Coinbase CEO Brian Armstrong has called for the next US Securities and Exchange Commission (SEC) chair to address the agency’s perceived inconsistencies in its approach to digital assets.
Armstrong’s criticism stems from the securities regulator’s shifting stance throughout the years which has caused frustration within the community.
SEC’s Contradictions on Crypto
His tweet, which accompanied a compilation of conflicting SEC statements on the issue, argued that the new chair should “withdraw all frivolous cases and issue an apology to the American people.” Armstrong laid out several examples of the SEC’s evolving position.
In 2018, the SEC stated that a digital asset “all by itself is not a security.” However, in 2021, the regulator declared that a digital asset “embodi(es)” and “represents the investment contract.” This is followed by three contradictory statements in 2024 alone.
For instance, in February 2024, the SEC stated a digital asset is “just computer code.” Then, five days later, it said the digital asset “itself ‘represents the investment contract.’” Finally, eight months later, the SEC declared the digital asset “itself ‘is not’ the security.”
The agency has also been inconsistent in determining whether Bitcoin is considered a security. In 2023, it stated that “(T)he SEC has never claimed (Bitcoin) is a security.” However, in 2024, the agency asserted “Maybe ‘(T)here’s not an answer.’” Notably, just four days later, it took yet another stance, proclaiming “‘(T)hat’s not a security.’”
The Coinbase CEO’s demand for an apology and withdrawal of “frivolous cases” reflected a broader sentiment within the community, which has long accused the SEC of overreach and a lack of clarity in its regulatory approach. Armstrong believes that restoring trust in the agency is crucial, as the damage done to the country’s financial landscape cannot be easily undone.
Shift in Leadership with Election Looming
The comments come at a crucial moment, with the US presidential election just around the corner. The Democrats have developed a reputation for their hostility towards cryptocurrency, an approach that many fear could undermine the US dollar’s status as the world’s dominant global reserve asset. Throughout her presidential campaign, Kamala Harris has made very few remarks on crypto-related issues.
On the other hand, Donald Trump has managed to curry favor with the crypto community this year. Most recently, he pledged to terminate Gensler’s tenure on his first day if re-elected and vowed to appoint a chair who believes that America should “build the future, not block the future.”
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On Wednesday, Judge Analisa Torres brought the first chapter of a major Securities and Exchange Commission crypto case to a close, imposing a $125 million penalty on the digital assets firm Ripple and forbidding the company from violating securities law in the future. The penalty fell fall short of the $2 billion the SEC had sought, causing XRP—the token closely tied to Ripple—to soar more than 20%.
The SEC v. Ripple case, which began in late 2020, has been viewed as a bellwether for how courts will rule on a broader anti-crypto enforcement campaign by the agency—a campaign the industry claims exceeds the SEC’s legal authority. In response to Wednesday’s ruling, Ripple executives and other crypto watchers framed the decision as a victory for crypto firms. In the bigger picture, though, an almost certain SEC appeal—alongside the vague language of the ruling—means that long-awaited regulatory clarity is still a distant dream.
“The immediate decision by Judge Torres on balance is very positive for Ripple,” said Joe Castelluccio, a partner at Mayer Brown and the co-leader of the law firm’s fintech and blockchain practice groups, adding that the decision should still “give the industry and the market a bit of pause.”
The XRP army
Since its founding in 2012, Ripple has carved out a prominent position in the crypto sector through its promise of building a global payments network and its proprietary token, XRP, which has gained a fiercely loyal follower base and an enviable $35 billion market cap. Along with the financial success, Ripple has faced a series of legal challenges, including the 2020 lawsuit filed by the SEC under then-chair Jay Clayton.
Clayton’s successor Gary Gensler inherited the case, which quickly became the agency’s flagship litigation as it pursued a bruising enforcement campaign against the volatile industry. The SEC argued that the company had violated the law by raising over $1.3 billion through an unregistered digital asset securities offering.
After a high-profile court battle, which included the unveiling of internal SEC emails detailing the inner workings of its approach to crypto, Torres issued a surprising decision in July 2023. She found that Ripple’s sales of XRP directly to institutional investors such as hedge funds violated securities laws, but secondary sales of the token on platforms such as exchanges did not. Ripple—and most of the industry—hailed the ruling as a victory, even as the SEC filed to immediately appeal the decision pending a final judgment.
In the time between Torres’s initial decision and her ruling on Wednesday about damages, several other federal judges—including two in Torres’s own district court—have weighed in with crypto-related rulings of their own. These decisions have come to separate and sometimes contradictory conclusions than what Torres found—meaning the legal status of digital token sales has become a ripe legal question for appeals courts, and potentially for the Supreme Court.
A penalty and an injunction
While it is common for government attorneys to ask for greater penalties than are ultimately enforced, Torres’s final figure of $125 million is much closer to Ripple’s ask than what the SEC requested.
“Anyone is going to spin things their own way, but it’s hard not to see it as a win for Ripple,” said a former SEC attorney now working in crypto law, who spoke with Fortune on the condition of anonymity because of their continued work with the agency. They pointed specifically to the fact that the judge denied the SEC’s request for disgorgements from Ripple, meaning the company would not have to pay back any profits it had earned from illegal behavior.
Despite the financial win, Torres also imposed an injunction against Ripple, ordering the company to refrain from further violations of securities laws. In her decision, she points to Ripple’s “willingness to push the boundaries” of the law after the SEC filed its initial lawsuit, arguing that there is a likelihood the company “will eventually (if it has not already) cross the line.”
Because Torres declined to specifically name whether—and how—Ripple had continued to violate securities laws, the question of when digital token sales constitute securities offerings will remain open. “That points to continued guardrails around conduct in the market, and also the fact that this remains an unsettled area of the law,” said Castelluccio.
Even if Torres had been more firm in her language, it would be unlikely to impact the behavior of other companies, given the ongoing litigation by the SEC against crypto firms like Coinbase and Binance. Moreover, because other federal judges have sharply deviated from Torres’s decision—with two in the Southern District of New York finding that secondary sales could also violate securities laws—the disagreements will not be settled until the cases wind their way up to the appellate level.
Given that the SEC already tried—and failed—to file an appeal in the Ripple case before Torres’s final decision, the agency will likely again appeal the ruling, including the matter of secondary sales and the penalty. Even with the market responding positively to the decision—including XRP rallying 20% in price—Castelluccio cautioned that Torres’s decision from last July, and yesterday’s, will not have the impact of “changing the game or changing the market.”
“Those are all significant overstatements,” he added.
A final wildcard in the legal tussle over XRP and other cryptocurrencies is the slow nature of the appeals process, meaning that any higher court ruling in the Ripple case is highly unlikely before 2025 while any Supreme Court ruling would almost certainly have to wait till 2026 or later. In the meantime, the growing interest in crypto on the part of lawmakers means it is possible Congress passes new rules to govern the sector—potentially resolving the legal issues in the cases involving Ripple and Coinbase before the courts do.
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Defi exchange Uniswap has received a warning of an impending enforcement action enacted by the U.S. SEC.
On April 10, Uniswap disclosed a Wells notice issued by the SEC’s Enforcement Division. The notice is part of a broader crackdown on crypto by the securities watchdog, as chair Gary Gensler insists that most digital assets issued on blockchains fall under existing financial laws.
Gensler has often referred to crypto as the “Wild West” and has sought to reign in the industry through enforcement action.
Uniswap founder reacts
Uniswap founder and CEO Hayden Adams wrote on X that he was annoyed and disappointed but ready to fight the SEC and protect his company.
Today @Uniswap Labs received a Wells notice from the SEC.
I’m not surprised. Just annoyed, disappointed, and ready to fight.
I am confident that the products we offer are legal and that our work is on the right side of history. But it’s been clear for a while that rather than…
In a blog post discussing the SEC’s notice, Uniswap also refuted claims that most cryptocurrencies constitute investment contracts. Like several in the industry, including Coinbase, the DEX argued that the overwhelming volume of traded tokens is stablecoins, utility tokens, and commodities like Bitcoin (BTC) and Ethereum (ETH).
“Despite SEC rhetoric that “most” tokens are securities, the reality is that tokens are a digital file format, like a PDF or spreadsheet, and can store many kinds of value. They are not intrinsically securities, just as every sheet of paper is not a stock certificate. We are confident that the products we offer are not just legal – they are transformative.”
