The Breakdown - TradFi Wants To Run Crypto

Episode Date: June 10, 2023

Operation Chokepoint 2.0 hasn't stopped savvy tradfi investors from smelling an opportunity. This week, revealing and emblematic comments from the leader of Soros' funds show how tradifitional financiers are seeing opportunity in the carnage.  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 Saturday, June 10th, and that means it's time for the weekly recap. A quick note before we dive in, if you haven't tried it out yet, I would highly encourage you to go check out the breakdown's first five. It's our weekday morning newsletter where we talk about the five most interesting or important stories in Bitcoin, macro, crypto, you name it. And you can find it at Breakdown. down.behyve.com. That's B-E-E-H-I-I-V.com. Well, friends, we are crawling over the finish line this week. I don't know why at the beginning of summer, my voice decided to go, but we have to wrap up

this crazy week, this crazy week, which will of course be remembered as the week that Binance and Coinbase got sued. However, where we're going today with this episode is that even as we deal with the fallout, the embers of what comes next are starting to show through. First of all, the SEC doesn't necessarily have guaranteed wins in these cases. Case in point. A federal judge has dismissed the case against defy startup pooled together, stating that the federal court system is not an appropriate venue to raise concerns about the platform. The pull together case caused waves in October 2021 when former Elizabeth Warren staffer, of course, forgive my cynicism, Joseph Kent, filed the lawsuit.

Kent had deposited $10 into the protocol, seemingly only to allow himself to file the lawsuit. Now, pool together allows users to deposit money to enter a week. weekly prize draw. Users remain entered in each week's draw and can withdraw their funds at any time, creating a lossless lottery system or a prize-link savings account. Prices are generated by a form of staking yield, with the yield creating the prize pool rather than being distributed among protocol users. As a defy protocol, there was no continuing operation, simply a piece of code stored on a blockchain that continued to function week after week. Kent had claimed that this lottery-like structure was illegal in New York, and that more broadly he wanted an answer to who should be held to

account when defy systems cause harm. Kent's case was obviously overtly driven by an anti-crypto ideology, with his complaint stating that he was, quote, gravely concerned about the cryptocurrency ecosystem, which requires enormous amounts of electricity, accelerating climate change, and allowing people to evade financial regulations and scam consumers. When the lawsuit was filed, lawyers for pool together said what everyone on crypto Twitter was thinking, which was, quote, this apparently ideologically driven lawsuit is a waste of the court and everyone else's time. And now it appears that the judge agrees with that sentiment. He stated in his order that, quote, while Kent's no doubt has genuine concerns about pool together, including its legality under New York law, a suit in federal court is not

an appropriate way to address them. Kent had brought his case under a New York state law, which allows the purchaser of an illegal lottery ticket to bring a class action lawsuit on behalf of themselves and other ticket holders. On that basis, the judge suggested that maybe this case would be more appropriately handled in state court rather than the federal court. Another question that arose was that of harm. Kent had deposited money into Pool Together, but apparently had sustained no loss as a result of that. Earlier in the case, Pool Together lawyers had suggested the only harm was the one Kent was attempting to manufacture using his lawsuit. The judge appeared to agree, asking lawyers for Kent, quote, you got exactly what you asked for, didn't you? stating that the choice to put money into pool

together was, quote, a matter of choice. The judge added, you did that with eyes wide open. While this case will not progress in federal court, the judge did acknowledge the interest in the legal issues around Defi and the liability of founders when a protocol causes harm. We're dealing with the exotic world we live in today, he said. In this whole new area, there are lots of questions that haven't been answered. Defi Dad writes, this absurd pool-together lawsuit triggered by Joe Kent must have caused such undeserved hardship and distress to the life of Leighton, and I would imagine his closest friend's family and of course his lovely wife. As a friend to Leighton who's eldest tongue, I want to say to Mr. Kent, and I mean this with all due respect, go eat rocks, you little twerp. I hope the world isn't half as cruel to you as you've been

to one of the kindest and hardest working people I know. Dysopia Breaker wrote, The Warren Staffer who put $10 into a no-loss lottery contract so they could sue the software developers who published a code of that contract has lost their case. The judge threw it out based on the absurdity of this manufactured claim, avoiding entirely the more interesting questions about defy and smart contracts. Coin desk columnist David Morris wrote,

