Hiltzig: The worst month for cryptocurrencies – Los Angeles Times

Forget what TS Elliott said about April. The cruelest month for the cryptocurrency community and its associated scammers was March.

The month saw a flurry of jury verdicts and judicial rulings exposing the dark underbelly of crypto trading, reinforcing its reputation as a haven for fraud and other illegal activities. So far, the situation has not proven attractive in April, as regulatory investigations and judicial decisions continue to shake up the asset class and its promoters.

From the perspective of public investors and the broader economy, this is all good. As I've written before, the value of crypto tokens, from Bitcoin to the most hilarious versions like Dogecoin, is so vague that it can lead unwary or gullible investors to lose their (real) money. Suitable for schemes aimed at decoupling.

The value of cryptocurrencies can be placed anywhere. They do not generate income like bonds, and their prices cannot be fixed in a liquid market like securities of public companies. To date, no one has explained what cryptocurrencies are useful for other than paying ransoms to criminals who have taken databases and computer systems hostage.

Just Monday, Change Healthcare, a medical transaction processing company owned by United Health Group, Number 2 The ransom demand in cryptocurrency tokens comes just weeks after a reported $22 million ransom was paid to rescue thousands of patients' personal information, including payment data and medical records.

The hack into Change's database disrupted health insurance payments across the United States, forcing some health care providers to lay off employees or shut down permanently due to lack of funding.

This new request appears to be from a ransomware group that feels cheated by its partners with the initial request, and the partners may have absconded with the original reward. As the saying goes, if a thief has no honor, cryptocurrencies will give him double the honor. No, not double — square.

Before we move on to April, let's take a look at the crypto March madness.

Of course, the most high-profile blow was the March 28 attack on crypto fraudster Sam Bankman Freed, who was convicted in October on seven counts of fraud related to the collapse of the FTX cryptocurrency exchange. It was a verdict.

Federal Judge Lewis Kaplan sentenced Bankman Fried to 25 years in prison and ordered him to forfeit more than $11 billion. Mr. Kaplan observed that Mr. Bankman-Freed expressed little remorse for his crimes. Kaplan justified his long tenure by observing from the bench that otherwise Bankman-Fried would be in a position to “do very bad things in the future, and that's not a trivial risk.”

That's not all. A day before Bankman Fried's sentencing, federal judge Katherine Polk Failla issued a ruling that could have far-reaching implications for crypto businesses. Failla authorized the Securities and Exchange Commission to proceed with a lawsuit against Coinbase, the giant cryptocurrency broker and exchange, for trading securities without a license.

What's significant about Failla's ruling is that she quickly rejected Coinbase's argument that virtual currency is a new asset outside the SEC's jurisdiction, and therefore not a “security.”

Cryptocurrency advocates have made similar arguments in court and in Congress, urging lawmakers to create an entirely new regulatory structure for cryptocurrencies, preferably over and above the existing rules and regulations promulgated by the SEC and commodity exchanges. It calls for the creation of a less rigid regulatory structure. Futures Trading Commission.

Coincidentally, at a time when Bankman Freed was considered the last seemingly honest crypto promoter before he was found to have been raising funds by illegally misappropriating his clients' stock holdings, , made the same claim in an appearance before a Congressional committee. and FTX's own investment business.

Phyla saw through the argument without breaking a sweat. “The nomenclature 'cipher' may be recent,” she writes. “However, the challenged transactions fit comfortably within the framework that courts have used to identify securities for nearly 80 years.”

Mr. Feira also took a swipe at a cryptocurrency gang organization romantic relationship, rejected Coinbase's argument that the case should fall under the “material issue doctrine.” This is an informal rule that requires explicit approval by Congress when regulatory efforts involve issues of “extreme economic and political importance.” Coinbase said the SEC's lawsuit should be dismissed because Congress has not enacted crypto-specific regulations.

The judge's opinion on that argument was withering. “Although certainly large and important, the crypto industry is far from being ‘a part of the American economy’ with any significant economic or political significance,” she wrote.

Cryptocurrency simply “cannot be compared to other industries that the Supreme Court has found to raise the doctrine of material concern.” Those include America's energy industry and the traditional securities industry itself, she wrote.

Failla's decision followed another New York federal court ruling in which a judge deemed cryptocurrencies to be securities.

