Ep 13 - June 19, 2024 - Crypto Asset Securities
Welcome to another episode of the weekly crypto check-in recorded on June 19, 2024. I'm your host, Robert Swartout, and I'm joined by my co host, Andres Sandate. How's it going, Andres?
Andres Sandate:Hey, Robert. Good. Another busy week, in the summer. I thought that with my kids being out of school, things might slow down. It just feels like it's busy.
Andres Sandate:Kinda like what's going on in crypto land.
Robert Swarthout:Yeah. It's, you know, kind of a smattering of topics today, but it definitely is, busier than I would have expected for Yeah. You know, being in the middle of the summer.
Andres Sandate:Middle of the summer. Yeah. So
Robert Swarthout:let's jump in here. So the first topic we're gonna talk about is the SEC versus Ripple case. Late last week, Ripple submitted a supplemental notice of supplemental authority to the court. Basically, he's using the Terraform Labs consent judgment. You know, Ripple's using this because it helps their case of saying we should have a smaller penalty.
Robert Swarthout:Think everyone agrees that the penalty that rip that the SEC is asking for for Ripple is way out out of line. So maybe Ripple's using try to find more evidence to kind of prove its case here. It's, you know, so so that happened. Then a couple days later, the FCC wrote, like, a one pager back in reply to that and submitted it with the court. It it just reads as though they're stomping their feet.
Robert Swarthout:Like, it's just kind of, entertaining, I guess, oddly enough. And it's a, you know, it it it will be a interesting to see what the judge has to say at the end of the day. I or towards the end of the summer, I guess, is a, is a better way to put it. So we, kind of are I wouldn't say holding our breath, but just kinda waiting. It's a wait and see approach at this point.
Andres Sandate:Yeah. The the, you know, the SEC in this ripple case, I know his is one that you have watched closely now. It's going on several years. I've followed it now for over a year, and it's, it's such a cat and mouse type of strategy. It feels like the SEC is just determined to try to extract a pound of flesh, and almost at every turn, it feels like, you know, they're either dropping other cases or the crypto industry is evolving, like, while some of these legacy cases are outstanding.
Andres Sandate:Right. And it almost feels, to some extent, like, I don't wanna say a PR stunt, but, like, we've gotta figure out a way to sort of save face.
Robert Swarthout:Right.
Andres Sandate:I know I'm oversimplifying it, but there's certainly a lot of optics, probably at work with some of these legacy cases that have dragged on.
Robert Swarthout:Yeah. No doubt. You know, at the at the end of the day, you know, the SEC has lost the majority of this case already. This is the part of the case where we're trying to figure out the tail end, the judgment phase, or some of the remedies phase. So it's, you know, it's more of the same from the SEC, which I guess I appreciate their consistency.
Robert Swarthout:It just seems well out of, sort of reasonableness. Right.
Andres Sandate:Yeah. Yeah.
Robert Swarthout:So our sec second topic here, kinda didn't see this one coming. It's it's been a long thought that I've had for years about this stuff is first corporations and businesses would try to use blockchain, but they were wanting to do it a private way because they didn't understand the technology. So they'd run their own versions of blockchains, which in my opinion, in for the most part makes it totally not the point. You're just running another database is all it is. So the BlackRock CIO was quoted recently as saying that a few years ago, we, thought private permission blockchains would lead.
Robert Swarthout:Basically, be be what's used. Mhmm. We now realize public blockchains are better. So wow. I mean, granted BlackRock has made a ton of news this year, after the ETF and then the then the, you know, they've made investments in other companies, and then they have continued to kinda just push the envelope in tokenization.
Robert Swarthout:So this is a bit more of the same for them, but, like, it's cool to hear it from someone else beside Larry. And Yeah. At the end of the day, it's a, to me, it's a no duh moment. I didn't think I would be saying no duh in 24. I figured this would be like a 26 or 27 type statement.
Robert Swarthout:So I was quite surprised in a in a great way.
Andres Sandate:Yeah. I was I you know, I I've been reading a lot more about the couple things that are happening in crypto land. Like, one, we've talked about this the last few times, about institutional adoption of crypto and some of the public filings that have come out about whether it's companies or pensions that are obligated to report and just their holdings. And I think so I've been trying to follow more of that and then also just the statements of other folks that maybe come from traditional finance or that are coming from some of these bigger asset management firms that are now recognizing the, size, magnitude, scope, opportunity, what what have you. Mhmm.
