Crypto collapse: SEC takes on Terraform and Coinbase, ETF fallout continues, Tether is for crime

By Amy Castor and David Gerard

“good news. you know that dog you loved? the one who crossed the rainbow bridge?? I just put him on the Block chain where he can live forever”




SEC v. Terraform: all securities, fraud claims going to trial

The SEC sued Terraform Labs and cofounder Do Kwon in February 2023 for marketing unregistered securities to retail investors in the US, for lying to investors, for losing everyone’s money, and for stealing the Luna Foundation Guard bitcoin reserve.

New York District Judge Jed Rakoff issued summary judgment opinions on December 28. His opinions mostly favored the SEC. [Order, PDF]

The court determined that there was “no genuine dispute” that Terraform’s four crypto assets — UST, LUNA, wLUNA, and MIR — “are securities because they are investment contracts.”

The SEC’s theory is that if you build a system of tokens and promote it as number go up, then the parts of that system are likely to constitute securities. Judge Rakoff concurred.

The UST stablecoin was not a security in its own right — but it was promoted by Kwon and Terraform as a ticket to invest in the Anchor protocol, “with a ‘target’ of ‘20% fixed APR,’” and “undisputed evidence clearly demonstrates that UST in combination with the Anchor Protocol constituted an investment contract.”

The SEC has already cited the Terraform decision on UST in the Binance case, where it argues that Binance’s stablecoin BUSD is a security for similar reasons — BUSD was part of a complete ecosystem. [Doc 202, PDF]

The court also determined there was “no genuine dispute” that Terraform and Kwon sold the securities — most notably LUNA and MIR — in unregistered offerings.

Rakoff was deeply unimpressed with two of Terraform’s three expert witnesses — and with how Terraform tried to dismiss the testimony of the SEC’s expert witnesses. “Defendants also make the puzzling argument” is not a phrase you want to hear from your judge.

Terraform won a summary ruling against the SEC’s claims that the Mirror Protocol involved offering and effecting transactions in security-based swaps. But the SEC can live with that.

The trial will now focus on the fraud claims that the SEC brought against Terraform and Kwon.

The trial has been moved to March 25 so that Kwon, currently awaiting extradition in Montenegro, can attend. That’s if he gets sent to the US in time! [Order, PDF]

Coinbase: all my Beanies gone

The SEC sued Coinbase in June 2023 for operating as an unregistered securities exchange, broker, and clearing agency. The SEC claimed at least 12 tokens listed on the exchange were securities, as was Coinbase’s staking program.

Coinbase filed a motion to dismiss in August 2023. In a five-hour hearing on the motion on Wednesday, January 17, US District Judge Katherine Polk Failla posed questions to lawyers on both sides.

Coinbase’s lawyer argued the tokens in question were collectibles, akin to Beanie Babies or baseball cards, as opposed to investment contracts like stocks. “It’s the difference between buying Beanie Babies Inc. and Beanie Babies,” he said.

Neeraj K. Agrawal of Coin Center said: [Twitter, archive]

coinbase isn’t arguing that cryptocurrencies are just fun beanie babies so they should be left alone by the mean sec. only a fool would think that’s what they said

they are arguing that the sec’s definition of an investment contact is so broad it would make beanie babies securities too

Agrawal is correct that this would be a very dumb argument to make. Unfortunately, it’s literally the argument Coinbase themselves made in the August motion to dismiss that was being heard today:

On Coinbase’s secondary-market exchange and through Prime, there is no investment of money coupled with a promise of future delivery of anything. There is an asset sale. That’s it. It is akin to the sale of a parcel of land, the value of which may fluctuate after the sale. Or a condo in a new development. Or an American Girl Doll, or a Beanie Baby, or a baseball card.

