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@JohnReedStark - John Reed Stark
Trying to Explain Why Bitcoin’s Price Continues To Rise Is Like Trying To Describe The Clothing Worn By Poltergeists For crypto: There's no inherent value. There's no cash flow. There's no yield. There’s no employees. There’s no management. There’s no balance sheet. There’s no product. There’s no service. There’s no history of operations. There’s no analytical valuations. There’s no earnings reports. There’s no proven track record of adoption or reliance. There’s no data of any kind except for analytics relating to crypto speculation, which are inherently suspect (e.g. the reported 90% likelihood of the SEC’s approval of a bitcoin spot ETF, which is absolutely absurd). Crypto prices go up for two reasons: First, because there is no regulatory oversight to prevent market manipulation and Second, because people are able to sell hyped, FOMO’d and overpriced crypto to a "greater fool," whether or not the crypto is overvalued. That is, of course, until there are no greater fools left, and then it all comes crashing down. Crypto has failed miserably in its mission to serve as cheap online cash; failed miserably in its promise to solve the problem of financial inclusion; and failed miserably in its goal to evolve into a true store of value. Nonetheless, crypto keeps on reinventing itself while its manipulation by a few Big Crypto fat cats keeps the celebration going. The stark reality is that terrorism, crime and pure speculation are the only actual crypto utilities. Yet, crypto enthusiasts continue to promise that crypto must be the solution to something - but precisely what remains a mystery. https://www.wsj.com/finance/currencies/binance-guilty-plea-shows-what-cryptos-really-about-f84200a3?mod=series_cryptobitcoindogecoin
@JohnReedStark - John Reed Stark
The SEC’s Crypto-Sweep Continues: Yesterday, The SEC Got Kraken, Filing a 90-Page Enforcement Action Against the Well-Known Crypto-Exchange Beneath yesterday’s dueling headlines of the ill-fated/botched ouster of Sam Altman and a rumored US DOJ deferred prosecution agreement with Binance, the U.S. Securities and Exchange Commission (SEC) quietly filed yet another major and comprehensive crypto-related enforcement action, this time charging cryptocurrency exchange Kraken in California federal court. The SEC enforcement action against Kraken alleges that Kraken is operating as an unregistered securities exchange, broker-dealer and clearing firm, while taking in "billions of dollars" in fees and trading revenue. U like the SEC's case against Binance, the SEC does not allege any fraud-related charges and does not seek an asset freeze or emergency temporary restraining order. https://www.reuters.com/business/finance/us-sec-sues-kraken-operating-crypto-trading-platform-without-registering-2023-11-20/ In their 90-page federal complaint, the SEC specifically alleges that, without registering with the SEC in any capacity, Payward Inc. and Payward Ventures Inc., which collectively do business as Kraken, have simultaneously acted as a broker, dealer, exchange, and clearing agency with respect to these crypto asset securities, creating risk for investors and taking in billions of dollars in fees and trading revenue from investors "without adhering to or even recognizing the requirements of the U.S. securities laws that are designed to protect investors." https://www.johnreedstark.com/wp-content/uploads/sites/180/2023/11/KrakenCmplaint.pdf Per Gurbir S. Grewal, Director of the SEC’s Division of Enforcement: “We allege that Kraken made a business decision to reap hundreds of millions of dollars from investors rather than coming into compliance with the securities laws. That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk. Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space, and today we’re both holding Kraken accountable for its misconduct and sending a message to others to come into compliance.” The SEC’s complaint, filed in federal district court in San Francisco, alleges that Kraken violated the registration provisions of the Securities Exchange Act of 1934 and seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties. This is the second SEC enforcement action against Kraken. Back In February of this year, Kraken agreed to cease offering or selling securities through crypto asset staking services or staking programs and pay a civil penalty of $30 million. https://www.sec.gov/news/press-release/2023-25 The SEC Allegations Since 2013, Kraken has operated an online trading platform through which its customers can buy and sell crypto assets, many of which the SEC asserts form the basis of investment contracts covered under U.S. securities laws. In addition to the alleged registration violations, per the SEC, Kraken’s business practices, deficient internal controls, and inadequate recordkeeping present a range of additional risks that would also be prohibited for any properly registered securities intermediary. For example, the SEC alleges that Kraken has at times held customer crypto assets valued at more than $33 billion, but it has commingled these crypto assets with its own, creating what its independent auditor had identified in its audit plan as “a significant risk of loss” to its customers. Along the same lines, the SEC alleges that Kraken has held at times more than $5 billion worth of its customers’ cash, and it also commingles some of its customers’ cash with some of its own. In fact, the SEC notes that Kraken has at times paid operational expenses directly from bank accounts that hold customer cash. In addition, during 2023, the independent auditor determined that issues related to Kraken’s recordkeeping for customer custodial assets had resulted in material errors to Kraken’s financial statements for 2020 and 2021. The SEC charges that Kraken turned a blind