Molly White's Citation Needed - Issue 61 – Soft war by the enemy

Episode Date: July 5, 2024

How will recent Supreme Court decisions affect the crypto world? Also, more absurdity from the crypto lobby, and some new regulatory actions. Originally published on July 5, 2024.

I'm Molly White, and you're listening to the audio feed for the citation-needed newsletter. You can see the text version of the newsletter online at citation-needed.news. Issue 61, Soft War by the Enemy. How will recent Supreme Court decisions affect the crypto world? Also, more absurdity from the crypto lobby and some new regulatory actions. This issue was originally published on July 5, 2024. I'm putting the finishing touches on that cryptocurrency industry election spending project that's been keeping me so busy lately. Keep an eye out next week for that announcement. For those who

have no idea what I'm talking about, I've been working on a website that will give a real-time view into the money that the cryptocurrency industry has been pouring into U.S. elections. Things like which companies and industry executives are contributing and how much, which races they're working to influence, and the advertisements they're running to try to sway voters. I think this is incredibly important information to have out in the open, and the importance is only underscored by recent primary wins in New York and Utah by candidates who received millions in support from the crypto industry. Not only is the industry actively influencing elections, they have only spent around 16% of the money they've raised so far, and they're continuing to raise millions more.

As I mentioned last issue, the largest crypto-focused super PAC raised 50% of its total funds, $85 million in May alone. The spending we're seeing already is only the tip of the iceberg, so I'm really happy to have this project up and running as election season looms ever nearer. I apologize for just how busy this project has kept me. It was a bigger project than I anticipated, and I know it's made my writing a little bit less frequent lately. Thank you for bearing with me. In the courts, the Wall Street Journal has published an article, alleging that Sam Bankman-Freed's whole family was in on the illicit campaign finance activity that he and at least two of his lieutenants were perpetrating.

The journal describes an email in which Bankman-Fried's law professor father, Joseph Bankman, appears to have knowledge that Ryan Salem was acting as a conduit for FTX donations to Republican causes, and writes about seeking to, quote, categorize these transfers from FTCS to Salem as loans. The journal also describes conversations between FTCS employees and Bankmanfried's mother, Barbara Fried, and brother, Gabriel Bankmanfried. These are much like the conversations that have come out in various court proceedings, in which Bankman Fried's mother appears to solicit money for her various charitable organizations,

and in which both his mother and brother seem aware of, and even to advise the straw donation, So far, I haven't seen anything to suggest impending criminal action against anyone else in the Bankman-Fried family, but there sure seemed to be plenty of threads the Justice Department could pull on if they felt so inclined. Two men were sentenced for manipulating the price of a token they had created, which was called hydro. They used trading bots to flood the market with manipulative trades intended to inflate the token price and drive consumer interest in the token.

and they ultimately profited around $2 million through their scheme. Both co-conspirators were sentenced to three years and nine months in prison. In governments and regulators, big news pertaining to the SEC this week came out of the Supreme Court, who, alongside a truly horrifying recent decision, issued another decision that's downright reasonable. In SEC versus Jarkasy, the Supreme Court determined that the SEC cannot continue to a fraud complaints in front of its own administrative law judges and without a jury. Although defenders of that approach have praised it for its efficiency and for drawing on the knowledge of judges who are particularly well-versed in securities law, others quite rightfully point

out that those facing fraud charges punishable by large fines ought to have the same right to trial by jury like anyone else. This decision certainly will make things more burdensome for the SEC, but appropriately so, in my view. As for the crypto angle, I don't think it's terribly likely to affect much. While an increased overall burden on the SEC could reduce the number of crypto cases it's able to pursue, those cases will likely look much the same, as most crypto-related SEC cases have already played out in federal courts in front of a jury, rather than in the now verboten administrative proceedings.

Also potentially impacting the crypto world is the decision pertaining to the Chevron deference, where the Supreme Court overruled a 40-year-old principle that gave broad discretion to government agencies in interpreting ambiguous laws and statutes. While some loud voices in the crypto world, who believe the SEC is abusing its authority, are hopeful that this decision might rein them in, it seems fairly unlikely to change much. I'm sure that the decision will be cited widely in the lawsuits against the SEC or in defenses against complaints brought by the agency, but judges thus far have broadly seemed to view the SEC's enforcement actions as well within the agency's remit. As for more concrete SEC activities, most of the SEC's case against Binance will proceed past the motion to dismiss, as Judge Amy Berman Jackson has ruled that the agency made plausible claims on most of the 13 charges it brought. However, one charge, the claim that Binance sold its BUSD stablecoin token

