The Breakdown - Binance Withdraws Voyager Offer as Coinbase Sues the SEC

Episode Date: April 26, 2023

Both of today's stories are, on some level, about US crypto politics. The first part of the show focuses on Binance US's beleagured and now withdrawn bid for the Voyager Digital assets. Despite a judge overruling US government objections, it appears Binance has decided it's more trouble than it's worth. Coinbase meanwhile, has filed suit against the SEC around that agencies failure to respond to a Coinbase petition filed last year to receive better clarity on which cryptoassets are securities and why.  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 “The Breakdown” is written, produced and hosted by Nathaniel Whittemore aka NLW. Research is by Scott Hill. Editing is by Rob Mitchell and Kyle Barbour-Hoffman. Our theme music is “Countdown” by Neon Beach.  

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 Wednesday, April 26th. And today, we are talking about Binance basically being done with the U.S. and Coinbase suing the SEC. Now, before we dive in, a couple quick housekeeping notes. First of all, if you're on Twitter, you might have seen that I have relaunched a breakdown newsletter. Every morning we're sending out what we're calling the first five. It's the five most interesting or important stories in and around Bitcoin, crypto, macro, or just interesting big

picture power shifty type things that we are catching on the internet. It's fun, fast, and I think you'll like it. Go to breakdown.bhive, B-E-E-H-I-I-V-com, and you can find that newsletter. Second, as always, I'd love you to come join the Breakers Discord. It's the place where we talk about, all of this stuff, drop memes, have a grand old time, and you can find it at bit.ly slash breakdown pod. Lastly, if you want more, big picture power shifts, go check out the other breakdown network shows. Bitcoin Builders has a new episode coming out later today, which I'm very excited about, and the AI breakdown is putting out episodes every day at this point. All right, so to today's show, as you know, yesterday's episode was a big old paradigm shift interview with Real Vision's

Raoul Paul. Because of that, we missed a piece of news that has got gotten a ton of people excited, which is, of course, Coinbase's lawsuit against the SEC. Now, I've been talking for over a year about how it feels like the crypto industry's only viable path at the moment to get resolution on key issues is litigating, and being specifically willing to litigate against regulators. This is the route that the digital currency group has taken against the SEC around their denial of the conversion of the grayscale Bitcoin trust into a spot ETF, and so far it looks promising. At the first hearing, the judges overseeing the case seemed to agree with DCG, that it was

inconsistent for the SEC to deny spot ETFs on the basis of being worried about market manipulation, but approved futures ETFs when both spot and futures ETFs would use the same price indices as part of the product. Custodia Bank has also been forced to go the legal path, and now it appears Coinbase has two. So that's going to be the second half of the show, and I actually recorded that section first as a video. You'll have probably heard me mention the YouTube channel a few times now. But to give a little bit more detail, I'm doing something I'm calling Breakdown Bites, which are shorter, call it 8 to 12 minute videos that are on just one topic,

and often come out just hours after news hits. In other words, they have an even faster turnaround than the daily pod. Those are, of course, more freestyle than the podcast, so you might notice it's a little more freewheeling and less polished than the normal show. But for the sake of today's episode, I think it does a good job of conveying what I wanted to convey. Before we get to that, though, I thought it would make sense to pair it with a related bit of news from another crypto situation, where the U.S. government is just doing everything it can to screw things up for regular people. Voyager's bankruptcy in general, and especially its deal with Binance U.S., have been rocky to say the least. It looked for a while like the Binance deal was done.

Initially, that deal had been scrutinized by the Committee on Foreign Investments in the United States, who raised no immediate objection, but flagged that ongoing national security's concerns could end up blocking the deal. Then, however, the U.S. trustee objected on the grounds that Binance U.S. had not demonstrated that it had sufficient funds separate from the offshore Binance entity to close the deal. Then the SEC filed a complaint, a very vague complaint, suggesting that if the deal went through, there was a chance that it might lead to an unregistered securities offering. Now, the SEC wouldn't say what assets they thought were securities, nor would it directly accused Binance U.S. of being a securities exchange. And for this reason, the judge in the case

was perplexed and perturbed. In fact, he overruled the objection, effectively saying, look, if you have a complaint, make it, but we're not going to hold up resolution of this issue because the SEC says there could be a vague, unarticulated issue at some point in the future. That decision was then appealed by government agencies on the grounds that the judge's orders provided too much of a protection against future prosecution to Binance U.S., and last week, government attorneys narrowed their appeal, agreeing that the deal would go through, while the appeal was pending on the single legal question about protection from prosecution. So, coming into this week, everything was looking like it had lined up to close the deal. The creditors had voted to

