The Breakdown - The SEC's Crypto Legal Battles Aren't Easy

Episode Date: June 11, 2023

On this Long Reads Sunday, NLW reads: The New Crypto Bill Gary Gensler Doesn’t Want You to Know About - David Z Morris The SEC Has Started an All-In Political Battle Over Crypto - Michael J Casey Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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 Sunday, June 11th, and that means it's time for Long Read Sunday. Before we get into that, a quick note, if you were enjoying the breakdown, please 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. Well, as you've heard for the last couple of shows, I have been on the midst of losing my voice for quite some time. And so today, we are taking a page from the AI breakdown, which, by the way, if you haven't tried out yet, you should check out. And we are doing a long read Sunday read by

AI. So you're going to hear my voice sort of. This is a voice clone that I did of myself using play.h. I'm using it to read two pieces today, both themed around, of course, the themes of this week, the SEC and the legal battles that we now find ourselves facing. The first piece comes from Coin Desk's David Z. Morris and is called the new crypto bill Gary Gensler doesn't want you to know about. When Gary Gensler's Securities and Exchange Commission, SEC, this week filed securities charges against America's biggest cryptocurrency exchange, they were premised on a single core idea that securities law already includes the necessary tools to regulate cryptocurrency assets and marketplaces, Jensler, an appointee of the Biden administration, has consistently repeated that

crypto doesn't need new rules. But legislators from both the House and Senate and belonging to both political parties seem to disagree. A series of recent bills show the legislative branch actively engaged in lawmaking around crypto. They clearly don't agree that the status quo is good enough. According to one legal theory based on a law known as the Administrative Procedures Act, APA. The existence of this process could undermine the SEC's current round of enforcement actions. On June 2, just days before the SEC actions, House Financial Services Chair Patrick McKenry and Agriculture Committee Chair, Glenn Thompson released a collaborative draft bill called the Digital Asset Market Structure and Investor Protection Act. The bill has some truly

excellent provisions, including a safe harbor for non-security cryptos under $75 million market cap and for limited sales to non-accredited investors. It also aims to clarify registration procedures for crypto exchanges and even includes a plan for progressive decentralization that would allow assets to transition from security to commodity status over time. These specifics are bad for the SEC's case against Coinbase, since they address many of the precise issues the SEC claims the law already covers. But the bill's very existence may be an even bigger problem for Jensler than its details, both legally and in the court of public opinion. The bill demonstrates an ongoing process of crypto market legislation, creating at least the appearance that Jensler is trying an end-run-around

Congress. Though the House bill is largely a Republican effort, Senator Syntha Lummus told the block that she and Senator Chris and Gillibrand are holding the reintroduction of their own crypto-regulation bill to see how things go in the House. So it's not a huge stretch to say that Gary Gensler's SEC is attempting to sneak past a bipartisan process unfolding across the House and Senate. The fact that neither version is likely to pass under a Biden administration doesn't change that. This could rise to the level of violating a 1946 law called the Administrative Procedures Act. The APA was crafted over more than a decade in an attempt to reconcile the growing administrative state with democratic principles. President Franklin Roosevelt warned at the time that the

growth of bureaucratic U.S. agencies threatens to develop a fourth branch of government for which there is no sanction in the Constitution. Broadly, the goal of the APA is to ensure that agencies like the SEC remain subordinate to democratic lawmaking processes. There is other evidence that the SEC is behaving not just unfairly, but undemocratically. On Wednesday, Robin Hood officials testified that they had spent 16 months working with the Sikhs to register the company's crypto sales service as a special purpose digital asset broker. According to their counsel, a former SEC commissioner himself, they were pretty summarily told in March that, we would not see any fruits of that effort.

That gets to the deep question about Jensler's representations over the past two years. While he has on multiple occasions repeated some version of these companies just need to come in and register, it now appears that may simply have been a lie. The preponderance of evidence, as argued this week by Blockchain Association Chief Policy Officer Jake Chervinsky, among others, suggests, Jensler's real goal is to effectively ban crypto in the U.S. In fact, Jensler's intent or mine state seem fairly irrelevant. of it. The effects of his and his agency's actions, if uncontested, could ultimately be the elimination of not just crypto businesses and development, but ultimately even its practical

usability by individuals on United States soil. Given the apparent interest of elected U.S. representatives in a more measured approach, it seems clear that Jensler's SEC is overstepping its moral authority. It will be up to the courts to determine the legalities. All right, back to non-AI Nathaniel here. We are going next to another piece from CoinDesk this time from Michael Casey. This one is called the SEC has started an all-in political battle over crypto. The Securities and Exchange Commission's lawsuits against Binance and Coinbase this week have set up a high-stakes battle that will engage all three branches of the U.S. government in a competition for power, determine whether the crypto industry will decamp the U.S.C. for good

and define the future of digital money. The SEC's aggressive actions against finance, the world's biggest crypto exchange, and Coinbase, the biggest in the U.S., are a big flex, one that reveals the agency's extraordinary discretionary power. In saying, we don't need more digital currency in interviews following the announcements, SEC Chairman Gary Gensler suggested he truly does want to destroy the crypto industry. By throwing the book at Binance, a thoroughly international company and its high-profile CEO, CZ, with a suit that, among other claims, alleges that it offered unregistered securities and commingled customer funds, the Sikh has sought to demonstrate that its reach extends beyond you. Borders! And with the Coinbase case, it is, quite clearly,

