Why Consensys Sued the SEC 😱
Weekly News Recap: 🚔 DOJ targets Samourai Wallet founders, 📉 Renzo’s ezETH depegs, 🌐 Global moves towards crypto ETFs, and more!
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Yesterday, Consensys initiated legal action against the U.S. Securities and Exchange Commission (SEC) in a Texas federal court.
This lawsuit seeks to challenge the SEC’s impending action against Consensys’ MetaMask wallet and assert that ether should not be classified as a security. The complaint accuses the SEC of excessive regulatory reach, emphasizing that both the SEC and the Commodity Futures Trading Commission have historically not classified ETH as a security. The legal challenge is also a response to the SEC’s scrutiny following Ethereum’s transition to proof of stake—a move that Joe Lubin criticized as “preposterous.”
Laura Brookover, Senior Counsel & Head of Litigation and Investigations at Consensys, talks about the significance of this lawsuit on Unchained, cautioning that “If Gary Gensler gets away with misclassifying ether as a security, it'd be catastrophic for the United States.”
Listen to the episode on Apple Podcasts, Spotify, Fountain, Overcast, Podcast Addict, Pocket Casts, Castbox, Google Podcasts, Amazon Music, or on your favorite podcast platform. Or watch it on YouTube.
Weekly News Recap
DOJ Cracks Down on Samourai Wallet Founders
In a significant operation against crypto mixing services, the U.S. Department of Justice (DOJ) has arrested Keonne Rodriguez and William Lonergan Hill, the founders of Samourai Wallet. The arrests, carried out on Wednesday, highlight ongoing government scrutiny over crypto tools that enhance privacy, but are also alleged to facilitate illegal activities.
Samourai Wallet, known for its privacy-preserving features, executed over $2 billion in transactions, purportedly laundering more than $100 million from illicit sources, according to federal prosecutors. The service, which started in 2015, is designed to obscure the origins of digital assets, which the DOJ claims has become a conduit for criminals.
Rodriguez, the CEO, was detained in the United States and is expected to appear in court. Meanwhile, Hill, the CTO, was apprehended in Portugal, with U.S. authorities seeking his extradition. Following their arrests, the Samourai Wallet website and mobile application were seized and are now inaccessible.
The DOJ has charged both individuals with conspiracy to commit money laundering and operating an unlicensed money transmitting business, bringing potential penalties for Rodiguez and Hill of up to 20 years and five years in prison, respectively. The case forms part of a broader crackdown on crypto mixing services, as the DOJ prepares for upcoming trials involving the likes of Roman Storm of Tornado Cash.
SEC Lawyers Step Down After Court Sanctions Agency for Misconduct
Two attorneys from the SEC, Michael Welsh and Joseph Watkins, have resigned following a Utah district court judge sanctioned the SEC for "gross abuse of power" in its handling of the Debt Box case. The court's criticism centered on misleading statements made by the SEC in its attempt to secure a restraining order against the Utah-based cryptocurrency firm, which undermined the integrity of judicial proceedings. The judge also ordered the SEC to cover Debt Box’s legal fees, highlighting the severity of the agency's procedural failures.
Sudden Depeg of Renzo's ezETH Shakes Restaking Ecosystem
Renzo Protocol's liquid restaking token, ezETH, faced a drastic drop in value following a poorly received airdrop announcement, plunging from over $3,000 to just $688. Originally pegged to Ethereum (ETH), ezETH's price tumbled on the decentralized exchange Uniswap, reflecting a significant deviation from its intended one-to-one correlation with ETH.
The incident emerged right after Renzo concluded the first season of its points program, which incentivizes ETH staking on its platform. This program’s closure led to a rushed sell-off as ezETH holders attempted to convert their tokens back to ETH amid the upcoming airdrop of $REZ, Renzo's new governance token. The market’s reaction was fueled by discontent with the airdrop's eligibility criteria and the distribution plan for tokens, particularly criticizing the transparency and fairness of the process.
Financial repercussions were severe, particularly for users engaged in leveraged trading on platforms like Gearbox and Morpho Labs, where ezETH was extensively used as collateral. Despite a partial recovery, ezETH continues to trade at a discount to ETH, signaling lingering doubts about the token's stability and Renzo's strategic decisions.
After the community backlash, Renzo increased the initial airdrop allocation from 5% to 7% of its tokens, with distribution set for the end of April and a subsequent phase planned.
DOJ Proposes Hefty Sentence for Binance Founder Changpeng Zhao
U.S. federal prosecutors are advocating for a three-year prison sentence for Changpeng “CZ” Zhao, the founder and former CEO of cryptocurrency giant Binance. Zhao’s proposed sentence doubles the federal guideline maximum of 18 months, reflecting the severity of Zhao’s violations of U.S. anti-money laundering laws.
Zhao pleaded guilty in November 2023 on charges related to money laundering and the evasion of U.S. sanctions. His plea was part of a broader settlement that also included Binance paying a historic $4.3 billion in fines to continue its U.S. operations.
Meanwhile, CZ apologized for his decisions in a letter to a U.S. judge ahead of his sentencing, and 161 letters of support were filed on his behalf.
In other Binance news, exchange executive Tigran Gambaryan's bail hearing in Nigeria has been postponed to May 17, following his arrest on charges of money laundering and tax evasion on February 26.
