The Breakdown - The SEC Confirms They're Never Going to Provide Crypto Guidance

Episode Date: December 19, 2023

It's no big shocker but it does open them up to some increased legal scrutiny. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown 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, December 18th, and today we are talking about some updates from the FTX estate, an SEC Coinbase thing, and a little bit more on Tether and the FBI. 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 of the show notes or go to bit.ly slash breakdown pod. Hello friends, happy last week before Christmas. An exciting thing that is going to happen this week or start happening is that we are going to see, I think, a ton of end-of-year reports coming out, which is always a type of content that I love to see. However, today we are starting with some

continued crypto-legal battles. The SEC has voted to deny Coinbase's petition for rulemaking, stating that they have no intention of putting forward comprehensive rules for the crypto industry. The commission said in its response, the commission disagrees with the petition's assertion that application of existing security statutes and regulations to crypto asset securities, including of those securities and intermediaries in the trading, settlement, and custody of those securities is unworkable. The five-member commission said that the matter had been given careful consideration within the agency, but stated, the commission concludes that the requested rulemaking is currently unwarranted and denies the petition.

Chairman Gary Gensler issued a statement along with the formal denial, explaining the commission's decision by asserting that the existing securities regime appropriately governs crypto asset securities. You'll notice that the SEC is using that crypto asset securities term quite a bit. You will also probably know that that is a term of their own invention, which implies that decisions about these things have been made, which they have not. Gensler added that the SEC is currently undertaking a range of similar rulemaking initiatives related to crypto, which are currently out for public comment. These include directions for investment advisors to use qualified custodians and efforts to expand the definition of an exchange to capture electronic messaging platforms. He further argued that,

it is important to maintain commission discretion in setting its own rulemaking priorities. Although he did not mention Prometheum by name, Gensler referred to a broker dealer who has now successfully registered, arguing that it proves that the existing pathway to registration is not unworkable. You may also recall that Prometheum caused a stir in June when it announced that it had successfully registered with the SEC. That announcement was accompanied by an appearance of Prometheus founder at a congressional hearing where he parroted Gensler's talking points. Interestingly, however, Prometheus registration apparently did not seem to actually allow them to offer trading in any existing crypto assets whatsoever. And at this point, Prometheum still hasn't released

a trading platform. Now, this was one of two outstanding lawsuits between Coinbase and the SEC. Coinbase had filed their petition for rulemaking in July of last year. They escalated the matter to federal court in April after months of silence. This lawsuit came shortly before Coinbase was sued by the SEC for operating as an unregistered securities exchange. The matter has since dragged on, with the SEC insisting to the court that the request is being considered by staff and that they needed more time. When filing their lawsuit, Coinbase had asserted that the SEC had long ago decided not to embark on rulemaking for the crypto industry. They claimed that the SEC chose not to make this policy decision public

to avoid it being challenged in court. Coinbase was explicit that the goal of their lawsuit was to force the SEC to engage with the issue one way or another. Coinbase chief legal officer Paul Gruel called the SEC's conduct a, quote, abdication of its duty. He explained, After 18 months of silence, we went to court to get the response the law requires. Gruel noted, No one looking fairly at our industry thinks that the law is clear or that there isn't more

work to do. Now, with the SEC's position now on the record, this does open the door for Coinbase to challenge that position in court. Indeed, a few short hours later, Coinbase had filed a petition for review in the Court of Appeals. They claim the SEC's decision not to pursue rulemaking is arbitrary and capricious, an abuse of discretion and contrary to law, in violation of the Administrative Procedure Act. More specifically, Coinbase claims that, quote, the commission's refusal to engage in rulemaking, even when it continues a campaign of regulation by enforcement against Coinbase and others that exceeds its statutory authority, flouts the APA

and fundamental principles of fairness it embodies. Now, of the five-member commission, three SEC commissioners voted in favor of taking this action with two dissenting. This has become fairly standard around anything having to do with crypto. In brief comments, outlining their disagreement, Hester Purse and Mark Yueda wrote, In our view, the petition raises issues presented by new technologies and other innovations, and addressing these important issues is a core part of being a responsible regulator. Any exploration of these issues should include public roundtables, concept releases, and request

for comment, which would afford us the opportunity to hear from a wide range of market participants and other interested parties. They added that, the public benefits from open conversations about how new products and services can be offered within a sensible regulatory framework to meet the needs of our fellow Americans. We hope that interested persons continue to posit specific rule changes, guidance, and exemptions that would form a useful basis for the crypto industry to continue its development within the United States. They promise that they will personally have, quote, an open ear for conversations that others host and the ideas that emerge from those conversations. Paul Grewell thanked Pearson Uaida stating,