(“funding my new startup by selling Stock Babies which are an asset just like a parcel of land, the value of which may reasonably fluctuate.” — Andrew Molitor)

Judge Failla asked whether Judge Jed Rakoff was wrong when he sided with the SEC in saying that Terraform Labs offered and sold unregistered securities. Coinbase wants the judge to follow the July 2023 Ripple ruling, where Judge Analisa Torres ruled that the sale of XRP on public exchanges complied with federal securities laws because purchasers had no reasonable expectation of profit based on Ripple’s efforts. (A ruling that many, including us, thought was completely nuts.)

Failla ended the hearing saying she would make a decision later. “I can’t decide this from the bench right now,” she said.

Coinbase general counsel Paul Grewal says the US exchange is still in pursuit of regulatory clarity! [Twitter, Nitter]

If Judge Failla denies Coinbase’s motion to dismiss the case — and we expect she will — the case will likely proceed to trial sometime in 2025. [Bloomberg, archive]

Crypto ETFs: collateralized rugpull obligations

Bitcoin is down 15% since the bitcoin ETFs were approved on January 10 — but the mechanisms of effect are tricky to trace.

Bitcoin trades 24/7, but ETFs only trade during stock exchange market hours. Outside those hours, there will frequently be a gap between the last ETF market price and a given moment’s bitcoin price.

Billions of dollars are going into ETFs — but billions are also going out. Some days show a net inflow of dollars to the ETFs and others show a net outflow.

We know that investors are cashing out of Grayscale’s GBTC as fast as possible now that they can — with $2.2 billion flowing out since the closed-ended trust became a two-way ETF. Some of that money seems to be circling back into other bitcoin ETFs.

When the shares are cashed in, the bitcoins backing those shares have to be sold. Even if Grayscale sells its BTC over-the-counter (OTC) via Coinbase Custody, that’s still going to push the bitcoin price down.

With ETFs, shorting bitcoin is now something you can do a bit more reliably — the WSJ notes that “speculators close out their bets and the price plummets.” The bitcoin price actually correlates with the Ark Innovation ETF, an ETF of speculative tech junk. [WSJ, archive]

VanEck already had a bitcoin futures ETF — but they’re shutting that down now that they have their spot ETF. [MarketWatch]

VanEck and Ark/21Shares have already proposed ether (ETH) ETFs. [Ark filing, PDF; VanEck filing, PDF]

ProShares is hard at work on making crypto ETFs stupider. As well as their existing spot ETF, they’re proposing cash-settled inverse ETFs — bets that go up when bitcoin goes down. Several of these are leveraged.

The names of ProShares’ new funds make them look even more like straight-up gambling than crypto already did — ProShares Plus Bitcoin ETF, ProShares Ultra Bitcoin ETF, ProShares UltraShort Bitcoin ETF, Proshares Short Bitcoin ETF, and ProShares ShortPlus Bitcoin ETF — but hey, as long as they file an S-1, apparently. Here’s to Moron-Backed Securities and Collateralized Rugpull Obligations. [FT, archive; prospectus]

Bloomberg’s Editorial Board thinks the SEC made a terrible decision in allowing bitcoin spot ETFs — this is not how to protect retail investors from a trash market. [Bloomberg, archive]

The use case for Tether

The United Nations thinks that tethers are widely used by criminals. The UN Office for Drugs and Crime (UNODC) published the report “Casinos, Money Laundering, Underground Banking, and Transnational Organized Crime in East and Southeast Asia: A Hidden, Accelerating Threat.”

The UNODC report points to USDT as one of the primary methods for money laundering in the region. It specifically points to the rising popularity of USDT on Tron due to its “stability and the ease, anonymity, and low fees of its transactions.” [Press release; report, PDF]

Separately, a new Chainalysis report finds that stablecoins like Tether were used in the vast majority of crypto-based scam transactions and sanctions evasion in 2023. [Wired, archive; Chainalysis]

David S. H. Rosenthal goes through what’s known about the nearly 100 billion tethers in circulation and concurs with Dirty Bubble’s claim that the guy who’s actually running Tether is iFinex shareholder Christopher Harborne. (Plus, presumably, a team at Harborne’s end.) [DSHR]

Meanwhile, Tether competitor TrueUSD is surely backed by something. Right? The real-time attestations paused again last week, though. Redemption hasn’t been reliable either. [Protos; CoinDesk]

We have rekt at home

SEC has shut down BarnBridge DAO, a “purportedly decentralized autonomous organization,” for selling unregistered securities to US retail investors.

