The Breakdown - A Massive Day For Crypto in the Courts

Episode Date: June 13, 2023

Today in Federal Courts: the Hinman docs get unsealed in Ripple vs. SEC; SEC has to respond to Coinbase; and Binance US in court around SEC request to freeze assets. Plus the new #FireGary bill introduced by Congressional Republicans.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Tuesday, June 13th, and today we are talking about the massive day for crypto in the courts. Before we get into that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to Bit.ly slash Breakd down pod. Hello friends, happy Tuesday. Well, to give you a sense of what's going on, let's turn to a tweet from Paul Grewell, the chief legal officer at Coinbase. Yesterday, he writes, 1. Hearing on motion to seize finance assets in DDC. Two, release of Hinman Docks in

SDNY. Three, SEC response to order on Coinbase petition in Third Circuit. Not every federal court day is eventful in crypto, but tomorrow is. May God bless the U.S. courts. So a lot of this is going to be resolved after this podcast comes out. And so what today is in part on the breakdown is the setup for all these cases so that tomorrow we can follow through and see what actually happened. So with that in mind, let's go through each of these really briefly. First, after years of fighting, the deadline for the SEC to release the Bill Hinman emails has arrived in the Ripple case. Basically, these emails contain internal communications with SEC Director of Corporate Finance, Bill Hinman, while he was preparing a speech about how

cryptocurrencies like Bitcoin and Ethereum can decentralized sufficiently to be considered as commodities. The SEC tried really hard not to have this come out. Ripple CEO Brad Garlinghouse said on Monday that the documents would be, quote, well worth the weight. And while I'm not going to get into the full analysis now, I will share the thread that Brad Garlinghouse dropped as I was preparing this show. He writes, it's absolutely unconscionable that a regulator, when presented with so much pushback on what he was about to say, how he compiled this fake test in the first place, decided to move forward anyway and throw an entire industry into chaos. For the SEC to sue Chris Larson and me personally for allegedly selling unregistered securities, when their own division had deliberately created

confusion about this, well, I don't have a single polite word to describe this deplorable, politically motivated overreach. Seeing the depth to which the SEC has essentially weaponized the lack of regulatory clarity through enforcement action since this speech was given, it's no surprise that we can call bluff on their claims to just come in and register as nothing but in bad faith. So again, analysis on those emails tomorrow. Second, the SEC has also run up against its deadline to explain to the court why it shouldn't be held to a particular timeline for conducting crypto rulemaking in the lawsuit Coinbase filed back in April. You'll remember that the court's request for an explanation from the SEC was widely viewed as precursor to the judge ruling

against the regulator in that case, and frankly, it hasn't particularly helped that they've sued Binance and Coinbase since then, while at the same time saying up that they haven't made their mind about whether they're going to issue guidance or not. Finally, and potentially, most importantly, the court was set to hear the SEC's emergency application to freeze the assets of Binance U.S. in the afternoon. Patrick Hillman, the chief communications officer at Binance, said in a tweet last night that today, quote, will likely prove to be one of the most consequential days in the history of the U.S. blockchain community. Buckle up and pray the judicial system helps provide relief for U.S. users tomorrow. So for today, we're going to focus on Binance,

as we do have some updates in that case. Ahead of today's injunction hearing, Binance filed their defense. The SEC had asked the court to freeze the assets of Binance U.S. to prevent them being transferred to international finance entities and out of the U.S. jurisdiction. They also sought an order that any assets which were already removed be returned to the U.S. These orders are extremely unusual and require a higher-than-usual burden of proof for the SEC regarding the harm of not making emergency orders.

Now, by way of background, Joe Carlson. Carlos Sarre, a commercial litigator on June 6th tweeted, In the temporary restraining order filed today, the SEC accuses CZ and Binance of manipulating their platforms to bypass U.S. regulations, despite publicly claiming independence from Binance U.S. The basis for irreparable harm is inconsistency in BAMTrading's claims about asset management. While maintaining they have control over their assets, their statements contradict their previous communication,

from Binance directly and its attorneys to the SEC, which merits court intervention. They are also contradicting their own audits. The SEC is concerned that CZ's current control could change unpredictably, and that U.S. investor assets may not be sufficiently protected and argues for an asset freeze and repatriation to protect U.S. investors. BAM trading and BAM management's potential liability could exceed their reported illicit gains of $420 million. The point being that these are big accusations that they are making against CZ and Binance. Now, Binance's defense characterized the SEC's application as a, quote, draconian and unduly burdensome freeze of all the company's operations without any exceptions.

Bam Trading, the entity behind Binance U.S., is under pressure in this case, and a court ruling could very well mean the end of the exchange according to that defense, which read, if the court does address the merits of the SEC's motion, it should deny that motion. The SEC seeks unnecessary and unjustified relief. Far from requesting relief that is carefully calibrated to maintain the status quo, the SEC's proposed remedies would effectively end BAM's business. The defense noted that the SEC is asking for the halt of all business transactions other than customer redemptions, a measure which would cause salaries and operating expenses to go unpaid.

