The Breakdown - DoJ Says SBF's Request to Dismiss Charges Are Dumb (Basically)

Episode Date: June 3, 2023

Today on the Weekly Recap, the latest out of the FTX bankruptcy and Sam Bankman-Fried's request to drop charges, plus Binance out of Australia and the CFTC getting more involved in crypto markets.  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 Saturday, June 3rd, and that means it's time for the weekly recap. Before we get into that, however, 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. pod. Well, friends, we are decidedly heading into the summer lull. You can just feel it. It happens every year in markets more broadly, but it feels like it's especially going to do so this time

around. On yesterday's show, we talked all about how the Fed might be likely to pause at the upcoming FOMC meeting, but whether they pause or not, there's really no clarity about where they head next, and we're just kind of in wait and C mode. That wait and C mode is even more clear in crypto, where we just saw the lowest monthly volumes in a couple years in May. Prices for assets, like Bitcoin and Eath, they're sort of lelting sideways and slightly down after the first monthly decline that we've had in 2023. And frankly, right now, there just isn't that much energy in the space. Now, part of that is because we are still being dragged down on some level by the cleanup from previous years. Today, we're going to check in on a couple examples of that.

One of them comes from Singaporean sovereign wealth fund Temasek. They've now completed their postmortem of the fund's disastrous $275 million investment in FTX, which was marked down to zero following the collapse of the exchange. Now, an independent team conducted a review and found there was no misconduct on the part of the investment team that greenlit the deal. However, despite this exoneration, Temasek said in a statement on Monday that, quote, the investment team in senior management, who are ultimately responsible for investment decisions made, took collective accountability and had their compensation reduced. The report concluded that, based on claims by prosecutors and the admission of FTX executives,

there was fraudulent conduct intentionally hidden from investors. Now, Temesek claims to have spent eight months conducting diligence on the deal, which saw the fund acquire a 1% stake in FTX International and a 1.5% stake in FTX U.S. The fund currently stands at around 293.5 billion in assets under management, so the markdown of the FTX investment won't meaningfully impact Temasek overall. However, the very public failure could have a chilling effect on investments into the crypto industry, especially from similar sovereign wealth funds. Temasek are one of the few funds in the world with both size and expertise in venture investing to write nine-figure checks for early stage crypto firms. For example, in addition to FTX, Temasek also led a $110

million funding round for blockchain gaming and Web3 firm Anamoka Brands back in September of last year. Temasek have said they will refine their investment appraisal process, especially for rapidly growing firms. They also plan to exercise more caution when considering further investments into the crypto industry and have no crypto deals currently in the pipeline. In December, Lawrence Wong, Singapore's Deputy Prime Minister, who also serves as the country's finance minister, said, the fact that other leading global institutional investors like BlackRock and Sequoia Capital also invested in FTX does not mitigate this. Now, staying on the FTX theme for a moment, the appointment of an independent examiner

in the FTC's bankruptcy has been referred for appeal. Now, you'll remember that the original decision not to appoint an examiner in the case was extremely controversial, with the U.S. trustee in the case strongly objecting, and a bipartisan group of senators weighing in on the decision in a letter to the judge. On Tuesday, the court confirmed that the matter would be heard on appeal, pointing out that there was no argument on the facts of the matter. The appeal will be solely held on the legal question of whether the bankruptcy code requires an independent examination to be conducted. The previous decision, handed down in March, was primarily decided on the point that an

independent examination could cost creditors around 100 million and would largely duplicate the work already done by current FTX management headed up by John J. Ray the 3rd, as well as in criminal investigations. Since then, the bankruptcy case has only increased in complexity, with Ray now conducting work towards the exploration of a reboot of the fallen exchange. The same time, however, there has also been consternation around the cost of the case, with legal fees running at over $30 million per month. Now, in the Celsius bankruptcy, an independent examiner was appointed, and important evidence on the improper use of customer funds was uncovered. However, it's much less clear what additional insight could be gained by an extra pair of eyes on the FTX case.

Now, one more story on the FTX side. In court documents filed on Monday, prosecutors in Sam Bangman-Fried's criminal case said that charges ought not to be dismissed. Shocker, that one. In early May, Sam lodged motions to dismiss 10 of the 13 charges against him, although he did not seek to dismiss charges of securities fraud or money laundering. Most of the arguments made by SBF's team hinged on technicalities according to prosecutors and do not warrant dismissal. One of the arguments, for example, was that Bahamian officials had not agreed to additional charges filed after Sam's extradition. Since the extradition in December, additional charges regarding campaign financing violations and bribing Chinese officials have been alleged. According to extradition law,

prosecutors must disclose all of the charges that will be put forward ahead of time. To that end, prosecutors have now sought the agreement of the Bahamian government on the new charges, stating that they will drop the charges if they do not consent to the charges proceeding. Prosecutors have argued that the court should refuse Sam's dismissal motion in the court. the interim. Additional arguments were made around the jurisdiction of the United States to prosecute financial crimes abroad. SBF's team had argued that commodities fraud occurring in the Bahamas is no business of U.S. prosecutors and should therefore be dismissed. The DOJ argued in their response that the impacts of Sam's fraud were felt in domestic crypto markets, providing prosecutors a

