The Breakdown - Securities Regulators in Texas, New Jersey and Alabama Go After Celsius

Starting point is 00:00:00 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. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, September 18th, and that means it's time for the weekly recap. There was a heck of a lot going on this week, so let's do a good old-fashioned recap. We'll look across a couple different areas. and let's start with the latest from Evergrand.

Starting point is 00:00:41 Yesterday, I gave you the 101 level overview, and not that much is new, but if you haven't caught that show, Evergrand is a Chinese real estate developer, formerly the second biggest in the country that has seen just a huge reversal of fortunes this year. Its share price is down 85%, its bond is trading 30% down this week, and even had to have markets shut down. 1.5 million people have put deposits down on properties that aren't built yet, and it's and the company has overall more than $300 billion in outstanding debt. ZeroHedge wrote that Evergrand is the single largest high-yield dollar bond issuer in China,

Starting point is 00:01:16 accounting for 16% of all outstanding notes. The Wall Street Betts crowd is watching this closely. Wall Street Silver tweeted, The next stage is where every bank in China gets suspicious of their counterparties because nobody is sure whose balance sheet is all fucked up right now. Nobody will want to lend a company similar to Evergrand and banks don't want to lend to each other. The other issue is individuals losing money in. China. These real estate development companies sell financial products direct to consumers to fund their

Starting point is 00:01:41 development. Everyone will be much more suspicious going forward. This might kill funding for other similar real estate development companies. Maybe the most interesting development comes from Chinese state media that is starting to indicate that maybe Evergrand should not expect the bailout that so many are assuming will come. Reuters writes, the editor-in-chief of state-backed Chinese newspaper Global Times warned debt-ridden property giant Evergrand Group that it should not bet on a government bailout on the assumption that it is too big to fail. Now, the state-owned media is saying that, but at the same time, the People's Bank of China injected 90 billion yuan in reverse repo agreements last week, which is the most since Friday and the first time this month that

Starting point is 00:02:20 they've injected liquidity into the system. So they're clearly monitoring things, even if they're trying to intimate that Evergrands shouldn't expect a bailout to come. If you want to understand more about what's going on and to what extent it could be a systemic failure, go check out the episode from yesterday. With that, though, let's shift to the regulatory situation. The latest news there is that Celsius has joined BlockFi in raising the ire of state-level securities regulators. From Bloomberg, Texas filed a notice seeking a hearing to determine whether to issue a cease

Starting point is 00:02:53 and desist order against the company. The action means Celsius will have to show why it shouldn't be ordered to stop offering its products to state residents. The hearing is scheduled for February 14th. Separately, New Jersey ordered Celsius to stop offering some of its products, which it also described as unregistered securities, effective November 1st. New Jersey's acting attorney general Andrew Bruch tweeted, if you sell securities in New Jersey, you need to comply with New Jersey securities law, and that includes those operating in the cryptocurrency market. Our Bureau of

Starting point is 00:03:21 Securities has ordered a New Jersey-based company, Celsius, to stop offering interest-bearing accounts. Now, at the SALT conference earlier this week, BlockFi CEO, Zach Prince, was kind of defiant, saying, we're not going to decide what box crypto lending belongs in based on what New Jersey does or what Texas does or what any other one state does. He seems, in other words, to be calling on the SEC to come join this fight, which, based on what we read from Brian Armstrong a couple weeks ago, it kind of seems like they're getting ready to do. Speaking of which, of course, the other regulatory story this week was that SEC Chair Gary Gensler testified before the Senate Banking Committee. It was nice to see some of our new allies from the infrastructure bill fight,

Starting point is 00:04:00 like Pat Toomey, arguing that the SEC should be giving us more clarity, more openness about what they think is and isn't a security, and also arguing that stable coins were not securities. It was also gratifying to see one senator ask Gary Gensler if he thought he was the market's daddy, and when he said no, asked why then are you acting like their daddy? But unfortunately, the show was stolen, of course, by Elizabeth Warren and her hypothetical trust-up example of someone who bought a bunch of crypto on Monday before last Tuesday's crash and then couldn't get it out because Coinbase went down and they have no recourse and blah, blah, blah, blah, blah. I did a whole show about that. It was very annoyed, pissed off, whatever term you want to use. That was Thursdays if you

Starting point is 00:04:37 haven't had a chance to listen to it yet. I think it's a pretty spicy one. You'll enjoy it. Either way, the one thing I wanted to share is something that I think gets at how I felt too. And yet another thread from Adam Cochran, who's the MVP of the breakdown lately. He writes, at this point, I'm convinced the SEC's current regulatory stance on crypto is more someone's personal political agenda. Highly technical, educated people informed on this space cannot reach the conclusion that DFI platforms can simply come in and register. The SEC's current rhetoric is, we won't tell you which tokens are securities, but every platform has lots of tokens, therefore some must be securities statistically. Their solution is, come talk to us. Coinbase did, and instead of conversation, is getting legal action.