as an investment contract was dismissed entirely. Portions of two others pertaining to Binance's secondary sales of B&B tokens and to its simple earn product were dismissed, with Jackson determining that specific types of sales described by the SEC did not meet the investment contract definition. Binance has naturally claimed this as a massive win, publishing a blog post boasting that, quote, U.S. federal judge rejects main claims by SEC against Binance. This is, of course, completely false, given that the majority of the very serious claims against the company and its former CEO will proceed. Furthermore, Jackson at point slaps down major arguments by Binance. For example, to Binance's oft-repeated claim that there must be a contractual relationship in order for a sale

to be a sale of an investment contract, Jackson wrote, quote, their argument has been foreclosed by Supreme Court and Circuit precedent, and indignation alone cannot open that door. While there is certainly room for the case to go in any number of directions, Binance seems to be dancing its victory dance quite prematurely. Ripple and Coinbase have both already cited this decision in their own cases involving the agency, though it's hard not to notice that Coinbate mostly just cites Binance's arguments against the SEC rather than Judge Jackson's decision, where she explicitly wrote, quote, no one should read this case as deciding that crypto assets themselves are or are not securities.

That is not the question presented. In the Ripple case, the SEC has already replied, to argue that the decision doesn't seem relevant to what Ripple's trying to apply it to, a decision on remedies. They also point out that a portion of the decision, not mentioned by Ripple, seems to actually support the SEC's case against Ripple. Although Ripple has argued at great length that the SEC failed to give them fair notice before taking action against the company, the Bynance decision included a note that Bynance could not reasonably be surprised

when the SEC began enforcing a, quote, decades-old federal securities statute, supported by a similarly old Supreme Court precedent, and that they should have taken warning in 2017 from the SEC's report on the Dow. Remember in the last issue when I wrote that, quote, despite the news about the ETH investigation, it seems likely that the SEC is still planning to bring action against consensus pertaining to their popular metamask wallet software?

Well, they didn't make us wait very long. They've set their crosshairs on Metamask's swaps feature, where users swap one token for an equivalent amount of another one, and on their staking service. Back when the threat of a lawsuit first emerged, Consensus' CEO, Joseph Lubin, hit back with an argument that only makes sense if you've managed to convince yourself

that the SEC and the courts are absolutely desperate to keep the cryptocurrency industry afloat. He said, quote, If we have to register our wallet as a broker-dealer, then virtually every application on Ethereum that does similar things with tokens will have to register themselves as a broker-dealer. And so an entire tech industry

would be profoundly killed in the United States. I'm looking forward to Lubin supporting me in my argument that if these courts require me to get a medical license before operating on patients, an entire industry of human surgical experimentation will be profoundly killed in the United States. The parent company of the bankrupt Silvergate Bank will pay around $63 million in fines to the Federal Reserve and to the California Department of Financial Protection and Innovation.

The SEC also imposed a $50 million fine, although the terms of that settlement noted that this, quote, may be offset by the other penalties. Silvergate Bank collapsed in March 23, after an FTX-induced bank run, by its unusually high proportion of cryptocurrency customers, who were largely drawn in by its send platform that allowed these customers to transfer money among one another, even outside of banking hours. According to the regulators, Silvergate, quote,

had serious deficiencies in its anti-money laundering programs, including in its SEN product. In particular, the SEC highlighted $9 billion in suspicious transfers among FTX entities that should have been detected by compliance programs. The SEC also alleged that Silvergate misrepresented its financial state during the post-FTX collapsed bank run. Silvergate, of course, said that they too were duped by FTX.

But former FTX executive Ryan Salem, who also said he was duped by FTX and who is still tweeting away, says that FTX was completely transparent with Silvergate about everything they were up to. If true, and that's a big if, it's hard not to wonder if there might be criminal charges coming down the line. In Elections and Political Influence The two primary candidates who enjoyed substantial support from crypto-focused super PACs both won their primary races. In Utah, Republican senatorial candidate John Curtis defeated Trent Staggs by a hefty margin, earning 51.6% of the vote to Staggs's 28.1%.

The Republican-focused crypto PAC, Defend American Jobs, spent $1.7 million to support him, and another roughly $280,000 to oppose Stags. Curtis, an incumbent, co-sponsored an anti-CBDC bill and Fit 21, and voted in favor of the SAB 121 House Resolution. In New York, George Latimer defeated incumbent Jamal Bowman, earning 54.5% of the vote to Bowman's 45.5%. Although Latimer himself received no direct support from crypto-packs, Fershake spent more than $2 million to oppose Bowman. Both Fershake and A-Pak piled on hard, fairly late in the race to oppose Bowman, and Fershake seemed to largely echo A-Pax messaging in the ads they ran, rather than focusing