The Elizabeth Warren staffer who manufactured a case against one of the actually useful and not even remotely malicious protocols out there is getting a preview of what the SEC could very well be hearing six months from now. And indeed, as the SEC enters its legal endgame, these cases are getting more significant. James Murphy at Meta Lawman wrote a thread about the case with Ripple. He writes, The stakes just keep getting higher for the ruling in SEC versus Ripple. Here's why. If Judge Torres rules that XRP tokens trading on secondary markets are not securities, it would undermine the entire basis for the SEC's case against Coinbase and much of the Binance case. In the Coinbase case,

the SEC claims that 13 tokens traded on Coinbase are securities. So Coinbase is, illegally operating an unregistered securities exchange, broker, broker, and clearing broker. But if those 13 tokens are judged not to be securities, the SEC has no case. Before anyone gets too excited, a ruling by Judge Torres would not be binding precedent in other cases, meaning other judges will not be bound to rule the same way. Only decisions of the Court of Appeals and the Supreme Court are binding on lower court judges. But here's what's interesting. The judge, Reardon, assigned to the Coinbase case is brand new, only been a judge for six months. Judge Reardon works in the same court in Lower Manhattan with Judge Torres.

So while a Torres decision on XRP would not be a binding precedent, I do believe Judge Reardon will pay very close attention to Judge Torres' legal reasoning in ruling whether XRP is a security. And I believe Judge Reardon would follow the same reasoning as she analyzes whether the 13 tokens cited in the Coinbase complaint are securities. This dynamic, of course, works both ways. If Judge Torres rules that XRP tokens traded on secondary markets are securities, the SEC will jump for joy and argue that the judge presiding over the Coinbase in Binance cases should follow Judge Torres's reasoning. A few caveats are in order. The Binance case is not quite as simple because unlike Coinbase, it did issue its own token, B&B, so Binance will be hoping Judge Torres rules that Ripple's own

issuance in sales of XRP do not qualify as securities offerings. And, with respect to Coinbase, the SEC could still argue that staking as a service qualifies as a security offering, even if Judge Reardon rules the 13 listed tokens are not securities. But the rest of the SEC's case would be gutted. Whichever way these early court rulings go, we should expect to see years of appeals. In the meantime, even more people in crypto have good reason to root for a big ripple win. So it looks like the XRP Army is finally getting some reinforcements. Now, speaking of all these tokens that were listed as securities in these lawsuits, some of them are pushing back on the idea that they are securities.

In a statement, Salana Labs said, The Salana Foundation strongly believes that Seoul is not a security. Sol is the native token to the Salana blockchain, a robust open-source community-based software project that relies on decentralized user and developer engagement to expand and evolve. At a Thursday event at the Solana Hacker House in New York, developers seemed unfazed. One developer told CoinDesk, I don't think any of the developers give a shit.

Sol being a security doesn't really affect anyone building on top of Solana. Bloomberg's Matt Levine even weighed in on the tokens issue on his column on Wednesday, writing, Solana, let's say, did do a securities offering of sole tokens, but legally, selling them to venture capitalists and private placements, subject to appropriate safes and lockups. The fact that those tokens now trade publicly, with less disclosure and fewer investor safeguards than the SEC would like, is from the SEC's perspective, unfortunate. But it's not exactly Salana's fault, or rather it is Salana's fault, but in a perfectly legal way. The Cardano Foundation also rejected the SEC's claim that it was a security.

They wrote, The Cardano Foundation disagrees with the recent qualification of Cardano as a security under U.S. law. We look forward to the continued engagement with regulators and policymakers to achieve legal clarity and certainty on these matters. Still, both tokens are down over 10% since they were first named in the Binance lawsuit on Monday. Now, while the SEC was shocking the industry with the Coinbase lawsuit on Tuesday morning, executives were in D.C. testifying. One of those executives was Robin Hood's chief compliance officer, Dan Gallagher, who also served as an SEC commissioner. Gallagher told Congress that Robin Hood had attempted to come in and register their crypto products, but staff were unable to guide the firm through the process.

He said, quote, when Chair Gensler at the SEC in 2021 said, come in and register, we did. We went through a 16-month process with the SEC staff trying to register a special purpose broker dealer. And then we were pretty summarily told in March that that process was over and we would not see any fruits of that effort. Also testifying that morning was Coinbase Chief Legal Officer Paul Grewell, who said, when Coinbase has attempted to do just that to talk about how we could register as a broker dealer or an alternative trading system, or even as a national securities exchange after

months and months of discussion, were simply dismissed with no response or any counterproposal or ideas coming back from the SEC. Senator Cynthia Lummis, no doubt watching the proceedings in the House chimed in afterwards on Twitter, the SEC has failed to provide a path for digital asset exchanges to register. Now elsewhere in the industry, some companies are ramping up for continued legal challenge. Although Circle has not yet attracted the gaze of the SEC, the firm is definitely pulling in reinforcements. This week, the staple coin issuer announced the hire of former CFTC chairman Heath Tarbert as chief legal officer. Tarbert served as the head of the agency during the Trump administration and also held domestic positions at the DOJ, Treasury, and White House. Most recently, he was the

