Crypto’s Final Boss Fight

Paris Marx: Molly, welcome back to Tech Won’t Save Us!

Molly White: Thanks for having me.

PM: Very excited to chat with you, as always, to dip into your great wealth of crypto knowledge and, knowledge on many other things, of course. Last week, we had some very big developments in the world of the crypto industry with the Securities and Exchange Commission, otherwise known as the SEC, filing lawsuits against Binance and Coinbase, some really major players in this space. Now, I want to dig into all of that what it’s going to mean for the industry, because this comes after a year of kind of collapses and declines and other lawsuits that the industry and other companies in it have been kind of subject to. But before we do that, were these lawsuits a surprise, or, for someone like you who watches this industry really closely, was it expected that this was going to happen? It was just a question of when?

MW: It was more a question of when, I think. So, the SEC had issued a WELS notice to Coinbase a month or so ago, basically telling them: We’re going to sue you unless you have some really good explanation for why we shouldn’t. And Coinbase’s reaction to that was basically just a PR push. And so, I think most people who are paying attention expected to see a lawsuit out of the SEC against Coinbase. And then Binance had already been subjected to a lawsuit from the CFTC. And it’s been fairly common in these crypto cases to see parallel lawsuits from the CFTC and the SEC, against crypto companies, partly because there’s not that much agreement over whether or not these cryptocurrencies are commodities or securities, and therefore, which agency would they fall under. And so to see another lawsuit, come out of the SEC against Binance, I think was pretty expected.

PM: That makes a lot of sense. And I think we’ll come back to that distinction between the CFTC. And the SEC, and what they’re both looking to get out of this through the course of this conversation. But I think before we dig into the specifics of both of the cases, maybe it’s good to get a bit of an overview on Binance and Coinbase. What are these companies? Where do they come from? What kind of role do they play in the crypto ecosystem?

MW: Right, so Binance is a giant in the cryptocurrency industry. They are the largest cryptocurrency exchange in the world, and by a pretty solid margin, as well. They have a very strong percentage of their market share. They operate in the United States, but like a lot of global cryptocurrency platforms, they have this thing where US customers are not supposed to trade on binance.com — the primary exchange — they’re supposed to use this smaller, less expansive cryptocurrency exchange called binance.us. We saw a similar thing with FTX and FTX. us. It has to do with the fact that a lot of cryptocurrency offerings are just not necessarily allowed in the US. And so crypto companies provide sort of a smaller subset.

As for Coinbase: Coinbase, is the largest crypto exchange in the US. So, it enjoys a fairly large amount of market share here. And they’ve always marketed themselves as the above-board compliant crypto exchange. They’re a public company; they’re based in the US. And so they try to attract customers by saying that they’re doing things the right way, and they’re compliant. Whereas Binance has always been a little bit more, let’s say, loosey goosey about some of the regulations. They’ve never really engaged with regulators to a major extent at least they sort of speak about working with US law enforcement and stuff like that. But it’s much more of an arm’s length relationship, I think.

PM: I think that makes a lot of sense. And, we know where Coinbase is located — it’s operating in the United States. It is publicly traded company. And of course, its stock has suffered recently. Binance, of course, is a very shady organization. We don’t really know where it’s operating from. Its executives are all over the place and very hidden figures. So, i’s much harder to figure out what’s actually going on there than with Coinbase, I guess.

MW: Binance definitely is a little bit more of an enigma. We know who the CEO is — Changpeng Zhao. But there are a lot of other higher ups in the company who are these elusive figures. And, there is no official Binance headquarters. They claim to have no primary base of operations, and it’s all just sort of very strange and unusual.

PM: Sounds very legitimate [laughs]. Just to backup what you’re saying about how large Binance within the crypto ecosystem, in a newsletter that you published quite recently, you use data from CoinGecko, as of June 5 2023, which shows that based on crypto exchanges by volume Binance is responsible for 45.8% and Coinbase is 9.2%. I’m assuming those are global numbers. But just so people get a picture of how significant Coinbase is in this, especially after the collapse of FTX, which was last year now. So it’s a really significant deal that the SEC is now going after both of these companies.

So let’s start with the Binance case, then, because this one came down on Monday, June the 5th; it twas the first one that was announced, and Coinbase came the next day. Of course, a surprise of two in one week. So what is the SEC alleging that Binance is done wrong for it to merit this enforcement action by the SEC?

MW: So, there’s a slew of charges in the Binance case. A lot of it has to do with allegations out of the SEC that a number of major cryptocurrency tokens are unregistered securities. And so they listed about a dozen cryptocurrencies, including Solana, Cardano — some of the pretty big ones — saying that these are securities and because you are not registered with the SEC as an exchange, a broker dealer or a clearing agency, it is illegal and in violation of securities laws for you to be offering these securities to US customers. So that’s a fairly substantial portion of the lawsuit, and is largely the same charges that they brought about against Coinbase as well.

But there are also charges around Binance offering securities of their own. So the SEC has alleged that the Binance tokens, BNB, which is their free-floating cryptocurrency exchange token, and BUSD, which is a US dollar pegged stable coin. They’ve alleged that both of those are also unregistered securities, and so Binance is violating securities laws by offering those. And then they’ve alleged that the staking products provided by binance are also securities and therefore not allowed because they’re not registered.

And so staking is basically just the process of taking a cryptocurrency, locking it up, and then earning rewards on it through a process in the cryptocurrency world with these proof of stake cryptocurrencies, where they’re used to actually secure the network and run the validator nodes. So Binance offers, basically, a service where they will take care of that whole process for you and then just pass through the rewards. And the SEC is saying: No, that’s far too much like an investment product that would require registration and all the disclosures that come with it. So those are sort of the security side of things with this lawsuit.

There are also a number of charges and also descriptions of activities in the lawsuit that go beyond just failing to register with the SEC side of things — where the SEC is actually alleging fraud, various forms of malfeasance around wash trading and allowing wash trading to happen on the platform and commingling of customer funds via these entities that are sort of opaque but seem to be run by Binance’s CEO, CZ (Changpeng Zhao), that are these trading firms, market makers on the Binance platform that were receiving a lot of Binance customer funds without that being disclosed to customers. So it’s kind of a lengthy lawsuit with a lot of moving parts.

