Price action in Bitcoin turned bearish in mid-August after failing to break above a multi-year macro resistance between $28,800 and $31,700 for several weeks. This level served as a multi-year support for Bitcoin in the previous cycle and, for now, heavy resistance remains. A slew of largely positive regulatory, legal and restructuring news which renewed optimism for a nascent crypto bull market, has been offset by the Securities and Exchange Commission’s (SEC) predictable delay for six spot Bitcoin exchange traded fund (ETFs) applications in the US.
At the time of writing, Bitcoin’s price has hovered just around the $25,700 level for three weeks, and with markets now entering a period of seasonal weakness alongside a resurgent US dollar, technical analysis indicates a break below back to test the crucial $20,000 level is possible over Q4. Over the year to date, it appears that much of the price appreciation in Bitcoin in 2023 – and the broader crypto markets – has been driven by capital on the sidelines within the crypto ecosystem in stable coins. Crypto markets appear to be in a holding pattern, awaiting new catalysts to either send prices above current macro resistance or back to retest lower levels, which may be precipitated by a seasonal correction in US equity markets over the coming months.
Over the remainder of the second half of the year, a raft of macro and regulatory catalysts can support or weigh on crypto markets. These include the outlook for US stock markets and the dollar, the SEC’s decision to approve, reject or further delay a raft of spot Bitcoin ETF applications in October, and the ‘Ripple’ effect from a US federal judge’s ruling over XRP sales across other enforcement action by the SEC. Also, within crypto, there is always the potential for the unforeseen collapse of a leveraged fund, crypto exchange, lending platform, the depegging of a stablecoin, or the liquidation of a major ‘whale’, which usually has contagion effects.
In this article, we review the salient regulatory, legal and restructuring updates over the past three months, as markets await renewed volatility in the autumn.
Bitcoin ETF approvals ‘within four to six months’
In the late second quarter, there was a flurry of revised Bitcoin spot ETF applications with the SEC in the US, including BlackRock, the world’s largest asset manager, Fidelity Investments and Invesco.
A Bitcoin spot ETF would track the price of Bitcoin, allowing investors to buy and sell shares of the ETF on a stock exchange, similar to any other stock. The slew of ETF applications also includes the proposed conversion of the over-the-counter Grayscale Bitcoin Trust (GBTC), a closed-end fund that invests directly in Bitcoin, into a Bitcoin spot ETF. On August 29, crypto asset manager Grayscale Investments scored a legal victory against the SEC in its efforts to convert GBTC into a listed Bitcoin ETF, which ruled the SEC’s reason for denying the GBTC listing application was inadequate and inconsistent. However, this will not directly pave the way for a GBTC conversion but require the SEC to be more precise in its rationale in future. Bitcoin’s price initially pumped and entirely retraced the move within days.
The SEC exercised its right to postpone decisions on six spot Bitcoin ETF applications – including Fidelity’s Wise Origin Bitcoin Trust, Invesco Galaxy, Bitwise Asset Management, WisdomTree, VanEck and Valkyrie – until October. Most expect the Commission to kick the can down the road again, and likely again in January, before a final deadline in March at which the SEC must either accept or reject the spot Bitcoin ETF applications. The SEC has previously rejected dozens of spot Bitcoin ETF applications – including a VanEck spot Bitcoin ETF in March and proposals by Ark Investment Management and 21Shares in April last year. Both reapplied in May this year.
The Commission’s slew of rejections were on the grounds that proposals failed to meet standards designed to prevent fraudulent and manipulative practices and to protect investors and public interest. The SEC has taken a softer stance on futures, approving Valkyrie’s and Teucrium’s Bitcoin futures funds last year. Insights from insiders at BlackRock and Invesco suggest one or more Bitcoin ETFs could be approved within four to six months, according to Galaxy Digital’s CEO Mike Novogratz in a recent Q2 earnings call.
However, regulatory caution over cryptocurrency remains elevated in the aftermath of FTX’s collapse last November. Market optimism may not be an accurate guide for the timing of the SEC’s approval of the first Bitcoin ETF. If and when one is approved, it would open the door to a substantially enlarged universe of global retail and institutional investors in the flagship cryptocurrency. It would serve as a bridge with traditional finance which has suffered the loss of three crypto-fiat gateways in 2023 with the failure of three regional US banks in mid-March – Silicon Valley Bank (SVB), Signature Bank, and Silvergate Capital – all major banks that had played a significant on-ramp role in bringing institutional capital into the crypto ecosystem. In particular, Signature and Silvergate acted as fiat/crypto liquidity cogs, operating systems used by crypto exchanges to settle transactions in dollars between each other 24/7.