on anything related to the economy or technology, much less cryptocurrency. Bowman had apparently earned the ire of the crypto lobby for voting against Curtis's anti-Cbdc bill, Fit21, and the SAB 121 House resolution. Latimer, for his part, has had very little to say on the topic of crypto. Coinbase's stand with crypto has finally admitted what I reported earlier. That less than 1% of the more than $175 million they boast was, quote, donated by crypto advocates, actually came from the sort of grassroots movement they claim stand with crypto to be. Now, next to the number that says around $179 million was donated, they have a small tooltip. And when you hover, it shows that $177.8 million of that was donated to

fair shake, with only $1.47 million being donated directly to stand with crypto. As I've noted previously, that 177.8 million is far from grassroots. Most of it was donated in roughly equal amounts by Coinbase, Ripple Labs, and Andrescent Horowitz. Not ones to let the truth get in the way of juicing the numbers, they simply moved on to the next thing to fudge. Coinbase CEO Brian Armstrong announced during the first presidential debate that, quote, 1600-plus crypto-debatte watch parties are in full force right now and encourage people to visit the Stand With Crypto Twitter feed to, quote, see some posts

from advocates hosting events. However, an actual glance at these posts revealed that many of these so-called events were just individual guys taking advantage of the organization's offer of $50 in pizza vouchers, eating pizza alone in their apartments and watching the debate. Wish I'd known. I'd have organized a crypto watch party of my own. Maybe next time. Stand With Crypto had also tried to organize a mass email campaign to get CNN to, quote, add crypto to the debate agenda. And crypto advocates were sorely disappointed when their pet issue made no appearance. Given that the 90-minute debate also made no mention of things like

public education, the COVID-19 pandemic, or broader technology policy, it was hardly a surprise that cryptocurrency didn't make the shortlist either. Cracken co-founder, chairman, and former CEO, Jesse Powell, has joined the Winklevoss twins in making a $1 million donation to Trump, and in having part of it refunded, because these guys are apparently far more interested in publicity stunts than campaign contribution limits. Powell's tweet, announcing his contribution, explicitly called out Senator Elizabeth Warren, who has yet to see much crypto-related spending in her upcoming Senate race, beside some early support from industry figures for her crypto-focused long-shot opponent John Deaton. Elsewhere in crypto, Bitcoin prices have been down for a variety of reasons, including more

rumors of Mount Gok's payouts, and the observation that U.S. and German-Gurton governments have moved around 11,768 Bitcoin, priced at around $664 million, to exchanges, likely in preparation to sell much of it. These are not tokens the governments are holding as some sort of investment, but are rather tokens that have been seized by law enforcement. The tokens moved by the U.S. government were seized from Bonn-Meet Singh, a drug trafficker who sold various controlled substances on dark web marketplaces like the Silk Road. Singh pleaded guilty to conspiracy to possess with the intent to distribute controlled substances

and conspiracy to commit money laundering in January and was sentenced to five years in prison in April. I bring up the Bitcoin price because I want to revisit something I wrote in April, shortly before the Bitcoin halving. Quote, there's also the miner problem. Bitcoin miners have already been operating on incredibly thin margins, and many washed out during the crypto winter, as long. low prices for their bitcoins made mining even less sustainable. Now, with half as many bitcoins issued per block, that's only going to get worse. If Bitcoin's price skyrockets as hoped,

they might break even and be able to stay in business. If Bitcoin's price falters, miners are going to have a really tough time paying off their electricity bills and loan payments, and more companies are likely to collapse. Any guesses what I'm about to say? The Bitcoin has price, that is the approximate dollar value of one terra hash per second of mining power on any given day, plummeted after the halving on April 20th, then recovered a tiny bit. However, it's spent on a steady downward trajectory for the last month and has hit a new all-time low. Combined with data showing a dwindling hash rate, it seems that Bitcoin miners are deactivating unprofitable equipment amid challenging business conditions.

Of course, people in the Bitcoin world have observed that these stats resemble the dire conditions around the time of the FTX collapse and have decided that, as always, this is good news for Bitcoin. After all, if that marked a market bottom in 2022, surely this must be all up from here. Sometimes I admire that level of optimism.

Some Bitcoin miners have been trying to rescue their sinking ships by, you guessed it, pivoting to AI, As one computation-hungry tech trend has given way to another, miners are just trying to keep up with the times by adapting their infrastructure to support the similarly power-intensive AI computing. A game called Hamster Combat has taken the CryptoWorld and Telegram users by Storm as an application that runs on the messaging platform's new mini-apps infrastructure. As with most blockchain games, it's more about money than it is about fun, and gameplay mostly involves mashing your hamster avatar, cookie clicker style, and spamming your friends with referral codes. The future of gaming that we were promised has finally arrived.

