The Breakdown - Is This the SEC's Most Brazen Crypto Attack Yet?

Episode Date: August 30, 2024

What's next, Pokemon and Magic the Gathering as securities? NLW covers the SEC sending a Wells Notice to Open Sea claiming NFTs are securities. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to 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, August 29th, and today we are talking about OpenC getting a Wells notice. 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 slash breakdown pod. The SEC has filed the latest salvo in the crypto crackdown, sending a Wells notice to

NFT trading platform OpenC. A Wells notice serves to warn of incoming enforcement actions and provides a right of response. In this case, the SEC are alleging that NFTs are securities, and OpenC was therefore operating as an unlicensed securities exchange. OpenC joins the rank of Coinbase, Cracken and Consensus who are in active litigation, as well as Uniswap and Robin Hood, who have been served with Wells Notices as well. OpenC's CEO, Devin Finserk, disclosed the Wells notice and said, we're shocked the SEC would make such a sweeping move against creators and artists, but we're ready to stand up and fight. This is a move into uncharted territory. By targeting NFTs, the SEC would stifle innovation on an even broader scale. Hundreds of thousands of online

artists and creatives are at risk, and many do not have the resources to defend themselves. NFTs are fundamentally creative goods. Art, collectibles, video game items, domain names, even tickets, and more. We should not regulate digital art in the same way we regulate collateralized debt obligations. Finser walked through the numerous positive stories he's heard from NFT artists over the years of running the platform. He committed to not only fighting the allegations, but providing a $5 million defense fund for any artists that come under attack from the SEC. This isn't the first time the SEC has come after NFTs. Last year, impact theory and stoner cats settled a pair of enforcement actions and agreed to pay millions of dollars in fines. Last month, law professor

Brian Fry and digital troubadour Song a day man took the fight to the regulator. They sued the SEC for clarity, seeking confirmation that their NFTs are not covered by securities law. One of the most interesting points about that lawsuit is Professor Fry's approach as a conceptual artist. Way back in 2020, he requested a no-action letter from the SEC and published copies of that correspondence as NFTs. His point was that the SEC can claim jurisdiction over digital art under a strict reading of the precedence, as they could do with other art and collectibles. Fry argued that even though they could, the SEC shouldn't attempt to regulate these markets as a matter of public policy, largely because of the huge amount of resources it would take and the chilling

effect on creative works. While the SEC never responded, Fry did obtain a copy of internal emails via a freedom of information request. The regulator called his legal theory fanciful and dismissed the notion that fractionalized interest in a work of art could fall under their jurisdiction. We also have the notorious moment when Congressman Richie Torres confronted Gary Gensler about his intentions to regulate digital art. Torres asked Gensler whether Pokemon cards are securities, and Gensler, famously unwilling to discuss what is or is it a security, confirmed that they were not. Torres followed up by asking whether a token, recognized Pokemon card as a security. Gensler said he would need to know more, but fell back on

repeating the factors of the Howie test. This is the point that Professor Fry has been making, that on the face of it, all valuable art involves an investment of money and a common enterprise where there is an expectation of profits derived from the efforts of others. For traditional art, this might simply involve an artist continuing to create new works and promote themselves, boosting the value of earlier pieces. Or, frankly, as art goes, die, meaning there's more scarcity of their pieces, thus boosting the value of their earlier works. Sorry to be morbid there, just looking at the way that it's played out. NFTs introduced other ways of adding value, but the principle remains the same.

Understandably, OpenC are not conceding the concept that NFTs are securities, but came to a similar point about the harmful public policy implications. In their blog post responding to the Wells noticed, OpenC wrote, Classifying NFTs as securities would not only misinterpret the law, but it would also jeopardize artists' livelihoods, disempower collectors and gamers, and stifle innovation across the many promising use cases for NFTs. The response from crypto-Twitter was general frustration at the never-ending stream of incoherent enforcement actions. Jake Trevinsky, the chief legal officer of variant fund, tweeted,

