🥊Ding Ding, Ripple Takes On The SEC🥊

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To Operators,

We knew 2020 wouldn’t go quietly, but wow, the cryptoverse is really starting to ramp up. Things are starting to feel notably different than 2017, with the influx of institutional money and the beginning of a new media cycle, regulators are starting to turn their attention towards digital assets.

First they ignore you, then they laugh at you, then they fight you, then you win.

– Mahatma Gandhi

Crypto is a new truth for the world, and as such it is in the process of being adopted by those closer to the middle on the risk curve. All truths go through distinct phases as they are realized by the world, and like Ghandi said, we’re in phase 3.

Pre-2017 crypto was ignored. It was a group of cyberpunks writing code and playing around with internet money. 2017-2019 crypto was laughed at. It wasn’t a real asset class, it was backed by nothing, it had no intrinsic value. Those that invested in it were chasing greater fools. In 2020 crypto is being fought. It’s new technology that is being met with skepticism and misinformation by those in the Executive and Legislative branches.

Governments historically are inflexible, they refuse to change when presented with new information and react by stuffing new things into old boxes. That is what is happening now.

Last week the U.S. Department of the Treasury announced that the Financial Crimes Enforcement Network (FinCEN) proposed new rules to essentially apply Know-Your-Customer and Anti-Money Laundering regulations to digital asset wallets. This is being done in the interest of “national security” 🙄.

At the surface this may sound reasonable but it is a classic example of stuffing new things into old boxes. Digital wallets are more akin to cash wallets than they are bank accounts (typically subject to these same KYC/AML rules). When you give your neighbor $2,000 for his used car do you need to verify that your leather wallet and his haven’t been used for illicit activity? No, that’s ridiculous. Sadly, this is what FinCEN is pursuing.

Industry leaders and allies quickly responded to the action (I recommend reading the threads):

In essence, the regulations will require any “unhosted” wallets (i.e. those not on registered exchanges) to go through KYC/AML to identify the owner. These whitelisted wallets will then be able to interact with and only with “hosted” wallets or other KYC’d “unhosted” wallets.

This will create a walled garden effect where capital will be walled off from the broader cryptoverse and contained to exchanges and whitelisted wallets. This has obvious stifling effects on not only payments and remittances but also anything powered by smart contracts (DeFi is a standout here).

What’s the big deal?

Development. The US has already lagged the world in crypto adoption and this move will cripple the crypto industry in the US. But crypto is global, the US is not a majority player. These actions will just shift the industry to other parts of the world where countries are more accepting of new technology.

The Chaser

If FinCEN’s actions were the shot, the SEC followed up yesterday with the chaser: a lawsuit against Ripple and two executives alleging the firm conducted a $1.3B sale of unregistered securities.

The unregistered securities in this case are Ripple’s token XRP. The market reaction to the announcement of this suit was swift:

I am not a fan of Ripple or XRP. The project is black-sheep in the cryptoverse, it’s centrally issued and has none of the distributed attributes of other cryptocurrencies. That being said this suit is extremely suspicious.

Bitcoin and Ethereum have been determined to not be securities by the SEC. Ripple never achieved this distinction but was left to operate in the regulatory void despite the company engaging with the SEC multiple times to clear up its position.

The sale of XRP by Ripple began in 2012 and has continued through this year. Meaning Ripple has been allegedly selling unregistered securities for 8 years and the SEC just sat on its hands.

The implications of this suit are massive and are already being felt regardless of XRP tanking. Numerous US & international exchanges have delisted XRP or halted trading. Bitwise has shuttered its public market Ripple product. Grayscale will likely follow with its XRP Trust. I expect Coinbase to delist in the coming days.

Regardless of the merits of the suit, the risk of operating as-is is too high. Exchanges doing business in the US are already on the regulatory fringe and they simply have no appetite for regulatory risk.

The Silver Lining

The death of XRP will free up ~$20B in capital assuming the XRP-army doesn’t hodl into the ground. As the #4 cryptocurrency by market cap I expect this capital to be reallocated elsewhere in the altcoin market. Near term, I expect alts to be very risk-off as investors liquidate on the news, but the reallocation could be the catalyst to kick-off another run in alts.

Thanks for reading, that’s all for today. Merry Christmas to those that celebrate and Happy Holidays to the rest, I’ll be back next week with the final two editions to close out the year.

– Mac


Situational Awareness

  • Cryptocurrency XRP plunges 25% after SEC files lawsuit against Ripple – The price of XRP plunged again Wednesday after the U.S. Securities and Exchange Commission filed a lawsuit alleging that Ripple, a blockchain company with ties to the cryptocurrency, conducted a $1.3 billion unregistered securities offering.

  • Ripple: The SEC filing highlights – Just before we pop off for the holidays we thought we would bring you some of the highlights of the SEC’s filing against Ripple Labs. Because its 71 pages really were hugely insightful reading. Emphasis ours throughout.


The Portfolio Rundown

The Ripple news has dragged the majority of altcoins down with it to some degree. Bitcoin remains relatively unaffected. This is presenting an interesting opportunity to buy the dip but has not quite hit the level for me to start submitting buy orders. I’ll be watching this pullback closely with an eye on topping up positions in ADA and LINK through the end of the year.

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Nothing in this email is intended to serve as financial advice. Do your own research.