SEC pumps brakes on BTC ETF, Coinbase argues that it’s above the law

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The U.S. Securities and Exchange Commission (SEC) keeps pumping the brakes on exchange traded funds (ETFs) based on BTC spot trades, spoiling the Coinbase (NASDAQ: COIN) digital asset exchange’s hopes of reversing its downward spiral.

On Friday (30), the Wall Street Journal reported that the SEC believes the flurry of ETF applications it has received in recent weeks are “inadequate” and thus not likely to receive the regulator’s stamp of approval. The WSJ quoted sources saying the SEC maintains that the applications “aren’t sufficiently clear and comprehensive.”

The BlackRock investment giant filed its BTC ETF application last month, a move that was swiftly followed by Fidelity Investments. Numerous other firms, including Cathie Wood’s Ark Investment Management, promptly revised and resubmitted their previously rejected spot ETF applications.

The SEC rejected these prior efforts in part based on the flagrant wash trading of BTC that occurs on digital asset exchanges, which leave a spot-based ETF highly vulnerable to manipulation. The fact that the majority of all BTC spot trades now occur on the criminal entity known as Binance—and the overwhelming majority of these trades are made with either Tether or Justin Sun’s TUSD stablecoin, both of which feature reserve assets that are suspected of being vaporware—doesn’t give the SEC confidence that this situation has improved.

BlackRock thought it had untied this Gordian knot by proposing a “surveillance-sharing agreement” whereby the Nasdaq exchange—on which the spot-based ETF was to list—would be provided with real-time data from the platform on which BTC trades would occur.

But the SEC reportedly viewed this move as insufficient, in part because BlackRock didn’t specify the digital asset exchange that would be conducting this surveillance. The Nasdaq-listed CoinBase, which BlackRock intends to use to custody the BTC tokens on which its ETF will be based, was officially named the surveillance partner of several ETFs in late Friday re-filings of applications. Considering the SEC is suing Coinbase, this could prove hella awkward.

BTC maximalists have been salivating at the prospects of a regulator-approved spot-based ETF for years, based on their belief that retail investors who view ‘crypto’ exchanges as rigged casinos run by thieves and scammers would be more likely to take the plunge if they could do so via mainstream brokers.

ETFs based on BTC futures have existed for years, most infamously the Grayscale Investments’ GBTC Trust. But that product’s infamous habit of trading well below the net asset value of its over 600,000 BTC tokens while refusing to let investors cash out while charging those investors excessively high annual fees has taken a lot of shine off the futures ETF sector.

Coinbase optimism misguided

Coinbase’s share price took a major dip in early June following the SEC’s civil suit accusing the exchange of listing unregistered securities and combining the activities of an exchange, broker and clearing agency. But the BlackRock news lit a fire under Coinbase shares, which soared as high as $75 after languishing in the mid-$50 range for most of this year.

Coinbase shares took a hit Friday from the WSJ report but staged a minor rally to close down only 1.2% by end of trading. Sentiment wasn’t helped by a new report from Berenberg analysts that put a target price of just $39 on the stock, based on skepticism that a BTC ETF would fix all of Coinbase’s monetary woes.

Berenberg warned investors that the SEC’s suit against Coinbase—and related actions simultaneously filed by 10 state securities regulators—could result in orders to halt Coinbase’s lucrative staking program. The resulting loss of staking revenue would far outstrip any gains made from the BlackRock custody arrangement.

Coinbase’s staking program involves the USDC stablecoin, on which Coinbase has partnered with Circle. While USDC escaped mention in the SEC’s civil suit, the possibility that it could later be lumped in with the other unregistered securities the SEC has charged Coinbase with unlawfully listing is yet another issue that investors are forced to contemplate.

There’s also the distinct possibility that the SEC might declare that BTC is also a security, based on the centralized control exerted over the token by the BTC Core developers, as well as the fact that Core’s imposition of the controversial SegWit update effectively created an entirely new token that was then airdropped to users of the forked chain. Which would poke a mighty big hole in everyone’s ETF fantasies.