Uniswap’s April 10 blog post
According to DefiLlama, Uniswap is the largest defi exchange and holds over $6.2 billion in total value locked across 16 individual blockchains. CoinGecko data showed that the DEX handles 22.5% of all cryptocurrency trading volume.
Following the news, the UNI token declined by over 9% and traded for around $10, per CoinMarketCap.
On the heels of the approval of spot Bitcoin ETFs, U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler is exercising caution on Ethereum.
In an interview with CNBC, Gensler addressed the possibility of a spot Ethereum ETF gaining SEC approval in the future. While acknowledging the approval of Bitcoin ETFs, he emphasized that this was specific to Bitcoin as a non-security commodity token.
He carefully refrained from providing further insights on an Ethereum ETF but hinted at a distinction between Bitcoin’s commodity status and the potential classification of other cryptocurrencies, including Ethereum (ETH), as securities.
Gensler has long maintained Bitcoin’s status as a commodity, outside the SEC’s direct purview, while the agency has yet to officially determine Ethereum’s security status.
Legal filings indicate the SEC’s inclination to view Ethereum transactions under its jurisdiction. If Ethereum were classified as a security, it could face increased regulatory scrutiny, potentially making the approval of a spot Ethereum ETF more challenging than that of Bitcoin (BTC).
Despite Gensler’s reservations, recent legal judgments, including a federal appeals court decision ordering the SEC to review a Bitcoin ETF application, may influence the regulatory landscape for crypto ETFs. This legal shift could have implications for Ethereum, especially considering the SEC’s prior approval of an Ethereum futures ETF.
JPMorgan Chase CEO Jamie Dimon also appeared on CNBC to discuss the crypto industry’s latest developments. The 67-year-old bank boss doubled down on his assertion that Bitcoin is utilized for illicit activities such as sex trafficking, tax avoidance, money laundering, and terrorism financing.
Meanwhile, the tweet comes as JPMorgan is listed as an authorized participant for spot Bitcoin ETFs, raising questions about whether Dimon’s thoughts on the matter hold water.
Pawan Passi, former equities executive at Morgan Stanley, arrives at court in New York, US, on Friday, Jan. 12, 2024.
Alex Kent | Bloomberg | Getty Images
Morgan Stanley has agreed to pay a total of $249 million to settle a criminal investigation and a related Securities and Exchange Commission probe of the unauthorized disclosure of block trades to investors by the bank‘s supervisor for such trades and another employee, authorities said Friday.
As part of the settlement, Morgan Stanley entered into a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York for making false statements related to certain block trades executed from 2018 through August 2021, the office said.
Morgan Stanley, which admitted responsibility for its employees’ actions, is obligated under the deal to cooperate with and provide information to U.S. authorities for at least three years.
The SEC charged Morgan Stanley with “failing to enforce its policies concerning the misuse of material non-public information related to block trades,” that agency said.
Block trades typically involve large numbers of shares of a company’s stock in privately arranged transactions executed outside public markets.
The SEC said the bank generated more than $100 million in illicit profits as a result of misconduct by Pawan Passi, the former head of the bank’s U.S equity syndicate desk.
Passi, 40, has entered into a deferred prosecution agreement with federal prosecutors, subject to approval by a judge. If Passi complies with the terms of that deal and demonstrates good behavior, he will not be prosecuted, prosecutors said.
Passi was ordered to pay a $250,000 civil penalty by the SEC.
Passi admitted that “from 2018 through August 2021, he promised sellers of certain equity blocks that Morgan Stanley would keep information concerning their potential sales confidential, knowing that he would disclose that information to buy-side investors and that those investors would use the information to trade in advance of the block sales,” according to prosecutors.
Passi appeared at a hearing Friday in Manhattan federal court. His deal does not include a monetary penalty in the criminal case because he had already forfeited about $7.4 million in compensation from Morgan Stanley.
Read more CNBC politics coverage
The SEC’s order in the probe says that a former senior member of the syndicate desk participated with Passi in disclosing to certain buy-side investors “non-public, potentially market-moving information” about block trades that Morgan Stanley had been invited to bid on or was negotiating with sellers.
“Those buy-side investors used such information to ‘pre-position’ — or take a short position in — the stock that was the subject of the upcoming block trade,” the SEC order says.
The order said the bank “failed to enforce written policies and procedures” designed to prevent material nonpublic information from being misused, and also failed to enforce information barriers to prevent such information involving block trades from being discussed by the syndicate desk with the institutional equity division. The syndicate desk is on the bank’s private side, while the equity division conducts trading in public markets.
“Sellers entrusted Morgan Stanley and Passi with material non-public information concerning upcoming block trades with the full expectation and understanding that they would keep it confidential,” said SEC Chairman Gary Gensler.
“Instead, Morgan Stanley and Passi abused that trust by leaking that same information and using it to position themselves ahead of those trades. While their conduct may have earned them tens of millions of dollars on low-risk trades, it violated the federal securities laws,” Gensler said.
Prosecutors said that the non-prosecution deal with Morgan Stanley “recognizes serious misconduct to which Morgan Stanley has admitted and was uncovered by the Government and was no voluntarily self-disclosed.”
But prosecutors also said the agreement recognizes that the bank “provided extraordinary cooperation” with the investigation and that the probe did not find evidence of “corporate management’s complicity in or knowledge of the wrongdoing.”
“Morgan Stanley’s controls, while ultimately unsuccessful in uncovering the misconduct, were designed in part to detect misconduct in the block trades business and were applied in good faith,” the U.S. Attorney’s Office said.
In a statement, Morgan Stanley said, “We are pleased to resolve these investigations and are confident in the enhancements we have made to our controls around block trading, including strengthening our policies, procedures, training and surveillance.”
“The core of this matter is the misconduct of two employees who violated the Firm’s policies, procedures and our core values, as outlined in the settlement documents,” the bank said.
Passi’s lawyer George Canellos said, “We are pleased that the U.S. Attorney’s Office agreed not to pursue a criminal conviction of Mr. Passi in this complex matter. Mr. Passi served clients with skill and delivered great execution quality and prices.”
“The settlements allow Mr. Passi and his family to move past two very difficult years of intense government scrutiny of the block trading practices on Wall Street,” Canellos said.
Ark Investment Management CEO Cathie Wood says Gary Gensler ‘denigrated the whole crypto space’ with his latest statement.
Speaking in an interview with Bloomberg on Jan. 11, Ark Investment Management founder and CEO Cathie Wood criticized the head of the U.S. Securities and Exchange Commission (SEC), saying the latest statement about cryptocurrencies “denigrated” the whole industry.
“He just denigrated the whole crypto space. I couldn’t believe it. This is par for the course in disruptive innovation.”
Cathie Wood
Wood’s comments were prompted by Gensler’s continued skepticism towards cryptocurrencies, even after granting approval for spot Bitcoin exchange-traded funds (ETFs). Gensler, who has been consistently critical of cryptocurrencies since taking charge at the helm of the U.S. financial regulator, reiterated in his latest statement that the SEC “did not approve or endorse Bitcoin.”
“While we approved the listing and trading of certain spot Bitcoin ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.”
Gary Gensler
Despite Gensler’s negative stance, Cathie Wood believes that the approval of spot Bitcoin ETFs marks a significant development for the largest cryptocurrency by market capitalization. She emphasizes that institutions will now need to navigate and adapt to the new regulatory framework with increased diligence.
As previously reported by crypto.news, the SEC gave the green light to multiple spot Bitcoin ETFs on Jan. 10, including the one jointly filed by Ark and 21Shares. The approval paves the way for ETFs to commence trading on the CBOE from 9 am on Jan. 11, coinciding with the opening of the U.S. stock market.
In their latest meeting, SEC and BlackRock reportedly discussed the iShares Bitcoin ETF on Dec. 14, raising questions about in-kind transactions.
Unlike previous meetings, James Seyffart, a Bloomberg Intelligence analyst, reports that there were no presentations.
As part of a follow-up thread on X, Seyffart reminds the community that Hashdex, another firm in the spot Bitcoin ETF race, had also engaged with SEC’s Office of the Chair.
