Tag SEC

On Tuesday, the Securities and Exchange Commission (SEC), headed by Gary Gensler, sued crypto exchange Coinbase for not registering as a securities broker. The day prior, the SEC filed charges against Binance for operating an unregistered securities exchange, also accusing CEO Changpeng Zhao of civil fraud.

The core issue that’s long been in dispute is whether cryptocurrencies are different from securities like stocks and bonds. If they are securities, as the SEC claims, firms like Coinbase and Binance have been illegally operating unregistered exchanges. In Coinbase’s case, the SEC alleges that it has sold 13 crypto-assets (of the roughly 250 on offer) that ought to be registered with regulators, as they deem them to be securities. Coinbase’s staking products are also deemed securities by the SEC, which the company disputes.

Many people within the crypto industry have long maintained that such digital assets should not be considered securities and that the regulatory framework surrounding crypto has been kept needlessly vague.

“I don’t feel like there’s a clear rulebook,” Coinbase CEO Brian Armstrong told The Wall Street Journal this week. “The only sort of high-level statements they’ve made is that everything other than bitcoin is a security which, that’s just not what it says in the law. By the way, that would also kind of mean the end of the crypto industry in the U.S.”

The Coinbase news comes as no surprise. Back in March, the exchange was sent a Wells notice by the SEC, as Reason‘s Brian Doherty reported at the time, which informed the company that the agency had made a “preliminary determination” that it might be seeking enforcement action against Coinbase for purported securities law violations. “We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so,” Paul Grewal, Coinbase’s chief legal officer, wrote at the time.

“In its filing on Tuesday, the S.E.C. detailed the ways in which Coinbase’s leaders had demonstrated that they knew how the marketing and sale of digital assets should be governed under U.S. laws, even while failing to follow them,” reported The New York Times.

But Coinbase disputes this characterization and contends that the legal framework just isn’t clear, nor has it been established that cryptocurrencies are securities or ought to be treated as such. Armstrong argues that the crypto-assets Coinbase works with do not pass the securities-defining Howey test—(1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of profits; (4) earned through the efforts of others—which is how securities are defined in the U.S., per a 1946 Supreme Court ruling. “All four of those things have to be true,” Armstrong told The Wall Street Journal this week. “So there’s various ways that you could imagine a crypto asset would not be a security, right; if it’s sufficiently decentralized there’s no common enterprise, right? If there’s some specific utility surrounding it, it’s not just for the purpose of the value going up, right?”

“Meanwhile, our industry continues to see new, conflicting statements from regulators instead of actual rules,” wrote Grewal in March (emphasis in original):

“The Chair of the CFTC recently testified to Congress that Ethereum is a commodity, which the public has long understood to be the case. Then-CFTC Commissioner Quintenz has said that ‘the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets.’ Current SEC Chair recently opined that perhaps BTC is the only digital asset commodity, which is entirely at odds with the position of the CFTC. If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed. Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules.”

The SEC’s case against Binance has some crucial differences from its case against Coinbase. Binance issues its own tokens, while Coinbase doesn’t. Coinbase is a publicly traded company, thus subject to certain disclosure rules, but Binance isn’t. And Coinbase’s chief executive has not been accused of fraud by the agency the way Zhao has.

Armstrong, Grewal, and others emphasize that U.S. regulators’ vagueness—or outright antagonism—will just drive the crypto industry out of the country.

Many industry insiders interviewed by Reason at the Bitcoin 2023 conference several weeks ago said much the same. With Bittrex shutting down U.S. operations, Gemini looking to operate in the United Arab Emirates, and Coinbase opening a derivatives exchange in Bermuda last month, tons of exchanges seem to see the regulatory writing on the wall and are eyeing the exit.

At the end of March, a long-lasting and prominent cryptocurrency exchange, Bittrex, announced it would no longer do business with U.S. citizens because “it’s just not economically viable for us to continue to operate in the current U.S. regulatory and economic environment.”

Then on Monday, the Securities and Exchange Commission (SEC) hit Bittrex with a lawsuit in U.S. District Court in the Western District of Washington.

Among the charges: “Bittrex has been operating as an unregistered broker (including by soliciting potential investors, handling customer funds and assets, and charging a fee for these services) and an unregistered clearing agency (including by holding its customers’ assets in Bittrex-controlled wallets and settling its customers’ transactions by debiting and crediting the relevant customer accounts).

