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‘Crypto’ operators are increasingly convinced that they’re in a war for survival against the U.S. Securities and Exchange Commission (SEC) and its efforts to rein in the sector’s excesses.
On May 8, the company behind the Exodus digital asset wallet announced that it was delaying its listing on the New York Stock Exchange (NYSE) until the SEC “completes its review of Exodus’ registration statement.” Exodus Movement Inc. said it had expected trading on the NYSE to commence on May 9 but, for the present, would continue to trade on the OTC Markets’ OTCQX exchange.
The statement quoted Exodus CEO JP Richardson saying that while the company was “surprised and confused by this last-minute decision, we remain hopeful that the SEC will follow through on its commitment to treat us as the law intends. Exodus has been fully transparent and responsive throughout this process and we expect a swift resolution in this matter.”
Richardson went further on his X/Twitter account, saying, “At the 11th hour, the rules of the game were changed. It’s beyond frustrating … For now, we will continue to work with the SEC on this listing, but are considering all of our options. Nothing is off the table.”
This is the latest disruption the SEC has caused in the disruptive ‘crypto’ sector, part of a campaign that has been underway for some time. Previously focused on the issue of whether sales/trades of certain tokens on centralized exchanges like Coinbase (NASDAQ: COIN) amounted to dealing in unregistered securities, the SEC recently began targeting decentralized finance operators such as Uniswap and Consensys’s MetaMask.
Similarly, Republicans in Congress have been hurling invective at SEC chair Gary Gensler for years, but the animosity has taken on a new intensity as the SEC sharpened its ‘crypto’ focus. On May 7, Rep. Ann Wagner (R-MO), chair of the House Financial Services Subcommittee on Capital Markets, announced a trio of bills intended to “improve the SEC’s rulemaking process and enhance accountability within the Commission.’
Co-sponsoring Wagner’s bills was House majority whip Rep. Tom Emmer (R-MN), who said “Gensler’s SEC needs significant reforms,” having “strayed from its statutory mission to protect investors, maintain fair, orderly, and efficient markets, and improve capital formation.”
Playing politics
As for why Gensler’s SEC is going so hard against all things ‘crypto,’ it may have something to do with the fact that his predecessors went so easy on it. For instance, Emmer loves to claim that Gensler’s meetings with Sam Bankman-Fried six months before SBF’s FTX exchange went belly-up mean Gensler was “helping SBF and FTX work on legal loopholes to obtain a regulatory monopoly.”
But Emmer never mentions the meetings and discussions Gensler’s predecessor Bill Hinman had with Consensys founder Joe Lubin and other Ethereum bigwigs that preceded Hinman’s infamous ‘ETH was a security but isn’t anymore’ speech in 2018.
Emmer also never brings up his own public fawning over SBF during a December 2021 committee hearing or his co-signing of a letter six months later warning Gensler to halt his investigations into ‘crypto’ firms because it was causing these firms paperwork headaches. So maybe, just maybe, Gensler is going a little overboard because his Capitol Hill colleagues keep steering this ship toward icebergs.
Regardless, the SEC’s aggressiveness in policing ‘crypto’ is making news in the 2024 presidential race, highlighted by Donald Trump’s pro-crypto comments to buyers of his non-fungible token (NFT) series last week. On May 10, billionaire Mark Cuban tweeted that if President Biden loses to Trump in November, “there is a good chance you will be able to thank” Gensler and the SEC.
Cuban urged Congress to “solve this problem for Biden by passing legislation that defines registration that is specific to the crypto industry just as other industries have registration that is defined for them.” Cuban also suggested Congress “assign all crypto to be regulated by the [Commodity Futures Trading Commission].”
Since Congress can’t agree on anything, the chance of legislative results seems slim (although the House Committee on Rules just announced plans to consider the Financial Innovation and Technology for the 21st Century (FIT21) Act—the CFTC-friendly act that was introduced last July—for a possible floor vote later this month.
Meanwhile, there’s been no shortage of other action on the SEC v crypto front, so let’s dive straight in.
Coinbase
On May 10, the SEC filed a motion opposing Coinbase’s desire to appeal the March 27 ruling by U.S. District Judge Katherine Polk Faila that the SEC’s “well-pleaded allegations … plausibly support the SEC’s claim that Coinbase operated as an unregistered intermediary of securities.”
Coinbase wants to take the question to the Second Circuit Court of Appeals, but the SEC’s motion claims Coinbase’s arguments are “self-defeating.” The SEC points out that Faila’s order noted the lack of legal authority in Coinbase’s original arguments, and the appeal motion “scarcely contends otherwise.” As a result, “there can be no doubt—let alone a substantial one—that [Faila’s ruling] was correct and does not meet the standards for interlocutory review.”
Kraken
On May 9, Kraken filed its latest motion regarding the November 2023 SEC complaint accusing the exchange of selling unregistered securities. The filing is a greatest hits compilation of crypto arguments, including the SEC’s alleged failure to prove that any of the tokens in question were securities under the Howey test because token sales don’t qualify as’ investment contracts.’
