Crypto Critics' Corner

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Episode 119 – Binance and Coinbase Sued by the SEC (feat. Dirty Bubble Media)

Binance, Coinbase, and the SEC (Featuring Mike Burgersburg of Dirty Bubble Media) – Crypto Critics' Corner

Today Bennett Tomlin and Cas Piancey are joined – yet again! – by Mike Burgersburg of Dirty Bubble Media to discuss the recent lawsuits brought against Binance and Coinbase by the US Securities and Exchange Commission.

Cas Piancey and Bennett Tomlin are joined by Mike Burgersburg of Dirty Bubble Media to discuss the SEC lawsuits against Binance and Coinbase.

This episode was recorded on June 6th, 2023.

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English Transcript:

00:00:05:03 - 00:00:11:17
Cas Piancey
Welcome back, everyone. I am Cas Piancey. I'm joined, as usual, by my partner in crime, Mr. Bennett Tomlin. How are you today?

00:00:11:19 - 00:00:13:02
Bennett Tomlin
I'm doing pretty good. How are you?

00:00:13:02 - 00:00:23:28
Cas Piancey
Guess I'm good. Busy. We're joined by our special guest as usual, Mike Burgersberg, Dirty Bubble Media. James, how are you?

00:00:23:29 - 00:00:26:19
Mike Burgersburg
I'm doing great, guys. Today It's been a very fun day.

00:00:26:29 - 00:00:49:00
Cas Piancey
Well, let's talk about why today and yesterday have been kind of bombshells for the entire industry. Let's and to be clear, I don't think I think all of us maybe saw this coming so it's not exactly surprising news, but it is it is bombshells nonetheless. So, Mike Bennett, I don't know which one of you wants to take it away, but let's start with Binance.

00:00:49:06 - 00:01:08:06
Mike Burgersburg
While it turns out that Binance was doing some things that maybe weren't legal and the SEC has something to say about it, and they finally released a motion or a filing that basically tells us that the S.E.C. is going to smash Binance into tiny pieces if they have their way.

00:01:08:16 - 00:01:42:23
Bennett Tomlin
Yeah, So for just a touch more context, yesterday, Monday, June 5th, the SEC filed a complaint against the SEC (he means Binance) with 13 separate violations, alleging a variety of things that they offered and sold unregistered securities, including both BNB, BUSD, BNB vaults, their staking program, their earn program, and a bunch of other tokens they were trading that they did a whole bunch of wash trading using Changpeng Zhao controlled market makers that they failed to register as a securities exchange, which yeah, no shit.

00:01:42:23 - 00:02:21:15
Bennett Tomlin
It's not like they were ever going to register. And what I think was really interesting is if you go all the way back to episode 23 of Crypto Critic's Corner, we talked about the Forbes reporting and the Tai Chi documents and the Tai Chi documents were a plan concocted by a consultant that Binance hired that suggested if they wanted to minimize their risk from regulators, their best tactic would be to create a US based entity which would license software from Binance, pass its trading fees back as those licensing fees that there would be affiliated market makers that would share liquidity between the two entities, and that this entity would pretend to be regulated, attracting the attention

00:02:21:15 - 00:02:49:07
Bennett Tomlin
of regulators and hopefully gaining them permissiveness for some of their past violations. And I think what is going to be the most important thing to go through as we talk about this complaint here is that the reporting from Forbes about the Tai Chi documents was entirely confirmed by this SEC complaint. We should also mention that, like this S.E.C. complaint echoes a lot of the same things we talked about a month and a half ago when the CFTC complaint against Binance came out.

00:02:49:14 - 00:02:58:06
Bennett Tomlin
But it really altogether confirms that reporting and shows Binance tried to use Binance U.S. as a shield from regulatory pressure.

00:02:58:12 - 00:03:16:01
Mike Burgersburg
The crypto market and the crypto believers. I think they really missed the significance of Binance US because when people like us, we're talking about a few months ago they said, well, it's just this tiny little exchange. I mean relative to Binance's, it's you, it's nothing. And they thought, well, it's a separate company, so if they get in trouble, it doesn't matter.

00:03:16:01 - 00:03:32:29
Mike Burgersburg
It's this, you know, little problem that that will just go away and it won't cause any issue for Binance. But actually what it's done is it's opened Binance up to federal regulators of every kind because they were doing business in the United States. And the evidence is quite clear that it was nothing more than an extension of Binance.

00:03:32:29 - 00:03:34:08
Mike Burgersburg
It was never a separate company.

00:03:34:17 - 00:03:52:01
Bennett Tomlin
Yeah, and there was a lot of evidence like pointing directly to that. They had a quote from Binance's former chief compliance officer saying, we do not want binance dot com to be regulated ever. They talked about like how at the surface we cannot be seen to have U.S. users, but in reality we should get them through other creative means.

00:03:52:03 - 00:04:22:07
Bennett Tomlin
Changpeng Zhao was a signatory and these Binance U.S. bank accounts as of last month Binance custody all of the crypto for Binance USD up until at least December 2022 and at least some of it the SEC was able to confirm. As of last month, all of the trading activity was done on Binance system and Binance is market surveillance team was not checking for was trading front running or anything like that and Binance U.S. plus we can get into it.

00:04:22:07 - 00:04:45:20
Bennett Tomlin
I think this is going to be an important part of this. There was a bunch of irregular transfers there. These were the potentially more justifiable ones, which is that Changpeng Zhao and Binance were using Merit Peak, a Changpeng Zhao owned market maker as an intermediary for BUSD. So they claim that when customers wanted BUSD, they would transfer the money out of Binance or Binance.

00:04:45:20 - 00:05:23:20
Bennett Tomlin
U.S. to Merit Peak. Merit Peak would transfer it to Paxos. Paxos would send them BUSD Merit Peak would send it back to Binance or Binance U.S. and then the customer would get their BUSD. However, this was not disclosed to clients. Clients didn't know their funds were being transferred to a Changpeng Zhao owned market maker and one of the other market makers Sigma Chain, the one responsible for more of the wash trading than Merit Peak also was receiving irregular transfers from both Binance's and Binance USD, some of which reportedly went to purchase an $11 million yacht.