PM: That latter part you were talking about — is that at all similar to what was going on with FTX last year?

MW: Yes, there’s a strong similarity there, I think, where the head of the company was operating the exchange, but then also operating these trading firms that were trading on the exchange. And there are some real concerns there around conflicts of interest where normally those types of functions would be separated and not something that you would want the same person or the same entities controlling just because you would end up potentially trading against your own customers. So we saw that in FTX, with the FTX exchange, and then Alameda Research, which was the trading arm. With Binance, we’re seeing it with Binance, and then these two trading firms called Merit Peak, and Sigma Chain, which are both owned and operated largely by CZ. And it seems like there is actually some overlap between the employees of Binance and the employees of these trading firms, as well.

PM: It makes a lot of sense, then, of course, to see the similarities between these two major platforms, and the regulatory enforcement that’s coming from. Binance has not collapsed in the way that FTX did. And of course, Binance was involved in that whole story. We don’t need to go over that again. If people want to know more about that, they can of course, go back to the last episode we did in December where we talk about that in much greater detail.

PM: So I feel like one of the things that really stood out to me as I was reading through the details of the Binance case — as you laid them out in your newsletter and some other things that you’ve written and other people have written — is really that Binance has this international platform for people outside the US to trade on. But then it also had binance.us, which was ostensibly a separate platform for people who are in the United States to trade cryptocurrency on. But I believe the SEC is alleging that the divide between these two platforms was not as real as the company was making it seem. Can you talk to us a bit about that and why that’s significant?

MW: So that was a significant portion of this lawsuit, as well as the previous lawsuit we saw out of the CFTC, where they are basically alleging that the Binance US exchange was kind of a front. They claimed that it was a very separate entity; it has its own CEO; it’s very much arm’s length from the primary Binance platform. But these two lawsuits are saying that: No, that’s really not the case, that it was CZ, who was pulling all the strings in binance.us and that the ostensibly independent leadership of that company was actually just a puppet. They even have a quote from a former CEO using the term puppet as a way to describe the weird governance that was happening there. And so, basically, it seems that CZ had pretty much total control over the US arm of things. But it also goes into this great detail about how, with the large customers who are based in the US, there was this whole process in which Binance employees, pushed those customers to the international exchange via a handful of really sort of shady operations involving having them register shell companies outside of the US so that they could claim they were not based in the US.

There was some really questionable activities happening around the Know Your Customer process, which is the way that people identify themselves and verify their identities to the exchange. And it seems like the whole thing was pretty much just a way to pretend to US regulators that they were abiding by the laws that are in place here, while very much just pushing people to the exchange that they will really wanted them to be able to trade on. And a lot of this really validates some reporting that came out in 2020 from Forbes around this document that’s been called the Tai Chi document, which was a program put together by some consultant for Binance, saying that you should avoid all of these regulatory issues by doing exactly this: setting up this complete facade of a US company, and then using that to distract the regulators while continuing to do the very same things that the regulators have been starting to crack down on you for. And so, we’re really seeing that coming out in these two lawsuits from the SEC and the CFTC, validating that reporting that that is pretty much exactly what Binance is doing.

PM: It’s wild! There are quotes to that effect in the lawsuit itself, of course, as as the SEC is laying this out, and as you quote in the stuff that you’ve written about it. Again, not to always go back to FTX, but am I wrong, that that was also what FTX was doing that was also part of their kind of problem?

MW: Well, it’s maybe a little bit less premeditated, I guess, in the case of FTX. This Tai Chi document is really, I think, damning for Binance, as far as the fact that they’ve been really intentionally doing this to skirt regulations. But there are allegations in both lawsuits around the quality of attempts at making sure that US customers were really segregated to this US exchange. And, the segregation of funds between the two exchanges has been put into question in both cases, where, if they were really complying by the regulations, there would be no commingling of assets between these US customers and the rest of the FTX or Binance exchanges. Whereas in reality, we’re seeing that it looks like the funds were really just all pooled together.

So, that is a part of why in the FTX case, FTX US customers are waiting in line with everybody else to receive some portion of their assets back as the bankruptcy case proceeds. Had they been properly segregated, had the SEC and other regulators really cracked down on this, that might not have been an issue. And I think that might be a factor in why the SEC is taking this action now on Binance. They eally feel like, at least the perception is that these regulatory agencies dropped the ball with FTX. And they really failed to do their job in protecting US consumers. And so they’re trying to get out ahead, I think, on some of the other exchanges that are still operational, rather than sort of waiting for everything to go up in flames and then come in after the fact.

PM: That’d be ideal, right? [laughs]

MW: I mean, that’s the dream [laughs]

PM: And I think that’s what I was thinking of most as well was, it was commingling of funds a lot with the FTX that I remembered, how the US and the international funds were really kind of mixed together, there was a lot of back and forth there, even though there was claims that they were supposed to be completely separate. And to pick up on the point that you were just making, one of the key pieces of the SEC suit against Binance is that there’s also a temporary restraining order against Binance, which seeks to “freeze assets belonging to Binance’s US entities.” Again, I’m quoting you there, as I read this out. Can you explain to us why that is and what they’re seeking to do in having this restraining order placed on the assets and ensuring that the company can’t access them?

MW: So the motion for the temporary restraining order is really interesting and somewhat unusual. It seems like the SEC is really concerned that Binance, or its executives, might do something with the funds that belong to US customers. And so they’re seeking this emergency action to freeze those assets. And it’s limited a little bit in the sense that they still want customers to be able to withdraw those funds. So it’s not a freeze, like we’ve seen, in the bankruptcy cases where assets are totally frozen customers have no access to their own funds that are stored on the exchange, it’s really to stop by Nance from doing something with those funds. And it seems like the SEC is concerned that Binance, CZ, various folks in charge, might try to move the funds out of the US bank accounts and entities into portions of the finance system where they are out of reach of US regulators.