accept it, the government had agreed to step aside and let it close, and the bankruptcy judge had signed off. Voyager customers had even begun to sign up with Binance U.S. or link existing accounts in preparation for the distribution. of assets. Alas, it was not to be. The deal for Binance U.S. to acquire the assets of bankrupt crypto lender Voyager Digital has been terminated. On Tuesday, Voyager tweeted that they had received a letter from Binance U.S. to notify them that Binance was walking away from the deal. Voyager noted that while the deal is off, assets can still be distributed to customers without the involvement of Binance U.S. While this development is disappointing, they wrote,

our Chapter 11 plan allows for direct distribution of cash and crypto to customers via the Voyager platform. Binance U.S. later tweeted that they had exercised their right to walk away from the deal due to the state of U.S. regulations. They wrote, While our hope throughout this process was to help Voyager's customers access their crypto-in-kind, the hostile and uncertain regulatory climate in the United States has introduced an unpredictable operating environment impacting the entire American business community, end quote. Now, the Voyager-unsecured creditors committee said in a tweet that they were disappointed with the decision, and are, quote, investigating potential claims against Binance U.S.

Still, their primary concern is moving forward with the alternative plan to distribute Voyager assets without Binance's involvement. The deal struck back in December, allowed Binance U.S. to back out if it wasn't completed within four months. Attorneys for Voyager had warned the court that the deal falling apart could cost the estate and therefore creditors around $100 million. Finance U.S. had agreed to purchase Voyager's assets for around $20 million and accept the responsibility to distribute their assets to customers. Now, there was speculation that walking from the Voyager deal was part of a settlement package in the CFTC's lawsuit against the offshore finance entity which was filed late last month.

In an interview with CNBC on Tuesday, however, CFTC Commissioner Kristen and Johnson said that no decision to settle the case had been made, but that the regulator is, quote, continuing conversations with the business to describe what we understand as potentially problematic conduct and to give them an opportunity to explain that conduct and help. help us find a path forward. When faced with speculation on Twitter, Binance CEO, CZ, simply responded with a shrug emoji. Now, Crypto News account Tier 10K really summed up the agony. He tweets, pour one out for the Voyager creditors. FtX's going to save us. FtX implodes. Binance going to save us. U.S. block sale. Court allows sale to go through. Binance pulls out. Now, there are,

of course, two specific and distinct things happening here. One is around questions of finance, the second is broader. Binance, for its part, continues to be beset by accusations and intrigue. For example, according to anonymous sources speaking with Bloomberg, Binance U.S. currently has around 100 contract workers in Shanghai. There have apparently been plans in the works for at least a year to relocate some of the team to the U.S., but progress has been slow. Binance U.S. responded that although they have a global workforce, all U.S. data and assets are stored stateside. In a statement, they said, Binance U.S.'s experienced independent leadership team controls the direction of the company,

its assets, and the supervision of customer accounts and data, all of which is stored on the Amazon Web Services platform based in Richmond, Virginia. Tennessee Republican Senator Bill Haggerty tweeted, Since December, I have voiced concerns about Binance's ties to China and the CCP. Today's report on their workforce in Shanghai raises yet another red flag about their operations both here in America and globally, and the influence of the CCP in crypto markets. Through Operation Chokepoint 2.0, the administration's attack on the crypto industry only benefits companies like finance and will ultimately expand the CCP's role in driving global innovation.

Ron Hammond, the director of government relations at the Blockchain Association, quote, tweeted Senator Haggerty and said, another example that Binance has no friends in D.C. Senator Haggerty is not only on the Senate Banking Committee, but also one of the sharpest senators on crypto and national security. While FTX's fraud was a shock to D.C., the same won't be said for Binance. Now, Patrick Hillman, the chief strategy officer at Binance, cracked back, tweeting, please note Bloomberg, that Google, Tesla, Intel, Amazon, etc., employ exponentially more contractors and full-time equivalents in China than Binance ever had.

