The Breakdown - What's Going On with the SEC's Sealed Binance Filings?

Episode Date: August 30, 2023

As everyone celebrated the SEC's upset in the Grayscale lawsuit, the Commission was quietly filing sealed documents in their lawsuit against Binance. NLW explores the community's theories around what those documents might represent. 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 Wednesday, August 30th, and today we are talking about everything that happened yesterday that wasn't the SEC and Greyscale. Before we dive 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 or go to bit.ly slash breakdown pod. Well, friends, yesterday was obviously a huge day, one of the bigger ones we've had for a while, so much so that I had to scrap a planned show and record all about Grayscale defeating the SEC

in their lawsuit. I don't have too many updates on that front today other than a return to this question of to what extent this means that a Bitcoin Spot ETF is more likely to occur. There were many who cautioned yesterday that just because the SEC is now forced to reconsider gray scale, it doesn't mean that they are being forced to approve a spot Bitcoin ETF. However, the ETF analysts at Bloomberg certainly think that this was a big deal. Eric Balcunis writes, Jamie Seyfart and I are upping our odds to 75% of spot Bitcoin ETFs launching this year, 95% by end of 24. While we factored a gray scale win into our

previous 65% odds, the unanimity and decisiveness of the ruling was beyond expectations and leaves the SEC with very little wiggle room. So there you, you have it. Clearly a pretty big deal, although again, nothing is guaranteed particularly with this SEC. Now still, as I said, quietly a ton of other things were happening in and around the jubilation around this news. Travis Kling summed up at least part of it saying, the juxtaposition here is palpable. In a single day, the SEC potentially approving a spot Bitcoin ETF, super tradfai, super institutional. And at the same time, SEC filing evidence against Binance under a sealed motion. Apparently whatever Binance did is so shady the SEC is scared to say it publicly.

So let's start with that. In the wee hours of Monday night, a curious filing was made to the court docket in the SEC's lawsuit against Binance. The SEC filed a sealed motion along with 35 exhibits in a proposed order. Now, documents can be filed under seal for a range of reasons. This allows information that is sensitive or confidential to be submitted to the court without disclosing the contents publicly. The motion and proposed orders are almost certainly a request to file under seal, so the big question, question is what the huge amount of exhibits related to. Once discovered, the secret filing set minds racing across crypto Twitter. John Reed Stark, a former chief of the SEC's Internet

Enforcement Division, and someone who has effectively remade his second career hating crypto publicly over the last year, explained that, quote, filing any court document under seal is a rare move by the SEC. It's in the public interest to know and understand the SEC's use of U.S. tax dollars, and the U.S. SEC wants its messages heard loud and clear to deter future securities violations. Stark offered two possible explanations, that the SEC were using information from a simultaneous DOJ investigation and wary of interfering with that process, or that the SEC were concerned with putting another company or witness at risk. He did note, however, that the second explanation usually involves redacted filings rather than a complete seal. Stark said that the move was so unusual

that during his 20 years at the agency, including frequent joint operations with the DOJ, he, quote, can't recall ever seeking to file a motion or any other court document under seal. He explained that the big tell will be whether Binance objects to the documents being filed under seal. If they don't, then the documents clearly related to something finance would rather not to be known to the public. If they do, then it's more likely the documents are being sealed to protect someone providing evidence against Binance. So pretty dramatic cloak and dagger stuff, right? Well, some other commentators had more mundane explanations. Lawyer Clayton wrote, the last filing was discovery dispute, so more of

the same if I had to guess, something along the lines of a motion to compel responses, production depots, and sealed because exhibits contain AEO materials. Bam says they've given us all docs related to X, but the email and example F references other responsive docs that exist, etc. Can be easy to rack up exhibits and discovery motions. Commercial litigator Joe Carlos Arlesare writes, in SEC versus Binance, Binance agreed to provide a written accounting by August 1, 2023, pursuant to the consent order that they agreed to with the goal of avoiding a TRO hearing when the case was filed. Binance failed to meet that deadline and sought an extension to August 7th, 2023. An accounting was supposedly tendered on this date, but the SEC claims it is not sufficient

to ensure customer assets are secure. On August 14, 2023, Binance filed a motion for a protective order seeking, among other things, an order blocking the SEC from deposing CZ. This order concludes as follows, quote, although it has expressed its concerns otherwise, the SEC has still yet to identify any evidence suggesting that customer assets were misused or dissipated in any way. End quote. Yesterday we got the new sealed filing by the SEC. My view, and again for those listeners, this is Joe Carlos Ari continuing, is that the sealed filing is a direct response to the highlighted text from Binance's counsel in the last tweet.

The SEC called Binance's bluff, but likely had to use material from an investigation with criminal or national security interests. This is the purpose of the sealed filing. The SEC wanted the court to be aware of the stakes. Binance had not commented on the filing. So for those keeping track at home, possible explanations include, one, just some weird procedural stuff that's far less sexy than it seems. Two, the SEC relying on evidence from the DOJ investigation, which could range from extremely dramatic on the one end of the spectrum, to fairly banal on the

other hand, but just part of another investigation and so not wanting to be public for that reason. The third possibility is that it's to protect a witness, given that, one, SBF was seen in Manhattan a few weeks ago at a time that wasn't related to a court hearing, and two, that many have speculated that one path for Sam to get reduced charges would be to give evidence against Binance, you can imagine how much the crypto rumor mill has run with that particular interpretation as well. Ultimately, the big thing to watch for is whether Binance files an objection or not. Other than that, we are unlikely to get much more information, at least in the short term. Now, notably, CZ has not said anything, not even his customary tweet of four, by which he

