The Breakdown - Judge Sanctions SEC for "Bad Faith" and "Abusive Conduct"

Episode Date: March 19, 2024

The crypto industry is feeling very vindicated in its assessment that the SEC has not been a good faith regulator. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet Kraken - Go to https://kraken.com/thebreakdown and see what crypto can be 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 Tuesday, March 19th, and today we are talking about the SEC being sanctioned. 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. Hello, friends, happy first day of spring. Of course, it being the first day of spring means that here

in New York, we are getting a cold snap and a snowstorm, but what are you going to do? We kick off today with a story that we have been tracking for some time, which is the case of SEC versus Debtbox. What has made this case interesting is less anything having to do with Debtbox itself and more the fact that the SEC's behavior in the case has been a major point of scrutiny and consternation. The latest update is that a federal court in Utah has imposed sanctions on the SEC for their conduct in this crypto lawsuit. The judge said that their behavior constituted a, quote, gross abuse of the power entrusted to it by Congress. The case is, of course, an enforcement action brought against a crypto project called Debtbox, which was launched in December 2021, and was alleged to have raised

$50 million for a token-based crypto mining scheme. In July of last year, the SEC alleged securities fraud and rushed to court to obtain a temporary restraining order or TRO. They wanted to freeze bank accounts owned by the project and its founders. The regulator claimed that Debtbox were closing bank accounts had already transferred $720,000 out of the country and were planning to flee the country. The SEC argued that the project shouldn't be warned of the hearing to avoid tipping them off and were granted the TRO without debt box having an opportunity to appear in court. It was later discovered that the SEC's evidence was misleading at best. The project had not, in fact, transferred any money out of the country.

The bank accounts, which were shut down, had been closed by the banks once the SEC informed them about the investigation. When the SEC was informed of their problems with their argument, they failed to correct the court record and continued enforcing the TRO, doubling down on their deceit. Through later court filings, the debt box founders discussed the massive damage done as a result of the SEC shutting down their financial lives. One founder said their real estate business had been ruined as they were no longer eligible for credit. Another failed to make payroll at his construction business and had $125,000 worth of tools stolen by disgruntled employees. A third founder was stranded in Ghana for two months

during a work trip as a result of his accounts being closed. What's more, each founder had their houses raided by U.S. Marshals. The tokens, which had been issued, issued two investors plummeted, falling to 90% below their all-time high. In December, the SEC admitted that it had made inaccurate statements and fallen short of expectations to be accurate and candid in court. Well, on Monday, the judge issued an 80-page decision, delivering scathing condemnation for the SEC's conduct. The judge wrote that the SEC had, quote, expressly traded on its special standing as a federal agency, reminding the court it had been granted this relief several times in the past 10 years to demonstrate it could be trusted when asking for this tremendous exercise of judicial authority.

End quote. Once the debt box founders were able to defend themselves, the judge found that each fact presented by the SEC crumbled under scrutiny. They wrote, quote, it was not just a single, imprecise statement or inadvertent misstatement. Each piece of support the commission offered in seeking the TRO, and then later reiterated in defending the TRO, proved to be some combination of false, mischaracterized, and misleading. Elsewhere in the order, the judge made it crystal clear that this conduct had been a, quote, deliberate and intentional choice. Overall, the judge found that, quote, the bad faith is inextricable from the abusive conduct and a sanction of attorney's fees and costs for all expenses resulting from that conduct is appropriate. So, the sanctions mean that

the SEC will foot the bill for legal costs incurred by Debtbox and will likely be forced to pay for some amount of the damage they caused in shutting down bank accounts. The judge also denied the SEC's motion to dismiss the case with the option to refile later, forcing the lawsuit to proceed as is. In response to the order, an SEC spokesperson gave the standard response, stating that they are reviewing the decision. The SEC has also removed a press release from July announcing the enforcement action from their website, which really says it all about the agency's approach to good faith regulation. This order spurred a flurry of discussion in crypto legal circles. James Murphy at Meta Lawman gave a good summary, tweeting,

The opinion is devastating to the SEC as an institution and to the particular lawyers who committed the misconduct. The judge made it crystal clear that the SEC lawyers did not make an error. They lied intentionally. The opinion will surely be called by litigants across the country, for years to come. This is a sad day. The SEC was once a great institution, respected around the globe for its competence and integrity. Now is a time for accountability. The judge found that the SEC engaged in a gross abuse of power entrusted to it by Congress. Will Congress do anything about this? Zero Knowledge founder Austin Campbell gave the fairly representative take writing, For those who have been telling me that I am being unfair to the SEC, please read this entire order.