00:05:23:27 - 00:05:58:12
Cas Piancey
But this actually brings me to today's news in regard to Binance, which was kind of a very specific freezing of assets request from the SEC. And as far as I understand it, was that they are freezing these assets on behalf of customers so that customers can still withdraw their funds from buying Binance US, but they want to keep these funds out of the hands of CZ and the rest of Binance International because of what you're specifically bringing up right now.

00:05:58:18 - 00:06:23:27
Bennett Tomlin
Yes. Yeah. And this was actually included as part of the complaint in the Prayer for Relief at the very bottom that like a lot of the things that were described in the proposed order filed today were mentioned in this is just the text. They hope the court will approve and then will be enacted. But as you mentioned, what's interesting about this is they're seeking this freeze on Binance assets, but there's a specific exemption to allow them to still be able to handle customer withdrawals and everything like that.

00:06:24:02 - 00:06:57:04
Bennett Tomlin
And so there's kind of this suggestion with the SEC seeking this relief, they haven't saw it in any other case in cryptocurrency that I can remember. At the very least, it seems to be worries that funds have been misappropriated. We talked about on here before, like there have been issues with Binance's accounting that might lead people to worry about that when the be pegged tokens were in fact when Binance pegged BUSD was unbacked, all of these things raised concerns about the quality of Binance's accounting and what that means for customer assets.

00:06:57:10 - 00:07:02:29
Bennett Tomlin
And so the SEC is seeking, like you mentioned, this very specific relief really kind of accentuates that.

00:07:03:09 - 00:07:30:00
Mike Burgersburg
Yeah, and I mean, I would mention that, you know, one of the reasons that I became interested in Binance's use was discovering that there were billions of dollars in crypto transfers between Binance, USD and Binance through a pair of really strange wallets that literally only existed to make those transfers. And that at one point, or at least one point of view on multiple points, our customer withdrawals could not be paid out of Binance US without making corresponding transfers from Binance before continuing those transfers.

00:07:30:00 - 00:07:38:22
Mike Burgersburg
So there's a serious concern that customer assets already have been misappropriated and are not even in financial crisis control, whatever that even means.

00:07:38:22 - 00:08:11:24
Bennett Tomlin
Yes. And one other thing that I want to highlight that you've repeatedly discussed in your reporting in your work is some of the payments processors, banks and entities like that that Binance U.S. has had to rely on. And the SEC talked about how in the Tai Chi papers there was a desire to use Binance USD for its functional fiat capacity, which seemed to imply that Binance USD was intended to be used as kind of like this face that would allow them access to the United States banking system, to these financial services and stuff like that.

00:08:11:26 - 00:08:19:18
Bennett Tomlin
And so I think this really confirms like the importance of some of the stuff you've been highlighting there in terms of like who Binance U.S. has been working with.

00:08:19:29 - 00:08:47:14
Mike Burgersburg
Right? I mean, that's exactly that's exactly the point. Right? Like, these guys are not people you want having access to the banking system and they've had to use all sorts of clever workarounds for years. You know that as you see, complaint specifically mentions the key, Key Vision Development Ltd, which is a Seychelles based Shell corporation that Binance used for years to access the U.S. banking system and, you know, only recently lost access after the collapse of Signature and Silvergate banks.

00:08:47:16 - 00:09:08:19
Mike Burgersburg
But they've been able to use Binance USD, it looks like potentially that's been their lifeline. So if they manage to freeze these accounts and cut them off that way, I don't think they have any access left. And that's a very interesting position to be in for a company that holds an unknown number of billions of dollars of assets, of a lot of people who live in the United States and are you know, companies are based in the United States.

00:09:08:19 - 00:09:31:13
Bennett Tomlin
Yes. Yes, exactly. And it's just so reminiscent of how FTX and Alameda Research for using its network of like global OTC desks in order to try to maintain access to the banking system like directly with Alameda Research in the way that everyone is familiar with, but also like around the globe with Genesis Block in Hong Kong with HiveEx in Australia.

00:09:31:20 - 00:10:03:09
Bennett Tomlin
My God, I've been covered. I knew that was bad, that I forgot that one or some of the other ones, like in the United Arab Emirates or things like that. It's the same strategy that we saw all the way back with Crypto Capital Corp in 2017, 2018, whatever, setting up a variety of shells in different jurisdictions in the hope that you can gain access to the banking system under false pretenses in order to make sure the businesses that rely in you, these major cryptocurrency exchanges, don't lose access to these fiat rails.

00:10:03:10 - 00:10:22:05
Mike Burgersburg
And going to that point about Alameda and aftershocks, you know, I'm reading this complaint and this is you specifically referring to how Merit Peak, which again, these are all supposed to be separate companies, right? Like Merritt Peak is a market maker. It's not supposed to be you know, it's supposed to be a separate entity from Binance. Right. At least in theory.

00:10:22:09 - 00:10:42:28
Mike Burgersburg
And yet it looks like they're the ones receiving like $22 billion, a lot of which is customer assets directly from this vision. Development services bank transfers are not being made directly to Binance. They're going through intermediary parties. It's it literally is. It's the same model. It's the same model as FTX Alameda, where Alameda was the one receiving all of the customer assets.

00:10:43:01 - 00:10:57:29
Mike Burgersburg
And then they would like Credit Binance or credit FTX with the money, but never actually sent it. And you know, I can't say that's what's happened here, but certainly there should be concern that at least some of that money may not have gotten where it should have. And I guess we're going to find out.

00:10:58:06 - 00:11:20:26
Cas Piancey
I think this brings up I know we're not going to I think it's not it's uncouth to discuss it at length or at least to try to predict anything. But I do think there's from what we've seen from these SEC actions, it appears as though there's a lot of room here for possible criminal criminal charges to be brought.

00:11:20:26 - 00:11:44:29
Cas Piancey
And I'm I'm just curious if you guys feel like that's the other shoe that everyone is waiting for it to drop or if if. Bennett I know we discussed MLARS before and how finance had hired somebody from MLARS to work with them. Do we think that's still in the works, that this is something that they're going to get get out of?

00:11:45:03 - 00:11:48:16
Bennett Tomlin
Mike, I'd like to hear your answer first, because I've got a bit of a rant on this one.

00:11:49:20 - 00:12:18:19
Mike Burgersburg
I mean, I probably do, too, unfortunately. I mean, I look at it this way, right? Like a civil agency is probably more inclined to settle than a criminal agency. Right? Like they have fewer means to enforce their actions. So if the fact that both the CFTC and SEC come out and tell you they're going to sue these guys and they use the kind of language they're using in their in their complaints, that is incredibly I mean, it's fiery language, right, For like for like lawyers.

