The Breakdown - Before Suing Them, Gary Gensler Once Offered to Be A Binance Advisor

Episode Date: June 8, 2023

Binance has alleged that Gary Gensler previously offered to be an advisor to the company. They say that this means that he should recuse himself from any proceedings having to do with Binance. Meanwhile the SEC says, basically, that CZ used Binance US like a personal piggy bank. It's messy out there, folks.    Are we at the SEC Crypto endgame? This week the regulator has sued Binance and Coinbase and made it clear they want crypto gone from America. Unfortunately for them, the industry isn't backing down.  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 Thursday, June 8th, and today we are talking about Gary Gensler behaving badly. 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 breakdown pod. Well, friends, the saga continues. Binance is fighting back and Gary, oh Gary, what a predictable turn of events. The TLDR is that Binance has accused Gary Gensler of approaching them about being an advisor in 2019 before, of course, becoming the chair of the SEC and suing them into oblivion.

So let's dig into all of that. A document filed on Wednesday by the SEC indicates that Binance lawyers alleged that SEC Chair Gary Gensler offered to work as an advisor for the exchange. Now, this is not the first time we've heard something like this. Similar issues were covered in March reporting from the Wall Street Journal, which had framed the story a bit differently as Binance approaching Gensler for an advisory role. That article described several meetings held between October 2018 and March 2019. Gensler is said to have met up for a lunch meeting with CZ in Japan to discuss the B&B token and the prospect of opening a U.S. exchange. Internal chat logs said that Binance viewed Gensler at the time

as being, quote, likely back in a regulator's seat if Dems win the 2020 election. Now, new reporting from CNBC cast the story in a very different light, with Gensler instead approaching Binance to suggest that he take up an advisory role. Previously, communications between Gensler and Binance were reported as having closed in March 2019, but Binance attorneys now claim that the head regulator stayed in touch with CZ beyond that. They even allege that CZ was asked to sit down for an interview with Gensler as part of the crypto course he was teaching at MIT at the time. Binance lawyers state that CZ understood that although Gensler hadn't taken up a formal role with the exchange, he was, quote, comfortable serving as an informal advisor. Indeed, they claimed that this relationship was so

cozy that Gensler even sent CZ a copy of his intended testimony in 2019, ahead of the congressional hearing into Facebook's Libra project in July of that year. In his prepared testimony, in that case, Gensler said, I do not advise any financial, technology, blockchain, or other companies, nor do I own any cryptocurrencies. Now, as a result of these allegations, finance lawyers say that Gensler should have never been anywhere near this investigation and should recuse himself from involvement in the lawsuit. They wrote, Mr. Gensler should have been recused from any consideration in this matter based on this history and the prospect that Mr. Gensler may be a material fact witness. To date, the staff has never confirmed whether Mr. Gensler has recused himself and if he has

not the commission's explanation for why not. In response, an SEC spokesperson said that, quote, the chair is very familiar with and in full compliance with his ethical obligations, including any recusal obligations. The SEC's probes into Binance U.S. and Binance International are said to have begun in 2020 and 2021, respectively, well after the alleged contact between Gensler and CZ. Now, of course, the community jumped all over this and made lots of comparisons to what many suppose are improprieties between SBF and Gensler as well. Well, Haseka Trades writes, ran the same playbook with FTX,

the goblin obliged and he turned a blind eye there. Binance rejected him and he went full schizzo mode. Your friend Sami writes, Did you see the breaking news that Gary Gensler applied to Binance as an advisor role? He went to Japan to have sushi with CZ. It was the same playbook as FTX. Adam Cochran writes, Wait, so Gensler's playbook was to be an advisor to exchanges back as far as 2019?

Then he gave SBF friendly treatment and was talking no action. letter? Congress should get him back under oath and ask what sweet deal SBF was offering him. Now, Justin Slaughter, the policy director at Paradigm, pointed out the unusual nature of Gensler sharing his testimony with CZ. He writes, lots of people in D.C. send their testimony around, especially once it's public. It's like sharing a speech or an article after it's published. But it's also the case that folks often send their testimony around to select friends and allies for edits before formally submitting it. Of course, there aren't exactly details about when Gensler shared this testimony. What matters is just that they were close enough for him to have CZ on email, I think.

