The SEC Takes On Crypto

The SEC sues Coinbase and Binance... A lot of allegations... Are crypto exchanges illegal brokers? Are cryptos 'securities'?... Crypto Capital editor Eric Wade's take... More to come... Oil prices and a pro golf merger... The 79th anniversary of D-Day...

The SEC is taking on Coinbase (and a bit more)...

You may not have expected this... but it was coming...

This morning, the U.S. Securities and Exchange Commission filed a 101-page lawsuit against U.S. crypto exchange Coinbase (COIN). The SEC alleges that the company has been operating as an "unregistered broker" since at least 2019.

This lawsuit is specific to Coinbase, the largest crypto platform in the U.S. But the outcome of this litigation will likely have a much wider and longer-lasting influence.

This is large-scale stuff... and has been coming for a while. Longtime readers might remember our discussion in 2021 about what whiskey barrels in the 1970s, gift cards today, and crypto might have in common...

Specifically, the SEC named 13 cryptocurrencies – not including bitcoin or Ethereum, notably – that it says Coinbase offers and sells "as investment contracts, and thus as securities." That would put the company in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934, and the suit therefore seeks to force the platform to stop offering these cryptos.

In an interview this morning on CNBC, SEC Chair Gary Gensler suggested that he's thinking about all crypto exchanges when filing the suit...

These trading platforms, they call themselves exchanges, are commingling a number of functions... We don't see the New York Stock Exchange operating a hedge fund.

That last part could be taken as an obvious reference to FTX... That's the exchange once run by Sam Bankman-Fried, which had allegedly taken customer deposits to fund speculative investments and other nefarious things.

Here's what Coinbase says...

Coinbase has long contended that the U.S. needs clarity around crypto rules, a statement that its CEO Brian Armstrong made again today. He said the company has actually tried to register as a broker and met with the SEC 30 times in 2022 to ask for policy guidance.

Armstrong wrote on Twitter this afternoon...

Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it.

Btw, in case it's not obvious, the Coinbase suit is very different from others out there – the complaint filed against us is exclusively focused on what is or is not a security. And we are confident in our facts and the law.

Armstrong also said this is why Congress "is introducing new legislation to fix the situation, and the rest of the world is moving to put clear rules in place to support this technology."

In fact, just last week, a massive draft bill was introduced in the House of Representatives that aims to govern the so-called crypto "Wild West" right now. This includes creating official definitions of crypto terms, like the blockchain itself.

On first impression...

First off, this news came a day after the SEC filed a separate suit against Binance, the world's largest crypto exchange, and its founder, Changpeng Zhao. (Ironically, he's the guy who started Bankman-Fried's fall from grace by calling him out on cozying up to U.S. regulators.)

In yesterday's suit against Binance, a little longer at 136 pages, the SEC similarly considered several crypto coins as securities. It was also more critical of Binance than Coinbase, alleging in the second sentence of the filing that Binance's leaders "enriched themselves by billions of U.S. dollars while placing investors' assets at significant risk."

This lawsuit against Coinbase doesn't read as strong, but it's still significant. It seems to be more about the SEC taking its biggest step yet into the conversation about what it considers securities in the cryptocurrency world. According to this suit...

This includes, but is not limited to, the units of each of the crypto asset securities... with trading symbols SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO...

The SEC also raised concerns about Coinbase's "staking" offers. That's where owners of certain cryptocurrencies agree to lock up their cryptos on a blockchain network for a set period of time in exchange for a reward.

The feds aren't happy with how Coinbase goes about it... For example, the company offers a "pro rata" return on staked coins and charges a 35% commission on staking rewards from crypto coins Cardano (ADA) and Solana (SOL). The SEC says this means Coinbase's staking program is a "common enterprise" and users are entering an "investment contract" – making these coins a security.

And, more broadly, the SEC says that Coinbase acts as a broker, exchange, and clearing agency all wrapped into one...

Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets.

All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk.

Here's what Crypto Capital editor Eric Wade has to say about it...

As regular Digest readers know, Eric and his team have been on top of the crypto-regulation story for years. Subscribers to Eric's Crypto Capital and Crypto Cashflow publications can expect a lot more analysis on this story.

But I checked in with Eric today to get his early thoughts on the news for all Digest readers. He told us the suit against Coinbase seems to be aiming in two directions: at coins that either pay a staking yield or can earn a yield by being lent out and, separately, the "unregistered securities." As Eric said...

Both are somewhat low-hanging fruit because the SEC hasn't really defined the rules, other than saying that their existing rules are all that anyone needs to know. (The crypto industry mostly disagrees and wants to fight this fight.)

But there's more to this one, and from our side (crypto industry) Gary Gensler looks like he's overreaching or trying to force the issue that he's in charge, when that is actually not entirely clear. What I mean by that is the SEC approved Coinbase's public listing not long ago!

That is a great point that struck me too while reading the lawsuit. Coinbase is a publicly traded company under SEC approval... Yet apparently, this company has been acting as an unregistered broker for at least four years and has been making "ill-gotten gains," as the suit suggests?

Stay tuned for more...

We'll have updates for you as the lawsuit progresses. And, in the meantime, our September 2021 essay on the crypto-regulation topic is a good primer on the arguments for and against crypto regulation. In the essay, Eric shared his strong opinions on if cryptos are securities...