Binance U.S. said it had attempted to negotiate less strict orders with the SEC ahead of the hearing as directed by the court. It proposed a more limited asset freeze, which would require customer assets to be custodied in the U.S., only accessible to U.S. employees. Transactions to international finance entities and CZ personally would also be prohibited under the counterproposal, an exception for ordinary business expenses. According to the court filing, the SEC rejected this proposal for fear that the exception would allow assets to be transferred offshore under the guise of paying vendors while also citing, quote, unspecified risks to customer assets. Finance US asserted that customer assets are, quote, secure, appropriately segregated,

and available to customers, and claimed that the SEC's complaint failed to, quote, identify a single instance in which BAM customer assets were mishandled or misused. They also claimed that the SEC's application is not an emergency as Binance US has been operating since June 2019 without the objection of the regulator, stating, quote, there's no emergency here at all, other than the one manufactured by the SEC for its own purposes, when the alleged securities law violations, according to the SEC, have been going on publicly and openly for years. A supporting memorandum filed by Binance International and CZ pressed on this point. Quote, why did the SEC let these platforms grow to their current size if it was always illegal?

and how is it that the sudden emergency happens to coincide with the SEC's assault on the crypto industry as a whole, with Binance and Coinbase being sued on back-to-back days? Now, the defense also mentioned the risk to customers which could be inadvertently introduced by the asset freeze. They pointed out that a banking partner had already frozen accounts holding customer funds last week pending the court hearing. They said that the banking partner was, quote, concerned about the broad language in the SEC's proposed orders and decided to freeze all activity in BAM's account until after the court ruled.

Binance U.S. claim that, quote, with the freeze of all corporate assets, banking partners would most likely cease to honor requests to transfer funds for any purpose, including customer redemptions. They also noted that a general asset freeze would prevent the U.S. exchange from funding their defense. On the merits of success in the case overall, Binance U.S. said that it was far from clear the SEC would prevail. It pointed out that Gensler's SEC, quote, has issued vague and ever-shifting guidance on digital assets in general, which at times has directly contradicted positions by other federal

regulators. The only crypto product available on Binance U.S., which the SEC claimed ought to be considered an unregistered security, is the B&B token. The defense argues that the SEC failed to establish a valid investment contract exists for B&B as required under the Howey test. The defense states that, quote, all of the SEC's claims fail because the regulator has not yet, quote, identified a single security trading on BAM's platform. The defense also pointed out that the SEC is only pursuing registration violations with no direct accusations or evidence that customer funds had been misused. Binance U.S. noted that in previous cases, the mere use of cross-border payment services was not enough to justify an asset freeze. Now, really importantly, today's

hearing is slash was, depending on when you're listening to this, not intended to decide the entire case. Instead, it was only to decide whether the SEC is entitled to impose such severe restrictions before presenting their entire case to the court. Fox business journalist Eleanor Territ writes, Binance has responded to the SEC's complaint. As an industry source told me on Friday, quote, this is exactly what the SEC wanted. Now panic sets in, and Gary Gensler, without any evidence of wrongdoing, will evaporate the second largest crypto exchange and wipe away $4.5 billion in value. Now, when it comes to community commentary, it is particularly difficult right now. All of these different cases are engendering a lot of legal takes from non-legal people, so it's a little

bit more difficult than usual. I would say that right now it feels by and large that people's perspective on this is dictated more or less by their feelings about Binance. Now, one additional part of the story is that also on Monday, Binance U.S. added a white-collar crime heavyweight to its roster for today's hearing. George Canellos declared that he would be appearing for the exchange. Canellas previously worked at the SEC as a co-director of its enforcement division, as well as serving as the head of major crimes at the DOJ Southern District of New York office. During his time at the SEC, Canellas was part of the investigations into large banks following the 2008 financial crisis. He later defended executive. He later defended

executives and companies in major SEC cases. Now, this got a ton of chatter going. AP Abacus writes, Update. Binance adds George Canellos, former head of the major crimes unit SDNY, and former head of the SEC's New York office and SEC enforcement division co-director. Binance clearly preparing for regulatory nuclear war and pending DOJ action. Former SEC officer and now professional crypto-needler John Reid-Reed stark agreed, saying, Binance, DOJ news flash. Binance and CZ just added a uniquely qualified criminal defense all-star lawyer to their legal team. Canellas possesses a rare and remarkable special combination of skill sets, having served as both an SEC prosecutor and a DOJ prosecutor. Binance is clearly preparing for a criminal prosecution and continuing to hire the best defense attorneys in the world.

But I doubt even Iron Man, Captain America, and the Hulk could get Binance out from their current perilous legal quagmire. Now again, even with these people who do have a legal perspective, they're still reading into it what they expect to see. In other words, this is an attorney who worked with both the SEC and the DOJ. We know for a fact that the Binance is up in court against the SEC, and this lawyer, who used to be at the SEC, and who has defended clients against the SEC, is now defending Binance against the SEC. It's not unreasonable to think that Binance is also preparing for the possibility of DOJ proceedings, but it's fairly clear that at least when it comes to today's hearing, Canellis's SEC experience would be more than justification to hire him.