Bitcoin News summed up the whole thing thusly, writing, Gensler's Villanark. One, be a humble MIT professor in 2018. Two, meet CZ in Japan for lunch in April 2019 and ask about a job as an advisor for Binance. Three, later in 2019, send CZ a copy of his intended testimony to Congress ahead of the hearing to gain goodwill. four, don't get job at Binance. Five, become Biden's SEC chair in 2021. Six, exact revenge in 2023.

So what do I think of all this? Well, one, I obviously don't think it's as simple as finance rejected Gensler, so Gensler had a grudge, and so Gensler has targeted them because of that. I think that Gary made a ton of money in the traditional sector and wasn't hurting when he probably approached Binance. At the same time, I do think it shows the base-level hypocrisy of all these people. At least when it comes to crypto media, we disclose our conflicts of interest and let you guys decide if you're going to listen to us because of it.

Gary's been out here talking out of both sides of his mouth, and it's clearly the case that the only thing that really matters to him right now is his own personal political destiny. The SBF implosion seems to have been a threat. The Gensler has now turned into an opportunity. He knows that no one in this administration is going to stay over time to fight him on these issues, so he's running roughshod, looking like a regulator who gets things done. But I don't think Gensler will think for a moment about us once he gets to his future preferred political positions. Anyway, coming back to the more substantive sides of this Binance lawsuit, the court filings are coming in thick and fast. The SEC has now publicly filed hundreds of pages of evidence to support their case, including more lengthy excerpts of internal Binance chat logs and the full testimony of former Binance U.S. CEOs,

Catherine Coley and Brian Brooks. The pile of evidence is aimed at convincing the court to take the drastic step of freezing assets on the Binance U.S. form as an emergency measure. The proposed orders would allow customer withdrawals to continue and so are primarily aimed at preventing transfers between Binance U.S. and the international entity. Still, an asset freeze would be the functional end of the domestic exchange. Binance U.S. have already halted trading on their over-the-counter desk and announced on Wednesday the removal of some advanced trading pairs. The original announcement included the discontinuation of tether as a trading pair against over 100 tokens, although major

markets like Bitcoin and Eath were not affected. After the news was reported, Binance U.S. U.S. reversed course citing community feedback and decided instead to only discontinue 10 low-volume markets with Bitcoin or BUSD as the trading pair. Now, the SEC are asking for this asset freeze to be ordered at a preliminary hearing ahead of a full trial. And it can't be overstated how high the bar is for a court to make that kind of order without allowing the full legal process to play out. The SEC will need to convince the court not only that they are likely to succeed in the lawsuit, but that irreparable harm could be done if the court doesn't act immediately. Given all this, the case is moving incredibly fast. On Wednesday, a conference call was held to set out a timeline. The court

gave Binance a Monday deadline to respond to the SEC's emergency application, which will go to a hearing on Tuesday afternoon. This will be our first chance to see whether the judge finds merit in the SEC's case and their extremely aggressive litigation strategy. In the worst case scenario, the assets of Binance U.S. could be locked away from the broader Binance Empire by the middle of next week. One rough note on that front for Binance comes in the judge who was assigned to the case. Consensus lawyer Bill Hughes writes, Finance drew Amy Berman Jackson in the DDC, known to be progressive and pro-fed regulation enforcement. Big Oof, probably the worst finance could have done, and probably bad news for crypto in the U.S. generally.

But we will see now, won't we? Binance case was always going to produce the worst law because the facts are so, so, so bad. This just adds accelerant to the conflagration, if anything. SEC trial team is high-fiving each other right now. Adam Cochran agrees saying, yikes, that might be one of the worst judges Binance could have gotten this case. They are cooked. But lawyer Brian Jagetout says, This issue will be appealed to the DC Circuit at minimum and likely to SCOTUS.

