The Breakdown - Unexpected Allies: 8 States File Amicus Brief Against SEC in Kraken Case

Episode Date: March 5, 2024

The Attorneys General of 8 states have filed an amicus brief in the lawsuit against Kraken by the SEC, effectively arguing that the SEC is way overstepping its bounds. Today's Show Brought To You By Kraken - Go to https://kraken.com/thebreakdown and see what crypto can be Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet 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, March 4th, and today we are talking about some very interesting new allies in a big legal case. 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 in the show. notes are go to bit.ly slash breakdown pod. Hello friends. Well, I am just casually watching Bitcoin rip past 66,000 while I record. To keep in mind, for perspective, Bitcoin has only spent around two days in its life above these levels, so this could be a very interesting week. However, somehow,

we are not talking about that today. Instead, we are talking about breakdown sponsor Cracken and their fight against the SEC. Quick note here, I think most of you know this, but just to be clear, when we do sponsorship on the breakdown, sponsors have absolutely no editorial control. I don't give preferential coverage. In fact, frankly, I tend to avoid sponsor topics more than I might even otherwise to avoid any sense that they're buying their way onto the show. When a sponsor joins, it's because they like what we talk about here. Point being, I'm covering this because I think it's a really big deal for crypto, not just for Cracken. Now, with that out of the way, Cracken has received some unexpected assistance in defending against the SEC's lawsuit. A group of attorneys general,

across eight states, have filed a joint amicus brief arguing that the SEC has stepped far outside its jurisdiction. An amicus or friend of the court brief allows a third party to explain the state of the law with the aim of helping the judge reach the correct decision. Amicus briefs have played a pivotal role in prior crypto cases, with numerous third parties influencing the outcome of hearings in the Coinbase and Ripple lawsuits, among others. This amicus brief was filed by the Attorney's General of Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas. It claims not to support either party, but, quote, poses the SEC's regulation of crypto assets absent an investment contract because Congress has not delegated this authority to the SEC.

The states have a keen interest in preventing the SEC from seizing regulatory authority over crypto away from state regulators. They argued that, quote, The court should reject categorizing crypto assets as securities absent an investment contract. The SEC's exercise of this undelegated authority puts state consumers at risk by preempting state statutes better tailored to the specific risks of non-securities products. Whether crypto assets are investment contracts is the key issue in the Cracken lawsuit, alongside other crypto cases which involve the Howie test. The SEC are claiming that Cracken operates as an unregistered securities exchange,

pointing to a number of crypto tokens as a form of investment contracts. The regulator is now arguing that an investment contract can exist, even though crypto tokens generally grant no underlying rights to business revenue. Instead, they are arguing that buying access into a crypto ecosystem should be considered akin to an investment contract. The next step in this case is for the court to consider Cracken's motion to dismiss. Cracken has argued that the SEC has failed to identify an investment contract between Cracken users and token issuers.

They said that success in this lawsuit would set a, quote, dangerous precedent of overreach by the regulator. Cracken noted that there is, quote, no limiting principle to the SEC's authority if they are allowed to move forward with such a nebulous definition of an investment contract. In addition to the state's attorneys general, a slew of other amicus briefs were filed late last week as well. A range of blockchain advocacy and lobbying firms as well as Senator Cynthia Lummis have waited on the case, with their briefs largely mirroring the filings in the Coinbase lawsuit. This is one where it is worth reading the full thread by Cracken chief legal officer Marco Santori, who does a great job not pitching Cracken's case, but just explaining. thing in very plain terms. Marco writes, Last week, you read Cracken's motion to dismiss the SEC's case against crypto. Today, you're

reading about a regulatory power grab, how the SEC has appointed itself crypto regulator and that the SEC puts consumers at risk. But wait, that's not Cracken talking. That's eight state attorneys general in a new explosive court filing. Here's what just went down. Cracken has long advocated for clear, concise rules for digital asset exchanges from Congress. There are multiple bills pending right now on both sides of the Hill. Cracken even testified before both the House Financial Services Committee and the Agriculture Committee. We testified that Congress should make new rules that limit the SEC's jurisdiction in favor of other agencies. The next day, the SEC called to say they were going to sue, and they did. But the theories in the SEC's complaint didn't make sense.