eye to its legal responsibilities and engaged in its securities intermediary conduct without registering with the SEC, depriving investors of the disclosures and protections that registration entails. The SEC argues that by failing to prevent known conflicts of interest and commingling its investors’ assets with its own, Kraken demonstrates why registration and the investor protections that come with regulatory oversight are critical to the soundness of the United States capital markets. In short, the SEC charges that Kraken has placed their own financial interests ahead of the legal obligations they owe to customers as securities intermediaries, failing to register as an exchange, a broker, a dealer, and a clearing agency without registration in violation of Exchange Act Sections 5, 15(a), and 17A(b) [15 U.S.C. §§ 78e, 78o(a), and 78q-1(b)]. The SEC seeks a final judgment: 1) Permanently enjoining Kraken from violating the federal securities laws; 2) Ordering Kraken to disgorge their ill-gotten gains, on a joint and several basis, and to pay prejudgment interest thereon; 3) Permanently enjoining Kraken from acting as an unregistered exchange, broker, dealer, or clearing agency; and 4) Imposing civil money penalties on Kraken. Kraken’s Defenses Kraken rolled out the usual spate of crypto-talking points, telling Law360 that: "For years, we have advocated for effective U.S. market regulation that addresses the unique risks and benefits which crypto presents to all individuals. We believe Congressional action is the most appropriate path to resolving the lack of regulatory clarity in the U.S. It is disappointing to see the SEC continue down its path of regulation by enforcement, which harms American consumers, stunts innovation and damages U.S. competitiveness globally." https://www.law360.com/securities/articles/1768836/kraken-is-running-unregistered-crypto-exchange-sec-says Meanwhile, Wyoming Senator Carol Lummis, a frequent (and IMHO, shameless) crypto shill also chimed in, singing the same tune as Kraken: “The SEC cannot continue ruling by enforcement. Crypto asset companies have repeatedly tried to get guidance from the SEC only to be hit with enforcement actions, causing unnecessary harm to consumers. It is time for Congress to pass a regulatory framework to provide clear rules to the SEC on what is a security and what is a commodity. The Lummis-Gillibrand Responsible Financial Innovation Act will rein in the SEC and allow financial innovation to thrive in the United States.” https://x.com/SenLummis/status/1726768494069354545?s=20 Kraken’s/Lummis’s tired and painfully transparent pivots have already been thoroughly debunked, time and time again. But it still makes sense to take some time to unpack and address each of their defenses seriatim -- and I do so below ad nauseam (in typical TLDR fashion). 1. The SEC Has Failed to Provide Meaningful Crypto-Guidance. Nope. Citing the lack of crypto-related SEC regulatory clarity is a bogus Big Crypto catchphrase and losing legal defense. Despite its pervasiveness and bluster, the laughable Big Crypto tagline calling for regulatory clarity is nothing more than a desperate deflection and noxious red herring. Intended to sidetrack and dissemble the plain truth — that the crypto-emperor has no clothes — the regulatory clarity and SEC hit-pieces are pure subterfuge, and an impulsive and frantic attempt to appeal and co-opt fundamental notions of fairness, liberty and freedom (which most people cherish and hold dear). Here’s why: Securities regulation is not meant to be precise but is instead intentionally drafted to be broad and all-encompassing; clarity is not just uncommon, it is deliberately avoided. Regulatory clarity is anathema to securities regulation. Securities regulation is rarely prescriptive but is a principles-based regulatory framework, much like other U.S. laws. For example, U.S. laws do not specify that one cannot steal a neighbor’s lawnmower from their garage, but rather prohibits the theft of someone else’s property, which covers all things, including lawnmowers. The same goes for securities regulation. This is why the definitions of “security” in Section 2(a)(1) of the Securities Act of 1933 (Securities Act), 15 U.S.C. 77b(a)(1), and Section 3(a)(10) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. 78c(a)(10), include not only conventional securities, such as “stock[s]” and “bond[s],” but also the more general term “investment contract.” Along these lines, in Reves v. Ernst & Young, the Supreme Court stated that: “The fundamental purpose undergirding the Securities Acts is ‘to eliminate serious abuses in a largely unregulated securities market . . . In defining the scope of the market that it wished to regulate, Congress painted with a broad brush. It recognized the virtually limitless scope of human ingenuity, especially in the creation of ‘countless and variable schemes devised by those who seek the use of the money of others on the promise of profits, SEC v. W.J. Howey Co., 328 U.S. 293, 328 U.S. 299 (1946), and determined that the best way to achieve its goal of protecting investors was ‘to define the term “security” in sufficiently broad and general terms so as to include within that definition the many types of instruments that in our commercial world fall within the ordinary concept of a security.’ . . . Congress therefore did not attempt precisely to cabin the scope of the Securities Acts . . . Rather, it enacted a definition of ‘security’ sufficiently broad to encompass virtually any instrument that might be sold as an investment.” (emphasis added) When SEC Commissioner Hester Peirce recently complained to CNBC of the need for “regulatory clarity” in the crypto space, one Twitter user quipped, “[Hey Hester], Is someone suggesting that the ‘don’t steal your customer’s money’ rule isn’t clear?” https://x.com/whittomd/status/1591226469585682433?s=20 In other words, fraud is fraud, whether committed on the bustling trading floor of the New York Stock Exchange in 1929, amid the basement confines of a Long Island New York boiler room in 1980, or within the borderless virtual landscape of a high-tech crypto-trading platform in 2022. As Supreme Court Justice (and former SEC Commissioner (1935) and Chair (1936-37)) William O. Douglas opined in Superintendent of Insurance v. Bankers Life and Casualty Co.: “We believe that section 10(b) and Rule 10b-5 prohibit all fraudulent schemes in connection with the purchase or sale of securities, whether the artifices employed involve a garden type variety fraud, or present a unique form of deception. Novel or atypical methods should not provide immunity from the securities laws.” From policing foreign bribery payments (before the Foreign Corrupt Practices Act) to municipal securities fraud, to derivatives and insider trading, to prime bank frauds, the SEC has addressed emerging regulatory issues without the benefit, or the hindrance, of precise proscriptions. Instead, the SEC has relied on the general proscriptions of the federal securities laws and applied them with practicality, soberness, and prudence. Hence, since its inception, the SEC has typically adopted a reasonable and necessary application of the basic requirements of the federal securities laws to new and evolving market conditions and technologies. Merely because no blackletter rule exists does not somehow violate due process or render the SEC’s efforts into ex post facto punishment. Like financial markets, prudential regulation must remain flexible, adaptive, and evolving. 2. The Cryptoverse Needs Regulatory Clarity. Nope. Although SEC regulations are primarily principles-based and not proscriptive, that does not mean that the crypto marketplace lacks clarity of existing statutes, rules, and regulations. In fact, the reality is precisely the opposite. https://www.linkedin.com/pulse/why-coinbase-binances-fair-notice-defense-fail-miserably-stark/ With respect to digital tokens and digital assets, never in its history has the SEC taken such drastic measures to make its views known. Along these lines, the SEC has used multiple distribution channels to share its message and concerns regarding crypto, digital trading platforms, initial coin offerings, and other digital asset products and services. For instance, with respect to crypto generally, the SEC has publicized its position through countless enforcement actions, multiple speeches, a series of Investor Alerts, a rare Section 21(a) Report of Investigation, staff guidance, Congressional testimony, and several official SEC statements and proclamations. (See detailed discussion at: https://sites.duke.edu/thefinregblog/2022/11/28/big-cryptos-bogus-demands-for-regulatory-clarity-2/ In fact, former SEC Chair Jay Clayton engaged in an unprecedented multi-year crypto-tour, always speaking bluntly and thoughtfully about the need for digital token offerings to be registered and addressing the many misconceptions in the digital asset marketplace. Speaking at a legal gathering in January of 2018, Clayton even went so far as to admonish the lawyers counseling clients engaged in digital coin and token offerings and current SEC Chair Gary Gensler gave a very similar speech in late 2022 at the annual SEC Speaks securities regulation conference. Additionally, Chair Gensler has often spoken about the perils of crypto lending platforms and decentralized finance in his speeches, warning that their failure to register with the SEC may violate U.S. securities laws. In fact, in an extraordinarily frank interview with Yahoo! Financial News, Gensler warned crypto exchanges that they are not just on his radar, but they have fallen squarely within his sights, stating: “The law is clear, it’s not about waving a wand. Congress spoke about this in 1934 . . . When a [digital] platform has securities on it, it is an exchange, and it’s a question of whether they’re registered or they’re operating outside of the law and I’ll leave it at that.” https://ca.finance.yahoo.com/news/crypto-platforms-dont-register-with-sec-outside-the-law-gensler-164215740.html To claim a lack of clarity and meaning amid such a concerted SEC effort for crypto-related transparency, notice, and candor seem not only disingenuous and ill-advised — but just plain foolish. 3. The Kraken Prosecution is Another Example of Rogue SEC Regulation by Enforcement. Nope. Charging Kraken, Coinbase, Binance, Beaxy, etc. with securities violations is not "SEC regulation by enforcement," it's just plain-old SEC Enforcement. With every new high-tech advancement, those whose behavior was questioned have quipped: “Why didn't the SEC tell us that this behavior is illegal?” They argue that if there is no blackletter rule, the government has failed to provide Fair Notice and violated hallowed Due Process rights, reflecting a misguided or even nefarious bureaucratic proclivity to expand power and broaden jurisdiction. But the SEC’s approach is rarely improperly expansive, nor does it involve rogue SEC enforcement efforts or a lack of Fair Notice. Rather, the SEC typically adopts a reasoned, common-sense application of the basic requirements of the federal securities laws to new and evolving market conditions and technologies. The same goes for SEC enforcement efforts relating to crypto and all the rest of the increasingly dangerous Web3 variants, many of which threaten not just individual investors but all global capital markets. That securities laws on the books adapt well to technology should come as no surprise – they were drafted with that specific notion in mind. Per Reves v. Ernst & Young (cited above) and countless other precedent, judges have agreed that Congress never meant to "cabin the scope" of securities regulation but instead, crafted definitions to