchange wasn’t supposed to allow US customers to participate. But Binance did anyway by promoting the use of VPN services.
This allegation has plenty of weight thanks to one Binance senior executive who said:
More importantly, BinanceUS allegedly performed wash trading, as in trading between internal wallets to artificially prop up some crypto assets.
BinanceUS’ market maker, Swiss-based Sigma Chain controlled by Zhao, purportedly did the deed.
This was in addition to the alleged commingling of customer funds, although no evidence shows that any client funds were lost.
With this ammo under its belt, the SEC filed an emergency motion to freeze Binance.US’ assets earlier this week.
But this is just the start of what we saw this week for crypto in the US.
- How the Coinbase-SEC Lawsuit Will Change Crypto for the US (source)
“We’re leaving together, but still, it’s farewell
And maybe, we’ll come back to Earth, who can tell?
I guess there is no one to blame
We’re leaving ground (Leaving ground)
Will things ever be the same again?”
When it comes to crypto in the US, the final countdown is here.
Coinbase is an SEC lawsuit-breed apart from Binance.
In both cases, the cause is singular. The burden of most cryptocurrencies being securities is too great.
But, the SEC is going after Coinbase “exclusively focused on what is or is not a security”, as Brian Armstrong, Coinbase CEO, put it. Specifically, the SEC is after Coinbase for being an unlicensed securities exchange.
Although the SEC reviewed and approved Coinbase to go public in April 2021 under the ticker $COIN, the agency now claims that the exchange’s billions in profit from collecting transaction fees were unlawful.
That’s because these fees came from “crypto asset securities” — and Coinbase isn’t registered with the SEC to facilitate securities transactions.
One of SEC’s building blocks against Coinbase, essentially screenshotting the exchange’s tradable assets front page.
While now it appears that nearly all crypto assets are securities, this is in stark contrast to Gensler himself saying in 2018 that “3/4 of the market is non-securities. It’s just a commodity, a cash crypto.”
Early on, Coinbase approached the SEC to clarify, which the agency refused to do.
Now the SEC gives such clarity under an experimental legal theory, as some lawyers view it.
Bottom line, Coinbase is bringing the SEC to court to showcase how robust their legal theory is. In the meantime, the TradFi sector is hinting that Gary Gensler, former Goldman Sachs banker, gave them an opening.
“I think what’s happened is clearly a setback. But right now, I actually think it’s a huge opportunity for the incumbent financial firms to actually take the lead.”
-Dawn Fitzpatrick, CEO & Chief Investment Officer of Soros Fund Management
Speaking of TradFi, did you notice something odd in this whole ‘Gary goes after top US crypto exchanges’ situation?
Such ‘crypto asset securities’ are NOT ONLY available on crypto exchanges, but on registered stock brokers as well, like Robinhood.
In its legal documentation targeting Coinbase and BinanceUS, the SEC explained how several of these ‘crypto asset securities’ were offered through sales which were neither registered, nor exempt from registration, with the SEC. This logically means they’re “unregistered crypto asset securities”.
Therefore, US investors, under the SEC’s protection, have access to unregistered crypto asset securities through traditional stock brokerages. But they are inherently unregistered as there is no reporting going on by the individuals whose efforts dictate the value of those assets (in the eyes of the SEC and the Howey Test, that is), like public companies do.
Here’s a list of cryptocurrencies which, in the recent legal documentation against BinanceUS and Coinbase, the SEC explains (in detail) are unregistered ‘crypto asset securities’:
And here’s Robinhood’s crypto offering, which apparently includes three unregistered crypto asset securities:
Image courtesy of Robinhood.
So, why isn’t the SEC targeting regulated brokerages? It’s OK for such platforms (but not others) to illegally offer access to an industry filled with “hucksters, fraudsters, scam artists, and ponzi schemes”?
That sounds dangerous for investors, doesn’t it?
It’s difficult to arrive at a conclusion different from that which was already established by Cooper & Kirk.
The Gary-headed SEC is hand-picking crypto targets to carve a new crypto landscape.
It’s Not Over Yet
Of course, all of this hinges on the SEC’s legal theory. How does one register ‘crypto asset securities’ in the first place? What would the reporting look like? Owning a token is very different from owning ‘equity’ in a revenue-generating business.
This is why many countries took a step back from pre-computer laws and carved out special rules for digital assets — the sensible approach.
Unfortunately, US lawmakers have failed to do so, giving the SEC ample wiggle room to fill the void.
Now, how the SEC vs. Coinbase legal battle plays out in court will determine the future of crypto in the US.
- Germany and Ireland Officially Tip Eurozone Economy into Recession (source)
What is the link between the Eurozone’s recession, Nordstream 2 getting blown up, US debt, and the issuance of new US debt in the form of T-bills?
Well, if you were to ask 2011 Jerome Powell, the current Federal Reserve Chair, the bond is quite tight. He said this on C-Span:
“Bad economic news drives people out of stocks and into bonds [government debt].”
Indeed, we can see this manifest now as total incongruity between futures on S&P 500 earnings and bonds.
Stocks and bonds pricing different market outcomes. Image credit: 3Fourteen Research.
Powell then continued:
“When people go into bonds, they bid up the price of bonds and that bids down the interest rate that the government is required to pay.”