The company has “operated the Bittrex Platform as an unregistered exchange by providing a market place that, among other things, brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders,” the SEC asserts. In doing so, Bittrex has met the demonstrated market needs of thousands of Americans, some of whom, given the rise in some crypto asset values in the past half-decade, have undoubtedly changed their lives enormously for the better.

Bittrex is accused of clearly knowing they might run afoul of the SEC, with the suit citing “Bittrex’s coordinated campaign, going back to 2017, to direct issuers of crypto assets to ‘scrub’ their public statements of any language that could raise questions from the SEC as to whether these crypto assets were offered and sold as securities, while allowing those securities to be traded on its platform….Bittrex knew what statements to ask issuers to ‘scrub’ because it understood the test to determine whether a crypto asset was being offered and sold as a security.”

The SEC wants Bittrex to stop violating the various securities laws it insists it has been breaking, and to “disgorge on a joint and several basis all ill-gotten gains,” with interest.

SEC Chair Gary Gensler has long mocked people in the virtual currency business who complain of lack of regulatory clarity and how the agency practices what many in the field see as arbitrary “regulation through enforcement,” occasionally hitting some market player for some version of dealing in unregistered securities. These have included XRP/Ripple (the subject of a long-ongoing lawsuit), LBRY, Beaxy, Kraken, and Gemini.

The twists and turns and reasonings of how and when one is dealing with a “security” can seem quite opaque. To attempt a simplistic understanding, one needs to go back to the 1946 Supreme Court case SEC v. W.J. Howey.

As explained in an earlier Reason article on the SEC’s threats against leading U.S. market crypto exchange Coinbase:

Whether or not a financial instrument, agreement, or coin in the virtual currency space constitutes a “security” under the reigning “Howey test” … continues to be a matter that courts seem to have to sort out on a case-by-case basis. While complex, as most legal definitional principles are, a central element of Howey is that the buyer and seller of the product are involved in a common enterprise involving a monetary investment in which reasonable expectation of profit is derived from the effort of others. Most argue that most virtual currencies are more like commodities whose values fluctuate based on mass market demand, not based on any effort of the original issuer. As Coin Center Director of Research Peter Van Valkenburgh explained in an interesting article assessing whether ether (the second-highest-market-cap virtual currency) should be legally categorized as a security, there is a meaningful distinction between a virtual object that may at some time have been part of some arrangement or offer that might be reasonably seen as a security and a virtual object that is in and of itself always a security.

A December 2022 article published at the Social Science Research Network, “The Ineluctable Modality of Securities Law: Why Fungible Crypto Assets Are not Securities,” makes a similar argument. The authors, lawyers with a firm called DLx specializing in the blockchain space, insist that while “capital raising from investors, whether involving sales of crypto assets or anything else of value, is incontrovertibly subject to the protections provided by U.S. securities laws….Expanding the reach of federal securities law to characterize fungible crypto assets as securities is both unnecessary and misguided” once the virtual currencies are out in the market being bought, sold, and held by entities with no relation to any original issuers to whom they could be said to be in a common enterprise expecting profit based on the effort of others.

Gensler thinks it’s simple: with bitcoin an exception (roughly, since it never involved any single entity raising money from the public), and ether maybe as well, pretty much every other virtual currency is to him a security; anyone dealing in them without registering with his agency is a criminal. And he will, maybe, probably, eventually, get around to tossing you against the wall. This week it’s Bittrex’s turn. The suit against them lists several virtual currencies Bittrex facilitated trading in that the agency asserts are securities, including Dash, Algo, and NCC.

Just yesterday, before the House Financial Services Committee, as the Wall Street Journal reported, Gensler again repeated that “I’ve never seen a field that is so noncompliant with laws written by Congress and confirmed over and over again by the courts….It’s not a matter of lack of clarity,” insisting crypto market players should understand “that they are providing exchange services, broker-dealer services, clearing services of crypto security tokens.”

Kristin Smith of the Blockchain Association told the committee in a statement that “Gensler’s testimony perfectly reflects the SEC’s approach to the crypto economy: confusing, unclear, opaque, and ultimately blind to the harm its regulation by enforcement strategy is doing to lawful companies in this country.”

Gensler’s SEC also this week announced it believed most decentralized finance (DeFi) platforms using virtual currencies and contracts should also be considered “exchanges” regulatable by them. SEC Commissioner Hester Peirce, far softer on crypto than Gensler, said, as Coindesk reported, that the SEC’s new scheme regarding DeFi “‘articulates confusing and unworkable standards.’ Noting last year’s destruction of so much of the centralized crypto industry, she added that ‘it seems perverse to me that we would be encouraging centralization.'”