dismisses FUDD. Yet one more piece of intrigue in the story of crypto 2023. Speaking of intrigue, much of yesterday was also spent speculating that Twitter, now X, is heading towards a crypto integration. On Monday, the firm was granted a money transmitter license by the state of Rhode Island. X now holds licenses across seven states, including Michigan, Missouri, and New Hampshire. The company has been working on obtaining money transmitter licensing across the U.S. since late last year and obtained its first approvals in July. Now, money transmitting licensing is a prerequisite to taking deposits and clearing payments

using the app. The notable thing here is that an MTL license is not just for crypto. That's said, the license would also allow X to operate as a custodial crypto wallet and exchange. Now, so far, X hasn't announced any sort of concrete plans for crypto functionality, but there have been plenty of rumblings. It is no secret that Elon wants X to be the everything app. And of course, with his history, payments are going to be part of the everything app. At the same time, sources have suggested that payments infrastructure being worked on at the company will only support fiat currencies. Then again, Musk has reportedly instructed developers to build the platform in a way that would allow crypto features to be added in the future. In recent posts, Musk has said that the

platform will never issue a token, but also declared last week that, quote, X is a Doge-friendly place. That drove the meme coin up 6% yesterday on the news. There is currently no timeline for when X would launch a payments platform. The timing will likely hinge at least in part on the firm's ability to gain licensing across the majority of the U.S. Current regulations require licensing in every state of payments platform operates. And so unless X is planning to do a lot of business as a payment's corridor between New Hampshire and Rhode Island, it will need to continue gathering up those licenses. Next up, speaking of 2022 cleanup, Cryptoconglomerate Digital Currency Group have reached an in-principle deal with Genesis and its unsecured creditors.

According to documents filed on Tuesday, the proposed plan could yield recoveries for unsecured creditors of between 70 and 90% in USD equivalent and 65 to 90% in crypto terms. Genesis, of course, halted withdrawals in November of last year as the crypto industry fell apart around them, and the bankruptcy, which was filed shortly afterwards, has been controversial to say the least. Allegations of bad faith dealings by Genesis' parent company DCG and their CEO Barry Silbert have been frequent throughout the process. The key issue was intercompany loans made by DCG, which represented to the market as a bailout of Genesis, but which were unable to be paid out when the maturity date was reached. The main instigator and accusator, of course, has been

Gemini and their CEOs, the Winklevosses. And so what does this deal actually say. DCG has existing liabilities to Genesis of approximately 630 million in unsecured loans that were due in May 2023, as well as $1.1 billion under an unsecured promissory note due in 2032. Under the bankruptcy plan, the debt would be restructured and a partial repayment schedule would be agreed to. The proposed repayment would happen in two tranches. Approximately 328.8 million will be repaid at a two-year maturity, while $830 million will come due at a seven-year maturity. DCG will also pay 275 across four installments after the date of the partial repayment agreement. The amended plan will require approval from the court before it can proceed.

Genesis owed more than $3.5 billion to its top 50 creditors when the bankruptcy was filed, but does have assets in addition to the DCG repayments which it can use to satisfy claims. DCG said in a statement, DCG is pleased to reach an agreement in principle with Genesis in the Unsecured Creditors Committee, which will provide a framework for a comprehensive resolution of the claims in the Genesis Chapter 11 cases and a pathway to significant recovery for creditors. Now, the key sticking point is the creditors that are not included in that statement. Gemini and its earned customers are the largest creditor in the Genesis bankruptcy and claimed to be

owed $766 million. Neither Gemini nor the secured creditors appear to be on board with this deal. Indeed, the deal, which is currently being proposed in bankruptcy court, is believed to be a variation on the in-principle deal which was reached back in February. That deal fell apart in April after Gemini and the secured creditors committee backed away. At the time, DCG said those creditors, quote, and raised new demands. Since then, Gemini have sued DCG and CEO Barry Silbert, accusing them of mastermining a fraud against creditors. On August 26th, Gemini tweeted

EURN Update, Gemini remains disappointed in how long it has taken to negotiate a DCG contribution that delivers appropriate value to Genesis' creditors, including earned users. Now, the Twitter interpretations are extremely skeptical. Orrari co-founder Sim says, seems like a pretty shh-hitty deal. Another way of Barry trying to sort it out while limiting his exposure, just permanently delaying things. Andrew at APAvacus writes, TLDR, it's not a repayment plan. It's a snake oil salesman deal for DCG to avoid bankruptcy. Economist Brad Huston writes, it's another Silbert stall tactic. And CMS Holdings tweeted, I don't understand the DCG Genesis deal other than buying time. What's structurally changing? Masari CEO Ryan Selkis says nothing.

DCG keeps pretending to act in good faith, while grayscale milks their GBTC investors like the blood boys they are, sponsored by the SEC. Now, you know, I try to find a diverse array of perspectives on any given thing, but I simply couldn't find a positive view of this that wasn't from someone involved with DCG itself. Then again, it remains extremely important to be skeptical, even of skepticism in these fraught times. Bankruptcies are complex and messy as we have well all learned this year, and so taking everything with a grain of salt continues to be the best approach. Anyways, guys, I think this week is going to have lots more interesting news. We just started to get word of a new tether banking partner, which is creating some conversation.

Robin Hood and Jump Trading appear to have ended their partnership. The DOJ and SBF go back and forth in a never-ending dance. So I'm excited to share more in a week that very clearly knows that fall is coming, and it's time to shake off the summer lulls and get to the action. For now, I appreciate you listening as always. And until next time, be safe and take care of each other. Peace.