The SEC Won't Let You Be

Malt Liquidity 96

May 11, 2023

20 Million Other Securities Emerge…

Let’s rewind to something I wrote back in November 2022:

Pretty much all cases involving token sales revolve around whether said tokens were unregistered securities. To determine whether an offering is a security, the courts developed a test called the Howey test, from a 1946 SCOTUS decision in SEC v. W.J. Howey, which states that “an investment contract … means a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”
[In SEC v. LBRY ~ed.] The SEC won summary judgment — a ruling made when a trial is unnecessary due to “no genuine issue as to any material fact” — by citing statements put out by LBRY that “led potential investors to reasonably expect that LBC would grow in value as the company continued to oversee the development of the LBRY Network.”
…it’s a little alarming to see summary judgment being granted — while ICOs were obviously securities, it seems that any token created for utility that has been sold as having value will be chased after and sued. It’s hard to see how any token with utility that has a fluctuating value can avoid being categorized as a security if the company makes any comment regarding its potential valuation. It really seems like we’re on the pathway to any tradable token being regarded as a security

How’d that prediction turn out? Let’s take a lap here, throw on some Rafferty and jam.

And for good measure…

SEC warns Coinbase enforcement over securities violations "is coming” (Mar 2023)

Turns out when you consider every token a security, a lot of parties are suddenly doing a lot of unregistered things with these securities! Let’s backtrack for a moment. Recall prior that my model for crypto essentially looks like this:

While tokens are built on 'hot air' — there isn't an underlying business involved with cash flow generation/accrual of debt for coins — the fact that there is liquidity is fundamental value. I think of tradable crypto as essentially a put on central bank stability — <1 delta in, say, the U.S., much higher delta in, say, Turkey. Specifically, they are far dated, far otm puts.

But from a central banking perspective, their model has always been of tokens as a call option on an existential threat, of sorts, if not outright an act of financial terrorism. The hand-wringing in non-financial media over the petrodollar being replaced is probably similar to the hand-wringing in central banks over a genuine alternative to global transactional liquidity. Crypto trading spawned as an accident of sorts due to essentially a positive-skewed bubble being created. ZIRP allocation frenzy allowed rampant speculation to thrive, and it got too big and too many people made money for it to disappear —

Really think about how shocking it is that trading volume still remains so high in altcoins. We grew so accustomed to speculating on baskets of hot air that we still don’t fully grasp how ridiculous it is that even today, DOGE has a market cap of $10 billion with $300 million volume traded. In 2020 and 2021, the mindset of searching for yield took a darkly cynical turn. The question we were trying to answer for the past decade — “what is the value of the dollar when there’s no value in holding the dollar itself” — resolved itself with no concrete thought, but rather the fatalist conclusion that if the dollar didn’t matter, nothing really mattered, which resulted in the punting of gobsmacking amounts of money into blatant pump and dump schemes and outright fraudulent markets, where otherwise smart people would pontificate to me about the merits of “Ponzinomics” with a straight face and postulate that we might be able to invalidate the prisoners dilemma by simply coordinating the holding of hot air, thus making (3,3) the first verb written in “math”.

A lot of this is due to the quirky nature of the pandemic creating a high stimulus, low work environment that essentially caused everyone to trade out of sheer boredom. A zombie was created — due to the highly negative prospect of shorting (because of positive skew and the option-like behavior of these coins, short of an outright mass sell dump, it was highly illogical to ever take a short if you could even get a proper trade in a proper venue off), nobody did it. The Fed raising rates was supposed to flush out most highly volatile/pointless speculation, but it’s too ingrained in society for it to simply go away. So, the legal nuclear option became the next play.

Weirdly enough, this is good for Bitcoin because regulators simply don’t want to touch that, probably because so much money has been funneled through the bond issue market into it. It’s not unreasonable to think that there is some intelligence operation afoot here, honestly. Ethereum is not so lucky.

The goal with the legal option is just to freeze the liquidity. It’s not good for any wealthy American or Western European resident to have money stuck outside the system. The companies will move operations, but all this degenerate trading/exchange stuff will necessarily flood to developing, banking-afflicted, or nondescript Asian countries. There’s no real future for the actual tokens in the US (and presumably its allies — just look at what the EU is trying to do) other than the last few people sticking around punting money back and forth. Hell, Jump and Jane are pulling operations due to regulatory concerns — the chilling effect is here, no (law)suits required.

Certainly coin issuances as funding mechanisms and “earn products” are likely dead. With the SEC claiming jurisdiction over virtually anything transacting in the US, it’s logical that companies will just avoid American clients entirely. With the erosion of liquidity, the alternative transaction circumvention inherently loses some value. I don’t think this is necessarily the worst outcome though. Amidst all this noise, it’s sort of lost on everyone that a currency is just providing liquidity to a denomination in transactions. It’s kind of the most meaningless layer of the financial system as I define it:

Equity provides liquidity to hope. Currency provides liquidity to bargaining — our transactions have to be denominated in something. The most important pillar, and what underpins it all, is debt, which provides liquidity to trust. The systems of law and government provide a safeguard of enforcement to trust, but trust without liquidity cannot scale — there is no society without it.

Disrupting the currency layer is an erosion of the trust in the system as guaranteed by the government in a particular country. It’s not particularly important what the transaction is denominated in as long as it’s sufficiently liquid, not particularly volatile (hence the central bank put model), and it facilitates debt-fueled growth. Transaction and basic lending layers aren’t really important in the grand scheme of things when you are trying to build a financial system, and disregarding all the utter nonsense that’s happened since the first bubble of 2017, this mindset is pretty much absent from mainstream crypto thought. Securitization of everything without enabling debt-based transactions is, well, pointless. Maybe the space will finally start to move on from trading.

I do think that blockchain tech itself contains some good ideas and there are probably smart people building these products who got funding in the rush of 2020-21. Maybe something comes out of it, but that probably won’t be a decentralized framework for the world going forward. The writing is truly on the wall if the SEC is going after Binance. Rates didn’t do the job and probably won’t go up more than 25-50 bips more, so the administrative state went ahead and looked at the fact that the daily forex trading volume is 5 trillion as opposed to crypto’s trading volume of 45 billion and figured that it was time to bite the bullet and shut it down. (And this kind of administrative overreach, along with the FDIC’s behavior, is why you should care about the usurping of power in the executive branch through the interplay between Chevron deference and the major questions doctrine.) This power grab will likely continue with the development and implementation of CBDCs — it all feels so empty, without glee.

The SEC Won't Let You Be

Malt Liquidity 96

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