00:12:18:19 - 00:12:39:18
Mike Burgersburg
I mean, it's like they're accusing them basically of being criminals. Any civil complaints? They have access to their phones, they have access to private chats. And that doesn't happen when you're a civil agency. So clearly, somebody is giving them all of this information. They didn't get it by themselves. So, yeah, I've been waiting for that shoe to drop for a while and I think it will be, but you never know.

00:12:40:11 - 00:13:06:27
Bennett Tomlin
So the third sentence in Binance's response to the SEC is most recently we have we have engaged in extensive good faith discussions to reach a negotiated settlement to resolve their investigations, meaning the SEC, in this case cases, as you and I have talked about, like in our episode, Fuck the SEC. The SEC loves negotiated settlements. It's their favorite thing.

00:13:07:03 - 00:13:30:06
Bennett Tomlin
They get to go into Congress and say, we closed this many cases and get this crazy number of dollars and all the problems are dealt with. And yet they passed up, apparently, according to Binance themselves, the opportunity for a settlement to instead take it to court. And as was mentioned here, both this case and the CFTC case discuss behavior which is potentially criminal.

00:13:30:08 - 00:14:03:02
Bennett Tomlin
We've known for months now that supposedly Western Washington prosecutors were ready to indict but were held up by members. The fact that the SEC chose not to settle makes me less confident than I was before that they'll get the deferred prosecution. I've suggested in the past. I am increasingly convinced that we are going to see like actual indictments without a negotiated deferred prosecution against Changpeng Zhao and against Binance for criminal behavior.

00:14:03:05 - 00:14:24:05
Bennett Tomlin
We don't know that's going to happen, obviously, but we know that prosecutors have been ready to do that for months. And the fact that these agencies were willing to go ahead despite the entity itself claiming it was willing to settle, suggests to me we reach some kind of tipping point in terms of political will or desire to go after this type of actor.

00:14:24:12 - 00:14:44:24
Mike Burgersburg
Yeah, yeah. It's easy. He finds himself in a uniquely bad position, right? Because after collapsing puts a lot of heat on the industry to begin with. He's the only big actor left who's engaging in things that are, you know, questionable to say the least. And there's a lot of other people doing things that Yeah, yeah, there's a lot of people but I'm say he's the he's the biggest fish left right on.

00:14:45:04 - 00:14:45:18
Mike Burgersburg
I mean clearly I.

00:14:45:18 - 00:14:46:20
Bennett Tomlin
Mean he had.

00:14:46:20 - 00:14:47:07
Mike Burgersburg
No doubts.

00:14:47:07 - 00:14:51:17
Bennett Tomlin
I mean I know about an 80 billion dollar fish that’s sitting there.

00:14:51:20 - 00:15:07:27
Mike Burgersburg
Those guys will never go down. That's the perfect Ponzi. You can't beat them. So you have to go after people you can beat, right? Like tether will survive. We all know that you'll never get them. But you know, so. So he has that problem going for him. And at the same time he has the anti Chinese government sentiment.

00:15:07:27 - 00:15:24:10
Mike Burgersburg
That's like building and building in Washington for the last couple of years. And Binance is viewed as a Chinese entity. So it's like a combination of the worst two things that can happen at the same time. So I'm not surprised that there suddenly will power the political will to, you know, throw the book at somebody. It's going to be him.

00:15:24:17 - 00:15:27:16
Cas Piancey
For what it's worth, I don't think Binance is a Chinese.

00:15:27:16 - 00:15:32:28
Mike Burgersburg
I don't think it necessarily either. It has no borders, Right. But it's perceived that way and that's all that matters.

00:15:33:07 - 00:15:35:23
Bennett Tomlin
Well, and like, there are a lot of for sure.

00:15:35:23 - 00:15:37:13
Cas Piancey
No, I totally get like there are.

00:15:37:13 - 00:16:01:06
Bennett Tomlin
A lot of directors and stuff for finance entities with addresses in China. Like, I remember when I was looking at Binance Australia for one of my recent newsletter is about issues like both of the entities that used had multiple people who had their address, like in China and were the directors for these finance entities. So there's definitely more substantial Chinese links than kingpins I will admit to.

00:16:01:08 - 00:16:12:03
Bennett Tomlin
But I agree that the company is not like uniquely Chinese or like is acting with some approval of the Chinese state, at least no more than any company operating in China is.

00:16:12:11 - 00:16:43:20
Cas Piancey
Yeah, and there I don't think there's many Chinese nationals using Binance for what it's worth. Sure. Again, but anyway, I, I do I want to get into the other kind of incredible thing that happened today. And the reason I want to get into that, which is it's Coinbase in case anyone is not been paying attention, it is that the SEC is coming after Coinbase as well, which is like, you know, these are two major exchanges in two days.

00:16:43:22 - 00:17:17:24
Cas Piancey
And I just, first of all want to address I think a lot of people are suggesting that like this proves that Operation Chokepoint .2.0 was a real thing. And that and here here's proof. And the only thing I want to say about that is to me, it's very clear that FTX was the spark, that as soon as the SEC and the CFTC and regulators in general were embarrassed by how horribly they played their hands when it came to FTX's and Sam Bankman-Fried and politicians for that matter as well, and how embarrassing that was.

00:17:17:24 - 00:17:42:26
Cas Piancey
Everybody got fire under their ass and started doing things. So I'm not surprised that they're doing that. They're bringing these actions and I don't think it's proof of some broader conspiracy. However, there was also a court that clearly coordinated state prosecution move today as well. And so I think we should get into all of this. Again, I don't know who wants to start this round, but please have at it.

00:17:42:26 - 00:17:48:19
Cas Piancey
Let's just start with let's start with the lawsuit itself, what the SEC is saying here.

00:17:48:23 - 00:18:07:28
Mike Burgersburg
So I understand it is the SEC is saying a few things, right, saying that Coinbase is operating as a securities exchange, but they never registered as that. They're engaging in the sale and facilitating the sale of a variety of securities which are not registered as such. And they're also offering securities products in the form of their staking services.