Starting point is 00:05:17 Simply register, technologically and legally impossible for a protocol and no burden showing it's necessary. I, like many in this space, strongly support consumer protections. We want consumers to be safe, we want to cut down on frauds, we want information to be clear and transparent, and to have a system that works for everyone. But while regulators all over the world are engaging with crypto, the SEC seems to be backpedaling, choosing to pursue a chilling effect on white knight rhetoric rather than work with the industry to make it safer. It's clear that these battles will be fought in the courts and ballot boxes, and that this industry will need to present a united front. I got to say, I think this was a depressing week for regulation in showing just how deep

Starting point is 00:05:56 these fights are going to run, and how this access, this Warren, Gensler, Yellen access, is coming together. So that's the stakes. That's the game. And that's what we're looking at. This podcast is sponsored by NIDIG, a firm that's making Bitcoin accessible to banking customers on Main Street and Wall Street alike. As part of their mission to bring Bitcoin to the people. Find out more at NIDIG.com slash NLW. That's NYDIG, forward slash NLW. A few more things to round us out in this weekly recap. Let's talk about Bitcoin adoption worldwide. The interesting thing here was the announcement by Laos that they were going to authorize and regulate Bitcoin and crypto, and this is an about-face from a couple months ago when the central bank was warning people about crypto.

Starting point is 00:06:53 The reason for this is, of course, the perfect storm of having excess hydroelectric power, both from damming the Mekong River, as well as from just seeing a decline in tourism, which would have consumed some of that energy. So you've got that one ingredient there, but then you also have potential demand in the form of miners who are leaving China based on the Chinese mining ban. As I discussed yesterday, it appears that China is intent on continuing to police that ban. Inner Mongolia has contracted with a firm to keep tabs on any mining operations that might try to restart secretly. I think the significance of this is, one, it's an interesting

Starting point is 00:07:26 footnote to the whole China ban's Bitcoin thing, but it's also relevant in terms of just setting a game theoretical model for other countries around Bitcoin. Danny Scott tweets Laos is legalizing Bitcoin mining. Louse has 78 hydro plants with an installed capacity of 9,972 megawatts in operation. Laos only uses 1,22 megawatts. Countries with wasted renewable energy have an opportunity in front of them right now. Speaking of smaller countries and Bitcoin, the one other thing that I wanted to make note of was that Little Romania became the first place to publicly unveil a Satoshi Nakamoto statue, which is very cool to see. Last couple of items to round us out. Discussed a couple days ago, the Salana Outage and the

Starting point is 00:08:10 arbitrium outage as well. I think that now a few days on, it's very clear that the key takeaway from this set of events is to understand the forming lines around these smart contract battles, these defied blockchain battles. And really, it comes down to tradeoffs. It comes down to what is sufficiently decentralized for the objectives a chain has. What are the tradeoffs between higher fees but more decentralization? I mean, that's really what that battle is about, in particular with Solana and Ethereum, and I think that this week ended up just being kind of a case study in that. I don't know that it convinced any partisans who are on one side that the other side was more correct, but I think it was an interesting flashpoint.

Starting point is 00:08:52 Finally, speaking of flashpoints, I just wanted to say one more thing about the OpenC insider trading front running happening. I talked about this on my Thursday show, I believe. Long story short, an employee Nate Chastain of OpenC had been effectively front-running. running the market. He knew which collections were going to be featured on the homepage and would buy them just before they were featured. He then transferred them back to his main wallet that held his crypto punk. So at some point, an enterprising crypto Sherlock figured it out, put him on blast, and here we are now days later. The next morning, OpenC acknowledged that this had happened,

Starting point is 00:09:29 they said they were reviewing what happened, and they made explicit some policies that should have been clear that employees are not allowed to do this sort of thing. And less than a day later, on top of that, Nate resigned from OpenC. I've seen a fair few people say basically that it's done, we should just forget about it, we should all move on. And it really rubs me the wrong way, and I wanted to attempt to explain why. I don't think that people should now hate OpenC or anything like that. I think this is an individual, and until there's evidence that this is a culture at OpenC, which right now I haven't seen any of, some people also said that there was a lot of bullying of this guy. And, you know, I don't condone that under any circumstances. I will say, though,

Starting point is 00:10:10 that the, I resigned because I got caught thing is, you know, fine. I mean, listen, I don't want to drag this guy's career down or anything like that, but this is a major breach of trust with a community. This isn't something where he, like, I don't know, stopped doing it because he had some moral quandary. He only stopped because he got caught. There's nothing to indicate that he's had some major emotional reflection and is now asking forgiveness. I mean, he hasn't tweeted at all. And this is what I said to someone who is basically like, you should just move on from this. I don't think that we really appreciate how damaging to the entire industry this sort of behavior is. It gives fuel for the fire of every regulator who wants to make an issue, every regulator who wants to say that investors in this

Starting point is 00:10:54 area need to be protected, because this type of shit is just normal. I don't know what the right answer is in the sense that, like I said, I don't want this guy's career to be completely ruined and him to have to hide from crypto for the rest of his life or anything like that. I don't know him. And everyone who knows him says he seems to be a great person. But this is a major, major betrayal of his community. I think that before we're ready to just blithely forgive people, they need to ask to be forgiven. They need to show that they understand why what they did was wrong, not just that they got caught. Anyway, like I said, it's been bothering me all week. I think that people are kind of still not really appreciating how egregious it is. But I've said my piece on it. Anyways, guys, I hope you

Starting point is 00:11:33 are heading into a great weekend. I appreciate you listening as always. If you like the show, please go give it a rating or a review. It helps new people discover it. And until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Securities Regulators in Texas, New Jersey and Alabama Go After Celsius

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