Gary Gensler’s SEC is playing a game, but not the one you think

February 22, 2023 Coin Telegraph

Gensler has made a show of cracking down on crypto companies that haven’t engaged in actual misconduct. When real fraud is taking place, he’s nowhere to be seen.

On Feb. 13, a federal judge put the Securities and Exchange Commission and the Commodity Futures Trading Commission cases against former FTX CEO Sam Bankman-Fried on hold. You’ll be forgiven if you missed this story — headlines and social media were dominated by the breaking news that the SEC was suing crypto firm Paxos for minting Binance’s stablecoin, Binance USD (BUSD).

But we’re not here to debate whether stablecoins are securities. The Howey test has been discussed to death, and while it’s true that few people expect to profit from a token pegged to a fiat currency, the issue is more nuanced than the debate typically suggests.

The issue is that the Paxos story broke on the same day as United States District Judge Kevin Castel delayed Bankman-Fried’s case. And the ensuing stablecoin debate detracted from that very significant change, distracting many from what should have been the bigger story.

The delay tactic: A tried and tested legal technique

Judge Castel granted a Justice Department motion to stay the FTX lawsuits filed by the SEC and the CFTC. Unsurprisingly, Bankman-Fried consented to putting the civil cases on hold.

Since pleading not guilty to defrauding billions of dollars from his collapsed exchange and paying a $250 million bond, Bankman-Fried has been living at his parent’s Palo Alto mansion in California. He’s free to soak up the sun by the pool and play all the League of Legends he wants while millions of FTX customers who lost billions of dollars are left waiting for justice and reparations.

You might claim that the timing of these two stories — the Paxos BUSD lawsuit and the staying of Bankman-Fried’s cases — is a simple coincidence. And even prosecutors argued that delaying these lawsuits made sense due to the considerable amount of overlap between them. But it feels very convenient for both Bankman-Fried and SEC Chair Gary Gensler.

Delay tactics are nothing new in court cases. Putting time and distance between the defendant and the crime itself is a well-established strategy. And let’s not forget: It took two months just for Bankman-Fried to be extradited from the Bahamas and formally charged on U.S. soil.

Gensler is a master magician, and he’s using misdirection to distract us

Unfortunately, the real story here is far more insidious. On Feb. 9, it was announced that Kraken would not only have to shut down its crypto staking service in the U.S. but also pay a fine of $30 million in its settlement with the SEC. Naturally, the internet was on fire with the news and its ramifications for American crypto consumers.

Coinbase founder and CEO Brian Armstrong announced that his company would fight back, tweeting on Feb. 12 that “Coinbase’s staking services are not securities. We will happily defend this in court if needed.”

Coinbase's staking services are not securities. We will happily defend this in court if needed.https://t.co/GtTOz77YV3
— Brian Armstrong (@brian_armstrong) February 12, 2023

Encouraging words. But it’s all just a distraction. Gensler is a magician, and his crypto crackdown taking place under the guise of investor protection is the misdirection part of the trick.

“Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection,” Gensler said.

It’s not about investor protection. It’s about keeping the public’s and the media’s eyes on the “cryptocurrency as securities” story while Gensler dupes us into forgetting that he met with Bankman-Fried in the months leading up to the FTX catastrophe — yet failed to prevent it.

We’re not in the Matrix — we’re in a selective attention experiment

In 1999, research psychologist Christopher Chabris and cognitive scientist Daniel Simons asked a group of people to watch a video and count the number of times the players wearing white shirts passed a ball. What the viewers often failed to notice was a person in a gorilla suit who walked right through the circle of players.

It’s been reported, but little investigated, that Gensler met with Bankman-Fried prior to the FTX collapse. In March 2022, the SEC chair had a 45-minute Zoom call — which was characterized as “unusual” — where they discussed, among other things, a new trading platform.

So, fraud and money laundering on a huge scale occurred not just on Gensler’s watch but right under his nose. And right now, he should be under an incredible amount of scrutiny, explaining how he missed the impending implosion of FTX, wire fraud, campaign finance violations and conspiracy to commit money laundering that Bankman-Fried has since been charged with.