The SEC's jurisdiction is limited to securities, but the complaint never actually tells us what the security is. At first, the SEC seems to argue that a token is an investment contract, therefore a security. Then they say, no, actually the token itself, isn't an investment contract, it's just code. A token is just, quote, sold as an investment contract. Then they said, actually, that's not it either. It's that the token represents an investment contract. Wait, then, they said no, actually the investment contract is the ecosystem that exists outside of the token. And ecosystems are contracts, or something. There are plenty of problems with the SEC's argument. Chief among them, it has no limiting principle. Beanie babies, Rolexes, and as we argue,

De Beers Diamonds would all be securities under this theory. The SEC wants a federal judge to hand them authority over any asset that could increase in value, security or not, investment or not. Trouble is, there are already cops on that beat. Enter the states. Eight of them, actually. Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas. In a new amicus brief, all are urging the court not to endorse the SEC's power grab. We should be clear about something. The states did not file in support of Cracken or the SEC, and we shouldn't put words into anyone's mouths. So here's what they actually said. quote, the SEC wrongly expands the definition of investment contract in this enforcement action

to add any asset that could increase in value. The SEC's theory functions as a regulatory power grab through an expansive interpretation of investment contract that would encompass many non-securities transactions. The SEC's actions seek to radically expand its authority into areas of traditional state regulation and other fields of law such as general consumer protection, which could preempt state laws that are more protective of consumers than our securities laws. The SEC's exercise of this undelegated authority puts consumers at risk, end quote. 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, BVI, DBA, Krakken. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. ledger combines both hardware wallets and the ledger live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use.

This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. once again to Ledger for supporting the breakdown. It really isn't Cracken's place to thank the states for weighing in. They're neutral on SEC versus Cracken. They're focused on the specific unconstitutional expansion of the SEC's power, and focused on consumer protection.

Nonetheless, we're pleased to see these cogent arguments given a voice. Others have weighed in two, blockchain association, Senator Lummis, paradigm, Chamber of Digital Commerce, and Investors Choice Advocates Network. Cracken will fight in the courts and we will win, but years of litigation do nothing to protect American consumers. It is time for all stakeholders to come together, including this U.S. administration,

to support the bipartisan bills that Congress has worked tirelessly over many years to develop that will bring consumer protection and regulatory clarity back to the U.S. markets. Now, if your ears blurred during that, Cracken CEO, Dave Ripley sums it up even more concisely, saying, first a growing number of people, then companies and organizations, and now even governments across the United States of America are calling out the SEC for their overreach and negative impact on American citizens. this is a big deal. I think Santory and Cracken are right to point out that this is much more about SEC authority than it is about an alliance with the crypto industry or Cracken specifically,

but it is pretty hard to state how impactful a group of state attorneys general filing an amicus brief could be. Staying on the theme of the SEC for a moment, SEC Commissioner Hester Purse took the stage at ETH Denver to underscore how disastrous the regulator's approach to crypto has been over recent years. Perce said the regulator has been stuck in enforcement-only mode, stating, you don't go after people who are asking you for some clear rules around how to proceed in this space. She added that it would have made a lot more sense to focus the agency's limited resources on going after the bad actors engaging in fraud.

Over the past year, much of the agency's attention has been focused on going after firms who failed to register with the SEC. All the agency really has to show after all that hard work is a settlement with Kim Kardashian and Stoner Katz NFTs. Purs highlighted how useful this strategy has been, adding, When you're talking about registration violations because someone has touched a crypto asset, then we come in years later and say, ah, that is a security. It seems pointless because you're bringing a case against someone where there's no allegation that anyone was hurt. Although Perth maintained that registration obligations are important, she pointed out the incoherence of running an enforcement

strategy without providing guidance to the industry. She said, if you're not willing to tell people what a security is, it seems very unproductive to go in after the fact and just start picking people off for not having registered. Since 2020, Perce has been advocating for a safe harbor provision. This would have given legitimate token issuers and crypto firms confidence that they can continue to operate while engaging with the regulator on useful disclosure and registration requirements. Perse hopes that the SEC could still arrive at Safe Harbor being the common sense policy approach. She said that an updated version of Safe Harbor would likely include semi-annual disclosures from token projects, describing why their network should be considered decentralized or functional.

She urged the crypto industry to continue working on their ideas with this in mind in order to, quote, have them ready to go. Perce added that, quote, I always say, well, maybe Chair Gensler will wake up tomorrow and have an epiphany and will be in a different place. So we need to have ideas on the shelf, ready to go when that happens. What's more, it's not just a crypto-friendly approach. Perse appears to genuinely believe that a disintermediated financial system is fundamentally more sound than what we have now. She said,

centralization means that you have concentrated risks. Decentralization can actually bring resilience and strength to the financial system. So I'd like to see more resilience and strength. Points of centralization always keep me up at night. PERS noted that the entire concept of decentralized systems has flummoxed regulators, who have for decades used oversight of trusted intermediaries as their way of engaging with the financial system. She said, quote, The whole concept of decentralization stands very much in contrast to what we're used to at the SEC.