You’re not the boss of me (or anything, apparently)

The SEC-Coinbase tilt is moving swiftly, with U.S. District Court Judge Katherine Polk Faila issuing an order on Thursday moving up the initial pre-trial conference originally scheduled for August 24 to July 13. The advance was made possible by Coinbase filing its official response to the SEC’s complaint on Wednesday, some 40 days ahead of the deadline.

The 177-page filing is largely a summary of previous these-really-aren’t-legal-arguments arguments that company principals like CEO Brian Armstrong and chief legal officer Paul Grewal have been making in public for years.

But the essence of these 177 pages can be distilled down to a single line in a letter to the court accompanying Coinbase’s filing, which aims to spell out the “fundamental problem” with the SEC’s case: “The subject matter falls outside the SEC’s authority.”

That’s right, folks. Coinbase continues to insist that none of the tokens it lists on its exchange meet the Howey Test’s definition of securities and thus the SEC can be on its merry way. The transactions Coinbase engages in with its customers are “asset sales, with the obligations on both sides discharged at the moment the digital token is delivered in exchange for payment.”

Coinbase appears to believe that it’s headed to defeat in this proceeding, but it’s fighting for its life here, so it will pursue the matter all the way to the U.S. Supreme Court. Hence the filing’s reference to the so-called ‘major questions’ doctrine, which the current Supreme Court has recently been employing with great relish to overturn longstanding rulings (and dismantling President Biden’s student-debt relief plans).

Coinbase argues that the major questions doctrine should be sufficient to dismiss the SEC’s suit “even if the SEC presented a colorable claim that the transactions at issue here are ‘investment contracts.’” So, sure, we know we’re guilty, but Chief Justice Roberts really doesn’t like big government, so we should go free.

Artificially high voice, artificially high value

Coinbase’s eagerness to flip off the SEC was on full display this week when it announced the addition of the Helium (HNT) token to its ‘roadmap’ for new listings on the exchange. This is the same Helium that duped nearly a million ‘investors’ into paying $500 for the privilege of contributing to a ‘decentralized wireless’ network of Hotspots.

This is the same Helium that promoted both Lime and Salesforce as among its many, many customers, only to backtrack when someone finally pointed this out to the two companies, who promptly disavowed any relationship with Helium.

It’s worth noting that Coinbase decided to list Helium after the token hit its artificially inflated peak of around $53 some 18 months ago. The token currently trades around $1.40, having jumped 20¢ or so following Coinbase’s announcement. Early Helium investor a16z—notorious for using Coinbase to dump its tokens post-pump—must have a few tokens left over it’s trying to clear off its books as it ‘pivots’ to pumping AI projects.

Coinbase’s CEO was put on the hotseat earlier this month by a Wall Street Journal reporter who wanted to know whether Coinbase’s listing choices were influenced by whether Coinbase Ventures had stakes in the projects. Sadly, Armstrong wasn’t pressed on what consideration was given to whether VC giants like a16z—an early investor in Coinbase—stood to gain from these listings.

The Five Million Dollar Woman

When he’s not facilitating opportunistic token dumps, Armstrong found enough time to unload his now twice-a-month allotment of $1.7 million or so worth of Coinbase shares on June 20. That brings Brian’s total share sales this year to $30,162,004 … and the year’s only half over.

Coinbase’s chief accounting officer Jennifer Jones clearly didn’t want to miss out on the company’s recent share price rise, leading to her dumping $5.2 million worth of her shares—more than two-thirds of her total holdings—in a single transaction on June 27. Prior to this epic rush for the exits, Jones had only sold shares totaling $624,000 this year.

Jones and Armstrong were among the Coinbase execs and investors named in an insider trading class action earlier this year. The suit alleged that Coinbase insiders knew all too well that the company was cash-poor and needed to raise an additional $1 billion just weeks after its 2021 debut on the Nasdaq.

So… insiders dumped over $1.8 billion worth of stock with the full knowledge that their company’s financial situation was far more dire than they were letting the share-buying public know? Inconceivable! Who writes this stuff?

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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.