00:18:08:04 - 00:18:27:03
Mike Burgersburg
I think that's the that's like the three main parts of the complaint. And we we knew this was all coming for a long time. Given that the SEC has already said a lot of these things were securities, they've already claimed that staking was a security. And, you know, companies have actually already settled charges based on that. So we knew this was coming for months.

00:18:27:03 - 00:18:30:02
Mike Burgersburg
The fact that it took so long for the market to recognize that is fascinating.

00:18:30:06 - 00:19:06:17
Bennett Tomlin
Yeah, I think that's actually a really good point to highlight here is like this was at this point kind of inevitable. They've settled with Kraken over their staking program. They brought a suit against Ishan Wahi. The former Coinbase product manager, in which they allege several of these tokens are securities. After you've done those two things, failing to sue Coinbase would have been seen as peculiar, and I think that we should probably like draw delineation at this point and say the Binance suit suggests mishandling of customer assets in a way that the Coinbase suit currently does not.

00:19:06:19 - 00:19:33:18
Bennett Tomlin
The Coinbase suit suggests Coinbase is operating as an unregistered exchange, as you mentioned, clearinghouses, broker dealer, etc. with a ton of unregistered securities on it, which is crazy because Paul told me they never lost securities. End of story, period. But they seem to disagree with the SEC in that matter. But like there's a fundamental difference between like operating in unlicensed securities exchange and misappropriating customer assets.

00:19:33:18 - 00:19:39:13
Bennett Tomlin
Right? And so we should draw that distinction Now before we get deeper into like what Coinbase was allegedly doing.

00:19:39:21 - 00:20:20:17
Mike Burgersburg
Yeah, my favorite thing is seeing that Coinbase is defending themselves essentially in there in I believe it was Armstrong's tweet in response was that hey guys were only probably engaging in some securities violations. We're not doing anything more serious than that. So why does anybody care is basically what he's saying. One thing that's really bothered me throughout this whole thing is that Brian Armstrong, the CEO of Coinbase and his legal team as well, have really intentionally misrepresented certain aspects of the SEC processes, claiming that because they were allowed to go public, somehow that meant that the SEC had to prove their business model and that everything was was hunky dory.

00:20:20:23 - 00:20:42:11
Mike Burgersburg
And that's totally unfair. They're coming back now. It's amazing for them to do that because it's totally false, as S-1 does not proven, that has nothing to do with them approving the business model. Right. Secondly, in the S-1 filing, which I and many other people have pointed out, because it's right there, Coinbase admits that, hey, at some point they might say these are all securities and then we might be out of business.

00:20:42:21 - 00:20:50:26
Mike Burgersburg
They basically say that right in their filing, Right. And now they're saying, well, geez, we didn't see this coming, guys. It's not fair. They saw it coming. They knew exactly what was going to happen.

00:20:51:04 - 00:21:09:05
Bennett Tomlin
This was actually a point that I ended up making in two episodes ago from when we were at consensus and talking about it like I had a whole rant because Paul Grewal tried to make this same point. He was speaking at consensus. They let us go public. They knew what our business model was. So clearly they approved of our business model.

00:21:09:11 - 00:21:34:12
Bennett Tomlin
And like the the Securities Act itself specifically says, like the SEC, allowing these things to go into effect does not serve as an endorsement and should not be in and should not be represented that way. It emphasized. And so I agree that's been really painful to see the other thing I wanted to emphasize is that Coinbase's business model has fundamentally changed since the IPO.

00:21:34:14 - 00:21:54:02
Bennett Tomlin
They started listing vastly more tokens. pre-IPO, even Dogecoin, wasn't on Coinbase and now doing Dogecoin would be seen as like an upper quartile coin and Coinbase. Like they fundamentally changed the type of asset they listed from when the S-1 was approved until now.

00:21:54:09 - 00:22:04:26
Cas Piancey
You know, can I just do you know how many assets were listed? pre-IPO I know like Tether had been listed before, like the day of IPO, like day before IPO or something like that.

00:22:05:02 - 00:22:07:07
Bennett Tomlin
After something much more suspicious.

00:22:08:06 - 00:22:11:14
Cas Piancey
I think it was right before. But either way that would be like.

00:22:11:15 - 00:22:16:03
Mike Burgersburg
Trusting thing to just graph that out like how many assets they had before and after that idea. Interesting.

00:22:16:10 - 00:22:30:01
Cas Piancey
I would love to know how how much it's increased. And I would also love to know how many of the assets they're suggesting are securities because they specifically said, what did they say in the lawsuit? Was it a 2018 or 2019 that the lawsuit starts?

00:22:30:01 - 00:22:31:02
Mike Burgersburg
I have to look back.

00:22:31:02 - 00:22:33:20
Bennett Tomlin
I don't yeah, I don't remember. Of 29 August.

00:22:33:20 - 00:22:34:10
Mike Burgersburg
2018, I.

00:22:34:10 - 00:22:38:01
Bennett Tomlin
Believe that. But that's a crazy thing.

00:22:38:06 - 00:22:44:01
Cas Piancey
It's date for the for the lawsuit to start in my humble opinion. Like it's just it's just interesting that it.

00:22:44:01 - 00:22:45:21
Bennett Tomlin
Didn't start 2014 or whatever.

00:22:45:28 - 00:22:46:12
Cas Piancey
Yes.

00:22:46:19 - 00:22:52:19
Mike Burgersburg
Yeah. Well, maybe they were playing it safe until they got they went public and then they just went for it because they already can.

00:22:52:21 - 00:23:13:16
Cas Piancey
So this is this. And here I want to play devil's advocate here because like, if the suggestion is that the SEC is here to protect the consumer, then isn't there an issue with letting like, if you're going to let them go public and you know that they're listing unregistered securities and you know that that's their business model, Like, are you protecting consumers, really?

00:23:13:16 - 00:23:19:02
Cas Piancey
Or you just kind of waiting for them to grow big enough for you to get your cream off the top?

00:23:19:05 - 00:23:41:07
Bennett Tomlin
I mean, we talked about this back, in fact, the SEC episode, right? Is that the SEC, by its very nature, is a disclosure and enforcement regime in that they try to make sure that your disclosures are appropriate and then enforce when they think there's a violation. I think that there's definitely an argument to be made that many of these enforcements could have and would have benefited from being brought sooner.

