The Breakdown - SEC Backs Off But Gaslights on "Crypto Asset Securities" Terminology

Episode Date: September 18, 2024

After being roundly spanked by a federal judge around their use of the term "crypto asset security," the SEC has apologized, but said they never meant the term to actually suggest that tokens themselves were securities. Plus an update on the basis point bets for the FOMC on Wednesday. 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 Monday, September 16th, and today we are talking about the SEC and its regrets. 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 Monday. Today our main story is about the SEC regretting its designation of crypto assets as

crypto assets securities. But before we get into that, I wanted to do a quick macro update because we are two days out from the Fed kicking off the rate cutting cycle and markets appear to be pushing for a larger than usual first cut. We've been tracking for a while now. That basically as the markets have settled on the idea that there was a cut coming this week, the debate really was just whether they would go for a 25 basis point cut or a 50 basis point cut. All the way up to the end of last week, especially after a number of new

economic data points, it seemed pretty clear that we were headed for a 25 basis point cut, at least that's what I said on Friday. However, something has changed. Fed Fund's futures priced in a 67% chance of a 50 basis point cut overnight. Now, keep in mind that the market-based odds of that had narrowed to just 14% last Wednesday after the release of August inflation numbers. That data you'll remember was relatively flat, save for a major uptick in shelter inflation, and in the immediate aftermath, analysis was mixed. Some suggested that shelter inflation was wildly overstated, while others noted a lack of further progress. What was clear was that the inflation data didn't provide a clear direction for the Fed.

There was no consensus then on whether the central bank should cut by 25 or 50 basis points, and analysts broadly spoke to their own bias in the absence of clear data. Friday's weekly jobless claims data was just as unclear. New and continuing claims increased marginally but came nowhere close to signaling a recession. With no clear signal in the data, some turned to Nick Timmeros of the Wall Street Journal for direction. Timrose is a known Fed insider and often clears up ambiguities ahead of FOMC meetings. Alas, his Thursday article provided insight but no clear view. He wrote, The Fed normally prefers to move in increments of 25 basis points because smaller adjustments

give them more time to study the effect of their policy changes. Some officials have suggested they would rather speed up the pace once the economy looks like it is weakening further. Alternatively, officials could conclude that if they expect a 50 basis point move is likely in November or December, they ought to make that move now, when rates are farthest from their ultimate destination. also pointed out, though, that a 50 basis point cut would set expectations for another jumbo cut in November, which the Fed might not want to do. John Faust, a former senior advisor to Fed Chair Powell said it was a close call. He claimed the number of cuts were more important than the size of the first cut, adding, I don't think we're in a spot that really shouts out for a preemptive 50,

but my preference would be slightly towards starting with 50, and I still think there's a reasonable chance that the FOMC might get there as well. These comments might have reinforced the idea that Powell will push for 50 when the FOMC assembles later this week. Another angle is how markets would read a jumbo cut, which is once again the subject of contradicting takes. Some warn that markets would freak out. Lena L. Debe, a research analyst at 21 shares, wrote, a more aggressive rate cut could shock the markets, given that it would ring alarm bells for a recession. Investors would trade cautiously into weather market conditions, which could hurt risk on assets in the short term. Others, though, have pointed out that a 50 basis point cut would accommodate

markets that have been constrained for over two years. John Hopkins economist Steve Hanke wrote, a 25 basis point cut is already anticipated by the market, which means the actual cut might underwhelm, triggering a sell-the-news response. In contrast, a 50-basis-point cut is not factored in. If it were to materialize, it would probably give the market a lift. Greg Gipp, the chief economics commentator at the Wall Street Journal, had a more nuanced take, tweeting, I think the Fed should cut by 50 basis points. I feel we overanalyze each data point for what it means on timing and size of rate move rather than ask what level of rates is appropriate. I think it's obvious the right level is well below where we are now. Real rates, which is the gap between Fed funds and the