Gensler has been known to suggest it’s a mystery to him why exchanges don’t just step right up and register with the SEC, implying that the legal fact they must is obvious and that doing so is straightforward and easy.

It is, for one thing, remarkably complicated and expensive, though surely Gensler would think that isn’t his problem. But as a detailed essay published by crypto investment firm Paradigm explains, the crypto business has qualities that pre-21st century dealers in items that the SEC might consider securities do not:

[Gensler’s] suggestion that crypto companies can register by “filling out a form online” fails for a … straightforward reason: until the SEC adapts the registration framework to the unique aspects of digital assets, it is impossible to “come in and register.” The current registration forms rely on a set of disclosures that are inadequate for crypto’s unique aspects and leave investors vulnerable. Registration also entails a host of additional regulations for the token, the reporting company, and other participants in the ecosystem that makes the functioning of most crypto protocols impossible.

Indeed, the reason there are virtually no registered token offerings in the US is because the SEC has failed to provide any  actionable guidance, issue a single rule or constructively engage with anyone in the crypto industry to provide a workable regulatory framework for security tokens.

In another essay from Paradigm explaining exactly how complicated both in application and later functioning it is to simply register with the SEC, for token issuers or exchanges, it is pointed out “tokens that register as securities would not be tradeable on existing crypto exchanges, none of which are registered as a national securities exchange. But there are also no registered national securities exchanges that can trade tokens. … But more fundamentally, the current regulations are incompatible with disintermediated trading.” Paradigm gives historical case studies about how tokens that have tried to play ball with the SEC all signed their own death warrants by doing so.

Gensler likely thinks the incompatibility of crypto markets—or the very existence of virtual currency—and existing securities law is appropriate, that in fact none of them should exist.

Some in the crypto space see a set of government actions lately, including the SEC’s recent muscle-flexing against exchanges, the closing amid various varieties of government pressure of two banks that were big deals in the crypto space, Silvergate and Signature, denying crypto bank Custodia out of Wyoming membership in the Federal Reserve system, and many other pressures on banks that deal with crypto, as constituting a clear and present conspiracy to just squeeze the entire industry out of existence. Some are calling the situation “Chokepoint 2.0” after last decade’s “Operation Chokepoint” aimed at harming various state-disfavored businesses from porn to guns.

Coinbase’s CEO Brian Armstrong said this week that bugging out from U.S. jurisdiction is a possibility for his company as well. Many in the crypto-watching space seem resigned that, at least under this administration, the U.S. government actively wants almost no virtual currency business to occur under its jurisdiction or involving its citizens.

Coinbase, which is by trade volume the largest cryptocurrency exchange in the United States, announced yesterday it had been hit by the Securities and Exchange Commission (SEC) with a threat of looming legal action.

As a public Form 8-K filed by Coinbase with the SEC explained, “On March 22, 2023, Coinbase…received a ‘Wells Notice’ from the Staff…of the Securities and Exchange Commission….stating that the Staff has advised the Company that it made a ‘preliminary determination’ to recommend that the SEC file an enforcement action against the Company alleging violations of the federal securities laws.”

In that 8-K filing, which is required to inform the public about important events that might affect shareholders, Coinbase explained that, based on what SEC staff have communicated to them, “these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet. The potential civil action may seek injunctive relief, disgorgement, and civil penalties.” (The news is indeed affecting stockholders, with Coinbase’s stock down roughly 13 percent today as of this article’s publication.)

Coinbase Chief Legal Officer Paul Grewal went public with a lot of the frustration that has hit market participants in crypto (and even federal bankruptcy judges) as they try to navigate the SEC’s approach to virtual currencies. Grewal explained how the SEC under chair Gary Gensler has been reshaping regulatory law and policy via enforcement (and the occasional vague public threat).

Grewal echoed the complaints many have had while trying to understand exactly why and when the SEC believes that a cryptocurrency is a security and able to be regulated as such, and thus that companies facilitating trading in them face certain registration requirements. “We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so,” Grewal wrote.

“We continue to think rulemaking and legislation are better tools for defining the law for our industry than enforcement actions,” Grewal went on to say. He again echoed a long-term frustration with the SEC’s apparent desire to reveal what it believes the law requires not through rigorous understandable written notice—something more like actual law or rule making—but by just bashing certain crypto market players against the wall, seemingly at random.

Grewal defended Coinbase’s efforts in trying to understand the law and follow it. In the course of the investigation that led to this week’s notice, “the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register.”