Grayscale Launches New Low-Fee ‘Mini’ Bitcoin ETF
Grayscale Investments announced the launch of a new Bitcoin Mini Trust (BTC) with a notably low annual fee of 0.15%, positioning it as the most affordable option among spot Bitcoin ETFs. This new product is designed to attract long-term investors by offering a more cost-effective alternative to higher-fee competitors.
The BTC Trust will be seeded with 10% of the assets from Grayscale's existing Bitcoin Trust (GBTC), which has an annual fee of 1.5%. This transfer grants GBTC shareholders automatic shares of the new ETF without triggering potential capital gains tax.
Grayscale's introduction of the BTC Mini Trust comes as the company adapts to growing market demand for lower-cost investment products and reflects an effort to stay competitive against other firms offering similar products, like Franklin Templeton’s Bitcoin ETF, which charges a 0.19% fee.
Hong Kong Set to Debut Bitcoin and Ethereum Spot ETFs, SEC Seeks Comments
Hong Kong is gearing up to launch its first-ever Bitcoin and Ethereum spot ETFs next week, on April 30. The products will feature in-kind subscription and redemption mechanisms. This approach allows investors to directly exchange the underlying crypto assets for ETF shares, offering an alternative to cash redemption models typically seen in U.S. funds.
In related news, the SEC has called for public comments regarding BlackRock's amended proposal for a spot Ethereum ETF. Initially delayed in January, the proposal was amended on April 19, with changes made to the ETF's creation and redemption processes.
Blockchain Association Challenges SEC's New Dealer Rule
The Blockchain Association, in collaboration with the Crypto Freedom Alliance of Texas, has filed a lawsuit against the SEC over its recent rule expansion, contesting the SEC's broadened definition of a securities dealer, which now includes liquidity providers on decentralized finance (DeFi) protocols.
The rule, enacted in February, categorizes any market participant controlling over $50 million and providing liquidity as a dealer. This adjustment aligns the regulatory obligations of DeFi liquidity providers with those of traditional securities dealers for the first time, marking a difficult operational transition.
Kristin Smith, CEO of the Blockchain Association, criticized the SEC’s move as an overreach of its statutory authority and a threat to digital asset innovation. "This is the latest example of the SEC’s blatant attempts to unlawfully regulate outside its authority," Smith said.
NYSE Explores Shift to 24/7 Trading
The New York Stock Exchange (NYSE) is considering a shift to 24/7 trading operations, prompted by growing demand for continuous market access — and perhaps influenced by profitable around-the-clock crypto exchanges.
Traditional NYSE stock trading operates from 9:30 a.m. to 4:00 p.m. ET, but the proposed expansion could see trading activities available around the clock, just like cryptocurrencies. This initiative is supported by technological advancements and an increased investor appetite for more flexible trading hours, especially from regions like Asia and Europe.
The NYSE has launched a survey to gauge market participant interest, asking for feedback on logistical considerations such as overnight staffing and measures to protect investors from price volatility.
IRS Previews New Crypto Tax Form 1099-DA for Brokered Asset Reporting
The U.S. Internal Revenue Service (IRS) has released a draft of the new Form 1099-DA, designed for the reporting of brokered cryptocurrency transactions. This early glimpse into the form shows spaces for wallet addresses, individual token codes, and transaction locations on blockchains, aiming to track taxable gains or losses from digital asset transactions.
The form also categorizes brokers by type, such as kiosk operators and wallet providers, to streamline reporting processes. With the IRS still finalizing the rule that necessitates this form, industry stakeholders are awaiting further clarity on how these new reporting requirements will be implemented.
SEC Demands $5.3 Billion from Terraform Labs and Do Kwon Following Guilty Verdict
The SEC is seeking a substantial financial penalty from Terraform Labs and its founder Do Kwon, totaling $5.3 billion. This follows a jury's decision earlier this month that found both Kwon and his company guilty of defrauding investors. The SEC's proposed penalties include $4.7 billion in disgorgement and $546 million in prejudgment interest, plus additional civil penalties of $520 million. And the SEC has requested that Kwon be barred from serving as an officer or director of any public company.
Meanwhile, Do Kwon is contesting a Montenegro high court decision that potentially allows his extradition to the U.S. or South Korea, labeling the interpretation as "unfounded and illegal."
El Salvador’s Chivo Wallet Compromised as Hackers Leak Source Code
The Chivo Wallet, El Salvador's government-backed crypto wallet, suffered a security breach with the release of part of its source code by cybercrime group CiberInteligenciaSV. This leak, disclosed on a notorious black hat hacking forum, also included VPN credentials tied to the Chivo Bitcoin ATM network. The hackers publicly declared the leak a response to unspecified grievances against the Salvadoran government. This incident follows closely after the same group released personal data of over 5 million Salvadorans earlier this month.
I hope Grayscale Investments will find a way around cryptocurrency fees. Apparently if one doesn’t make a substantial amount, the fees just swallows the profit.
In 2021, this high fee in part contributed to my adventure into trading FUTURES with 50% percent of my crypto account on leverage. 10-20% leverage trades came with its perks, but the addictive flow and spontaneous significant loss took that to a quick end.
If institutional investors don’t see such profit(200-1000% per trade) like I used to, the risk in crypto doesn’t seem attracting.
Because of my risk tolerance after losing almost all my assets makes me to feel the pains of such investors hence I decided to rather carry out Quality investing by participating projects that are really building and attracting big money hence: https://cryptofada.substack.com/