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Not Just Another Enforcement Action

On Wednesday, Coinbase, one of the largest and longest operating crypto exchanges and one of the few to operate within the US, was hit with a Wells notice, which is what the Securities and Exchange Commission tosses through the door just before they start shooting. Like a flash bang grenade.

There are few details, and Coinbase took the opportunity to beat an old drum: We tried to sort all this out in advance and register by the book – but there is no book and you guys wouldn't even take our calls!

Long story short, if the SEC is after Coinbase, no one is safe. They are probably the most careful and legally aware operation going, and have made a reputation as the go-to platform for normies. Their bet, which may be off now, was that taking the hard road, engaging with US regulators and getting registered in the US would be a huge competitive advantage in a world where doing business out of the Cayman Islands is considered good optics.

But there's also a good chance this is just what everyone needed. Critics say the SEC owes everyone some guidance on what's allowed, instead of going around one by one and saying what's not. They're practicing regulation by enforcement, which does nothing to provide clarity.

A lawsuit will, and Coinbase is prepared to fight. This could be the forcing function that's required to establish ground truth on how crypto businesses need to operate in the US.

American policy makers are far behind, but it is becoming clearer each week that few currently in government believe crypto is safe for consumers or useful for business. The threat of over regulation pushing financial innovation off shore seems to fall on deaf ears. Regulation is coming, and it is not going to go down easy.

Pres. Joe Biden last year ordered White House economists to study crypto and offer recommendations. This week they came, in the annual Economic Report of the President.

Crypto enthusiasts hoping for a friendly stance got a bucket of cold water instead. The subject gets an entire chapter to itself, and that is not good in a report filled with crypto put-downs.

"Crypto assets do not appear to offer investments with any fundamental value, nor do they act as an effective alternative to fiat money, improve financial inclusion, or make payments more efficient," the authors conclude.

The report falls in line behind federal regulators orchestrating a broad crackdown on the sector. Since the collapse of crypto exchange FTX:

  • The SEC has announced a flurry of lawsuits and forced settlements with leading companies such as Genesis Capital for offering unregistered securities products to investors.
  • Regulators have scored direct hits on everything from stablecoins to staking, imposing millions of dollars in fines and shutting down products.
  • All three of the top US banks servicing crypto have been taken over by regulators, including one under unusual circumstances (see below).
  • The IRS is now considering taxing NFTs like luxury goods.
  • Even before yesterday's SEC letter, Coinbase was planning an exit strategy, exploring setting up a new platform somewhere else.

The whole thing has crypto conspiracy theorists in overdrive.

Rumors are flying that Signature Bank, one of the three largest in the US to offer crypto services and therefore a key on-ramp and off-ramp for converting fiat currency into tokens, was 86'd not for fundamental financial reasons, but ... can you guess?

“I think part of what happened was that regulators wanted to send a very strong anti-crypto message,” Signature board member Barney Frank, a former chairman of the House Financial Services Committee and sponsor of the Dodd-Frank financial reforms enacted after the 2008 banking crisis, told CNBC at the time. “We became the poster boy because there was no insolvency based on the fundamentals.”

I guess it's possible to sneak in a non-insolvency bank takeover when other banks are tipping over like dominoes? Who's going to notice?

Some people are closely watching the FDIC's sale of Signature, and waiting to see what will happen to its crypto business. They believe the agency plans to force any potential buyer to shutter it, although the FDIC has denied any plans to require that. We'll see what happens.

Meanwhile, as the feds raid crypto in the name of protecting consumers by making it harder or impossible to participate, Bitcoin whales are warning (and betting, as we recently wrote) the centrally backed global financial system itself is set to implode. Crypto is a target, under this view, because it is a viable replacement for the dollar, so to the powers-that-be, that's a threat that must be stopped.

If they are right, that would turn Bitcoin not only into the "effective alternative to fiat money" that the White House economists searched for but could not find, but one of the few viable alternatives to fiat money in a world of hyperinflation and a devalued greenback, they argue.

It's a tough card to follow, and self-serving for anyone long on Bitcoin. It's unlikely? But it does focus the attention.

Central bankers are in a Mexican standoff between inflation and bank stability: Raise rates to bring down inflation, further damage banks exposed to long term treasuries, whose prices go in the opposite direction of yields. Protect the banks by holding interest down, and risk runaway inflation.

The Fed took a middle course Wednesday, edging up the prime rate 0.25% to 5% – a level not seen since 2007, but less than the 0.5% rises it has been doing until this week.

If that's not enough, The Economist just reported that billions of dollars are moving out of the banking system, making it weaker and more susceptible to shocks, especially among smaller regional institutions.

It's vanishing not into thin air, as the "Bitcoin maxis" might have you believe, but into money market funds, where investors collect a higher rate of return than ordinary bank deposits in assets backed by the Federal Reserve itself.

This is worrying, they say, but not a full blown crisis. Yet.


Part of the series "Demons of the Night" from AI artist Ivona Tau.

Artist 1962 imagines how the war on drugs might have been waged differently if President Reagan had tried psychedelics. Recently sold on Auction.

"Flat Earth" by MoonLight Media is up for auction on Foundation.

"Rise of Her" by Morph.

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