The Breakdown - "The SEC Is Floundering"

Episode Date: August 21, 2023

That's the assessment of one lawyer working currently with Gemini. On today's episode, NLW looks at the SEC's motion to appeal in the Ripple case, Coinbase's international trading data, and SBF's request to not be in jail so much. 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, August 21st, and today we are talking Coinbase International, Sam's request to not be in jail, SEC Ripple, and much, much more. 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. Well, we are officially in the dog days of summer. This is a period of the year that is always quiet. People are soaking in the last of their summer vacations.

Traditional markets aren't very active. People are getting ready to go back to school or go back to jobs. And particularly this year, given that we are in the true depths of a bear market, or if you've listened to my episodes with James Check from Glassnode, that long in between a bear and a bull market, where things just kind of stay flat and boring, the August old drums are even more amplified. Now, I will say interestingly, that the excitement around things being built on base, and in particular friend.com, I do think is at least a little worthy of notice

in the context of some patterns that I've noticed at the beginning of bull markets. Patterns that involve on the one hand, Bitcoin driving a new narrative return to the space, and on the other hand, in franchise builders within the space, finding some new play or sandbox to mess around in, but maybe we'll look a little bit more at that later this week. For today, we're going to do a grab bag of some of the more important things from the past few days, and we're going to start with the SEC and Ripple. Ever since Judge Torres handed down her decision in the Ripple v. SEC case, the big open question has been whether the SEC was going to file their appeal, and what would it say if they did?

Well, now the SEC have filed their motion for permission to appeal the Ripple decision. This is still a preliminary motion asking the court to certify the case for appeal. If successful, the SEC will also need the appellate court to accept their case before they can proceed. Although it's still early days in the Ripple appeal, this motion gives a look at how important the Ripple decision is to the SEC's overall enforcement strategy. The SEC noted that the Ripple decision, quote, could have a substantial impact on a large number of pending litigations. They specifically noted its relevance in ongoing cases against Coinbase, Binance, and Justin Sun, among others.

One of the key questions in the Ripple case is whether blind purchases of digital assets from an exchange could create a, quote, reasonable expectations of profits based on the efforts of others. This is, of course, one of the key elements of the Howie test. The SEC highlights the importance of getting a firm answer to this question for the purpose of setting precedent for other cases. They write in their filing that, quote, the pending cases may involve different crypto asset securities, but the same legal disputes at issue in the order's rulings will likely be critical in those actions as well.

Now, the Ripple decision has already been outright rejected as a precedent in the Terraform Labs case. In that lawsuit, the judge not only found that Terraform's Luna and UST tokens were factually distinguishable to Ripple's XRP token, they also determined that the Howie analysis in the Ripple case was an incorrect application of the case law. The Terraform decision was in an early stage motion to dismiss, but the judge still found that UST could be a securities offering, even when sold by a third party through an exchange. Notably, in their filing, the SEC is backed away. from their position that crypto tokens are inherently securities and will not argue that point on appeal. The regulator, in fact, claims they never even took that position in the first place,

stating that the SEC did not argue here or in Terraform that the asset underlying those investment contracts were necessarily a security. The SEC's appeal, if it's allowed to go ahead, would be what's known as an interlocutory appeal. This means it would take place before the final trial has concluded and is a somewhat unusual but not unheard of process. Most of the issues have been decided already, with the only outstanding issue being whether ripple executives aided and abetted the firm in breaking securities law. Now, interestingly, one attorney, Greg Buk, has said that the SEC's strategy is not particularly smart. Greg writes, filing for interlocutory appeal was a huge strategic blunder for the SEC. Win or lose. It fundamentally misunderstands the ruling.