In mid-July, the Southern District Court of New York ruled in favour of blockchain developer Ripple Labs in its three-year lawsuit with the SEC. The court ruled that institutional sales of Ripple’s XRP token “constituted an unregistered offer and sale of investment contracts”. However, sales of XRP to the general public via crypto exchanges did not represent unregistered sales of investment contracts because secondary market buyers “did not know to whom or what it was paying its money”, US District Judge Analisa Torres in New York ruled last month.
The Ripple ruling has been monitored closely for a possible legal precedent to bring clarity to crypto token classification, amid a wave of enforcement action and to pave the way for bespoke regulation that covers investment and trading in decentralised assets, to improve investor protections and promote institutional adoption. The ruling also has implications for the SEC’s lawsuit against both Coinbase and Binance (see below), as well as providing a legal precedent for lower court decisions.
The court’s ruling suggests the SEC’s argument that all crypto tokens – except Bitcoin – are securities does not stand. Exchanges, including Coinbase, which is defending itself against its own SEC lawsuit; Kraken; Gemini and Bitstamp, moved to re-list XRP following the ruling. However, the SEC has confirmed it intends to challenge the federal judge’s ruling.
SEC sues Coinbase for allegedly violating US securities law
In early June, the SEC filed charges against Coinbase, the largest US crypto exchange, for allegedly illegally operating as an unregistered securities platform and brokerage service. The SEC alleges that Coinbase operated illegally as it failed to register as an exchange, despite the Commission approving Coinbase’s direct listing on the Nasdaq back in April 2021 requesting the crypto exchange to register its operations. Coinbase is also accused of depriving investors of supervisory inspection, record-keeping requirements, and conflicts of interest safeguards. The Commission wants Coinbase to repay all profits earned through its violations of securities laws, with interest for late payment, and to impose fines on the crypto exchange for its violations. Coinbase asked a judge to dismiss the case, citing the Ripple decision.
The SEC is using the US courts to push all crypto exchanges and tokens it believes are securities to register in the traditional way that stocks and bonds are required to. Prior to the SEC’s June lawsuit, the US securities regulator asked Coinbase to delist trading more than 240 tokens, except flagship cryptocurrency Bitcoin, which the Commission believes is a commodity under US law. A dozen crypto tokens are alleged as securities by the SEC; however, six of these were listed on the crypto exchange at the time of its registration for its IPO. The SEC called none of those six token securities in 2021, according to Coinbase.
The aggressive action by the SEC, under Chair Gary Gensler, has been interpreted as the Commission’s attempt to gain wider authority over the crypto industry. In response, Coinbase filed a 177-page motion in a Manhattan federal court to dismiss the SEC’s lawsuit. Coinbase leaned on the recent Ripple legal ruling, claiming that the cryptos on its platform are not investment contracts and, therefore, are not securities. “The SEC can pursue its claims only if the tokens and staking services it has identified are securities”, Coinbase said, adding: “They are not.” Consequently, Coinbase claims the SEC has no jurisdiction to prosecute the crypto exchange.
Regulatory pressure ramps up for Binance
The SEC’s enforcement action followed a 13-strong complaint filing one day prior against Binance, the world’s largest crypto exchange, and its chief executive Changpeng Zhao. The Commission alleges Binance failed to register with the SEC and combined the functions of exchanges, brokers, dealers, and clearing agencies, which “imposed outsized risks and conflicts of interest on investors.” Binance is also accused of comingling customer funds with a trading firm owned by Zhao, and that it “mislead investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform”. SEC Chair Gary Gensler alleged in a statement that: “Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure and calculated evasion of the law.”
It follows an earlier lawsuit against Binance and its CEO and founder Zhao by the US Commodity Futures Trading Commission (CFTC) in March, which alleges “wilful evasion of US law”, including compliance efforts described as a “sham” and “engaging in a calculated strategy of regulatory arbitrage to their commercial benefit”. Binance is also facing a barrage of similar allegations around the world, including by French authorities which allege the crypto exchange illegally advertised its services to consumers and failed to carry out adequate checks to prevent money laundering. Binance has also withdrawn from the Netherlands after failing to secure regulatory permissions to operate. In July 2022, the Dutch central bank fined Binance €3.3m for operating without registration. In the UK, Binance was banned from operating by the Financial Conduct Authority in 2021 over concerns about its lack of cooperation with regulators.
US Department of Justice officials are considering fraud charges against Binance, but are concerned legal prosecution could ignite a run on the exchange, similar to the panic when FTX collapsed last November, causing consumers to lose money.
FTX Group proposes draft creditor repayment plan
In early August, FTX Group’s new management team proposed a schedule to repay creditors after recouping some $7bn from the estimated $8.7bn that founder Sam Bankman-Fried and executives misappropriated.