There’s also some wording in there that makes it seem like they’re concerned that Binance might destroy evidence and things like that. So, it’s a pretty extreme motion in the sense that it’s really alleging that Binance has engaged in some shady stuff, and they really want the judge to crack down on it before something really bad can happen. It’s an unusual thing for the SEC to do. I’ve spoken to some former SEC folks who talked about how it’s a pretty extreme thing to do. And it’s sort of a worst case scenario tool in the toolbox. But it’s something, again, that we’re seeing in the Binance case and not in the Coinbase case.

PM: I guess it’s not surprising, as we were talking about earlier, where Binance is this international entity that’s very shady, you don’t really know where it’s completely headquartered, you don’t even know everyone who’s involved with the company. So it’s probably not surprising that they’re taking an action like this.

MW: Or they’re at least trying to. But we’ll see, I think, to some extent how effective it is — assuming that it is granted — just in the sense that it’s not clear that Binance US customer funds are all as carefully segregated as they ought to be. And so I wonder, to some extent, how much the SEC can properly freeze those assets when they’re not actually segregated in US bank accounts or whatever. The lawsuit claims that some of them are stored with the international exchange. There’s claims around how customer funds were transferred to these other two entities, these trading firms that are not even really disclosed to Binance customers. And so, it seems like there’s a mess happening over there on the accounting department. But it is, at least, an attempt to try to protect assets belonging to US consumers. And, it’s a substantial amount of money in this sort of billions of dollars range, which is, again, beyond the type of thing we tend to see in these TROs (temporary restraining orders), which are usually in the millions of dollar range in normal circumstances.

PM: Hopefully, the accounting over there is at least a bit better than FTX, where I believe it was QuickBooks they were using still [laughs]

MW: And even that, it was like napkin math, it looked like! Very much ad hoc.

PM: Absolutely. I feel like the other big piece of the Binance case that stood out is that it’s not just going after the company itself, but CEO CZ, Changpeng Zhao. I might be butchering that pronunciation. He’s also explicitly named in this lawsuit. Can you talk to us about that?

MW: So, CZ is named directly and there are several of the complaints are towards him specifically, which is an interesting distinction from the Coinbase case, and definitely, I think, speaks to the fact that the SEC sees this as a more fraudulent case, and a case in which CZ specifically is engaged in activities that are circumventing the law in some way. So I think in some ways, it’s a more serious case, in that sense, just in terms of the alleged wrongdoing. I saw something where, I think, Matt Levine — one of Bloomberg’s columnist — was talking about the distinction between like process crimes and more of the serious fraud. Where selling unregistered securities, failing to register as an exchange — that’ts one level of criminal activity where it is against the law, obviously. But it is not necessarily the same level of malfeasance as fraud, the rampant washed trading, commingling of customer assets, etc., that we’re also seeing alleged in the Binance case. And the fact that they’re going after CZ, specifically, I think speaks to that.

PM: Absolutely. And I can link to that Matt Levine piece in the show notes for listeners, as well. Now, you mentioned the case that we’re mainly talking about is the SEC suing Binance. But you mentioned that the Commodities Futures Trading Commission, the CFTC, is also suing Binance at the same time. Can these two lawsuits be pursued at the same time? Or is there kind of a conflict there, where I’m assuming the CFTC sees what Binance is doing as a commodities issue whereas the SEC sees it as a securities issue? Can both of these agencies be going after the same target?

MW: Yes, I believe they can. I’m not an expert in sort of this side of things. To my understanding, it is possible for something to be both a commodity and a security. But there has been this sort of turf war going on between the CFTC and the SEC, over who really is the primary regulator for cryptocurrency assets in the United States. And it is absolutely not a settled debate. There’s somewhat broad agreement that Bitcoin is probably a commodity in the United States. That’s about as much as everyone agrees on this. As far as some people think, they’re securitiese. Some people think they’re commodities. Some people think they’re neither. Some people think they’re both. It’s really all over the place. And so we just sort of see these regulators coming out and making these lawsuits. And then, I think they’re really just hoping that the courts will come out and decide it, to some extent. But yes, I think it is possible for these two lawsuits to proceed simultaneously.

The one thing we do sometimes see is if there’s a criminal lawsuit also in the mix, then the civil lawsuits out of the SEC and the CFTC are sometimes put on pause. So that’s what we’ve seen in the case of FTX, where there is a criminal lawsuit against Sam Bankman-Fried and several other executives of the FTX exchange. And so while that is under way the civil lawsuits are on hold, just because there can be some conflicts that disadvantage both the prosecutors and the defendants, as far as people making conflicting statements and the level of discovery that’s allowed in a criminal case versus a civil case, and so on and so forth. So that’s one case where we would expect to see maybe the civil cases put on hold as if a criminal suit came out against Binance, which I think is distinctly possible. But that’s more of the realm of speculation at this point.

PM: I was going ask you about that, but you preempted me. So that’s perfect! But I believe what we’re expecting is that the Department of Justice is probably working on something as well, the question is more: when is it going to come rather than if, once again?

MW: So, a lot of the behavior that’s described in the two civil suits against finance sounds very criminal. There’s a lot of allegations of what sounds like fraud, questions around sanctions evasion, anti-money laundering law, compliance, and things like that. It would seem like they would be better suited to a criminal case out of the Department of Justice, which there’s been reporting about criminal investigations and whether or not they might be approaching an actual indictment and things like that. But so far, there has been no official movement out of the DOJ. I think a lot of us in this crypto skeptic research community are starting to think that maybe there are charges filed under seal against CZ, and perhaps others in the Binance umbrella. But that’s again, all sorts of speculation.

PM: So that’s Binance. That’s the big picture of what’s going on with the big international juggernaut. But as you say, Coinbase is the major kind of US crypto trading platform. So you’ve already talked a bit about it. But what we see in that lawsuit that’s distinct from the Binance case? How are they similar? And how are they different?

MW: The SEC case against Coinbase involves many of the same charges around failing to register as an exchange broker dealer and clearing agency. And they make the same argument around: Okay, here are these dozen or so cryptocurrency assets that Coinbase lists and makes available to US consumers; we believe, as the SEC, that these are unregistered securities, and therefore, in order for you to offer securities, you would need to be registered with the SEC as an exchange, etc. And so those charges are very similar between the two lawsuits.