If our CEO wasn't ethnically Chinese, I doubt this would be a story in the interest of national security. His family immigrated to Canada and renounced their Chinese citizenship when he was eight. Whatever you think about Binance, it is pretty undeniable that there has been a lot of leaked information that seems very questionable about its sourcing that has come from Washington this year. And honestly, if you want a sense to the degree to which Binance is turning away from the U.S., CoinDisc is reporting that the company has been systematically lifting restrictions on Russian citizens that have nominally been in place since sanctions went into effect around the war in Ukraine. Apparently, a Binance spokesperson in an email did not explicitly confirm or deny the lifting of restrictions,

but said, all current restrictions related to sanctions against Russian nationals are applied by the platform and its legal entities in the European Union in full. So like I said, there's a Binance side to this story, but there's also a U.S. side. And that is the chilling effect that we're seeing in crypto. This is just not the same U.S. that passed Section 230 to allow the internet to grow without unnecessary regulatory burden. And as much as it would be nice to see it as just crypto, it's clearly leaking into fields at a similar stage of evolution, including FinTech and AI.

And that brings us to the Coinbase lawsuit. As I mentioned, this was originally released as a video on the breakdown YouTube channel, which you can find at YouTube.com slash Nathaniel Widemore Crypto. Let's listen in and then I'll give a quick wrap up. Welcome back to a breakdown bite. Today we are covering Coinbase and their lawsuit against the SEC. So Paul Grewell, who is the chief legal officer at Coinbase yesterday, wrote, Today we filed a narrow action in the U.S. Circuit Court to compel the SEC to respond

yes or no to a rulemaking petition we filed with them last July, asking them to provide regulatory guidance for the crypto industry. The SEC is required by law to respond to petitions, quote, within a reasonable time, but they have not yet responded to our petition from last July, which is why we filed our action in court today. It's obvious that there's a lack of clarity among our regulators regarding crypto, as even the chair of the SEC has declined to say which crypto assets are securities. At that point, Paul points to the video of Patrick McHenry, grilling Gary Gensler last week in Congress, trying to get him to answer whether Ethereum, ether is a security or not, which he would not do.

Paul continues, the crypto industry and its users need clear laws and rules to follow that are built for a new technology. Enforcement actions based on inapplicable securities laws aren't the answer. So this is the Coinbase blog post. It talks about the Administrative Procedure Act or APA, which is the law that requires the SEC to respond to Coinbase's rulemaking. petition. Basically, the SEC doesn't have the right to just not respond or to ignore it. There has to be some attempt, again, within a reasonable period of time, which is where the legal disagreement can come in in terms of what's reasonable, to Coinbase's request. Now, this is something that the crypto industry

has been watching closely ever since it happened. And Cryptotax Guy.e. jason Schwartz does a good job of giving the timeline here. So let's go through the salient points in this timeline. One, Jason writes, As recently as 2021, SEC words in action signaled, if anything, that the securities laws do not apply to many digital assets. A, SEC allowed Coinbase to register as a public company without requiring it to register as a securities dealer. B, Gensler testified before Congress that crypto exchanges, quote, do not have a regulatory framework at the SEC or CFTC. Now, this is an important point that Coinbase has made over and over again, that it's quite weird for Gensler to be bringing up and the SEC in general to be bringing up these issues now, given that they close. cleared them to become a public company to IPO. Number two, Jason says, the SEC then changed its tune.

Gensler now claims it's quote-unquote clear that the securities laws apply, and in March 2023, the SEC sent Coinbase a Wells notice recommending enforcement action. Number three in July 2022, Coinbase petitioned the SEC to issue rules describing which tokens are securities and how to come into compliance, given that the current rules are incoherent as applied to crypto. Number four, the SEC has clearly decided not to issue rules, otherwise its recent barrage of enforcement actions wouldn't make sense. Quote, it could not defensively seek penalties for violations of its registration requirements if it initiated a rulemaking conceding that those requirements are insufficiently clear or

workable. Number five, the Administrative Procedure Act requires agencies to act on rulemaking petitions within a, quote, reasonable time. The SEC can say no, in which case Coinbase can challenge that in court. 6. By refusing to issue a formal response, the SEC is evading judicial review. Their delay is unreasonable because, A, they've clearly made up their mind. B, nine months is a long time to say no. And C, there's potential, there's big potential for harm. Companies have to decide how to structure their businesses. Really good sum up from Jason, and I just want to hone in on a couple of the points. The first is what prompted this specifically in July 2022, and it was the fact that the SEC had

charged former Coinbase employees with crypto asset insider trading. Now, this wasn't an accusation that Coinbase had done anything wrong, but buried in this was the accusation that these guys had traded securities. And Coinbase didn't know what were securities, what the SEC considered securities in this framework. So their response in part was this July 21st, 2022 petition for rulemaking. They start, Coinbase Global is filing this petition with the U.S. Securities and Exchange Commission, requesting that the Commission propose and adopt rules to govern the regulation of

securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities. It goes on, but the real money paragraph, I think, here is this one. Rather than initiate new rulemaking, Chair Gensler has repeatedly stated through speeches and testimony that the vast majority of digital assets are securities and has asked issuers and exchanges that offer sell and trade them to comment and register. We disagree that the majority of digital assets are securities. For those digital assets that are securities, registration under the current rules is, for many market participants, either not possible or not economically viable given the associated and unnecessary compliance burdens. When existing

regulations are unworkable, some market participants may be less willing to invest the resources necessary to follow the rules. Failure to resolve these shortcomings leaves investors unprotected due to a lack of regulatory clarity, prevents market participants from leveraging the efficiencies new technology can offer and materially impairs capital formation in the blockchain technologies that underlie digital assets. This is wholly inconsistent with the SEC's mission. Now, as you can see, the letter is really long. The petition is quite extensive. And this is what the SEC just hasn't responded to. Now, what the SEC has done in the intervening time is basically sue Coinbase, right? On March 23rd, we got information that the SEC was pursuing enforcement action over

securities violations via a Wells notice, which most of the crypto industry basically saw as a sign that the industry was no longer welcome in the United States. Among all market participants, Coinbase has strived the most to be the compliant U.S.-based crypto exchange. If the SEC is even going after them, there's no one who's safe. Now, in public interviews, Coinbase has really been not afraid to ratchet up the rhetoric. This Fortune crypto piece quotes the company saying we're absolutely convinced that the SEC is violating the law.

Grewell said, we're not going to court lightly because we're absolutely convinced the SEC is violating the law. We feel like we have no choice but to take them to court. Now, as you can probably tell from the initial montage that I shared, a lot of the crypto industry is quite enthusiastic about this. It has felt like we're on a collision course for some time where we have to rely on courts to figure this stuff out. Austin Campbell writes, this is exactly what should happen when a regulator refuses

to explain rules on the record. Ryan Sean Adams from Bankless writes, Coinbase suing Gensler's SEC. Executive branch won't hold him accountable. Congress won't hold him accountable. Maybe the courts will hold him accountable. Now, how good is the case? Obviously, I'm not a lawyer, but some lawyers seem to think it's pretty strong.

At Meta Lawman, James Murphy, says, here's what you should know about the Coinbase suit against the SEC. This will move fast, unlike the Ripple case. The case begins in the appellate court, not the trial court. There will be no discovery, just briefing and a hearing. Coinbase has an all-star legal team, led by Eugene Scali, former Secretary of Labor and son of deceased Supreme Court Justice Antonin Scalia. Scalia has experienced defeating government agencies, including the SEC in court. The petition filed yesterday

is quite persuasive. Coinbase is seeking a writ of Mamandis, which is a court order compelling the SEC to do its job and announce a decision on Coinbase's request for rulemaking. The action does not necessarily affect the SEC's timing for suing Coinbase as it is threatened to do. I expect major industry players to pile in with Amicus Briefs supporting Coinbase's position. We also might see the House Financial Services Committee or individual members come in with briefs in support of Coinbase. The SEC commissioners will have to approve any response to Coinbase's action. There's a tiny chance the SEC will blink and agree to engage in rulemaking. If just one commissioner withdraws their support for Gary Gensler's regulation by enforcement strategy, he's done.

While Coinbase's action does not directly affect pending SEC cases against Ripple, Bitrex, and others, it does a great job of shining a spotlight on the SEC's contradictory positions about its authority. to regulate digital assets. Other judges will take note. Now listen, guys, it is a sad state of affairs that we're at a place where all we can rely on in America is the courts to address the overreach of the SEC as it relates to its antagonism towards the crypto industry,

but it's where we are. And I think for many of us, it is extremely relieving that we can at least be having these fights in court rather than fighting this weird behind-the-scenes political battle and just yammering on Twitter. So kudos to Coinbase for taking what's an unfund but necessary action, and let's see what happens next. All right, guys, back to NLW podcast side for the quick end note.

Like I said at the end there, it just sucks that this is the state of the discourse, but it is what it is. The then-they-fight-you phase was never going to be pretty. All we can do is keep trying to build political momentum, support companies that are taking on these legal challenges, and avail ourselves of the democratic process over the next year and a half to try and make some change. Until next time, guys, be safe and take care of each time. other. Peace.