SEC vs. Crypto… Cont’d

June 7, 2023

My take on the not-unexpected actions this week…

Yesterday Binance was sued by the SEC. This has been rumored for a long time. Apparently some former exec’s have been cooperating and providing evidence. I wondered if would simply follow the lead of Bittrex and others by picking up their toys and exiting the US, but instead they appear to have engaged some elite law firms (multiple) and are digging in for a fight. This could get interesting.

Today Coinbase was sued by the SEC. This was expected given they were already served with a Wells Notice. They have been preparing for this fight for awhile and appear to have zero intention of backing down. Even releasing this video today…

How did that markets react? Coinbase’s stock slid a bit, dropping $7.10 to $51.61 while Bitcoin gained $1,434.35 and Ethereum gained $78.63. So the world did not melt down…far from it.

My thoughts…

First, these were expected actions. Nothing much new here other than the SEC now listing MATIC, SOL, FLOW and other tokens as “securities” in their eyes.

Second, the SEC has now picked fights on multiple fronts, and against targets who have incredibly deep pockets, are passionate about the industry and fiercely determined to defend it (and who seem to have made every effort to engage the SEC as good citizens for many years), and who have powerful allies in Congress and even within the SEC itself. Heck, even the IRS recognizes that not all NFT’s are securities further complicating the SEC’s arguments.

Third, this doesn’t change the fact that the blockchain as a technology and ledgering system is going to utterly revolutionize finance, real estate, healthcare, video games, music, art, inventory-control, anti-counterfeiting, and so many other industries and use-cases. This monster is out of the cage and neither the SEC nor Operation Chokepoint 2.0 can kill it. 

So, what happens now? Not much. This is going to be a long fight. 

What’s the SEC’s goal? I’m not exactly sure. It might be the obvious (that they want all fungible and non-fungible tokens to be deemed “securities” and thus in their sandbox). It might be less obvious, perhaps exerting such a massive overreach and effort to kill a new industry that they want to goad Congress into action to craft legislation to clarify the technology and its applications, and thus get it off of their plate (and out of their budget/expenses). 

Obvious example:

I have an NFT in my Fortress wallet of Josh Altman (of Million Dollar Listing Los Angeles) video saying happy birthday to my wife…

a. this IRS is correct in that it’s not a security (and thus not an “investment” for an IRA). 

b. if I want to send this to my wife’s wallet, then the blockchain needs to move that to her. To do that, the Polygon blockchain (which it resides on) gets paid a fee (called “gas”). As there is no central authority to send a $ payment for the transaction, and as the cost is less than a penny anyhow and there is no form of USD currency less than $0.01, the form of payment for the transaction/movement is MATIC, the native token on the Polygon blockchain. To that end, I’ve never heard of anyone using securities to pay for transaction fees.

And, another example…my 8-year old daughter is addicted to Roblox and I keep having to buy “Robux” for her to use. Maybe the SEC thinks those are securities too since they are being used a currency on that “chain” to move and settle assets between players as well as the company? 

This is a new world, with incredible new technologies and tools. Laws and regulations from the 1930’s never could have anticipated this, and weren’t crafted for it. So I think ultimately these actions (and inactions) by regulators are going to lead to new forms of oversight and guidance that both protects the public and enables innovation. Will it be the SEC? For some things, sure, such as when securities are delivered to investors in the form of an NFT instead of on paper certificates or on electronic ledgers at DTCC. For others it’ll be the CFTC, when futures and commodities are tokenized. And it’ll be states pursuant to lending regulations. And it’ll be the OCR for healthcare records that are tokenized. And it’ll be the FDA. And the DoJ. And the IRS. And…appropriate regulators for specific use-cases. 

By the way, fun fact…DTC is a state-chartered trust company

Disclaimer: as always, these are just my musings…my thoughts and observations as someone who is deeply involved in both crypto and banking. That said, I am in no way making a recommendation that anyone invest or divest in anything, ever. Only rely on the advice of your licensed investment, legal, and accounting professionals. These matters are extremely complex and something as short as my blog is just to reflect my opinions, not a complete analysis of any of the events or situations I discuss. So only make decisions after consulting with the professionals you employ.


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