There’s also charges that are similar between the two around the staking programs. So Coinbase also offers cryptocurrency staking services and the SEC is making the same argument here that that is a securities offering. That’s where the Coinbase case ends. There are no allegations like in the Binance case around fraud around Wall Street, doing commingling of customer assets and things like that. So it looks like it’s really more of the process crimes, as Matt Levine said, in the case of Coinbase. And we’re seeing in the Coinbase case, that they’re not charging Brian Armstrong. They’re not naming him as a defendant, specifically. And so it’s really more just around the the securities laws in this particular case.

PM: Absolutely. And Brian Armstrong being the CEO of Coinbase, of course. As you say, it seems still serious, but much less serious than what we’re seeing with Binance, because of the types of things that the SEC is pursuing with Coinbase, how they’re more focused on the securities aspect of it and not going so much beyond that. At the same time, as this case was put out on Tuesday, states in the United States also hit Coinbase with a number of cease and desist orders and fines and things like that. Can you talk to us about that? And what that actually means for Coinbase is ability to continue operating in the United States?

MW: Sure. That was a really interesting aspect of the Coinbase case. And not something that we saw in the Binance case, where there was this very coordinated effort by, I think, 10 states that all acted together to tell Coinbase that they need to stop offering their staking services to customers residing in those states. And the specifics of the orders vary a little bit. So there’s some states that said: You need to stop this immediately. There’s some states that have given them 30 days to respond, and so on and so forth. But it’s all to do with the staking services and that sort of thing. And that’s really interesting. I think it’s just state securities regulators basically saying: Okay, the SEC thinks this is a violation of securities laws, we’re going to fall in line with that, and we agree with the arguments that they’ve been making. And we’re going to try to shut this down right now, rather than wait for this potentially drawn out battle in the courts about the staking service.

And Coinbase has come out and said that they intend to continue offering staking, as this lawsuit is battled out. And so, I think this might make more of an immediate difference, at least in those states, compared to the federal lawsuit, although there’s always the possibility that they could be required to stop offering the staking as a part of a court order or something like that, but definitely could make more of an immediate difference in that sense.

PM: It’s really fascinating. And I looked at the list that you included in your newsletter as well, because I was like: Iss this blue states? What is it? But it does seem like a real kind of mix — you have California, Maryland, Wisconsin, Kentucky, New Jersey, South Carolina, Alabama, Illinois, Washington. So it’s a real mix of different states that are kind of pursuing this against coin base, rather than just kind of one political line or something like that.

MW: I thought that was interesting as well.

PM: It just seems fascinating to me, just to see how it plays out. Because obviously, we know there have obviously been Democrats that have been kind of open and close to the crypto industry. But I feel like it’s probably fair to say that the Republicans have been more open to the crypto industry than the Democrats. Would you say that’s right?

MW: I would say that’s generally true. It’s not a strictly partisan issue, but it definitely is more popular among the Republican side of the aisle.

PM: There’s definitely some Democrats who got some crypto money, and were happy to go along with it. And so, obviously, we talked about with Binance, how they’re also facing the CFTC case and possible criminal charges. Does it look like any of that is coming with Coinbase? Or does it look like it’s probably just this SEC lawsuit?

MW: I think it’s possible that we could see a case out of the CFTC. As far as Coinbase, I don’t think it’s necessarily likely that we’ll see anything criminal, at least not based on what we’re seeing in the SEC lawsuit. So, despite the SEC and the CFTC being civil, they can only file civil charges. In the binance lawsuits, they described a lot of activity that seemed to go far beyond just securities law violations, whereas that was not the case and that Coinbase suit. So I mean, it’s always possible that something could happen from the DOJ against Coinbase. But I think it would be based on behavior that is not known to the public at this point, just from what we’ve seen.

PM: And I guess if we we’re zooming out on Coinbase, just a little bit, what has their business been recently, since we’ve seen the downturn in the crypto ecosystem over the past year and a half or so? And have they experienced a hit because of this lawsuit?

MW: They have. We’ve seen the impact to their stock price, obviously, since the lawsuit was announced. But I think that even before the lawsuit Coinbase was seeing some challenges, both because of the crypto markets in general, but I think also because people knew this was coming. There’s been a battle raging between Coinbase and the SEC for quite a while now. This was not the beginning of it. And Coinbase has become I think, more and more sort of defiant towards the SEC, around the allegations that cryptocurrencies are securities and that sort of thing. They sued the SEC earlier this year seeking faster reply to something that they filed even before that, or they’ve been trying to pressure the SEC to create new laws or new sort of rules of the road for the cryptocurrency industry that are quite bespoke to the industry rather than applying existing securities laws. And they argue that these securities laws were written in the 1930s. They can’t possibly apply to cryptocurrency assets, because those are so new and unique and innovative, etc.

The SEC so far, has pretty much disagreed with that and said that: Well, no, these laws were written to be very broad, and to be applied to any sort of asset that might emerge, because it is challenging to be reactive to every new invention that someone comes up with. And so there’s been this battle sort of raging between Coinbase and the SEC for a while now, where the SEC has been issuing warnings and telling the industry — not just Coinbase — that offering these cryptocurrencies to consumers is something that would require registration under securities law, and the industry has largely ignored that, at least in the US. And so now I think the SEC is sort of putting their money where their mouth is and saying, all right, we’re gonna take it to court and actually get a ruling on this, because so far, the industry has been unwilling to comply with the laws that are in place.

PM: It’s an important move to try to see where this thing is going to go into the future. Obviously, we’ll talk about the wider kind of implications of that. But you started to mention there, how have Coinbase and Binance responded to these lawsuits? What is the tack that they’re taking in trying to oppose them?

MW: So they’re both being pretty defiant, I think. It seems like both of them intend to fight it in court. Binance actually made reference to having been in discussions with the SEC over settlements, which I think is really interesting, because the SEC is historically very willing to settle with companies over these types of complaints. We’ve seen a whole slew of settlements recently. Kraken just settled with the SEC over a very similar allegation around their staking services. And we’ve seen other crypto settlements in the past as well over allegations of not registering as an exchange and things like that.