Despite the fact that the in-game tokens can't actually be traded for any other kind of currency, crypto, or fiat, we're beginning to see a similar story emerging around hamster combat, as with Axi Infinity in its heyday. Those living under challenging economic conditions in locations like Iran are turning to hamster combat in desperation, hoping that the team behind it will actually follow through on their promises to launch a crypto token that could allow them to cash out actual money based on their in-game performance. The game has not been warmly received by the Iranian government, and an Iranian military chief has gone so

far as to accuse the hamster combat developers of harming the country's elections by distracting its populace. Quote, one of the features of the soft war by the enemy is the hamster game, he said to local news. The web three is going just great recap. There were five entries between June 24 and July 5th, averaging 0.5 entries per day. 8.15 million dollars was added to the grift counter. Five-dollar wrench attackers arrested. For all the effort that goes into digitally securing cryptocurrency assets, crypto holders, and really holders of any bearer asset, still face the threat of what's known as the $5-Rench attack, thanks to XKCD, who published a comic making fun of crypto-nerds who imagined sophisticated encryption attacks, when in fact a person might actually

just say, his laptops encrypted, drug him, and hit him with this $5.00. a wrench until he tells us the password. Such an attacker was busted recently by the FBI after a string of violent home invasions, in which he and his accomplices tried, but mostly failed to physically rob their victims of their cryptocurrency. They beat, tortured, and kidnapped various victims while demanding passwords to cryptocurrency accounts, but in two cases, their captives managed to escape without turning anything over. In another case, they targeted. a woman from whom their more digitally inclined accomplices had already stolen $3 million. Hoping to steal another $500,000 that she had managed to hang on to, the attackers broke into

her house and held her at gunpoint. However, prosecutors say that she was so dismayed by the earlier loss that she told the attackers to just shoot her. They did not. In a final instance, after attacking a man and his wife and threatening them with further physical and sexual violence, the attackers were able to get a man to transfer cryptocurrency holdings to them from his Coinbase accounts. However, after moving $156,000 of his holdings, Coinbase's software determined the transaction seemed suspicious and blocked any further activity. The leader of the group, a 24-year-old from Florida, was arrested and charged with crimes that, if he is convicted, will carry a sentence of up to life in prison and a mandatory minimum of

seven years. Another 13 co-conspirators were also arrested and all pleaded guilty. Logan Paul actually sues Coffeezilla. In January 2020, I wrote that influencer turned alleged crypto-grifter Logan Paul had threatened YouTuber and crypto-slooth Coffeezilla over the videos he'd made investigating Paul's failed Crypto Zoo game. Like many other would-be crypto-influencers, Paul had made huge promises of an elaborate NFT-based game, only to completely fail to deliver anything remotely close to what he'd promised. Only after extensive attention, largely thanks to Coffeezilla's reporting,

did Paul cancel the project and promise a so-called $2.3 million buyback program, which he, of course, made conditional on participants not pursuing legal action against him. I had assumed that the legal threat was probably the normal rich guy bluster at being publicly called out for his wrongdoings, which rarely amounts to much, but apparently Paul actually meant to follow through with it. Now, a full year and a half after his initial threat, and after most people who weren't directly affected have completely forgotten about his scummy project, he's decided to bring it back into the public consciousness by filing what looks to be a pretty flimsy lawsuit. Worth a read.

I have previously mentioned in this newsletter my excitement that the ghost blogging platform, which I use for this newsletter, is planning to federate via activity pub. Ghost founder and CEO went on Mike McHugh's dot social podcast to talk about why they decided to do it, and it was a really cool conversation. I particularly liked where John O'Nolan said, quote, I think to have journalism with integrity, you have to have technology with integrity. And in my mind, open source is the way to have technology with integrity. And I want the best journalism to win because it's the best journalism,

not because they have the best platform. The episode is titled, This Publishing Platform Sees the Future, with Ghosts John O'Nolan. With the exception of the rare Wikipedia-versed journalist, the media is tends to have a tough time reporting on things that get into the nuts and bolts of how Wikipedia is built. This time, it was a different long-time Wikipedia, helping to explain what several media sources got wrong, and more broadly, how Wikipedians evaluate what is and is not a reliable source, particularly when it comes to sources with strong points of view. You can read, did Wikipedia ban the Anti-Defamation League? The truth is more complicated in the Wikipedian.

That's all for now, folks. Until next time, this has been Molly White. Thanks for listening to this issue of the citation-needed newsletter. To learn how to support my work, visit mollywhite.net slash support. If you'd like to read the text versions of these episodes, sign up to receive the newsletter in your email, or support my work on a recurring basis, go to citation-needed.news.