After this, a community member asked Seyffart about the likelihood of SEC approval, given Chairman Gary Gensler’s comment on listening to the courts from yesterday.
I mean. We’ve been at 90% odds since October when people told us we were insane for thinking it was gonna happen!! haha. Now people want us to increase the odds. But yes — we think its happening. https://t.co/bLO8qcchj3
“Yes – we think it’s happening,” was the Bloomberg analyst’s response.
The application had been revised following a third meeting between BlackRock representatives and the SEC led by Gensler on Dec. 11, with prior engagements occurring on Nov. 20 and 28.
The SEC still must hold to the deadline of Jan. 15 to make a decision on BlackRock’s application, with a final cutoff on Mar. 15. Grayscale, Bitwise, VanEck, WisdomTree, Invesco Galaxy, Fidelity, and Hashdex are also awaiting the SEC’s decision.
U.S. Securities and Exchange Commission Chair Gary Gensler indicated a possible change in the agency’s approach towards Bitcoin ETFs.
During a CNBC interview, Gensler revealed that the U.S. Securities and Exchange Commission (SEC) is reconsidering “between eight and a dozen filings” for spot Bitcoin ETFs, a move influenced by recent court decisions in the District of Columbia.
🇺🇲 SEC Chair Garry Gensler commented on @CNBC about SPOT #Bitcoin ETF.
How they have been denying a dussin of these ETFs in the past, but now BlackRock… I mean Courts in DC have intervened and now the SEC have to reprocess these ETF applications again. 😅
Historically, the SEC has hesitated to approve such proposals, citing various concerns. However, Gensler hinted at a shift, attributing it to judicial input. While he avoided directly referencing the Grayscale case, the context suggests a connection. Earlier this year, Grayscale won a legal battle against the SEC, leading to a reassessment of its application to convert its Bitcoin trust into an ETF. This decision was not appealed by the SEC.
Grayscale’s progress, alongside others rooting for ETF approval, has stirred optimism in the market. Bloomberg analysts James Seyffart and Eric Balchunas noted ongoing discussions between the SEC and Grayscale, indicating a collaborative effort toward regulatory compliance.
The race for a Bitcoin ETF has attracted diverse players, including major asset managers like BlackRock. With the SEC set to decide on ARK and 21Shares’ proposal by Jan. 10, anticipation is high. Bloomberg analysts estimate a 90% chance of approval, though skeptics like former SEC staffer John Reed Stark deem such optimism “absurd.”
The SEC faces a series of legal challenges, including a recent rebuke from the Fifth Circuit Court, highlighting scrutiny over its regulatory decisions and potential implications for the cryptocurrency market.
Recent legal proceedings have prompted commentary from Ripple’s Chief Legal Officer, Stuart Alderoty, regarding the United States Securities and Exchange Commission’s (SEC) actions under the leadership of Chair Gary Gensler.
Alderoty has pointed to a “deeply concerning trend” of decisions by the SEC that he considers to be arbitrary and lacking a solid legal foundation.
Another day and another Court finds that the SEC again acted arbitrarily and capriciously. Is anyone else concerned about this very troubling pattern of the SEC flouting any faithful allegiance to law under Mr. Gensler? https://t.co/5bUgSBUOI8
The commentary follows a decision by the Fifth Circuit Court of Appeals, which on Oct. 31, criticized the SEC’s rule regarding stock buyback disclosures as arbitrary and insufficiently justified. The ruling called on the SEC to provide more substantive reasoning for its regulations, echoing Ripple’s triumph in the XRP lawsuit earlier in July 2023.
These developments come amidst a broader debate on the SEC’s approach to regulation and enforcement, especially in the evolving cryptocurrency sector. In the XRP lawsuit, Judge Analisa Torres ruled in favor of Ripple executives, dismissing charges against CEO Brad Garlinghouse and executive chairman Chris Larsen.
The lawsuit’s outcome, especially the Summary Judgment on July 13, which favored Ripple concerning retail sales of XRP tokens, may have far-reaching implications for the crypto industry’s regulatory landscape.
The SEC has been challenged by business and trade associations over a rule that requires companies to report daily on share repurchases every quarter and explain their reasons for such transactions.
Gary Gensler, Chair of the U.S. Securities and Exchange Commission (SEC), called for compliance from an industry he has frequently tagged as “rife with fraud”.
Gensler advised cryptocurrency operators and service providers to stop tricking investors in his message to the digital industry on the Bitcoin white paper’s 15th anniversary.
Rhetoric from the SEC’s Chairman has consistently painted virtual currencies akin to the wild west, where bad actors defraud unsuspecting customers with the guise of decentralized technology.
The regulator’s short address saluted Satoshi Nakamato’s brainchild as the progenitor of crypto while throwing aspersions on the so-called anonymity achieved through blockchain networks.
If Satoshi Nakamoto went as Satoshi Nakamoto for Halloween, would we be able to tell?
Happy 15th anniversary to Satoshi’s famous white paper that started crypto.
Any crypto companies that are tricking investors should start treating them to compliance with the securities laws.
Gensler’s post came amid bullish sentiment for Bitcoin (BTC) as prices rose above $30,000 and expectations of a forthcoming spot Bitcoin ETF approval from the securities regulator. The SEC Chair said his commission is currently reviewing eight-to-10 spot BTC applications while ETF experts placed the total number of filings at 12.
Possible dates for approval remained speculative, while updates from Wall Street titan BlackRock gave hints at the status of developments. The issuer filed for a CUSIP number which is procedural for listing financial instruments.
The Depository Trust and Clearing Corporation (DTCC) added BlackRock’s spot Bitcoin ETF to its clearing list. The update is routine and part of bringing an ETF to market according to experts.
Per reports, the DTCC also listed, removed, and relisted BlackRock’s iShare Bitcoin Trust (IBTC) on its website as part of ongoing monitoring and research on the buzz around spot Bitcoin ETFs.
SkyBridge Capital founder Anthony Scaramucci believes that if Balckrock receives approval to launch a spot Bitcoin ETF, it could cause Bitcoin’s value to multiply as much as 11 times.
The politically connected entrepreneur — who is also the founder and chairman of SALT, a global conference series that covers finance, economics, and geopolitics — argues that a BlackRock greenlight could cause a massive $100 billion in institutional investments.
This would turn Bitcoin (BTC) into a $600 trillion asset.
Speaking on the YouTube channel “Altcoin Daily” hosted by the Arnold brothers, he mentions how this imminent approval can spike the price of Bitcoin.
“Think of the magnitude of that, if there’s $100 billion that flows in bitcoin … that could have an 11-times factor in terms of valuation. So you could see bitcoin go from a $600 billion asset to a $600 trillion asset.”
Anthony Scaramucci, founder, SkyBridge Capital
Extrapolating the current price of Bitcoin, Scaramucci added that a BlackRock ETF approval could see Bitcoin potentially go as high as $330,000.
On Sam Bankman-Fried
In the segment, Scaramucci also spoke about his company’s association with former FTX CEO Sam Bankman-Fried, who is currently on trial for money laundering and fraud.
Scaramucci’s name was brought up on day 12 of the trial, leading to questions about whether he would testify in the case.
Don’t expect the SkyBridge founder to testify. Scaramucci confirmed that he had already spoken to the Department of Justice (DoJ) and turned over his text messages, emails, and Signal account.
The DoJ did not feel he had any “smoking gun info” on Bankman-Fried and thus did not need to call him to the witness stand, he says.
Scaramucci maintains that Bankman-Fried bears blame for the illegalities that allegedly happened at FTX.
“Sam equivocated his ADHD and his sloppiness and his disorganization as a cover for the crimes that were being committed,” Scaramucci said. “You can’t have $8.8 billion of your customers’ money in your personal account no matter what your excuse for that, you cannot do that.”
However, he believes Bankman-Fried’s sentence may be lighter than people may want, as he expects the former FTX boss to blame his “youth and inexperience” for the goings-on that led to the crypto exchange’s collapse.
On Gary Gensler, Scaramucci described the Securities and Exchange Commission (SEC) chair as “arrogant” and “self-righteous,” stating that “he will be a problem for the crypto industry for a while.”
Tesla CEO Elon Musk and Dallas Mavericks owner Mark Cuban have teamed up to voice their opposition against Securities and Exchange Commission (SEC) Chair Gary Gensler.