Andres Sandate:And this to me is, you know, is is very interesting because of the the the seniority of the executive and, like you said, the Larry Fink. So there's it it is just really interesting because these are public companies that are making comments, and, you know, it's out there. So I I just think the ball is rolling now, and we're seeing, you know, more and more, momentum on Capitol Hill around legislation. And it it just it feels like this is a different moment than in 2, 3 years ago.
Robert Swarthout:Right. Or even, heck, 6 months ago for that matter. Yeah. Like, you you barely are in 24 before all this stuff started happening. So, anyways, the next topic is kind of an update on the Ethereum ETFs.
Robert Swarthout:So they are 19 b's are approved. The s ones are going through revisions. It sounds like the last set of revisions were very light on the s ones back to the issuers. So we're getting close, it sounds like, and, Eric from Bloomberg, he has put his stake in the stand to say he thinks July 2nd is the 1st trading day of these ETFs. So we're getting close.
Robert Swarthout:We're just a little over a week out at this point, and I know it's it I don't think it's gonna be a fireworks moment No. Per se, but it'll be this the first day of trading. That's that's probably will be a great way to sum it up. So Right. But it's a
Andres Sandate:it will be more market coverage. There will be, you know, just just a lot more awareness. The media will will surely have, its, you know, take on, you know, the the the moment, and the talking heads will will, you know, get on TV. But I'm I'm really also curious to see, you know, what is the impact on inflows to Bitcoins, you know, Bitcoin ETFs? We've seen some negative, inflows Mhmm.
Andres Sandate:Here recently. And I wonder if the sentiment public sentiment that if this doesn't have the type of mass adoption that we saw from, you know, from crypto investors like we did with BTC. Are they gonna, quote, unquote, label it a failure, which it isn't. It's, it's something to watch Yeah. This technology.
Robert Swarthout:That will be interesting. I you know, I'm hoping more of the narrative is around, oh, this is something you can add to a Bitcoin portfolio that is only Bitcoin right now to add some diversification. Yeah. And I would love for start hearing what the sales pitch on this thing is gonna be because I still don't understand it myself. Well, I understand Ethereum.
Robert Swarthout:I don't understand the sales pitch that's gonna be 30 seconds. So it can be a lot of different things to a lot of different people. So at a minimum, it's just a divert the it's a diversification tool. So Sure. Our 4th thing here, the market structures bill.
Robert Swarthout:So we've reviewed this, probably 2 or 3 podcasts ago. It was, the FIT 20 1 bill is the Financial Innovation Act for the 21st century. It's got like a sentence long name, but it's referred to as FIT 21. You know, it surprised me. And early on, it got, approved in the house, went went to the senate.
Robert Swarthout:We knew there was some work that needed to happen on it in the senate, so it it would have to come back to the house, you know, and then it congress went on their break. And, admittedly, I think that was good in this case because this thing is not ready, like I just mentioned, to be passed. It's got some, admittedly, some problems with it that the crypto industry does not like.
Andres Sandate:Mhmm.
Robert Swarthout:And, you know, so then you have you overlay some attorney opinions that happened to be on Twitter, and and Jake Trubinski, he basically, he's been tooting the horn the whole time. He's like, this thing is not happening at all this year. Don't get too excited. And he's like, it's 2025 before we get any sort of structure if Biden is not reelected. So, you know, it's unfortunate that it may become a partisan issue, but, up until this point, it has been, partisan slash more of an age skew to it as well.
Robert Swarthout:So Yeah. It's, I don't know. I look forward to being at a political season because I'm already tired of hearing about it just generally. And, and then maybe we could get some positivity in crypto, with market structure after that. So
Andres Sandate:Well, yeah, there's no doubt the market, the the market does like clarity. I think there tends to be a lot of folks that, in in past election cycles, there tends to be a lot of retail concern that there's gonna be, you know, a change in the administration. For example, like presidential administration is gonna, you know, be bad for the markets. We have seen more of the business community, starting to it feels like, not all, but more starting to align around a Trump administration. That doesn't necessarily mean he's gonna win.