Grewal said that after trying to get the SEC to give feedback on various registration models that Coinbase proposed, the agency generally stonewalled, was unresponsive, and eventually in January just “told us they would be shifting back to an enforcement investigation.” Coinbase insisted “our staking and exchange services are largely unchanged since 2021, when the SEC reviewed our S-1 and allowed us to become a public company,” he wrote. “Our core business model remains the same.”

Grewal noted that different federal agencies have given conflicting reports on the way to legally categorize certain virtual currencies: “The Chair of the CFTC [Commodity Futures Trading Commission] recently testified to Congress that Ethereum is a commodity, which the public has long understood to be the case. Then-CFTC Commissioner Quintenz has said that ‘the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets.’ Current SEC Chair recently opined that perhaps BTC [bitcoin] is the only digital asset commodity, which is entirely at odds with the position of the CFTC.”

“If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed,” Grewal concluded. “Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules.”

Whether or not a financial instrument, agreement, or coin in the virtual currency space constitutes a “security” under the reigning “Howey test,” based on the 1946 Supreme Court case SEC v. W.J. Howey Co, continues to be a matter that courts seem to have to sort out on a case-by-case basis. While complex, as most legal definitional principles are, a central element of Howey is that the buyer and seller of the product are involved in a common enterprise involving a monetary investment in which reasonable expectation of profit is derived from the effort of others. Most argue that most virtual currencies are more like commodities whose values fluctuate based on mass market demand, not based on any effort of the original issuer. As Coin Center Director of Research Peter Van Valkenburgh explained in an interesting article assessing whether ether (the second-highest-market-cap virtual currency) should be legally categorized as a security, there is a meaningful distinction between a virtual object that may at some time have been part of some arrangement or offer that might be reasonably seen as a security and a virtual object that is in and of itself always a security.

Grewal insisted that nothing on his exchange should qualify as a security, including the staking services that he said the SEC has been familiar with since 2019. “Until this investigation, we had heard no concerns at all from the SEC about” them, he explained.

Grewal believes, as do many in the crypto space who have been watching with dismay as the SEC’s wrecking ball swings unpredictably, that SEC actions like this “will only drive innovation, jobs, and the entire industry overseas.”

Many in the virtual currency industry have been confused and bedeviled by the Securities and Exchange Commission’s (SEC) gradual and ill-explained encroachment on their world, with frequent claims from SEC Chair Gary Gensler that most cryptocurrencies should be properly seen legally as “securities” that ought to be regulated by his agency. That would potentially make lots of legit businesses suddenly illegal dealers in “unregistered securities.”

In a decision last week in an ongoing bankruptcy case of Voyager Digital Holdings, U.S. bankruptcy Judge Michael E. Wiles in the U.S. Bankruptcy Court for the Southern District of New York laid into SEC agents for their perplexing and officious manner of trying to force through their attitudes about cryptocurrencies-as-securities.

Part of the proposed bankruptcy reorganization plan for Voyager Digital Holdings would involve shifting customer accounts over to cryptocurrency exchange Binance.

The SEC objected to this Binance solution, claiming “that in its view the Debtors had the burden to prove that the rebalancing of the Debtors’ cryptocurrency portfolios…would not involve illegal purchases and sales of securities.”

The SEC did this, as Judge Wiles complains, essentially through innuendo: “The objection did not take the position that any particular cryptocurrencies are securities, or otherwise explain how or why the Debtors’ rebalancing activities might be illegal, although it did contain a vague footnote suggesting that the VGX token was one as to which some unspecified issue might exist,” Judge Wiles wrote.

“The SEC also suggested that the Debtors should be required to prove that Binance.US is not operating as a securities broker without registering as such,” he continued. “Once again, the SEC did not actually take the position that Binance.US is operating as an unregistered and unlicensed securities broker. Instead, it just suggested that the Debtors had the burden to prove the negative, without offering any evidence or even any reason to think that Binance.US actually is doing anything for which it requires further SEC registrations.”

Judge Wiles finds this situation highly aggravating, noting that “Voyager operated, and Binance.US currently operates, in a regulatory environment that at best can be described as highly uncertain.”

If the present legal environment in which companies such as Binance must operate is unknown, the future into which the judge must hope his decisions will function is even more so: “The SEC has filed some actions against particular firms with regard to particular cryptocurrencies, and those actions suggest that a wider regulatory assault may be forthcoming. The CFTC [Commodity Futures Trading Commission] seems to have taken some positions that are at odds with the SEC’s views. Just how this will all sort itself out, how the pending actions relating to cryptocurrencies will be decided, and just what issues might be raised in future regulatory actions, and how they will affect individual firms or the industry as a whole, is unknown.”