So to see the SEC basically say: No, actually, we’re not going to settle even if you are willing to settle. It really speaks, I think, to the uniqueness of this case. I can’t really speculate that well on why the SEC would make that sort of decision. It could be that Binance was lying to them repeatedly, and they were like: We’re not going to settle with you because of that. It could be that they’re trying to set a precedent here. It’s hard for me to say. But I do think that’s worth noting is just that Binance at least claims that they tried to settle with the SEC, and that the SEC turned them down.

Coinbase has also repeatedly said even before this lawsuit that they intend to sort of fight to the death with the SEC. And, I think that’s a possible outcome for them as well, because if these things go in favor of the SEC, and not Coinbase, that is a very, very major change, and a threat to Coinbase. And so they I think are going to fight with everything they’ve got, as far as I can tell. Binance, I think if they wanted to, could make the decision that this isn’t worth it, we’re just going to exit the US entirely. And, there obviously might be some action that they would have to take as far as the past breach of law and things like that. They can’t just be like: Oops, sorry! And then leave and everything’s fine. But, there is the potential that Binance could continue operations because they have such a global footprint.

Although, I do think that some people have somewhat underestimated the extent to which Binance relies on the US markets as far as their business. There are statements in the two lawsuits against Binance that really support the fact that CZ was unwilling to give up the US market and was willing to take these fairly substantial risks in order to keep access to US customers. So it would make a dent, I think, in the business, but I think Binance could continue to survive if they exited the US. Coinbase, on the other hand, does not have much of a global footprint. They are a very US-focused exchange and they’ve made some comments and sort of threats reasonably to say that they’re thinking about moving outside of the US and setting up shop somewhere outside of US jurisdiction, but I think that’s mostly talk honestly at this point.

PM: That makes sense. And I believe Binance recently pulled out of Canada to give an example of where they pulled out of countries in the past, but obviously, they’d be far less dependent on Canadian customers than American ones.

MW: Right, exactly. So in recent months, we’ve seen Binance take a slightly more defensive stature towards other jurisdictions that have come down on them. They’ve recently changed some of their offerings in the EU as well, like you said, they exited Canada. I think they’re more willing to fight the US just because they have a substantial market there, where there is a lot of money out of US customers coming into Binance. And so they want to hold on to that if they can.

PM: Absolutely. Maybe this is obvious, but why do these companies want to avoid securities registration and regulation and it being seen that they’re securities exchanges and selling securities to customers?

MW: That’s a really good question, because I don’t actually think it is that obvious to a lot of people. So the types of business that these companies are doing right now, I don’t think could be compliant with securities laws. And Coinbase has actually said that multiple times, as have other US based crypto companies, saying: There is no way for us to be compliant with securities laws. And their argument is that that is a flaw in the securities laws. The SEC says that that is a flaw in the crypto company’s business models. And I’m inclined to agree with the SEC on this [Paris laughs]. But there are basically requirements around what types of activities that company can engage in when it comes to securities. And the functions that these companies are taking on around being an exchange and a broker dealer, and a clearing agency. Those are the types of things that would normally be segregated in US financial markets, because there is this strong potential for conflicts of interest there.

And so, I think it would be possible for a company to register as, say, just a crypto exchange with the SEC. There was a company that just did that quite recently — I’m forgetting the name of it off the top of my head — but it was within like the last month or so. But it’s the fact that these companies want to do all of those things at once that I think is just not possible, and for good reason. Because we see the type of trading against the customers that we saw in FTX, that we are seeing alleged with Binance. These are the exact reasons that those laws are in place.

There are also substantial requirements around disclosures and auditing that would be imposed on these companies if they were to become compliant with SEC regulations that I think would be really challenging to abide by. We’ve seen some audits of Binance that were published as a part of the SEC documentation that show pretty concerning flaws around finances, internal controls, and the accounting that was happening there. And that, again, seems to be very commonplace in the cryptocurrency industry, where there is just not the type of record keeping that you would need in order to operate as an exchange. The bar is pretty high, I think, for companies to register and operate under securities regulations in the United States. And I think it would just be really challenging for that to happen. So I think that this argument that the crypto companies can’t comply with regulations is actually quite accurate. It’s just the sort of where you go from that, that differs pretty dramatically.

PM: Absolutely. And I think that is a really great explanation. So thank you for that. I have to note that in the Binance lawsuit, the SEC quotes Binance’s Chief Compliance Officer, as you write, who sent in a message, “We are operating as a fucking unlicensed security exchange in the USA, bro.” So, seems they know it [laughs]. Now the SEC is saying: Yeah, we know it too!

MW: That’s not a great thing to put into writing, I think, if you’re a compliance officer. But it is very useful to the SEC as they try to make this argument.

PM: It’s always funny to see how these crypto people love to put their crimes into writing. Because I believe FTX were doing the same thing in they’re group chats and stuff like that. They all love to do it!

MW: It makes me wonder if these companies ought to go back to using phones a little bit more. It’s like the fact that everyone uses Slack and Telegram and stuff like that is not very useful to them when the SEC comes knocking! [both laugh]

PM: Absolutely. Now, you mentioned earlier that in both of these lawsuits, the SEC is kind of naming a bunch of other cryptocurrencies and saying these are all securities. So what does that mean for those cryptocurrencies and for the other exchanges that are not facing SEC lawsuits right now, but are still kind of allowing those currencies to trade? What is the implications of that?

MW: So, that’s a really fascinating aspect of this. So, other exchanges could respond in a handful of ways to this. They could make the argument that because this case is not settled, it’s just a complaint at this point. That means that the SEC, there is no firm decision that those cryptocurrencies are securities. But I think historically, we’ve seen that when the SEC actually names a token as a security in one of these lawsuits, a lot of exchanges in the US have — historically at least — backed off from offering those currencies. The one that I’m thinking about in specific is the Ripple case and the XRP token, where the SEC sued in 2020. They said that this XRP token is an unregistered security. And most of the platforms in the United States stopped offering it to US customers, because they didn’t want to end up on the wrong side of an SEC lawsuit or listing a token that had already been described as a security. In this case, I think it’s going to be interesting to see what happens.

