News : Hoping for the best, planning for the worst

Tuesday, December 20, 2022

Hoping for the best, planning for the worst

Dec 20, 2022

Presented by Binance

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One of the biggest legal challenges to the Securities and Exchange Commission's authority over the crypto industry is still in its early innings. The plaintiffs are already planning for what happens if they lose.

On Monday, Grayscale Investments announced that it might buy back shares of its Bitcoin Trust if it loses a highly publicized bid to force the SEC into letting it convert the $10.7 billion vehicle into a publicly traded investment fund.

And while CEO Michael Sonnenshein says the company won't back down from the case — which was filed hours after the SEC rejected its application in June — the implosion of FTX, along with the subsequent market crash's effect on Grayscale's parent company Digital Currency Group, has compelled the firm to detail how its shareholders might fare in defeat.

Grayscale "and a lot of others have a lot to do to shore up investor confidence, and a lot to do to regain the confidence of regulators and legislators," Sonnenshein told MM. "Being able to give this message to the market is certainly a piece of doing that"

That's a much softer tone than the one Grayscale took in the run-up to the SEC's rejection of its plan to launch a Bitcoin exchange-traded fund earlier this year. The firm had telegraphed its plan to sue the regulator well before it was blocked from converting the Bitcoin trust into an ETF. It also spent heavily on an aggressive lobbying and public relations strategy to make its case to Congress, an effort that drew support from top lawmakers and industry groups.

It's also a sign of how quickly the political winds have shifted for crypto investment shops in Washington as the Justice Department pursues a case against FTX founder Sam Bankman-Fried, who's alleged to have used stolen funds to power his political machine.

The FTX fiasco, along with an earlier market crash that took out a popular stablecoin and an overleveraged crypto hedge fund, "have generally caused crypto investors to be increasingly wary of crypto intermediaries and crypto businesses," Sonnenshein said.

Of course, SEC Chair Gary Gensler has been quite wary of crypto businesses for some time. The SEC blocked Grayscale's ETF application — as well those of several other investment firms – on the grounds that Bitcoin ETFs couldn't adequately protect investors from fraud or manipulation.

Over-the-counter shares of GBTC have traded at a steep discount to the value of the trust's underlying Bitcoin for almost two years. And investors have been pressuring the firm to seek SEC relief to address the discount — a factor in the collapse of the overleveraged crypto hedge fund Three Arrows Capital earlier this year — since the spring of 2021.

Grayscale has argued that SEC approval would be the quickest way to offer its shareholders relief. It's also contended the agency's earlier approval of ETFs that trade futures contracts linked to the price of Bitcoin set a legal precedent for its application, and that its rejection was unwarranted.

"We have [made] common sense and very compelling legal arguments that should overturn the SEC's decision," Sonnenshein said, adding that a tender offer for 20 percent of GBTC's shares would only come if "we ultimately exhaust all of our judicial options."

IT'S TUESDAY — You're in the home stretch. Sam picked up Charles Portis's Masters of Atlantis and Haruki Murakami's Norwegian Wood for his trip to the West Coast. What are you reading over the holidays? Please send tips to ssutton@politico.com and zwarmbrodt@politico.com.

A message from Binance:

It's been a tough year for crypto. After unprecedented fraud and mismanagement, industry confidence has been shaken. As the world's largest crypto exchange, Binance believes greater transparency is critical. At Binance, user assets are backed 1:1 and our capital structure is debt-free, and we are eager to work with regulators to help bring order to the markets. Learn more about our commitment to moving forward in Politico this week.

Driving The Day

Housing starts data will be released at 8:30 a.m. … The Brookings Institution will hold an event on crypto regulation at 9 a.m.

OMNIBUS — Our Caitlin Emma, Jordain Carney, Marianne Levine and Sarah Ferris: "Leading lawmakers unveiled a $1.7 trillion year-end spending bill early Tuesday as they raced to pass the sprawling package by week's end, with federal cash expiring at midnight on Friday. The so-called omnibus would provide the military with $858 billion this fiscal year, a nearly 10 percent increase over current levels. It would fund domestic programs at more than $772 billion, including nearly $119 billion, or a 22 percent increase, for veterans' medical care, according to the office of Senate Appropriations Chair Patrick Leahy (D-Vt.)."

— The bill includes $388 million for the construction of 21,500-plus affordable housing units and $75 million to fund permanent supportive housing for those experiencing homelessness, according to a readout from Rep. Rosa DeLauro's (D-Conn.) office.

— Our Benjamin Guggenheim: "A restoration of the enhanced Child Tax Credit as well as key tax breaks pushed by businesses have been left out of the government funding package Congress is expected to take up this week."

THE PROBLEM — Our Katy O'Donnell: "The White House on Monday said it wants to bring down homelessness by 25 percent over the next two years, partly by increasing the supply of housing in the U.S. 'My plan offers a roadmap for not only getting people into housing but also ensuring that they have access to the support, services, and income that allow them to thrive,' President Joe Biden said."

INHALE THE MUSK — Our Rebecca Kern and Kelly Hooper: "Elon Musk asked Twitter users Sunday whether he should step down as head of the social media platform he bought earlier this year, pledging that he would 'abide by the results of this poll … By a 15-point margin, respondents to Musk's unscientific Twitter poll said he should resign from his post atop the social media giant."