The SEC lied in court and doubled down when the judge noticed. Why should any American trust the SEC or believe they act in good faith after this. Like the judge, I make no statement on the merits of the case. Rather, I believe if the SEC wants to retain the authority Congress has granted them, they should obey the law. Given how bad this is, my view is they should be placed under congressional oversight. The staff involved should be terminated, the agency should be reformed, and going forward SEC lawyers should have personal liability for such conduct in addition to the agency itself. What is described here is unconscionable for those entrusted with such authority by law." End quote. Many others pointed out how egregious this conduct was, falling far below any reasonable

bar for professional standards. For a non-government lawyer, the consequences would be career-ending. Erie Paul, the CIO Block Tower, wrote, staggering, if not for the deference to regulators, this could have been referred for perjury charges or more extreme. Defrauding a court like this can produce jail time for anyone else. Paul Grewell, the chief legal officer at Coinbase was clearly astounded by how brazen the SEC had been in this case. However, he honed in on one important point, tweeting, the worst part of all, guess who pays the sanctions? you, me, and every U.S. taxpayer. The commission just foisted a bill onto every one of us for their litigation misconduct. Leo Schwartz, a reporter for Fortune, noted the disgust for the SEC extended

across party lines in this case, writing, The decision by Robert Shelby, the judge overseeing the case, is about as strongly worded a denunciation as can be written in legalese. This is no small government-Trump appointee either. Shelby was nominated by Obama. Still, House Republicans have clearly taken note of this decision and will likely use it to hold the SEC's feet to the fire. Financial Services Committee, Republicans wrote in a tweet, Gary Gensler's SEC continues its losing streak in the courts. A judge has ruled against the SEC in the debt box case, imposing sanctions on the commission for acting in bad faith. This is one of the most alarming examples yet of Gensler's abuse of power. Dan McArdle really

summed up the sentiment, tweeting, wow, so in August we had a court say the SEC's actions were arbitrary and capricious, and now we have another court saying they've been engaging in bad faith conduct and gross abuse of power. Guess what? The crypto industry has been right about the SEC all along. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if?

It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown.

Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, Craken. Hello, Breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same.

Ledger is the global platform for securing Bitcoin and other crypto. Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown.

So what impact will this order have on the industry's battle with the SEC? The case has not yet been decided and could very well still result in a ruling against debt box once it concludes. In some ways, this demonstrates how misguided the SEC's approach to crypto enforcement has been. If this is a fraudulent scheme, then nine months have passed while the SEC has been fighting this battle instead of dealing with the core legal dispute. The next time a lawmaker suggests that the SEC is just doing their best against an industry full of cowboys, lobbyists can place this order on their desk. Across 40 pages, this ruling cataloged the deliberately misleading and deceptive conduct of the regulator at every step of the process. It will also be referenced in every single.

every single crypto lawsuit moving forward to warn the court about what to expect. If there is a shred of sanity left at the SEC, this order would trigger a complete rethink of their crypto strategy. This is just one relatively minor case, but still, we can now see the lengths the SEC lawyers were willing to go to in order to get their desired result. They didn't demonstrate any faithfulness to the law. They simply said whatever they needed to get a judge to agree. We also witnessed here the vindictiveness the SEC is capable of against crypto founders. The entire purpose of taking this action was to shut down the team's bank accounts, both business and personal. The SEC did their best to proactively destroy these people's lives

before a court had made any real determination. The ruling spells out in black and white that we are dealing with a government agency that has gone rogue. Gary Gensler has clearly given himself a mandate to destroy the crypto industry by any means necessary, completely ignoring the legal standards of this country in the process. Hopefully, this is such a clear stain on the agency's reputation that it actually starts a conversation beyond just the crypto industry about how much things have to change.

Now, staying on crypto in Washington for a moment, digital asset subcommittee chairman French Hill is angling for the top job at the House Financial Services Committee during the next Congress. The crypto-friendly Republican lawmaker has put his name forward to take over as the chairman of the HFSC

if the GOP retains control of the House. The current chairman Patrick McHenry is planning to retire at the end of the year and is not standing for re-election. Hill's communication director released a statement which read, Representative Hill has been visiting with his colleagues about the possibility of seeking the House Financial Services chairmanship, drawing on these conversations

as well as his four decades of public and private sector experience in financial services, Representative Hill has decided he will seek the committee chairmanship. Certainly for the duration of this Congress, Hill has been a steady hand at the helm of the Digital Assets Subcommittee. His hearing topics have been timely and well directed. He's also assisted in shepherding multiple pieces of crypto legislation through the committee stage. Cody Carbone, Vice President of Policy for the Chamber of Digital Commerce, said in a statement, Congressman Hill has been a champion in prioritizing the creation of robust regulatory frameworks for digital assets. We look forward to continue working with him on creating rules that promote innovation and provide legal clarity.