Judge Torres did not rule that sales over exchanges can't be investment contracts. She only ruled the SEC failed to meet its burden of proof that a reasonable reasonable reason. retail investor would believe they were relying on Ripple's efforts for profits. The SEC relied on cherry-picked statements from Ripple and selected employees, but failed to produce evidence of the reach. The SEC didn't produce evidence of a single XRP holder who said he was relying on Ripple to increase the price of XRP. It tried to use expert testimony, but that testimony was excluded. The SEC didn't try to rebut Johnny Deaton's affidavits from the XRP community. So why is the interlocutory appeal a huge strategic mistake for the SEC? Normally, a party.

appealing of final ruling has the chance to interpret the ruling in a way that is helpful to it, and the court that issued the ruling doesn't get a chance to explain or clarify. But now, whether Judge Torres certifies the interlocutory appeal or refuses to, she will have the chance to clarify her ruling. She will make it very clear that her decision was only that the SEC utterly failed to meet its burden of proof. One important thing non-lawyers might know but not always remember or appreciate is the general rule that no new evidence can be made on appeal, and no new legal arguments can be made on appeal either. The SEC is that the law is a general rule. is stuck with the record and will have scant evidence to point to on appeal about reasonable retail

purchasers. What this means is that when the case does get to the Second Circuit on appeal, Second Circuit might even be inclined to agree with the SEC's underlying theory of the case, but it will be very clear that Judge Torres's ruling was based on the undisputed factual record, which shows a glaring lack of evidence from the SEC about the understanding of the retail investors it was supposed to care about, but always sought to minimize and found itself adverse to throughout the litigation. As the plaintiff, the SEC loses on a tie, it has to to show it was more likely than not that a reasonable retail XRP purchaser was aware of Ripple and relied on Ripple's efforts for profits or it loses. Deaton's affidavits by XRP holders to the

contrary were answered by the SEC with nothing, and nothing is what the SEC is stuck with on appeal. Now, I think the big interesting thing about this motion so far is the SEC effectively acknowledging that their enforcement strategy really hinges on being successful in this case and that they needed to be decided in appellate court so that it can be binding precedent in other cases. It certainly validates those who have found this whole legal strategy of doing zero rulemaking to be super, super high risk. Now, speaking of the SEC, Gemini have filed their reply brief supporting effort to dismiss the lawsuit brought by the SEC. You'll remember that in January, the SEC sued both Gemini and bankrupt Cryptolender Genesis, arguing that their Gemini

earned product was an unregistered securities offering. Gemini's filing took on a rather derisive tone, arguing that the SEC had failed to properly identify any violation of the law. Gemini stated that, quote, Section 5 of the Securities Act is not hard to understand. The fact that the SEC cannot decide what is the security at issue only underscores the weakness of its position. Jevonai argued that the court should not entertain the, quote, convoluted analysis presented by the SEC. Instead, they proposed a series of straightforward questions to determine whether the Gemini earned product qualifies as a security. These included, when was the alleged security sold? Who was the buyer? who is the seller? What price was offered or charged? Gemini have consistently argued that their

earned product was essentially structured as a loan and stated that therefore cannot possibly be deemed to be an investment contract and therefore a security. Now Jack Balman, who's a founding partner at JFB Legal who is representing Gemini in the case, writes, the SEC is floundering. They can't even decide what the security is. On the one hand, they claim that the loan agreement was a security. On the other hand, they claim that the entire Gemini Earned program was itself a security, an argument absurd on its face. Another absurdity is the SEC's efforts to identify a quote-unquote sale. They never do and instead fall back on arguments like this. Gemini and Genesis did not in fact sell their promise to pay the interest in exchange for crypto assets. Not only is this factually

wrong, it is ridiculous. A sale and a loan are different things. At some point, words must mean something. I've been litigating for 30 years. It doesn't bother me when private parties make ridiculous arguments. Judges swat them down. But it is something else entirely for the government to take outlandish positions. The truth is that the government gets the benefit of the doubt for most judges, and its arguments will get more attention than they otherwise deserve. There is deference to how agencies interpret the statutes they administer. That is why it is so wrong for the SEC and other regulators to be, quote, pushing the envelope and trying to win cases no matter what. That is not their role, and it harms the public and the market. They have a duty to everyone,

including those they litigate against. The current crop of regulators in Washington has lost the plot. A great threat, and I think many in this space will agree with Jack's assessment there. Now, moving over to markets for a moment, Coinbase International recorded its largest day of volume ever on Friday. The newly established offshore derivatives venue saw $287 million in trading volume as crypto markets moved on from Thursday's flash crash. Trading commenced in mid-June with the exchange exclusively offering perpetual futures trading to institutional clients. For the first 50 days, volume was soft, struggling to register more than $100 million in daily trading volume. The past two weeks, however, have seen significantly more volume, with each workday seeing