jurisdictional nexus to bring charges. Now, as you know, SBF is currently scheduled to stand trial in October. Moving to the world's current biggest exchange, after warning customers two weeks ago, Binance Australia has closed down bank transfers, being unable to find a replacement payments partner. The exchange shut down transfers via Australia's instant payment network two weeks ago, warning due to a decision made by a third-party payments provider. At the time, Binance said they would be, quote, working hard to find an alternative provider. Now payments via credit and debit cards still do remain available. Binance Australia has been at odds with local regulators for some time now. In April, their license to offer derivatives products was revoked after it became clear that the exchange had

erroneously classified 500 users as wholesale investors, a local equivalent of U.S. accredited investor status. Under Australian law, retail traders are prohibited from accessing derivatives or leverage trading. The impacts are pretty clear of all of this. During this week, Bitcoin has traded at as much as a 20% discount on Binance's Australia dollar trading pair, perhaps indicating that investors were converting Bitcoin into fiat currency at a discount, or simply that Binance Australia's market-making affiliates had been unwilling to deal with the trading pair as cash withdrawals were shutting down. To me, Dammotics really summed it up when he wrote, and just like that, we have an example of how quickly and how possible the whole playground

could get wiped out for crypto. Now back over here in the U.S., the CFTC has recently become more active in looking at crypto policy. Thursday, the regulator issued a proposal to potential changes to the agency's risk management program. Commissioner Christy Goldsmith Romero said that any changes should insist that firms prepare themselves for crypto volatility and are adequately prepared to safely custody digital assets on behalf of customers. Romero said in a statement, technologies like digital assets, artificial intelligence, and cloud services have also emerged as areas that can carry significant risk.

These technological advancements with their accompanying risks necessitate the commission revisiting our regulatory oversight, including our risk management requirements. Integration of digital assets with banks and brokers and the risks that could be posed could continue to evolve. Romero flagged ongoing issues with custody practices within the industry. noting that some of the regulated brokers hold customer property in the form of stablecoins in digital assets, which carry unknown and unique risks. The regulator will accept public comments

on the rules for 60 days before a vote of commissioners is held. Now on Tuesday, the CFTC also issued guidance via their division of clearing and risk related to allowing registered firms to clear digital assets. The supervision relates to the settlement of derivatives trades in crypto assets, essentially ensuring that when a futures contract is settled, the transfer of the underlying digital asset is administered safely and securely. Currently, major U.S. derivatives instruments listed on traditional exchanges are cash settled so there's no need to handle digital assets. However, new products and offerings have been springing up recently proposing to settle in crypto. One of these efforts, for example, was led by former FTCS subsidiary Ledger X,

which had proposed derivatives offerings using a market structure that utilized direct clearing without middlemen overseeing settlements. Either by requiring direct payment of crypto or utilizing smart contracts, there is no technical need to maintain a system of intermediaries to settle trades. This sort of disintermediated clearing is not yet widespread, but it's a proposal that's growing in popularity among clearinghouses. The CFTC's new advisory warns of the risk inherent in crypto settlement, urging firms that are engaged in the clearance of crypto assets to, quote, actively identify new, evolving, or unique risks, and implement risk mitigation measures tailored to the risks. The CFTC identified cybersecurity as a major concern alongside the procedural

safeguards required to securely transfer digital assets and issues regarding conflicts of interest within firms. While the advisory is somewhat vague in the specific issues the regulator is concerned about, the overtone is clear. The CFTC sees the potential for problems and wants to ensure mitigation strategies are in place. Now, some commissioners on the CFTC think that this advisory is not enough and that the CFTC should embark on a full-blown rulemaking effort to ensure that the expectations of firms are made clear and best practices are codified. In a statement also on Tuesday, Commissioner Kristen Johnson said, we observe increasing registration activity

for crypto-commodity derivatives clearing and note that several proposed models adopt a non-intermediated market structure. Unless we introduce parallel regulation, these crypto-commodity derivatives clearing models may not be subject to the most rigorous regulatory standards. Now, the turf war between the CFTC and the SEC over who gets to be the primary regulator for the crypto industry has now been going on for the better part of a year,

but we're still no closer to firm and clear guidance on how firms can proceed. In a lot of ways, this latest advisory highlights the issue. Rather than taking on the complex but ultimately necessary task of setting clear rules, all the CFTC can do is issue vague guidance alluding to concerns and warning of continued oversight. Still missing from U.S. regulatory structure is any agency with oversight over Bitcoin and other crypto-commodity spot markets. Johnson made the point that disintermediated settlement of crypto assets is clearly a novel market structure that is desirable for both firms and market participants. These sort of novel products

deserve to have their own well-considered rules written rather than being crammed down into the existing ill-fitting frameworks. But as we have seen over and over and over without a clear mandate from Congress to formulate and enforce these sort of rules, the crypto industry will be stuck forever in this regulatory purgatory. Obviously existing, but unable to be comprehended or governed properly by existing regulations. This is deja vu and not the good kind. This is the part of Groundhog Day, where Bill Murray is just trying to off himself over and over because he's so bored with the same thing. But it is where we are, and unfortunately there is no way but through. Hopefully now that the debt ceiling deal is in the rearview, crypto's advocates in Congress can get back to the

difficult work of actually figuring out some common sense rules for how to regulate this thing. Until then, I'm sure we'll keep having these debates to talk about. That is it for this weekly recap. I hope you are having a great weekend. Until tomorrow, be safe and take care of each other. Peace.