Washington Is Knocking On Crypto’s Door

Look, I think the crypto industry more broadly, if it's going to have any success going forward, has to come into compliance with basic public policy about disclosure, about avoiding conflicts, about properly segregating customer funds, and guarding against fraud manipulation. Without that, this whole area stands the chances of collapsing like a house of cards.

That very serious sounding person is Gary Gensler. He's the chairman of the US Securities and Exchange Commission and perhaps the most feared and loathed man in the world of cryptocurrency. In the eight months since the shocking implosion of Sam Bankman Freed's FTX exchange, Gensler and other federal officials have stepped up their demands for stricter federal regulation of the industry. The sec has also launched lawsuits against two of its

Yes, it got this mainstream recognition, but the stakes were that much higher. So these falls, these scandals, these implosions, they've just hit the industry super hard.

One of the things that we have to remember with these two lawsuits we've seen so far is that they could just be the tip of the iceberg.

I'm Wes Kasova today on the Big Take Ken Washington and Crypto Learn to get along.

Sam Bankman Freed has been arrested in the Bahamas, and we got that confirmation from the Bahamas attorney.

Just try to.

Calculate the contagion here because investors are not expecting much in terms of their funds here.

I've been so many twists and turns in the case that US officials are building against FTX founder Sam Bankman Free.

But now we have Hannah. I think by now all of us are really familiar with the spectacular failure of Sam Bankman Freed's FTX exchange. And in fact, just to give you a shout out, you recorded a whole podcast with Bloomberg and Wondering called Spellcaster The Fall of Sam Bankman Freed. It is terrific, by the way, and I encourage everyone to give it a listen. Can you start by telling us what's happened since? Because the entire industry has really been shaken to its bones.

We're still seeing fallout from the collapse of FTX. There are companies like Block five that had FTX exposure that had to file for bankruptcy. There have been lawsuits against celebrities who endorse FTX. I'm talking about Steph Curry, Tom Brady, Gissell Bunchin. The other thing, too, is that the cryptocurrency market is still reeling. I mean, it's lost about one point eight trillion dollars in value, and you know, there are a lot of questions on whether this industry can survive,

Have two different things happening on two different days. You have Binance, the largest exchange in the world, but some of the allegations being made against Binance are very different than the ones being made against Coinbase. Here at Binance.

Coinbase is based in the US. Binance does not have an official headquarters, but is you know, sprawling across the world and has run into issues with regulators around the globe. So these are two you know, very powerful companies, very different in their own ways, but both of them are facing regulatory trouble at the moment, and.

We're going to get into all the details about those lawsuits in just a little bit, But Helle, I wanted to ask you, because you cover financial regulation Washington, it's been taken a really hard look at crypto from the very beginning. Why has it been so hard for them to kind of put guardrails on this industry the way they do with others?

So, I mean, it's been really difficult because it comes down to basic characterization, right nobody knows necessarily, or at least, there's a gray area over which digital assets are securities that would be regulated by the sec or are commodities that currently you know, if you have a futures based product on something like bitcoin, that can be regulated by the Commodity Futures Trading Commission, but anything kind of in the underlying commodity basket would be regulated at the state level.

Right now, all right, So let's take a second and to find our arms here, because this gets pretty weedy, and yet it's really really important to understand. And one of the big tensions here is is crypto currency a security or is it a commodity? And can you tell us just a bit about the difference between those two things and why it matters so much.

Yeah, so securities were kind of are regulated under this test that's called the Howie test.

It's from a nineteen forty six.

Supreme Court ruling was actually related to sales of tracks of of Florida centrist growths to investors. So nothing to do with you know what we traditionally think of securities now, which are stocks?

Really? I think most people would think of it as you know, a security, as a stock or a bond, something that you would invest in.

Yeah, I mean, at the simplest level, it's basically anything that involves investors kicking money with the intention of profiting from the efforts of an organization's leadership. So, you know stocks, for instance, if I invest in Apple stock, you know, I expect that Tim Cook or Apple's leadership are going to make certain decisions that will increase the value of that stock.

So you're investing in an enterprise like a company, yes, or even like in the case of a bond, a government right.

