SEC Voyage Into Futures Ends Badly
Today was not a great day for the SEC. There were two major hearings, and things appear not to have gone well for the agency.
Before we begin, some meta-context is that these hearings are not necessarily final rulings (though in one case, it was). So some of this is reading tea leaves, but it’s also a useful set of insights with regard to how things are going for the SEC when, instead of just engaging in saber rattling, they have to actually meet their opponents on the field of battle (in this case, the courtroom).
Voyager
First, because it is final, let me address Voyager’s bankruptcy. For those who don’t recall, Voyager had originally struck a deal for the bankrupt crypto bank without capital or risk management (let’s call a spade a spade) to be sold to the then-golden-child of the industry: FTX.
We all know how that worked out.
With the FTX plan somewhat obviously on the rocks, Voyager was forced to find another firm to acquire them, and their savior materialized in the form of Binance.US. This was largely good for consumers, as optimistic estimates of recovery are now in the ~70% range, as opposed to the original ~50% that had been kicking around in markets.
Note that these estimates are highly variable, and there are intertwined concerns with the FTX bankruptcy where clawbacks may occur. Suffice to say, having high confidence in these numbers is probably a bad idea.
However, as the court proceedings were held about this new deal (to be clear, in bankruptcy, you typically need the approval of a judge to move forward with restructurings), a party emerged to attempt to prevent retail users and end consumers from recovering their funds and instead preferred to keep the Voyager acquisition in limbo, apparently to… protect… those consumers?
It’s hard to say what the rationale is, but obviously, this was the SEC, and as we’ll find, they had a hard time saying a lot of things today.
The judge in this case, Michael Wiles, had some harsh words for the SEC. He called them out for attempting to only discuss the concerns about tokens being securities in private (who demanded they happen in open court), he accused them of trying to “stop everybody in their tracks” without explaining how to address the SEC’s concerns, and then when the SEC could not or would not provide specific concerns or commentary, he reminded them actual creditor money was at stake on timeframes that were immediate, not glacial, with the following: "Bankruptcy code doesn't contemplate an endless period of time". The judge overall said he was “absolutely shocked” with the SEC’s conduct.
Ouch.
In the end, Voyager’s deal with Binance.US is likely to move forward, though there are conditions that must be complied with and an order to sort out. The SEC seems to have been sidelined after their showing, however.
Grayscale Bitcoin ETF
This? This went badly for the SEC. There’s simply no way around it. The three judges hearing this were Rao, Srinivasan, and Edwards. Rao was largely expected to side with Grayscale based on past jurisprudence, but I think perhaps surprising to the peanut gallery was how negative the other two judges were.
One of the main sticking points here was that Bitcoin futures ETFs have been approved by the SEC in the past. However, the judges all rightly have attached to the point that if the spot market is “manipulated”, then the futures market inherently has the same problems.
The SEC lawyer attempting to argue they were not “manipulated in the same way” drew an incredible amount of fire from Srinivasan and Edwards. Edwards in particular pushed the SEC to explain exactly what they meant, and he did not seem to be satisfied by the answers of the SEC attorney1.
Most of the legal commentators I know have moved up the chances of Grayscale winning dramatically, although it’s important to know that Grayscale winning does not necessarily mean ETF conversion will happen.
There are other issues the SEC has introduced, such as the insanity that is the new custody rule (a topic of its own) and the fact that it’s quite possible the SEC will simply withdraw approval for Bitcoin futures ETFs and require them to be unwound rather than allow spot ETFs to proceed.
It’s surprisingly hard for a judge to get an agency to do something, as it turns out. Congress, on the other hand, less so, but they seem actively disinterested in solving this problem.
So what is the endgame for the SEC?
SEC as Overseer
Ultimately, the core objection likely comes down to something the SEC appears to have made an issue of repeatedly, and as recently as the Voyager case: they view all crypto trading exchanges as unregistered securities exchanges. Their objections about manipulative trading ultimately relate to things happening outside the walls and rules of the SEC securities regime.
It is likely that the current SEC stance is simply that they don’t intend to approve anything until all the exchanges come and register with the SEC, with the small detail that it’s not entirely clear how a crypto exchange could register with the SEC and be within the rules of a 90 year old exchange act. No, that’s not a typo. The 1940 act that governs securities in the United States was written closer to the Civil War than it was to the current day, and yet we continue to use it.
To that end, despite the optimism and the courtroom smackdowns of the SEC, the reality is that until there is legislative reform, the path for crypto is very clear:
Leave the United States.
There are other regulatory regimes2 emerging that offer a much cleaner path to both legal clarity and safe operation, and the United States is taking an approach guaranteed to cause crypto firms to take a second look at all those options.
Austin Campbell is the founder and managing partner of Zero Knowledge Consulting, as well as an adjunct professor at Columbia Business School. He has previously run the stablecoin platform at Paxos, run trading desks at JP Morgan and Citi, and been a portfolio manager at Stone Ridge, the parent of NYDIG. Austin has been in crypto since 2018 and has been trading and structuring profoundly weird financial instruments for decades.
I have no idea what they were trying to say either
Where, you ask? I’ll probably write about that at some point.