Welcome to The Node. This is Daniel Kuhn and Prachi Vashisht, here to take you through the latest in crypto news and why it matters. In today’s newsletter:
Lohan and YouTuber Jake Paul, for “illegally touting” Justin Sun’s cryptocurrencies tron (TRX) and bitTorrent (BTT) without disclosing they were being paid to do so. Six have settled the charges. The agency is also suing crypto billionaire Justin Sun and his companies the Tron Foundation and BitTorrent over the sale of the tokens, which, according to regulators, are unregistered securities. The SEC further alleged the defendants ”fraudulently manipulat[ed]” TRX’s secondary market through an “extensive wash trading” scheme. In other news, former U.S. President Donald Trump’s NFTs have jumped over 30% in ether-denominated value over the past week amid his potential indictment and arrest.
Estranged Exchange
Coinbase (COIN) may be facing future enforcement action by the SEC for potentially listing unregistered securities and operating in violation of securities laws, the company announced Wednesday. On Twitter, CEO Brian Armstrong and other Coinbase executives said the exchange was served a Wells Notice allegedly regarding aspects of the company’s spot market, staking, prime and wallet services. The document is not yet public, and Armstrong said the company would be prepared to go to court. Following the news, Coinbase suspended its Algorand staking rewards program and financial analysis firm Oppenheimer downgraded expectations of the firm’s stock. Meanwhile, In the wake of Silvergate Bank’s failure, cryptocurrency exchange Kraken will suspend automated clearinghouse (ACH) deposits and withdrawals beginning March 27. The move will impact no other services, the exchange said, as it looks for “alternative funding providers.”
Insane Mainframe
Arbitrum’s website and blockchain scanner went down ahead of the highly anticipated ARB token airdrop due to recorddemand from token holders. Over 600,000 wallets claimed the reward for using the popular Ethereum layer 2 scaling system, as it now charts its path forward as a decentralized autonomous organization governed by token holders. Meanwhile, Avalanche nodes on the protocol’s specialized X- and C-Chains went down due to bugs in a new software release. The blockchain’s C-Chain (built specifically for smart contracts) has recovered from the outage, while X-Chain (the exchange chain) was lagging at time of publication.
Sound Bites
“There continues to be signals out of this administration that are making it hard for crypto [firms] to operate here in the U.S., which we believe have serious national [and] economic security issues.”
– Head of government affairs at the Crypto Council for Innovation Brett Quick, on CoinDesk TV’s “First Mover”
Of the other participants that were actively involved in the conference, no other made an impact quiet like Near Protocol. Until recently, Near was a super-charged, proof-of-stake platform designed for speed, security, and scalability. Building on such a strong platform, people too often view Near as a competitor to Ethereum. However, Near’s presence at ETHDenver showed that the blockchain is not out to compete against Ethereum, but instead compliment the blockchain and support Ethereum for its shortfalls. Continue reading.
*This is sponsored content from Near Protocol.
The Takeaway: High Priorities
It was a triple whammy from the U.S. Securities and Exchange Commission on Wednesday. Coinbase said it received a message saying the SEC essentially intends to sue over violations related to the largest U.S. cryptocurrency exchange’s staking service and possibly token listings. It filed a lawsuit against one of crypto’s wealthiest and most influential entrepreneurs, Justin Sun, and it took aim at more than half-a-dozen celebrities who promoted TRON-related blockchain projects.
The particulars in Coinbase’s case are still mostly unknown. The exchange was served a “Wells Notice” – the same legal formality the SEC issued to stablecoin company Paxos last month derailing its Binance USD product – that serves as a fire alarm that the securities watchdog intends to bring the heat. The document hasn’t yet been made public, though many are interpreting it as a sign the agency is finally taking action against crypto exchanges simply for being crypto exchanges.
Just like when the SEC sued Kim Kardashian for failing to disclose she was a paid promoter of EthereumMAX, a project in no way related to Ethereum, the agency today is trying to send a signal. Chair Gary Gensler does not have the resources to go after every celebrity shill or wannabe influencer, so he has to pick his battles. He shoots for the top (the top being someone with millions of Insta followers) and hopes the message trickles down.
In the case of Justin Sun, the megalomaniac crypto billionaire who’s hard not to love, the SEC charged him and his companies, Tron Foundation Limited, BitTorrent Foundation Ltd. and Rainberry Inc., with offering and selling unregistered securities. He was also charged with manipulating markets, including allegations of wash trading TRX to artificially inflate the price of the token as well as directing payments to eight celebrity endorsers to create a false perception of investor interest.
Six of those celebrity endorsers, including “Parent Trap” star Lindsey Lohan, YouTuber Jake Paul and rappers Lil Yachty, Ne-Yo and Akon, have settled with the agency, paying in total more than $400,000 in fines, disgorgement and interest payments. On paper, this is a win for the underfunded agency, which under Gensler has taken the entire crypto industry into its purview. Gensler has stated quite frankly that nearly all cryptocurrencies beyond bitcoin are securities, and that all paid promoters must disclose that they were paid.
But the fact that this stuff keeps happening, and that the SEC has to keep escalating its enforcement actions, only shows how ill-equipped the agency is to rein in crypto. Six celebrities settled but how many remain? How many could the SEC even go after – if they’re even aware of all the bad actors?
The irony here is that by trying to signal strength over the crypto industry, the SEC is essentially showing it has a very weak hand. The Kardashian suit looked bad enough after the collapse of the FTX exchange, which exemplified the poor priorities of the nation’s top securities regulator. And now that eight additional celebs with household names have been sued, it makes it seem like the agency is powerless to stop even low-effort (and frankly, comparatively, low-impact) crimes like failing to say an obvious crypto promotion is indeed a crypto promotion.
If I were a scam artist I wouldn’t feel scared now, I would feel relieved. Maybe emboldened. The SEC has its sights on targets that will garner impressive headlines, rather than the web of scams, “pig butchering” schemes and faulty projects across the crypto industry. And it’s not just the SEC’s fault but other agencies that seem to at random determine what projects to regulate. When enforcements are stochastic, they cannot be a deterrent – because “maybe getting arrested” is just part of the job for a scammer.
The alternative, of course, is providing regulatory clarity. I won’t go into the details here, but you know it, I know it and Gensler knows it. The problem is, especially by threatening Coinbase, Gensler has backed himself into a corner. There are no new rules that need to be written, none of the particularities about how decentralized projects function need to be taken into account, he suggested. Crypto itself is bad. That’s a losing prospect for consumers who could benefit from crypto, people the agency is meant to serve – because crypto is too big to tackle and because much of it isn’t bad at all.
How all of this plays out remains to be seen. The U.S. government has essentially declared war on the industry and taken steps designed to debank and ostracize even registered crypto firms. Coinbase is likely going to take the matter to the courts. And if the exchange has grounds to question the SEC’s reasoning, the lawsuit may extend well past the point when Gensler leaves office in two years. But he’s made his mark. Let’s hope he doesn’t embolden actual scammers by muddying the water.
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