Point being, keep in mind the source of all of the information you get in these perilous time. times. Now, there's going to be a lot more to discuss tomorrow, but let's cover one other piece of SEC-related news. A new bill introduced in the House would fire Gary Gensler from his position as the head of the SEC. The SEC Stabilization Act was introduced on Monday by GOP Housewhip Tom Emmer and fellow pro-cropto legislator Warren Davidson. The bill would reform and restructure the SEC. It would remove the position of chairman and replace it with an executive director with oversight of the day-to-day operations of the agency. The current SEC has five commissioners, including the chairman, who vote on enforcement and rulemaking decisions. This typically makes the chairman the tie-breaking

vote, giving them outsized importance. The proposed restructure would feature the addition of a sixth commissioner and require that no political party controls more than three seats on the commission. This balancing feature across party lines is currently used to maintain the integrity of some other agencies, including the Federal Elections Commission. Now, while the bill represents a rebalancing of the SEC to become less partisan, the need to remove Gensler came through loud and clear in the lawmakers' messaging. Warren Davidson said in a statement, U.S. capital markets must be protected from a tyrannical chairman, including the current one. That's why I'm introducing legislation to fix the ongoing abuse of power and ensure protection

that is in the best interest of the market for years to come. It's time for real reform and to fire Gary Gensler as chair of the SEC. He added in a tweet, so basically, hashtag fire Gary and depoliticize the world's biggest and best capital markets. This should be a unifying, nonpartisan plan to restore focus on the mission, who will be the first Democrat to co-sponsor? Tom Emmer added, American investors in industry deserve clear and consistent oversight, not political gamesmanship. The SEC Stabilization Act will make common sense changes to ensure that the SEC's priorities are with the investors they are charged to protect and not the whims of its reckless chair.

Now, as of recording, the bill currently lacks a Democrat sponsor and has a long way to go before seeing a vote in Congress. Laying out the difficulty again is Eleanor Territ. it would need to pass the House in the Senate, which means it would need Democrat support. As we saw from the leaked key points memo from the crypto hearing a few weeks ago, Dem leadership supports Gensler and thinks the SEC is doing a fine job. On top of this, it would also need to be signed by POTUS, who appointed Gensler and has the power to veto. Keyboard Monkey reinforces this point, saying proposing a bill does not equal passing a bill,

for anyone with a shrimp brain. Still by and large, the community was stoked. Cryptotrater Lanero says, regulatory agencies should not be able to de facto enact new laws by suing to establish case law. They should not be able to disingenuously claim that all you have to do is register, yet have multiple otherwise compliant legitimate entities say they are unable. They should not be able to be the fist of embarrassed or agenda-driven politicians. Lady of Crypto, put it more simply.

What an effing legend. Lastly, let's close on one more positive story. Congratulations are in order for Caitlin Long, the CEO of Custodia Bank, who was selected as one of the top three for American Bankers' Innovator of the Year Award. Long was selected from a field of 20 to receive the honor. American Banker is a Manhattan-based trade magazine which has been published since 1835, covering news and current events affecting the banking industry. Now, in other Custodia news, the court has ruled that the bank's lawsuit against the Federal

Reserve can proceed. Custodia brought the lawsuit last year, after their application for access to a Fed master account and central bank services was rejected. custodias claim hinged on the idea that the Fed's board of governors had put their thumb on the scale to influence the Kansas City Fed's decision to reject custodia's application. While the court denied the Fed's application to dismiss the case, it did also deny Custodia's application for immediate relief, deciding instead that the case should proceed along the usual course. The court said in its order, quote, custodia has stated a plausible claim for relief. The alleged occurrence of certain events

and the timing of those events plausibly suggest the board of governors had at least some hand in controlling the outcome of custodia's master account application. Former U.S. Senator Pat Toomey said, The Fed tried to pull a fast one in their motion to dismiss Custodia Bank's important lawsuit against the Fed for its denial of custodia's application for a master account. The Fed totally mischaracterized my provision from last year's NDAA. The language requires them to disclose their disposition of master account applications. As I explained in my amicus brief,

disclosure is not the same thing as permission to deny. Fortunately, U.S. District Court of Wyoming, Judge Scavdahl agreed with me and saw through the Fed's specious argument. The result, Custodia Bank will get its day in court. Meta lawman James Murphy writes, congrats to Custodia and CEO Caitlin Long on a big win in their court battle with the Fed. The case now proceeds to discovery where we just might learn new details of the government's Operation Chokepoint 2.0 effort to eliminate on and off ramps between crypto and the banking system. Anyone who cares about government overreach in this area should pay attention as this important case progresses. So, friends, this week and beyond, we have

a lot of legal proceedings to watch. And certainly it has to be said that it stinks to be in a place where the only possibility of progress we seem to have right now is with the legal system. But it's where we are. And so this is the game we have to play. I'm excited to give you guys an update around what happened tomorrow. But until then, be safe and take care of each other. Peace.