And you know, so if you're not a security which is regulated by the sec then maybe you're a commodity with which could eventually be regulated by the CFTC if Congress acts, and so you know a lot of people will say that they think digital assets are more like commodities, that they're more like digital gold. And there's actually laws that kind of just list out what commodities are. So that's wheat, gold, you know, some of those other things

Decentralized is how they call it.

And so that's kind of a development that we've seen over the last couple of years. It's also you know, I will point out that the crypto industry would prefer to not be regulated by the SEC. This is something that would be really costly for them. They are all of these disclosures, they are stricter investor protections, even though the CFTC will say, you know, our rules are just as strong. And there's also this question right now, you know, the CFTC doesn't have the ability right now to directly

Hannah, you've written in great detail about the really rough state of the crypto industry, and when you look back to bitcoin's high point in twenty twenty one, when I think crypto was at like sixty nine thousand dollars, what surprises you most about where the industry finds itself now.

Yeah, well, the crypto industry is no stranger to scam scandals, crimes, things like that, but I think the scale of these obstacles that it's faced in the past year or so was just unimaginable. Prior to this, I mean, nobody saw the collapse of FTX coming. That was preceded by, you know, the implosion of three Hourro's Capital, which was a major crypto hedge fund. Celsius, a crypto las went into bankruptcy.

And also a lot of people who weren't big name investors got burned too.

I mean, there are still people waiting to get their money back from FTX. They have no idea whether they're going to be able to recover, in some cases, their entire life savings that they put on this crypto exchange. And I think what also sets the crypto industry apart is that so many celebrities, you know, started promoting crypto companies, doing commercials promoting coins on social media, particularly in ftx's web.

Like I was saying, it's FTX, it's a safe and easy way to get into a crypto.

I don't think so, and I'm never wrong about this stuff never.

So I think that has also put a lot of people on edge that here you have these very wealthy individuals, these famous people promoting these companies and cryptocurrencies, profiting from it, and they may have not seen the same fallout that just individual investors have. And you know FTX. They renamed an arena in Miami where the Heat.

Plays after FTX.

You could see Coinbase's logo on basketball courts for NBA games. MLB umpires wore FTX patches on their uniforms. Like these companies were everywhere, and it was really crazy to see them breaking over into the mainstream.

After the break, government takes crypto to court. Ellie, we mentioned a little bit earlier about these two lawsuits that have been filed against the two biggest of the crypto exchanges. One is against Binance. Can you tell us about finance and what the charges are against it?

Sure?

So, Binance is actually facing two lawsuits. There's one from the CFTC that was actually filed first earlier this year, and then we had one filed in June by the SEC. Both of these have registration failures essentially, you know, operating as unregistered exchanges or clearing agencies.

But then we also have a slew of.

Kind of different accusations over mishandling customer funds. That feels a little bit FTX.

Like parallels here to the FTX of fraud and minute pulation that we saw and we allege against Sam Bakmin Freed where he had sister organization Alameda and the special arrangements with that trading platform FTX.

For instance, the SEC alleged that a total of at least one hundred and ninety million dollars was transferred from the US based Binance Exchange to an account with this company called Sigma Chain, which was a trading firm that the SEC said was controlled by Binance's CEO, Chenpeng Jao, who goes by cz.

SO here Binance. At his sister organization controlled by mister Zao called Sigma Chain, we alleged that they had corrupted their trading volumes by a lack of risk controls about their affiliate Sigma Chain and wash trading. There are challenges of custody throughout this space. There's a business model that bundles and co mingles functions that we don't see nor would we allow elsewhere in finance.

And so basically they also said from that amount there was eleven million dollars I was drawn to purchase a yacht. Some of that money was customer funds. There was another firm that was controlled by CZ that also was kind of seeing co mingled customer money and company money. We've also seen in the CFTC side of things, they're alleging that Binance took kind of purposeful steps to evade US laws to allow American VIPs, for instance, to access the

Can you tell us a bit about Binance?

Finance is the leading crypto exchange in terms of trading volume. It really outpaces its competitors. It's probably the biggest name in the industry, and there's been a lot of i think intrigue and interest in this company. It has this very global presence. It does not have, you know, an official headquarters.

It does have a.

