| | | | |  | | By Declan Harty and Jasper Goodman | | | Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro.
| | Washington’s biggest cryptocurrency battles are rising to a new level in the courts. Over the last week, Coinbase and Binance — the world’s largest crypto exchanges — have pressed federal judges in New York and Washington to throw out lawsuits from the Securities and Exchange Commission challenging their businesses. If successful, the crypto giants stand to strike at a central pillar of SEC Chair Gary Gensler’s crackdown on crypto in what has already become — less than one month in — a banner year for the once-beleaguered industry. The Wall Street regulator argues that the crypto businesses need to follow the same rules that govern much of traditional finance. The SEC says the two companies, among many others, offer trading in assets that — despite all the talk of innovative breakthroughs like blockchain technology and tokenization — are simply a new form of a decades-old type of security that fits squarely under the agency’s authority. An SEC spokesperson told MM that many courts have found as much. “The history of the crypto markets shows that investors are at risk and are being hurt by these platforms’ utter disregard for regulatory requirements,” the spokesperson said. Coinbase and Binance, however, reject the SEC’s claims that they offer trading in securities. They’re more like collectibles, such as Beanie Babies, Coinbase’s lawyers said last week. And now they are pushing judges to see it their way, too. “The SEC’s regulatory reach does not go beyond securities,” said William Savitt, a partner at Wachtell Lipton who is representing Coinbase, during the hearing. “And if it’s permitted to regulate here, it’s permitted to regulate everywhere.” Last year, much of the crypto industry was still dealing with the wreckage from Sam Bankman-Fried’s FTX collapse. Yet the new year has given crypto new wind. Most notably, after a decade of unsuccessfully trying, crypto and traditional financial fund managers recently landed the SEC’s approval for a new breed of bitcoin investment funds that will open the door for more investors to start dabbling in the market. To be certain, Coinbase and Binance’s effort to have the cases thrown out is a predictable and early phase of the legal battles, which could last months if not years. There are crucial differences between the two, including the SEC’s allegation of fraud against Binance. But the lawsuits represent dangerous and potentially existential threats to the companies as well as the crypto market’s U.S. future, and both have promised to vigorously fight the agency in the courts. “Even if Coinbase doesn’t win these arguments, which I think they will, they have the backstop of the Supreme Court down the road,” Bloomberg Intelligence Senior Litigation Analyst Elliott Stein told MM. Stein wrote in a report late last week there is a 70 percent chance that Coinbase will succeed in having the charges dismissed.
| | | | JOIN 1/31 FOR A TALK ON THE RACE TO SOLVE ALZHEIMER’S: Breakthrough drugs and treatments are giving new hope for slowing neurodegenerative diseases like Alzheimer’s disease and ALS. But if that progress slows, the societal and economic cost to the U.S. could be high. Join POLITICO, alongside lawmakers, official and experts, on Jan. 31 to discuss a path forward for better collaboration among health systems, industry and government. REGISTER HERE. | | | | | During the hearings, both of which lasted more than four hours, lawyers representing the companies argued that the SEC is claiming far too much authority over the crypto markets, pulling in commodities in the process. Judge Katherine Polk Failla, who oversaw the Coinbase hearing last week in New York, echoed those concerns, saying she has a “real fear” that the agency’s argument “is just sweeping too broadly.” The SEC’s attorneys countered that the measure for determining whether a crypto token falls under the regulator’s remit — known as the Howey Test — is designed to be flexible and hinge on the “economic realities” of the situation. “Platforms like Coinbase and Binance are serving as intermediaries in these transactions, enriching themselves while handling customer funds and people’s hard-earned investment funds” without following long-standing registration and oversight rules, the SEC spokesperson said. Failla and Judge Amy Berman Jackson, who is in charge of the Binance proceeding in Washington, shot down other arguments brought by the companies. They include claims that crypto is a so-called major question that the SEC needs express authority from Congress to regulate before it can enforce the securities laws. “I have to say that while this may be a trillion-dollar industry, I’m not inclined to think it qualifies,” Jackson said. IT’S TUESDAY — Can’t stop thinking about crypto litigation? Drop me a line at dharty@politico.com.
| | A message from Chime: Tired of overdraft fees? Learn how Chime is different.