CLO at Citadel Securals CEO Jeremy Aller said in a Twitter thread, It's a pivotal time for our company in the broader industry, and a critical part of the path forward is building durable relationships with governments around the world as we look to bring the power of blockchain native money and payments everywhere. Tarbert said in a press release, I'm thrilled by the opportunity to help Circle's efforts to evolve the global financial system and encourage policymakers to establish sound rules for digital assets that provide clarity, coherence, and protection for people and businesses. Investor Adam Cochran wrote, huge hiring win for Circle, showing once again that established American businesses in this space are ready to double down, be transparent, and do this right. Cryptotrater Turbo wrote,

bigger signing than messy to FC Miami. Now, while the appointed regulators continue their shenanigans, the elected officials seem to be getting a little bit more in line. The Patrick McHenry-led financial Services Committee continued to move the ball down the field, releasing a new revision draft of a stable coin bill on Thursday. This third public draft of the bill will be discussed at a committee hearing on Tuesday and is intended to represent a compromise with Democrat lawmakers. At a hearing to discuss the previous Republican draft bill in May, Democrats complained about a lack of input on the legislation, claiming to be blindsided by its release. The bill has now been cut down and has incorporated concerns raised by both Democrats and Republicans

at the previous hearing. In the new draft bill, for example, the Federal Reserve would be called upon to write requirements for stablecoin issuers, but state regulators would maintain oversight of the companies for compliance with those requirements. The Fed would also be granted power to intervene in emergency situations, while state regulators could pass their supervision duties to the Fed if desired. The primary concern of Democrats was that the previous Republican bill cut the Fed out of the equation and granted too much power to state regulators. It was feared this could drive regulatory arbitrage, with firms seeking out state regulators with the softest touch. The revision draft seeks to meet in the middle on this issue, giving the Fed a powerful overarching role on stable coin regulation. Now, more broadly,

we've also seen the first signs of dissent among the Democratic ranks when it comes to the actions of their appointed regulators. First term Congressman Richie Torres spoke out against the SEC's action. The House member for New York said, quote, the latest enforcement action against Coinbase is an egregious example of regulation by enforcement. It demonstrates a complete contempt for Congress, which is in the process of developing a framework. Now, Torres has consistently called for reasonable crypto policy, from his seat on the House Financial Services Committee, often at odds with his Democrat colleagues. Speaking plainly, Torres gave his view on Gensler's motivation. His view of the law has been constantly changing. Mr. Gensler has gone from a crypto cheerleader to a crypto-skeptic. He's

portraying crypto as the villain in order to portray himself as a political hero. Now, the question, of course, is who is waiting on the other side of this? Is anyone even going to be here to still be in this industry? Well, it turns out, despite all the lawsuits and the tumult and the downturn, the CEO for Soros Fund management remains bullish on crypto. Don Fitzpatrick, who also heads up investment at billionaire George Soros' family office, has been keen on crypto for years. Rumors for surface in early 2021, with confirmation shortly after that that the fund had bought Bitcoin. More recently, the fund added positions in Marathon Digital, Micro Strategy, and Silvergate Bank prior to its collapse. The fund is currently valued at around $30 billion.

Speaking to Bloomberg this week, Fitzpatrick said that while the lawsuits against finance and Coinbase were a setback, they could pave the way for traditional financial institutions to, quote, step in and take the lead. She noted that a lack of standards and rules around customer funds have played a key role in major events in crypto over the past year. Quote, it's clear these crypto-native platforms would have benefited from having an adult in the room. They're just long-held and simple norms about how you treat customer assets. Still, regardless of the frequent problems in the industry, Fitzpatrick said, I think crypto is here to stay. Now, I think the crypto-twitter space knew exactly what was going on here.

Zero X-Hank writes, phase one, crypto-illegal. Phase two, crypto-not illegal if tragic management. Will Clemente writes, almost like a lot of this regulation has been to crush crypto-native companies and clear the way for the big boys, traditional investment banks, who weren't prepared for the 2021 rally. Trista Kelly writes, I'll say it again. The crypto land grab by banks, hedge funds, HFTs, and fund managers is going to be so fast. I give it less than two years. So friends, there you have it, the weekly recap. Too big a week not to recap or at least get all of this last information in. Wherever you are, I hope you are having a great week. I appreciate you making it through the awkward voice.

Until next time, be safe and take care of each other. Peace.