00:23:41:13 - 00:24:04:02
Bennett Tomlin
But like we've talked about broadly, there has not been any kind of political desire to go after cryptocurrency in that way. And it hasn't really been until first Luna and Terra and then FTX and Alameda Research that we've really seen, like politicians and regulators really engage in that kind of way with a desire to potentially disrupt these types of things.

00:24:04:04 - 00:24:19:25
Bennett Tomlin
And like we've alluded to in the past, you like there's some really perverse incentives around that where it can be seen as very negative to go after something new because you're going after innovation. Why do you hate innovation Cas?

00:24:19:27 - 00:24:45:16
Cas Piancey
Yeah, I mean, I know, I know the Bermuda. Bermuda loves innovation. The Bahamas, love Innovation Malta, just a host of very interesting countries and tax havens really love innovation. So, yeah, I mean, I we've both been you and I covered the there was a subcommittee hearing today and Paul Greenwald.

00:24:45:26 - 00:24:46:27
Bennett Tomlin
It was a full committee.

00:24:46:27 - 00:24:47:27
Cas Piancey
Hearing. Her full.

00:24:47:27 - 00:24:48:14
Bennett Tomlin
Committee committee.

00:24:48:14 - 00:25:36:22
Cas Piancey
Here didn't seem like it. Anyway, Paul Grewal was there. That's that's where he was today while Gary Gensler was on Squawk Box or something. Grewal went there to basically suggest that the draft, the new digital asset law bill, that draft that they were looking into was much better than what we currently have. And the argument continually seemed to be that a lot more a lot more of the regulatory burden should be placed on the CFTC and less so on the SEC and everyone was suggesting like they had a bunch of former people involved with the CFTC, former chairs and former people involved, and all of them were suggesting that that this was a great

00:25:36:22 - 00:26:17:13
Cas Piancey
draft and a great bill. And then Berkovitz, who is the only one who's currently working there, was like, no, no, please, no. Like repeatedly saying no, I don't think the CFTC can handle protection of retail consumers. We can't do that. That's not why we were created. And it's just interesting to see Greenwald, Coinbase, all of these guys making making a real push right now while simultaneously playing this weird bully role of saying like, we're already one foot out the door, we're heading to Bermuda, but also we're still publicly listed.

00:26:17:13 - 00:26:31:14
Cas Piancey
It's business as usual, but also like it just all of it feels so convoluted and the straits seems so tumultuous right now. I don't know. Like what? What are you guys thinking this means for Coinbase longer term?

00:26:31:16 - 00:26:46:24
Mike Burgersburg
I mean, you can think of their strategy as somebody like with a dam in front of them that starts popping holes and water starts spewing out of it and they start sticking things in it to try to keep the water from rushing out and destroying the dam. Like that's what they're doing, right? They're trying to put out all the fires at once and they can't do it.

00:26:47:26 - 00:27:06:14
Mike Burgersburg
So yeah, it's obvious. I mean, the strategy doesn't make any sense because there is no strategy, right? They're just reacting as things happen to them, which is really inexcusable because they should have seen all these problems coming a long time ago. And I'm sure they knew these problems were coming. And yet it doesn't seem like they did much to prepare for them except try and spin stories that don't have any kind of legal basis.

00:27:07:10 - 00:27:33:02
Mike Burgersburg
You know, the only concern I have is that, you know, as we saw with Sam Bankman-fried, a lot of people will take money in Washington regardless of where you're getting it from. And my concern would be that they buy enough people to subvert our government and achieve, you know, the destruction of securities laws that took, you know, basically the Great Depression to be in for to be created and like have been effective in a lot of ways in protecting consumers for a long time.

00:27:34:05 - 00:27:40:09
Mike Burgersburg
But, I mean, if if the execution issue goes through, Coinbase ceases to exist as we know it. There's no question about that.

00:27:40:12 - 00:28:05:27
Bennett Tomlin
I think that what's especially interesting in all of this is Rostin Behnam, because I did more of the first half of the hearing and you did more. The second half did suggest that the CFTC could handle an expansion into the digital commodity spot supervision thing, but then ordered to do that, it was going to be essential to expand the budget of the CFTC by tens of millions of dollars a year.

00:28:06:01 - 00:28:28:14
Bennett Tomlin
And like the I think the last appropriations budget that the GOP suggested cut the CFTC budget. So like even in theory, if the CFTC could expand in the same way they did to supervise the swap markets, there doesn't seem to be a willingness to actually invest to make them prepared for that congestion. And the.

00:28:28:16 - 00:28:32:28
Cas Piancey
The suggestion I heard was $120 million over three years.

00:28:33:16 - 00:28:34:20
Bennett Tomlin
And 40 million.

00:28:34:25 - 00:28:46:10
Cas Piancey
Also also that Berkovitz was like pretty staunch in his suggestion that like altering these securities laws drastically is just going to create a burden and chaos, you know.

00:28:46:24 - 00:29:12:09
Bennett Tomlin
Well, and that's like the other thing is when we get into this is like the Thompson, McHenry, Johnson some other generic name proposal that's been put forward does like create this new SRO. But it kind of like dances around the issue of what's a security and what's a commodity and doesn't actually provide any new clarity on that in a way where it still falls that like anything the SEC says is a security ends up mostly being a security.

00:29:12:15 - 00:29:34:12
Bennett Tomlin
And so it doesn't really change that much except for the creation of this new like SRO, partially funded by the crypto industry where the CFTC and the SEC are supposed to collaborate, it's mostly it's performative, right? It's performative in the same way we always discuss these hearings in these bills as like it's not really a serious proposal to deal with digital assets in the United States.

00:29:34:14 - 00:29:56:19
Bennett Tomlin
It looks like a serious proposal, right? We're going to create a self-regulatory organization that's self-funding and we're going to promote regulator collaboration. Sounds like a really good idea until you look at the appropriations budget and realize that you're not funding those agencies, right? You're just creating another task You expect them to complete on even less money than they had in the year in which they failed to deal with these issues.

00:29:56:26 - 00:30:00:00
Bennett Tomlin
Right. It's not a meaningful advancement of anything.

00:30:00:08 - 00:30:16:27
Mike Burgersburg
But if you're if you're Coinbase. Yeah. Or you're Binance, it's a great it's the perfect the best of both worlds, right? Like you take the take the rulemaking and enforcement out of the hands of the people that can do it. And you put them in the hands of people who can't and then you starve them of funds. There's no way they can ever even catch up.

