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Newsletter | June 21, 2023

In Case Of Emergency Spin Revolving Door

BigLawCryptocurrencyLarry SummersRevolving DoorSEC
In Case Of Emergency Spin Revolving Door

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A silver lining of FTX’s implosion last November was the immediate reorientation of media coverage of the crypto industry’s grift. For a brief moment, mainstream outlets were able to look beyond crypto’s false promises to actually educate the public on the significant levels of fraud perpetrated by the likes of Sam Bankman-Fried and the industry’s growing influence in Washington, including attempts to secure favorable legislation and regulations. And, for the most part, this increased scrutiny yielded benefits. Both crypto-captured and crypto-curious politicians sought to distance themselves from the industry by returning campaign contributions, downplaying their boosterism, and/or re-evaluating their positions entirely. The spread of contagion from FTX’s collapse even prompted prominent figures outside of public office, like Larry Summers, to end (some of) their relationships with various crypto firms.

However, in the absence of actual changes to ethics policy, this shame-based course correction could only do so much — or in this case so little — considering how quickly Congressional crypto shills returned to form by once again advocating on behalf of the industry. In the aftermath of FTX’s collapse, despite there being no shortage of bad press since, crypto firms have remained able to easily recruit public servants, both former and current, into their ranks.

In mid-May, Coinbase announced the formation of a global advisory council which included three former members of Congress: Pat Toomey, Sean Patrick Maloney, and Tim Ryan. (Disturbingly, Sean Patrick Maloney remains Biden’s nominee to serve as the ambassador to the Organization for Economic Cooperation and Development while on Coinbase’s payroll.) Binance has also bolstered its legal ranks by bringing on government lawyers with decades of regulatory experience. While over in Congress, House Republicans in the Financial Services and Agriculture committees released a draft bill that would offer the Commodity Futures Trading Commission (CFTC) near total jurisdiction over digital asset regulation — an explicit goal of Bankman Fried’s lobbying.

These frustrating displays of pervasive industry influence, however, have been overshadowed by the enforcement actions of state and federal regulators against Binance and Coinbase. In the second week of June, the Securities and Exchange Commission (SEC) announced back to back lawsuits against the world’s largest and second-largest cryptocurrency exchanges, respectively. The move was the culmination of the agency’s patient approach to regulating crypto. After two years and 130 digital asset-related case wins, Chairman Gary Gensler reasonably decided that courts would appropriately apply securities laws to even the industry’s heaviest hitters

Though the details of each case differ, the SEC is essentially suing both firms for operating in direct violation of established securities law — and, in Binance’s case specifically, engaging in outright fraud. While a full breakdown of these respective lawsuits is outside the scope of this newsletter (but can be found over at Molly White’s excellent blog), it would not be an understatement to say that these cases, if successful, represent an existential threat to the crypto grift in the United States. A grift that is clearly  losing steam by the minute. 

As my colleague Henry Burke noted in our Hackwatch newsletter a fortnight ago, the fickle investor class has all but abandoned crypto, redirecting the capital that kept the industry afloat these past few years towards the next frontier of regulatory arbitrage — generative artificial intelligence. Likewise, even firms that aren’t in direct litigation with regulators, like Crypto.com, have seen the writing on the wall, suspending their operations in the U.S. Though the opaque nature of crypto trading allows markets to maintain the veneer of stability via high speculative values, it’s safe to say that the industry is in an increasingly fragile state.

With all these factors in mind, the SEC’s lawsuits could prove to be crypto’s death knell, at least with respect to the U.S. economy. Too brash a statement? Consider the incredibly damning evidence the SEC has against the firms. (A good rule of thumb when operating an unlicensed securities exchange in the U.S. is to not put in writing that “we are operating a fking unlicensed securities exchange in the USA bro.” An incredibly low bar that Binance’s Chief Compliance Officer still couldn’t clear — also funny that the criminal confession was deemed appropriate to commit to writing, while eliminating two letters from the profanity was deemed necessary). And yet, the embattled industry may be able to survive its clash with regulators thanks to Binance and Coinbase’s bullpen of regulatory revolvers at BigLaw firms.

SEC alumni feature prominently in Binance’s (and its affiliate entities’) defense teams; these revolvers include George Canellos, Richard Grime, and William McLucas. Canellos — currently a partner at Milbank LLP, where he worked prior to revolving into the public sector — served as co-director of the SEC’s enforcement division from 2009-2014, and before that was the chief of the major crimes unit at the U.S. Attorney’s Office in the Southern District of New York. Grime, who has worked at Gibson Dunn & Crutcher LLP since 2015, spent the previous nine years of his career at the SEC’s Division of Enforcement; the latter four of which as an Assistant Director. The most notable revolver of all, however, is McLucas. Currently at WilmerHale, McLucas spent 21 years at the SEC, nine of which were as the agency’s Director of Enforcement. As such, he holds the distinction of being the longest serving director in the division’s history.

While Coinbase’s defense team features only one SEC alum in Stevin Peikin, his history of revolving between public office and the BigLaw firm Sullivan & Cromwell includes tenures as the SEC’s Enforcement Division co-director (from 2017-2020) and Chief of the Assistant U.S. Attorney Office’s Securities and Commodities Fraud Task Force in the Southern District of New York (from 1996-2004).

With such a star-studded cast of former regulators at their disposal, it is no surprise that Binance and Coinbase are both willing to fight tooth and nail against the SEC’s lawsuits. Despite venture capitalists, investment pundits, and other crypto firms alike all acknowledging that the jig is up, the aforementioned experts’ seem undeterred in their willingness to lend their reputations, expertise, credibility, and relationships to keep this con alive. The only question worth asking now is why these former public servants are so adamant about defending an industry that has yet to yield any public benefit?  

CORRECTION: A previous version of this newsletter misstated that Sean Patrick Maloney was on Binance’s payroll. He is on Coinbase’s payroll.

IMAGE: “Set of cryptocurrencies on dollar bills by marcoverch is marked with CC BY 2.0.

BigLawCryptocurrencyLarry SummersRevolving DoorSEC

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