contemplate not only known securities arrangements at the time, but also any prospective instruments created by those who seek the use of others’ money on the promise of profits. Litigation and SEC enforcement are actually how securities regulation works. The flexibility of SEC statutory weaponry is an SEC hallmark, enabling SEC enforcement to keep fraud in check. Some History In 1998, when the SEC Office of Internet Enforcement was created, critics dwelled on the same humdrum of complaint, i.e., the vagueness of SEC regulation; the lack of clarity about what is a security; and “regulation via SEC enforcement” would stifle the growth of the Internet. In response, I co-authored an article entitled “The SEC’s Statutory Weaponry to Combat Internet Fraud,” laying out the SEC’s crucial common sense strategy of ramped-up Internet-related enforcement efforts. https://www.johnreedstark.com/wp-content/uploads/sites/180/2016/03/1997-The-Business-Lawyer-SEC-Enforcement-and-the-Internet-Meeting-the-Challenge-of-the-Next-Millennium.pdf My thesis then was nothing new. The same notions had already been championed by: -- Famed Georgetown Law School professor Donald Langevoort in 1993, in Rule 10b-5 as an Adaptive Organism (“Rule 10b-5s survival is largely due to the flexibility of its language which has enabled the rule to embrace malleable social perceptions of the securities market and the securities business.”) (https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=3040&context=flr); and -- Legendary former SEC Enforcement Director Bill McLucas and then SEC senior counsel Mark Lewis in 1996, in Common Sense, Flexibility and Enforcement of the Securities Laws (“Those whose behavior is challenged cry foul, and the lawyers who represent them argue that even offensive conduct which is not expressly prohibited, must be permitted. Somewhere between a literal approach to enforcing the law, and the obvious unfairness that would accompany the wholesale retroactive application of newly announced standards, is a reasoned middle ground.”) (https://www.johnreedstark.com/wp-content/uploads/sites/180/2018/10/3WilliamRMcLucasMarkBLewis.pdf). In hindsight, relying upon the flexibility of securities regulation to police the Internet cleared out the more egregious instances of early online securities fraud. Moreover, vigorous online SEC enforcement efforts also paved the way for legitimate technological innovations to flourish, rendering markets more efficient and transparent, thereby allowing investors more opportunities for success. The bottom line for all crypto-investment iterations? Whether an investment product acts as a stock token, is priced off of the value of securities and operates like derivative, is a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities, they must all comply with U.S. securities laws. As SEC Chair Gensler recently explained: “It’s not about whether you set up a legal entity as a nonprofit and funded it with tokens. It’s not whether you rely on open-source software or can use a token within some smart contract. These are not laundromat tokens: Promoters are marketing and the investing public is buying most of these tokens, touting or anticipating profits based on the efforts of others.” https://www.sec.gov/news/speech/gensler-sec-speaks-090822 Old News That the SEC believes cryptocurrency exchanges fall under its jurisdiction is old news. More than three years ago, on March 7, 2018, the SEC published its “Statement on Potentially Unlawful Online Platforms for Trading Digital Asset,” ("The SEC Statement") jointly issued by the SEC’s Enforcement Division and its Trading and Markets Division, which clearly set forth its jurisdiction over cryptocurrency trading platforms, facilities, exchanges, etc. (N.B. This varied nomenclature is used interchangeably among regulators, commentators and the like.) https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading The SEC Statement offered a laundry list of worries regarding cryptocurrency exchanges but, most importantly, reflects a focused concern on how cryptocurrency exchange platforms appear to investors as SEC-registered and regulated marketplaces when in fact, they are not. For instance, The SEC Statement notes that many platforms refer to themselves as "exchanges," which can give the misimpression to investors that they are regulated or meet the regulatory standards of U.S. national securities exchanges. Many also appear to perform exchange-like functions by offering order books with updated bid and ask pricing and data about executions on the system -- yet those systems are more of a masquerade and remain worlds apart from the regulatory framework associated with the several dozen actual U.S. SEC-registered “National Securities Exchanges” (which are all listed specifically on the SEC’s website). https://www.investor.gov/introduction-investing/investing-basics/glossary/national-securities-exchange The SEC Statement emphasized that if a platform offers trading of digital assets that are securities and it operates as an “exchange” — as defined by federal securities laws — then the platform must register with the SEC as a national securities exchange or be exempt from registration. The SEC Statement warned investors to remain cautious about cryptocurrency exchanges, urging the importance of careful due diligence before conducting business with any cryptocurrency exchange, going so far as to list the kinds of questions investors should consider asking. These questions range from probing the nature of trading protocols, to how prices are set, to whether the U.S. brokerage regulator. The SEC also recommended that investors ask whether the tokens offered should be regulated as securities and whether the platforms prioritize certain traders over others. While The SEC Statement does not provide a detailed legal breakdown of its approach, the legal analysis