So we have seen a little bit of that already. Robin Hood in specific has delisted, I think, Solana, Cardano, and Polygon tokens, which are three of the ones named in the lawsuit. And so they are taking this sort of conservative route where they’re really trying to say: No, no, we’re really trying to not list securities here. And so if you think those are a security, we’ll have nothing more to do with it. But it’s gonna be a question of whether or not the rest of these platforms serving US customers do the same thing, because it’s a lot of tokens that were named in these lawsuits. And there’s some of the bigger ones. I think the three that I just named are in the top 10, maybe 20 of crypto tokens by market cap. And so that’s a pretty big change. And then if you add in BNB, and BUSD, those are also right up there. And so that could be a pretty big change for some of these US platforms. But they are running the risk if they keep offering them that in a later lawsuit, the SEC could come and say: Look, we were very clear that we believe these are securities, and you kept offering them anyway. And so we’re coming after you now.

And then there’s the open question of what the actual offerors of these tokens are going to do. So if you are the Solana Foundation, or one of these groups that stewards these tokens, what do you do when you have been described as an unregistered security in one of these lawsuits? It’s kind of a catch-22, I think, to some extent, because you could have someone from the Solana ecosystem file an amicus brief or something in the lawsuit and say: No, no, we’re not a security. But part of the way that the SEC determines if a token is a security is whether or not there’s sort of a centralized group governing it, offering it, controlling the token. And so having some lawyer show up on behalf of your group and say: No, no, we’re not a centralized group controlling the currency is kind of the wrong thing to do, I think, in that case. And so there’s this sort of awkward scenario for those foundations and other companies that are sort of really controlling these crypto tokens where they need to claim that they’re a decentralized entity, and so not really come out in support.

So I don’t know what will happen there. They might leave it up to Binance and to Coinbase to make those arguments on their behalf, which, in this case, both of those companies have a fairly substantial war chest to fight these lawsuits, they have onshore good lawyers. And so it might be okay for these token offerors to just stand back and let that play out. But t’s not good for Solana as an ecosystem or for polygon or Cardano, or any of these others to have that written out in the lawsuit that these are unregistered securities.

PM: When I was reading that the first thing that came to mind is, I don’t know a year or so ago, I heard a guy pitch a kind of crypto carbon credit scheme using Solana. And I was like: Man, I’d be so happy if that goes down. Maybe it’s already gone down, I don’t know.

MW: I’ve had some unpleasant arguments with the guy behind Cardano. And so I when I saw that lawsuit, I was like: Ohhhh!

PM: Love it. Yeah, a bit of schadenfreude, right?

MW: Just a little [laughs]

PM: And, just to back up what you’re saying some of the other ones name, there are Filecoin, Cosmos, tokens for the Sandbox, Decentraland, Axie infinity — these names that I think people will be familiar with, if they’ve kind of been paying any attention to what has been going on with some of these projects. I guess, if we’re thinking about these tokens being seen as securities, I’m assuming a company like Coinbase is saying: We are objecting to this whole notion that we are a securities exchange, that we’re offering securities. So we’re not going to take those off of our platform because we reject the whole premise, I’m assuming, right?

MW: That’s what I would assume. I would think that if Coinbase decided now to take this tokens off of their platform it could be seen as them acknowledging that they were securities, which would probably be bad for them. But that is Coinbase’s position and has been, which is that they say very firmly and repeatedly that: We do not list securities; we have this whole process by which we evaluate whether or not a token is a security. And the SEC goes into that in a lawsuit to some extent, because they are claiming that, even by Coinbase’s own standards, some of the tokens that they have listed, really sure seem like securities. And I think that’s sort of an interesting point, actually, is that Coinbase used to take a fairly conservative approach towards which tokens they were offering, especially sort of back around the time that they were going public. They did not less nearly as many tokens as they do today. And they were far more cautious, I think about which ones they were listing. And then since going public, it seems like they’ve really loosened the standards around what they will list on the platform.

Before they went public, they didn’t even have Dogecoin on there. And Dogecoin is something that some people will argue is not a security because it is decentralized, etc., etc. I don’t know how much I agree with that. But that’s now one of the more conservative ones compared to some of these tokens, where it seems very much like almost a stock in the company, whereas there is no sort of Dogecoin company, thank God.

PM: Maybe it’ll just be rolled into X/Twitter!

MW: Yeah, that’s true! [laughs]. So, I think that that’s sort of an interesting thing to point out, as well as just that it seems like CoinBase began to play very fast and loose around what they were listing. With some of these tokens, they were saying: Come invest in our company by buying x, y token. And that’s pretty strong case for the SEC to say: No, this is a security. And despite the fact that the SEC has listed around a dozen tokens, they really only need to prove that one token listed by Coinbase, or by Binance was a security and then, that’s enough to show that they were in violation of the law. So that’s a tough thing to defend, I think for these two companies where they have to say that not only are some of these tokens, not securities, none of these tokens are securities.

PM: It’s a good point, and especially as you say, Coinbase was doing assessments, and based on its rules and assessment process, it seems like some of these things would be securities. It’s been about a week as we talk, since the SEC has filed these lawsuits against Binance and Coinbase. When we see bankruptcies, when we see platforms collapse and things like that, obviously, that’s not what we’ve seen in this case, there’s usually kind of ripple effects that hit the rest of the industry. Have we seen any kind of broader follow yet from the lawsuits that have been filed throughout the crypto industry and in companies and coins and tokens and stuff that are not named in these?

MW: It’s been somewhat limited. So like I said, Robin Hood delisted some of the tokens. Some of the tokens that were named, dipped in price early considerably. So the BNB token in particular has come down a lot, because that is so closely tied to by Nance, there’s some fallout from that token price coming down, that could be coming as far as like liquidations in the markets and things like that. But so far, that’s all been fairly limited. The effect on crypto prices broadly has been also pretty limited, I would say. So there were some dips in the Bitcoin price, for example, that recovered fairly quickly. So I think it’s been fairly limited. As far as the fallout, I think people just know that this lawsuit is going to take a while. And I also think they knew it was coming. This, again, should not have surprised anybody who’s been paying attention. And so, it would be a little bit strange for it to have this huge impact on the market, if everyone sort of knew it was about to happen.

