Welcome to The Node! This is Daniel Kuhn, here to take you through the latest in crypto news and why it matters. There were more than a few headlines worth highlighting in today’s news:
In a Thursday report the International Monetary Fund said Thursday banning crypto may not be the best way of handling the sector’s risks. This is something of a reversal for the international organization, which suggested a potential ban some months ago. “While a few countries have completely banned crypto assets given their risks, this approach may not be effective in the long run,” the IMF wrote in a post about central bank digital currency (CBDC) adoption in Latin America and the Caribbean. This comes as the Financial Action Task Force (FATF) said that nearly three-quarters of jurisdictions are not complying fully with the global watchdogs financial guidance for preventing money-laundering with crypto.
Highest Court
Crypto exchange Coinbase won a reprieve from the U.S. Supreme Court on Friday, after the high court ruled that a lawsuit filed by one of the exchange’s users couldn’t proceed until Coinbase is able to appeal a previous judicial decision in a lower court. The ruling, which won a 5-4 majority, allows Coinbase to continue its effort to compel arbitration against the putative class action lawsuit, thereby temporarily halting the lawsuit’s progress. The initial suit that set this legal quagmire in motion centers around Coinbase user Abraham Bielski’s complaint that the exchange is not protecting consumers enough, which was filed after a scammer stole $31,000 from his account. In short: what could be crypto’s first lawsuit before the Supreme Court isn’t directly about digital assets, but instead is a dispute over how courts should handle scuffles over arbitration.
A message from PayPal
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Crypto custody firm Prime Trust may be insolvent and has not met all customer withdrawal requests this month, according to the Nevada Department of Business and Industry said Thursday. The Department’s Financial Institutions Division (FID), which oversees state-regulated trust companies, ordered Prime Trust to cease all activities that violate Nevada regulations, alleging that the company’s “overall financial condition … has considerably deteriorated to a critically deficient level.” The news came shortly after crypto custodian BitGo announced it was terminating its potential acquisition of rival Prime Trust. Meanwhile, the U.S. Securities and Exchange Commission (SEC) has agreed to forgo a $30 million fine from bankrupt crypto lender BlockFi until its investors are repaid, according to a Thursday court filing. This sum is what’s left over from a $50 million penalty BlockFi owed as part of a 2022 settlement with the SEC over an unlicensed crypto lending product.
Bitcoin Is Back
Bitcoin is now trading at a one-year high above $31,000. The cryptocurrency, which is up roughly 20% over the past week, started to rally after the world’s largest asset manager BlackRock applied for a spot bitcoin exchange-traded fund, a type of financial vehicle the SEC has yet to approve. Separately, Volatility Shares’ 2x Bitcoin Strategy ETF (BITX) will become the first leveraged crypto ETF available in the U.S. after the U.S. Securities and Exchange Commission (SEC) let it go effective on Friday. The products, which gives customers bitcoin exposure by only putting up half the value of the bitcoin, will begin trading Tuesday. Finally, crypto publicly-traded mining company Applied Digital signed a deal to host AI and cloud computing loads in its data centers in an agreement that could be worth as much as $460 million over 36 months.
The Takeaway: Yes or No?
(Wesley Tingey/Unsplash)
In pretrial proceedings on July 15 in its case against Binance, lawyers for the U.S. Securities and Exchange Commission (SEC) struggled to justify their request for a near-total financial freeze order against American arm Binance.US. Judge Amy Berman Jackson, who is expected to oversee the entire case, was palpably annoyed as the SEC lawyers tried to fill the gaping hole in their allegations with wilting word-salad.
The exchanges, available in transcript form, were reported in coverage of last week’s hearings, but made the rounds of crypto Twitter again this week. They add to the much broader impression that the Securities and Exchange Commission has overreached its mandate at many levels in its apparent crusade to destroy cryptocurrency as a technology and industry in the United States.
It also adds to increasing signs of displeasure with these tactics from other branches of government.
The June 15 hearing considered the SEC’s June 6 request for an emergency injunction to freeze the assets of Binance.US, and to repatriate to the U.S. assets held abroad by related entities including Binance.com. The request could be seen as part of the SEC’s larger attempt to paint Binance as not just in violation of U.S. securities law, but as a fundamentally fraudulent parallel to FTX. Requesting an asset freeze to ensure, as the SEC put it, “that Binance.US customers’ assets are protected and remain in the United States” suggests a belief that U.S. customer assets are at risk of being stolen by Binance entities or officials abroad.
The SEC has already seemingly failed to convince one important counterpart of this parallel: the U.S. Department of Justice has so far declined to file parallel criminal charges against Binance or CEO Changpeng Zhao. In the case of FTX and its CEO Sam Bankman-Fried, civil and criminal charges were filed within hours of each other. As Judge Amy Berman pressed the SEC’s lawyers, it became increasingly clear that the SEC had at best circumstantial grounds for its requested freeze. Jackson expressed sharp frustration when the SEC could not provide any clear sign that U.S. customer assets had been, or were planned to be, exfiltrated by Binance International.
“It’s happening or it’s not?” Judge Barrett asked at one point. “It’s kind of stunning to me that I’ve now asked this question to each of you [SEC lawyers] five times” without getting a clear answer. “So currently the assets are not going offshore,” replied SEC counsel Jennifer Farer. “…the current accounts, we’re not seeing any flows of money [to] outside of the United States.”
Judge Jackson also noted seeming discrepancies in earlier documents supporting the injunction request.
“There are a lot of details about amounts transferred and where they went…” Barrett asked the SEC’s lawyers. “You say these funds consisted in significant part of Binance platforms, plural, customer assets, including those of Binance.US … Can you clarify or walk me through the transfers you allege were made specifically from the U.S. entities, as opposed to the international Binance platform, to offshore accounts held by Zhao, and how you know that those were customer assets?”
The SEC lawyers did not appear to provide that clarity.
Instead, SEC counsel returned repeatedly to large transactions involving offshore entities. In one instance when Jackson pressed for detail on the claims of U.S. customer funds “dissipating” abroad, the SEC’s Matthew Scarlato repeated SEC claims that funds had moved among Binance.com, CEO Changpeng Zhao’s personal entity Merit Peak and the holding company Key Vision.
Farer elsewhere claimed that assets flowing out of the U.S. were in fact not the key issue, because the freeze order on Binance.US was also intended to protect U.S. investor assets abroad. “We are concerned about all U.S. investors, both those on the domestic platform, Binance.US, and the international platform, Binance.com.”
This again left Judge Jackson seemingly flummoxed. “What you said in your memo was we need this [injunction] because we don’t have sufficient reassurance that Binance.US customer assets … are in the control of BAM Trading. And you said you’re concerned about the safety and security of those assets. And now you just told me, well, no, actually, the [injunction] is about all the investors on both platforms. What is it? Which is it?”
Binance has maintained that Merit Peak has not received customer funds, and is only a vehicle for Zhao’s own personal wealth and trading. That’s still questionably ethical if true – it could mean CZ was trading against his customers. But Judge Jackson did not seem to find it relevant to the question of Binance.US and the security of customer funds there. Jackson later in the hearing cited arguments by Binance that the SEC had “no evidence” of a risk to U.S. customer funds.
If we’ve learned one thing about the crypto space in the past year, it’s this: Trust matters.
One way to earn trust is to get vetted by a reputable financial institution. Which is why it’s notable that Alchemy Pay, a gateway between fiat and crypto, has been given the stamp of approval, of sorts, by a trusted brand in finance: Mastercard. Continue reading