District judge predispositions are largely immaterial. If these companies give up at the trial court, then they weren't serious in the first place. Now, going back to the filings, as they roll in, details are emerging around the SEC's claims that CZ and Binance International misappropriated funds from Binance U.S. customers. The SEC claims that between 2019 and 2021, over 12 billion in customer assets, were transferred to entities controlled by CZ. In support of these claims, the SEC has analyzed bank records from accounts held with Silvergate and signature banks. Lawyers for the SEC alleged that the bulk of these transfers were made to Merit Peak,

a trading firm owned by CZ, which is accused of operating as a marketmaker on Binance U.S. The SEC repeatedly mentioned a statement where Merit Peak described itself as, quote, a proprietary trading firm with its founders self-made wealth from the digital asset business. They claim that this indicates that transfers to Merit Peak were functionally transfers to CZ himself. The SEC alleges regarding the transfers that, quote, Consisted in significant part of Binance Platform's customers' assets, including those of Binance-U-S-Platform customers and other sources. They claim that almost all of MeritPeaks funds passed through New York-based stable-coin

issuer Paxos, which had partnered with Binance to issue the BUSD stablecoin. The regulator said in its filings, the SEC-controlled entity that was purportedly trading on the Binance-U-U-S platform using CZ's personal funds would have acted as a, quote, pass-through account for billions of dollars of Binance Platform's customers' funds. SEC filings also fill in details about the investigation into Binance U.S., which had commenced in 2020 prior to Gensler's arrival. The SEC says it subpoenaed records about how the domestic exchange controlled and stored its digital assets. After a long delay, the documents were produced, with SEC lawyers saying the, quote, answers were not reassuring. The SEC alleges that despite

public comments that there was separation between the domestic and international exchange, Binance U.S. used Binance International as its official custodian. This arrangement of sending customer assets offshore for custody was confirmed by the auditor of Binance U.S. and occurred until at least December last year. The auditor warned that the arrangement made it, quote, very difficult to ensure that Binance U.S. had sufficient assets to pay customers when they withdrew funds. Now, people aren't stoked on all of these alleged revelations. Lee Drogan of Star Killer Capital writes, CZ was basically doing the same thing as Sam, except it seems like he was more competent and or Binance got so big that he was able to earn his way out of the fraud and criming.

Colin Wilhelm, a reporter for the Block, writes, The SEC alleges Binance and Binance US redirected over 12 billion in customer assets to funds controlled by CZ. That's 4 billion more than SBF's accused of taking out of FTX for Alameda. Most of the funds went to an entity that paid BUSD issuer Paxos. The SEC has bank records for the companies. They also have a non-public report from Binance US's auditor from said year, saying it was difficult to tell if Binance US had enough collateral because the collateral was kept offshore with Binance. Now, a counterpoint, however, comes from security's lawyer Brain Genius who wrote,

beginning of a campaign by the SEC to make CZ look like SBF, media warfare. They want you to think he misused customer funds. But the SEC only alleges funds moved in a way that's not compatible with being registered. And I don't see any wire fraud charges from the DOJ. I saw someone say it's gross CZ and his PR team pushing stories about Gary, but he'd be a fool to let the SEC completely control the narrative, which it would. Now, when it comes to what the community thinks, they're kind of voting with their feet and they're staying put. Tree of Alpha writes,

It's impressive how it took 10 days for FDX to fully go down from vague balance sheet rumors, while Binance wallets barely budge after an avalanche of FUD where government agencies claim they co-mingled customer funds. Different kind of users, question mark? CZ responded, trust is earned through a long history of decisions and actions taken to protect users. Now, friends, right now, my best advice is to stay safe and believe, Nothing. CZ himself pointed to an article in an Asian publication that said that he had initiated a gunfight with international authorities and had been shot 27 times and killed. The fog of war is thick, literally out there right now, so the best we can do is maintain a skeptical disposition.

Anyways, that is the view from here. Those are the new rumors and innuendos. It's messy, folks. It's messy. Until next time, be safe and take care of each other. Peace.