over $100 million in aggregate daily volume across all trading pairs. Now, by way of comparison, Binance regularly sees over $15 billion in daily futures volume, so there's still a long way to go for the fledgling Coinbase platform. The offshore exchange was of course launched as part of Coinbase's recent push to accelerate global adoption of the asset class and expand the firm's business internationally. The decision to restrict the trading venue to institutional clients only was punctuated by the exchange only being accessible via API with no user interface offered. According to a recent letter to shareholders, Coinbase has onboarded 50 institutions to the new exchange. These clients have traded 5.5 billion over the first seven weeks of trading.

Coinbase said in the shareholder letter, quote, While we are in the early days of investing to build liquidity and grow institutional participation, we are also working to bring new features and additional products to market over the second half of the year, such as additional asset trading books and spot trading. We remain committed to partnering with high bar global regulators, and are encouraging the U.S. to follow the progressive regulatory framework seen in emerging crypto hubs. With Coinbase successfully obtaining a license to offer futures products to U.S. customers last week, they no doubt have plans to further develop and integrate their

futures offerings over the coming year. Now, speaking of offshore, the days of privacy-protected crypto trading appear to be numbered with another offshore exchange implementing KYC policy to conform with global regulatory guidelines. Seychelles-based crypto-derivatives exchange BitGet will now require customers to provide government identification documents and complete facial recognition in order to trade. The firm says that the new KYC requirements were being put in place, quote, to better protect users' rights and interests, comply with regulatory requirements in the global cryptocurrency sector, and to create a secure cryptocurrency trading environment. The new KYC requirements will be enforced starting in September, and the move follows in the footsteps of

OkX and Kukoin, who also both strengthened KYC policy over the past year to come in line with global regulatory expectations. Now, speaking of expectations, SBF is apparently finding being locked up not to meet his expectations. Days after the judge revoked his bail, Sam's legal team has requested that he be released five days per week to work on his defense. In a letter sent to the judge on Friday, lawyers complained that Sam is unable to properly review the volumes of evidence recently disclosed by prosecutors. They wrote, just last week, the government produced three quarters of a million pages of Slack communications, which were supposed to be produced months ago, that Mr. Bankman Freed will have no hope of reviewing under this schedule. The lawyer suggested that Sam could be

released to interview rooms at the courthouse daily to review documents and consult with his legal team. They argue that his current situation is, quote, entirely inadequate and will, quote, substantially interfere with Mr. Bankman Fried's Sixth Amendment right to participate in preparing his defense and his right to receive effective assistance of counsel. Now, while locked up in the Metropolitan Detention Center in Brooklyn, Sam is supposed to be given access to a laptop to review evidence in his case, but internet access is not allowed. This means that additional files need to be physically transported on hard disk by prosecutors, who claim it is not feasible to to load all of Sam's documents onto a laptop. Prison authorities have already rejected a plan to move

Sam to an upstate facility where he could have easier access to a laptop in the internet, and his lawyers are also arguing that without the ability to meet with his lawyers and use an internet-enabled laptop at the courthouse, the October 2nd trial date might need to be pushed back. Meanwhile, later, on Friday, prosecutors claim that Sam has not yet turned over all of the required information to ground a defense that he relied on legal advice in his conduct at FTX. prosecutors argued that Sam should not be allowed to introduce this defense at trial unless he promptly turns over information about the contents of this advice and identifies who he received it from. Now this news went over about as well as you would expect in the crypto sector

with Aden tweeting, dude, this isn't a camp, you don't get to choose what days you do and do not go to jail. And another account wills saying, this makes a lot of sense. If I were in prison, I would also want to be released from prison. Anyways, guys, that is going to do it for today's episode. Like you said, a bit of a short one, but we are firmly in the dog days of summer. Now it is crypto, so who knows what will be coming around the corner tomorrow, but in the meantime, I hope you're catching up on the news, catching up on some time with fam, and looking forward to another phase, which will inevitably be a lot more volatile than what we have right now. Thanks as always for listening, and until tomorrow, be safe and take care of each other. Peace.