FTX’s proposed repayment plan to creditors will value customer claims in US dollars as of the date the crypto exchange went bankrupt, financed by selling company assets tied to different group subsidiaries. Under the plan, holders of the exchange’s native token FTT will receive nothing, due to their “equity-like characteristics”, according to the filing as reported by Bloomberg. The rationale may serve as a reference case in future crypto exchange bankruptcies. Almost every proposed creditor class is deemed impaired, implying creditors will not be made whole, the report adds. FTX has also not ruled out rebooting an offshore exchange.
John Ray, the restructuring executive who replaced FTX founder Sam Bankman-Fried after its stunning collapse last November, wrote in his second interim report on FTX Group that Bankman-Fried and executives “commingled customer deposits and corporate funds, and misused them with abandon”. Proceeds were used to finance political and charitable donations, venture investments and acquisitions, and the purchase of luxury real estate for senior FTX Group employees in the Bahamas. To date, Ray’s management team, alongside extensive work by experts in forensic accounting, asset tracing and recovery, and blockchain analytics, have recovered approximately $7bn in liquid assets, and they anticipate additional recoveries.
Earlier in June, Bankman-Fried lost his bid for criminal charges to be dismissed. He is accused of stealing billions of dollars from FTX customers, through fraud, money laundering and a conspiracy to commit campaign-finance violations, while misleading investors and lenders. He is expected to go to trial in October. Separately, Kwon Do-hyeong, known as Do Kwon, the former cryptocurrency boss behind the $41 billion collapse of the Terra USD[JA1] and Luna tokens, has been sentenced to four months in prison in Montenegro. Do Kwon, who is wanted in the US and South Korea on fraud and other charges, was found guilty of forging official documents.
Celsius restructure will facilitate $2 billion creditor redistribution
Celsius Network, the cryptocurrency lending platform founded by Alexander Mashinsky in 2018, has settled on a plan to distribute at least $1.98bn in cryptocurrency to creditors whose digital assets were trapped on the platform when customer withdrawals were halted in July 2022. Shortly after, Celsius filed for bankruptcy saddled with more than $1bn of debt.
The Celsius bankruptcy was the largest in a series of crypto platforms that collapsed after the “death spiral” of Terra Luna ecosystem and crypto hedge fund Three Arrows Capital last November. The turnaround plan involves a restructure with Fahrenheit Group, the winning bidder for Celsius’ assets. Under the proposed plan, the majority of creditors will be reimbursed in Bitcoin and Ethereum, common stock in the new company and via litigation proceeds. Estimated recoveries will vary between 69% and 74%, reports Axios.
In mid-July, former Celsius CEO Mashinsky was arrested and charged with wire fraud and other crimes. Companion lawsuits were filed by the SEC and the Federal Trade Commission that alleged Mashinsky and Celsius misled investors about the financial success of Celsius’ initial coin offering, in an effort to entice customers onto the Celsius platform. It is alleged the price of Celsius’ native token CEL was fraudulently manipulated, which enabled Mashinsky and other Celsius executives to profit in the region of $42m. Mashinsky pleaded not guilty at a hearing in New York. In early August, he was also ordered to face a civil fraud lawsuit filed by New York’s Attorney General. He is accused of deceiving hundreds of thousands of investors out of billions of dollars in cryptocurrency assets by repeated false and misleading statements about Celsius’ safety. Mashinsky denies all allegations. At its height, the Celsius Network managed approximately $25bn in customer assets. In a statement, US Attorney Damian Williams said: “This case, like the others my office has recently announced alleging fraud in the crypto economy, may appear complicated. But the message we send today is quite simple: if you rip off ordinary investors to line your own pockets, we will hold you accountable. Whether it’s old-school fraud or some new-school crypto scheme, it doesn’t matter one bit. It’s all fraud to us. And we’ll be here to catch it.”
Indeed, the SEC looks to be far from done in filing lawsuits. On 31 July, the Commission filed a lawsuit against the creator of cryptocurrency HEX and related projects, PulseChain and PulseX. The SEC alleges the founder, Richard Heart (aka Richard Schueler), conducted unregistered offerings of crypto asset securities that raised more than $1bn in crypto assets from investors. Heart is charged with fraud for misappropriating at least $12m of offering proceeds to purchase luxury goods including sports cars, watches, and a 555-carat black diamond, reportedly the largest black diamond in the world. The implications of such lawsuits can be far-reaching, as a successful prosecution by the SEC could prompt plaintiffs to sell off significant crypto assets, which – depending on volume – could destabilise markets.
BTG Advisory offers a wide range of expertise for corporates in the crypto sector as well as those exploring digital assets as part of a diversified treasury management strategy. Our advisory services include regulatory, governance, tax, accounting, financial due diligence, audit, cybersecurity, transaction advisory and digital asset custody for crypto and digital assets. If your company would benefit from help in navigating crypto markets, do not hesitate to get in touch today.