The Breakdown - The SEC Sends a Parting Shot at the NFT Space

Episode Date: December 18, 2024

Bitcoin smashes through another all time high. The SEC meanwhile has sent a Wells Notice of their intent to sue Cyberkongz. The question is whether it's just the Enforcement Division clearing out their desks, or the start of an 11th hour assault. 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, December 17th, and today we are talking about the last gasp of a dying SEC. But before that, of course, we got to get into some price action. Before we get into any of that, though, 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.

Well, friends, another day, another new all-time high. Bitcoin stopped just shy of $108,000 yesterday after a strong morning rally that began as soon as markets opened in New York. Evening price action was choppy but extremely well supported with price remaining above $105,000. An overnight rally took Bitcoin back up to the highs trading above $107,000, and as of this recording, it is just under $107,000. Analysts remained bullish as the Santa Claus rally seems to be in full swing. Jeff May, the COO of Crypto Exchange BTSE, said, We think Bitcoin still has tremendous upside potential and could easily hit the 125K mark by the end of 2025. While some say the upside has already been priced in over the last month or so, we think the rally is just getting started.

Augustine Fan, head of insights at Sofa said, Tradfai inflows now dominate all sentiment and price action in Bitcoin unlike any other prior crypto cycle before. This influence will only grow as more and more traditional firms finally need to have a digital asset policy, given the immense revenue opportunities and see change in the political environment. Some suspect the Santa Claus effect is driven by Trad V firms rebalancing their books heading into the new year. If that's the case, we could be watching a whole lot of portfolio managers figuring out how they want to treat Bitcoin ahead of 2025. Aside from Bitcoin-specific factors, macro conditions are currently in a state of flux. This Wednesday's Fed meeting has a rate cut fully priced in.

However, many expect this could be the end of rate cuts, at least for now. Mark Chandler, the chief market strategist at Banachburn Global, wrote, we suggest the risk of a hawkish cut with less rate hikes next year than anticipated in September in the SEP or dot plot. Recognition that the economy is stronger than had previously been expected, and inflation is on a bumpy path that allows the Fed to be patient. In China, though, policymakers have run out of time to be patient. Goldman Sachs analysts believe the decision point is now writing in this week's newsletter, the choice in front of Chinese policymakers is simple, either to provide a large dose of policy offset or to accept a notably lower headline real GDP growth.

We expect them to choose the former. Already trading at multi-decade lows, Chinese bond rates collapsed further this week. Chinese 30-year bonds are now trading within a slim margin of their Japanese equivalence for the first time ever. This suggests China is headed into another growth slowdown and isn't expected to recover. We haven't seen strong stimulus out of Beijing during the Bitcoin era. The last time policymakers delivered meaningful fiscal support was in 2008. Marty Bent is paying close attention, tweeting, Don't sleep on this Bitcoin pump being driven by Chinese capital flight.

Turning to market structure, Ibit has seen a surge in volume for put options. volume was particularly strong for the $35 and $30 strike prices, which represent a 40 and 50% drawdown respectively. The two expiry dates that were in focus stretched out to May of next year in January 2006. Normally, heavy volume in puts would be viewed as bearish, but Greg Magadini, the director of derivatives at Amber Data, has a different interpretation. He believes this activity is hedge fund selling extremely out of the money puts as an income generation strategy. If Bitcoin doesn't collapse before the expiry date, the funds are happy pocketing the cash raised from selling the options. If Bitcoin sees a 50% drawdown, then the funds are quite happy to buy the Bitcoin at that price,

making the trade a win-win. Saxo Bank promoted a similar strategy for Nvidia earlier this year as a way for funds who missed the trade to still profit. Notably, this isn't the sort of trade you'd put on if you were expecting Bitcoin to suffer an 80 or 90% drawdown, a stark change in outlook from previous cycles. For the long-time Bitcoiners, they're just sitting there watching their thesis play out. Hodelnot wrote, fully numb to these all-time highs. We know Bitcoin is worth so much more.

