June 14, 2023

The biggest crypto news and ideas of the day

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Welcome to The Node! This is Daniel Kuhn, here to take you through the latest in crypto news and why it matters.

In the news: U.S. judge declined to freeze Binance.U.S.' assets. Prime Trust subsidiary Banq has filed for bankruptcy protections. And Alchemy, the major crypto infrastructure provider, is getting into AI.

The takeaway: The FINRA-registered trading platform Prometheum pitched House representatives on a way to regulate tokens – except his platform doesn't offer any digital assets to trade, CoinDesk Chief Insights Columnist David Z. Morris writes.

Also, CoinDesk is hosting a free webinar this Friday on hybrid public and private blockchain solutions for enterprise use cases. The event is sponsored by Hedera.

Binance Not Frozen

The federal judge overseeing the U.S. Securities and Exchange Commission's case against Binance declined to freeze its stateside division Binance U.S.' assets, saying "there's absolutely no need" for a restraining order. The SEC claims Binance and Binance.U.S had commingled funds, putting billions of dollars in customer funds at risk. Notably, Judge Amy Berman Jackson, who left the option to restrain some assets at a later date, took issue with the SEC's inability to answer whether any Binance.US customer funds had actually left the U.S. Meanwhile, Binance CEO Changpeng "CZ" Zhao has denied rumors the exchange is manipulating the price of bnb coin (BNB), the exchange's native token. Finally, Binance is rescinding a regulatory application in Cyprus to focus on meeting the requirements of the newly passed European Union's Markets in Crypto Assets (MiCA) legislation.

Chain Agnostic

Major blockchain infrastructure company Alchemy announced a suite of AI tools that will become available over the next few weeks, the latest crypto company to take an interest in artificial intelligence. AlchemyAI will consist of two flagship products, ChatWeb3, an Alchemy-specific chatbot, and an Alchemy plugin for ChatGPT, which will help users pull information from several different blockchains including Arbitrum, Ethereum, Polygon and Optimism. Meanwhile, digital payments firm Strike is expanding its Lightning Network-based cross-border payments service to Mexico, the largest market for remittances from the U.S. Finally, the Shibarium network's native testnet Puppynet now counts 16 million wallets, as it crawls closer to a mainnet release in the coming months.

Lobbyist Group

Blockchain Australia, a lobbyist group, is tackling crypto's ongoing issue with maintaining banking relationships "head-on by using real data," according to a Wednesday announcement, and is hosting a roundtable discussion at the end of the month. Several cryptocurrency companies in Australia have seen their payments disrupted, including Binance Australia, which recently halted Australian dollar (AUD) services. Notably Commonwealth Bank (CBA) applied partial restrictions on cryppto companies citing "scams and the amount of money lost by customers." Meanwhile, Banq, a subsidiary of embattled crypto custodian Prime Trust, has filed for bankruptcy protections in the U.S. BitGo is reportedly interested in acquiring Prime Trust.

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The Takeaway: Classification Catch-22

The House Financial Services Committee heard testimony from experts and insiders yesterday on the burning question of the best way to regulate digital asset markets. The discussion was specifically focused on a pair of draft bills on crypto market structure and stablecoin regulation, but also unfolded under the shadow of the U.S. Securities and Exchange Commissions' (SEC) active lawsuit against the U.S. crypto exchange Coinbase.

The final witness on the lineup was Aaron Kaplan, co-founder and CEO of Prometheum, "a FINRA [Financial Industry Regulatory Authority] and SEC regulated ATS [alternative trading system] and broker-dealer in digital asset securities" incorporated in 2021 and expected to launch in the third quarter of this year.

Kaplan (in contrast to most other witnesses) essentially echoed SEC Chair Gary Gensler's position that existing securities laws are fully sufficient to regulate crypto markets. Some lawmakers held Kaplan's platform out as evidence that Gensler's repeated offer that exchanges "come in and register" was entirely sincere.

But to skeptics, Kaplan and his testimony instead wound up depicting the SEC's stance as a classic instance of malicious bureaucracy: An inescapable Catch-22.

Novelist Joseph Heller coined the now-common term in his novel of the same name. In Heller's screwball antiwar tragedy, "Catch 22" was a circular bureaucratic rule, designed by the U.S. government to prevent draftees from leaving the World War II-era military. According to the (fictional) rule, you could only get out of the Army if you could prove you were crazy – but if you wanted to get out of the Army, you were clearly all too sane.

Gary Gensler's SEC seems to have relied on similar logic when imagining its preferred crypto market structure: You're free to launch a regulated crypto exchange, as long as it doesn't actually enable the purchase or sale of crypto. This point was driven home by the (audibly frustrated) Representative Mike Flood (R-NE), who asked Kaplan a pair of simple questions: Does Prometheum allow users to buy and sell ether (ETH)? What about bitcoin (BTC)?

Kaplan's answer to each question was a curt, faintly embarrassed no.

Prometheum, in fact, has not yet identified any assets that it plans to offer. While its website depicts an app offering tokens connected to the Flow, Filecoin, The Graph, Compound and Celo protocols, these appear to be merely hypothetical examples. The path to actually "registering" a blockchain token as a security is not at all clear, suggesting a possible scenario where Prometheum becomes a formally registered digital asset marketplace … that doesn't actually sell any digital assets. Additionally, Prometheum currently only serves accredited investors, not the general public.

Flood argued that Prometheum's shortcomings, particularly its exceedingly limited offerings, show the hollowness of the SEC's claims that existing law provides a path to registration for crypto exchanges. Prometheum's registration, Flood said, "does not address the core issue: There is not a consistent definition of a digital asset security within current law."

This is the Catch-22 the SEC has attempted to characterize as reasonable regulation: If you want to get properly registered as a crypto exchange, you won't be able to offer the most popular and important digital assets. That's particularly illustrated by the cases of bitcoin and ether, the native token of Ethereum. While bitcoin has been fairly clearly designated a commodity for regulatory purposes, it's one of many crypto assets that do not have any clear "issuer" or other figure who would even be able to properly register the asset with the SEC. That includes genuinely open-source and community-driven protocols like Dogecoin and Monero.

The hearing, and Prometheum, highlighted another fundamental shortcoming of the SEC's current approach. Because it will only sell to accredited investors, Prometheum does not represent a viable way to get crypto assets into the hands of actual end users.

Lawyer Coy Garrison, former counsel to SEC Commissioner Hester Peirce, pointed out that this means the SEC is advocating an utterly incoherent market structure for crypto assets. "People purchase [digital assets] for a number of reasons," Garrison said, "but one is to use them on the network … The application of securities laws [to these assets] would be so burdensome as to render the operation of the network moot."

That is, Prometheum is licensed to sell big blocks of tokens to institutions and whales. But if there's no legal path to get those assets into the hands of everyday users, the tokens would have no value, because there would be no users.

"If you have to go through a broker dealer to [buy crypto assets], it adds a tremendous amount of friction to the system," Blockchain Association CEO Kristin Smith told me this week. The SEC's approach "ignores that these tokens have a function."

As many crypto skeptics have pointed out, the SEC has no obligation to craft a set of classifications that better fit the way crypto works. And certainly, there are plenty of crypto assets which would be rightly designated as securities under the standard established by the Howey Test. But the best example the SEC can put forward of its vision of a compliant future is, it seems, a Potemkin platform that will sell only to the wealthy few, has no clear framework for actually listing assets, and isn't even operational yet.

That makes the real goal clear: The SEC doesn't want crypto technology to exist, much less remain accessible to everyday users.

– David Z. Morris

@davidzmorris

david.morris@coindesk.com