PM: It was already kind of priced in, I guess, the expectation that this was going to happen. I did see that Nigeria’s SEC has said Binance’s operations are illegal now. Cypto.com says its US exchange is winding down as well. Is that at all linked to what is going on here?

MW: It’s hard to say if the Nigerian decision was taking into account the US SEC is arguments. That would be very quick on their part, I think, so it could have been a distinct thing that was underway. As far as crypto.com. I think there’s an important distinction there where crypto.com is shutting down, its institutional trading, they are keeping retail trading open for us customers, so they’re not exiting the US entirely, which makes me think that may also be an independent thing where they are saying there’s just not that much interest from institutional traders in the US right now, and their argument, at least, or their justification for this decision is that there’s just not the interest, there’s not the demand, so we’re just gonna let that go. But it’s hard to say. I assume they are taking into account those types of risks. And, it’s hard to argue right now that the US is a more unfriendly place for the crypto markets, and it was a year ago. So I’m sure there are a lot of companies that are reevaluating their operations in the US as a result of these lawsuits.

PM: I think that’s a really good point. And I appreciate you laying that out for us. A few final things I want to kind of go through quickly, just to get a bit of an update on where the industry is right now. Obviously, we’re all familiar with Sam Bankman-Fried and the collapse of FTX last year and how he is facing court date, I guess, in the nearish future. Any updates on him and what’s going on with his case? Or are we just kind of waiting for this all to kick off in October, I believe it is?

MW: So things have been pretty quiet in the Sam Bankman-Fried department.

PM: He’s not writing blogs or anything anymore? [both laugh]

MW: He’s got a flip phone and a laptop that lets him access Netflix, and that’s kind of it. So not much word from Sam Bankman-Fried, which has been kind of a blessing. Not a whole lot, I think, happening in his case, either just as far as the filings that we’ve been seeing. It’s all fairly standard stuff. But he is slated to go to trial sometime in October — that was at least the date that was laid out. That could well be pushed off. But that does seem that’s coming pretty soon, I would say so I’m sure more will come from that.

PM: Absolutely. It’ll be a big story that everyone will be watching, like the Elizabeth Holmes Theranos lawsuit last year, or whatever that was.

MW: Right. I will say that his legal team has filed to dismiss a lot of the charges that have been laid against him. So that’s, that’s worth mentioning, at least based on several different arguments. So, some of the arguments actually have to do with the fact that some of the charges were filed, after he was extradited from the Bahamas. And they are saying that it was not allowed, basically for the US to just tack charges on after he’d agreed to be extradited based on the charges that had been laid out in the beginning. And then some of the other arguments are just around whether or not the DOJ can charge him for some of these various fraud complaints and things like that. So, they’re trying, I think, a lot of arguments on these dismissals. They’re sort of throwing spaghetti at the wall and seeing what sticks is what it looks like to me. But, that’s sort of what they have to do, I think.

PM: Totally, you can’t blame them. That’s kind of their job, I guess, is to try to get rid of as much as possible before it actually goes to trial. Another of our crypto buddies, Do Kwon, of course, responsible for Terra and the Terra Luna collapse. I guess that was a bit over a year ago now that happened. He was obviously an international fugitive for a while; South Korean authorities were looking for him and US authorities, as well, or I believe that was filed when he was finally found. They found him in Montenegro. Any updates on him? Is he going to South Korea, the United States — what’s going on there?

MW: So it’s kind of a weird situation with him where he was arrested in Montenegro on charges around document forgery, because he had these fake passports that he was using to try to travel. And so he I think Montenegro wants him to face those charges before anything else, which is kind of funny to me, because I feel like forging a passport is fairly low on the list of crimes compared to his billion dollar crypto collapse, multibillion dollar. But he’s, I think, expected to face those charges before everything else proceeds. But both the US and South Korea are seeking his extradition for much more serious charges around the actual cryptocurrency crimes and fraud and everything that was going on there.

And there’s been no decision yet on where he will go or when. The only thing is that he was initially supposed to be released on bail in Montenegro, which was really shocking given the whole monthslong manhunt that was going on. It’s like he’s obviously demonstrated that he’s a flight risk. He was supposed to be released on bail. That was appealed. And I guess the judges in Montenegro saw the light and realized that maybe that wasn’t such a good idea. So he and his traveling companion — who was also charged with these documents forgery allegations — are both in custody, I think, still in Montenegro and waiting to see where they will end up.

PM: Very good. Very good. Is there any indication of if he does get extradited whether South Korea or the US will get precedence?

MW: I don’t think so. Not that I’ve heard of, but I have heard that some even South Korean people would prefer to see him extradited to the US because it seems like the charges might be more significant here. But that’s all I know.

PM:I was wondering it when I was thinking about it the other day, so I figured I would ask, almost done with my little catchups here. Of course, Elon Musk. We know him very well. Dogecoin is his favorite little crypto token. He’s facing a class action lawsuit right now for pumping and dumping Dogecoin. Is that going to go anywhere you think? Will he finally face some accountability for something, for once in his life?

MW: I would love to see that happen! Nothing more. My hopes are not terribly high for that lawsuit, I will say. They’ve made some allegations around cryptocurrency wallets that they believe were under his control. But, to me, it seems like the actual evidence that it was Elon Musk controlling those wallets is a little bit light. It has to do with him, or the operator of the wallet at least making trades in amounts that appear significant to Elon Musk in terms of, I think, one of them it was an amount that might represent like his son’s birthday, or something that looks like a coded message that said: Hi, Elon. You would think that that would be a weird thing to say to yourself.

Then there’s a lot of arguments around his sort of crude sense of humor, where some of the transactions were made in amounts that reference, like 420, or 69, or things that he has historically loved. But things that are also widely loved by crypto enthusiasts. And so, I think if if they could definitively tie some other wallets to him, then there could be an interesting case to be made that there do appear to have been significant trades that were made. And, it could be a market manipulation type of thing. But I think there’s a hurdle there first, before we get our hopes up too much.