In this case, Judge Edgardo Ramos dismissed the SEC's charges against Gemini Trust, a cryptocurrency trading company run by Cameron and Tyler Winkelboss, and crypto financier Genesis Global Capital. refused.

The SEC charged that Gemini's scheme in which it pooled customers' crypto assets and loaned them to Genesis while promising high interest rates to customers was an unregistered security. Like the case against Coinbase, the SEC case will proceed.

Both rulings tended to overturn a 2023 ruling by New York federal Judge Annalisa Torres in an SEC enforcement case against Ripple, the developer of the cryptographic token known as XRP. Torres found that in some circumstances, tokens may not be securities. However, her ruling is being overshadowed by an onslaught of attacks from her colleagues who argue that crypto market operators and exchanges are trading in unregistered securities, which is illegal.

The hangover from March continued this month. On April 5, a federal jury in New York found Terraform Labs and its CEO and major shareholder Do Kwon responsible for what the SEC called a “massive cryptocurrency fraud.”

The incident involved Terraform's so-called stablecoin UST, a cryptographic token pegged 1:1 to the US dollar. Kwon did not appear in court to hear the verdict. He is being held in the Balkan country of Montenegro as U.S. and South Korean authorities fight his extradition.

Terraform claimed that if the value of the UST coin falls below the $1 peg, it will automatically “self-heal” through software algorithms. It happened in May 2021. When the coin actually returned to a value of $1, Terraform and Kwon boasted that the price recovery was a victory over “human decision-making in times of market volatility,” the SEC alleged.

In fact, the algorithm had nothing to do with it. According to testimony in a trial that began in late March, Terraform was secretly bailed out by trading company Jump Trading, which invested tens of millions of dollars to prop up UST and exited the deal with a profit that was probably even higher. It's possible that it slipped out. 1 billion dollars. The SEC said it violated the law by not disclosing the arrangement to investors.

Mr. Kwon and Mr. Terraform also lied to the public that Chai, a South Korean financial company similar to Venmo, was using Terraform to process transactions. In fact, Chai had stopped using Terraform in 2020, the SEC said.

These deceptions painted a picture of sound security within Terraform, which authorities allege collapsed when the UST was once again de-linked to the US dollar in May 2022, making it irreversible. did. The SEC said UST's value fell to virtually zero, “erasing more than $40 billion in total market value and shocking the crypto asset community.”

Terraform is currently bankrupt. No charges have been filed against Jump.

These events should give U.S. lawmakers pause as they ponder what, if anything, to do when it comes to regulating cryptocurrencies. At Tuesday's hearing of the Senate Banking, Housing, and Urban Affairs Committee, committee chairman Sen. Sherrod Brown (D-Ohio) warned that cryptocurrencies are a potential threat to national security.

“Bad actors, from North Korea to Russia to terrorist organizations like Hamas, are turning to cryptocurrencies not because they saw an ad and bought into the hype,” Brown said. “They use it because they know it’s a workaround. They know it’s easier to move funds behind the scenes without safeguards like know-your-customer rules and suspicious transaction reporting. We know that…we need to make sure that cryptocurrency platforms play by the same rules as other financial institutions.”

Brown's words were further amplified by Treasury Department Deputy Secretary Wally Adeyemo, who urged Congress to pass the Treasury's proposed reforms that would strengthen sanctions on “foreign digital asset providers that facilitate illicit finance.” did.

Meanwhile, on Monday, Sen. Elizabeth Warren (D-Mass.), perhaps the most uncompromising crypto enemy on Capitol Hill, told the House Financial Services Committee to “pull stablecoins into a deeper fold.” “Avoid trying to create new rules,” he urged, taking aim at stablecoins. Enter the banking sector. ”

Given the potential for stablecoins and their ilk to “undermine consumer protection and the safety and soundness of the banking system,” the so-called reforms “could amplify and entrench risks rather than reduce them.” '' he warned.

What drives politicians' interest in promoting an asset class that has no value whatsoever except where fraud and theft are involved? As is often the case, it's money. It's green and foldable.

Cryptocurrency promoters are stepping up their lobbying efforts in Washington. Cryptocurrency companies spent nearly $20 million on lobbying in the first nine months of 2023, according to watchdog group Open Secrets.

Coinciding with an election year, there is a growing push for new regulatory approaches, especially among House Republicans, and more spending is likely to come. This is a win-win-lose situation, with politicians and crypto promoters poised to win, while ordinary investors and the economy as a whole are poised to lose.