Many in the virtual currency industry have been confused and bedeviled by the Securities and Exchange Commission’s (SEC) gradual and ill-explained encroachment on their world, with frequent claims from SEC Chair Gary Gensler that most cryptocurrencies should be properly seen legally as “securities” that ought to be regulated by his agency. That would potentially make lots of legit businesses suddenly illegal dealers in “unregistered securities.”
In a decision last week in an ongoing bankruptcy case of Voyager Digital Holdings, U.S. bankruptcy Judge Michael E. Wiles in the U.S. Bankruptcy Court for the Southern District of New York laid into SEC agents for their perplexing and officious manner of trying to force through their attitudes about cryptocurrencies-as-securities.
Part of the proposed bankruptcy reorganization plan for Voyager Digital Holdings would involve shifting customer accounts over to cryptocurrency exchange Binance.
The SEC objected to this Binance solution, claiming “that in its view the Debtors had the burden to prove that the rebalancing of the Debtors’ cryptocurrency portfolios…would not involve illegal purchases and sales of securities.”
The SEC did this, as Judge Wiles complains, essentially through innuendo: “The objection did not take the position that any particular cryptocurrencies are securities, or otherwise explain how or why the Debtors’ rebalancing activities might be illegal, although it did contain a vague footnote suggesting that the VGX token was one as to which some unspecified issue might exist,” Judge Wiles wrote.
“The SEC also suggested that the Debtors should be required to prove that Binance.US is not operating as a securities broker without registering as such,” he continued. “Once again, the SEC did not actually take the position that Binance.US is operating as an unregistered and unlicensed securities broker. Instead, it just suggested that the Debtors had the burden to prove the negative, without offering any evidence or even any reason to think that Binance.US actually is doing anything for which it requires further SEC registrations.”
Judge Wiles finds this situation highly aggravating, noting that “Voyager operated, and Binance.US currently operates, in a regulatory environment that at best can be described as highly uncertain.”
If the present legal environment in which companies such as Binance must operate is unknown, the future into which the judge must hope his decisions will function is even more so: “The SEC has filed some actions against particular firms with regard to particular cryptocurrencies, and those actions suggest that a wider regulatory assault may be forthcoming. The CFTC [Commodity Futures Trading Commission] seems to have taken some positions that are at odds with the SEC’s views. Just how this will all sort itself out, how the pending actions relating to cryptocurrencies will be decided, and just what issues might be raised in future regulatory actions, and how they will affect individual firms or the industry as a whole, is unknown.”
Judge Wiles is, thus, unhappy with SEC agents’ refusal to give any public certainty to the parties in this case or the industry at large about how their views will affect crypto businesses moving forward.
The SEC had not in its objections in this bankruptcy case “offered any guidance at all as to just what it was that the Debtors allegedly were supposed to prove on these issues, or how the Debtors possibly could prove what the SEC wanted them to prove without receiving any explanation at all from SEC as to just why the Debtors’ operations, or Binance.US’s operations, might raise legal issues,” Judge Wiles noted.
And when he insisted on clarification from the SEC, its agents “initially asked if it could state its position only to me on an in camera basis, but I denied that request and ruled that to the extent the SEC wanted to say something further about its objection, it ought to be stated in the public forum, where all other interested parties could hear and understand the SEC’s position.”
What Judge Wiles got on the record from the SEC folks did not satisfy him. He was merely told that SEC staff thinks that the VGX token “has aspects of a security, but that the Commission itself has not taken any position on that subject.” Similarly, the staff “believes that Binance.US is operating as a securities exchange without registering as such, though once again the Commission itself has not taken any position on that subject.”
Judge Wiles found this attempt at legal interference based on staff opinion, without the SEC itself or lawmakers having ratified the staff’s opinion as regulation or law, unconvincing and vexing. He rejected the idea that it should be his or Voyager’s responsibility to figure out what SEC staff meant about the degree to which the VGX token is a security or the extent to which Binance should be subject to SEC registration issues. He griped that vague interference like this from SEC staff was unduly delaying the resolution of this bankruptcy case, costing customers and creditors lots of money and time.
“I cannot simply put the entire case into an indeterminate and expensive deep freeze while regulators figure out whether they do or do not think there is any problem with the transactions that are being proposed,” Judge Wiles wrote. “If there is a problem, I expect a regulator to tell me that it has an actual objection (as opposed to saying that there ‘might’ be an issue), and also to tell me what the issue is and why it is an issue, so that other parties may address it and so that I may make a proper and well-considered ruling.”
“I asked the SEC’s counsel at the outset of this hearing to explain what the consequences would be if Binance.US were to be found to have been acting as an unregistered broker dealer,” Judge Wiles wrote. “I asked if that would just mean that Binance.US might have to stop certain activities while it pursued a license, or if it would mean that Binance.US would have to shut down all of its activities. The SEC said it could not answer that question.”
If Judge Wiles feels this way about the SEC’s casual but often destructive mystery-shrouded tiptoeing around the issue of regulating virtual currencies as securities in this one case, imagine how the investors and holders and businesses whose careers and fortunes are built on trying to stay legal in this industry feel.