PM: Damn!

MW: I know!

PM: Hopefully, he can finally get hit with something. Okay, two final questions before we close it off. Binance and Coinbase are now facing these lawsuits. One of the things that the whole crypto industry was really hoping for was that Congress would regulate the industry and do so in a way that would really help them, and that was beneficial to their argument, maybe put this under the CFTC instead of the SEC, because they figure that might be kind of lighter enforcement. Does it look like Congress is actually going to move forward and do any regulation or has the interest in doing that kind of evaporated now that AI is the next big thing?

MW: I think it’s unlikely that we will see anything substantial soon. The proposed legislation that we have seen has not enjoyed a whole lot of support. So there have been a handful of drafts of things that were proposed involving stable coins and various other things. And it was very much divided among by partisan lines, I think where there was a stable coin bill that was once described as a bipartisan effort. But after the collapse of FTX, the Democrats took a step back and said: We no longer really support this approach, and have even described the bill as basically completely Republican drafted. And that, I think, was the closest that we saw to anything enjoying more a widespread support. More recent proposals have enjoyed quite a lot of support from the crypto industry, but not necessarily from Democrats are the more skeptical of the Congress people in the crypto department.

So I don’t think there’s anything coming soon that might decide this once and for all. Although, it could be that some of these Congress people see the SEC lawsuit against Coinbase, in specific, as a reason that they need to take quick action now and really rein in the SEC, and so on and so forth. I’ve seen some statements out of individual Congress, people to that effect, the campaign that Coinbase has been making against the SEC, I think, has won over some Congress, people who in a recent hearing that involved Gary Gensler, the chairman of the SEC. They were quite hostile to him. And so, it is possible that we’ll see something come out as sort of a reaction to the coin base lawsuit. But I don’t think that there’s anything coming down the line and, the next months or even year, just because of how divided people are in Congress on the crypto issue.

PM: It makes a lot of sense. And that means that these lawsuits are even more important then, I guess, if that means that regulation is likely not coming from Congress, and it will be the courts that ultimately decide what is going to happen here and what the determination is going to be around these things. And I guess that leads me into my final question. In an article you wrote for Rolling Stone, you said that this is like the final boss fight, as the SEC launches these lawsuits against Binance and Coinbase, because they are such major players in this crypto ecosystem. Where do you think this is going to go? What is this going to mean for the crypto industry? And will this kill crypto in the US or broadly? Or is it likely that this technology is going to continue well into the future regardless of what happens with this?

MW: So I think there is a huge potential that these lawsuits change the direction of the industry in one direction or the other — assuming that the lawsuits actually play out in fall. If the courts decide in favor of the SEC, that is an enormous precedent for the crypto industry as a whole that would dramatically change how the industry functions in the United States and would really make a lot of the current crypto platforms that operate here have to either dramatically change their operations or shut down or exit the US.

On the contary side of things, if the courts were to decide that this was an overstep by the SEC, that they had not approved the points around these tokens being securities, that would be a strong precedent in the opposite direction. That, okay, these are not securities, they are something else whether it’s a commodity or some totally new class of things. And that would really open up a lot of doors for the crypto industry, I think, because then they would be able to function much more aggressively. A lot of companies that don’t have the legal firepower of Coinbase, or Binance would be able to start taking the risks that they were previously afraid to take because of the SEC. And so I think that would also be a dramatic change.

So I think one way or another, these are going to be impactful lawsuits. And it just depends sort of what the courts decide how much they buy Coinbase’s arguments around their attempts to comply with regulation versus the SEC’s arguments that these are really securities and that Coinbase has been brazenly flouting securities laws. And it could be really impactful specifically, I think, for Coinbase and for Binance. Like I said earlier in the episode, I think, this is sort of Coinbase’s whole business. If the courts decide that this is violating securities laws, that’s kind of it for Coinbase. They could stop listing securities and just list…I guess, Bitcoin? And they could become a Bitcoin only exchange, which is hardly as lucrative, I think, as what Coinbase has been doing. Or they could try to set up shop outside of the US, but they don’t have a very strong established footprint there. And so they would be sort of starting from scratch, I think.

And then Binance, I discussed this earlier, they could potentially exit the US, but they would be losing a substantial portion of their revenue, I think. So, I think there is the potential for a pretty huge change as far as how things go in the US. Obviously, the SEC doesn’t have jurisdiction over what Binance is doing outside of the US. This wouldn’t necessarily impact the crypto industry beyond the borders of the US. But I do think that the US is a substantial portion of the cryptocurrency industry. And so it would put a damper on things just in that sense.

PM: We know that the courts in the US are quite politicized, because of how the appointments work, and all those sorts of things. Is there any indication politically how the courts that would be dealing with these cases, how they would be leaning on this, or is it not really clear yet?

MW: So, it’s hard to say. Amy Berman Jackson was assigned, I think, to the Binance case, I could be getting that backwards. She has considered some of the cases around Trump and the allegations against him. I don’t think she would be considered by any reasonable person to be a Trump loyalist, and so she might be more open to cracking down on the crypto industry than people might worry that a Trump appointee or sort of Trump loyalists might be. But she also, I think, does not have a ton of experience in crypto cases. Like I said, a lot of her previous experience, at least recently has been to do with all of the various lawsuits against Trump, which are not financial crimes, necessarily. I guess there’s the tax issues. But, it’s not a cryptocurrency thing by any stretch. And I don’t think she has any past cases that have involved the cryptocurrency industry. It’s hard to say. I think it’ll really depend. I don’t have too strong concerns yet, at least that: Oh, this person loves cryptocurrency and is going to decide in favor of Binance, or Coinbase.

PM: Well, that’s good to hear at least. And of course, we’ll be watching to see how this all plays out in the coming months, maybe even years we’ll see how long this takes to kind of play its way through the courts and what happens, but I know that you’ll be watching it and we’ll be looking forward to seeing your takes and analysis on all of this as it continues to play out. And I’m sure that we’ll be talking to you again. Thanks so much for taking the time, Molly.

MW: Thanks for having me.