Judge Wiles is, thus, unhappy with SEC agents’ refusal to give any public certainty to the parties in this case or the industry at large about how their views will affect crypto businesses moving forward.

The SEC had not in its objections in this bankruptcy case “offered any guidance at all as to just what it was that the Debtors allegedly were supposed to prove on these issues, or how the Debtors possibly could prove what the SEC wanted them to prove without receiving any explanation at all from SEC as to just why the Debtors’ operations, or Binance.US’s operations, might raise legal issues,” Judge Wiles noted.

And when he insisted on clarification from the SEC, its agents “initially asked if it could state its position only to me on an in camera basis, but I denied that request and ruled that to the extent the SEC wanted to say something further about its objection, it ought to be stated in the public forum, where all other interested parties could hear and understand the SEC’s position.”

What Judge Wiles got on the record from the SEC folks did not satisfy him. He was merely told that SEC staff thinks that the VGX token “has aspects of a security, but that the Commission itself has not taken any position on that subject.” Similarly, the staff “believes that Binance.US is operating as a securities exchange without registering as such, though once again the Commission itself has not taken any position on that subject.”

Judge Wiles found this attempt at legal interference based on staff opinion, without the SEC itself or lawmakers having ratified the staff’s opinion as regulation or law, unconvincing and vexing. He rejected the idea that it should be his or Voyager’s responsibility to figure out what SEC staff meant about the degree to which the VGX token is a security or the extent to which Binance should be subject to SEC registration issues. He griped that vague interference like this from SEC staff was unduly delaying the resolution of this bankruptcy case, costing customers and creditors lots of money and time.

“I cannot simply put the entire case into an indeterminate and expensive deep freeze while regulators figure out whether they do or do not think there is any problem with the transactions that are being proposed,” Judge Wiles wrote. “If there is a problem, I expect a regulator to tell me that it has an actual objection (as opposed to saying that there ‘might’ be an issue), and also to tell me what the issue is and why it is an issue, so that other parties may address it and so that I may make a proper and well-considered ruling.”

“I asked the SEC’s counsel at the outset of this hearing to explain what the consequences would be if Binance.US were to be found to have been acting as an unregistered broker dealer,” Judge Wiles wrote. “I asked if that would just mean that Binance.US might have to stop certain activities while it pursued a license, or if it would mean that Binance.US would have to shut down all of its activities. The SEC said it could not answer that question.”

If Judge Wiles feels this way about the SEC’s casual but often destructive mystery-shrouded tiptoeing around the issue of regulating virtual currencies as securities in this one case, imagine how the investors and holders and businesses whose careers and fortunes are built on trying to stay legal in this industry feel.

The Securities and Exchange Commission (SEC) charged Kraken—America’s third-largest cryptocurrency exchange by volume—with offering an unregistered security last Thursday. As part of a settlement, Kraken agreed to immediately cease offering interest-bearing “staking” services to U.S.-based customers and pay a $30 million fine.

But one SEC commissioner, Hester M. Peirce, published a forceful dissent, calling the SEC’s action “paternalistic and lazy” and questioning “whether SEC registration would have been possible” given the murky framework the agency offers.

Join Peirce and Reason‘s Nick Gillespie and Zach Weissmueller for a live discussion of the regulatory threats to cryptocurrency this Thursday at 1 p.m. ET. Watch and leave questions and comments on the YouTube video above or on Reason‘s Facebook page.

This week’s The Reason Livestream is produced by Adam Sullivan.

Show notes:

SEC press release on Kraken enforcement action  

SEC Commissioner Hester Peirce’s dissent 

CNBC: “SEC commissioner Peirce publicly rebukes her agency, Gensler on crypto regulation.”  

SEC Commissioner Gary Gensler on crypto staking

CNBC: “SEC’s Gary Gensler on Kraken staking settlement: Other crypto platforms should take note of this“

Kraken CEO Jesse Powell responds to SEC head Gary Gensler 

FTX Meltdown and the Future of Crypto. Live With Kraken’s Jesse Powell 

“Operation Choke Point 2.0 is Underway, and Crypto is in its Crosshairs,” by Nic Carter in Pirate Wires

Coin Desk: “SEC Proposal Could Bar Investment Advisers From Keeping Assets at Crypto Firms”

The Block: Total value locked into DeFi projects

Disgraced crypto king faces criminal charges and SEC lawsuit. Sam Bankman-Fried, founder and head of the popular cryptocurrency exchange FTX, has been arrested in the Bahamas at the behest of U.S. prosecutors, who have filed charges against him. Bankman-Fried also faces charges from the U.S. Securities and Exchange Commission (SEC).

