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SEC’s Schrodinger cat

Commentaries & Views

David Lifchitz, CIO Tellurian-ExoAlpha – June 9th, 2023

The US are now openly at war with Cryptos, and SEC Chairperson Gary Gensler is the general in charge. The US knows that cryptos are a direct threat to their own CBDC which is nothing more but a digital representation of the existing fiat dollar carrying its same infinite debt and debasement capability, and will do whatever they can to remove these threats. Instead of banning cryptos outright, which would require an act from the US Congress which is anything but given, CBDC proponents are fighting cryptos by cutting their bridges to US dollar convertibility by coming after the exchange platforms (Congress ruled out that the SEC cannot regulate cryptos, only securities, so the SEC in turn labeled cryptos as securities, allowing thus them to intervene…).

After a “dry run” with Kraken a few months ago, the SEC went after Gemini, and on May 5th 2023 aimed at the “plat de resistance” (meal main dish in French) by hitting Binance and Coinbase two days later, the two largest crypto exchanges.

The SEC’s only argument is that several cryptos traded on these exchanges were securities and that these exchanges were not properly registered…. Interestingly enough, the SEC was completely asleep at the switch when FTX was running afoul of its clients, investors and even regulators, as FTX also allowed the trading of these same coins… By the same token, the SEC validated Coinbase’s business model, approved Coinbase to go public and allowed it to sell securities to retail investors… but now suddenly changed its stance, alleging that Coinbase’s business model is illegal… It looks like the SEC has adopted Schrodinger’s cat!

Besides coming after the exchanges, the SEC has already been after Ripple for a long time, which token (XRP) is used as a real-time settlement system, currency exchange and remittance network open to financial institutions worldwide, as Ripple has also been perceived as a direct threat to the existing fiat system with so many vested interests. XRP’s fate should be decided shortly now, and could have a huge impact on SEC’s actions against Binance and Coinbase: if XRP is not deemed to be a security, then the SEC case against Coinbase is over. Regarding Binance however, the SEC alleges other claims of wrongdoing by the company, on top of providing access to securities like Coinbase.

Thus the pattern is clear for the US… whereas other countries have decided to establish clear laws to properly regulate cryptos (MICA in Europe), Switzerland, Japan, and even China which just reversed course on the topic, as they don’t want to miss out on the innovation.

Besides the political considerations and long-term consequences for the US if they end up banning cryptos, what is interesting from a trading point of view, is the price action of XRP vs. Bitcoin. Contrarily to Bitcoin or even Ether, which have been going nowhere in the last 4 weeks, XRP has completely decoupled, gaining 25% over that same period: is this a classic “Buy the rumor, Sell the news” pattern, with the anticipated news being XRP not deemed a security?

Another interesting note is that besides an initial hic-hup on the day the SEC announced it sued Binance, then Coinbase two days later, Bitcoin has been relatively unmoved, whereas secondary coins were more badly hurt and haven’t yet recovered.

This shows that Bitcoin and Ether, the two main cryptos, are perceived as immune to the SEC attacks and XRP gains as another defiance of the SEC. No matter the outcome of this arm wrestling between cryptos and the SEC, as long as large jurisdictions around the world welcome cryptos, cryptos are here to stay.

Bitcoin remains in hibernation as institutional investors have still not come back following the 2022 bear market and collapse of FTX. The argument that comes back often from these institutional investors these days is that they see cryptos as a huge beta play (as it was in the heydays of 2017 for example) and are waiting for them to start moving again to chase them, and while they are not moving: what’s the point of taking on so much risk when US T-Bills yield 5% “risk-free”.

The market could only be back in motion if “new money” gets in, and that could be coming soon from Hong Kong as China has recently completely reversed its stance on the topic.

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