The Breakdown - Chamber of Commerce Says “The SEC’s actions are not just harmful policy; they are unlawful.”

Episode Date: May 12, 2023

On today's Breakdown, NLW catches up on:  A number of amicus briefs filed in support of Coinbase's lawsuit against the SEC The Chamber of Commerce joins the fight Reps McHenry and Huizenga pen another letter to SEC demanding information Brad Sherman blasts GBTC in letter to SEC  DCG-Genesis in mediation after deal falls apart 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 Friday, May 12th, and today we are talking about an unexpected ally showing up in Crypto's corner for the fights that are happening right now. Before we dive 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, it is no secret that we are engaged in battles on all fronts. Behind the scenes, we've got Operation Choke Point that is trying to get crypto company access to the banking infrastructure to be effectively null and void, plus whatever pressure is being put

on market makers like Jump and Jane Street to get them out of the space. Then in front of the scenes, we've got Dame taxes, enforcement actions, and, as Travis Kling so eloquently, put it once on this show, Brad Sherman's punk ass. And yet, we are not without allies. Today's breakdown is about a couple of those allies, including one that is somewhat new, standing up to fight shoulder to shoulder with us in this battle. Now, the first of these comes in the case of Coinbase. Last year, Coinbase requested information from the SEC, quite reasonably, I would say, about which assets are securities and how the SEC makes that determination. Instead, as so often happens, the SEC sent them a Wells notice,

informing them of forthcoming enforcement actions. So, Coinbase sued. They said that the SEC had denied their responsibility to answer Coinbase's question in a reasonable manner. And believe it or not, it's not just us bloodthirsty crypto-titter denizens who are excited about the lawsuit, but some heavy hitters as well. This week, Paradigm Ventures and the Crypto Council for Innovation lodged Amicus Briefs or friend of the court briefs expounding on the legal arguments against the SEC's current stance. And their Amicus Brief Paradigm said, the end result of this untenable situation is a de facto ban on digital asset trading platforms and a grave threat to a fledgling industry. This is not the rule of law. It is ruled by bureaucratic whim.

The Crypto Council for Innovation echoed this sentiment, writing, The SEC failure to respond to Coinbase's petition for rulemaking is causing tangible harm to a major American industry. Regulation by enforcement thwarts meaningful participation in agency decision making, deprives market participants of fair notice as to what is permissible, and chills innovation and investment in digital assets. Unless companies can rely on clear, consistent guidance and work within a regulatory framework that makes compliance possible, digital assets will not achieve their full potential in the U.S. The failure to provide a clear path opens the door for bad actors and incorrectly paints the industry with one broad brushstroke. It also undermines

the SEC's mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Far from protecting investors, it exposes them to increased risk by pushing good and responsible actors out of the market, creating a vacuum to be filled by those least concerned with compliance. As a result, the U.S. risks losing influence over defining the standards, not to mention the national security implications if the next wave of global financial infrastructure evolves outside U.S. borders. Looking abroad, we see no one waiting for the U.S., in fact, jurisdictions like the EU and UK, among others, are actively courting the next wave of tech leadership by providing regulatory frameworks that seek to foster innovation while protecting market participants.

Developers, the backbone of the digital asset economy, are responding to these calls by seeking much-needed clarity. Since 2018, the share of global blockchain developers in the U.S. has dropped from 40% to 29%. Simply put, the limited guidance received from the SEC thus far has been vague and inconsistent. The SEC is trying to fit a square peg into a round hole. This treatment leads to innumerable problems. In short, there is no viable path to fit blockchain network tokens into existing securities classifications. The proper approach is for the SEC to initiate rulemaking procedures that will provide fair notice, an opportunity to be heard, and will allow for judicial review in due course. Finally, the SEC's failure to respond to Coinbase's petition for rulemaking

is part of a pattern that has stymied judicial review. The SEC neglects, to act on all five petitions for rulemaking received seeking clarity on the Security and Exchange Act's application to crypto. Seeing the bigger picture is critical. Regulatory clarity is necessary to allow the U.S. to recapture its position, foster innovation, and become an attractive destination for both new and established developers. We think the context surrounding the SEC's approach to digital assets should inform this court's analysis of the legal questions presented in this case. So strong stuff, but of course these are crypto market participants. which is why the most surprising support came from the broader business community in the form of an amicus brief filed by the U.S. Chamber of Commerce.