Bankman-Fried’s arrest follows revelations that FTX lent customer assets to Alameda Research, which he also owned, and that FTX had filed for bankruptcy.

“Earlier this evening, Bahamian authorities arrested Samuel Bankman-Fried at the request of the US government, based on a sealed indictment filed by the [Southern District of New York],” said U.S. attorney Damian Williams in a Twitter statement on Monday night. “We expect to move to unseal the indictment in the morning and will have more to say at that time.”

It’s unclear precisely what charges Bankman-Fried faces, but authorities were looking at him for potential fraud charges.

“The SEC has authorized separate charges relating to his violations of securities laws, to be filed publicly tomorrow,” said Gurbir Grewal, director of the SEC’s Division of Enforcement, in a Monday night statement.

This morning, the SEC alleged that Bankman-Fried had been diverting customer funds from FTX to Alameda Research “from the start,” and that he had also used customer assets to fund venture investments, real estate purchases, and even political donations.

Bankman-Fried was known to be a major donor to Democratic politicians (the second-largest in the 2022 election cycle, according to Forbes). Bankman-Fried has also stated that he secretly gave a lot to Republicans, too, though this hasn’t been verified. “I’ve been their third-biggest Republican donor this year as well,” but it’s “not generally known,” because “all my Republican donations were dark,” he said in a recent YouTube interview.

Bankman-Fried “orchestrat[ed] a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the crypto trading platform of which he was the CEO and co-founder,” alleged the SEC in a press release, stating that he “commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.”

Bankman-Fried has blamed incompetence for any crimes he may have committed. “I didn’t knowingly commit fraud,” Bankman-Fried told the BBC last weekend. “I didn’t want any of this to happen. I was certainly not nearly as competent as I thought I was.”

John Jay Ray III, who has been appointed CEO of FTX to oversee its bankruptcy case, said in court filings: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”

FREE MINDS

Virginia Postrel offers a fascinating history of how department stores helped liberate women—and moral panic. From her Wall Street Journal essay:

Urban shopping districts were where women claimed the right to dine outside their homes, walk unescorted and take public transportation without loss of reputation. Thousands of female sales clerks flowed out of stores in the evenings, when downtowns had previously been male territory. Department stores provided ladies’ rooms that gave women places to use the toilet and refresh their hair and clothing. They offered female-friendly tearooms. Directly and indirectly, modern shopping enlarged women’s public role.

Of course, this led to new levels of contact between men and women and that freaked a lot of people out:

Men known as “mashers” gathered in shopping districts to ogle and chat up women. Some were no more than well-dressed flirts, violating Victorian norms in ways that few today would find objectionable. Many contented themselves with what an outraged clubwoman termed “merciless glances.” Others followed, catcalled and in some cases fondled women as they strolled between stores, paused to look in windows or waited for trams.

Postrel offers more details in her newsletter:

Newspapers launched anti-masher crusades and prominent women demanded stricter law enforcement and stern punishment.…The crusade against mashers, while based on a real problem, had a strong element of moral panic.

FREE MARKETS

The obvious cause of homelessness: not enough housing. Jerusalem Demsas with more in The Atlantic:

In their book, Homelessness Is a Housing Problem, the University of Washington professor Gregg Colburn and the data scientist Clayton Page Aldern demonstrate that “the homelessness crisis in coastal cities cannot be explained by disproportionate levels of drug use, mental illness, or poverty.” Rather, the most relevant factors in the homelessness crisis are rent prices and vacancy rates.

Colburn and Aldern note that some urban areas with very high rates of poverty (Detroit, Miami-Dade County, Philadelphia) have among the lowest homelessness rates in the country, and some places with relatively low poverty rates (Santa Clara County, San Francisco, Boston) have relatively high rates of homelessness. The same pattern holds for unemployment rates: “Homelessness is abundant,” the authors write, “only in areas with robust labor markets and low rates of unemployment—booming coastal cities.”

[…] America has had populations of mentally ill, drug-addicted, poor, and unemployed people for the whole of its history, and Los Angeles has always been warmer than Duluth—and yet the homelessness crisis we see in American cities today dates only to the 1980s. What changed that caused homelessness to explode then? Again, it’s simple: lack of housing. The places people needed to move for good jobs stopped building the housing necessary to accommodate economic growth.

