Bitcoin rally stalls as crypto dragnet ensnares Coinbase, Do Kwon, and Lindsay Lohan: ‘We will see more enforcement news like this’

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Last year’s cryp­to-mar­ket melt­down trig­gered a series of bank­rupt­cies that almost com­plete­ly reshaped the dig­i­tal-asset indus­try. This year, gov­ern­ment watch­dogs appear to be arriv­ing on the scene to fin­ish the job.

The past week saw the indus­try hit with anoth­er del­uge of enforce­ment news, from the SEC’s threat to take legal action against Coin­base Inc. and its suit against the Tron blockchain net­work to the appre­hen­sion of cryp­to fugi­tive Do Kwon. Even celebri­ty cryp­to pro­mot­ers like actress Lind­say Lohan and rap­per Soul­ja Boy got caught up in the crackdown. 

As the head­lines piled up, the devel­op­ments put a lid on a ral­ly in Bit­coin that had been push­ing the old­est token back up toward the close­ly watched $30,000 lev­el. A glitch Fri­day morn­ing at cryp­to exchange Binance took spot trad­ing offline for more than two hours on a plat­form whose mar­ket dom­i­nance has only grown as oth­er play­ers have fold­ed, adding to the sour mood. Bit­coin drift­ed around $27,500 on Saturday.

The col­li­sion course between the US gov­ern­ment and cryp­to true believ­ers’ vision of a sys­tem where mon­ey can be freely exchanged around the world with­out “cen­sor­ship” by author­i­ties was accel­er­at­ed by the fail­ure of the Ter­ra blockchain’s sta­ble­coin to main­tain its $1 peg and the bank­rupt­cy of FTX last year, which com­bined to vapor­ize almost $2 tril­lion of dig­i­tal wealth. This month’s implo­sion of cryp­to-friend­ly banks Sil­ver­gate Cap­i­tal Corp. and Sig­na­ture Bank has added fuel.

At the cen­ter of much of the recent actions is the SEC’s deci­sion to treat many cryp­toas­sets as secu­ri­ties that must be reg­is­tered with the agency and sub­ject to all the reg­u­la­tions that go along with it. Need­less to say, dig­i­tal-asset afi­ciona­dos were livid with much of the week’s news flow, espe­cial­ly when it comes to pub­licly list­ed Coin­base, which says it has repeat­ed­ly tried to engage with the reg­u­la­tor to no avail. 

“A rep­re­hen­si­ble amount of resources and brain­pow­er have been spent in the US try­ing to engage with this SEC and try­ing to cre­ate sub­stance and a path out of the wraith­like com­ments issued by the agency,” Sheila War­ren, chief exec­u­tive of the Cryp­to Coun­cil for Inno­va­tion trade group, said in an email. “Mean­while, most oth­er major economies are active­ly in pro­duc­tive con­sul­ta­tion with experts about how to land the reg­u­la­to­ry plane.”

The treat­ment of many cryp­to coins as secu­ri­ties means the SEC is test­ing its author­i­ty, leav­ing those caught up in its sights an option: capit­u­late and pay a set­tle­ment with the reg­u­la­tor, or fight it in court. Coin­base CEO Bri­an Arm­strong has made it clear that the com­pa­ny will fight the com­plaint, tweet­ing that the process will prove “that the SEC sim­ply has not been fair, rea­son­able, or even demon­strat­ed a seri­ous­ness of pur­pose when it comes to its engage­ment on dig­i­tal assets.”

Six of the eight cryp­to-tout­ing celebri­ties – includ­ing Lohan and YouTube prankster-turned-box­er Jake Paul – decid­ed just to cut the SEC a check after the reg­u­la­tor accused them of tout­ing coins trad­ed on the Tron blockchain with­out dis­clos­ing they were being paid to do so. 

DeAn­dre Cortez Way – aka rap­per Soul­ja Boy – and singer Austin Mahone haven’t set­tled. The celebri­ties are keep­ing qui­et about the whole issue. (For what it’s worth, the only thing Soul­ja Boy was hawk­ing this week on Twit­ter was a pink hood­ie fea­tur­ing a car­toon image of his smil­ing face. That is almost def­i­nite­ly not a security.) 

Of course, some of the crimes being alleged went beyond just deal­ing in unreg­is­tered secu­ri­ties. The case against Justin Sun and three of his com­pa­nies con­nect­ed to the Tron blockchain also involves accu­sa­tions of fraud and mar­ket manip­u­la­tion that arti­fi­cial­ly inflat­ed the trad­ing vol­ume of tokens by encour­ag­ing employ­ees to do more than 600,000 so-called wash trades. Sun wrote on Twit­ter that he believes the SEC’s com­plaint lacks merit.

Do Kwon’s indict­ment in the US, which came short­ly after his arrest Thurs­day in Mon­tene­gro, also revealed that the gov­ern­ment believes the col­lapse of his Ter­ra blockchain project was more than just a $60 bil­lion acci­dent. Accord­ing to pros­e­cu­tors, Kwon also alleged­ly engaged in mar­ket manip­u­la­tion and deceived investors about cer­tain aspects of the project. His US lawyer did not respond to a request for com­ment from Bloomberg.

By the end of the week, it had all start­ed to look like a dra­ma that could be called “Law & Order: Web3.” So what will the next episode entail? Many indus­try watch­ers are brac­ing for more shoes to drop. 

“Over­all, I expect we will see more enforce­ment news like this in the future giv­en we are oper­at­ing in an envi­ron­ment with lit­tle or no reg­u­la­to­ry guid­ance,” said Duke Uni­ver­si­ty finance pro­fes­sor Camp­bell Harvey. 

For the cryp­to opti­mists search­ing for a sil­ver lin­ing, it’s all about look­ing at the future instead of the dwelling on the ugli­ness of the past week. The lat­est bout of dra­ma in the mar­ket “tells us noth­ing,” accord­ing to Aaron Brown, a cryp­to investor who writes for Bloomberg Opinion

“Use­ful atten­tion should be direct­ed to the new ships prepar­ing for depar­ture, the ones who will lead the next boom,” he said. Many of the devel­op­ments of the past week were just “the flot­sam and jet­sam wash­ing ashore long after the storm has passed.”

Or maybe Soul­ja Boy put it best back in his MySpace days when he rapped: “On the inter­net, got ‘em jumpin’ off the wall.”

— With assis­tance by Emi­ly Nicolle



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