Crypto YouTube channel Crypto Banter explained in an Oct. 19 livestream that, in an amicus brief filed this week, Musk and Cuban supported an overhaul of the SEC’s current use of administrative law judges in enforcement actions. The existing system allows the SEC to both bring cases and preside over them, denying defendants the right to a jury trial.
Musk has a contentious history with the SEC. In 2018, he settled a lawsuit brought by the agency over his tweet about potentially taking Tesla private. As part of the settlement, Musk agreed to have his Tesla-related tweets pre-approved by the company.
Earlier this year, Musk criticized the SEC, saying “I do not respect the SEC. I do not respect them.” Cuban also settled a high-profile insider trading case with the SEC in 2008.
The amicus brief states that Musk and Cuban “have an acute interest in SEC enforcement actions [and] in the protection of due process” in such cases. The brief argues that the current SEC administrative proceeding system is unconstitutional.
Musk and Cuban are the latest high-profile figures in the business and tech space to challenge Gensler’s leadership. The SEC chair has drawn criticism from the crypto industry over his hesitance to approve a Bitcoin ETF.
Earlier this week, Galaxy Digital CEO Mike Novogratz predicted the SEC would approve a Bitcoin ETF in 2023, stating that “Gensler needs a win” given the mounting pressure.
The Musk-Cuban amicus brief signals continued pushback against Gensler’s SEC from the tech and crypto community. Their high profiles could lend momentum to efforts to reform the SEC’s enforcement procedures.
Gary Gensler, Chair of the U.S. Securities and Exchange Commission, takes his seat before the start of the Senate Banking, Housing, and Urban Affairs Committee hearing on Oversight of the U.S. Securities and Exchange Commission on Tuesday, Sept. 14, 2021.
Bill Clark | CQ-Roll Call, Inc. | Getty Images
SEC Chair Gary Gensler stepped up his attack on the crypto industry this week, suing Coinbase and Binance for securities violations and casting doubt on the future of token trading.
Crypto investors took the hint. Four of the 10 most valuable coins plunged in value by at least 15% this week, according to CoinMarketCap, a sell-off sparked by the lawsuits and Gensler’s interview with CNBC on Tuesday, in which he said “we don’t need more digital currency.”
In alleging that Coinbase was acting as an unregistered broker and exchange, the Securities and Exchange Commission said at least 13 crypto assets available to the company’s customers were considered “crypto asset securities.” They include Solana’s SOL token, Cardano’s ADA token, Polygon’s MATIC coin and Protocol Labs’ Filecoin token (FIL).
Trading app Robinhood followed on Friday by announcing that, starting June 27, it will no longer support trading of coins from Cardano, Polygon and Solana. The company said “no other coins are affected.” Also on Friday, Crypto.com said it will shut down its U.S. institutional exchange.
“No other coins are affected and your crypto is still safe on Robinhood,” the company said in a post.
Cardano’s coin, the seventh-most valuable cryptocurrency, according to CoinMarketCap, tumbled 20% in the past week. Solana, ranked ninth, dropped 18%. Polygon, ranked 10th, also slid 18%. Filecoin, which is further down the list, dropped 19%. Binance’s BNB token, ranked fourth, fell 16%.
Bitcoin and ethereum, the two most popular cryptocurrencies, were more stable, each declining less than 5%.
Gensler, who was appointed to head the SEC by President Joe Biden in 2021, has spent much of the past year going after crypto firms and exchanges for effectively selling highly speculative and risky securities dressed up as something else.
From high-profile fraud cases involving Sam Bankman-Fried’s FTX and Do Kwon’s Terraform Labs to dozens of charges involving coin offerings and alleged false marketing, Gensler has made the once-burgeoning crypto industry his primary takedown target.
“The investing public has the benefit of U.S. securities laws,” Gensler said in an interview with CNBC’s “Squawk on the Street” on Tuesday. “Crypto should be no different, and these platforms, these intermediaries need to come into compliance.”
Gensler’s TV appearance came after the SEC sued Coinbase and said the company should be “permanently restrained and enjoined” from “operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency.”
Shares of Coinbase, the only major crypto exchange that’s publicly traded in the U.S., sank 18% this week. Coinbase legal chief Paul Grewal told CNBC in a statement that the SEC’s approach to enforcement without laying out clear rules is “hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance.”
A day earlier, in its lawsuit against Binance, the SEC alleged that the company and founder Changpeng Zhao comingled billions of dollars worth of user funds and sent them to a European company controlled by Zhao.
While Binance claims no official headquarters and does most of its business overseas, the SEC’s complaint cited a senior executive allegedly telling a compliance officer that the company was operating as a “[f—ing] unlicensed securities exchange in the USA bro.”
In a blog post, Binance said it was “disappointed” in the SEC’s suit and said it had “engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigations.”
Others named in the SEC lawsuit also weighed in after this week’s charges landed.
The Cardano Foundation, which works to advance use of its namesake technology, said in a tweet that it disagrees with the labeling of its ADA coin as a security and “we look forward to the continued engagement with regulators and policymakers to achieve legal clarity and certainty on these matters.”
Protocol Labs, the developer of Filecoin, said in a series of tweets on Thursday that the token is critical to the operation of its distributed storage network. It’s how people buy storage from providers, and Protocol says the cost is much less than what users would pay Amazon Web Services or Google Cloud.
“Filecoin is a cryptocurrency-powered global storage network preserving humanity’s most important information, not a security,” Protocol Labs tweeted.
In its 101-page complaint against Coinbase, the SEC made clear that regardless of whether these tokens have some level of utility, they can easily be purchased on the app by people who have no interest beyond investing. And Coinbase generates revenue by executing those trades.
“Coinbase makes these crypto assets available for trading,” the SEC said, “without restricting transactions to those who might acquire or treat the asset as anything other than as an investment.”
U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler, testifies before the Senate Banking, Housing and Urban Affairs Committee during an oversight hearing on Capitol Hill in Washington, September 15, 2022.
Evelyn Hockstein | Reuters
WASHINGTON — As investors focused this week on earnings and regional banks, the Securities and Exchange Commission quietly adopted new rules that will require public companies to disclose far more information about stock buybacks than they ever have before.
The new rules “will increase the transparency and integrity” of corporate stock repurchasing overall, and allow investors “to better assess issuer buyback programs,” SEC Chairman Gary Gensler said in a statement about the updated disclosures.
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Gensler also noted the soaring rate at which U.S. corporate buybacks have grown in recent years, from a total of $950 billion worth in 2021, to more than $1.25 trillion worth last year.
This year could be just as big. Google parent Alphabet announced last month that its board had approved $70 billion in stock buybacks this year, matching the amount the company spent repurchasing its own shares in 2022. This week, Apple announced plans to buy back even more stock than Google: $90 billion worth this year, on the heels of a previous $90 billion in 2022.
The new disclosure rules will begin to apply when U.S. corporations report earnings for the fourth quarter of 2023, and to foreign issuers on a slightly longer timeline.
What public companies will need to disclose
A daily log of share repurchase activity, disclosed at the end of each quarter as an exhibit in 10-Q reports and the annual 10-K report.
A description of the rationale behind each buyback, and the goals of that buyback. The issuer will also need to explain the criteria it used to determine how many shares to repurchase.
Whether certain directors or officers of the company bought or sold any of the shares in question within four days before or after the buyback.
More details about company stock trading agreements with their directors and officers, known as 10b5-1 plans. This includes the start and end dates, the total number of shares, and the material terms of these plans.
Approved by a commission vote of 3-2 on Wednesday, the new rules mark the end of a yearslong battle over how much information the public and shareholders have a right to know about the increasingly common practice of companies repurchasing their own shares.
They also reflect a bigger debate nationwide about share buybacks, which typically increase the value of a company’s shares by reducing the total number of shares in the market.
With top executives’ compensation often linked to share price performance metrics, buybacks have emerged in the past decade as a relatively simple, quick means by which to raise a company’s stock price, much simpler in many cases than it is to grow sales, expand operations, or increase profits.
The changes approved Wednesday represent a softening of the SEC’s initial proposed disclosure rules, which would have required public companies to report trades by corporate insiders on a daily basis. The commission said its final decision was influenced by concerns raised in public comments, that daily reporting would be too expensive and time consuming.
