On Feb. 13, a federal judge put the Securities and Exchange Commission and the Commodity Futures Trading Commission cases against former FTX CEO Sam Bankman-Fried on hold. You’ll be forgiven if you missed this story — headlines and social media were dominated by the breaking news that the SEC was suing crypto firm Paxos for minting Binance’s stablecoin, Binance USD (BUSD).
But we’re not here to debate whether stablecoins are securities. The Howey test has been discussed to death, and while it’s true that few people expect to profit from a token pegged to a fiat currency, the issue is more nuanced than the debate typically suggests.
The issue is that the Paxos story broke on the same day as United States District Judge Kevin Castel delayed Bankman-Fried’s case. And the ensuing stablecoin debate detracted from that very significant change, distracting many from what should have been the bigger story.
The delay tactic: A tried and tested legal technique
Judge Castel granted a Justice Department motion to stay the FTX lawsuits filed by the SEC and the CFTC. Unsurprisingly, Bankman-Fried consented to putting the civil cases on hold.
Since pleading not guilty to defrauding billions of dollars from his collapsed exchange and paying a $250 million bond, Bankman-Fried has been living at his parent’s Palo Alto mansion in California. He’s free to soak up the sun by the pool and play all the League of Legends he wants while millions of FTX customers who lost billions of dollars are left waiting for justice and reparations.
Related: Expect the SEC to use its Kraken playbook against staking protocols
You might claim that the timing of these two stories — the Paxos BUSD lawsuit and the staying of Bankman-Fried’s cases — is a simple coincidence. And even prosecutors argued that delaying these lawsuits made sense due to the considerable amount of overlap between them. But it feels very convenient for both Bankman-Fried and SEC Chair Gary Gensler.
Delay tactics are nothing new in court cases. Putting time and distance between the defendant and the crime itself is a well-established strategy. And let’s not forget: It took two months just for Bankman-Fried to be extradited from the Bahamas and formally charged on U.S. soil.
Gensler is a master magician, and he’s using misdirection to distract us
Unfortunately, the real story here is far more insidious. On Feb. 9, it was announced that Kraken would not only have to shut down its crypto staking service in the U.S. but also pay a fine of $30 million in its settlement with the SEC. Naturally, the internet was on fire with the news and its ramifications for American crypto consumers.
Coinbase founder and CEO Brian Armstrong announced that his company would fight back, tweeting on Feb. 12 that “Coinbase’s staking services are not securities. We will happily defend this in court if needed.”
Coinbase’s staking services are not securities. We will happily defend this in court if needed.https://t.co/GtTOz77YV3
— Brian Armstrong (@brian_armstrong) February 12, 2023
Encouraging words. But it’s all just a distraction. Gensler is a magician, and his crypto crackdown taking place under the guise of investor protection is the misdirection part of the trick.
“Today’s action should make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection,” Gensler said.
It’s not about investor protection. It’s about keeping the public’s and the media’s eyes on the “cryptocurrency as securities” story while Gensler dupes us into forgetting that he met with Bankman-Fried in the months leading up to the FTX catastrophe — yet failed to prevent it.
We’re not in the Matrix — we’re in a selective attention experiment
In 1999, research psychologist Christopher Chabris and cognitive scientist Daniel Simons asked a group of people to watch a video and count the number of times the players wearing white shirts passed a ball. What the viewers often failed to notice was a person in a gorilla suit who walked right through the circle of players.
It’s been reported, but little investigated, that Gensler met with Bankman-Fried prior to the FTX collapse. In March 2022, the SEC chair had a 45-minute Zoom call — which was characterized as “unusual” — where they discussed, among other things, a new trading platform.
So, fraud and money laundering on a huge scale occurred not just on Gensler’s watch but right under his nose. And right now, he should be under an incredible amount of scrutiny, explaining how he missed the impending implosion of FTX, wire fraud, campaign finance violations and conspiracy to commit money laundering that Bankman-Fried has since been charged with.
Congress should be asking Gensler some tough questions over his failure to prevent such a catastrophe despite his links to Bankman-Fried. But the spotlight isn’t on this element of the story. Gensler and the SEC are working diligently to keep the spotlight on anything but that. Kraken’s staking services. Paxos’ BUSD stablecoin. And the latest? Do Kwon.
The SEC has suddenly found time to charge the Terraform Labs founder with “orchestrating a multi-billion dollar crypto asset securities fraud.” But Terra Luna and the TerraUSD token crashed in May 2022. So, why is it finally filing these charges now?
Related: The SEC shook Kraken down for $30M, but it doesn’t mean they had a case
“We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for Luna and Terra USD,” Gensler said in a statement. “We also allege that they committed fraud by repeating false and misleading statements to build trust before causing devastating losses for investors.”
It’s estimated that the Terra implosion cost investors over $40 billion. But that was almost a year ago. And FTX investors lost approximately $10 billion. So, it’s safe to say that the SEC isn’t great at protecting investors.
Is the SEC overcompensating, or is it something more sinister?
At best, this recent round of regulatory “crackdowns” is a product of the SEC overcompensating for its past failures, which go much further back than just FTX and Terra. At worst, they’re an attempt by Gensler to distract us from the fact that he’s either corrupt or inept — and hoping we forget that he met with Bankman-Fried in 2022.
What we need to remember is that Kwon is still free. So is Bankman-Fried. Yet, millions of retail investors had their life savings wiped out. Where was Sheriff Gensler then?
Zac Colbert is the head of content at Cryptology and an official content creator for Binance Feed. He graduated with a degree in digital media from Brighton University in the United Kingdom.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.