Note, this is not the Digital Chamber of Commerce formed in 2014 to advance the interests of the crypto industry, but rather the 110-year-old organization, which directly represents 300,000 firms, and claims to represent the interest of nearly 3 million companies across almost 3,000 state and local branches. Consider the largest lobbying body in the country, the Chamber of Commerce has weighed in on major policies for over a century, from the need for a U.S. national budget in 1913 to the Clinton health care reforms of 1993. The Chamber of Commerce has rarely commented on crypto issues, but its involvement in the industry has recently increased. Last year, for example, the Chamber wrote an amicus brief in support of the attempt to convert the gray-scale Bitcoin Trust into an ETF. In that brief, they criticized the

SEC's, quote, freewheeling private policymaking and said their denial of the conversion amounted to a, quote, paternalistic belief that the agency knows better than investors. The Chamber's brief in support of the Coinbase lawsuit said that, quote, The SEC has deliberately muddied the waters by claiming sweeping authority over digital assets while deploying a haphazard enforcement-based approach. This regulatory chaos is by design, not happenstance. The Chamber claimed that the complete lack of response from the SEC to lawful request for rulemaking has, quote, destabilized the regulatory environment surrounding the industry.

Taking the strongest possible tone, the Chamber wrote that, quote, the SEC's actions are not just harmful policy. They are unlawful. They added that the agency's refusal to, quote, announce the rules of the road in combination with taking enforcement action, has undermined the right to due process. By proceeding through enforcement, they wrote, the SEC has denied the public any opportunity to comment on its invocation of depression-era laws to assert jurisdiction over a trillion-dollar industry. It deprives the entire public of its right to be heard. To summarize their position, the chamber says that the SEC's delay is having a chilling effect, which is, quote, causing substantial economic harm to both Coinbase and the broader

business community. James Murphy at Meta Lawman wrote a hugely viral summary thread saying, Breaking, the U.S. Chamber of Commerce has just filed a brief in the Coinbase v. SEC case, calling out the SEC for acting unlawfully in the digital asset space. This is a big deal. The U.S. Chamber is a highly influential organization representing companies in all industries across the U.S., not just crypto. The brief opens with, as it stands today, nobody knows for certain which digital assets, if any, are securities under federal law. The Chamber makes three arguments. One, regulatory uncertainty is killing innovation in the U.S.

Two, the SEC is destabilizing the digital asset regulatory environment. Three, the SEC is violating constitutional due process and fair notice rights. And the topper is, four, the Chamber declares the SEC's actions are not just harmful policy. They are unlawful. Bottom line, the Court will give these arguments advanced by the U.S. Chamber of Commerce serious attention and the largest, most influential business organization in the U.S. has just declared it stands with crypto. Twitter lit up with the news.

Lawyer Bill Morgan writes, The U.S. Chamber of Commerce is the latest party to claim that there has been a lack of fair notice this time in the context of the need for rulemaking. This organization cannot be merely viewed as one of the participants in the crypto ecosystem that the SEC sympathizers like to write off on mass as scam artists and security law violators. The fact that so many entities think that the lack of fair notice argument has merit makes me think that those who don't like crypto and support the SEC and dismiss this argument out of hand are like a sick person who doesn't know its own condition and is in denial.

DC investor agrees saying, what this tells me is that it's not just crypto-focused businesses who want regulatory clarity. It's many other American businesses who also want to be able to use these technologies and products for their customers. Tech and IP attorney Bernals recognizes that this is a pretty big, heavy-hitting law team that wrote this brief. They tweeted, So the first attorney listed on the Chamber of Commerce briefing was one of the main attorneys in West Virginia v. EPA, which was the biggest blow to administrative agency like the SEC power in decades.

Now, in a lot of ways, this brief reads more like a declaration of war against the SEC, and it seems like the Chamber of Commerce is willing to put resources behind that. No, it's a little bit broader than this show normally gets into, but the upcoming legal battle waiting for a case is the major questions doctrine. This doctrine is about the idea that when it comes to major questions regarding the U.S. economy, bureaucratic organizations like the SEC should not be making calls, but rather require explicit direction from Congress. Some observers think that six out of the seven votes on the Supreme Court are sympathetic to this idea,

and the question is when the correct case to take to the Supreme Court around it is going to come. It certainly seems like the crypto industry could be the genesis of that, but it also has much broader implications. Now, if the Chamber of Commerce is a new ally we didn't really know we had, some other allies that have been clear are congressional Republicans, like House Financial Services Committee Chairman Patrick McHenry. McHenry and his fellow Congressman Bill Hizenga, growing tired of the lack of compliance from the SEC,

wrote a letter on Tuesday, giving the agency until next Friday to offer a satisfactory response. The congressman had made it clear that oversight of the SEC is one of their core focuses, and to that end have written a series of letters seeking information about the agency's enforcement actions against the crypto industry. These letters so far have received unhelpful responses that do not properly address the questions asked, with one response simply consisting of 232 pages of already public documents. As the most recent letter points out, quote, volume does not automatically satisfy a request.

SEC staff had complained that the nature of the letters had been too broad and compliance with the request too burdensome, asking that the congressman narrow the scope of their questions. In deference to this request, McHenry and Heisenga have offered a, quote, extraordinary accommodation, reducing their immediate request for information about crypto enforcement to simply producing a list of crypto firms that have attempted to, quote, come in and register, as Chair Gensler is so fond of suggesting that they do. The letter says that if the SEC fails to comply, then the Financial Services Committee will look to, quote, schedule testimony from your legislative affairs and office of the general counsel teams to examine the SEC's failure to comply with congressional requests.