Public interest groups, many of which have become increasingly critical of widespread corporate buybacks, applauded the new rules.
“Stock buybacks have grown substantially in recent years and increasingly they are used to enrich executives instead of re-investing capital to advance a company’s long-term productivity, profitability, and employee welfare,” said Stephen Hall, legal director at the nonprofit Better Markets. “This final rule will certainly increase the quantity, quality, and timeliness of reporting on these controversial transactions.”
But industry advocates called the new rules onerous and unfair, and accused the SEC of trying to deter companies from repurchasing their own shares.
“The commission’s attempt to discourage these commonplace, commonsense transactions via an overly complicated, expensive and unworkable disclosure mandate is … a departure from its mission to enhance capital formation and protect investors,” said Chris Netram, managing vice president of the National Association of Manufacturers.
On Capitol Hill, bipartisan support for stricter buyback disclosure rules has been apparent since the start of the SEC’s rulemaking process, more than a year ago.
Capital markets “provide the means by which companies raise capital and invest it productively for the good of their investors, workers, communities, and, ultimately, our country as a whole,” wrote Sens. Tammy Baldwin, D-Wisc., and Marco Rubio, R-Fla., in a letter to Gensler in 2022.
The explosion of corporate buybacks, they wrote, represented a shift “toward transactions in securities for the purposes of financial engineering over raising capital to invest productively in trade and industry.”
The SEC has repeatedly stated that it does not have a position on whether corporate share buybacks are good or bad, and that the new disclosure rules merely reflect the growing importance of buybacks as a key element of corporate strategy.
Crypto companies are frustrated at the U.S. government for its lack of clear rules for the industry and the Securities and Exchange Commission for its aggressive actions against digital currency firms, according to multiple executives who spoke to CNBC.
Unlike other countries, the U.S. has yet to come up with a comprehensive framework or set of regulations that allows cryptocurrency and blockchain firms to operate without fear of being targeted by regulators.
Meanwhile, since the collapse of crypto exchange FTX last year, the U.S. SEC has stepped up enforcement action against companies.
On Wednesday, the SEC sent exchange Coinbase a Wells notice, warning the company that it had identified potential violations of U.S. securities law. The SEC also unveiled fraud and unregistered securities charges against crypto founder Justin Sun and celebrities that endorsed the digital coins he was pushing.
“It feels uncollaborative,” a senior crypto executive at the Paris Blockchain Week event told CNBC, wishing to remain anonymous due to the sensitive nature of the matter. “It’s very frustrating for players that have been doing right the whole time.”
Joe Lubin, CEO of ConsenSys and co-founder of Ethereum, told CNBC Thursday that he thought the ecosystem was “generally frustrated.”
“I think we’re sort of continuing to watch the SEC play this game of punishing the people that are still surviving. And it’s a little bit, you know, sort of a frustrating thing to observe,” Nicolas Cary, president of Blockchain.com, told CNBC on Thursday.
Read more about tech and crypto from CNBC Pro
Much of what the SEC has done involves applying existing regulations to the crypto industry, which were formed several decades after the Howey Test — one of the key tests to determine whether something is a security or not.
Many in the crypto industry feel this is not the right path to take.
“Where I think you have less successful regulatory regimes is when you try to analyze crypto through the lens of traditional finance. You say, ‘well, is it a bit like a security? Is it a commodity?’ … No, it’s kind of none of those things. It’s crypto,” Oliver Linch, CEO of Bittrex Global, told CNBC Wednesday.
The SEC was not immediately available for comment when contacted by CNBC.
CNBC spoke to numerous executives on the ground at Paris Blockchain Week, one of the most prominent crypto conferences in Europe, and one request executives made to U.S. regulators was the need for clarity.
“We’d love to have a little bit more clarity in regulation,” Silvio Micali, founder of blockchain company Algorand, told CNBC on Wednesday.
Bitcoin has had a strong start to the year with the cryptocurrency seeing a huge rally.
Jakub Porzycki | Nurphoto | Getty Images
Some have expressed some sympathy with the SEC, however, suggesting that the watchdog is just operating within existing rules and that it is up to the U.S. government to change them.
“What are they supposed to do? If all you’re given is a hammer, the whole world looks like a nail,” Bittrex Global’s Linch said.
Blockchain.com’s Cary said the SEC is “trying to do their job to protect consumers.”
SEC Chair Gary Gensler addressed a lot of these points in a opinion piece he wrote in The Hill this month, suggesting the regulator has been clear on the rules.
“I find the talking point that there’s a lack of clarity in the securities laws unpersuasive,” Gensler said. “Some crypto companies might message that the laws are unclear rather than admitting that their platforms don’t have sufficient investor protection.”
He laid out instances where crypto firms come under existing securities laws, such as when a company offers lending products.
Gensler also said “crypto intermediaries aren’t exactly lining up to register with the SEC and comply with the laws enacted by Congress.”
The SEC chair said enforcement actions are “another tool” in the regulator’s toolbox to root out “noncompliance.”
Executives have warned that the lack of clear regulation in the U.S. could see it fall behind other countries and jurisdictions.
“It’s incumbent, I think, on Congress to actually create a legal regulatory framework that regulates crypto properly, because … crypto is here to stay,” Linch said.
Governments across the globe are weighing up how to regulate crypto. Places like Switzerland and Dubai have marketed themselves as crypto-friendly destinations with favorable regulation.
Meanwhile, the European Union is slated this year to introduce the Markets in Crypto-Assets, or MiCA, regulation, designed to bring some rules in and around digital currency companies.
When asked by CNBC if the U.S. is at risk of falling behind other jurisdictions in the crypto economy, Monica Long, president of Ripple, said: “We think so.”
“Europe is really emerging as a leader in terms of setting really clear regulations and rules that allow crypto companies and also traditional finance to embrace crypto,” Long said.
The Ripple president referenced MiCA, a law that required the agreement of all 27 nations that make up the EU, calling it “remarkable when the U.S. has one government and they can’t get their act together.”
The Securities and Exchange Commission on Thursday charged crypto firms Genesis and Gemini with allegedly selling unregistered securities in connection with a high-yield product offered to depositors.
Gemini, a crypto exchange, and Genesis, a crypto lender, partnered in February 2021 on a Gemini product called Earn, which touted yields of up to 8% for customers.
According to the SEC, Genesis loaned Gemini users’ crypto and sent a portion of the profits back to Gemini, which then deducted an agent fee, sometimes over 4%, and returned the remaining profit to its users. Genesis should have registered that product as a securities offering, SEC officials said.
“Today’s charges build on previous actions to make clear to the marketplace and the investing public that crypto lending platforms and other intermediaries need to comply with our time-tested securities laws,” SEC chair Gary Gensler said in a statement.
Gemini’s Earn program, supported by Genesis’ lending activities, met the SEC’s definition by including both an investment contract and a note, SEC officials said. Those two features are part of how the SEC assesses whether an offering is a security.
Regulators are seeking permanent injunctive relief, disgorgement, and civil penalties against both Genesis and Gemini.
The two firms have been engaged in a high-profile battle over $900 million in customer assets that Gemini entrusted to Genesis as part of the Earn program, which was shuttered this week.
Gemini, which was founded in 2015 by bitcoin advocates Cameron and Tyler Winklevoss, has an extensive exchange business that, while beleaguered, could possibly weather an enforcement action.
But Genesis’ future is more uncertain, because the business is heavily focused on lending out customer crypto and has already engaged restructuring advisers. The crypto lender is a unit of Barry Silbert’s Digital Currency Group.
SEC officials said the possibility of a DCG or Genesis bankruptcy had no bearing on deciding whether to pursue a charge.
It’s the latest in a series of recent crypto enforcement actions led by Gensler after the collapse of Sam Bankman-Fried’s FTX in November. Gensler was roundly criticized on social media and by lawmakers for the SEC’s failure to impose safeguards on the nascent crypto industry.
Gensler’s SEC and the Commodity Futures Trading Commission, chaired by Rostin Benham, are the two regulators that oversee crypto activity in the U.S. Both agencies filed complaints against Bankman-Fried, but the SEC has, of late, ramped up the pace and the scope of enforcement actions.
