The SEC's "Gross Abuse of Power"

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The SEC’s “Gross Abuse of Power”

The SEC has long been the ‘final boss’ for the crypto industry here in the U.S., wielding its mighty hammer of enforcement with a gusto that's both feared and, let's face it, sometimes chuckled at by those in the trenches of blockchain innovation.

The SEC's been on a bit of an enforcement spree, amassing a record-breaking collection of actions that have left the industry buzzing and, in some cases, bristling. But it's not all high-fives and victory laps over at SEC HQ. The Commission has had its fair share of setbacks in the ring, most notably:

• The Ripple Rumble of July 2023: In a verdict that had crypto enthusiasts popping champagne, a judge ruled Ripple didn't violate securities law, slamming the SEC's approach as "arbitrary and capricious." This wasn't just a win for Ripple but a moment of vindication for every crypto advocate who's ever shouted "regulation by enforcement" from the rooftops.
• The Greyscale Grapple of Last August: Another courtroom, another upset. This time, the SEC's attempt to block Greyscale's Bitcoin trust from morphing into an exchange-traded fund was met with judicial resistance, with the court rejecting the SEC's reasoning as, well, unreasonable.

Even the SEC’s own, “Crypto Mom” Hester Peirce, keeps throwing shade at her colleagues for their crypto crackdowns, becoming a bit of a legend in the process.

The SEC has already lost in the court of public opinion; now they're getting slammed in judicial courts.

The SEC's latest defeat in court is noteworthy not because it concerns a high-profile entity but due to the federal judge's damning critique of the SEC itself. This judgment doesn't just challenge the SEC's actions in a singular case but raises fundamental questions about its approach and integrity in the broader regulatory landscape.

Federal Judge: The SEC’s “Gross Abuse of Power” and “Pervasive Misconduct”

A federal judge ruled that the SEC committed a “gross abuse of power” in its legal battle with DEBT Box, a Utah-based crypto company.

The case revolved around the SEC's allegations of fraud against DEBT Box, leading to a temporary asset freeze. However, the judge found the SEC's conduct in securing and defending this restraining order deeply flawed, accusing its attorneys of presenting misleading and false evidence. This led to the unprecedented order for the SEC to cover the defendants' legal fees, raising serious questions about the regulator's approach to enforcement in the crypto space.

And you know who’s ultimately footing the bill for the SEC’s screw-up? Me, you, and every American taxpayer. Wonderful.

Crypto Lawyers Chime In

Experts have weighed in heavily on the matter, highlighting the gravity of the judge's 80-page opinion. MetaLawMan pointed out the damning nature of the judgment against the SEC's integrity, saying, “The judge made it crystal clear that the SEC lawyers did not make an error -- they lied intentionally.”

He also highlighted that the SEC’s misconduct was not attributable to just a few bad apples; rather, "the pervasive misconduct exhibited demonstrates a pattern of organizational bad faith and broadly implicates the Commission itself—not just isolated individuals."

Coinbase Chief Legal Officer Paul Grewal emphasized the fundamental breach of trust and the undermining of judicial proceedings by the SEC's conduct.

Miles Jennings, General Counsel for Andreessen Horowitz, reflected a shift in the professional community's perception. He noted a growing reluctance to associate with former SEC crypto enforcement lawyers, underscoring a call for accountability and change within the regulator.

And, yet, despite all this backlash, Gary Gensler continues his campaign to kill crypto.

The SEC Investigates Ethereum

Hot on the heels of its recent courtroom dramas, the SEC isn't slowing down, now turning its eagle eyes toward Ethereum. CoinDesk and Fortune are buzzing with reports that the SEC's latest crusade targets Ethereum and its Foundation, aiming to tag Ethereum (ETH) as a security. This move could shake the very foundations of the crypto world.

The buzzkill doesn't stop there.

Before the ink could even dry on reports of the SEC's Ethereum probe, the dream of a Spot ETH ETF was already dimming.

Coinbase's sit-down with the SEC about an Ethereum ETF should've been a glimmer of hope, but the vibe check from experts like James Seyffart, Eric Balchunas, and Jake Chervinsky suggests we might want to hold off on the celebration.

In the midst of this regulatory roller coaster, Patrick McHenry is taking a serious side-eye at the SEC's latest antics, hinting that it might be time for Congress to step in.

Talk about drama. This could be the plot twist Ethereum didn't see coming.

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Watch This Newsletter

If you’ve been subscribed for a long time, you might remember the Triple Entry Lunch Break, a livestream review of this newsletter with occasional guest appearances. Well, in this entry, we’re bringing something similar into play. Bitwave CEO Pat White and I sat down last Friday to chat informally about a lot of the stories that made it into this newsletter - and a few that didn’t. If you’d rather watch a podcast-style conversation than read a newsletter to get your Triple Entry fix, try this out. 👇

Other Significant Findings

Check it out - three more stories of interest hand-picked for YOU, aka a thought leader in crypto accounting and finance. We just don't have room to give these a full write up.

• Sphere Wif Hat? What be dat? [Cointelegraph] Dogwifhat (WIF), a Solana-based memecoin, has jumped by 25% to hit a record high of $3, as enthusiasts raised over $700,000 for a crowdfunding effort to display the token's logo on the Las Vegas sphere.* The project, dubbed "Sphere Wif Hat," surpassed its initial goal of $50,000, with donations exceeding $702,000 in USD Coin (USDC). Following the campaign's success, WIF's price spiked, reaching $3 and a market capitalization of $3 billion. However, not all within the crypto industry welcomed the move, suggesting it could signal market overheating. Despite criticisms, WIF's market cap has surpassed that of other memecoins, making it the 51st largest cryptocurrency by market capitalization. WIF has shown remarkable performance since its launch in late November last year, posting gains of over 1,000,000%.

*A sentence that we'd love to try to say to a medieval peasant just to see the blank confusion on their faces.

• Biden’s Budget Bad for Miners: [Coindesk] U.S. President Joe Biden's proposed budget for the upcoming fiscal year includes regulations targeting digital assets, aiming to generate nearly $10 billion in 2025 and over $42 billion over the next decade. On the heels of Biden's recent State of the Union address, the proposed regulations cover wash trading rules, information reporting requirements for financial institutions and digital asset brokers, foreign crypto account reporting rules, mark-to-market rules, and an excise tax on mining. These measures supposedly aim to close tax loopholes benefiting the wealthy and large corporations. Wash trading rules are particularly aimed at preventing tax abuse in the NFT markets. The proposal projects significant revenue generation from including digital asset transactions in wash sale rules and mark-to-market rules, with additional revenue expected from an excise tax on mining. This isn't the first time such measures have been proposed; last year's budget included similar provisions.
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• Dencun is Good News for L2s: [Coindesk] Ethereum activated its "Dencun" upgrade, the network’s biggest move since The Merge, aimed at reducing data fees and boosting growth on layer-2 networks like Arbitrum and Polygon. Warning: lots of technical babble here, but in a nutshell - the upgrade implements "proto-danksharding," a transaction category storing data on Ethereum via "blobs." This shift benefits layer-2 networks, facilitating more efficient and cheaper data settlement. Additionally, the upgrade introduces other Ethereum Improvement Proposals (EIPs) focused on reducing fees, improving blockspace, enhancing bridge designs, optimizing the Ethereum Virtual Machine, and more, setting the stage for potential fee wars among layer-2 networks competing for users. So this is good news for L2s.