Big office in Dubai, but this company has clashed with regulators in many of the countries it's done business in including in the US, and it's CEO CZ You know, he's a very interesting figure in crypto. He has sort of this cult following. He's active on Twitter. He is very confident in the business's company does and the influence that they have over the industry. So it's been very interesting to see how they've reacted to the lawsuit. You know,

And I'll jump in there too.

I mean, I think one of the things that we have to remember with these two lawsuits we've seen so far is that they could just be the tip of the iceberg. So we know from prior reporting, including our own, that the Justice Department, the IRS's Criminal investigation unit. They're also investigating Binance, so we could see charges come from those avenues as well. You know, those things are still ongoing, so we haven't had any sort of resolution, but it's something to keep an eye on.

And Allie you mentioned something that I think is important, which is that the government is coming after them in part for their failure to register, and that kind of gets at the heart of it, right, because these crypto exchanges say, well, they're not subject to the sorts of regulations that would make them have to file, So what do they say about that charge.

Finance is an interesting case, right because you have Binance kind of the international company, and then you have this separate entity called Binance US that it is supposed to be separate. But you know, these lawsuits both sort of allege that that's not actually the case, that Finance US is just sort of a front for.

The international company.

But even so, setting that aside, a lot of US based crypto exchanges will say, you know, we don't have to register with the SEC because the tokens that we have on our platform are not securities. We've done internal vetting, we've determined they don't meet the how we test that test of about Citrus Groves that I mentioned earlier, and

And so those are the cases against Finance. Let's now move to Coinbase because they too are the subject of a lot of scrutiny.

So in the SEC Coinbase case, they basically said the company was operating unregistered securities exchange broker clearing Agency Chair Gensler has repeatedly said he thinks these different functions, like if you're holding assets for customers and allowing them to trade, that these should be separate, regulated entities.

So that's kind of what they're dinging them on here, plan that.

The SEC is making that they are acting as an unregistered broker dealer and listing on registered securities, which has been up for debate in the cryptocommunity when it comes to regulators at least for a long time now. Coinbase we know says that a lot of the things that they've listed are not securities, while the Securities and Exchange Commission believes they are, and they have a varia And.

They also said that thirteen of the different cryptotokens listed by the exchange were actually securities. Obviously things that Coinbase has denied.

And Hannah tell us about Coinbase.

Coinbase is the first publicly traded crypto exchange in the US. It's CEO, Brian Armstrong, is a force within the industry. They have really made a name for themselves. They follow behind Binance in terms of trading volume when you look at crypto exchange rankings and Brian Armstrong, you know, he's really tried defending against the SEC's allegations by pointing out that, hey, you guys have proved us to go public, how can you say now that we're in violation of federal securities laws?

And Hennery, when you talked to Coinbase and talked to Binance, what do they say about these charges.

They've really always kind of directed to the responses that their respective CEOs have put online. Finance also did an extensive blog posts denying the allegations. Both Coinbase and Finance have also been extremely critical of the SEC's approach here that they say, you know, we've been asking for regulatory clarity in the US, and you've just provided enforcement, like you've never laid the groundwork for us to effectively register

Even you know, a change in the administration someone maybe you have a Republican president or folks come in that are a little bit more sympathetic to the crypto industry.

And Hannah, we've been hearing about how the argument of the industry is that crypto is not a commodity, crypto is not a security and shouldn't be regulated. But why do they say that, Like, what is their argument to say, you should buy this, but it should be entirely free of regulation.

The industry has long argued for decentralization. You know that they are focused on peer to peer interactions with people can engage directly with each other, that men are cut out like brokers, And I think they've also argued that crypto is different, that this is a financial tool, that

So they're arguing that they're intrinsically different than other forms of investment that are.

Regularly The argument that they'll make is, for instance, if you're a token issuer, so you issue you know, X, y Z token, they'll argue that, you know, the current rules just don't make sense, that there are unique aspects of blockchain technology that aren't you conceived of in existing rules, And so they'll say, SEC, we really need you to come in and update this because we actually can't even register because we can't abide by the current disclosure forms

So, Alison, we have these multiple lawsuits among government entities. When you look ahead, where do you see this going? How long will it take for these cases to kind of play themselves out?

