SEC: EXCHANGES AT RISK: Aggressive Pursuit Continues, 1Broker And EtherDelta Only The Beginning (Bistamp, Kraken, Bitfinex)

The EtherDelta action by the SEC yesterday  (and 1Broker more than a month ago) has spurred a flurry of dialogue and rumor mill conversations behind crypto closed doors. Crypto hedge fund water coolers are abuzz with what the action means, who could be at risk and where crypto money flows should continue and where they should stop, immediately, based on the regulatory risk that could come to bare.

We’ve had extensive conversations with all manner of players in the crypto ecosystem and have put together different angles, analysis, rumors, guesses, and ‘what ifs’ to give you all you need to make decisions with your crypto assets and where they are currently held.

**We use the term ‘held’ in this instance because your crypto assets are not ‘custodied’ at firms like BitMex or Binance. Not even close. That in and of itself is important to remember here as we walk through this story.**

Conversations that we have had with multiple sources across the asset management space, legal, regulatory, and ‘in the know’ crypto ecosystem believe that the SEC is planning more actions based on specific criteria and crypto exchanges. The basis of these actions has to do with the lion’s share of assets, revenue and trading coming from the United States and United States consumers. The SEC believes that it can take significant liberties in enforcement no matter where these exchanges choose to set up their legal entities. That doesn’t matter to the SEC.

1Broker and EtherDelta were just the first two to feel the heft of an SEC action and quickly acquiesce to civil law enforcement.

Several sources from the AML/CFT, SEC, crypto hedge funds, and other crypto sources have given us thoughts and opinions on where this roadmap could lead and who could be next. Here are parts of those conversations and some explanations as to who, why, where, and when.

A former AML/CFT enforcement agent had this to say based on background conversations with two contacts at the SEC:

“There will be more actions taken. That much I am certain about. Geography is not a factor as they formulate any strategy and are having back-channel conversations. One important point to make here, sticking your thumb up the nose of the SEC over the past six months, or any other regulatory agency, has been noticed and cataloged. It is incredibly stupid to basically dare a federal or state organization to come after you. Which led our conversation to Kraken and the dialogue there CEO decided to air in public. They are firmly in the crosshairs here.”

A current SEC contact was matter of fact and careful:

“The 1Broker and EtherDelta actions were appropriate and serious. Treated as such by both entities. We are carefully evaluating other crypto exchanges and their policies and consumer protection policies and actions. That is an important distinction. We are interested in both what an exchange prints and what it actually does.”

A crypto hedge fund source:

“We are looking at every exchange carefully and taking necessary steps where we think there is added risk. And our legal team is doing what it can to grab any and all clues in the 1Broker/EtherDelta actions. Can it be mapped over other larger exchanges? Should we move crypto assets based on those findings? I would imagine that others in our space are doing the same. You may find that there is a story in that dynamic alone. Follow where the crypto may or may not flow over the next month and that may give you a firmer hold on who could take a hit.”

A different hedge fund source:

“Whatever the rumors are you can cross BitMex off that list. They have serious legal architecture in place and meet every possible check mark that the SEC could possibly question. Then you add the concept of ‘geofencing’ within their platform and you simply can’t make a connection with 1Broker or EtherDelta in any way. Have we heard other names over the past 24 hours? Yeah – sure. But BitMex is got serious legal cover here – and they are represented by Sullivan and Cromwell. No chance they are under the microscope of the SEC.”

A third crypto hedge fund source made the distinction between the SEC and the CFTC:

“One important point in all the back and forth going on right now is that the SEC may take more action but the CFTC weighing in would be the bigger story, if it were to happen. That is a distinction that needs to be discussed further. Really, 1Broker took a hit because they were giving investors access to US securities via BTC funding. That crosses the border so to speak into SEC territory. That is a line that needs to be closely looked at. Does the CFTC have the appetite to join the SEC in some of these actions? Don’t know. But if that were to occur that would set off serious alarm bells and concern on our end. To be clear, though, we don’t see that happening.”

A crypto twitter voice that we spoke to that has seen it all since their involvement in the space since 2012:

“I expect Kraken and Bitfinex to be the headliners to get punk’d at some point. How, when, or for what is anybody’s guess at the moment. But one of them has actively antagonized regulators (Kraken) and the other has played all sorts of legal and geographic games specific to avoiding regulators (Bitfinex). Should the SEC begin to really get frisky and take on Bitfinex that would be serious and cause some price destruction. Were I to offer a guess, I think Kraken gets slapped and Bitfinex finds a way to avoid *public* enforcement. I could see a way that a backroom conversation occurs and Bitfinex is given a ‘deal they can’t refuse’ to clean some things up.”

When the above source was asked about BitMex being in the clear based on the dialogue above connected to ‘geofencing’ and representation:

“Yeah – even though on the surface you would think that gambling like leverage and liquidations would bring regulatory scrutiny – they’ve legally covered the bases when you enter the gates at that place. It is essentially ‘moted’ as a gambling site.”

Sources, conversations, conjecture, rumors, what if’s, and a feeling that there is still more to come from an enforcement standpoint is the purveying vibe with those in the know across the crypto spectrum.

Offering our opinion based on all of the above feedback, as well as conversations that we didn’t share; BitMex is in the clear, Kraken should be concerned, smaller exchange ‘pop-up’ shops should be very, very concerned. And there will be more regulatory action and exchange shutdowns to come.