Congress should be asking Gensler some tough questions over his failure to prevent such a catastrophe despite his links to Bankman-Fried. But the spotlight isn’t on this element of the story. Gensler and the SEC are working diligently to keep the spotlight on anything but that. Kraken’s staking services. Paxos’ BUSD stablecoin. And the latest? Do Kwon.

The SEC has suddenly found time to charge the Terraform Labs founder with “orchestrating a multi-billion dollar crypto asset securities fraud.” But Terra Luna and the TerraUSD token crashed in May 2022. So, why is it finally filing these charges now?

“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for Luna and Terra USD,” Gensler said in a statement. “We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”

It’s estimated that the Terra implosion cost investors over $40 billion. But that was almost a year ago. And FTX investors lost approximately $10 billion. So, it’s safe to say that the SEC isn’t great at protecting investors.

Is the SEC overcompensating, or is it something more sinister?

At best, this recent round of regulatory “crackdowns” is a product of the SEC overcompensating for its past failures, which go much further back than just FTX and Terra. At worst, they’re an attempt by Gensler to distract us from the fact that he’s either corrupt or inept — and hoping we forget that he met with Bankman-Fried in 2022.

What we need to remember is that Kwon is still free. So is Bankman-Fried. Yet, millions of retail investors had their life savings wiped out. Where was Sheriff Gensler then?

Zac Colbert is the head of content at Cryptology and an official content creator for Binance Feed. He graduated with a degree in digital media from Brighton University in the United Kingdom.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

The SEC shook Kraken down for $30M, but it doesn’t mean they had a case

February 15, 2023 Coin Telegraph

<div>The SEC shook Kraken down for M, but it doesn't mean they had a case</div>

Coin Telegraph

Kraken agreed to a settlement with the SEC, but that didn’t change the law. Staking does not constitute a security.

The settlement between Kraken (Payward Ventures) and the United States Securities and Exchange Commission set off alarm bells in the crypto community this month. Apparently, Kraken — one of the most compliance-minded crypto exchanges in existence — decided to buy its peace rather than fight with the SEC for years over whether it was offering unregistered “securities” through its staking program. The nature of the settlement is that Kraken neither admitted nor denied the SEC’s allegations, and the existence of the settlement, technically speaking, cannot be used as legal precedent for any argument either side of the issue might present.

That said, the settlement matters, as it will clearly chill crypto staking in the United States. As SEC Chairman Gary Gensler said, “Whether it’s through staking-as-a-service, lending, or other means, crypto intermediaries, when offering investment contracts in exchange for investors’ tokens, need to provide the proper disclosures and safeguards required by our securities laws.” Gensler casts a wide net, indeed, for what the SEC considers to be “investment contracts,” and running staking out of business was perhaps precisely what he had in mind.

That the SEC was successful in pressuring Kraken out of $30 million does not, however, make the agency’s position legally or logically correct. As a preliminary matter, “staking” and “lending” are totally different things. Staking is the process by which one pledges one’s coins or tokens to a proof-of-stake blockchain, either directly or by delegating one’s coins to a third party, for the purpose of securing the network. Stakers are the ones through whom the blockchain’s consensus mechanism operates, as they “vote” on which blocks will be added to the chain. The process is algorithmic, and the reward is automatic when one’s position is electronically “selected” as the validator for a given block.

Settlements are not law. They're a decision that the economics of settling are better than fighting, no more.

The SEC thinks staking-as-a-service is a security. Kraken didn't admit or deny either way.

It may be a tough question, but the SEC hasn't answered it either way today.
— Jake Chervinsky (@jchervinsky) February 9, 2023

Stakers don’t necessarily know who the other stakers are, nor do they need to know, as the fate of one’s stake is dependent only on following the rules of that blockchain as to “liveness” (availability) and other technical considerations. There are risks of “slashing” (losing your coins) for bad behavior or unavailability, but again, these are algorithmic remedies doled out automatically according to transparent rules built into the code. Put simply, in staking, it’s between you and the blockchain, not you and the intermediary.