You know, I think we could see these going on for years. We also see on the fringes of other regulators getting involved. So banking regulators putting out warnings about banks kind of working with crypto firms or taking deposits from crypto companies. We're definitely going to continue to see Congress attempting to write legislation, though getting something across the finish line is always difficult, as we've seen in the past.

Your leadership, this year's Exchange Commissions brought nearly fifty separate enforcement actions against digital asset firms. At the same time, you've refused to provide clarity on whether digital assets offered as part of an investment contract or subject to securities laws, and more importantly, how these firms should comply with those laws. You're punishing digital asset firms for allegedly not adhering to the law when they don't know it will apply to them it's nonsensical, so.

That legislation's being worked on, but right now it's mostly Republican backing, so we'll see if it can get democratic support, especially in the Senate that it would need to get enacted.

When we come back. What do crypto purists think about the government's plans to regulate the industry, And I guess I'm kind of wondering how we got to this point, because when crypto first started, it was this kind of new, exciting thing, a little seed of the pan. It grew very quickly, probably much faster than anyone expected, and that was part of the allure for a lot of the

I talked a little earlier about this idea of decentralization and peer to peer transactions. So, you know, cryptocurrencies like bitcoin, we're seen as ways for people to easily exchange money in a trusted, simple, decentralized way, and it's been very interesting to see in the evolution of the industry that yes, there are people who still want it to be decentralized, but centralized entities like coinbase, like finance have really stepped in and gained a lot of influence over the industry

Actually took off and people invested in it, like we started as a joke but then became a.

Real Yeah exactly.

So, yes, it got this mainstream recognition, but the stakes were that much higher. So these falls, these scandals, these implosions, they've just hit the industry super hard.

Ell.

You mentioned earlier that Congress has taken a hard look at this, and there are some bills at least advancing through committees. Who gets to decide ultimately how crypto is regulated.

I mean, so right now it's kind of being left up to enforcement actions and it's sort of a battle of wills right now between the SEC and the CFTC. I mean, you'll see the Binance lawsuit is a really good example. Both of them listed Binance USD, which is a type of token called a stable coins pegged to like the US dollar, and basically one of them said it was a security, the other said it was a commodity. So you'll see those kinds of things continuing to pop up in lawsuits and then that'll have to.

Get worked out by the courts.

Congress can step in and to define these things, and the bill I mentioned from McHenry and Thompson right now, they do kind of require the two agencies to come together and decide on certain definitions, decide on regulations. It does sort of keep you know, anything that kind of qualifies under the Howie test I mentioned that's still under the SEC's raimit and crypto firms can come in and say we think we're decentralized enough. They certify that to

And as you say, I mean, that's so dependent on politics, where you have a very activist sec under Joe Biden, whereas if you had a Republican president, maybe they wouldn't be as activists if you have a Republican Congress versus the Democratic Congress. So so much of this is at the whims of just Washington politics.

It is.

And I will say, you know, one of the points that people have made to me is with the crypto bills or proposals that we're seeing right now, they've kind of said if nothing advances by this fall or maybe even the end of this year, that it probably won't advance before the presidential elections, because everyone knows that once you start getting into kind of campaign season, things sort

Anna you've written. They given all the troubles of the industry is having in the US, that coinbase is now looking at other markets around the world, are they getting a warmer reception outside the US. Yeah.

So I had the chance to sit down with a coin based executive who helps oversee their international strategy, and he really spoke about how they're doubling down on their efforts outside of the US. So for right now, their top international market is the UK. We've seen the UK government express, you know, some friendliness towards crypto, and you've

So despite all this scrutiny. Despite the whip sign up and down a Bitcoin, all the collapses, all the drama we've seen, people still want to put their money in this.

Yeah, there are still true believers. There are still people who you know are holding on to their bitcoin for dear life and you know are invested in this industry.

Hannah Ali, thanks so much for coming on the show.

Thanks for having me, Thank you for having.

Me, Thanks for listening to us here at The Big Take. It's a daily podcast from Bloomberg and iHeartRadio. For more shows from iHeartRadio, visit the iHeartRadio app, Apple Podcasts, or wherever you listen, and we'd love to hear from you. Email us questions or comments to Big Take at Bloomberg dot net. The supervising producer of The Big Take and the producer of this episode is Vicky Bergalina. Our senior producer is Catherine Fink. Raphael Celia is our engineer. Our