BarnBridge was a DeFi protocol that allowed users to earn a fixed return on their deposit — by selling bonds. Tyler Ward and Troy Murray set up BarnBridge as a DAO in 2020, presumably to disguise that it was just the two of them running the project. From March 2021 to May 2023, the BarnBridge DAO sold SMART Yield bonds to retail investors — not governance tokens.

SMART Yield attracted more than $509 million. To settle the SEC charges, BarnBridge will disgorge $1.5 million and Ward and Murray will pay $125,000 in civil penalties. This is the first time the SEC has targeted a DAO. [SEC; order, PDF; order, PDF]

HyperVerse was a $1.3 billion crypto scam run by Sam Lee and Ryan Xu, founders of the collapsed Australian crypto company Blockchain Global. HyperVerse’s CEO, Steven Reece Lewis, turned out … not to exist.

HyperVerse seems to have used Cameo — a website that lets you pay celebrities to read a script for you — to get endorsement-like videos read by Steve Wozniak, Chuck Norris, Jim Norton, and Lance Bass.

Sam Lee denies having anything to do with HyperVerse, but also felt he had to claim it wasn’t a scam. [Guardian; Guardian]

A blockchain developer was approached with a job offer on LinkedIn. He was given a “take home” project to download and debug on his computer. Hours later, he discovered 0.225 ETH ($558) had been siphoned from his Metamask wallet. Shocked to hear that a blockchain developer might be of less than first-rate competence. [Bleeping Computer]

Good news for bitcoin

Venture capital investment in the crypto industry totaled just $9.5 billion last year, less than a third of what it was in 2022. But crypto VCs are currently sitting on investor funds they have to put out there sometime. Perhaps at “the intersection of blockchain and artificial intelligence.” [Bloomberg, archive]

Australian bank blockchain startup Lygon has gone broke. It was formed five years ago by ANZ, the Commonwealth Bank, Westpac, IBM, and Scentre Group, with the finest of 2019-era enterprise blockchain hype. The idea was to digitize bank guarantees to businesses — but on the blockchain! Nobody cared, and Lygon appointed an administrator in June 2023 and declared insolvency in late 2023 with AUD$14.3 million in debts. The company’s assets — mostly trademarks — were bought by senior management at one-tenth of their book value. []

The Venezuelan Petro was dead as of last May. Now it’s even deader — it’s finally been removed from its only exchange, Patria. The remaining petro tokens are being converted to Venezuelan bolivars. [Barron’s]

USDC stablecoin issuer Circle has filed confidentially for an Initial Public Offering. The IPO will take place after the SEC completes its review of the filing. [Businesswire]

Use case for blockchain found! Court service of a SIM-swap scammer on the bitcoin blockchain by sending an OP_RETURN message to the address with the victims’ bitcoins in it. [Krebs]

Celsius Network had 30,000 ETH staked in validators. They’re unstaking it now so they can distribute the funds to creditors. CoinDesk insists that dumping a mountain of ETH is good news for the price. This huge unstaking delayed everyone else who wanted to unstake by nearly six days. [CoinDesk; CoinDesk]

Apes can no longer set NFT profiles on Twitter! Never mind, you can always right-click and save. [TechCrunch]

Bloomberg has a nice profile on James Block, a.k.a. Mike Burgersburg of Dirty Bubble Media, after he marked Silvergate Bank for death two months before it collapsed. Block did in fact short Silvergate and make some money. Bloomberg thinks this was “The best short call of 2023.” [Bloomberg, archive]

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