is not at all complex, but rather a straight-forward application of the same principles the SEC has promulgated and enforced throughout its almost 90-year history. In essence, what the SEC is saying is that the rules have not changed, and cryptocurrency exchanges cannot conduct exchange-related activities until becoming SEC-registered. Be Careful What You Wish For Cryptoverse, You Just Might Get It Although the crypto industry constantly grouses for regulatory clarity, whenever any specific regulatory crypto-related rules are promulgated or proposed, the crypto industry cries foul and almost instantly files a flashy legal challenge to its enactment. For example, consider the following five examples during the past few years involving Big Crypto’s challenges to crypto-related provisions contained in: 1. The Infrastructure Investment and Jobs Act (“Infrastructure Act”); 2. SEC Rule 3b-16; 3. OFAC Sanctions Against Tornado Cash; 4. A Proposed Bitcoin Spot-ETF; and 5. FinCEN Anti Money Laundering (AML) Crypto-Rules. See detailed discussion at: https://sites.duke.edu/thefinregblog/2022/11/28/big-cryptos-bogus-demands-for-regulatory-clarity-2/ This blatant hypocrisy vividly illustrates the deception and duplicity of the Big Crypto cartel. Big Crypto demands regulatory clarity, but they do not like it when they get it – so they file lawsuits, comment letters, and mount billboards worldwide in a feeble attempt to manipulate the public, and bully the SEC, into accepting their point of view. A cursory analysis of these frivolous and baseless Big Crypto lawsuits manifests not just hubris but absurdity, and is arguably as bad of an affliction as the plague of bitcoin itself. Clearly, the only thing these lawsuits will accomplish will be to generate offensively high fees for the legal teams who filed them. Looking Ahead One positive note for Kraken is that unlike the SEC’s case against Binance, the SEC does not allege Kraken committed fraud and does not seek an emergency asset freeze or temporary restraining order. Indeed, the lack of a fraud allegation and a corresponding asset freeze is kind of a victory for Kraken, because just like Coinbase is doing with the SEC’s case against them (which contains similar allegations of failing to register as an exchange, broker-dealer and clearing firm), Kraken can continue playing the game of regulatory arbitrage and drag out the litigation for years with endless motions, discovery disputes, pleadings and other obstructionist tactics. In the meantime, the SEC will continue its crypto-regulatory onslaught, forging ahead until there is no firm left in the crypto-space who is not wearing the scarlet letter of an SEC lawsuit. As famed technologist and “http://Concerned.Tech” author Stephen Diehl noted in an X posting yesterday: “We're at the point where it's easier to list the crypto companies that *aren't* being sued by SEC or DOJ. The entire space is a den of thieves, everyone from the rank and file to the executives are choosing to break American securities laws. There are zero good actors in crypto.” Stephen Diehl is spot-on. The cryptoverse is a den of thieves where the emperor has no clothes — a perilous mixed metaphor of grift and illusion. By masquerading as some sort of newfangled fantasy of financial innovation, crypto-promoters turn victims into victimizers and laugh all the way to the bank (to deposit their fat (and fiat) profits. The stark reality is that crypto is nothing more than mathematical computational blather custom designed for speculation and manufactured exclusively for crime, terrorism and predatory inclusion. Kudos SEC for doing a solid Samuel L. Jackson, continuing to Warn Big Crypto, over and over again that Enough is Enough.
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@SenLummis - Senator Cynthia Lummis
The SEC cannot continue ruling by enforcement. My statement on the Kraken lawsuit below:
@JohnReedStark - John Reed Stark
Don’t Believe the Hype: When it Comes to Tracing Crypto Used in Crime and Terrorism and Bringing Crypto-Using Criminals to Justice, Law Enforcement and Everyone Else Are Mostly SOL. That is Axiomatic. https://www.moneylaundering.com/news/cryptocurrency-research-firms-vastly-underestimate-illicit-payments-critics-claim/ For example, how often is the FBI able to recover ransomware payments? As one senior FBI Agent and crypto-crime specialist told me yesterday: "Never." The stark reality is that for criminals and terrorists who have incorporated crypto into their modus operandi, tracing their crypto transactions creates unprecedented challenges for law enforcement, regulators and everyone else. There may be a few exceptions and rare occasions when crypto is recovered and the culprits are sent to prison but they are few and far-between. While crypto payments (if not obscured or properly laundered) might in some instances provide a glimpse into the chain of where crypto is going, the chain does not identify who the crypto is going to. Indeed, according to the U.S. Department of Justice (DOJ), mixers and tumblers are designed specifically to conceal or disguise the nature, the location, the source, the ownership, or the control’ of a financial transaction. https://justice.gov/archives/ag/page/file/1326061/download Moreover, even in the best cases of crypto-tracking (which are rare, take a lot of effort and only work in some instances), the identity of the actual holder is typically found using subpoenas, search warrants, arrest, etc. Not an easy task when the individuals and entities reside in countries outside the U.S., who will not only fight U.S. law enforcement efforts but will go so far as to refuse to accept delivery of service. See e.g. SEC/Terraform case, where Terraform and its founder continue to fight SEC subpoenas despite a detailed ruling compelling them to do so. https://www.linkedin.com/pulse/secterraform-litigation-compendium-commentary-takeaways-stark/ Consider Ransomware Attacks Take for example the crypto-crime of ransomware. Perpetrators of ransomware attacks demand crypto to unlock corporate IT systems and data that the attackers have surreptitiously encrypted. Collecting crypto in extortion transactions allows ransomware attackers not only to conceal their tracks and identities, but also to conduct their schemes from anywhere in the world. But for bitcoin, ransomware attacks would not exist. And anyone who tells you otherwise is dead wrong. For instance, FinCEN announced in November, 2022, that US financial institutions spent nearly $1.2B on ransomware payouts in 2021 more than double from 2020, and three quarters of the 1,251 ransomware payments pertained to ransomware were apparently paid to Russian gangs. If crypto were so easy to trace, then the identities, whereabouts and details of the ransomware payment collectors would become known -- and prosecutions would follow. But that rarely, if ever, actually happens. See, e.g.: https://fincen.gov/news/news-releases/fincen-analysis-reveals-ransomware-reporting-bsa-filings-increased-significantly https://www.reuters.com/legal/government/how-crypto-giant-binance-became-hub-hackers-fraudsters-drug-traffickers-2022-06-07/ https://www.pinsentmasons.com/out-law/analysis/cryptocurrency-money-laundering-on-defi-skyrockets https://www.nytimes.com/2022/02/23/business/russia-sanctions-cryptocurrency.html Crypto and Traditional Crimes Traditional crimes have also increased exponentially because of crypto, including: drug-dealing; human sex trafficking; money laundering; sanction evasion by countries like Russia, North Korea and Iran, who use crypto to transfer funds outside financial systems; assassins and other killers seeking payment for murder-for-hire services; and a slew of other financial crimes. https://sites.duke.edu/lawfire/2022/03/17/shane-stansbury-on-understanding-the-role-of-digital-assets-in-illicit-finance/; North Korea is a particularly egregious criminal application of crypto. North Korea's crypto hackers are paving the road to nuclear Armageddon. North Korea has quietly become a cryptocurrency superpower. It has stolen billions in bitcoin and ether and is funneling profits to fund its nuclear weapons program. Indeed, https://www.technologyreview.com/2020/03/05/916688/north-korean-hackers-cryptocurrency-money-laundering/ https://www.wsj.com/articles/how-north-koreas-hacker-army-stole-3-billion-in-crypto-funding-nuclear-program-d6fe8782 https://www.cnet.com/culture/features/north-koreas-crypto-hackers-are-paving-the-road-to-nuclear-armageddon/ Sources Here is just a small sample of authoritative, independent and objective sources supporting the multiple axioms postulated above: -- This April 6, 2023 U.S. Treasury Department Report, entitled, "Illicit Finance Risk Assessment in Decentralized Finance," states ominously: "[T]here are some limitations to relying on public blockchain information and tracing to mitigate illicit finance risks in the DeFi space. First, as noted above, the data on the public blockchain is pseudonymous. While regulators, law enforcement, and public blockchain companies can in some cases identify transaction participants, they may in other cases only have the participants’ wallet addresses without additional identifying information. Additionally, users can obfuscate the tracing of transactions on the public blockchain through the use of mixers, cross-chain bridges, or anonymity-enhanced cryptocurrencies (AECs), which can create challenges for blockchain tracing. Second, blockchain tracing and analytics often require an initial identified illicit transaction or address as a starting point, although new tools are able to identify potentially suspicious activity based on blockchain data. Third, critical activities in a DeFi service can occur off-chain and there are challenges to locating and obtaining this data." https://home.treasury.gov/system/files/136/DeFi-Risk-Full-Review.pdf -- This article (which is just one of many scholarly works and government reports) explains how Hamas and other terrorist organizations evolve and transmogrify, changing their crypto financing techniques to evade capture: https://criminologyjournal.org/uploads/1/3/6/5/136597491/cryptocurrency_and_national_security.pdf -- This article exhaustively and meticulously debunks the myth of crypto traceability: https://www.linkedin.com/pulse/crypto-traceability-dont-believe-hype-john-reed-stark/?trackingId=xlT8JHIwS36cjERJzCo1Gw%3D%3D -- This testimony from a former US Department of Justice (DOJ) prosecutor (which is somewhat supportive/agnostic of blockchain) explains in plain language the challenges for law enforcement when terrorists use crypto: https://www.banking.senate.gov/imo/media/doc/Stansbury%20Testimony%203-17-22.pdf -- This DOJ report responding to the President’s Crypto-Executive Order highlights how criminals and terrorists continue to use crypto and other digital assets for money laundering, weapons purchases, facilitating tax evasion, and evading sanctions: https://www.justice.gov/ag/page/file/1535236/download -- This US General Accounting Office Report explains how the increasing use of advanced obfuscation techniques makes blockchain analysis difficult and resource intensive for US agencies. "Criminals are getting more sophisticated and using anonymity-enhanced tools or methods to obfuscate illicit transactions when facilitating criminal activities, including human and drug trafficking. " https://www.gao.gov/assets/gao-22-105462.pdf -- This recent panel discussion between the SEC’s current and former Crypto Unit chiefs covers how the lack of crypto traceability makes detection of market manipulation an impossibility for any investor: https://www.youtube.com/watch?v=57OLu6mDfdk -- This article debunks one of the bigger myths of crypto-traceability -- that all cryptocurrency transactions are recorded on the blockchain. In fact, per AML expert Allison Jimenez, "Just a small fraction of crypto transactions are permanently, immutably, de-centrally recorded on the blockchain. Most transactions occur off-chain, within exchanges, who keep private ledgers. History has shown us plenty examples of 'sloppy' or fraudulent recordkeeping by crypto companies." https://securitiesanalytics.com/fraud-within-crypto-companies/ "Now Do Fiat" No doubt that half of the comments below will dismiss my post as meaningless because fiat is so much worse -- their catch phrase is like a broken record: "Now Do Fiat." What a crock. What a cop-out. And what a lame attempt at retort -- so tedious and so tiresome. I get it, fiat fraud, money laundering and financial chicanery is horrible and a problem -- but whataboutism is a flawed and anemic pivot. What every study shows is that crypto has evolved into the killer app for criminals, ushering in a crypto-crime wave of epic proportions. Clearly, the scale of crime in crypto is orders of magnitude greater than what it is in traditional finance. Moreover, comparing fiat to crypto is a mammoth false equivalency. Fiat is money, which is used and respected across the word, and serves as the key to commerce and financial markets. On the other hand, crypto is not money - crypto is a mere speculative and vacuous asset with no other current use case than gambling and making crime a heck of a lot easier. For instance: Crypto fails as an "investment” because there's no regulatory oversight, transparency, consumer protections, insurance, licensure, net capital requirements, and the crypto rug-pull bazaar is so rife with market manipulation/insider trading/fraud, investors stand no chance from the get-go. https://linkedin.com/pulse/perilous-regulatory-vacuum-web3-john-reed-stark/?trk=pulse-article_more-articles_related-content-card Crypto fails as a “currency” because the price is too volatile; fees too high; taxes too burdensome; and risks too infinite. How can anyone accept crypto as payment when it could be worth a lot less the next day? https://news.bitcoin.com/fed-governor-warns-crypto-prices-could-fall-to-zero-says-dont-expect-taxpayers-to-socialize-your-losses/ Crypto fails as a “store of value” because it lacks utility and intrinsic benefit, the measure of what an asset is actually worth. Crypto has no value to store and its price is solely dependent upon the greater-fool-theory. https://ft.com/content/f2faeec9-6d42-4d78-9c68-1f59795789a7 Crypto fails as a “financial panacea for the unbanked” because it’s just another exemplar of “Predatory Inclusion” and affinity fraud, sadly peddled to dupe the disadvantaged and disaffected. https://brookings.edu/articles/debunking-the-narratives-about-cryptocurrency-and-financial-inclusion/ Along the same lines, let’s just compare banks with crypto firms to see if your argument actually holds up. Banks are heavily regulated and depositors generally have protections. In stark contrast, with crypto firms there is no insurance, no regulatory oversight, no consumer protections, no examinations, no auditing, no licensure, no mandated cybersecurity standards, no fiduciaries, no segregation of customer assets, no rules against insider trading or market manipulation — no traditional protections of any kind -- which renders the entirety of the crypto-ecosystem not just unsafe and dangerous but also easily susceptible to fraud, grift and chicanery. Of course, it should go without saying that U.S. TradeFi is rife with bad actors and can be dangerous -- and is a system that has a lot of flaws -- and some really dire oppressive tendencies. Believe me, I get it, I spent almost 20 years investigating and prosecuting financial crimes. However, the risks of transacting with U.S. registered financial institutions like banks and brokerages pale in comparison to the risks of engaging in transactions with crypto platforms and stablecoins . That point seems pretty basic, at least IMHO. Looking Ahead Crypto is not innovation – it’s mathematical computational blather, hyped up by incessant, fraudulent marketing theater and a massive market manipulation campaign. Sadly, crypto-grifters have orchestrated a deadly masquerade, presenting crypto as a miraculous and magical tool that will somehow usher in a magnificent era of technological transformation. But the truth is precisely the opposite -- and sooner or later, the world will come to realize that "The Crypto-Emperor has No Clothes." Meanwhile, unable to displace legitimate currencies, crypto has become a perilous and vacuous asset and because the cult of crypto turns victims into victimizers, vulnerable and desperate investors stand little chance against the relentless barrage of crypto chicanery, fraud and hocus-pocus. P.T. Barnum was spot-on when he declared that there's a sucker born every minute. This is why, from tulips to tokens, Ponzi schemes like crypto have thrived for centuries. Coinbase, Binance and the rest must be called out in plain view for their bogus admonition and preposterous scare tactics. When any crypto operation is forced to shut down, people should celebrate, and not lament. Without crypto, countries are safer, and not less secure. Without crypto, financial marketplaces are stronger, sounder and more transparent, and not systemically weaker. Without crypto, investors are far better off, and less vulnerable to fraud and chicanery. When any crypto operation is forced to shut down, there exist only two categories of loser. First, the sad and vulnerable hodge-podge of victims who got duped, which is a terrible tragedy, and second, the well-heeled profiteers who benefited handsomely at the expense of those victims. As for me, a device has yet to be invented that can measure the vastness of my indifference to crypto's demise. So There’s That.
