The Breakdown - Crypto Continues Its Pushback on Washington D.C.

Episode Date: July 3, 2023

Today on The Breakdown, NLW continues coverage of the crypto industry's growing push back against the SEC and overreaching politicians. The show examines the SEC's price-shocking claim on Friday that ETF applications were inadequate, as well as a new motion to dismiss an SEC lawsuit from Bittrex.  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 Monday, July 3rd, and today we are talking about crypto's continued pushback on Washington, D.C. A quick note before we dive in, if you listen to the AI breakdown, you may have heard that we have some new sponsors over there, and more broadly speaking, sponsorship is officially open on the Breakdown Network show. shows. I'm going to be sharing more resources on that, but suffice it to say if you or your company are interested in sponsoring the breakdown, you can send us a note at sponsors at breakdown. Now, for those of you who have enjoyed this sponsor list, period, I'm exploring some sort of Patreon ad-free version, and we'll get back to you with plans on that as they materialize.

For now, however, let's dive into this 4th of July week. Now, the show is off tomorrow, because freedom, of course, but today we have a bit of a freedom, episode. As you'll know, 20203 has been all about the battle between politicians and the crypto industry. And over the last couple weeks, we've finally started to see some serious pushback on our side, and that has continued through into today. Now, before we get into that, we're actually going to start today's show with a rumor. If you were watching Twitter yesterday, you might have thought that Gary Gensler had resigned

as chair of the SEC. The rumor was spread by a news aggregator known as Whale chart who tweeted, quote, anonymous official at the SEC has reportedly disclosed that Chairman Gary Gensler is going to resign following an internal investigation. Now, almost immediately people assumed that this had to be some sort of fake news. And soon enough, tireless Fox Business Newshound Eleanor Territ shared the response that she got from the SEC's PR team asking if there was any truth to the rumor, to which they simply responded, nope. Still, Ryan Selkis from Asari summed up a lot of people's feelings when he tweeted, I would not be surprised if Gensler soon. His only political future rests on bowing out gracefully in order to do this administration

a solid in an election year, because we are making him an issue that could cost Dems the Senate and key electoral college states. Bye. As I said on Twitter, if you're going to have a holiday weekend rumor, you might as well make it a good one, right? Still, there was some real SEC news over the weekend as well. On Friday morning, a Wall Street Journal headline shook Bitcoin market saying, SEC says spot Bitcoin ETF filings are inadequate. Seemingly on the headline alone, Bitcoin crashed by more than 3%, and crypto-twitter was sent into a frenzy. Still, once the dust had settled and people began to actually, you know, read the article, it seemed like the inadequacy mentioned by the SEC might not be the massive problem

the headline would have made it appear. So what basically happened is that the SEC informed ETF applicants, of which there have been, as you know, so many over the last couple weeks, ever since BlackRock dropped their ETF application, that their filings were inadequate due to the lack of detail surrounding surveillance sharing agreements. All of the recent ETF applications had indicated that an agreement would be put in place with a unnamed at that point crypto exchange to monitor spot Bitcoin markets for fraud and manipulation. The problem was that none of the applications had actually named which crypto exchange would be the market surveillance partner. Now, as those details became clear, it looked less like a typical SEC rug pull

and more like a request for clarification that could actually easily be dealt with by updating applications. Bitcoiner Alessandro Ataviani said, this is actually good news. One, in the past, the SEC replied after 240 days to Bitcoin spot ETF submissions. Now they replied in one week. Two, in the past, it was always a clear rejection. Now it is highlighting where the problems are. it is an invitation to amend. Three, Fidelity, and BlackRock can edit their applications and resubmit. Bloomberg senior ETF analyst Eric Belcunis also pointed out that it was not what the headline made it seem like. Hold up a second, he tweeted, this isn't as bad as the headline. The key paragraph is deep in the story. Basically, SEC wants them to name the crypto exchange

