June 9, 2023

Exploring transformation of value in the digital age

By Michael J. Casey, Chief Content Officer

Was this newsletter forwarded to you? Sign up here.

Supported By

Everything was leading to this: a one-two punch by an extremely aggressive Securities and Exchange Commission against crypto exchange giants Binance and Coinbase. Today's column looks how this will only intensify and further politicize a mounting war over crypto regulation in Washington.

In this week's Money Reimagined podcast, my co-host Sheila Warren and I talked to Kurt Hemecker of the Mina Foundation about the opportunities that zero-knowledge proof technology holds to address challenges of bias and governance with artificial intelligence systems.

SEC Sets Up Political Fight for Crypto's Future

(Kevin Dietsch/Getty Images)

The Securities and Exchange Commission's lawsuits against Binance and Coinbase this week have set up a high-stakes battle that will engage all three branches of the U.S. government in a competition for power, determine whether the crypto industry will decamp the U.S. for good, and define the future of digital money.

The SEC's aggressive actions against Binance, the world's biggest crypto exchange, and Coinbase, the biggest in the U.S., are a big flex, one that reveals the agency's extraordinary discretionary power. In saying "we don't need more digital currency" in interviews following the announcements, SEC Chairman Gary Gensler suggested he truly does want to destroy the crypto industry.

By throwing the book at Binance, a thoroughly international company, and its high-profile CEO, Changpeng Zhao ("CZ"), with a suit that, among other claims, alleges that it offered unregistered securities and commingled customer funds, the SEC has sought to demonstrate that its reach extends beyond U.S. borders.

And with the Coinbase case it is, quite clearly, taking aim at a much wider set of players than just that one defendant. The case is premised on the notion that most of the securities traded on the San Francisco-based exchange are unregistered securities, creating legal concerns for the likes of Algorand, Polygon and Solana. The actions directly go after the centralized finance (CeFi) system on which Binance's and Coinbase's custodial models are based and, indirectly, some of the main protocols on which decentralized finance (DeFi) depends.

But this is far from a slam-dunk for the SEC. For one, the cases likely won't be decided or settled for many years – if the SEC's three-year-old case against Ripple Labs is any indication. Both Coinbase and Binance are vowing to fight hard in court, which will leave the Commission's resource-challenged enforcement team stretched under a massive workload.

And the SEC's hardline approach does not enjoy widespread support in other areas of the U.S. government. The timing of these actions being what it is, the agency is almost willing other bases of power to come after it.

Read the full story

Whether you are a crypto expert or a newcomer to the world of digital currencies, PayPal provides a secure and convenient platform for converting dollars into crypto. Start exploring new web3 applications with peace of mind knowing that PayPal has your back. Buy, Sell, Hodl, Transfer, Send and Checkout with Crypto. All with PayPal.

Get Started at paypal.com/crypto – Terms and conditions apply.

Off the Charts: The Cursed 13

The SEC's lawsuits caused gyrations in the crypto market this week. The Binance news fueled sharp drops on Monday for pretty much every token. The next day, in its lawsuit against Coinbase, the SEC explicitly named thirteen tokens that trade on its exchange and labeled them as unregistered securities: Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Sandbox (SAND), Axie Infinity (AXS), Chiliz (CHZ), Internet Computer (ICP), Voyager Token (VGX), NEAR protocol (NEAR), NEXO, FLOW and DASH.

Despite that news, there was a generalized rebound Tuesday, led by both bitcoin and ether, which comprise more than 65% of total crypto market capitalization, according to CoinMarketcap.com. (Investors may have seen the lawsuits as "old news": Coinbase had received a so-called Wells Notice from the SEC earlier this year, which was an indication that action was coming.) Notably, though, that upswing in the broad crypto market was not enjoyed by the 13 named tokens.

To illustrate this, I had Craig Braswell at CoinDesk Indices break out the past month's performance of eleven of the named tokens from the broad CoinDesk Market Index. (Two of the 13 – Voyager's VGX token and Nexo's NEXO – are not included in the CMI as they do not trade on two eligible exchanges.) My colleague Sage D. Young then charted a month's worth of performance data from a composite index of the 11 tokens versus a CMI measure that excludes those eleven.

You'll note a reasonably close correlation between the eleven tokens (the line in purple) and the broader, adjusted CMI (in yellow) up until this week. But this week, the eleven fell more steeply on Monday, experienced a proportionally smaller rebound on Tuesday, and then dropped far more sharply in the second leg down on Wednesday.

This may be a sign of a bifurcation, at least for a while, between tokens like ether and bitcoin that are now considered safe from SEC action, and those that aren't. Time will tell if this trend continues.

The Conversation: Bitcoin Cult

Castle Island Ventures general partner and CoinDesk columnist Nic Carter let fly on Bitcoin maximalists this week, describing their celebration of the lawsuits against non-bitcoin tokens and other parts of the crypto ecosystem as toxic behavior reminiscent of a "cult." He then identified religious parallels in this community.

Not surprisingly, he provoked a big, not always friendly, reaction from Bitcoiners. Carter, a long-time Bitcoin supporter, has since changed his Twitter profile descriptor to "bitcoin cult escapee."

Relevant Reads: Big Week for Reg

After a very busy week, it's impossible to comprehensively capture the breadth of CoinDesk's coverage of the SEC's actions this week. Here are but a few highlights, starting with the breaking news stories.

Nikhilesh De, who must not have slept this week, filed the opening story on Monday: the SEC's sweeping suit against Binance and its CEO, "CZ."

Dan Kuhn weighed in on the outlook for Binance and CZ. As bad as the charges are, alongside concurrent actions by the CFTC and the threat of one by the Department of Justice, Dan said, don't write off someone who has 8 million Twitter followers. That army might just forgive him and keep sending him their money, whatever the SEC does.

Sandali Handagama reported on two senators telling the Department of Justice to investigate BInance for potentially lying to lawmakers.

Nik De reported on the SEC seeking a restraining order to freeze Binance U.S.'s assets while its case against the exchange proceeds.

The SEC didn't stop there. Sam Reynolds reported on new filings late Wednesday in which the SEC charged that Binance redirected $12 billion in funds to firms controlled by CZ.

Columnist David Z. Morris pointed out holes in the SEC's cases and argued that it is trying to put Binance and Coinbase in the same category as exchange FTX, but didn't really see the customers of these two exchanges abused.

Jesse Hamilton reported that digital exchange Robinhood joined Coinbase in a common retort that it and others have made: that they had tried to register with the SEC but were unable to.

Overall, despite all of this, the bitcoin market mostly shrugged off any sense of panic, at least according to measures of volatility observed by Omkar Godbole.

Thanks for reading the entire newsletter. Here's a reward!

Each week, we give our loyal Money Reimagined readers the opportunity to claim DESK, our social token, which is a mechanism for returning the value of engagement directly to users who create it.