We're grateful that two commissioners disagreed with the denial and called for real dialogue. We should be working together to create laws and rules that will benefit consumers in U.S. innovation, not defending lawsuits based on legal positions that change month after month. Some of the more considered commentary from the crypto industry came once again from Austin Campbell, who wrote, Given the securities acts were written closer to the civil war than today, If the SEC truly believes that they are specific enough to deal with digital assets, which are globally provoking legislators and regulators to create new regimes, it's probably worth asking

if the SEC knows something that literally everyone else in the world does not, and if they do to say it publicly. Or if maybe the SEC is in way over their head trying to understand this technology. I'm not speaking off the cuff here. I fielded incredibly insightful questions from people at the BOK, the MAS, the JFSA, the Federal Reserve Banks of New York, Chicago, Cleveland, and Philadelphia, personally. Every single one of them, including PhD economists and exceptional technologists among them, believe there were novel problems here. But not the SEC. Either the SEC is derelict, or they need to clearly spell out their views publicly on this to show everyone else what they have missed. It's hard for me to see how the judge in this case is going to take this conduct well

from the SEC, long delay only to reject, or how this will not harm the SEC in other cases. If the SEC is not now providing specific and granular statements about exactly how to comply, but also suing for noncompliance, judges are not going to be impressed by this as a general rule. Here, they are definitely risking any degree of agency deference and inviting courts to make the rules clear where the SEC has refused to. In short, the SEC is indicating that clarity is not on the menu, and there is no path forward for crypto under the current regime. That stance puts them on a head-on collision course with the Supreme Court increasingly skeptical of agency power. A simpler analysis came from Burdenles who wrote,

Loll, Coinbase filed an Amandaas, the SEC litigated it to the appellate judges for over six months, spent tens of thousands in agency resources, just to say nah like they were always going to. Scumbag behavior. 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, PVI, DBA, Cracken. Now, next up today, we have our first FTX update for a while.

It's been nice, right, to not have to hear about that every day? Well, anyway, FDX had filed their amended bankruptcy plan, clarifying their view on a range of contentious issues. The plan of reorganization sets out how creditors' claims will be assessed and how assets will be distributed. FtX is proposed to dollarize creditors' claims. This means claims will be evaluated in terms of market value at the time of bankruptcy filing on November 11, 2022. That date was right in the midst of the FTCS collapse and marked the cycle lows for most crypto assets. The plan also proposed that creditors would receive cash rather than an in-kind distribution of the crypto assets they held

on the exchange. Finally, the plan features no mention of an FTCS 2.0 relaunch, which was supposed to be in the works. Now, most notably, if this plan is approved, it would mean that creditors who own spot crypto on FTX would miss out on the massive asset appreciation since then. It should be noted that this style of liquidation is fairly standard for bankruptcies. What's more, the writing was on the wall that this would be the nature of the proposal since at least August, when the estate was granted permission to liquidate its crypto holdings rather than preserve them for the benefit of creditors. Still, seeing the details of the plan finally confirmed has left a sour taste in the mouth of many creditors. One of the key criticisms is that by refusing to distribute crypto tokens to

creditors, the FTX estate is choosing to ignore the exchange's terms of service. Customers of FTCS retained ownership of their crypto assets, but this ownership right has been summarily dismissed by the estate. The FTCS estate, for their part, said in the filing that the plan was designed to, quote, reflect many compromises to create the best, most equitable, and economical outcome for all creditors and stakeholders. Now, of course, part of the issue is that FTCS recovery efforts have been widely reported as highly successful, but a large part of that success has hinged on the increase in crypto prices. If creditors' claims were distributed in crypto rather than cash, the recovery would not be sufficient to return all assets, meaning that creditors would need to take a substantial haircut on their

returns. That wouldn't have been impossible, as that was the path that the Mount Gawks bankruptcy went down, with creditors expecting a portion of their Bitcoin to be returned. Of course, the FTCS bankruptcy is much more complicated than Mount Gawks. An in-kind distribution would necessarily favor spot crypto customers over futures customers, whose claims could only be valued in cash terms. This kind of unequal distribution among similar classes of creditors is something that bankruptcy courts are usually unwilling to do. It goes against the fundamental principle of equality between creditors. That's why the argument being raised by creditors is based on the idea

that they retained ownership rights to their crypto and are entitled to an in-kind distribution. Creditors will be able to vote on the plan in due course before it's put into action. investor Adam Cochran wrote, WTF, claims will be paid out at bankruptcy prices? So if you had one Bitcoin, they'll be paying you 17K instead of one BTC, even though most of their recovery has been in crypto or stock assets that went up, this should be illegal. Your title rights should be protected first.