The SEC has fully lost the plot. The idea that a financial markets regulator established in the 1930s would have jurisdiction over digital art in the 2020s defies not only common sense, but also the SEC's statutory authority. Katie Biber, the chief legal officer of paradigm, thought the incoherence might be part of the strategy, tweeting, others have already expressed incredulity at the weak legal basis for this Wells notice. Consider that clearly established. But this is not about the SEC's incompetence or stupidity, far from it. This is part of a larger plan, mapped out and executed with precision, utilizing tools established to protect due process to spread fud instead. It's based on a political philosophy that holds government gatekeepers as the paragon of virtue and casts

innovators as capitalist villains. Like all the others recently, this Wells notice isn't just directed at OpenC, it's a broadside pointed at every single innovator and entrepreneur, crypto, or otherwise. Others are simply resigned that this is what the industry has to trudge through to get to legal clarity. Hayden Adams, the creator of Uniswap, welcomed OpenC to the club, In crypto, an SEC Wells notice means you're a legit company building an important product in the U.S. SEC are clowns taking the idiotic stance that digital art magically transforms into a security when it's put on a blockchain. Even SEC Commissioner Hester Purse seems exhausted with her agency's approach. During a Twitter space is held last night, she said, we should be thinking about what

makes sense for us to do. Let's make sure that the stuff that really doesn't belong in a security's framework isn't dragged in. It may not make a lot of sense for the SEC to have anything to do with some of the things in the NFT space. I think it's an area where we could have provided guidance if we had wanted to. Instead, we're reading tea leaves based on enforcement actions. Regarding the overly broad interpretation of the Howie test the SEC has landed on, Pierce added, I blame myself in part for that. Something I could have done differently has helped bring legal clarity and legal discipline around how we thought about Howie earlier on. It's certainly a cautionary tale for other regulators. I think we've got a lot of work to do both at the SEC and in the industry.

Many of those involved in crypto policy feel this could be the most damaging overreach from the SEC to date. Miles Jennings, General Counsel of A16Z Crypto, said, This is a brazen example of the SEC's use of lawfare to chill innovation. Under the guise of investor protection, dubious legal theories are being used to curtail use of NFT platforms and scale artists and creators away from the space. G Kim, the chief policy officer of the Crypto Council, tweeted, The SEC's regulation by enforcement approach to digital innovation

poses a huge risk to creativity, expression, and economic dynamism. The Wells notice issued to OpenC is a clear escalation. The reality that people will create art, images, music, games, collectibles, and even code, is as old as humanity itself. Equally old is the idea that people will value such creation and be willing to pay economic value for it. The SEC's most recent action should cause concern across all society. Any effort to chill creativity and expression is antithetical to American norms and values. Perhaps the excess is demonstrated by the SEC's actions today will be remembered as a tipping

point when democratic institutions said enough is enough. Hello, friends. Before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately

new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And perhaps more importantly, I will be there. The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. One of the interesting points arising out of the backlash was that OpenC actually made a pretty clear attempt to paint within the lines. During the height of the NFT craze, they refused to drop a token,

unlike all of their major competitors for fear of SEC enforcement. Mike Dutis of Sixth Man Ventures commented, sue you if you launch a token, sue you if you don't, sue if it's art, sue if it's the first one the SEC agencies in the morning, never pass a law, regulate by selective enforcement. The U.S. government approach to crypto is a dangerous goat rodeo that must be stopped. Jibis made the point that perverse incentives are starting to show up as a result of the SEC's approach, adding, This SEC has taught me that if there's any regulatory gray area, the play is to push the gas as hard as you can, so you can pay off the regulators when they come after you.

There is no upside to trying to play within whatever you perceive the line to be if the line isn't solid. Along a similar line, Fubar noted that the SEC is once again picking off a company that's down on its luck, tweeting, the open seas wells notice reinforces the notion that the SEC is solely interested in preying on weakness. Did Gary pick a fight at the $10 billion peak? No, too scared. Only after market share dwindles do they try to weasel concessions.

the only viable compliance strategy is strength. Now, some noted the coincidence that this enforcement action showed up the same week Donald Trump launched his latest NFT series. Bankless as Ryan Sean Adams writes, the same week Trump launches a new NFT collection, the SEC drops a lawsuit letter into America's largest NFT exchange. That's probably a coincidence. I'm sure none of the anti-crypto action is ever politically motivated.