I may be the last guy hanging onto the last thread of the last rope on this one as everyone else seems to be begging for the SEC to shackle America to more regulations... but I say NO. Not many of them are securities.

On the other hand, Stephen Wooldridge II, an analyst on Eric's research team, suggested that more people might be inclined to try cryptocurrency trading if it were more regulated, though that would be hard to do. As Stephen said then...

Crypto by its very decentralized nature is a hard thing to regulate, so it'll be interesting to see what the next year or two look like.

We're here now, two years later. And as Eric also told us today, the lawsuit is a public reminder of the unsettled issues...

One issue that we haven't entirely sorted out is what will be the effect of all this attacking with respect to getting money into and out of crypto. The cooling of fiat onramps and offramps may pinch retail users, but won't completely hamper the industry which, by the way, is currently worth over $1 trillion in market cap.

And we will have more updates here in the Digest as this story develops. In any case, new financial law is going to be made... eventually, given how long lawsuits can go.

Eric also touched on the topic of crypto regulation during his presentation at our Stansberry Research conference last October in Boston and in 2021 in Las Vegas. (By the way, we're returning to Vegas this fall for the 2023 conference. Find ticket, venue, and speaker information here.)

Moving on, here's another quick note on Saudi Arabia...

Yesterday, I wrote about how the Saudi government has gone rogue from the rest of the OPEC oil cartel and decided to cut its oil production by 1 million barrels per day. It's an effort to boost oil prices around the world so it can make more money.

I mentioned this because oil profits are critical to the Saudi government's spending plans, including a new desert city. I also nearly mentioned that in another part of its growth plan, Saudi Arabia's sovereign wealth fund has been bankrolling the controversial LIV Golf tour, a rival entity to the PGA Tour that offers golfers guaranteed money.

But, since its launch two years ago, it doesn't seem like LIV Golf has been making any money. It has had pitiful broadcast ratings and has been tied up in legal battles with the PGA Tour.

Well, just today, it turns out the Saudi Public Investment Fund has ditched its current golf business model and reached a deal to merge with the PGA Tour. The agreement ends their legal battles, brings Saudi investment into the PGA Tour, and gives the Saudi sovereign wealth fund the right of first refusal on new capital investments into the top U.S. and European professional golf tours.

You probably won't hear this opinion in many reports about this story, but I don't doubt that the state of oil prices today played a role in the decision. If prices were higher – for instance, above the Saudi government's estimated breakeven price of $81 per barrel – the two leagues might still be separate today.

Last but not least, today... remembering D-Day...

Our Stansberry NewsWire's Kevin Sanford wrote a timely piece today marking the 79th anniversary of D-Day. That's when Allied forces stormed the beaches of Normandy, France in the largest seaborne invasion in military history. The operation ultimately led to the liberation of France and Western Europe from the grip of Nazi Germany during World War II...

In our free NewsWire service today, Kevin shared five lessons investors can take from that historic day... and noted the economic influence of the invasion and the Allied victory in World War II.

Most notably, in July 1944, the U.S. took a leading role in establishing the Bretton Woods Institutions – the World Bank and the International Monetary Fund ("IMF") – founded on the idea that international cooperation was crucial for global economic stability and peace. As Kevin wrote...

Led by Secretary of the Treasury Henry Morgenthau Jr., his top economic adviser Dexter White, and British economist John Maynard Keynes, the architects of the Bretton Woods Institutions sought to create a framework that would prevent the economic imbalances and protectionist policies that had contributed to the Great Depression and ultimately led to the outbreak of World War II.

The World Bank focused on rebuilding war-ravaged countries, while the IMF was designed to promote global monetary cooperation and stability. As Kevin wrote...

The creation of these institutions marked a significant shift in global economic governance. They emphasized the importance of multilateralism, cooperation, and collective decision-making to address global economic challenges.

However, the global economic landscape today isn't what it was back then.

Kevin then explained exactly what he means by that... how the global political and economic landscape is different than in the period after World War II... and his thoughts on the timeless investing lessons that come to his mind when remembering D-Day. You can read the piece right here.

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In today's mailbag, some ideas on why electric vehicles ("EVs") could lead to higher produce prices... and more thoughts on a "recession or not"... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"EVs in any shape or form are a waste of money. The Rivian Truck tricked out how I would a gas- or diesel-powered vehicle starts at $92,000. If the truckers just band together and tell California to shove the EV mandate up where the sun don't shine, the politicians will get the message.

"But my gut tells me, the truckers are going to hopefully just leave, leaving the docks chuck full of stuff and no one to move it, first causing a shortage again of stuff, and second hopefully bankrupting the state of California so the fools in charge are finally thrown out of office.

"If this comes to pass, lettuce might cost 20 dollars a head. The agriculture industry in CA is OVER, and any company doing business will fold..." – Paid-up subscriber Monty B.

"Like a reader wrote. Just the thoughts are worth the price of subscriptions. Recession has been here for a while. Don't need idiotic talking heads trying to tell me otherwise.

"As far as the investment end: I'm still watching [price-to-earnings (P/E) ratios]. The tech P/E's are outrageous. Apple and Microsoft are great companies and make money and will continue that way – but at 30x earnings (Apple) or 36x (MSFT) or 208x (Nvidia).

"With a recession and no money to invest, all these and many more are going to crash unbelievably!!!" – Paid-up subscriber Dave F.

All the best,

Corey McLaughlin
Baltimore, Maryland
June 6, 2023