Crypto vs SEC: The Chips are Pushed In
More lawsuits from the US Securities and Exchange Commission bring more market volatility. These are not battles the domestic crypto industry wants to lose.
It’s been a strange couple weeks. Since my last post on May 31st, the plot has thickened in the crypto vs US regulators war. Despite my silence online, I’ve been keeping up with the news the best I can. The challenge with publicly opining on it all was that we’ve simultaneously been hosting my wife’s parents for the last ten days and that has demanded quite a bit of my attention.
I’m ready for a return to normal and I’ll leave it at that.
As far as the last week+ in the crypto/SEC war goes, the latest developments are disappointing but far from surprising.
A brief summary
The SEC has sued both Binance and Coinbase COIN 0.00%↑ . In the process, several top coins have been deemed securities as part of these lawsuits. The regulation by enforcement continues. This will not stop until Gary Gensler is removed from his position. And that is unlikely until the corpse of Brandon is voted out of office. So let’s all do our part!
Of course, there’s also the possibility the courts will rule in favor of the crypto industry but it’s difficult to handicap that likelihood due to the nature of the judicial branch. Interpretation of the law is subjective. And no matter how many times Gensler goes on television and claims otherwise, the laws are not clear and his agency is taking advantage of Congress’ inability to set standards.
Speaking of which, the SEC lawsuits against Binance and Coinbase came just days after some in Congress put forward a bill that hopes to set those standards:
The new U.S. crypto bill—after several attempts to pass crypto legislation in previous sessions—proposes cryptocurrencies offered as part of an investment contract would fall under SEC oversight, while those that qualify as commodities would be overseen by the Commodity Futures Trading Commission (CFTC).
That the SEC has seemingly put all of the agency’s cards on the table with lawsuits against both Binance and Coinbase immediately following a Congressional bill that would potentially take some of the self-granted regulatory oversight away from the SEC is likely not a coincidence.
Interestingly, recent claims from Binance that Gensler was in talks with the company to become an advisor in 2019 before his SEC appointment lend one to wonder just what Gensler’s role was in bringing Binance to court. This also comes less than two months after Gensler’s SEC deemed Algorand an unregistered security even though Gensler spoke glowingly of that network when he taught a blockchain course at MIT.
Where This Leads
The war between US regulators and the crypto industry is not unexpected. It should be noted that the expressed purpose of many of these assets has been to disrupt all sorts of legacy systems, from banking to the dollar itself. Given this, it’s telling that self-proclaimed Wall Street watchdog Elizabeth Warren has formed an “anti-crypto army” and arguably helped incite the bank run at Silvergate Capital before trying to pass the buck.
Surely maintaining the status quo of an industry that hasn’t meaningfully innovated in years aligns with being “progressive.” The Vanguard Financials ETF VFH 0.00%↑ vs the S&P VOO 0.00%↑ over the last ten years doesn’t lie:
What’s frustrating about all of this mafioso-style old guard cronyism is that it’s impacting real people who are trying to use a new technology to build products and businesses. Those products and businesses can’t function in a jurisdiction where an unelected, intentionally vague, wannabe overlord is randomly designating digital assets as unregistered securities.
Want an honest concession? A lot of these coins and tokens probably are unregistered securities. The problem is we don’t know how to determine for ourselves which ones the agency believes are securities because the goalposts are constantly changing.
The SEC claims the Paxos Trust-issued stablecoin BUSD is a security even though the logic fails when applying the Howey test as stables have no expectation of profit. Yet the Howey test is repeatedly pointed to in other instances of securities designations. Gensler’s old pal Silvio Micali is evidently tied to an unregistered security because Algorand had an ICO. Somehow DASH is also a security in the eyes of Gensler’s SEC even though the network has the second largest retail holder distribution in all of crypto, a more decentralized mining pool than Bitcoin, and there was never an ICO.
To me, the reality is this obfuscation of what is or isn’t a security is entirely intentional. The major exchanges getting tied up in what can reasonably be assumed to be lengthy court battles has been coupled with Operation Choke Point 2.0 on an entirely different front. It’s obvious at this point that the US establishment is out to destroy the domestic crypto industry. Why?
I think it’s safe to assume this is about preserving the full end to end control of digital currency movement through a soon coming Central Bank Digital Currency. The most dangerous version of a CBDC would be fully programmable - meaning, a central issuer could program holding decay through a negative interest rate, put limits on certain product purchases, and/or turn off funds entirely if a holder practices the crime of having an unsatisfactory opinion.
This is not the future we want.
The Flight To Safety
It turns out, it’s hard to sell a research service focused on digital assets when nobody really knows for sure what they are. Bitcoin has been eating the alt coins and that has created challenges for ya boi. Bitcoin market dominance is up to 47% from 38% just a few months ago:
Part of this is due to the banking meltdown and the perception of Bitcoin as an alternative to banks, but at least some of it is due to the uncertainty surrounding asset classifications for the smaller coins. In the Coinbase/Bianance suits, the SEC claimed Polygon (MATIC-USD), Cardano (ADA-USD), and Solana (SOL-USD) are unregistered securities. The performances of these assets against Bitcoin and Ethereum since those designations have been abysmal:
Are they unregistered securities? Maybe. Maybe not. It’s impossible to answer. I like MATIC a great deal. When I bought it originally, I bought it because I needed it to pay network gas fees to buy a music NFT. The MATIC purchase had nothing to do with expecting a profit. To me, it’s a utility coin more akin to a commodity like bitcoin rather than a security. But we don’t know which metrics or thresholds truly make the difference.
Ultimately, Bitcoin isn’t going to be immune from any of this either. First they come for the little guys who don’t have the bankroll to adequately fight in court. Then they come for the bigger fish like Algorand. Dash. Then they go for the whales. Coinbase. Binance. Then Moby Dick. Proof of Work. Before you know it, anything that had a token ICO is an illegal security and anything that is properly decentralized is “too dangerous” to the environment to be allowed to exist.
After that, you’re trapped in the permissioned, paternalistic clown show that destroys your privacy and your economic freedom. It’s better to just win these first battles. Because if we give any more inches it’s much harder to get them back.
Disclosure: I’m not an investment advisor. I personally hold BTC , ETH, and MATIC.