Jesse Powell, the chairman at Cracken, sort of summed up what I felt when he wrote, this is obviously absurd on its face. No, they aren't that dumb. the point isn't to win. The point is to distract, waste resources, spread fud, and slow us down. But why is it always American companies? It's time for a serious investigation into these treasonous acts of sabotage. As if on cue, Stand With Crypto have announced a tour of swing states to get out the crypto vote. The pro-crypto political organization has gathered 1.3 million signups that it hopes to convert into impact at the ballot box. The tour will start next week in Arizona,

with appearances from Independent Senator Kristen Sinema and Republican State House Speaker Travis grant them. Similar events will be held in Nevada, Michigan, Wisconsin, and Pennsylvania. Logan Dobson, the group's executive director said, there's a large group of people who are into crypto. It's our job to use sort of campaign-style tactics to motivate them to vote. Crypto voters are already, I think, decently fired up about this election. And while the events will be nonpartisan, many found the open seas wells notice to be further confirmation that Democrats' crypto pivot is pure fantasy. Cameron Winkelvoss tweeted, the quote-unquote reset with crypto has turned into an expansion of the war on crypto. Others suggested this might just be gans,

are playing politics and will only ramp up into November. Justin Slaughter, the policy directorate paradigm, commented, probably more cases coming before election. I think Chair Gensler has decided to make himself harder to replace by starting so many cases so he can say any effort to replace him as trying to stop these cases. But he's just out of control in giving Trump political ammo. Investor Adam Cochran agreed and thinks Gensler will only become more dangerous over the coming months. He tweeted, Warren's lapdog knows his time is up, as he isn't wanted in a Trump or Harris administration. clawing for his political future, he thinks the only way he can win is to deliver something to warn so she goes to bat for him at all odds, or help gracefully land him in a private industry

placement. Gensler's embarrassing attacks and continued court losses will be his undoing. I expect to continue with a flurry of unfounded, misguided, politically driven attacks that don't reflect the direction that either party is moving in, all in a desperate clawing to try and make himself relevant. This is his audition for private industry, and the industry should reject it at all costs rather than encourage this childish behavior. Finally, today, a quick update on the arrest of Telegram CEO Pavel D'Urov. D'Rov went before the court on Wednesday with the judge approving a formal investigation. He was released on a bond of $5 million euros and is prohibited from leaving France. Large differences between the French and U.S.

criminal justice system have led to some confusion in the reporting, but here's a best attempt to explain the current status of the charges. D'Urov has not yet been formally charged. However, this ruling moves his case into a more serious phase. The judge found there was enough evidence to merit a continued formal investigation. This is the standard process under French law, and it is somewhat analogous to being indicted by a grand jury, a ratification step before moving forward with charges. Potential charges under investigation are unchanged from a press release earlier this week. They include complicity with criminal activity conducted via telegram, with drug trafficking and distribution of child exploitation material being the most serious. Also highlighted as a lack

of cooperation with valid law enforcement requests and direct involvement with money laundering, reporting de-emphasized charges related to providing encrypted services without the correct paperwork, but those charges are still in the mix. Commentary continues to focus on the implications for digital free speech and the liability of internet platform executives. This is the first case that has attempted to hold a CEO of a major communications platform liable for the conduct of users. New York Times reporting compared the case to the imprisonment of Silk Road founder Ross Ulbricht

and finance founder Z. Their point was that attaching personal liability to Duroff, rather than purely to telegram as a corporate entity, is highly unusual. Daniel Lyons, a professor of internet regulation at Boston College Law School, said, As a CEO, seeing that you are personally put at risk, I'm going to have much lower tolerance for speech and transactions at the margin. It would at least make me question where I'm traveling and why. David Kay, a former UN monitor for Global Freedom of Expression, suggested this prosecution could be a turning point for digital free speech, stating, the Dura of indictment is a very big

deal. The question is whether it's a big deal that signals a new era of government restriction on online expression and pressure on platforms. The other notable development is that we're starting to see various unrelated Durav scandals being presented in the press. According to a Forbes report, there is a domestic violence allegation that claims that Durav harmed his child, who was 17 months old at the time. Criminal charges were initially ruled out due to a delay in reporting but could still move forward in Geneva. We're also seeing headlines suggesting that holding passports from the UAE and the Caribbean nation of St. Kitts and Nevis are inherently suspicious, but of course we're also in a real fog-of-war type of moment. Questions are also being raised about Durav's status

as a French citizen. Reports are that he secretly met with President Macron in 2018. and was recruited to move telegram to Paris. Dharov doesn't qualify for citizenship via residents or family connections, but may have been granted that status under a rare exception for, quote, merited foreigners. Meanwhile, the Russian foreign ministry finds themselves in the unusual position of defending the right to free speech. A spokesperson said, It seems to me that all this has once again demonstrated the true attitude of the French leadership, which is blatantly trampled on international norms in the field of protecting freedom of speech and expression for only one reason, because if they protect certain standards, they must not only

comply with them, they must protect and implement them. I have a strong sense that this case is going to get more, not less complex, and might find itself with some very strange bedfellows as allies. For now, though, that is going to do it for today's breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.