Andres Sandate:It's just that I think that there are more and more, of the the fortune sort of 500, you know, public company CEOs starting to sort of align around his his, policy. And yet, I mean, I think without even looking at polls, I think it's still very much a toss-up. You know? It's it's it's so unsure uncertain which which way it's gonna go, and this is gonna just be an up and down market, you know, in my estimation for crypto for the time being. And I'd I'd be surprised if we get much less legislation, you know, until the market clears, unless one of these bills, you know, when they come back from recess, some for some reason, gathers some momentum.
Andres Sandate:Right. Absolutely. But it wouldn't be an update without something about our friend Gary Gensler.
Robert Swarthout:Right. Yes. What did he do now, Robert? Yeah. This guy, he he's a bit of piece of work.
Robert Swarthout:So, you know, in the spirit of we need regulation so we can just have clear rules of the road. Gensler, obviously, the head of the SEC, has made up this phrase slash term that he likes to use. He's used in the past, and he still continues to use it. It is crypto asset security. So there's nowhere in law that defines this at all.
Robert Swarthout:So he's made it up. He was sharing this to congress as if it's, like, the law in front of them with some testimony. And it's just, like, he's been called out on it, like, and he just, you would think that he just lives in a bubble, and maybe he does. But that is he hears no nothing from the outside world. And based upon the the way the SEC is handled also in this reversal on the ETF launch for Ethereum, you it felt like they were maybe changing course a little bit.
Robert Swarthout:They weren't gonna say that they were wrong all along. It's certainly not gonna happen. But, like, you have this moment in time, then he kinda comes out and uses this phrase again. It's kinda like, you you can't have it both ways. Like, at least he's trying to at least, and it just blows my mind.
Robert Swarthout:So Yeah.
Andres Sandate:I think he does want to have it both ways. And, yeah, it's it's sort of like the analogy of calling like, coming up with a new name for, say, a mutual fund or, like, a new name for an exchange traded fund, you know, because you wanna come up with a new name. And and so Not
Robert Swarthout:just new name. You wanna come up with the rules that also govern that new name. Right.
Andres Sandate:Right. Yeah. So calling it a security when there's no clarity whether it is a security or not. So yeah. It's a it's a mouthful.
Andres Sandate:Crypto asset securities.
Robert Swarthout:Right. And it's just like, why do we have to play this game? Like, it just seems silly. So, anyways, we're we're gonna move on. So some news out of Europe, which I found pretty fascinating.
Robert Swarthout:So USDT, is the stable coin that is the biggest by market cap. It's backed by dollars or dollar vehicles. And, they are getting delisted on exchanges that work in Europe because USDT and I believe it is let's see. 1, 2, 3, 6 others or 6 including USDT, as of July 1st will not be tradable on Uphold for European customers. They're telling me to convert all those different 4 assuming all 6 different of those into USDC because it is, you know oh, USDC and 2 others.
Robert Swarthout:One's a euro one and one's another dollar one. But to stay, I'm not surprised this is happening. I'm because Mika is going into effect. There's no doubt about that. Mika is the framework that they put a lot of time into.
Robert Swarthout:They've been rather forward thinking in Europe, and it's great to kinda see it. What will be interesting to see is does USDT slash Tether, the company behind it, do they figure out how to get in line and become compliant, or are they just gonna slowly bleed off and, you know, once the US has its regulations, it probably get delisted here, and does it become the, you know my guess is it would go to z not 0, but it would just kind of bleed off at that point, over time, because no none of the big markets would use it. Then, also, no, it would be probably the term term like the drug money again and all that other bullshit. So, anyways, it's a, you know, interesting news news tidbit, I guess.
Andres Sandate:The just picking up on that, in terms of just the broader, just the broader adoption for crypto. This is more a question opinion question than than necessarily asking you to weigh in on, you know, is is a reaction I guess, a reaction. When you look at the the Mika frameworks and you look at Europe relative to the US, you I know you have often said that innovators in this space will move offshore. They'll move to jurisdictions where they can operate, not to break the law, but just where there's more clarity. Right.
Robert Swarthout:So they don't rule that.