An SEC spokesperson declined to comment on the matter, stating, Chair Gensler will respond to members of Congress directly, rather than through the media. Representative Hizenga tweeted, we are tired of stonewalling from the SEC. During a financial committee hearing, Gensler said he respects the role of congressional oversight. If Chair Gensler won't live up to his own standard and answer our questions, we'll make sure someone from his staff does for him. Alas, not all congressmen are this cool, and the Brad Shermanator keeps rearing his ugly head. To cap off a busy week of soundbites in slander against us crypto bros,

Congressman Brad Sherman himself sent a letter to the SEC this time regarding the grayscale Bitcoin trust. He pointed out common critiques of GPDC that the fees are too high and that the massive increase in issuance between 2018 and 2021 push shares of the trust to trade at a significant discount. Sherman said he was concerned that as many as 850,000 retail investors had been induced to invest in GBT due to its presentation as, quote, a way for retail investors to invest in Bitcoin and share in its financial growth without worrying

about the safety and storage difficulties that come with owning cryptocurrency directly, end quote. Sherman suggested that, quote, the plight of GBTC investors may ultimately be due to a governance structure that is dominated by Grayscale's parent company DCG. He asked the SEC to answer a range of questions about GBTC, including whether regulations or the ongoing litigation, which seeks to convert GBTC to an ETF, are preventing shareholder redemptions today. and whether there is anything untoward in the use of GBTc shares or the underlying Bitcoin in dealings between DCG, Grayscale, and Genesis. Sherman tweeted yesterday,

Recent actions by Grayscale have created concern for thousands of GBT investors. Today I call for the SEC's attention to this matter and to help honor our commitment towards investor protection. Crypto rumor source Andrew AP Abacus writes, DCG and Grayscale are now on the political radar in a new and somewhat ironic way. Brad Sherman and his office pens a scathing letter to the SEC and Gary Gensler hammering GPTCC, its outrageous fees and incestuous relationship to DCG. Statements such as these are generally a precursor to an invite to a congressional hearing. One would imagine this doesn't help DCG in their quest for growth capital. Now, there was a little bit of wishful thinking going

around after this. Luke Martin wrote, Sherman's crypto rampage leads him to GPTC. Sherman's rage is so blinding he doesn't realize his efforts might increase chances of a Bitcoin ETF. Bitcoin Trader Matt, however, writes, You guys really think that they'll just let them convert to a spot ETF? No way. More likely, they dissolve the trust forcing a liquidation of the asset to pay out as units are redeemed. David Bailey, the CEO of Bitcoin magazine, writes, oh, for once I agree with Brad Sherman. Strange feeling.

Wayne Vaughn reminds him very importantly, in this case, the enemy of your enemy is not your friend. Now, Sherman or not, it's very clear that DCG has problems. Settlement negotiations surrounding the bankruptcy of crypto-lender Genesis appeared to have hit a snag. In February, creditors agreed to an in-principle deal, however, late last month, the unsecured creditors committee sought a renegotiation of the terms. They said their subsequent investigations had led them to believe that the contribution made to the bankrupt estate by Genesis' parent company DCG should be re-evaluated.

All parties agreed to enter into court-facilitated mediation to come to a new agreement beginning last Monday. Now, DCG is under pressure to close a deal, as the crypto conglomerate has $630 million in intercompany loans falling due this week. On Tuesday, DCG released a statement, saying they continued to be engaged in the 30-day mediation process and, quote, look forward to a productive resolution. They also said that the firm is, quote, in discussions with capital providers for growth capital and to refinance its outstanding intercompany obligations with Genesis. Following the release of DCG's statement, host of the Unchained podcast, Laura Shin, tweeted that, quote,

a Genesis creditor and someone close to the matter have told me that the mediation is dead. The parties are too far apart and talks are not continuing. Rahalawalia tries to sum up what's happening by saying, Both sides are digging in. This is DCG saying, bro, we agreed to heavy terms. Why move the goalposts? The UCC is saying they don't trust DCG and have uncovered new information that warrants a new deal. Makes you wonder, why would DCG refinance with Genesis on loan terms it could not meet? Or was there another assumption they were relying on, e.g. external debt refinancing.

Looking back, there's no question in my mind that one of Barry's regrets was having DCG step in and assume the $1.1 billion defaulted 3AC loan obligation. The decision to quote-unquote rescue Genesis put DCG's balance sheet at risk. A desire to preserve DCG's reputation forced the 3AC swap. Had DCG simply let Genesis enter Chapter 11 bankruptcy, their financial health and balance sheet would be strong today. DCG would have been able to cordon off its liabilities. Many untold stories in the DCG Genesis Gemini saga yet to be revealed. So guys, that's the story from here. 2022 still dragging us down, but at the same time new allies emerging, it is nothing if not exciting times,

and I appreciate you hanging out as we go through them together. Until next time, be safe and take care of each other. Peace.