The SEC brought a similar action against now bankrupt crypto lender BlockFi and settled last year. Earlier this month, Coinbasesettled with New York state regulators over historically inadequate know-your-customer protocols.
Since Bankman-Fried was indicted on federal fraud charges in December, the SEC has filed five crypto-related enforcement actions.
To build a fire — but not destroy the market by doing so. That’s the goal right now. It’s not as easy as in the famous Jack London short story (“To Build a Fire”) where, in the end, the survivors profit rather than freeze to death in their sleep. In the early part of this decade, we saw the rise of Robinhood (HOOD) and the distribution of investments from the serious to the ephemeral. These days, Robinhood has the appearance of one gigantic bonfire of young people’s money. The gamification concept was real and the exodus of investors was noisy — culminating with the ridiculous self-immolation of GameStop (GME), AMC Entertainment (AMC) and the meme stocks. Those who fought this trend abandoned Twitter, hired bodyguards and tried to hide from the angry mob that was attempting to will stocks higher by savaging the sellers. No tinder from these clowns. Then there was the much larger-than-expected romp to crypto. The people who bought it somehow ensconced their brains into something they didn’t understand. As a result, they overran their brains and outsourced them to others who claimed to know more than they did. You had to oppose a phalanx of vociferous, self-promoting scoundrels and their fintech allies in government and venture capital — all of whom should feel shame, but shame eludes them. They will not accept their intellectual disgrace, and instead, continue to argue that it was all about blockchain and DeFi (decentralized finance). They want to explain to you why they got it right and you got it wrong, even as they lost everything and you were safe keeping your cash at JPMorgan. I wish I had a hubris scale, something like a gigantic thermometer that could measure these arrogant promoters and give them the hook when they contend that they are smarter than you for believing in something with a best-use case as untraceable ransom money. But this era is running out. It’s going to be done with a fight, of course, as we see its representatives defend themselves with specious arguments that sound so self-serving and outright phony that even neutral minds are repelled and rebelling. The money furnace that was Robinhood burns blandly compared to the napalm of crypto. The interests that defended crypto can’t go quietly because they will empty the coffers of their crypto banks and cause waves of bankruptcies; the $34 billion that we know of that was destroyed by Sam Bankman-Fried — the disgraced former boss of failed crypto exchange FTX — pretty much propped up everything. We keep getting stung by the alleged due diligence done by so many who should have known better, with only a couple of institutions writing their investments to nothing, along with their explanations, or lack thereof. Here’s the problem: If it all goes away — crypto and all the institutions supporting it — the money that’s left won’t help push equity prices higher. It was once a magnet to a couple of trillion dollars. Now I wonder if there’s $400 billion to the entire edifice. The whole thing reminds me of a line from the film “Beau Geste,” when two of the main characters are under attack: “You’ll do your duty better dead than you ever did alive.” The biggest guns are most likely liquidating as they talk, the duplicitous cads. They will tell us that we are fools not to believe in blockchain as if somehow that is dispositive to something other than lies and blunders. My point is this: The crypto con and the Robinhood dollar conflagration can’t produce enough money to buoy stocks. There’s not enough left in these embers to do anything but marvel at how much there used to be and how little bankruptcy produces. No matter how many hearings, we will never know the full culpability behind those in Congress and those in the Securities and Exchange Commission who opposed SEC Chairman Gary Gensler. He came on CNBC specifically to warn us of made-up coins and institutions that give you too high a return compared to cash in a real bank. Self-serving cryptocurrency players have been critical of the SEC. They want to school Gensler and let him know he can only go so far before running into all the well-endowed entities and their secret paid supporters. The horror! The horror! So where else will the money come from? Unlike the chimerical trillions that vanished into thin crypto air, the fuel will come from four stocks that have a combined total of $6 trillion to donate: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL) and Amazon (AMZN). There is simply too much money in these names to take us higher, or at least how high we can go after the Federal Reserve’s next meeting this week. But I think some of that investor money will be transferred into the stocks of companies that have the most voracious buybacks. Those are the companies without enough stock available to handle all the money that will flood in. Money in those four stocks will be pulled out, kicking and screaming, until the valuations become earthly — better than Meta Platforms (META) and more like the S & P as they are revealed to be mortal. Not until then can the rally start in earnest. Can these valuations be played out? It’s happening as you read this. Of course, there’s one other enemy to the advance and it’s a powerful one: The 4.5% yield from 2-year Treasurys is outrageously bountiful in a market where anything north of 4% in equities is likely tied to plummeting oil. However, we cling to the oils, betting that they can maintain their well above market prices when Russia can’t produce its endless reserves and China goes voracious upon reopening. I think we will win. Bottom line We will hold Apple, Microsoft, Alphabet and Amazon, even as we’ve trimmed them higher. Their spiral down to earth, however, will be painful. If we hadn’t sold some, it would be getting late in the game. But I suspect there’s more pain to come. Why take it? Because these companies still have value, even though it won’t surface until the selling’s done and we don’t know when that will occur. It’s too dangerous now to depart, although Apple could see $120 and Microsoft a 10-point decline. Amazon and Alphabet control their own destinies through headcount reductions. The good news? The selling could end after the Fed meeting. The bad news: If it does, there will not be enough rocket fuel. The big four need to shed a trillion minimum to power things higher. I think it will happen in time. Which would mean a brutal week until the transfer begins to be made. Hold on to what you have, but get ready to be lifted by the stocks with the strongest buybacks. That’s where the accumulation will matter the most. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Satya Nadella, chief executive officer of Microsoft Corp., during the company’s Ignite Spotlight event in Seoul, South Korea, on Tuesday, Nov. 15, 2022. Nadella gave a keynote speech at an event hosted by the company’s Korean unit.
SeongJoon Cho | Bloomberg | Getty Images
To build a fire — but not destroy the market by doing so.
That’s the goal right now. It’s not as easy as in the famous Jack London short story (“To Build a Fire”) where, in the end, the survivors profit rather than freeze to death in their sleep.
In the early part of this decade, we saw the rise of Robinhood (HOOD) and the distribution of investments from the serious to the ephemeral. These days, Robinhood has the appearance of one gigantic bonfire of young people’s money. The gamification concept was real and the exodus of investors was noisy — culminating with the ridiculous self-immolation of GameStop (GME), AMC Entertainment (AMC) and the meme stocks. Those who fought this trend abandoned Twitter, hired bodyguards and tried to hide from the angry mob that was attempting to will stocks higher by savaging the sellers. No tinder from these clowns.
FTX CEO Sam Bankman-Fried attends a press conference at the FTX Arena in downtown Miami on Friday, June 4, 2021.
Matias J. Ocner | Miami Herald | Tribune News Service | Getty Images
Sam Bankman-Fried, the disgraced former CEO of FTX — the bankrupt cryptocurrency exchange that was worth $32 billion a few weeks ago — has a real knack for self-promotional PR. For years, he cast himself in the likeness of a young boy genius turned business titan, capable of miraculously growing his crypto empire as other players got wiped out. Everyone from Silicon Valley’s top venture capitalists to A-list celebrities bought the act.
But during Bankman-Fried’s press junket of the last few weeks, the onetime wunderkind has spun a new narrative – one in which he was simply an inexperienced and novice businessman who was out of his depth, didn’t know what he was doing, and crucially, didn’t know what was happening at the businesses he founded.
It is quite the departure from the image he had carefully cultivated since launching his first crypto firm in 2017 – and according to former federal prosecutors, trial attorneys and legal experts speaking to CNBC, it recalls a classic legal defense dubbed the “bad businessman strategy.”
At least $8 billion in customer funds are missing, reportedly used to backstop billions in losses at Alameda Research, the hedge fund he also founded. Both of his companies are now bankrupt with billions of dollars worth of debt on the books. The CEO tapped to take over, John Ray III, said that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” This is the same Ray who presided over Enron’s liquidation in the 2000s.
In America, it is not a crime to be a lousy or careless CEO with poor judgement. During his recent press tour from a remote location in the Bahamas, Bankman-Fried really leaned into his own ineptitude, largely blaming FTX’s collapse on poor risk management.
At least a dozen times in a conversation with Andrew Ross Sorkin, he appeared to deflect blame to Caroline Ellison, his counterpart (and one-time girlfriend) at Alameda. He says didn’t know how extremely leveraged Alameda was, and that he just didn’t know about a lot of things going on at his vast empire.