taking aim at a much wider set of players than just that one defendant. The case is premised on the notion that most of the securities traded on the San Francisco-based exchange are unregistered securities, creating legal concerns for the likes of Algarand, Polygon, and Solana. The actions directly go after the centralized finance system on which Binances and Coinbase's custodial. models are based and indirectly some of the main protocols on which decentralized finance depends, but this is far from a slam, dunk for the SEC. For one, the cases likely won't be decided or settled for many years. If the SEC's three-year-old case against Ripple Labs is any indication, both Coinbase and Binance are vowing to fight hard in court, which will leave the commission's

resource, challenged enforcement team stretched under a massive workload, and the SEC's hardline approach does not enjoy widespread support in other areas of the U.S. government. The timing of these actions being what it is, the agency is almost willing other bases of power to come after it. To start with, Congress. A draft bill that will soon come before the House sets parameters for how to classify digital assets and circumscribes the SEC's powers of interpretation of crypto, within existing securities law, curtailing its capacity to launch these kinds of enforcement actions.

It is co-sponsored by Rep Patrick McKenry, the chair of the House Financial Services Committee, who has been critical of Jensler's aggressive actions against the crypto industry, and rep. Glenn Thompson, the chair of the Agriculture Committee, which has jurisdiction over the Commodities Futures Trading Commission, the other big agency vying for a greater say in crypto regulation, whether the McKinney-Thompson bill gets through a Democrat-controlled Senate and eventually makes it into law is doubtful within the current electoral term, but the proposed legislation makes for a very important talking point as the election season ramps up. That brings us to a second branch of government, the executive, within whose authority the SEC and other such agencies fall.

These lawsuits will land into a presidential campaign in which the future of crypto and digital assets will, like never before, be part of the public debate. Already, expressions of support for crypto have come from three presidential hopefuls. Robert F. Kennedy Jr., who is challenging Biden for the Democratic nomination, Florida Governor Ron DeSantis, seen as the main challenger to former president and third go-round candidate Donald Trump and biotech entrepreneur Vivek Ramoswamy, another Republican contender? Trump, until now, the Republican frontrunner, has himself used non-fundable tokens as fundraising vehicles, though his pronouncements on crypto have been all over the shop. Whether or not Biden retains the presidency, this level of attention on the industry will

help shape the politics of how a future SEC deals with these cases. Then there's the Supreme Court, which last month scaled back the Environmental Protection Agency's power to enforce rules on landowners based on the Clean Water Act. What does this have to do with the SEC and crypto? Conservatives who now control the court see the EPA as just the first regulatory agency whose authority needs to be clipped. A more sweeping attack on executive agencies is coming, and the SEC is likely to be a target. In other words, a perfect political storm is brewing that makes the outcome of this current war on crypto hard to predict. multi-front nature of this fight also raises the stakes in that outcome, even if we have to wait

years to see it. If the Jensler strategy of All-Out Attack wins, it could be the de facto death knell for crypto in the U.S., developers will leave NMASI to set up shop in Dubai, or Bermuda, or Singapore, or France, or in any number of jurisdictions that are proactively developing regulatory guardrails for crypto innovation to occur. This is not to say certain bank-licensed stablecoin ideas or real-world asset tokenization strategies led by existing regulated institutions, and public companies won't be allowed or even encouraged in the USS. But since these would struggle to interface with the permissionless architecture of prohibited crypto-blockchains, an outdated U.S. capital market might struggle to compete with the new models of programmable money and decentralized

governance being fostered elsewhere. Alternatively, the passage of time and the mounting counteroffensive from crypto supporters in Congress and in the courts could quash this wave of attacks. But to what end? If such a victory just further entrenchedes politicization and partisanship around this issue, the bigger, most important battle for mainstream acceptance and adoption will still need to be fought. What's needed, for all of our peace of mind, is for the crypto topic to transcend politics. It would be nice to think that this would happen organically because, after all, this is a technology. But, sadly, it's going to be up to the crypto community to engineer. There should be a focus on education efforts, which show real use cases and demonstrate the benefits to humanity from this industry's approach

to decentralize value exchange and data. We must try to ignore the theater in Washington, not to disengage with the political process, but to figure out how to do so in a way that can appeal to both sides. All right, back to NLW for just a very, very quick wrap-up. There are two things that I want to pull out from both of these pieces,

because I think they're very good companions to one another. The first is that there is no universe in which the SEC has guaranteed path between here and winning. In fact, there are many people who feel that part of the calculus is to just tie the industry up in court for so long and create such intense pressure that it has its impact in other ways. Given that we've seen people abandoning Binance U.S. this week, it's not hard to see how that would play out. It's a very public version of Operation Choke Point.

But to the extent that we start accumulating political wins, it could mitigate the impact that these actions actually have. Second, on that front, when it comes to the question of Bitcoin and crypto and the culture war, one optimistic thing here is that there is an emergence strand that you see in the campaigns of people like Bobby Kennedy and a couple of these other challengers that aren't positioning so much as right versus left, but as entrenched ways of thinking versus open ways of thinking. Now, one can be skeptical or even cynical about the vessels for these particular claims, but Bitcoin and Cryptos seem to be a part of the story for all sides.

I don't think it's going to be as easy as the SEC and Gary Gensler and Elizabeth Warren hope to make this a clear partisan issue. It's just too dynamic. And the set of people who participate are too diverse for that to really work. So despite everything, despite two lawsuits this week, I remain as bullish as ever, as convinced as ever, and frankly as unconcerned as ever, even if in the short term it can be a huge pain in the butt. Anyways, guys, that is it for today's Long Read Sunday. I appreciate you listening as always. Until tomorrow, be safe and take care of each other. Peace.