Kraken also raises the so-called ‘major questions’ doctrine, the half-baked school of legal thought that claims crypto is such a rarefied unicorn that no existing laws apply. So until Congress passes crypto-specific laws, crypto bros should be left alone to do what they will, and if they’re later found to be guilty of anything, they promise to say they’re very, very sorry.
Ripple
In the SEC suit v. Ripple Labs, the regulator filed a motion on May 7 to support the $2 billion penalty it’s seeking to impose on Ripple for selling unregistered XRP securities. The SEC pushes back on Ripple’s counteroffer of $10 million as “a slap on the wrist” that would “encourage other crypto asset issuers” to disregard securities law.
The SEC also mocked Ripple’s argument that because it has obtained licenses in jurisdictions outside the U.S. that “do not treat XRP sales as sales of securities,” it isn’t likely to violate U.S. securities laws in the future. The SEC responded thusly: “This argument—akin to saying a New York restaurant need not obtain a liquor license because it obtained a fishing license in California—is absurd.”
Ripple’s chief legal officer, Stuart Alderoty, responded by claiming that the SEC was dissing foreign regulators. “The SEC has no respect for you and thinks you are handing out the equivalent of fishing licenses.” For what it’s worth, a final judgment in this long-running saga is expected in September, just around the start of fishing season.
Robinhood
The latest recipient of an SEC Wells notice was the ‘crypto’ division of online brokerage Robinhood (NASDAQ: HOOD). According to a February 2023 subpoena, the SEC has focused on Robinhood Crypto’s (RHC) “cryptocurrency listings, custody of cryptocurrencies, and platform operations.”
On May 8, Robinhood co-founder/CEO Vlad Tenev told CNBC’s Last Call his execs had met with the SEC “16 times” in a bid to obtain a “a special purpose broker-dealer [license] for the purpose of transacting in crypto assets.” Tenev said the SEC “told us they didn’t want to keep meeting about it, and they didn’t see a path toward it.”
Tenev said the SEC “has the ability to change the rules to allow for brokers to accommodate crypto assets, and they don’t seem intent on doing that … and that’s disappointing. I didn’t want to have to get into this situation, but we have to defend ourselves and advocate for our customers. We do believe that crypto assets are becoming more and more important, and it would not be acceptable to us to not have Americans have access to them.”
Robinhood’s Q1 financial report showed its RHC unit’s notional trading volume hitting $36 billion, 224% higher than the same quarter last year. RHC’s revenue similarly shot up 232% to $126 million, accounting for most of the transaction revenue gains in Robinhood’s overall operations.
(As always, we need to stress that much of this volume/revenue surge is based on the outsized spikes in the value of the assets being traded since Q1-2023, which was the depths of ‘crypto winter.’ But we digress.)
Robinhood’s CFO Jason Warnick was asked about the Wells notice on the company’s analyst call. While he expressed disappointment at the SEC’s actions, he insisted it would be “business as usual” at RHC. Warnick claimed Robinhood had been “very conservative in our approach in terms of points listed and services offered,” and the company had “applied the same legal and compliance standards we use for our brokerage to the way we run our crypto.”
Consensys
There’s no shortage of half-baked conspiracy theories as to why the SEC has become such a sharp thorn in crypto’s side. Ethereum co-founder Joe Lubin, whose Consensys filed a pre-emptive suit against the SEC this month, offered his take at the Financial Times Crypto and Digital Assets Summit in London last week.
Lubin regurgitated the now-standard lines about the SEC taking “a strategic series of enforcement actions rather than open discourse and clear rulemaking,” then claimed that these actions represent “an attempt to paralyze us, or have us move offshore.”
That’s odd because the crypto companies themselves are the ones constantly threatening to move ‘offshore’ in search of jurisdictions where accommodating regulators recognize that boys will be boys. In fact, many of these same companies decamp even further ‘offshore’ when previously lenient jurisdictions belatedly realize the criminal can of worms they’ve opened.
Lubin claimed the SEC was acting against crypto because it “doesn’t want to see a wave of innovation” sweep across the traditional finance sector should Ethereum gain further mainstream adoption. If that suggestion wasn’t fanciful enough for you, Lubin added that “many of the banking industry’s customers will move their assets into digital form,” so “certain factions” are determined to “slow it down or shut it down.”
Lubin’s outlandish theories are explained by his being an Ethereum OG who knew ETH was an unregistered security long before its controversial crowd sale and desperately needs the focus to be elsewhere. Lubin is rumored to have been the largest beneficiary of that insider feeding frenzy, to the point that one former Ethereum developer quit because “pumping Joe Lubin’s bags” was “just not what I want to do.”
We wish ‘crypto’ operators wanted to do more than feather their own nests at others’ expense while avoiding any legal blowback. Apart from the damage this causes the countless victims who buy into these harebrained get-rich-quick schemes, it detracts from the more practical use cases other blockchain proponents are trying to educate the public about.
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