Bankman-Fried admitted he had a “bad month,” but denied committing fraud at his crypto exchange.
Fraud is the kind of criminal charge that can put you behind bars for life. With Bankman-Fried, the question is whether he misled FTX customers to believe their money was available, and not being used as collateral for loans or for other purposes, according to Renato Mariotti, a former federal prosecutor and trial attorney who has represented clients in derivative-related claims and securities class actions.
“It sure looks like there’s a chargeable fraud case here,” said Mariotti. “If I represented Mr. Bankman-Fried, I would tell him he should be very concerned about prison time. That it should be an overriding concern for him.”
But for the moment, Bankman-Fried appears unconcerned with his personal legal exposure. When Sorkin asked him if he was concerned about criminal liability, he demurred.
“I don’t think that — obviously, I don’t personally think that I have — I think the real answer is it’s not — it sounds weird to say it, but I think the real answer is it’s not what I’m focusing on,” Bankman-Fried told Sorkin. “It’s — there’s going to be a time and a place for me to think about myself and my own future. But I don’t think this is it.”
Comments such as these, paired with the lack of apparent action by regulators or authorities, have helped inspire fury among many in the industry – not just those who lost their money. The spectacular collapse of FTX and SBF blindsided investors, customers, venture capitalists and Wall Street alike.
Bankman-Fried did not respond to a request for comment. Representatives for his former law firm, Paul, Weiss, did not immediately respond to comment. Semafor reported earlier that Bankman-Fried’s new attorney was Greg Joseph, a partner at Joseph Hage Aaronson.
Both of Bankman-Fried’s parents are highly respected Stanford Law School professors. Semafor also reported that another Stanford Law professor, David Mills, was advising Bankman-Fried.
Mills, Joseph and Bankman-Fried’s parents did not immediately respond to requests for comment.
Bankman-Fried could face a host of potential charges – civil and criminal – as well as private lawsuits from millions of FTX creditors, legal experts told CNBC.
For now, this is all purely hypothetical. Bankman-Fried has not been charged, tried, nor convicted of any crime yet.
Richard Levin is a partner at Nelson Mullins Riley & Scarborough, where he chairs the fintech and regulation practice. He’s been involved in the fintech industry since the early 1990s, and has represented clients before the Securities and Exchange Commission, Commodity Futures Trading Commission and Congress. All three of those entities have begun probing Bankman-Fried.
There are three different, possibly simultaneous legal threats that Bankman-Fried faces in the United States alone, Levin told CNBC.
First is criminal action from the U.S. Department of Justice, for potential “criminal violations of securities laws, bank fraud laws, and wire fraud laws,” Levin said.
A spokesperson for the U.S. Attorney’s Office for the Southern District of New York declined to comment.
Securing a conviction is always challenging in a criminal case.
Mariotti, the former federal prosecutor is intricately familiar with how the government would build a case. He told CNBC, “prosecutors would have to prove beyond a reasonable doubt that Bankman-Fried or his associates committed criminal fraud.”
“The argument would be that Alameda was tricking these people into getting their money so they could use it to prop up a different business,” Mariotti said.
“If you’re a hedge fund and you’re accepting customer funds, you actually have a fiduciary duty [to the customer],” Mariotti said.
Prosecutors could argue that FTX breached that fiduciary duty by allegedly using customer funds to artificially stabilize the price of FTX’s own FTT coin, Mariotti said.
But intent is also a factor in fraud cases, and Bankman-Fried insists he didn’t know about potentially fraudulent activity. He told Sorkin that he “didn’t knowingly commingle funds.”
“I didn’t ever try to commit fraud,” Bankman-Fried said.
Beyond criminal charges, Bankman-Fried could also be facing civil enforcement action. “That could be brought by the Securities Exchange Commission, and the Commodity Futures Trading Commission, and by state banking and securities regulators,” Levin continued.
“On a third level, there’s also plenty of class actions that can be brought, so there are multiple levels of potential exposure for […] the executives involved with FTX,” Levin concluded.
The Department of Justice is most likely to pursue criminal charges in the U.S. The Wall Street Journal reported that the DOJ and the SEC were both probing FTX’s collapse, and were in close contact with each other.
That kind of cooperation allows for criminal and civil probes to proceed simultaneously, and allows regulators and law enforcement to gather information more effectively.
But it isn’t clear whether the SEC or the CFTC will take the lead in securing civil damages.
An SEC spokesperson said the agency does not comment on the existence or nonexistence of a possible investigation. The CFTC did not immediately respond to a request for comment.
“The question of who would be taking the lead there, whether it be the SEC or CFTC, depends on whether or not there were securities involved,” Mariotti, the former federal prosecutor, told CNBC.
SEC Chairman Gary Gensler, who met with Bankman-Fried and FTX executives in spring 2022, has said publicly that “many crypto tokens are securities,” which would make his agency the primary regulator. But many exchanges, including FTX, have crypto derivatives platforms that sell financial products like futures and options, which fall under the CFTC’s jurisdiction.
“For selling unregistered securities without a registration or an exemption, you could be looking at the Securities Exchange Commission suing for disgorgement — monetary penalties,” said Levin, who’s represented clients before both agencies.
“They can also sue, possibly, claiming that FTX was operating an unregistered securities market,” Levin said.
Then there are the overseas regulators that oversaw any of the myriad FTX subsidiaries.
The Securities Commission of The Bahamas believes it has jurisdiction, and went as far as to file a separate case in New York bankruptcy court. That case has since been folded into FTX’s main bankruptcy protection proceedings, but Bahamian regulators continue to investigate FTX’s activities.
Court filings allege that Bahamian regulators have moved customer digital assets from FTX custody into their own. Bahamian regulators insist that they’re proceeding by the book, under the country’s groundbreaking crypto regulations — unlike many nations, the Bahamas has a robust legal framework for digital assets.
But crypto investors aren’t sold on their competence.
“The Bahamas clearly lack the institutional infrastructure to tackle a fraud this complex and have been completely derelict in their duty,” Castle Island Ventures partner Nic Carter told CNBC. (Carter was not an FTX investor, and told CNBC that his fund passed on early FTX rounds.)
“There is no question of standing. U.S. courts have obvious access points here and numerous parts of Sam’s empire touched the U.S. Every day the U.S. leaves this in the hands of the Bahamas is a lost opportunity,” he continued.
Investors who have lost their savings aren’t waiting. Class-action suits have already been filed against FTX endorsers, like comedian Larry David and football superstar Tom Brady. One suit excoriated the celebrity endorsers for allegedly failing to do their “due diligence prior to marketing [FTX] to the public.”
FTX’s industry peers are also filing suit against Bankman-Fried. BlockFi sued Bankman-Fried in November, seeking unnamed collateral that the former billionaire provided for the crypto lending firm.
FTX and Bankman-Fried had previously rescued BlockFi from insolvency in June, but when FTX failed, BlockFi was left with a similar liquidity problem and filed for bankruptcy protection in New Jersey.
Bankman-Fried has also been sued in Florida and California federal courts. He faces class-action suits in both states over “one of the great frauds in history,” a California court filing said.
The largest securities class-action settlement was for $7.2 billion in the Enron accounting fraud case, according to Stanford research. The possibility of a multibillion-dollar settlement would come on top of civil and criminal fines that Bankman-Fried faces.
But the onus should be on the U.S. government to pursue Bankman-Fried, Carter told CNBC, not on private investors or overseas regulators.
“The U.S. isn’t shy about using foreign proxies to go after Assange — why in this case have they suddenly found their restraint?”
Wire fraud is the most likely criminal charge Bankman-Fried would face. If the DOJ were able to secure a conviction, a judge would look to several factors to determine how long to sentence him.
Braden Perry was once a senior trial lawyer for the CFTC, FTX’s only official U.S. regulator. He’s now a partner at Kennyhertz Perry, where he advises clients on anti-money laundering, compliance and enforcement issues.
Based on the size of the losses, if Bankman-Fried is convicted of fraud or other charges, he could be behind bars for years — potentially for the rest of his life, Perry said. But the length of any potential sentence is hard to predict.
“In the federal system, each crime always has a starting point,” Perry told CNBC.