And why don’t many cities have enough housing? In large part because regulations have made it difficult:

Few Republican-dominated states have had to deal with severe homelessness crises, mainly because superstar cities are concentrated in Democratic states. Some blame profligate welfare programs for blue-city homelessness, claiming that people are moving from other states to take advantage of coastal largesse. But the available evidence points in the opposite direction—in 2022, just 17 percent of homeless people reported that they’d lived in San Francisco for less than one year, according to city officials. Gregg Colburn and Clayton Aldern found essentially no relationship between places with more generous welfare programs and rates of homelessness. And abundant other research indicates that social-welfare programs reduce homelessness. Consider, too, that some people move to superstar cities in search of gainful employment and then find themselves unable to keep up with the cost of living—not a phenomenon that can be blamed on welfare policies.

But liberalism is largely to blame for the homelessness crisis: A contradiction at the core of liberal ideology has precluded Democratic politicians, who run most of the cities where homelessness is most acute, from addressing the issue. Liberals have stated preferences that housing should be affordable, particularly for marginalized groups that have historically been shunted to the peripheries of the housing market. But local politicians seeking to protect the interests of incumbent homeowners spawned a web of regulations, laws, and norms that has made blocking the development of new housing pitifully simple.

Read the rest here.

FOLLOWUP

Bari Weiss has released the latest installment of the Twitter Files, for which Twitter CEO Elon Musk has granted access to internal documents to a small group of friendly reporters. Now on installment five, the “files” reveal more about Twitter’s internal deliberation processes regarding things like de-amplifying accounts, the Hunter Biden laptop story and Hunter Biden dick pics, misinformation reports from law enforcement, and Donald Trump’s account suspension. So far, the dispatches have contained some interesting and notable information, and also a lot of Musk-friendly spin and culture war hyperbole. Some other perspectives…

David French’s take on the Twitter Files: “The picture that emerges is of a company that simply could not create and maintain clear, coherent, and consistent standards to restrict or manage allegedly harmful speech on its platform. Moreover, it’s plain that Twitter’s moderation czars existed within an ideological monoculture that made them far more tolerant toward the excesses of their own allies. In other words, Twitter behaved exactly like public and private universities in the era when speech codes ruled the campus.”

Mike Masnick’s take on the Twitter Files: “They are all written by people who appear to have (1) no idea what they’re looking at (2) no interest in talking to anyone who does understand it and (3) no concern about presenting them in an extremely misleading light in an effort to push a narrative that is not even remotely supported by what they’re sharing.”

Yasha Levine’s take on the Twitter Files: “One of the saddest things about them is that the people on both sides of this holographic media fight really are horrible, and yet we’re supposed to get all emotionally involved in it and pick one oligarchic faction—either TEAM LIB or TEAM MAGA—and root for it like it’s our lord and savior. All the while, nothing about this drama will have any real impact on anyone in America. It’s just feeding the political-entertainment complex and the rich assholes and their hanger-ons that feed off of it.”

QUICK HITS

WARNING: GRAPHIC ⚠️ A cop in Florida shoots a man in the woods holding an axe. The officer ran up to a man described as mentally ill, attempted no de-escalation, and shot him despite not being in danger. pic.twitter.com/jbWcHdoQsZ

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The cryptotoken LBRY credits (LBC), issued by LBRY, a blockchain-based content hosting service, is legally a security according to a decision today from the U.S. District Court for New Hampshire.

In a decision for summary judgment in favor of the Securities and Exchange Commission in the case SEC v. LBRY, Inc., which began in March 2021, U.S. District Judge Paul J. Barbadoro insisted the company violated Section 5 of the Securities Act of 1933 by selling its tokens without registering with and obeying SEC requirements for the legal sale of securities.

“The only issues impeding a finding that LBRY violated Section 5 are LBRY’s claim that it did not offer LBC as a security and its argument that it was not given fair notice that it needed to register its offerings,” Judge Barbadoro wrote. The relevant definition is based on the Supreme Court’s ruling in the 1946 case SEC v. W.J. Howey Co., which declared that a security is “a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” This definition “’embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.'”

The issue, then, is whether anyone buying LBC did so with “a reasonable expectation of profit to be derived from the entrepreneurial or managerial efforts of others.” Judge Barbadoro found a statement in a LBRY blog post essentially proof of their guilt; they wrote “that the long-term value proposition of LBRY is tremendous, but also dependent on our team staying focused on the task at hand: building this thing.”