Stephen Lubbka commented, Bitcoiners are simply having a better time than Bitcoin haters. Lesson there. Now, our main story today is that the SEC has taken their first major enforcement action since Gensler announced his resignation, sending a Wells notice to an NFT project called Cyberkongs. The letter informed the project to expect a lawsuit shortly, providing them with one final opportunity to explain themselves. Taking to Twitter, Cyberkongs explained that they were first contacted two years ago, and have been engaging with the Division of Enforcement ever since. They said, Cyber Kongs is a project deep-rooted in gaming and the SEC's division of enforcement have approached

us with very concerning rhetoric that you cannot have an ERC20 token in tandem with a blockchain game without registering it as a security. This discourse would have major implications for the entire Web3 gaming industry, and we will defend against this stance for the wider space. In addition, the SEC has demonstrated a perplexing interpretation of smart contracts. One of their major concerns with Cybercongs is around the quote-unquote sale of Genesis Kongs in April 2021, which was actually a contract migration. If they cannot distinguish between a primary sale and a contract migration, what hope do we currently have for a clear regulatory pathway going forward? At first glance, Cyber Kong seems like an extremely odd choice for the SEC

to go after. The project was always a fairly middle-of-the-road NFT collection. They never rose to the prominence of collections like Pudgy Penguins or Bored Apes, and the project was also entirely community-funded, taking in no venture capital. One reason the SEC may be paying more attention is the recent resurgence of NFTs. They are certainly not back to their 2022 highs, but a handful of collections popular with the crypto community have seen their prices double or triple since August. At this point, it appears that NFTs are regaining popularity within the crypto industry, but haven't really made an impact outside of the community as of yet. As the clearest example, board apes are still down 90% from all-time highs. In general, as you know, we don't really cover

the ins and out to the NFT industry here, but the decision to go after this relatively obscure project is so baffling it warrants attention. Austin Campbell of WSPN payments commented, Thank God we have an SEC willing to protect investors from the horror of smart contract migrations while wisely avoiding prosecution the good actors in the space like FTX, Terraform Labs, or Celsius, none of whom were sued by the SEC before inflicting tens of billions of dollars of damage on retail investors. I feel very protected. Crypto lawyer Larry Floreo wrote, If you don't think the Gensler regime at the SEC was acting in bad faith,

this next level absurdity probably won't convince you. But if this doesn't convince you, then I'd love to hear you share how a smart contract migration is somehow a securities transaction. Mike Selig, a partner at Wilkie Far, tweeted, an SEC well's notice at the tail end of Gensler's run as SEC chair. SEC purportedly issued the notice to Cyber Kongs after a contract migration for Genesis Kong's NFTs to investigate the migration as a sale of securities. Optimistic, the next SEC will provide clarity on NFT sales. It's difficult to know whether this is Gensler's SEC's lobbing bombs on their way out the door

or simply the enforcement division clearing their desks before the end of the year. Even within the frame of regulation by enforcement, this makes very little sense. Was this action intended to discourage smart contract migration? This is exactly the kind of thing that could be dealt with easily through guidance rather than enforcement. That is, of course, unless the point of the last two years was to stifle activity in the crypto sector. The question for the next few weeks will be whether this is the first of many 11th hour enforcement actions we should expect, or simply the death rattle of a failed regulatory strategy. Katie Biber, the chief legal officer of Paradigm doesn't know, but recognizes we're close to the end.

She wrote, We always knew the dead cat bounce was coming and there may be more still, but the ideology of propelling this lawless SEC is finito. Help is on the way. Another loose end being tidied up at the end of the year is the reappointment of SEC Commissioner Caroline Crenshaw. Crenshaw is the sole remaining Democrat commissioner after the resignation of Jamie Lizaraga and Gary Gensler and has reached the end of her term. She was re-nominated by outgoing Senate Banking Committee Chair Sherrod Brown, but appears to be struggling to get the votes. The confirmation hearing was rumored to be scheduled for last Wednesday but was bumped to later

this week. Brown claimed the vote was held up by Republican senators, quote, doing the bidding of corporate special interests. He's almost certainly referring to the crypto industry, who are no fans of Crenshaw and have campaigned against her renomination. Crenshaw's most notable action came during the vote to approve the Bitcoin ETFs. Despite having a court order in hand, Crenshaw voted against the approval and wrote a scathing dissent. She argued that the judge had ruled incorrectly and ignored the concept of investor protection, insisting that the court had drawn the wrong conclusions from the evidence. If you believe the Gensler SEC was lawless undermining a court order during a commission vote is a pretty stark example.