When you have people working together and someone interacting with code instead of with a person or entity, it's a real challenge for the SEC to figure out what to do with that. Recent rule proposals from the SEC have attempted to jam decentralized systems into the same role as centralized intermediaries with the same set of ill-fitting regulatory requirements. Her point was that the SEC needs to get back to the basics, stating that it isn't even necessarily the SEC's role to, quote, get comfortable with crypto. Instead, she suggested, our job is to figure out where the securities laws are impacted to try and help people get disclosure when there are securities, and then let people make their own decisions. To me, it's clear that the unspoken commentary from

Perce is that the industry needs to be making preparations for a post-Gensler SEC. Gensler's term as SEC Commissioner finishes in 2026, and it's highly likely that there might be a very different attitude an approach in that role after that. So that's what's going on in the U.S. Obviously, these are really significant changes. But a couple quick notes around the world before we get out of here today. Law enforcement agencies in the UK will soon have additional powers to freeze and seize crypto. Regulations have now been passed which allow UK police to place seizure orders on crypto held with exchanges and custodial wallets. From April 26th, crypto that is suspected to have been used in crime or terrorism financing can be frozen without a court order or a conviction recorded.

Crypto can even be frozen before a suspect has been identified or an arrest has been made, with police acting solely based on blockchain data. The new powers will vastly expand the ability to deal with offshore crypto crime. This is particularly relevant with the rise of crypto scammers, which has become a massive problem in the UK and abroad. The new regulations will only be useful to the extent that bad actors continue to use centralized services, so could prove to be of limited benefit. Over in Australia, Australia's Commonwealth Bank is blocking payments to crypto platforms,

with a notification email going viral over the weekend. customers are limited to $10,000 in transactions to crypto exchanges each month. The policy has been in place for months, but a post showing the bank's communication has attracted a fresh wave of condemnation. Combank wrote that they, quote, introduced these limits to help protect you from fraud and scams. Investor Jasper Hall tweeted in response, Combank has introduced these limits to keep you within our frauds and scams ecosystem. Zero Knowledge Consulting founder Austin Campbell questioned the need for this kind of policy, writing, if this is really to prevent frauds and scams, they could verify this with users.

So I have to ask ComBank, as someone who is a former banker myself. One, do you not have the systems to do this and you're punishing users for your lack of investment in tech and customer service? Two, do you have data showing fraud is so rampant that 10K AUD is an appropriate limit for everyone no matter what, and you don't need to evaluate transactions individually? Three, do you just have an ulterior motive and want to tell your customers how they are allowed to spend money? I'm open to other explanations, but unless you can substantiate two, and if so, you should

show the receipts, my only possible conclusion is people shouldn't use you as a bank. Today it's crypto. Tomorrow, it's whatever you feel like it should be, after all. Lastly, problems continue to escalate for Binance in Nigeria, with reports of a ridiculously large $10 billion in compensation being demanded by the government. Nigeria's currency crisis continues with Binance finding itself at the center of the controversy. The Naira has plummeted by more than 40% against the dollar this year, with the government blaming currency speculators for the collapse of the currency, signaling out Binance as a major facilitator. Last week, the central bank governor accused Binance of processing $26 billion worth of foreign exchange payments from, quote, sources and users

who we cannot adequately identify. Binance has now halted peer-to-peer crypto markets using the Naira. The arrest of two executives has been confirmed with allegations that the platform assists in money laundering and terrorism financing. The pair were reportedly detained when they arrived in Nigeria and had their passports confiscated. In comments reported by the BBC, a spokesperson for the president said that the government had demanded a $10 billion payment from Binance, claiming that they had, quote,

messed up our economy in a very short time. for perspective, that fine would be more than twice as large as Binance's settlement with U.S. authorities. This low-key feels like a very big story to me. So the first time I've seen a crypto exchange blamed for a currency crisis. But boy, if that is a new line of argument from a beleaguered government, watch out. Anyways, friends, that is going to do it for today's breakdown. One more big thank you to the sponsors for today's show. Go to crackin.com slash the breakdown and see what crypto can be.

And of course, big thank you to Ledger. Check out the Ledger Bitcoin Nano, where 5% of profits. are going to Bitcoin development. Until next time, be safe and take care of each other. Peace.