To the judge, this admits that buyers of the token were expecting effort from LBRY to make that “investment” rise in value. Emails from LBRY execs to potential investors quoted in the decision, as well as postings on Reddit and public interviews from LBRY staffers, also show they were telling potential buyers/investors that their company’s efforts would make the token increase in value and thus mark LBC as a regulatable security, says Judge Barbadoro.

“The fact that it informed some potential purchasers of LBC that the company was not offering its token as an investment,” Judge Barbadoro asserts, is a mere “disclaimer” that “cannot undo the objective economic realities of a transaction.”

For its part, among other arguments against the SEC’s actions (including due process violations since the SEC has “conducted itself inconsistently and in violation of its own purported standards”), LBRY has asserted in court filings that its tokens are used by “millions” daily in their “LBRY Network–which runs on blockchain technology that requires the use of a token.”

Thus, LBC are intended for use and consumption, not merely bought in expectation of profit based on LBRY’s actions, and thus not securities. Judge Barbadoro believes, according to his decision, that the fact that some people use it for consumption does not mean that others are not using it as an “investment contract” and thus a legally regulatable security.

Barbadoro also shot down LBRY’s claim that they had not received legally required fair notice that they were acting in violation of the Securities Act of 1933: “SEC has not based its enforcement action here on a novel interpretation of a rule that…does not expressly prohibit the relevant conduct. Instead, the SEC has based its claim on a straightforward application of a venerable Supreme Court precedent [Howey] that has been applied by hundreds of federal courts across the country over more than 70 years. While this may be the first time it has been used against an issuer of digital tokens that did not conduct an ICO [initial coin offering], LBRY is in no position to claim that it did not receive fair notice that its conduct was unlawful.”

The LBC token’s market value fell by nearly one-third in the past day as of posting time. Within the LBRY system, the tokens compensate miners, and, as the decision explains, “can also be spent on the LBRY Blockchain to publish content, create ‘channel[s]’ that associate content with a single user, tip content creators, purchase paywall content, or ‘boost’ channels or content in search results…Users generally must pay a fee in LBC in order to ‘interact with the LBRY Network for anything beyond viewing free content.'”

LBRY Credits (LBC) are thus mostly used for the LBRY site’s operation. The company runs a blockchain-based censorship-free online site for content, one that vows users will suffer no YouTube-esque takedowns. Its CEO is Jeremy Kauffman, a Libertarian Party candidate for Senate in New Hampshire. Some see hints of a political hit in the fact that this one small token-issuing company among so many has been singled out for SEC clampdown; as LBRY notes in a court filing in June 2021, the SEC has only ever brought “about 19 actions involv[ing] registration violations without fraud allegations” and that “it is a mystery why the SEC chose to pursue those matters—and why the SEC now pursues LBRY—while leaving thousands of other digital assets relatively untouched.”

A rub in this decision that seems to be unnerving the crypto token community the most, a strong hint that those other digital assets might not remain “untouched” by the SEC for long, is it implies that any pre-mined token—which the issuers keep quantities of without spending money before releasing it into the marketplace at large—is thus obviously a security under SEC definition.

The relevantly unnerving part of the decision is where Judge Barbadoro writes that “a reasonable purchaser of LBC would understand that the tokens being offered represented investment opportunities—even if LBRY never said a word about it.” Because “by retaining hundreds of millions of LBC for itself, LBRY also signaled that it was motivated to work tirelessly to improve the value of its blockchain for itself and any LBC purchasers. This structure, which any reasonable purchaser would understand, would lead purchasers of LBC to expect that they too would profit from their holdings of LBC as a result of LBRY’s assiduous efforts.”

This seems to imply that to pre-mine means to have created an unregistered security. And that means every transaction involving such tokens that were not registered with the SEC is potentially a crime. This would include the second largest market-cap virtual currency, ethereum. (SEC chief Gary Gensler already said last month before this decision that he believes ethereum is a security for different reasons.)

The SEC seeks in this case “injunctive relief, disgorgement of monies obtained through LBRY’s offerings, and civil penalties.”

The crypto world has feared decisions along these lines; a more well-known token called XRP, issued by Ripple, has been in an ongoing legal fight with the SEC over these same questions since 2020. While they are in a different federal court district, the Southern District for New York, and this LBRY decision is in no way a binding legal precedent over that court, it’s a bad sign for how federal courts could choose to address this “are crypto tokens securities?” question.

Kauffman tweeted this morning that “Under this standard, almost every cryptocurrency, including Ethereum and Doge, are securities. The future of crypto now rests with an org worse than the SEC: the US Congress.”