To be continued: SEC pushes back at Coinbase

Bank Frick
Crypto Industry Reports

This week, our blockchain experts assessed the following topics:

Our bi-weekly Crypto Industry Report provides you with valuable information on the global crypto industry - picked and analysed by our blockchain experts.

To be continued: SEC pushes back at Coinbase

On July 7, the SEC responded to Coinbase’s motion requesting the court to dismiss the lawsuit the U.S. regulator had filed against it. Coinbase, in the 177-page motion it filed nearly two weeks ago, stated that the SEC had no jurisdiction to prosecute it. The exchange also argued that the regulator approved its IPO in 2021 without classifying any of the cryptocurrencies on its platform as securities or needing it to register with the regulator.  In addition, Coinbase, in its counterattack, quoted a 2021 statement from Gary Gensler, the SEC’s Chair, saying only the U.S. Congress had the authority to regulate the cryptocurrency sector. Therefore, this leaves the SEC with no jurisdiction to sue it even if the allegations against it are genuine, according to Coinbase.

In its response, the SEC claims the crypto exchange was aware that it was contravening the country’s securities laws, which could pertain to its operations even before it was sued. Additionally, the regulator observed that Coinbase had publicly informed its shareholders that the assets on its exchange could be considered securities.

About a month ago, the SEC filed a lawsuit against Coinbase over claims that it was operating as an unregistered broker, clearing agency, and securities exchange. The legal suit came a day after the regulator sued Binance, another crypto exchange accused of operating an unregistered brokerage.

The SEC has been receiving heat over the past few weeks on what is seen as a witch hunt against crypto firms in the U.S. Lawmakers have even gone as far as introducing a bill to have the SEC chair removed for abusing his power.

Battle of the crypto billionaires: Winklevoss versus Silbert

On July 7, Gemini, a US-based cryptocurrency exchange firm, filed a lawsuit at the New York County Supreme Court against Digital Currency Group (DCG) – Genesis’ parent company – alongside Barry Silbert, DCG’s CEO. Gemini, which is owned by the Winklevoss twins — Cameron and Tyler Winklevoss — is accusing the US-based crypto firm and its CEO of fraud and deception.

The lawsuit comes after months of a long-standing public feud between the two firms after a collapsed lending venture. In February 2021, Gemini partnered with Genesis to enable its customers to earn an annual percentage yield of up to 7.4% on their deposits via a service known as Earn. The service would see Gemini users lend out their coins and, in return, earn a yield using Genesis’ infrastructure.

However, after nearly two years of Earn being operational, Genesis filed for bankruptcy in January 2023 following the effects of the collapse of the crypto hedge fund Three Arrows Capital (3AC) and cryptocurrency exchange platform FTX. The bankruptcy filing happened a few days before the U.S. Securities and Exchange Commission (SEC) sued the firm. The move to file for bankruptcy by Genesis was preceded by the halting of the Earn service in November 2022, which led to the freezing of customer funds.

As a major creditor in the ongoing bankruptcy case filed by Genesis, Gemini offered to put up $100 million towards Earn’s asset recovery efforts. This money will help partly pay back the 232,000 Earn customers owed over $1.1 billion in assets. In addition, DCG owes Genesis, its subsidiary, more than $1.65 billion and has defaulted on agreed payments.

In the recently filed lawsuit, Gemini wants to recover losses and damages incurred directly from the false, incomplete, and misleading representations by both DCG and Silbert. The lawsuit also claims that in October 2022, Silbert reached out to one of the Gemini founders, assuring them that it would only be a matter of time before their troubles were resolved. In addition, Gemini claims that Silbert knew the troubles facing Genesis were deeply rooted and couldn’t be resolved quickly.

Gemini filed the lawsuit a few days after Cameron, one of Gemini’s co-founders, shared an open letter via his Twitter handle to Silbert extending a final offer for the restructuring of the DCG loan. He warned Genesis and Silbert of a potential legal lawsuit if the company didn’t accept the offer. Neither Silbert nor DCG responded, prompting Cameron to invite Silbert to a Twitter Space to discuss the proposal a day later. With no response, Gemini went ahead to file the lawsuit against DCG and Silbert.  

As it stands, Genesis has yet to strike a deal with any of its creditors on how to restructure its debt which currently stands at over $3 billion, even though it had planned to do so in May of this year. The lawsuit will be interesting to follow, considering that the SEC sued both companies in January of this year over the Earn product.

News from the latest BIS survey on CBDCs

The Bank for International Settlements (BIS), a Switzerland-based international institution that 63 different central banks own, has published the results of a survey carried out end of last year on central bank digital currencies (CBDCs) and cryptocurrencies.

Eighty-six central banks participated in the survey, whose goal was to collect information on central banks' plans and views on CBDCs. Based on the survey responses, 93% of central banks are involved in CBDC work, with work on retail CBDCs being more advanced than wholesale CBDCs. The paper also established that nine wholesale and 15 retail CBDCs could be in circulation by 2030.

The paper further stated that most of the central banks examined see the latent value in having both a fast payment system (FPS) and a retail CBDC, as the latter provides financial access to both the unbanked population and a wider array of financial institutions. Moreover, offline payments and programmability were cited as features that may not be present in an FPS.

CBDCs are also considered a geopolitical policy tool that might dethrone the dollar, allowing for a multi-currency society where no one currency is supreme. Nonetheless, CBDCs could be used as a tool against a government’s own citizens if the codes allowed a central authority to perform functions such as freezing funds. This potential problem was discovered by a blockchain developer that reverse-engineered the source code of Brazil’s pilot CBDC. The developer detected functions in the code that would enable a central body to freeze or unfreeze accounts, alter balances, move money, and create or burn Digital Real. 

In other news, the IMF has stated that tax systems need updating before the use of cryptocurrencies becomes widespread. The international body also shared a new paper on how governments can tackle crypto-related tax issues while the use of cryptocurrencies is still limited.

The Bitcoin ETF race intensifies

The ETF race has seemingly intensified after the SEC responded to some of the Bitcoin ETF applications stating they were inadequate and needed to be revised. Following this announcement, BlackRock worked with Nasdaq to refile its Bitcoin ETF to include Coinbase as the market surveillance partner. Fidelity also got Cboe to refile its application after the SEC rejected the initial one. While SEC chairman Gensler was recently asked about Coinbase being the prime exchange in the ETF filings in a webinar, he did not directly comment but mentioned that crypto exchanges in the U.S. still operate conflicting services and thus have limited risk monitoring.

As BlackRock awaits a response from the SEC regarding its resubmitted application, its CEO, Larry Fink, has come out very bullish on crypto and BTC. Fink has called Bitcoin an international asset and digital gold, contrary to his 2017 statement saying Bitcoin was an “index of money laundering.”

Connected to this ETF topic is the Grayscale Bitcoin Trust (GBTC), whose discount to net asset value (NAV) has continued to narrow after BlackRock submitted its spot Bitcoin ETF. In early July, the GBTC discount to NAV dropped as low as 26%, the lowest level recorded since May 2022. Investors believe that should a Bitcoin ETF be approved, the GBTC product will finally be transformed from being a trust only into a proper ETF, which means the discount would all of a sudden close.

Bank Frick Crypto Industry Report
Bank Frick
Bank Frick is a family-run enterprising bank serving intermediaries with a strong expertise in funds and emissions and a focus on blockchain banking.