Thread by @SethHertlein

There’s never a slow news week in #crypto, but this week was truly extra:
-The SEC sued @binance and @coinbase,
-10 states piled on Coinbase the same day,
-the SEC won a TRO freezing @BinanceUS assets, and
-2 senators told the DOJ to investigate Binance for perjury.

The SEC charged Coinbase with operating as an unregistered securities exchange, broker, and clearing agency. They further alleged that Coinbase Prime (an institutional trading platform) and @CoinbaseWallet (a self-custody app) are also unregistered brokers bc they “route orders.”

For these charges to stick, the SEC must prove that at least one (any one) of the assets traded on Coinbase is a security. That’s why the complaint includes that odd list of tokens - for whatever reason, those are the assets the SEC thinks it can prove are securities.

Unlike its case against @Ripple over #XRP, the SEC has not charged the projects associated with these tokens, so they can't defend themselves. That feels…wrong. The SEC tried this tactic against the Wahi brothers, but quietly settled when it looked like they were going to lose.

The SEC’s case hinges on that threshold question: are crypto-assets securities? We know what the SEC thinks, but that doesn’t really matter. Only the courts can decide what meets the current definition, and only Congress can change the definition. The SEC just makes accusations.

@matt_levine said it best. In the US, this is, and always has been, the ball game.

So…are tokens securities? The official answer is: we’ll find out when the court rules. The right answer is: No! Of course not!

I’ll spare you the Howey analysis, but if you want to dig in, read this bit.ly/42zxY1I paper by @NYcryptolawyer & team at @DLxLawLLP, and the Securities Clarity Act bit.ly/43TcYUq from @GOPMajorityWhip & @RepDarrenSoto. 🙏 to @FallonLizzy @Landon @BillRockwood2

Finally, the SEC charged Coinbase with the unregistered sale of its staking program. IMO, this is their strongest count. They don’t have to prove that any of the underlying crypto-assets are securities; they’re alleging that the staking program itself is an investment contract.

Same fact pattern that caused everyone to freak out about staking after @krakenfx settled with the SEC over its program. Because these platforms contractually manage customer assets for the purpose of generating a return, they fit neatly into Howey in ways raw tokens don’t.

This does not mean that staking is per se a security. Direct, on-chain, user-managed staking certainly is not. But, the more decisions a “staking-as-a-service” provider makes for the end user, the more sus it becomes.

The SEC’s charges against Binance are similar to the Coinbase charges, with one very big exception. In fact, the Binance & Coinbase registration charges are copy/paste. Where the Binance complaint differs is in the amount of ink spilled to support the SEC’s fraud charge.

TLDR; despite the public portrayal of @BinanceUS as a separate organization independent from @binance, the SEC paints a very compelling picture that .US is a mere front for .com.

Also not a good look is that two other CZ wholly owned entities, Merit Peak and Sigma Chain, traded against customers on both platforms, and may have misappropriated customer funds to buy a yacht, a la @SBF_FTX/@FTX_Official/@AlamedaResearch.

There’s also a lot in the complaint about Binance’s efforts to evade international AML requirements, but the SEC doesn’t prosecute money laundering and sanctions violations - the DOJ does - and that guillotine hasn’t fallen...yet: reut.rs/43uwWW7

So, what does it all mean? How is this going to play out? I’m glad you asked. First, don’t panic, these lawsuits take a long time, perhaps even longer than Gensler’s remaining tenure at the SEC.

And unless and until the SEC wins, nothing has changed - it’s business as usual. @iampaulgrewal 💪

https://twitter.com/fintechfrank/status/1666085987892748290?s=20

Meanwhile, Gensler’s crusade is pushing Enforcement to the breaking point. Taking on Ripple, Binance & Coinbase at the same time is like opening a 2nd front in a land war in Asia. These 3 will spare no expense & won’t be bullied into submission like the SEC’s usual victims.

The SEC Inspector General reported last October that staff morale was low and turnover high even then, when they only had one major crypto fight on their hands. Since then, they’ve continued taking Ls in both the Ripple and Wahi cases. politi.co/3qA2viu

But let’s say the SEC sneaks out a W in the lower courts. They’ll run headlong into the buzzsaw of the Major Questions Doctrine. Justice Gorsuch is primed to drive the final nail into Chevron deference, and Coinbase could be the perfect case to do it. bit.ly/45XZfxK

So, if the SEC is likely to lose eventually, either in court or from something like the new @PatrickMcHenry-@CongressmanGT market structure bill, what’s Gary’s endgame? Why is he doing this? I can only guess but it seems like he’s simply trying to cause max pain as long as he can

/END

https://twitter.com/SethHertlein/status/1667393120755908608?s=20

UPDATE 1/2: In my initial tweet in this thread, I said the SEC had "won" a TRO freezing BinanceUS assets. That was premature. I mistakenly read the SEC's proposed order too quickly without realizing it hadn't been ruled on yet. Now it has been, and the SEC has not won the TRO yet

UPDATE 2/2: In DC District Court yesterday, June 13, the judge declined to grant the SEC's request for now, and instead ordered the SEC and Binance to a mediation conference at 2:45pm ET today, with a status update on the negotiation due to the court by CoB Thursday, June 15.