Moving over into the EU. OKX has delisted tether pairs for their EU customers. The stable coin will still be available as a pair against USDC and euros, but will no longer trade against cryptocurrencies. Tether is also still able to be deposited and withdrawn, as well as being accepted in OTC trading. The exchange posted a note explaining the move, including the statement that, quote, Not all tokens are supported in all markets due to regulatory requirements. It's unclear whether this points to regulatory issues for tether in Europe, or if this is just the standard formatting for OKX delisting notices.

An OKX spokesperson claimed the change was intended to consolidate liquidity, stating, this year our focus is to expand euro-payer liquidity and become the preferred venue for euro to crypto-spot trading. We evaluated this decision in delisting the current USD-T pairs only impacts a small subset of our user base. Importantly, we've recently expanded our product offerings in the Eurozone by introducing a variety of Euro-fiat on ramps and Euro pairs.

Some are suggesting that this could be regulatory related, given the markets and crypto assets or mecca regulations which are set to come into force in Europe towards the end of this year. The stablecoin provision in that legislation requires stablecoin issuers to be regulated as electronic money institutions, a license that Tether likely won't qualify for. In addition, there has been a growing concern about the dominance of U.S. dollar-denominated trading from some EU lawmakers, so this could be a way of appeasing regulators. Finally today, a bit of an update on the ETF flows, because, as the blocks Frank Shapiro put it, Bitcoin ETF flows are in the driver's seat. In that area, the Fidelity Bitcoin ETF has become

the fifth most popular ETF so far this year after hitting $6.9 billion worth of inflows. It's now the second Bitcoin ETF in the top five, with the BlackRock product currently sitting in third place with $12.5 billion in inflows. The rest of the top five is rounded out by the three most popular index funds. Two of those are offerings from Vanguard, which perhaps sadly for us suggests that the multi-trillion dollar asset manager is still doing fine without a Bitcoin product. On yesterday's show, we discussed how last week set a new record for inflows on the US-based products, even though they slowed down dramatically at the end of the week. CoinShare's latest report confirmed that last week was also a new record for global

crypto products, which achieved 2.9 billion worth of inflows. It was also a new record for global volumes, which came in at 43 billion for the week. Global AUM topped 100 billion for the first time, but receded to close the week at 97 billion due to falling asset prices. The other interesting note from CoinShare's report is that the new US ETFs appear to be draining assets from Canadian and European funds. Collectively, those funds have seen a $685 million drawdown in asset so far this year. Ethereum and Solana funds also suffered significant outflows. So what's the story at the beginning of this week? The flows do appear to be petering out at the moment. Monday's flows were another major step down, ending up as the first day of negative

flows in more than two weeks. Fidelity saw just $5.9 million worth of inflows, Grayscale surprise to the downside with 642.5 million in outflows, its largest ever, BlackRock performed strongly chalking up 451 million worth of inflows, but still couldn't save the day. All told, there were 154.3 million in outflows yesterday, just a few million short of the worst day for ETFs. Still, CoinShare's head of research, James Butterfield, isn't sweating a few days of weak ETF flows, as he thinks the big money is yet to arrive. Like many other commentators, Butterfill is watching out for when the big wirehouses come online, setting their army of investment advisors loose on the market. Butterfield noted that three months of trading data is the rule of thumb

before new ETFs are added to these platforms, which would put the earliest approval dates at the end of next month. Heated similar back of the napkin math as other analysts stating, given that the RIA market represents around $50 trillion in assets, the potential inflows could be significant. For instance, if 10% of RIAs chose to invest 1% of their portfolios, this could result in approximately $50 billion in additional inflows. Butterfield suggested this could lead to a positive demand shock, particularly after the halving as huge ETF demand hits a reduced supply. Even though we might have to wait a little longer to see this excess demand show up, there's already some hints that Bitcoin markets are much tighter than they have been in the

past. Butterfield suggested that ETFs are needing to source a significant amount of their Bitcoin in the open market, noting, we can see this in the data, where OTC desk coin holdings have fallen by 74% since their 2020 peak, much likely due to ETF demand. So friends, that is the story for now. Hard to overstate how big a deal this debt box case is. It's the type of thing that we can talk about now, but the real implications will be played out over years and years and years. Trust and institutional credibility are incredibly hard won and incredibly easily lost, and that makes for a fairly toxic and difficult mixture for this SEC going forward. For now, though, that is going to do it for The Breakdown. Big thank you, as always, to my sponsors for today's show. Go to crackin.com

slash The Breakdown and see what crypto can be, and check out the ledger Bitcoin Nano. 5% of sales will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.