00:30:16:29 - 00:30:19:07
Mike Burgersburg
That's perfect. They'll never be in any enforcement. Well, and.

00:30:19:08 - 00:30:19:14
Bennett Tomlin
Like.

00:30:19:20 - 00:30:20:08
Mike Burgersburg
That's what they want.

00:30:20:08 - 00:30:39:07
Bennett Tomlin
Well, yeah, and like, as you mentioned, the CFTC there is distinct from the SEC and many other financial regulators in that it does not have any self funding mechanism, any money they make from fines and stuff goes straight back to the general treasury and they depend on the appropriations for their budget every single year with no other self-funding mechanism.

00:30:39:07 - 00:31:10:04
Bennett Tomlin
And so like putting things in the hand of the CFTC, if you think you're going to be able to gain political powers and other avenues, gives you a way to potentially then, like you mentioned, defund the CFTC. And like I think broadly, we're getting back to kind of the same reason that Sam Bankman-fried, with his support of DC, CPA and more broadly wanted the CFTC as the primary regulator, is that they are currently under resourced to deal with it and it is unlikely that they're going to be able to get the resources to deal with it.

00:31:10:11 - 00:31:18:28
Bennett Tomlin
And so the idea is you're picking the least resource regulator so that you are as limited in the regulations you have to endure as possible.

00:31:19:05 - 00:31:47:26
Cas Piancey
So this we're talking about limited resources here. And I and this leads me to another devil's advocate question in regard to the SEC and what they did with Binance and Coinbase. Right? And this idea that they mentioned, I don't know how many it was, was it 13, 18, something like that, different tokens specifically as securities. Right. Why aren't they going after those tokens as opposed to Coinbase and Binance?

00:31:47:26 - 00:31:56:29
Cas Piancey
Like why wouldn't you try to take on if those are easy to attack unregistered securities? Clearly, then why aren't you doing anything about it?

00:31:57:03 - 00:32:19:02
Mike Burgersburg
Well, I mean, I think SEC RTC to go after, right. Like there's not like the organizations behind them are even more amorphous, a lot of cases than, you know, a publicly traded company or even Binance. So that's one thing. The other thing is that these exchanges are how customers access them. So you have to if you if you want to actually protect consumers, you have to prevent consumers from being able to be scammed.

00:32:19:02 - 00:32:29:23
Mike Burgersburg
Right? So you have to cut them off at the source, which is actually the exchanges. But I mean, that would be my assumption. Also, they have the exchanges have the money that can pay the fines, whereas the token people don't.

00:32:30:02 - 00:32:52:17
Bennett Tomlin
That was going to be my leading point is that many of the cryptocurrency unregistered securities are currently broke and that even if you do want to go after them specifically like we've seen in the excerpt case, that is potentially an expensive and time consuming litigation where at best you levy a fine and make it uncomfortable for exchanges to list it.

00:32:53:00 - 00:32:59:00
Bennett Tomlin
You want to make it uncomfortable for exchanges listed as make alluded to go after the exchanges.

00:32:59:23 - 00:33:02:18
Cas Piancey
Yeah I think I think my last devil's advocate.

00:33:02:20 - 00:33:21:23
Bennett Tomlin
Sorry before you get down to that, I think and we've talked about this before, like the SEC is not some perfect good faith arbiter who acts on like each case in some hypothetical version of like what the law is and what that means in all these cases. And we're going to go after as many people as possible who are breaking the law.

00:33:21:25 - 00:33:46:11
Bennett Tomlin
They pretend they're not. But the SEC, along with all these other executive appointed regulators, are political organizations, and their leaders are, at least in some sense, politicians looking for their own advancement. Right. And so all of their decisions are kind of mediated through that framework. So they are going to pick the cases where they think it is going to benefit them the most, and that's bad, and we should do things to fix that.

00:33:46:16 - 00:33:51:29
Bennett Tomlin
But it's also an important thing to acknowledge when we're dealing pragmatically with the reality of what the SEC is.

00:33:51:29 - 00:34:14:25
Cas Piancey
Yeah, it's funny, I just remembered that library lbry had settled with or not settle. I don't even know what happened, but they had lost to the SEC and owed I don't know what it was 20 million or something like some not crazy number but large number. And now it's been knocked down to something like $100,000 because they are absolutely penniless.

00:34:14:27 - 00:34:45:27
Cas Piancey
So like you make a good point that like if they're trying to levy fines and penalties, the reality is most of these most of these coins, the operators will go broke fighting instead of instead of trying to. Yeah. Trying to like let things play out the way they they will you know what we haven't we haven't discussed the coordinated state state prosecutor move so yeah let's let's get into that.

00:34:45:27 - 00:35:12:21
Bennett Tomlin
I mean it doesn't really seem that shocking to me, right. It's kind of like what we saw in the end when they finally went after Celsius. Rate is a bunch of the states all filed like simultaneous orders saying, hey, if you're violating federal laws, you're probably violating our laws, too. And so a bunch of states did that. What Alabama, California, Illinois, Kentucky, Maryland, Vermont, New Jersey, South Carolina, Washington and Wisconsin.

00:35:13:12 - 00:35:32:09
Bennett Tomlin
So, yeah, I mean, all of those states have issued their show case orders, which means Coinbase has like a month, four weeks or something to explain why they're not selling unregistered securities in each of these states, which is just a lot more paperwork for Coinbase to deal with. But Paul's got a good team, I'm sure.

00:35:32:11 - 00:35:35:24
Cas Piancey
I mean, this is why I'm like, I'm curious if we I just.

00:35:35:24 - 00:35:54:19
Mike Burgersburg
I just love the assault, like the assertion by the crypto folks that there's a conspiracy because these things got filed on the same day. It's like these guys talk to each other. Believe it or not, the regulators from states and the federal government talk to each other because they're part of like the same kind of system. So it's not really all that surprising that, you know, these things could be filed at the same time.

00:35:54:24 - 00:36:29:25
Cas Piancey
But yeah, yeah, the conspiracy theories are a little out of hand at this point, but it doesn't I mean, this doesn't help necessarily that all these things are happening at once. I do, in my heart of hearts believe that this is like pure embarrassment after tax and and all the escapades of last year that there's little like you don't the government doesn't ever do things in a in like any kind of efficient coordinated way like coordination insofar as they talk to each other a little bit like yeah, there is no there is no conspiracy theory needed here.