A lot of people acting like this isn't new. First off, most bankruptcies didn't recover nearly as many assets as FTX, nor did assets appreciate 2 to 3x plus in that time. Then, even if it were not new, that's my point. You deserve crypto treated as in-kind and title like money, not leaving you undercut so people can pay more lawyers. You should get a pro rata of each recovered asset, not to be treated as a second-class citizen where gains on your assets go back to paying USD debtors. Shameful to not recognize property rights because the asset is digital. If you tax it like property,

treat it like property. Now, another thing that has had people in an uproar is that according to some of the latest estimates, FTX's creditors group, has paid $1.45 billion in legal fees so far, which is more than the 1.42 billion owed to customers. Squiggle Hairshanks writes, this means that if you lost 100th on FTX in November 2022, when ETH price was around 1,300 USD, you would not get back 100th or the equivalent U.S.D value of today. You would get back the USD value of your Eth at the time of collapse.

That's a 42% haircut. Man, lawyers are the worst. They will bleed anyone dry for their own gain. They're charging more than 1 million USD daily for their cleanup work and have been working for over a year on it already. Now, although FTX customers are in an uproar over the plan, bankruptcy claims buyers like what they see as the crypto rally makes a full recovery and cash terms more likely. The FtX bankruptcy has seen a flurry of activity from firms who purchase claims from creditors seeking an early exit from the

process. According to claims buyer Thomas Brazil of 117 partners, the secondary market for claims has hit 60 to 70 cents on the dollar. He said, the market for claims has gone red hot. Everything that was off the table is now on the table in terms of issues with claims, such as KYC-A-ML not being verified. In the beginning, it was super picky. Now it's whatever we can touch that we can figure out, we will do. One thing to note is that most of the firm's buying up claims are entirely uninterested in crypto and are just betting on those claims being paid out in full. Last thing around FTX, alongside the filing of the proposed plan, the court also heard from lawyers on the issue of a $24 billion claim for unpaid taxes filed by the IRS. This claim has

been lowered from its original figure of $44 billion, but is still based on rough estimates as the IRS has not completed their audit. In earlier filings, the FTCS state said the IRS claim has, quote, no support in the law. One of their major issues was that without court intervention, the IRS could unduly delay distributions to creditors. During the hearing, the judge impressed upon IRS lawyers that he wanted a speedy resolution of the bankruptcy. He said, the idea here in tax court bankruptcy is we're trying to get to conclusions quickly and be as accurate as possible without wasting a lot of time and resources of the state or other creditors. At one point, the IRS objected to being rushed to commit to a certain figure, with the lawyer representing the agency stating, it's not on the IRS to make up a number.

The judge retorted, isn't that what you did? Referring to the $24 billion figure. Ultimately, the judge warned the IRS that they should temper their expectations of a multi-billion dollar payout, stating, you might not get to a point where the debtors owe any taxes. Maybe they owe a little bit of taxes. Might be that they owe a few million, tens of millions of dollars. I don't know at this point because they don't have the benefit of the evidence. The judge scheduled a hearing to discuss the IRS claim early next year, but advised attorneys on both sides that they should work. together to avoid this matter going to a trial. Now, obviously I am no expert in this area, but it certainly reads to me like the judge warning the IRS that he is going to slash and burn their

claim and is predisposed to thinking that they are on a big old fishing expedition. Lastly today, a follow-up from a story last week. Tether have published letters sent to U.S. lawmakers in response to criticism of illicit use of their stable coin. In October, letters were sent by members of both the Senate Banking Committee and the House Financial Services Committee, demanding that Tether answer for the use of USDT in terrorist financing. By publicly releasing their correspondence, Tether has given a summary of the actions taken as part of their, quote, commitment to security and close working relationships with law enforcement. Notably, the letters confirm that Tether has onboarded the FBI and the Secret Service onto their

platform. This was disclosed in a prior public statement in late November, but it was overshadowed by the Binance settlement which occurred during the same week. Tether also detailed their know-your-customer and anti-money laundering procedures, claiming that they take a proactive approach to identifying suspicious activities. The letter also detailed a range of recent actions taken by Tether, including the freezing of hundreds of millions of dollars worth of stable coins and blacklisting sanctioned wallets. Tether CEO Palo Arduino said in a statement, Tether seeks to be a world-class partner to the U.S. as we continue to assist law enforcement and expand dollar hegemony globally. Now, one other interesting note, Tether also disclosed

that they're working with chain analysis, which is, of course, the preferred partner of the U.S. government when it comes to blockchain surveillance. All in all, it definitely seems like a shift, in the approach that Tether is taking, which from a cynical side could be an indication of pressure. As Crypto Critic Crypto Inferno writes, imagine being certain that the FBI and Secret Service presence at Tether means everything is fine. More opportunistically, it strikes me that they could be trying to position themselves now to be the de facto USCBDC instead of USDC, which has, of course, lost a lot of market share to tether over the last year. That is a narrative and a sub-story that I'm watching closely and will continue to as we head into next year. For now, however, that is going to do it

for The Breakdown. Big thank you to today's sponsor, Cracken. Go to crackin.com slash the breakdown and see where crypto can be. Until next time, be safe and take care of each other. Peace.