and give more details on SSA. That's understandable, arguably good news. You have to wonder, if the SEC thought all crypto exchanges were not of sufficient size or too shady, it could have just told them to all go F-off, either now or when the decision is due. But instead, it is asking them to name the exchange and provide details of these SSAs. Now, Financial Services Committee Chairman Patrick McHenry used it as a chance to fire a warning shot to Gensler saying, if these reports are accurate, Gary Gensler has a lot of explaining to do. An ETF would provide everyday investors with an SEC regulated product. The only reason for Chair Gensler to oppose it is if he wants to kill crypto in the U.S. altogether. Now, by Friday afternoon, the CBOE had clarified that its surveillance sharing agreement

had been arraint with Coinbase. This was reflected in amended applications from Fidelity, Wisdom Tree, Vaneck, and Arc. BlackRock CTF will trade on the NASDAQ rather than on the CBOE, and we are still waiting for clarification on that application. The refiled applications mentioned that Coinbase, quote, represents a substantial portion of U.S.-based and USD-denominated Bitcoin trading. Now, the SEC has yet to formally acknowledge that it is reviewing applications by publishing them to the Federal Register. Once the filings are published, the SEC will commence a 45-day review period, but can extend this up to a total of 240 days before making a decision. So ultimately, when all was said and done, this seemed like kind of a little bit of headline gamesmanship. Investor Adam Cochran

wrote, a bit dirty of the SEC to respond on a Friday before a longish weekend and give a blanket headline statement, but it does look like it's not a full rejection, just asking for more info to refile. A dirty play, but the game is still on. Now, zooming out a little bit to the ETS, trends that we've seen over the last couple weeks, Bitwise CIO Matthew Hogan provided some additional background on the rush to file. His firm is in the mix with an application on foot alongside the numerous other firms, and he told the block, quote, ETFs are generally a winner-take-most market. We've certainly already seen this play out in the Bitcoin Futures ETF space, where pro-shares, which launched the first futures-based Bitcoin ETF has dominated the market simply by beating rival

funds to market by a few days, and a similar dynamic is observable with gold ETFs, where SPDR's gold trust is still almost double the size of its closest competitor. So with the mini-crisis out of the way, attention turned back to speculation on how likely the SEC is to approve a spot Bitcoin ETF. Presuming that the regulator will stand firm that a surveillance sharing agreement needs to be with an exchange of, quote, significant size, would Coinbase count? According to Bloomberg ETF analyst James Safart, probably. He pointed out in a note that when considering U.S. dollar Bitcoin pairs and excluding stable coin pairs, Coinbase dominates the market with a 14th 40% share of volume. That puts Coinbase as the number one exchange globally for Bitcoin markets

traded against non-stable coin U.S. dollars ahead of even Binance. Elsewhere, TradFi players seem to be echoing the sentiments of the crypto industry thinking that this is likely to be an approval. A recent report from Bernstein said that the SEC is likely to approve a spot Bitcoin ETF from this particular crop of applications. They noted that the SEC has already approved futures base ETFs and recently allowed the first leverage Bitcoin futures ETF to begin trading. They wrote that a key issue for the regulator has been that, quote, spot exchanges, e.g. Coinbase, are not under its regulation, and thus spot prices are not reliable and prone to manipulation. In contrast, Bitcoin futures trade on CFTC regulated exchanges with the associated market

manipulation protections. The report focused in on the ongoing lawsuit regarding the conversion of the grayscale Bitcoin Trust into an ETF. Analysts wrote, the court did not sound convinced that the futures price is not derived from the spot price, and thus to allow a futures-based ETF and not allow spot, sounds like a difficult pill to swallow for the courts. Bernstein noted that trust products like GBTC are often more expensive, illiquid, and inefficient compared to more typical products. They wrote that, quote, the SEC would rather bring in a regulated Bitcoin ETF led by more mainstream Wall Street participants and with surveillance from existing regulated exchanges than having to deal with a grayscale OTC