inflation rate are currently at multi-decade highs. This means the Fed should have plenty of room to cut simply to normalize rates without implying that they're fighting a recession. Simply the fact that markets are now pricing in strong odds of a double cut might be enough to get the Fed over the line. The Powell Fed has avoided taking markets by surprise almost to a fault. An adjustment in market positioning reduces the stakes, allowing the FOMC to simply endorse what is already priced in. It also likely reduces the risk that markets will be spooked by a jumbo cut, considering they are already positioned for it. Bloomberg economist Anna Wong commented, if these odds continue to swing in favor of 50 on Monday, and the gap opens up, even if there is no additional Fed signal, I think we have an

answer. The meeting will also set the pace for the final quarter, with Zahir of split capital tweeting, 50 basis points on Wednesday would be wild. Recall this Fed meeting is more important because of the dot plot that is attached showing where various members of the Fed stand, forward guidance for the remainder of the year. Then again, financial plumbing expert conks thinks we're all vastly overthinking the move tweeting, 25 basis points cut, bullish. 50 basis point cut, also bullish. Hope that helps. So a nice little bit of intrigue right at the end of this cycle.

Of course, we will get our answer in just a couple of days. 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. Now to our main topic, speaking of over-analyzing things to death, one of the tools of the SEC has been language. But now one part of their language

path has apparently closed. The SEC has officially backed away from the term crypto asset securities. In an updated filing in the Binance case, the SEC said they never intended to imply that the tokens themselves are securities. Rather, the regulator claims they always recognize that securities law only applies when the circumstance of a token sale meet the Howey test. As a quick reminder, the Howie Test holds that an investment contract is an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. In a footnote to the filing, the SEC said the term was always meant as a shorthand. They referred back to the language of the telegram lawsuit in 2020 when they explained, quote, while helpful as a shorthand reference, the security in this case is not simply the

crypto asset, which is little more than alphanumeric cryptographic sequence. The security in this case consists of the full set of contracts, expectations, and understanding centered on the sales and distribution of the crypto asset. The regulator said they were no longer using the shorthand term in the finance case and, quote, regrets any confusion it may have invited in this regard. The SEC made it clear they are not arguing that a token carries the securities designation in perpetuity, even if an ICO was originally covered by securities law. This is relevant for the Binance, Coinbase and Cracken lawsuits, which all involve trading in secondary markets. With respect to the Binance case, the SEC claim they are arguing that the tokens, quote,

promotions and economic realities have not changed in any meaningful way under Howie, such that they continue to be offered and sold as investment contracts. The same filing expanded the number of tokens that were claimed to be traded as securities to 10. The list in the finance case now matches the Coinbase and Cracken lawsuits, including Solana, file coin, and DeCralands Mana token. The SEC is largely focused on the B&B token, though, as they only need to demonstrate that a single token is covered by securities law in the secondary market. They claim that B&B was originally, quote, offered and sold as a security. Further, they urged the court to consider ongoing promotions and the economic reality of transactions

that, in their view, quote, make clear that the post-ICO sales of B&B, including between investors on the Binance platforms, satisfy Howie. We've seen the language used by the SEC's slowly change over the years. Back in 2017, the regulator published their first guidance on crypto tokens, known as the Dow report. Their contention at the time was extremely clear, with one section titled, Dow tokens are securities. The next evolution came after the SEC's case against Ripple turned against them. For a brief moment, the SEC claimed the ecosystem present on crypto networks was a form of investment scheme. They claimed the tokens represented a way to buy

into this scheme and embodied the investment contract. These arguments were finally killed off last month in a ruling in the Cracken case. The judge warned that to the extent the SEC were arguing that tokens are securities or embody investment contracts, quote, its argument cannot proceed. Since then, the SEC began to refer to tokens being bought and sold as securities. The I Toro settlement announced last Thursday contained this new language in the press release. However, the settlement order filed with the court referred to crypto asset securities eight times. Crypto lawyers for their part could not believe how disingenuous the SEC was in claiming they had, quote, consistently maintained the position that the tokens themselves are not securities.