POLITICO AT CES 2023 : We are bringing a special edition of our Digital Future Daily newsletter to Las Vegas to cover CES 2023. The newsletter will take you inside the largest and most influential technology event on the planet, featuring every major and emerging industry in the technology ecosystem gathered in one place. The newsletter runs from Jan. 5-7 and will focus on the public policy related aspects of the event. Sign up today to receive exclusive coverage of CES 2023.

Regulatory Corner

MARTY'S BACK IN THE SADDLE — Our Victoria Guida: "The Senate on Monday confirmed Martin Gruenberg to another term atop the Federal Deposit Insurance Corp.'s board alongside two Republican candidates, giving the bank regulator a full complement for the first time since 2015."

BUYBACK — Our Brian Faler: "The Treasury Department confirmed today that it will soon deliver more details about how both a new minimum tax on big companies and a new levy on stock buybacks will work."

DON'T DO THAT — Our Declan Harty: "Honeywell International has agreed to pay more than $200 million to settle charges from U.S. and Brazilian authorities that the company allegedly engaged in two bribery schemes in Brazil and Algeria a decade ago."

A message from Binance:

Wall Street

$900 MILLION — Bloomberg's Chris Dolmetsch, Katherine Doherty and Jennifer Surane: "A hard-fought battle between Citigroup Inc. and creditors of Revlon Inc. over an epic blunder in which the bank accidentally sent the lenders almost a billion dollars was finally capped with a legal pronouncement: Case dismissed."

WATCH THIS SPACE — Reuters Rae Wee: "Private equity holdings are being sold at a record clip in an opaque secondary market, investors say, as asset managers cash out to cover losses elsewhere and rebalance portfolios."

CARLYLE LEADERSHIP LIMBO — Bloomberg's Dawn Lim and Heather Perlberg: "Carlyle Group Inc.'s search for a new chief executive officer is expected to extend into the new year, dashing hopes among investors and insiders for a swift resolution to its leadership limbo."

A NEW POLITICO PODCAST: POLITICO Tech is an authoritative insider briefing on the politics and policy of technology. From crypto and the metaverse to cybersecurity and AI, we explore the who, what and how of policy shaping future industries. We're kicking off with a series exploring darknet marketplaces, the virtual platforms that enable actors from all corners of the online world to traffic illicit goods. As malware and cybercrime attacks become increasingly frequent, regulators and law enforcement agencies work different angles to shut these platforms down, but new, often more unassailable marketplaces pop up. SUBSCRIBE AND START LISTENING TODAY.

Markets

IT'S COLD OUTSIDE — Bloomberg's Peyton Forte and Vildana Hajric: "US stocks dropped for a fourth session as traders assessed the Federal Reserve's path next year after central bank officials vowed to keep raising rates until they're confident inflation is coming down meaningfully."

THE U.S. TRADE — WSJ's David Uberti: "Volatile energy markets have made 2022 a big year for commodity traders. One of the biggest and perhaps most unlikely winners: The U.S. government. Emergency releases from the U.S. Strategic Petroleum Reserve are slated to end this month, concluding an unusual attempt to lower gas prices after Russia's invasion of Ukraine sent oil prices soaring."

TARIFF TROUBLE — Our Doug Palmer: "U.S. Trade Representative Katherine Tai sharply criticized a recent World Trade Organization ruling that rejected the United States' national security justification for the tariffs that former President Donald Trump imposed on steel and aluminum imports in 2018."

BIG TECH'S LOBBYING PUSH — WSJ's John D. McKinnon and Chad Day: "Supporters of tougher tech regulation are making a final push to eke out a few wins before Congress adjourns—and big technology companies are responding with a fresh advertising blitz."

Crypto

BINANCE'S BLACK BOX — Reuters's Tom Wilson, Angus Berwick and Elizabeth Howcroft: "The world's biggest crypto exchange, Binance, is battling to shore up confidence after a surge in customer withdrawals and a steep drop in the value of its digital token … a Reuters analysis of Binance's corporate filings shows that the core of the business — the giant Binance.com exchange that has processed trades worth over $22 trillion this year — remains mostly hidden from public view."

BANKMAN-FRIED CAN'T STOP TICKING OFF HIS LAWYERS — NYT: The disgraced cryptocurrency mogul Sam Bankman-Fried has agreed to be extradited to the United States … Jerone Roberts, a local defense lawyer for Mr. Bankman-Fried, told reporters that his client had agreed to the extradition voluntarily, defying 'the strongest possible legal advice.'"

A message from Binance:

It's been a tough year for crypto. Macroeconomic headwinds have ushered in challenging market conditions, followed by unprecedented fraud and mismanagement. The combination rocked consumer confidence and created a level of skepticism about the future of crypto. Binance strongly believes crypto's best days remain ahead, but to get there, transparency is the only path forward. At Binance, we are investing in transparency protocols to demonstrate our strong financial health. Our capital structure is debt-free and all user assets are backed 1:1. Binance does not borrow against customers' funds or invest them without their consent. Most importantly, we look forward to working with policymakers to better protect consumers while promoting innovation. Learn more about our commitment to moving forward in Politico this week.

Fly Around

EU countries finally struck a gas price cap deal Monday after months of fraught divisions over a key aspect of the bloc's response to the energy crisis — but the final settlement may end up pleasing no one. — Our Charlie Cooper, America Hernandez and Victor Jack

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