SEC Going For the Jugular

DCG Filings Analysis | Optimism Bedrock Upgrade

Marco Manoppo & Karon Pangestu
June 07, 2023

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Good Morning,

The SEC is going for the jugular. The agency charges Binance and Coinbase back-to-back, alleging both with multiple wrongdoings. Gensler also said that the US doesn’t need more digital currency because it has the USD. Yikes.

In Today's Email:

What Matters: SEC vs Binance and Coinbase 👨‍⚖️
Case Study: DCG filings analysis 🔎
Governance & Features: Optimism Bedrock upgrade 🪨

Narratives: Pay attention to tokens listed as securities by the SEC. While you might not agree with the decision, there might be some short-term market opportunities at play.

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WHAT MATTERS

SEC Going For the Jugular

BusinessNews

State of play: The SEC has filed a complaint accusing 13 Binance affiliated entities and CEO Changpeng Zhao of mishandling customer funds, misleading investors, and violating securities rules.

SEC asked the court to freeze Binance assets and appoint a receiver.
SEC charged Binance for offering SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI, which the agency alleged as securities.
Binance allegedly commingled customer funds improperly — with billions of dollars directed to a bank account controlled by Zhao's entity, Merit Peak Limited.
SEC also accused Sigma Chain, a trading firm owned and controlled by Zhao, engaged in wash trading to artificially inflate the trading volume of Binance.US.
One day later, the SEC filed a separate charge against Coinbase for operating an unregistered securities exchange.
Binance has responded to the charges.
Coinbase has responded to the charges.
Many thinks this is a coordinated efforts as 10 state regulators joined the SEC claims a day after.

Summary of tweets and threads here:

The big one has finally dropped.
The US SEC has filed 13 charges against Binance entities and CZ.
A compilation of tweets, threads, and the important bits that you need to know 👇
— Marco Manoppo (@ManoppoMarco)
10:53 AM • Jun 6, 2023

Why it matters: Even though there might be a good shot for Binance and Coinbase to win in courts, this will significantly impact interest and liquidity in the short term.

Binance and Coinbase handles around 50%+ of all crypto trading volume.

For builders and investors: There’s too much to cover here but a few things remain true.

And as always, decentralize your operations offshore if possible.

CASE STUDY

DCG Filings Analysis

KPMG

Credits to DataFinnovation - Chain Argos for the original analysis.

State of play: Genesis' bankruptcy filings uncovered important “overlooked facts”. Simply put, Genesis' creditors are facing substantial claim reductions with Gemini experiencing the largest losses.

Here are the key takeaways:

The filings show a total of over $4B in loans outstanding to 668 borrowers.
~$114M was loaned to now-bankrupt Cash Cloud. If the Cash Cloud’s loan is written off, Genesis’ equity is beyond negative $1.7B.
External creditors are looking at something like a 40% haircut.
Gemini seized and sold ~$284M of collateral while the amount of Genesis’ debt to them is ~$750M-$900M. Gemini loses ~70% of its real debt value.
The filings show that Gemini Earn was dealing in tokens the SEC has called securities.

DCG affiliated entity, HQ Digital, borrowed and repaid $1B from Genesis in conjunction with the assumption of the 3AC liability.

This an entity seems to tie directly with Barry Silbert’s personal assets.

Our take: Related parties transactions and failure to address duration mismatch have been the main themes that caused multiple crypto firms to implode in the past year.

The existence of HQ Digital, its connection to DCG’s Founder Barry Silbert, and how does it all connect with the ongoing Genesis bankruptcy remains to be seen — but it’s not looking pretty.

Take a peek at our new referral reward at the bottom of this issue. Share this newsletter and receive our list of 100 smart crypto investors' wallet addresses 👇

INSIGHTS

Tokens Listed as Securities

@apes_prologue

The SEC listed numerous tokens as securities in its latest filings against Binance and Coinbase.

BTC and ETH are not mentioned.
Many L1 are listed as securities, including SOL ATOM and ADA.
Interestingly, AVAX was not mentioned.

Full filing to read how each token is allegedly classified as a security is available here.

FEATURES & GOVERNANCE UPDATE

Optimism ‘Bedrock’ Update

Optimism

Optimism implemented its hard fork ‘Bedrock’ update. The update will improve the overall functionality of Optimism, by lowering gas fees and cutting deposit-confirmation times

Reduce gas fees by 40% and deposit-confirmation times from 10 minutes to 1 minute via optimized data compression strategy.
Introduces mechanisms to mitigate blockchain reorgs, an instance when two blocks are produced simultaneously, resulting in a temporary duplicate blockchain.
The update will also improve proof modularity for its OP Stack, which is an open-source toolkit for developers.

Why it matters: Bedrock will facilitate the transition of Optimism to a multi-client ecosystem.

This means that there would at least be 2 client software options, increasing the network’s decentralization.

Other notable feature updates:

UniswapDAO voted against protocol fees.
Rocket Pool deployed on zkSync.
Y2K v2 goes live.
FDUSD goes live on BNB Chain.
Trader Joe’s Auto-Pools goes live.
Tai.money goes live.
Injective upgrade Avalon.
Stargate disable Fantom Pools.
PancakeSwap launches Protectors.
RouterChain launches Testnet.

QUICK BITES

SEC charges Coinbase for operating as an unregistered securities exchange.
SEC charges 13 Binance entities and founder CZ.
SEC files motion to freeze crypto held by Binance and CZ.
US Court tells the SEC to respond to Coinbase’s rulemaking petition.
Circle obtains major payment institution license in Singapore.
SEC’s regulatory net covers $115B of crypto.
Coinbase shares plummet as SEC sues rival Binance.
CFTC approves Cboe to clear margined crypto futures.
US Judge extends mediation period between Genesis and Creditors.
SEC's Gensler says United States doesn't need crypto.

MEME & NOTEWORTHY READS

Packy McCormick’s read on blockchain meets bio.
Paul Grewal’s thread on his testimony summary.
Gabriel Shapiro’s thread on the proposed crypto market structure bill.

Apple to Facebook, Google, and Snap
— Kevin Kwok (@kevinakwok)
7:28 PM • Jun 5, 2023

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Disclaimer: All the information presented in this publication and its affiliates is strictly for educational purposes only. It should not be construed or taken as financial, legal, investment, or any other form of advice.