The Democrats only have a majority in the Senate for the rest of this week, though, so time is running short. Interestingly, the fact the Democrats couldn't force Crenshaw through implies a few holdouts within the party. Basically, it suggests that there are a few Democrat senators unwilling to carry the war against crypto into the next political cycle. Assuming Crenshaw doesn't return, there is a fascinating discussion emerging about how the SEC could change next year. The default assumption has been that the Democrat ranking member of the Banking Committee will put forward their nominations, keeping with congressional norms. However, that member is likely to be Elizabeth Warren due to her seniority on the committee. It's entirely unclear that she still holds sway within the party to force through her picks. Instead, there is a serious suggestion that the SEC could have zero Democrat commissioners next year.

The law requires that neither party has more than three members of the commission. However, it is completely silent on what should be done with the other two seats. This means it's legal to nominate independence to round out the five-member panel. This would be completely unprecedented in the history of the SEC, which is traditionally bipartisan. However, as we know, the Trump administration seems more than willing to reject Washington norms. The idea has been percolating for around a week in the rumor mill, but is starting to get a little more credence. Politico's Tuesday newsletter suggested a variant of this plan could be in the works for the short term. They wrote, if Crenshaw is left hanging, Trump will have the power to nominate

his pick to lead the agency, former SEC Commissioner Paul Atkins for her seat, potentially setting up a three-person commission exclusively consisting of Republican members. Presumably, the plan would be to leave the other two seats empty and simply pass rules with the minimum quorum of three commissioners. That seems like an incredibly controversial path, but Politico isn't in the habit of writing things that aren't being seriously discussed in Washington. T.D. Cowan's political analyst, Jared Seiberg, is echoing Politico, writing in his Monday note, we believe it is increasingly likely that there will not be any Democrats on the SEC next year. He warned, though, that executing the strategy to push through crypto rulemaking could come with a cost, adding, if the rules are viewed as

partisan, then a democratic SEC is more likely to change them. By contrast, bipartisan rulemakings likely create a regulatory regime that survives elections. We view that as providing the political stability that would benefit crypto trading platforms, token issuers, and the broader crypto sector. One of the things we've been talking about heading into next year is the potential for a wave of IPOs, and the SEC has approved Crypto Wallet company Exodus to go public on the NYSC American Exchange. NYSE American is a sister exchange to the New York Stock Exchange, offering more competitive pricing ideal for smaller companies. Exodus went public via a novel tokenization process, selling their stock directly to qualified investors on the securitized platform. Following tokenization, the stock

tokens traded freely on the Algarand blockchain. The stock also trades on an over-the-counter venue called OTC markets. Exodus was originally scheduled for uplisting in May, but was stymied by the SEC, who said they were reviewing the company's application. It could simply be a coincidence of timing, but the approval could also be a sign that regulators are beginning to loosen up, heading into the change of administration. Once listed, Exodus will be the only U.S. stock with a tokenized version. The stock is set to begin trading on Wednesday, and, just in case you're wondering, the company has a reserve of 1900 Bitcoin worth around $200 million. Lastly, one on inflows. The latest ETF report from Coin shares highlights just how strong the recent trend has been.

Last week saw a remarkable 3.2 billion inflow into global crypto ETFs. This was the second largest inflow week ever, only falling short of the week prior. Even more significant is how large the current streak of inflows is. Global crypto ETFs are now in their 10th week straight of positive flows. Out of the total net inflows of $44.5 billion for the year, 45% came in the past 10 weeks. Ethereum funds saw their seventh consecutive week with inflows above $1 billion, suggesting that crypto investors are looking to branch out from pure Bitcoin exposure. Highlighting how much ETFs are dominating the Bitcoin landscape,

trading volumes are now averaging $21 billion per week, which represents 30% of all Bitcoin trading. Total Bitcoin volumes are now averaging $8.3 billion per day. Nate Garaci of the ETF store pointed out the obvious saying, there was clearly significant pent-up demand for crypto exposure. And with that, we close today's breakdown. Appreciate you listening, as always, and until next time, be safe and take care of each other. Peace.