Some thoughts on the SEC Action vs. Binance today

 I'd like to make a few observations/comments on what's going on here, and especially how it affects my fund, Crimson Assurance Partners. Please note that these are my personal opinion, and that's about it.

First off, let's take a look at what the SEC has done.

"The US Securities and Exchange Commission (SEC) has sued Binance, the world’s largest crypto exchange by volume, alleging that the company sold unregistered securities in the US.

The company also faces a lawsuit from the US Commodities and Futures Commission (CFTC) alleging that the exchange sold unregistered commodities derivatives to US retail investors.

...

The regulator alleges that Binance Coin (BNB), Binance USD (BUSD), Simple Earn, and BNB Vault were all unregistered securities in the US.

Here’s a breakdown of what these crypto financial instruments entail:

• BNB is a token issued by the exchange which was initially created as a utility token that offer discounts on trading.
• BUSD is a dollar backed stablecoin issued by Paxos and Binance.
• Simple Earn provides a variety of products including lending, staking, and liquidity farming.
• The BNB Vault Product is an investment product that pooled customer money into several different yield bearing products without forcing funds to be locked up.

The SEC suit also said the following cryptocurrencies are unregistered securities: Solana (SOL), Cardano (ADA), Polygon (MATIC), Coti (COTI), Algorand (ALGO), Filecoin (FIL), Cosmos (ATOM), Sandbox (AXS), and Decentraland (MANA).

(source: QZ)

Further reading: Marketwatch, NY Times

Binance's public response

OK, now, some observations:

First, Binance (and other companies) have been trying to get the SEC and other entities to provide some definition for the crypto market for literally years. The SEC has vigorously refused to do so, but now steps up and says "hey, these are all unregistered securities" without  actually having engaged in any rulemaking to define why they are securities. In July of 2022, Coinbase submitted a petition for rulemaking to clarify the crypto market.  Then in April, they filed a writ of Mandamus, in an attempt to force the SEC to either accept or  reject the petition. 

Coinbases's explanation is illuminating. "The Administrative Procedure Act (“the APA”) requires the SEC to respond to Coinbase’s rulemaking petition “within a reasonable time.” If the SEC says no to our rulemaking petition, which it has the right to do, then Coinbase would be allowed to challenge that decision in court and explain in that formal setting why rulemaking is required. So it’s important for the SEC and any other agency petitioned for rulemaking to respond to the petition once the agency has made up its mind, especially if the answer is no – otherwise the public can never exercise its right to ask a court if the agency’s decision was proper. "

What was even more illuminating was the SEC's response. Basically, the SEC said no, you don't even have a right to file the petition or the writ, and we're not going  to engage in rulemaking - we'll just go straight to enforcement action without bothering to tell you what the rules are. Oh, and you can't rely on the public statements of the Chairman of the SEC either.

So I'm predicting that the SEC is going to continue to attempt direct enforcement, without actually clarifying the rules regarding crypto.  This is going to be something that I think  will see a lot  of  lawfare in coming years, and I have _no_ idea how it's all going to shake out.

Interactions with Crimson Assurance Partners...

Let's start with the unrepentantly good news: we have no direct interaction with any of Binance's products or coins that the SEC is complaining about. There's no exposure that we're aware of. Yes, we'll continue to monitor this issue. But as of today, we don't see an issue.

Are we concerned? Yes. But we've deliberately selected for the most stable, lowest volatility operating  platforms, operating currencies, and the contracts that we execute against are the lowest risks solutions we can find.  So while there may be some systemic risks, we don't see any substantial threats to our business model or our client funds. The best we can say is "we're watching the situation,  and will take appropriate actions as they are warranted."