00:36:30:14 - 00:36:53:22
Cas Piancey
But yeah, there is a lot going on. And I do think you're you're right to suggest that perhaps this changes Coinbase's business model forever. I'm also I think everybody is on the edge of their seats about what this means for Binance because it either means not that much possibly, or it means a lot. There's criminal charges eventually involved.

00:36:54:12 - 00:37:02:15
Cas Piancey
So I don't know. Yeah. Any, any other what other, what other craziness has to have. I've forgotten some stuff here.

00:37:02:21 - 00:37:28:27
Bennett Tomlin
Yes. Well, our favorite shadow banker got sentenced to six years in prison. So on Monday, the same day this Binance's case dropped three months delayed sentencing of Reginald Fowler, one of the principles of Crypto Capital Corp Episode Six I want to say five maybe was sentenced to six years in prison for wire fraud, operating an unlicensed money transmitter and a bunch of other stuff.

00:37:29:00 - 00:37:50:04
Bennett Tomlin
At the last second, the U.S. attorney tried to get some of the counterfeiting stuff that the FBI agents had mentioned in there. Which case I got to ask you now, this is this might not make the actual podcast, but did you know that Reggie was caught in 2016, the Canadian border with counterfeiting stuff? I knew the 2019 time he got out when it was at his house, but I didn't know the 2016 time.

00:37:50:11 - 00:38:16:10
Cas Piancey
Do you remember there was a Twitter account that posted a bunch of paragraphs from a book that some other person had written and that had mentioned Reginald Fowler and this car wash business that they had started with Reggie and how this car wash business had gone totally sour, like incredibly fast, and how Reggie had like, fucked him out of this multimillion dollar car wash business.

00:38:16:10 - 00:38:32:19
Cas Piancey
But I'm just curious if that was like the same time period. There's 2016 like Shady weird stuff going on. I can't believe he wasn't even charged for it. I think I'm it's blows my mind that you could be caught counterfeiting money and they're like, we'll just charge you with some other stuff.

00:38:32:20 - 00:38:43:05
Bennett Tomlin
See, that's the thing. He wasn't caught counterfeiting. He was caught with some, but not all of the supplies necessary for counterfeiting. And with counterfeit bills.

00:38:43:13 - 00:38:47:18
Cas Piancey
I guess that's. That's reasonable. Reasonable doubt? I don't know.

00:38:48:20 - 00:38:51:03
Bennett Tomlin
Yeah, but, yeah, he's spending six years in prison.

00:38:51:20 - 00:38:54:28
Cas Piancey
That's less than he was originally going to be facing, isn't it?

00:38:55:03 - 00:39:13:20
Bennett Tomlin
It isn't. It is in his defense, wanted basically time served plus a few weeks. And like under the sentencing guidelines, I think he was eligible for, like, depending on how you interpreted it up to like 12, I want to say. So this is maybe on the little bit shorter end, but it's really among white collar criminals and stuff like that.

00:39:13:20 - 00:39:30:20
Bennett Tomlin
A six year sentence is pretty substantial and we can talk about what that means for white collar prosecutions when you can misappropriate over $1,000,000,000 in a six year sentence seems pretty substantial, but that's like a broader societal issue rather than like a Reggie Fowler issue, you know?

00:39:30:29 - 00:39:51:24
Cas Piancey
Well, I just found out. So this is a federal was this a federal prosecution or was or or not like I know that that for yeah, for Liz for for Elizabeth Holmes for Liz Holmes the mom and and lady that is, you know, only doing good in the world I know she.

00:39:51:26 - 00:39:52:23
Bennett Tomlin
Thought of Mr..

00:39:54:01 - 00:40:06:13
Cas Piancey
Right She she's facing 11 years now. Right. But then someone said like oh she'll get a ton of time off for good behavior, but it turns out that.

00:40:06:16 - 00:40:08:00
Bennett Tomlin
In federal prison, federal.

00:40:08:09 - 00:40:30:26
Cas Piancey
In federal prison, you have to you have to do 85% of your of your sentence. So I guess even for for good behavior, Reggie is facing, what, then? Five, five plus years in in prison. So, yeah, I mean, that's that sucks. Can I say one thing while we're here is do you think this is going to mean anything for other cryptocurrency exchange tokens like Binance?

00:40:30:27 - 00:40:51:08
Cas Piancey
Binance's Token BnB is the one that's in the crosshairs of the SEC. It seems like FTT kind of propped up FTX and that might be why they're going after BNB. I'm curious if, like these other exchange tokens are going to get fucked too, or if they don't even matter enough to to for the SEC to chase them.

00:40:51:08 - 00:41:03:10
Mike Burgersburg
I don't think they matter enough. Yeah. I mean, like which like so Okex is pretty big. They don't really operate in the U.S., I mean there's OKcoinor whatever. They I know they have a U.S. branch, but like, I don't know how split up that is. Like most of those have not.

00:41:03:16 - 00:41:07:21
Cas Piancey
They have one will be as a token bitmex as the token.

00:41:07:21 - 00:41:26:15
Mike Burgersburg
One but it's like, yeah, yeah, they have one. But I don't know, like I, I mean they should. Yeah they should but like, will they. I don't know. I mean, okay. Like that one is so you can look at on chain, it's like it's all held in fake wallets like there's like no real interest in that token despite it being one of the biggest in the market.

00:41:26:15 - 00:41:34:27
Mike Burgersburg
Like, all those things are totally faked. But I don't know. I mean, tether, right? Why the why haven't they gotten tether yet? I don't understand it. I mean.

00:41:35:01 - 00:41:51:02
Bennett Tomlin
Is the registered only legitimate business. Mike they're the guys in crypto. They're there's billions of dollars in renewable energy production when they've got 200 million in cash on hand. They don't ask me to tell you that. Me a bad.

00:41:51:02 - 00:42:03:03
Cas Piancey
Refuse to exchange. Never. They've never made a bad trade in their history. It's like they are the best traders in the world and they're only doing good for for the planet. I mean, they're humanitarians. If we're trying to if they want to play.

00:42:03:03 - 00:42:04:20
Mike Burgersburg
The real version of Sam Bankman-fried.