Andres Sandate:Yeah. When you look at Europe and this and this action, do you think that's a step back for them, or do you think it's a step forward for them overall as far as the European, regulatory, bodies with this crypto?
Robert Swarthout:I I think it's a step forward. I just generally like Mika passed, I think, late last year, and then there's this period of the member states have to, you know, basically put put it into practice. I I if I haven't read the the law that is NECA. I'll be very clear about that. But I've read people that have got opinions about it.
Robert Swarthout:And I think that generally it's regarded as well thoughtful. They spent the time to do it the right way. And, you know, when you have that many different countries having to basically come to an agreement on a law that's gonna basically govern them, it's actually quite the accomplishment. It's not a single country coming up with it. It's obviously a group of countries.
Robert Swarthout:So I think that it's a, it's a positive. You know, there there's parts of Europe, and the EU to me that don't, emphasize privacy enough. And I think that there's parts of Mika, and this is maybe a part of it where privacy was, you know, not for, the the first thing they thought about, and it was something else. They're just so worried about all these others supposedly bad things that happen with money, and they, you know, wrote the laws the way they did. It's obviously can be changed over time, but, generally, I think people you don't hear much squawking around, like, oh, we want Mika to change.
Robert Swarthout:Right now, all the squawking here is we actually want some rules in the US. So
Andres Sandate:Yeah. Yeah. I'm hopeful that that Europe and other jurisdictions can serve as a model. I know the US style and our, you know, our our our approach is typically we're gonna do this our way. We're gonna do it, you know, but it just feels like there's there's so many other, jurisdictions and regions of the world where, there's been adoption.
Andres Sandate:There's been more of a forward thinking, collaborative approach to getting things done. I sure do hope, you know, the second half of this year or going into next year once maybe it's political, maybe it's elections, maybe the clarity is not there right now. But I sure do hope, you know, early next year, if we have to wait that long, that we get real serious about trying to get some legislation in place.
Robert Swarthout:Yeah. You know, it's a it'll be an interesting time. That's, probably where I'll leave this one. But it's a, it can be confusing. It can be frustrating, but somebody did tell me about a year or 2 ago, remind well not not so much told me.
Robert Swarthout:It reminded me that you can be reassured that Congress is gonna try all the wrong options before they try the right option. So, so we are working through I don't know. Maybe some bad options right now. Yeah. So anyways, so our last topic here is the SEC this, announced it is not gonna pursue a case against Ethereum, for being an unregistered security.
Robert Swarthout:I I'm blown away that we're talking about this in June of 24. Anything about it. They announced it not even 6 months ago that they were potentially gonna do a case. Maybe a Wells notice was coming. Consensus, one of the companies in the Ethereum space, founded by one of the cofounders of Ethereum, preemptively sued the SEC.
Robert Swarthout:It just seemed like, here we go. We're gonna have it. This is Ripple SEC version 2, and it's nothing but the opposite. It's it's actually mind blowing why this happened. So if you if you kinda understand that the timeline that is the Ripple SEC case, they filed that lawsuit in December of 2020.
Robert Swarthout:There's still it it got, the, the judge's paper ruling in July of 2023, and we're here we're almost a year out from that now and almost at the tail end of the case if nobody, decides to appeal. So you're talking all of almost 4 years. This happened in less than 5 months. Nothing the SEC has done with crypto has ever been that fast outside of their switcheroo on the Ethereum ETF launch. So you have both of these.
Robert Swarthout:It just seems so suspect to me. It you know, and I was telling you off air that I actually have the opinion not not to be like tinfoil hat conspiracy theory here, but it's, you know, it feels like they announced they were gonna do a lawsuit, and then they dropped it just so they could say they looked into it and they can brush their hands of it and move on. I I can't imagine much of anything happened in 3 months that they already didn't know. So I don't know. It's a, it's puzzling.
Andres Sandate:Yeah. What I think is fascinating is you had all these Ethereum applications for ETFs go through. They're sitting there. They're getting comments. They're getting revisions.
Andres Sandate:This case is in the background. You sort of look at the SEC from the outside and you say, isn't this one organization? Like, one organization's man like, one one mandate within the organization is provide clarity, you know, opine on new securities, new offerings, you know, the whole process of these ETFs. And then on the whole other side of the building, it's almost like there's this Mhmm. Completely separate group of folks running this enforcement division around, an agenda of we're gonna sue everyone, We're gonna call all these securities until you prove otherwise.