product filling the institutional gap. Now elsewhere in SEC land, Crypto Exchange Bitrex has filed a motion to dismiss the SEC lawsuit against it. Bitrex, you'll remember, was sued by the SEC in April shortly after announcing plans to shutter its U.S. exchange. The regulator sued both the domestic and international exchange, arguing that they were offering unregistered securities to U.S. residents. Many had presumed the shutdown of the U.S. exchange indicated that Bitrex would look for a settlement rather than fight the case. However, the motion to dismiss, which was filed on Friday, argues many similar points made by Coinbase in its case against the SEC. Bittrex argues that crypto tokens are not securities once they are trading on the secondary market, if there is no

ongoing contractual relationship with the original issuer, and the tokens do not confer any right to the underlying revenue of the protocol. They also argued that the SEC failed to provide timely communication that certain assets required securities registration. In particular, Bitrex noted that Dash, a token named by the SEC lawsuit, had been actively traded since 2014 without objection from the regulator. The major argument shared with the Coinbase lawsuit is that the SEC doesn't have jurisdiction over crypto assets. Bittrex argues that the SEC's authority is limited to power expressly granted by Congress and that the SEC cannot extend its grasp to include crypto assets without explicit authorization. This argument relies on the recently established

major questions doctrine, a legal theory that would rein in the unilateral power of the administrative state to make consequential decisions about the U.S. economy. Only a few cases have reached the Supreme Court, however, to define this new legal theory, so the current batch of crypto lawsuits appear primed to more clearly define the limitations of regulators. Delphi Labs General Counsel Gabriel Shapiro writes, Bitrex lawyered up big. Interesting dynamic, if this case moves faster than CoinBases, CoinBases lawyers might not get first crack at these issues, and it could take the sheen off of Coinbase's defense. Might be why Coinbase is pushing the pace. James Murphy at Meta Lawman writes, earlier today Bitrex filed motions to dismiss the SEC's

complaint. This is good news for anyone concerned with the SEC's regulatory overreach. Here's why. has wound down its U.S. operations and put its U.S.-based exchange into bankruptcy. So in these circumstances, Bitrex could have easily just caved to the SEC and agreed to a quick settlement, which the SEC would have paraded around as another quote-unquote win. But they didn't. Instead, Bitrex hired two high-powered law firms. The motion to dismiss argues, one, crypto assets trading on secondary markets are not securities. Two, the SEC lacks authority in this area under the major questions doctrine. Three, the SEC has failed to provide notice of its claims in violation of due process. The arguments are all expertly articulated.

But why is the SEC suing BitTREX at all for failing to register as a securities exchange after it has already exited the U.S. market? One reason BitTrex may have decided to exit the U.S. market could be that the SEC subjected the company to a six-year-long investigation. After six years of investigating, the SEC's complaint does not allege any fraud or customer harm at BitTREX. So I have just one question. Why are our tax dollars being spent on this case? maybe some congressional oversight is in order. Now, as we start to close out one more wonky one from the SEC, the Supreme Court has accepted a case which will review the use of in-house judges at the SEC. The regulator maintains an internal court system which hears some cases rather than referring

them to federal court. There have been numerous lawsuits already about whether this process is constitutional, as defendants have no ability to move the case to the external court system. The federal court has already found on appeal that this process is a violation of the Seventh Amendment, which preserves the right to a jury trial. The case which will be heard on appeal before the Supreme Court related to the 2013 trial of a hedge fund manager for misleading investors. His lawyer state that he was, quote, put to trial before a captive agency judge sitting unconstitutionally with no right to a jury and no way to escape the court. They urged the Supreme Court to reject the SEC's appeal without a hearing. Paradigm policy offer Rodrigo Sierra wrote,

Today's SCOTUS granted cert to a case that will decide the legality of SEC's in-house administrative court, showing once again that the court intends to curtail administrative overreach. Gensler's over-eagerness and the belief that regulators are, quote, not pushing hard enough if they aren't losing cases, is going to end up not only with big SEC defeats, but ultimately unravel the administrative state. I'm eagerly awaiting this outcome. All right, guys, so there you have it. That's the latest from our pushback against Washington, D.C. And really, let's be clear, the SEC. I will continue to keep you posted as new developments come up. But for now, for those of you who are in America, I hope you are having to be.

having a great long holiday weekend. Until next time, be safe and take care of each other. Peace.