by Amy Castor And David Gerrard
“Good news. You know that dog I loved? Who crossed the rainbow bridge?? I just put him on the block chain where he can live forever.”
SEC v. Terraform: All securities and fraud claims to be prosecuted
The Securities and Exchange Commission sued Terraform Labs and co-founder Do Kwon in February 2023 for allegedly marketing unregistered securities to U.S. retail investors, lying to investors, losing everyone's money, and stealing Luna Foundation Guard's bitcoin reserve.
New York District Judge Jed Rakoff issued summary judgment opinions on December 28. His opinions were mostly in favor of the Securities and Exchange Commission. [Order, PDF]
The court determined that “there is no genuine dispute” that Terraform’s four cryptocurrency assets — UST, LUNA, wLUNA and MIR — “are securities because they are investment contracts.”
The SEC's theory is that if you build a system of tokens and promote them as the number rises, the parts of that system will likely constitute securities. Judge Rakoff agreed.
The UST stablecoin was not a security per se — but was promoted by Kwon and Terraform as a ticket to investing in the Anchor protocol, with a “target of 20% fixed APR,” and “clearly indisputable evidence” showing that UST In combination with the Anchor Protocol they constitute an investment contract.
The SEC has already cited the Terraform decision over UST in the Binance case, where it said that Binance's stablecoin BUSD was a security for similar reasons – BUSD was part of an entire ecosystem. [Doc 202, PDF]
The court also determined that there was “no genuine dispute” that Terraform and Kwon sold securities — most notably LUNA and MIR — in unregistered offerings.
Rakoff was not strongly impressed by two of Terraform's three expert witnesses — and by how Terraform attempted to dismiss the testimony of the SEC's expert witnesses. “The defendants also make a confusing argument” is not a phrase you want to hear from a judge.
Terraform won summary judgment against SEC claims that the mirror protocol involved offering and executing transactions in security-based swaps. But the SEC can live with that.
The trial will now focus on the fraud allegations brought by the SEC against Terraform and Kwon.
The trial was postponed to March 25 so that Kwon, who is currently awaiting extradition in Montenegro, can attend. That is, if it is sent to the United States in time! [Order, PDF]
Coinbase: All my small caps are gone
The SEC sued Coinbase in June 2023 for acting as an unregistered securities exchange, broker, and clearing agency. The SEC claimed that at least 12 of the tokens listed on the exchange were securities, as is the case with Coinbase's staking software.
Coinbase filed a motion to dismiss in August 2023. At a five-hour hearing on the motion on Wednesday, January 17, U.S. District Judge Katherine Polk Failla asked questions of attorneys on both sides.
Coinbase's attorney argued that the tokens in question were collectibles, such as Beanie Babies or baseball cards, as opposed to investment contracts such as stocks. “It's the difference between buying Beanie Babies Inc. and Beanie Babies,” he said.
Neeraj K said: Agrawal from Coin Center: [Twitter, archive]
Coinbase is not arguing that cryptocurrencies are just fun little caps that should be left alone for seconds. Only a fool would think that's what they said
They argue that the SEC's definition of investment contact is so broad that it would make securities for young children too
Agrawal is right that this would be a very stupid argument. Unfortunately, this is the argument that Coinbase itself made in its August motion to reject what was heard today:
On Coinbase's secondary market exchange and through Prime, there is no investment of funds coupled with a promise to deliver anything in the future. There is an asset sale. That's it. It is similar to selling a piece of land whose value may fluctuate after the sale. Or an apartment in a new project. Or an American Girl doll, or a beanie, or a baseball card.
(“I am financing my new startup by selling Stock Babies which is an asset just like a piece of land, and the value of which can fluctuate reasonably well.” – Andrew Molitor)
Judge Failla asked whether Judge Jed Rakoff was wrong when he sided with the SEC in saying Terraform Labs offered and sold unregistered securities. Coinbase wants the judge to follow the July 2023 Ripple ruling, in which Judge Analisa Torres ruled that selling XRP on public exchanges complied with federal securities laws because the buyers did not have a reasonable expectation of profit based on Ripple's efforts. (A ruling that many, including us, thought was completely crazy.)
Failla ended the session saying she would make a decision at a later date. “I can't decide this from the bench right now,” she said.
Paul Grewal, general counsel at Coinbase, says the US exchange is still seeking regulatory clarity! [Twitter, Nitter]
If Judge Failla denies Coinbase's request to dismiss the case — and we expect she will do so — the case will likely go to trial sometime in 2025. [Bloomberg, archive]
Cryptocurrency ETFs: Collateralized Roegpoll Obligations
Bitcoin is down 15% since Bitcoin ETFs were approved on January 10 – but the mechanics of the impact are difficult to track.
Bitcoin is traded 24/7, but ETFs are only traded during stock market hours. Outside of those hours, there will often be a gap between the ETF's last market price and the price of Bitcoin at a given moment.
Billions of dollars go into ETFs — but billions go out, too. Some days show a net inflow of dollars into ETFs, while other days show a net outflow.
We know investors are cashing out of GBTC's Grayscale as fast as they can now – with $2.2 billion flowing since the closed-end trust became a two-way ETF. Some of this money appears to be going back to other Bitcoin ETFs.
When shares are cashed out, the bitcoins backing those shares must be sold. Even if Grayscale sold its bitcoin over-the-counter (OTC) via Coinbase Custody, that would still push the price of bitcoin down.
