Coinbase Attempts To Get SEC Suit Dismissed; Senators Wyden, Lummis Question SEC

tomorrow could be big

Tomorrow is potentially a big day for digital assets.

Oral arguments will begin on Coinbase’s attempt to have the court dismiss the Securities and Exchange Commission’s suit against the company originally filed last June. Coinbase’s dismissal request was in August.

In a tweet thread at the time, Coinbase Chief Legal Officer Paul Grewal said, “Our core argument is simple — we do not offer ‘investment contracts’ as that term has been construed by decades of Supreme Court and other binding precedent.” Read that one.

The Wall Street Journal previewed the court drama within a glowing profile of Coinbase CEO Brian Armstrong over the weekend. Read the profile.

In discussing the prospects for dismissal, former SEC enforcement lawyer Lisa Bragança tells the WSJ, “The case is very unlikely to be dismissed… Coinbase is saying that the types of coins it lists on its platform are not securities, and that is going to be very hard for them to prove.”

But… doesn’t the SEC have to prove the “coins” are securities?

Coinbase chief financial officer Alesia Haas adds, “We are preparing the company for a variety of scenarios… We are investing in the future.”

more tips

4 possible outcomes for Coinbase’s Motion to Dismiss hearing tomorrow – MetaLawMan (James Murphy) on X

what you should know: A dismissal would be an enormous setback for the SEC – if it happened – and poke a significant hole in its mantra that cryptocurrencies are securities. Arguably, the implications for digital assets in the United States would be much bigger than approval of Bitcoin spot market ETFs. This would be a step forward in bringing digital assets underneath the umbrella of the U.S. financial system.

bipartisan letter – SEC hack

A bipartisan Congressional letter continued to put the Securities and Exchange Commission (SEC) and its Chair, Gary Gensler, on the spot (pun intended) for the alleged “hack” of its X account a day prior to approval of Bitcoin spot market ETFs last week. Senate Finance Chair Ron Wyden (D, OR) and Senator Cynthia Lummis (R, WY) asked for a full accounting on the disturbing “hack” of the regulator. See the letter (PDF).

Addressed to the SEC’s Inspector General Deborah Jeffrey, the Senators express disbelief as to why multi-factor authentication (MFA) was not used on the X account in spite of an internal mandate to do so.  They conclude “We urge you to investigate the agency’s practices related to the use of MFA, and in particular, phishing-resistant MFA, to identify any remaining security gaps that must be addressed.” Answers are due from the SEC IG by February 12.

Also last week, Republican leaders from the House Financial Services (HFS) Committee sent a letter of their own to Chair Gensler. A briefing by the SEC is due to be made to HFS staff by tomorrow.

what you should know: Will it be Senate Finance or the Republican-controlled HFS Committee with the first Congressional hearing on the alleged hack?

Gensler responds kinda

With the bicameral heat increasing, late Friday, SEC Chair Gary Gensler provided a bit more detail on the alleged hack of the SEC’s X account in a statement. Read it.

He noted that the hacker in question had published not just one, but two tweets – and deleted the second one after two minutes. Gensler’s statement tried to assure lawmakers, “While SEC staff is still assessing the scope of the incident, there is currently no evidence that the unauthorized party gained access to SEC systems, data, devices, or other social media accounts.”

more tips:

Exclusive: Senate Finance head calls for probe into hack of SEC’s X account – Axios

what you should know: As to who did it and why – and why the SEC did not use better security practices at the time – this has yet to be revealed. Also the SEC and Chair Gensler has made no mention of adopting multi-factor authentication (MFA) practices for its X accounts.

Sen. Warren letter – Coin Center

Just beating the Sunday deadline, Coin Center responded to Senator Elizabeth Warren (D, MA) Dec. 18 letter over the weekend as the Senator tries to make the case for revolving door politics in crypto companies while building support for her Digital Asset Anti-Money Laundering Act [S.2669], which the industry views as draconian.

Coin Center executive director Jerry Brito does not answer any of the Senator’s questions in the response and says, “With respect, we have no obligations to answer these questions beyond the public disclosures we make under the law.” See the response. More background here.

more tips:

Casinos and cryptocurrency: major drivers of money laundering, underground banking, and cyberfraud in East and Southeast Asia (Jan. 15) – United Nations

what you should know: One gets the feeling from the Coin Center letter that if Senator Warren or Senate Banking Chair Sherrod Brown (D, OH) plan on holding a Senate Banking hearing on the Senator’s employment requests of crypto companies and associations, this would be welcomed by Coin Center and Mr. Brito.

regulatory uncertainty kills

Gaming company GameStop has decided to get out of the NFT (non-fungible token) business and is blaming the government. From a statement on the company’s NFT website: “GameStop has decided to wind down our NFT marketplace due to the continuing regulatory uncertainty of the crypto space. Effective as of February 2, 2024, customers will no longer be able to buy, sell or create NFTs. Your NFTs are on the blockchain and will remain accessible and saleable through other platforms.”

Crypto publication Decrypt notes that GameStop shut down its digital wallet four months ago, so it’s unclear why they didn’t shut down their NFT efforts at the same time. Read more.

CSAM and crypto

CSAM, or child sexual abuse material, is the subject of new research from blockchain analytics firm Chainalysis. In the blog post titled, “CSAM and Cryptocurrency: On-chain Analysis Suggests CSAM Vendors May Benefit from Privacy Coins like Monero and Other Obfuscation Measures,” crypto mixers and privacy coins appear to be aiding and abetting criminals. Read the Chainalysis report.

The Chainalysis team suggest that even though not all CSAM involves crypto, the use of crypto with CSAM is becoming a growing problem. Tamsin McNally, Hotline Manager at the Internet Watch Foundation (IWF) tells Chainalysis “that they ‘find virtual currency is the dominant choice for buyers and sellers of commercial child sexual abuse content, so much so that we now have a dedicated crypto unit that works with law enforcement and the finance industry to help provide evidence for investigations.'”

more tips:

Child Abusers Are Getting Better at Using Crypto to Cover Their Tracks (Jan. 11) – Wired

what you should know: No doubt this will get the attention of Members of Congress such as Sen. Ellizabeth Warren (D, MA) who looks to bolster their case for better tracking of crypto through stricter anti-money laundering laws. The level of detail that Chainalysis shares in the blog post is impressive and speaks to how a blockchain analytics firm can potentially assist law enforcement in hunting down CSAM perpetrators. Also, how mixers and privacy coins survive government scrutiny and sanctions with use cases such as these circulating seems increasingly unlikely.

still more tips

House Financial Services Democrats’ shallow bench (Jan. 14 – subscription) – Punchbowl News

AI Has a Trust Problem. Can Blockchain Help? (Jan. 11) – The Wall Street Journal

Morgan Stanley: Spot bitcoin ETF approvals are a ‘potential paradigm shift’ in global view of crypto (Jan. 13) – The Block

Bitcoin Heads to Wall Street. Now What? (Jan. 11) – The New York Times

NYDFS Superintendent Adrienne Harris Announces $8 Million Penalty Against Genesis Global Trading After Investigation Finds Significant Failings in Anti-Money Laundering and Cybersecurity Programs (Jan. 12) – New York Department of Financial Services

Stablecoin firm Circle confidentially files for US IPO (Jan. 11) – Reuters

BlackRock CEO Larry Fink: Bitcoin ETF approvals are ‘stepping stones’ towards tokenization (Jan. 12) – CNBC