Coinbase chief legal officer Paul Grewell noted that paragraph one of the ripple lawsuit claimed that XRP was a security, adding, gaslighting the American public is bad enough. But the United States government misrepresenting themselves to a court in this way is something I've never seen in 28 years in the law. Jake Chivinsky, the chief legal officer of Varian Fund, tweeted, the SEC finally addresses criticism of its nonsense term crypto asset securities by Checks notes lying about and abandoning it? So the SEC is going to amend all its other complaints to remove that term now, right? Right? I genuinely cannot get over how insane this is. The SEC has officially jumped the shark. Catherine Minerick, the chief legal officer at Unoswap Labs, pointed to the awful

public policy implications, commenting, truly whether or not you care about crypto, if you care about fundamental fairness in our legal system, then you should be deeply concerned about the SEC's approach to crypto. No government agency should work this way. Government agencies are trusted with enormous power to enforce laws, which is why they are required to give us all notice of their views of those laws before bringing the full force of the government against any of us. But the SEC is not just inventing new theories of how to apply securities law in its crypto cases as it goes along. It is contradicting itself with those theories, sometimes within days or hours, often within the same

courthouse. The SEC has active cases right now premised originally on legal theories that it no longer stands behind when pressed. But instead of dropping those cases, the SEC moves to a new theory and continues on. Minaret goes on to make it clear why these shifts in language matter. Each shift has come as a response to push back from the court. This whole language change around cryptoasset securities only happened after they got spanked. Rather than going back to the drawing board and making clear rules, the SEC decided to revamp

the language and reframe their argument. The language matters because it creates the impression that the SEC's jurisdiction is clearly established. By claiming that tokens in general are, quote, crypto asset securities, the SEC packaged up to jurisdictional claim into an easily repeatable phrase. That phrase is still being used across SEC communications, such as a social media post published on Thursday that warned of scams involving crypto asset securities, end quote. At this stage, the language shift is only in court filing,

so we'll have to wait and see how the judge responds to the goalpost shifting again. Stuart Alderati, the chief legal officer of Ripple pointed out, Ripple's case is over, but the fair notice defense is still alive for others. The SEC cites the 2017 Dow report as industry notice that cryptoasset securities are subject to U.S. securities laws. Seven years later, the SEC apologizes to a federal judge, surely a person of at least ordinary intelligence, for the confusion it invited by using the inherently unclear term. of which term is used, the SEC will still need to prove that sales between third parties and the secondary market are somehow investments in an investment scheme. They struggled to do so in the

Ripple case, given that Ripple didn't receive any money from secondary sales. The Binance filing is focused on marketing and sales materials that promoted tokens as investment opportunities. The SEC claimed that the economic realities of the investment scheme were unchanged even though the tokens changed hands between third parties. Basically, my TLDR on this is that the central issue and the thing that has been frustrating to everyone is the SEC's approach to regulation by This has been their mantra and their approach for years now. The industry bristles because it argues that the SEC has not been clear about actually articulating its theories, for example, of what makes a crypto asset security a security.

Instead, they do things like label them crypto asset securities, hoping that the language will take, and that it will somehow add weight or be a self-fulfilling prophecy that people just start to think about these things as securities. The fact that it takes a judge smacking them down every single time is part and parcel about what's been so frustrating. We don't have the normal rulemaking process to go through, so all we have is court battles. Now, those court battles are increasingly ending up in favor of the crypto industry. It feels like part of the game might just be dragging it on for so long that it suffocates and dampens enthusiasm so fully that the SEC gets its wish that crypto not exist at all by sheer inertia.

In other words, this is just a glaring example of tactics that are ultimately not about investor protection, but instead about killing an industry that the SEC does not like. Good news is the fights keep going against them, but boy, is this frustrating. Anyways, guys, 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.