With ETFs, shorting Bitcoin is now something you can do more reliably — the Wall Street Journal notes that “speculators close their bets and the price drops.” Bitcoin price In reality It is tied to the Ark Innovation ETF, a junket technology ETF. [WSJ, archive]
VanEck already had a bitcoin futures ETF — but they've closed it now that they have an ETF. [MarketWatch]
VanEck and Ark/21Shares have already proposed Ethereum (ETH) ETFs. [Ark filing, PDF; VanEck filing, PDF]
ProShares is working hard to make cryptocurrency ETFs dumber. In addition to their existing spot ETFs, they propose cash-settled inverse ETFs – bets that rise when Bitcoin falls. Many of these are being taken advantage of.
The names of ProShares' new funds make them sound like more of a straight-up gamble than cryptocurrencies actually are — ProShares Plus Bitcoin ETF, ProShares Ultra Bitcoin ETF, ProShares UltraShort Bitcoin ETF, ProShares Short Bitcoin ETF, and ProShares ShortPlus Bitcoin ETF — but hey, as long as they file an S-1. , Seemingly. Here are Moron-backed securities and Rugpull collateralized obligations. [FT, archive; prospectus]
Bloomberg's editorial board believes the SEC made a terrible decision to allow Bitcoin ETFs — which is not the way to protect retail investors from a garbage market. [Bloomberg, archive]
Tether use case
The United Nations believes that ropes are widely used by criminals. The United Nations Office on Drugs and Crime (UNODC) published a report entitled “Casinos, money laundering, underground banking and transnational organized crime in East and Southeast Asia: a hidden and accelerating threat.”
The UNODC report cites USDT as one of the main methods of money laundering in the region. He specifically points to the growing popularity of USDT on Tron due to its “stability, ease of transactions, anonymity, and low transaction fees.” [Press release; report, PDF]
Separately, a new Chainalysis report found that stablecoins like Tether were used in the vast majority of cryptocurrency-based fraud transactions and sanctions evasion in 2023. [Wired, archive; Chainalysis]
David SH Rosenthal reviews what is known about the approximately 100 billion tethers in circulation and agrees with Dirty Bubble's claim that the man actually running Tether is Christopher Harborne, an iFinex shareholder. (Plus there is a team at the end of Harbourne). [DSHR]
Meanwhile, Tether competitor TrueUSD is definitely backed by something. right? However, real-time certifications were paused again last week. Redemption was not reliable either. [Protos; CoinDesk]
We have rekt at home
The SEC shut down BarnBridge DAO, a “purported decentralized autonomous organization,” for selling unregistered securities to US retail investors.
BarnBridge was a DeFi protocol that allowed users to earn a fixed return on their deposits – by selling bonds. Tyler Ward and Troy Murray created BarnBridge as a DAO in 2020, to hide that they were only running the project. From March 2021 to May 2023, BarnBridge DAO sold SMART Yield bonds to retail investors – not governance tokens.
SMART Yield attracted more than $509 million. To settle the SEC charges, BarnBridge will forfeit $1.5 million, and Ward and Murray will pay $125,000 in civil penalties. This is the first time the SEC has targeted a DAO. [SEC; order, PDF; order, PDF]
HyperVerse was a $1.3 billion cryptocurrency scam run by Sam Lee and Ryan Shaw, founders of the collapsed Australian cryptocurrency company Blockchain Global. Turns out HyperVerse CEO Steven Rhys-Lewis isn't there.
HyperVerse appears to have used Cameo — a website that lets you pay celebrities to read text for you — to have endorsement-like videos read by Steve Wozniak, Chuck Norris, Jim Norton, and Lance Bass.
Sam Lee denied having anything to do with HyperVerse, but also felt he had to claim it wasn't a scam. [Guardian; Guardian]
A blockchain developer was contacted with a job offer on LinkedIn. He was given a “take home” project to download and debug on his computer. Hours later, he discovered that 0.225 ETH ($558) had been withdrawn from his Metamask wallet. I was shocked to learn that a blockchain developer could be less than top-notch competent. [Bleeping Computer]
Good news for Bitcoin
Total venture capital investment in the cryptocurrency industry was just $9.5 billion last year, less than a third of what it was in 2022. But crypto venture capital firms are currently sitting on investor money that they have to put out there at some point. Perhaps at the “intersection of blockchain and artificial intelligence.” [Bloomberg, archive]
Australian bank startup Lygon has gone bust. It was founded five years ago by ANZ, Commonwealth Bank, Westpac, IBM and Scentre Group, with the best enterprise blockchain hype of the 2019 era. The idea was to digitize corporate banking guarantees – but on blockchain technology! No one cared, and Ligon appointed a director in June 2023 and declared bankruptcy in late 2023 with debts of A$14.3 million. The company's assets – mostly brands – were purchased by senior management at a tenth of their book value. [news.com.au]
Venezuela's Petro was dead as of last May. And now it's even more serious, as it has finally been removed from its only exchange, Patria. The remaining petro tokens are converted into Venezuelan bolivar. [Barron’s]
USDC stablecoin issuer Circle has secretly filed for an IPO. The IPO will take place after the SEC completes its review of the filing. [Businesswire]
Use case for blockchain found! Court service for a SIM swap fraudster on the Bitcoin blockchain by sending an OP_RETURN message to the address containing the victims' bitcoins. [Krebs]
Celsius Network had 30,000 ETH stored in validators. They are disposing of it now so they can distribute the money to creditors. CoinDesk insists that getting rid of the mountain of ETH is essential good News for the price. This massive cancellation delayed anyone else who wanted a removal by about six days. [CoinDesk; CoinDesk]
Monkeys can no longer set NFT profiles on Twitter! It doesn't matter, you can always right click and save. [TechCrunch]
Bloomberg has a nice profile on James Block, Also known as Mike Burgersburg of Dirty Bubble Media, after he tagged Silvergate Bank to death two months before it collapsed. Block actually shorted Silvergate and made some money. Bloomberg believes this was the “best short call of 2023.” [Bloomberg, archive]