Robert Swarthout:Mhmm. That, you
Andres Sandate:know, we're gonna go down this process with the courts. We're gonna then expect to extract big fines. So if we lose in court, then we can at least get a big fine. It's just amazing. Like, to your point, like, should we be surprised?
Andres Sandate:I don't know. But is it, like, the most effective and efficient use of taxpayer dollars? Like, it just seems
Robert Swarthout:Mhmm.
Andres Sandate:I don't know. For me, the conspiracy theory is, like, now you have big dollars on Wall Street and the influence the the average investor, it's hard for them to not think that those folks control what's going on.
Robert Swarthout:Absolutely.
Andres Sandate:Because the moment right now, you got these you got Bloomberg expert predicting June or July 2nd. Like, that's record time for ETFs with this backdrop. So Right. What else are you left to believe than it's just big money calling the shots?
Robert Swarthout:Yeah. Coin flip. I mean, it just there's no predictability. That's the problem.
Andres Sandate:Yeah.
Robert Swarthout:So it's a different attorney on Twitter that follows the crypto industry tweeted, which I found pretty fascinating. This is metal law man. This is Twitter handle. He's because the SCC in the Coinbase case has been fighting that a digital asset plus an ecosystem equals a security. That's been their argument.
Robert Swarthout:Is whether you like it or not, that's argument. But now they just acknowledge that Ethereum is not a security. Okay. So never mind. We're just kidding.
Robert Swarthout:Like like, where where does this leave us? It it just it it actually creates more confusion in the market than it did have they just, like, not done anything. Mhmm. So it's, I I and I also don't understand, like, you you would think that Gary cares about his reputation. Like, maybe he doesn't, because what he's doing, but, like, you would think he cares about it.
Robert Swarthout:And, like, running a business effectively that is all over the place, it appears to have, you know, functionally no control or no clear thinking. Is it ultimately reflects on the leader, him. And this is like, did he just wanna come in and ruin his reputation over the course of 3 years? Like, maybe. If he did, he's done an amazing job at that.
Robert Swarthout:So I
Andres Sandate:don't know. At least in that yeah. At least in the eyes of crypto and, you know, whether whether, you know, the ultimate irony here would be if, you know, in a year or 2, he's working at a big, you know, crypto firm or do something pro crypto. I mean, now he's the expert. It's it that would be the ultimate irony.
Andres Sandate:We've seen that happen before with regulators, you know, going going, on the other side of the table, if you will. Yeah. I, yeah. I I mean, it it's just it's such a legal, like, not illegal, but it's such a regulatory drama when, you know, when people think of regulators, you know, you think, okay. Too much regulation is not good for business.
Andres Sandate:In this case, like, just a lack of actual clarity, what seems like a lack of a coherent strategy, a lack of alignment within the organization around priorities. Like, it just yeah. It it's just it's it's ultimately like like you said, it's confusing. It doesn't make any sense. It's a complete head scratcher.
Andres Sandate:Oh, you know, you just love you'd love to have been on the other end of some of those conference calls and letters and things. Whether or not any of that stuff ever becomes public, who knows? But, you have to think there's been an an an intense amount of backroom dialogue, lobbying, handshaking. Who who knows what it's called for this flip to have happened, like, amidst, you know, these ETFs getting ready to be approved and mass adoption. Right.
Andres Sandate:With retail now being able to, you know, own Bitcoin in their brokerage account.
Robert Swarthout:Yeah. I don't know. It's, I can't wait to, like, be, I don't know, a year or 2 out, maybe 5 years out, and, like, reflect on this time and, like because then you'll have the full history. Right? Right now, we're kinda obviously in the middle of it.
Robert Swarthout:Yeah. Like, think, like Kinda predicting like, what were we thinking moment? What were they thinking moment? Like, it's gonna be fascinating. So
Andres Sandate:Yeah. Anyways Yeah. Awesome. Well, thanks
Robert Swarthout:for joining us on this episode of the Weekly Crypto check-in. If you want to stay updated on future episodes, you can find us in any podcast player by searching Teton Crypto Capital or the weekly crypto check-in. Take care.
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