Chime is expanding banking with no overdraft fees to everyday people. Cost is a barrier to many, which is why Chime never charges overdraft or monthly fees — and there are no minimum balance requirements for our checking and savings accounts. We reach customers traditional banks don't, can't or won't and are helping everyone unlock financial progress. Learn more. | | | DRIVING THE DAY Fed watchdog clears ex-officials — ”The Federal Reserve’s inspector general on Monday found that two former central bank officials made personal investment decisions in a way that would make people question their integrity in policymaking,” Victoria Guida reports. “In a long-awaited report, the watchdog agency found that neither former Dallas Fed President Rob Kaplan nor former Boston Fed President Eric Rosengren broke any federal laws or formal policies, but it said they also did not live up to the standard of avoiding 'even the appearance of a conflict of interest.’” Critics blasted the IG’s report as not credible. Sen. Elizabeth Warren (D-Mass.) said in a statement that the report "reveals the culture of corruption that has taken root under Chair Powell, and why we need a stronger, independent watchdog at the Fed." She called the report's conclusion "feckless" and "inexcusable." “This was a transparent and egregious breach of the public trust and a gross disservice to the hundreds of Fed officials and staff working 24/7 for weeks on end to save the economy,” Dennis Kelleher, CEO of the financial watchdog group Better Markets, said in a statement. He added: “This was not an independent, outside investigation that the American people can trust.” SEC hack — “The hack of the SEC on X earlier this month was the result of an unauthorized party hijacking the cellphone number linked to the account, an agency spokesperson said Monday,” your MM host reports. “In what is known as a SIM swap attack, the hacker took control of the phone number on another device after obtaining it through the telecom carrier, the spokesperson said in a statement. They were then able to reset the password for the SEC's account on X, the site formerly known as Twitter, allowing them to set off panic in the cryptocurrency markets with a post stating the agency had signed off on several bitcoin investment fund applications.” An ECB divided — European Central Bank President Christine Lagarde did not fare well on her latest review from employees, POLITICO EU’s Johanna Treeck reports. In a trade union survey, 50.6 percent of responding staff ranked her performance as “very poor” or “poor.” By comparison, Mario Draghi’s performance was ranked “very poor” or “poor” by less than one of 10 respondents in a similar survey while at the ECB.
| | | | YOUR GUIDE TO EMPIRE STATE POLITICS: From the newsroom that doesn’t sleep, POLITICO's New York Playbook is the ultimate guide for power players navigating the intricate landscape of Empire State politics. Stay ahead of the curve with the latest and most important stories from Albany, New York City and around the state, with in-depth, original reporting to stay ahead of policy trends and political developments. Subscribe now to keep up with the daily hustle and bustle of NY politics. | | | | | ON THE HILL Waters v. Zuck, crypto edition? — “House Financial Services ranking member Maxine Waters pressed Meta CEO Mark Zuckerberg on Monday over whether the company plans to enter the cryptocurrency space, citing a series of recent patent applications,” according to our Jasper Goodman. Waters wrote in a letter that Meta informed the Financial Services panel in October that there “is no ongoing digital assets work at” the company. But she wrote that five crypto- and blockchain-related patent applications, filed between last August and earlier this month, “indicate there are specific goods and services connected with digital asset work that Meta is doing.”
| | | | A message from Chime:   | | | IN THE MARKETS Trump-linked SPAC wins, too — One day after Florida Gov. Ron DeSantis called its quits on his bid for the White House, the blank-check company tied to former President Donald Trump’s social media venture, Truth Social, saw its stock surge by 88 percent, The New York Times’s Matthew Goldstein reports. Franchise Group chief out amid SEC probe — Bloomberg reports that Brian Kahn is stepping down as chief executive officer of Franchise Group amid an SEC probe into his dealings with B. Riley Financial.
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