Yes, less money to be debt-burned as we’ve previously explored in Five Minute Finance. Now, here’s the kicker:
“Another thing that drives people into our bonds is the turmoil in Europe.”
Remember, Powell said this in 2011. And what is happening in Europe now?
For starters, the US Treasury Secretary, Janet Yellen, had a surprise visit to Ukraine in February. This is quite unusual.
A domestic treasurer going to a war-torn country? What’s one have to do with the other? Is foreign policy somehow in the purview of the US Treasury? Not by any official mandates anyway, it isn’t and never has been.
But it is quite clear that the Ukraine war created the conditions for two things:
- Sanctions, now commonly called ‘boomerang sanctions’ as many actually backfired against Europe.
- Nordstream 2 getting blown up, as a source of cheap Russian gas for the German economy, Europe’s mighty engine.
No more cheap gas, no more competitive German industry.
And as Germany cut its GDP growth figures from zero to -0.3% for Q1, it entered a technical recession. With Ireland and other countries following suit, the Eurozone is now officially in a recession.
At 0.1% GDP contraction in Q1 ’23, followed by another 0.1% in Q4 ’22, the euro area is in a recession. Image courtesy of Eurostat.
Per tradition, this proved the president of the European Central Bank (ECB), Christine Lagarde, wrong. She said in May that the ECB doesn’t “have a recession in our baseline projection for 2023”.
Circling back to 2011 Powell, “turmoil in Europe” is now set to drive demand for US Treasuries, just in time for the $1 trillion worth of T-bills to unload.
Well played.
- Bitcoin Rises Back Above $27,000 a Day After SEC Sues Binance (source)
When negative regulatory events threaten to alter the entire cryptocurrency industry, we usually see a reaction in price.
And it never goes up.
Yet that’s not what happened in the midst of the SEC suing both Coinbase and Binance this week. In fact, the BTC price rebounded almost instantly.
Over the week, Bitcoin suffered a -2.6% dip amid the hottest SEC news of the year. Year-to-date, Bitcoin is still up nearly +60%. Image courtesy of Trading View.
Likewise, both Binance and Coinbase outflows are relatively low, at cumulative $597.2 million worth of withdrawals since the SEC news hit the public spotlight.
For Binance, it’s a minor blip so far, compared to the great disturbance in the crypto force that was the FTX crash.
This is positive in a number of ways, all favoring Bitcoin.
- First, the regulatory swings are losing steam, having become predictable, used up, and tiresome.
- Second, Bitcoin is nowhere mentioned as an “unregistered security” by anyone (maybe the only thing that still makes sense in crypto right now).
- Third, Bitcoin’s balance on exchanges continues to drop.
Presently, exchanges hold 1.91 million BTC available for trading, with an expected sharp drop to 1.74 million BTC on Thursday. Image courtesy of coinglass.
And the fewer BTC available on exchanges, the lesser potential sell pressure.
At this point, it’s safe to say that a particularly upsetting news cycle failed to exert downward pressure, indicating a bottom has been reached — at least for now.
- Swift to Test Tokenized Asset Transactions with Major Banks (source)
When some Russian banks were prohibited from accessing SWIFT, an interbank payment processor, it was a major turning point in monetary history. The financial payment rails had been weaponized, accelerating BRICS coordination.
But even for the Western block, SWIFT has been a dinosaur, dragging its cumbersome feet for days to execute simple cross-border payments. This is now poised to change.
Collaborating with 12 global banks, the SWIFT messaging network successfully tested token transfers between public and private blockchain networks. No doubt, this is a sign of a new digital era.
Users will no longer have to think which network to use for which assets. Eventually, tokens will freely flow, just as information flows on the internet.
Under banking regs, of course.
SWIFT’s experimentation is particularly bullish for Chainllink (LINK) holders.
SWIFT used Chainlink’s Cross-Chain Interoperability Protocol (CCIP) to make the transfers happen. In the press release, they mentioned Chainlink four times, as “a leading Web3 services platform”.
Chainlink co-founder, Sergey Nazarov, is not surprised. He recently noted on CNBC that “it’s absolutely inevitable that all the value in the global financial system will be on a blockchain.”
Goldman says S&P 500 is undervalued b/c of AI boom. Using a dividend discount model & economists’ assumption that widespread
AI adoption could boost productivity growth by 1.5pp per year over 10y period, Goldman estimates that S&P 500 CAGR EPS over the next 20yrs would be 5.4%, compared w/+4.9% that model currently assumes, & would support an S&P 500 fair value 9% above today.
Observation #67
The pattern of drawdowns from the Strategic Petroleum Reserve since the beginning of 2021 is unsustainable. The 283 million barrels released took 25 years to accumulate. Can these be replaced? Will they?
The Bretton Woods system was proposed in 1944 but it didn’t really go into full effect until 1958, with the elimination of exchange controls for current-account transactions.
h/t @joakimbook
From that point, it’s shocking how fast the system failed. Just 13 years from 1958–1971.
The bond market is $133T.
The largest issuer, the US Government, is insolvent.
Their obligations can only make good on their payments by issuing more debts while maintaining the inflation rate above interest rates.
Bonds can no longer store value.
Buy #bitcoin.
The @SECGov is weaponizing their role to kill an industry. Allowing a company to list publicly and then stonewalling their attempts to register is indefensible.
@GaryGensler, expect to hear from Congress.
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