00:42:05:03 - 00:42:06:24
Cas Piancey
Right? Yeah. Honest tether.

00:42:06:28 - 00:42:45:12
Bennett Tomlin
The world's best effective altruist. Yeah. Exchange tokens are fucked. They're the most terrible thing I want to add. This is a tiny Binance thing, so I feel justified including it.. Protos had some interesting reporting about Wyre a payment processor who we talked about, who I talked about briefly and a couple of the non podcast videos and our YouTube channel where is a cryptocurrency payments processor that it seems like Binance US is now using. Wyre also currently has their their entity in the European Union that their terms of service tell people to go to is Wyred Oü of Estonia.

00:42:45:14 - 00:43:08:17
Bennett Tomlin
It's currently in liquidation and is controlled by a fraudster. The entity in the UK which is still referenced in their policy, is currently dissolved and has been for over a month but is still listed in their policy. They said their CEO stepped down in January, their annual reports they filed in February for their primary corporation. That one is still active, believe it or not.

00:43:08:24 - 00:43:33:29
Bennett Tomlin
Still lists the CEO who's supposedly stepped down. So they're in some type of disarray. Well, they're currently seeming to serve Binance U.S. So, yeah, I think there's still a few other payment processors and other bad actors in the cryptocurrency ecosystem who are going to find that as the tide continues to go out, they're going to be in more and more precarious positions.

00:43:34:08 - 00:43:55:23
Mike Burgersburg
Yeah, for me, that the most one of the most interesting parts of this whole thing that I've learned about is the payment processor aspect of the industry and more broadly, just how these companies function in what they're doing is it's just fascinating how dirty they all are. It's all these like pay prepaid debit cards. Everybody's doing prepaid debit cards.

00:43:55:23 - 00:44:04:22
Mike Burgersburg
It's just crazy. And the amount of money these guys are moving is insane. You know, it's like, which one was the one that Rails banked? Did you hear of them?

00:44:05:00 - 00:44:06:21
Bennett Tomlin
Melzer I don't think they were.

00:44:06:27 - 00:44:30:09
Mike Burgersburg
They were the yeah, they were a UK based one. They were valued at $1,000,000,000. They took over. It's not even like you can make this shit up. They literally had taken over Wirecard's prepaid debit card business in the UK and then proceeded do the exact same business model where they were creating, they were servicing all of these like defi crypto things that had like crypto based prepaid debit cards and stuff like that.

00:44:30:23 - 00:44:35:18
Mike Burgersburg
And they were, they, they just went insolvent recently. I never read the article about that, but there's, there's a ton of them.

00:44:35:22 - 00:44:40:02
Bennett Tomlin
It just became public that they were insolvent is what I believe you mean.

00:44:40:29 - 00:44:41:25
Mike Burgersburg
Yeah right. Yeah.

00:44:42:13 - 00:45:06:00
Bennett Tomlin
Yeah. No that is still one of the craziest things. And like there's I go down that path every so often and just eventually you reach some out of date like WordPress Forum website for this entity that is clearly connected to everything else, but that is also clearly not being updated. And you're like, Oh, so someone bought something and we're not getting any further without a subpoena.

00:45:06:11 - 00:45:20:26
Bennett Tomlin
I hit that dead end a lot when I start digging into payment processors or you look in like right before it became a payment processor, the corporate entity was doing forex trading. They're always forex traders right before they become payment processors.

00:45:21:05 - 00:45:44:25
Mike Burgersburg
It's really fascinating as a I mean, and just like the little pieces that connect the binary options people to crypto, right? Like Bybit CEO is a former binary options executive right after access European operations being based off of a binary options operation. Right? All these guys, it's amazing. Or or Celsius for God's sake. I mean, the ties there are just insane.

00:45:45:04 - 00:45:47:13
Mike Burgersburg
It's amazing. Yeah. They all transitioned over to crypto.

00:45:47:20 - 00:46:00:03
Bennett Tomlin
Do you? I know the name of Binance's Australia derivatives corporate entity before Binance took it over and converted it into there in converted into it is now our shares trading. It's called easy capital.

00:46:00:11 - 00:46:01:27
Mike Burgersburg
It sounds That sounds good. Yeah.

00:46:02:09 - 00:46:04:13
Bennett Tomlin
Capital's always easy. That's what I say.

00:46:04:26 - 00:46:11:29
Mike Burgersburg
Oh my God. It's amazing though. Yeah. Well never, never, never run out of things to talk about yet.

00:46:12:01 - 00:46:35:07
Cas Piancey
Anything else. Yeah I, I know. I mean I think, I think that just about covers it. I can only assume that by the time we release this, even if it's tomorrow, it's going to be an entirely different world. And that some other horrible news for the industry will be coming out, whatever that may be. I guess we'll be discussing it soon.

00:46:35:28 - 00:46:40:22
Cas Piancey
And I hope that this is even still relevant by that time. Yeah, but.

00:46:41:03 - 00:46:42:07
Mike Burgersburg
I'm I'm holding out hope.

00:46:42:07 - 00:46:43:01
Cas Piancey
Thank you for joining me.

00:46:43:01 - 00:46:50:08
Mike Burgersburg
This is like the week of enforcement. And every day is a new thing. And that's what I hope you know, Monday through Friday, they just keep hammering out. But we'll see.

00:46:50:08 - 00:46:54:28
Bennett Tomlin
Yeah, because you have no professional obligation to cover it. You can just watch it if you want.

00:46:56:01 - 00:46:56:08
Mike Burgersburg
Yeah.

00:46:57:00 - 00:47:01:29
Bennett Tomlin
I've read so many dozens of pages of S.E.C. bullshit over the last few days.

00:47:02:13 - 00:47:04:06
Mike Burgersburg
If you like it going live.

00:47:04:06 - 00:47:23:11
Bennett Tomlin
Fine, fine. And I just before we say off, want to say thank you, Mike, for spending your time with us. And CasCoin has not been named as security by the SEC will not be named as security by the SEC and cannot be named as security by the SEC, because we say it's not a security. If it was a security, we would tell you and then you wouldn't invest in it.

00:47:23:13 - 00:47:27:25
Bennett Tomlin
But it's not a security and never will be. And that's what you must remember.
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3 responses to “Episode 119 – Binance and Coinbase Sued by the SEC (feat. Dirty Bubble Media)”

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