Lending, in contrast, invokes the entrepreneurial and managerial skill (or lack thereof) of the people to whom you lend. This is a distinctly human enterprise. One does not necessarily know what the borrower is doing with the money; one simply hopes to get it back with a return. This counterparty risk is in part what the securities laws are intended to address. In lending, the relationship is between the lender and the borrower, which relationship that can take all kinds of unexpected turns.

The reasons why staking arrangements are not “investment contracts” (and thereby “securities”) wer stated eloquently by Coinbase chief legal officer Paul Grewal in a blog post. Put simply, merely serving as an intermediary does not render the underlying economic relationship an “investment contract.” Yet the SEC here does not seem to want to entertain the differences between service providers and counterparties.

It is true that third parties, such as Kraken, serve a custodial role in the staking relationship — that is, they may hold the private keys to the particular coins the client intended to stake. However, serving as a custodian of a fungible asset, especially where such a custodian holds collateral on a 1:1 basis to back every customer account, is a discreet service.

There is nothing to suggest that Kraken, Coinbase or any other staking-as-a-service provider, otherwise uses human judgment, intuition, grit or any other hallmark of one’s entrepreneurial or managerial ability, to advance or inhibit the staker’s purpose. One’s reward does not improve or decline based on how the intermediary performs. There should be (and are) rules and regulations for how custodians function, but possession does not, by itself, a security make.

Ari Good is an attorney whose clients include payments companies, cryptocurrency exchanges and token issuers. His practice areas focus on tax, securities and financial services compliance matters. He received his juris doctor from the DePaul University College of Law in 1997, his Master of Laws in taxation from the University of Florida in 2005, and is presently a candidate for the Executive Master of Laws in securities and financial regulation from the Georgetown University Law Center.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Institutions ‘moving very, very fast’ into Crypto: Coinbase exec

October 19, 2022 Coin Telegraph

Coin Telegraph

D’Agostino also said the recent battles between the SEC and CFTC is a good thing for crypto because it indicates that it will be a “vitally important piece of market structure” moving forward.

Institutional adoption of digital assets is “moving very, very fast,” and much faster than the rate nascent industries ordinarily develop at, says Coinbase Senior Advisor John D’Agostino.

In an Oct. 18 interview with SALT moderated by Anthony Scaramucci, D’Agostino said that new asset classes often take time to develop, as “institutional inertia is a very real thing” and “there’s a lot of switching costs associated with adding new assets” but that this hasn’t been the case with crypto.

“So for me, for someone who spent 15 years trying to get commodities to be mainstream, it’s actually moving fast. But I do understand why somebody in the heat of the moment feels it’s glacial. But for institutions I think it’s moving very, very fast.”

As for what may have slowed institutional adoption, D’Agostino said that U.S. regulators have been “complacent” to the point that it harmed “the growth of the technology.”

But interestingly, D’Agostino sees the “bifurcated regulatory regime” between the U.S. Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) “as a good thing” because “nobody fights over something that is going to go away.”

“The fact that crypto is being used as a bargaining chip by the heads of regulatory agencies [and] the fact that these public announcements are being made to push a positioning around which regulatory agency will be in control is an indication that this is a vitally important piece of market structure.”

D'Agostino was adamant that a crypto-related Exchange-Traded Fund (ETF) will eventually be approved, despite the SEC's ongoing rejections.

“I think that’s going to change. Despite the delay, an ETF is inevitable. I can’t tell you when it’s going to happen. But I know at some point it’s going to happen.”

Co-founder and CEO of Singaporean crypto exchange Coinhako Yusho Liu recently told Cointelegraph that he expected institutional interest to keep growing as the industry matures.

"We believe institutional flows into the market will continue to grow and serve as a crucial driver for future crypto innovation and adoption," he said.

Securities Exchange Commission