Why Big Crypto's "Regulation by Enforcement" Mantra is "Utter Nonsense"

Why “SEC Regulation by Enforcement” is a Bogus Big Crypto Catchphrase

The crypto-spin goes like this: The crypto-enforcement efforts of the U.S. Securities and Exchange Commission (SEC) will crush innovation via regulation-by-enforcement. Rather than create regulations that provide specificity and clarity to crypto-firms, the SEC instead unlawfully uses enforcement actions to develop the law on a case-by-case basis, molding securities regulation into whatever best suits the SEC staff at the time.

“Big Crypto,” the now popular epithet for the extraordinarily well-funded and well-organized group of cryptocurrency lobbyists, “educational groups,” and other crypto, DeFi, NFT, and Web3 supporting organizations, have been carping about RBE ad nauseam. But that does not make them right.

In fact, the repetitive chorus of RBE is not only a misguided, deflective effort designed to tap into sympathetic libertarian and anti-regulatory mores – it’s also utter nonsense.

Elizabeth Holmes made an ‘attempt to flee the country’ after her conviction, prosecutors say

Elizabeth Holmes made an “attempt to flee the country” by booking a one-way ticket to Mexico in January 2022, shortly after the Theranos founder was convicted of fraud, prosecutors alleged in a new court filing Friday.

***

The claim that she tried to leave the country last year surfaced as part of a new filing from prosecutors arguing that Holmes should begin serving her prison sentence rather than living on an estate reported to have $13,000 in monthly expenses for upkeep while she awaits her appeal.

In the filing, prosecutors argue Holmes has not shown convincing evidence that she is not a flight risk, as her lawyers have stated, and used the alleged 2022 incident to support their |concerns that she could pose such a risk.

SEC Charges Avraham Eisenberg with Manipulating Mango Markets’ “Governance Token” to Steal $116 Million of Crypto Assets

Eisenberg, a 27 year-old U.S. citizen who was arrested and detained at MDC Guaynabo, Puerto Rico, is awaiting transport to appear before the Southern District of New York where he is facing parallel criminal and civil charges, brought by the Department of Justice and the Commodities Futures Trading Commission (CFTC), respectively.

According to the SEC’s complaint, beginning on October 11, 2022, Eisenberg engaged in a scheme to steal approximately $116 million worth of crypto assets from the Mango Markets platform. The complaint alleges that Eisenberg, who perpetrated the scheme while living in Puerto Rico, used an account that he controlled on Mango Markets to sell a large amount of perpetual futures for MNGO tokens and used a separate account on Mango Markets to purchase those same perpetual futures. The complaint further alleges that Eisenberg then engaged in a series of large purchases of the thinly traded MNGO token for the purpose of artificially raising the price of MNGO token relative to the crypto asset USD Coin.

Split verdict in federal insider trading case involving Chicago attorney, friendIn a split verdict, a federal jury on Thursday convicted a Chicago attorney of using insider information from a friend to make a windfall in stock purchases involving an education-technology company, while acquitting the friend on all counts.

The jury deliberated for about nine hours over two days before the verdict was announced Thursday afternoon in U.S. District Judge Manish Shah’s courtroom.

The attorney, David Sargent, 38, of Glenview, was found guilty of six counts of securities fraud, but acquitted of conspiracy to commit securities fraud.

His co-defendant, Christopher Klundt, 39, of San Francisco, was found not guilty of all seven counts of conspiracy and securities fraud, a rare outcome in a building where prosecutors win more than 90% of cases that go to trial.

Top Law Firm Can Continue Advising FTX on Bankruptcy, Judge Says

The big law firm had drawn fire from four U.S. senators, two FTX creditors and even the U.S. trustee appointed to oversee the case, who argued that the firm’s initial disclosures, filed in December, were incomplete. Some of the critics also complained that Sullivan & Cromwell was conflicted because it had handled some regulatory matters for FTX before the company’s Nov. 11 bankruptcy filing, and advised it on acquisitions of other crypto companies.

But at a hearing on Friday in Delaware bankruptcy court, Sullivan & Cromwell got a reprieve on the disclosure issue after it responded to a Jan. 13 motion from the trustee calling for more information. And after a hearing on the potential conflict claims raised by two FTX creditors, Judge John T. Dorsey of U.S. Bankruptcy Court said he would approve the firm as FTX’s bankruptcy counsel.

Judge Dorsey said “potential conflicts” do not disqualify a law firm from representing a company in bankruptcy court.

The SEC Seeks to Supplant the Market

The SEC’s mandate is vital but limited. Securities laws empower the commission to combat market abuses and fraud and to ensure that investors have material information to make their own investment judgments. As President Franklin D. Roosevelt explained when signing the Securities Act of 1933, “It is, of course, no insurance against errors of judgment. That is the function of no Government. It does give assurance, however, that, within the limit of its powers, the Federal Government will insist upon knowledge of the facts on which alone judgment can be based.”

But the SEC now proposes to substitute its own judgment for that of investors, corporate directors and managers. Its recent set of proposed rules, many of which go beyond any statutory remit, have little to do with preventing abuse or fostering transparency. The SEC has taken on the role of telling companies how to run themselves and investors how to invest. In the process, the SEC is eviscerating the vital barrier in our market-driven economy between the limited and legally constrained responsibilities of the public sector and the primacy of the private sector as the driver of American prosperity.

The Crypto Crackdown Is Just Getting Started

Regulation has critics. Some fear overreach; others think it counter-productive to try to build guardrails around digital assets rather than stepping back and letting it “burn.” It’s true that crypto is rife with activity that’s more gambling than investing. And it’s somewhat depressing to see that those at the heart of last year’s crypto collapse already have redemption in mind, from Three Arrows Capital to FTX.

But money laundering, fraud, market manipulation and tax evasion aren’t risks that just fix themselves. As the European Central Bank’s Fabio Panetta has pointed out, regulators see the costs to society of unregulated digital assets as high and requiring more action. The crackdown is clearly just getting started; those who are keen to dive back into crypto, even having just taken a bath, should take note.

Fairfax County, Virginia, Pension Funds Exposed to Genesis Bankruptcy

Genesis owes over $3.5 billion to its top 50 creditors – and one of the creditors has ties to a $6.8 billion pension fund system in Fairfax County, Virginia.

The list of creditors in the bankruptcy filing included the New Finance Income Fund from global asset manager VanEck with a $53 million claim against Genesis. The fund launched in December 2021 with a strategy of forming short-term lending arrangements with digital-asset entities to achieve high yields, according to VanEck’s website.

Last July, VanEck made headlines when two of the funds in the $6.8 billion Fairfax pension system – the Fairfax County Employees’ Retirement System and the Fairfax County Police Officers Retirement System – invested a combined $35 million in the VanEck fund as part of a then-new yield strategy, which also included an investment in Parataxis Capital.