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@JohnReedStark - John Reed Stark
Crypto & Ransomware: The Perfect Match Per the Wall Street Journal, Caesars Entertainment paid a $15 million ransom to hackers in a cyberattack late this summer. Meanwhile MGM has apparently been hit by a similar ransomware attack variant. Thanks bitcoin — much appreciated.…
@JohnReedStark - John Reed Stark
Newsflash: Ripple Decision Already in (Big) Trouble SDNY District Judge Jed Rakoff today allowed the SEC to go forward with its case against Terraform Labs and founder Do Kwon. In doing so, Judge Rakoff specifically rejected the distinction made in the Ripple case between public… Show more
@JoelKatz - David "JoelKatz" Schwartz
@JohnReedStark This ruling seems to be based no some very unsual properties of this particular scheme and not the way cryptocurrencies generally work. None of the below, the crux of the reasoning here, applies to typical cryptocurrencies as far as I can tell.
@JoelKatz - David "JoelKatz" Schwartz
@JohnReedStark To be clear, the court also does make it clear that it disagrees with the ruling in the Ripple case and explains its disagreement. But, oddly, it doesn't seem to have based its rejection of that ruling on its disagreement with it but rather in the difference in facts.
@JoelKatz - David "JoelKatz" Schwartz
I guess I read it as somewhere between two possible things: 1) The worst case for fans of the decision in Ripple: The court is saying it disagrees with the Ripple decision because it applies additional tests that are not part of the Howey test and so it won't apply/follow the ruling here. 2) The best case for fans of the decision in Ripple: The court is saying it disagrees with the argument that it should follow the Ripple decision because the reasoning relied on in Ripple makes sense not because it directly implicates the Howey factors but because it indirectly implicates them due to facts not applicable in this case.
@JoelKatz - David "JoelKatz" Schwartz
The put two another way, the court might be saying that there's no rule that secondary sales need to be treated differently from institutional sales because nothing in the Howey test says so. So if the court did so in Ripple, it was either wrong or did so because the facts in that particular case justified that distinction and the court thinks the facts in this case don't justify such a distinction. Those are my initial impressions anyway, for what it's worth.
@dee_bates - Danielle Bates
@JoelKatz @JohnReedStark Find me a case where the court extended securities laws to the secondary market.
@JohnReedStark - John Reed Stark
Thanks Danielle, I totally appreciate your point but this quote from Judge Rakoff is quite compelling though, don’t you think? “Simply put, secondary-market purchasers had every bit as good a reason to believe that the defendants would take their capital contributions and use it to generate profits on their behalf." And this one too: “That a purchaser bought the coins directly from the defendants or, instead, in a secondary re- sale transaction has no impact on whether a reasonable individual would objectively view the defendants’ actions and statements as evincing a promise of profits based on their efforts.”
@JohnEDeaton1 - John E Deaton
John that quote isn’t compelling nor is it illogical, if applied to specific facts. Judge Torres or Judge Rakoff can’t ignore the issue of PRIVITY - or the lack thereof, in many instances. The bottom line is that there isn’t a single case in history where an investment contract has been found with absolutely no privity between the seller and the buyer. Period. And by prvity I mean some level of contact, communication or business dealings. If it’s a direct sale - there’s contact - a transaction between the two. However, that doesn’t mean direct sales are required before you can have an investment contract. For ex, Ripple sent brochures to 100 investors. If after receiving the brochures some of those investors purchased XRP on Coinbase, not from Ripple, there could still be an investment contract, depending on whether Ripple made promises or caused an objective person to rely on the efforts of others in expecting a profit in those Brochures. The SEC could possibly prove an investment contract existed with those receiving the brochure and then buying XRP. But to argue that all XRP purchased on exchanges by people who never received the brochures or don’t even know Ripple existed would be absurd AND it’s never been done in 80 years of caselaw. As a trial lawyer, you know cases are decided on facts and evidence. In fact, Judge Torres acknowledged that some secondary purchasers MAY have bought XRP relying on Ripple’s efforts but that doesn’t turn all secondary sales into investment contracts. Judge Torres cited ACTUAL EVIDENCE in the case demonstrating many secondary market purchasers were unaware of Ripple as a company. I submitted 3600 XRP holder affidavits showing the majority of first time acquirers of XRP were completely unaware of a company called Ripple. Thousands of people acquired XRP for non-investment reasons, to transfer money on the XRPL or access the DEX. Thousands of vendors accept XRP as payment. In my amicus brief I point out Time Magazine accepted XRP as a form of payment. You know damn well Time Magazine didn’t acquire XRP as an investment, considering it almost immediately sold it for fiat. @TapJets accepts XRP for payment and it allows them to fly on the weekends when the banks are closed because XRP solves that problem. Torres’ decision will be validated because it’s the right result and the SEC couldn’t cite a single case to show otherwise.
@Zer0LM - ZeroLatencyManifestation ☀️
@JohnEDeaton1 @JohnReedStark @dee_bates @JoelKatz @reseeit save thread
@GQBader - OverHere ⚽️
@JohnEDeaton1 @JohnReedStark @dee_bates @JoelKatz I (and 1000s of people) would love to listen to you guys discuss your opinions on Twitter Space or the CryptoLAw channel. @CherryEmpress21 and @attorneyjeremy1 too. Thanks in advance 🙏.