Federal sentencing guidelines follow a numeric system to determine the maximum and minimum allowable sentence, but the system can be esoteric. The scale, or “offense level,” starts at one, and maxes out at 43.
A wire fraud conviction rates as a seven on the scale, with a minimum sentence ranging from zero to six months.
But mitigating factors and enhancements can alter that rating, Perry told CNBC.
“The dollar value of loss plays a significant role. Under the guidelines, any loss above $550 million adds 30 points to the base level offense,” Perry said. FTX customers have lost billions.
“Having 25 or more victims adds 6 points, [and] use of certain regulated markets adds 4,” Perry continued.
In this hypothetical scenario, Bankman-Fried would max out the scale at 43, based on those enhancements. That means Bankman-Fried could be facing life in federal prison, without the possibility of supervised release, if he’s convicted on a single wire fraud offense.
But that sentence can be reduced by mitigating factors – circumstances that would lessen the severity of any alleged crimes.
“In practice, many white-collar defendants are sentenced to lesser sentences than what the guidelines dictate,” Perry told CNBC, Even in large fraud cases, that 30-point enhancement previously mentioned can be considered punitive.
Bankman-Fried could also face massive civil fines. Bankman-Fried was once a multibillionaire, but claimed he was down to his last $100,000 in a conversation with CNBC’s Sorkin at the DealBook Summit last week.
“Depending on what is discovered as part of the investigations by law enforcement and the civil authorities, you could be looking at both heavy monetary penalties and potential incarceration for decades,” Levin told CNBC.
In the most famous fraud case in recent years, Bernie Madoff was arrested within 24 hours of federal authorities learning of his multibillion-dollar Ponzi scheme. But Madoff was in New York and admitted to his crime on the spot.
The FTX founder is in the Bahamas and hasn’t admitted wrongdoing. Short of a voluntary return, any efforts to apprehend him would require extradition.
With hundreds of subsidiaries and bank accounts, and thousands of creditors, it’ll take prosecutors and regulators time to work through everything.
Similar cases “took years to put together,” said Mariotti. At FTX, where record keeping was spotty at best, collecting enough data to prosecute could be much harder. Expenses were reportedly handled through messaging software, for example, making it difficult to pinpoint how and when money flowed out for legitimate expenses.
In Enron’s bankruptcy, senior executives weren’t charged until nearly three years after the company went under. That kind of timeline infuriates some in the crypto community.
“The fact that Sam is still walking free and unencumbered, presumably able to cover his tracks and destroy evidence, is a travesty,” said Carter.
But just because law enforcement is tight-lipped, that doesn’t mean they’re standing down.
“People should not jump to the conclusion that something is not happening just because it has not been publicly disclosed,” Levin told CNBC.
Could he just disappear?
“That’s always a possibility with the money that someone has,” Perry said, although Bankman-Fried claims he’s down to one working credit card. But Perry doesn’t think it’s likely. “I believe that there has been likely some negotiation with his attorneys, and the prosecutors and other regulators that are looking into this, to ensure them that when the time comes […] he’s not fleeing somewhere,” Perry told CNBC.
In the meantime, Bankman-Fried won’t be resting easy as he waits for the hammer to drop. Rep. Maxine Waters extended a Twitter invitation for him to appear before a Dec. 13 hearing.
Bankman-Fried responded on Twitter, telling Waters that if he understands what happened at FTX by then, he’d appear.
Correction: Caroline Ellison is Bankman-Fried’s counterpart at Alameda. An earlier version misspelled her name.
This is an opinion editorial by Shane Neagle, the editor-in-chief of “The Tokenist.”
The continued discussion about the need for a comprehensive U.S. regulatory framework to identify opportunities and risks within the rapidly growing Bitcoin sector has caught the attention of the wider public.
Rostin Behnam, chairman of the Commodity Futures Trading Commission (CFTC), said recently that proper regulation of the cryptocurrency space could have significant positive effects on market growth, particularly for bitcoin.
“Growth might occur if we have a well-regulated space,” Behnam said during his appearance at New York University School of Law.
Behnam also said, “Bitcoin might double in price if there’s a CFTC-regulated market,” which made headlines around the globe. His comments aren’t surprising given that he has emphasized the need for regulatory clarity in the Bitcoin market several times before.
The CFTC And SEC Must Work Together
Earlier this year, representatives of the Senate Agriculture Committee, which oversees the CFTC, proposed a new bill that would make the CFTC the primary regulator of the digital assets industry and strengthen its control over cryptocurrency spot markets. The bill would also require trading companies to register with the CFTC. Behnam voiced his support for the bipartisan bill, which would also allow the CFTC to charge fees on regulatory entities and reinforce its financial power.
“We are [currently] appropriated money by Congress, and it has put us in a position where we feel like we’re constantly on edge about how much money we will be appropriated,” Behnam added during the NYU School of Law event. “We are still feeling the wounds and scars from about five or six years of flat funding.”
Behnam added that its modest financial budget and other headwinds have also prevented the agency from putting up a proper fight against crime involving bitcoin and other digital assets. Because the CFTC has no jurisdiction, the agency lacks traditional surveillance services and market oversight solutions to appropriately oversee trading platforms and other intermediaries, Behnam further noted.
These remarks come roughly a month after the former CFTC chairman, Timothy Massad, called for the CFTC and the U.S. Securities and Exchange Commission (SEC) to come together and address the current crypto regulatory gaps by establishing a self-regulatory organization (SRO).
Massad argued that neither CFTC nor the SEC has the necessary power to regulate bitcoin and other digital assets. At the moment, there is a significant gap when it comes to regulating what he called “the cash market for crypto assets.” This includes bitcoin trading activities on exchanges like Coinbase or Kraken. While the U.S. Congress has attempted to address this issue through several bills, Massad believes that the solution lies in an SRO.
Earlier this month, SEC Chair Gary Gensler said that he supports the idea of handing the CFTC the role of top non-securities cryptocurrency regulator, though Congress shouldn’t overlook the SEC if that happens. He stressed that it’s important to make sure that securities laws regulating the $100 trillion capital markets must not be undermined as these laws have made capital markets the envy of the world.
At the moment, the CFTC is responsible only for regulating cryptocurrency derivatives, though many in Washington and the bitcoin-centered industry seem to support the idea of handing the reins of cryptocurrency regulation to the agency.
Who Will Benefit From Regulation?
The idea that a well-established regulatory framework could lure more institutional investors and boost bitcoin market adoption is a stance prompted by many within the industry. Behnam also argued that digital asset firms see significant potential “for institutional inflows that will only occur if there’s a regulatory structure around these markets.”
Behnam added that Bitcoin projects “thrive on regulatory certainty” and the organization hopes to have more clarity in the near future that will allow these companies to continue delivering innovative products that change people’s lives. Again, this stance is not surprising as Behnam has consistently argued for the need to provide market participants with regulatory clarity — something that many in the industry have argued is lacking.
Finally, putting bitcoin under the supervision of the CFTC could put the entire securities discussion to bed. This increased clarity and visibility could then pave the way for more institutional players — who insist on having a clear framework regulating digital assets — to increase their exposure to bitcoin.
However, while many are calling for more regulatory clarity, some analysts believe that a comprehensive regulatory framework could hurt some of the biggest businesses in the U.S., including Coinbase. Wells Fargo analysts initiated research coverage on Coinbase at an underweight rating, citing, among other factors, the risk of a more restrictive government stance toward digital assets.
A tougher regulatory environment as well as continued macro headwinds, could materially impact Coinbase’s volumes and revenue in 2023, analysts wrote in the initiation note.
“Regulation in particular will be a challenge for COIN, for example, note the recent discussion coming from the SEC about ‘cryptos as securities’ (e.g., for staked assets),” Wells Fargo analysts added.
Bottom Line
For years, the CFTC and the SEC have squabbled for the role of top regulator of the cryptocurrency industry. Both have been reluctant to issue much in the way of formal guidance for Bitcoin companies, choosing instead to set a regulatory precedent through enforcement actions.
While some industry experts aren’t supportive of the creation of a comprehensive regulatory framework for Bitcoin, many continue to stress the importance of having more clarity in this area. While many Bitcoin natives are still against any regulation, the added clarity could further accelerate the evolution of the asset.
This is a guest post by Shane Neagle. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
