Empire Newsletter: A busy crypto lawsuit season looms

The SEC has issued its latest Wells notice to Robinhood


Robinhood CEO Vlad Tenev | Permissionless I by Blockworks


Another one bites the dust

And then there were three. 

Robinhood has become the latest company to receive a crypto-related Wells notice from the Securities and Exchange Commission.

If you don’t know what a Wells notice is, you might be new to crypto. The notice is basically a heads-up given to a company that the SEC completed an investigation and may pursue an enforcement action against them. 

The notice doesn’t always mean that legal action will play out, but this is crypto.

This time last year, for example, we were playing the waiting game after Coinbase was served with a Wells notice in March. The SEC then filed a suit against the exchange company in June. 

As I previously reported, if that timeline holds, we could be looking at a summer legal action — similar to what we saw with Coinbase

So if things head to court, what happens exactly?

Robinhood, as part of its disclosures, said the SEC alleged that it violated 15(a) and 17A of the Securities Exchange Act. If that rings a bell, it’s because both Coinbase and Binance were hit with similar charges. 

17A focuses on clearing agencies and 15(a) centers around broker-dealer registration. It’s unclear if the SEC will seek charges regarding tokens it believes are securities, like we’ve seen in other cases. 

For its part, Robinhood has tried to stay out of the SEC’s spotlight by delisting tokens that the regulatory agency has targeted, such as Solana’s SOL, Polygon’s MATIC, and Cardano’s ADA. Unfortunately, it doesn’t seem like any company offering crypto services can avoid Gensler’s ire.

“​​The potential action may involve a civil injunctive action, public administrative proceeding, and/or a cease-and-desist proceeding,” Robinhood warned in its disclosure. 

Putting aside the potential charges, let’s talk about Robinhood’s chief legal and compliance officer, Dan Gallagher. 

Gallagher is actually no stranger to the SEC, having served as a Commissioner between 2011 to 2015. He worked in other positions within the SEC as well. 

Gallagher said yesterday that he was “disappointed” and insisted that the “assets listed on our platform are not securities.” He called the case against Robinhood Crypto “weak.” Perhaps Gensler’s met his match?

Either way, Robinhood’s not alone in the SEC’s spotlight.

Though Consensys — another company that was served with a Wells notice — may face different charges in a potential lawsuit from the regulator. We know from the lawsuit Consensys filed against the SEC that its Wells notice centered on two of its product offerings: MetaMask Swaps and MetaMask Staking. 

One aspect could look similar, however. 

Consensys said the SEC held a telephone conference between the two parties during which SEC staffers said they believed the Brooklyn-based company was operating as an unregistered broker-dealer because of the MetaMask Swaps software. 

The SEC also took issue with the staking program — which would echo what we’ve seen in the Coinbase and Binance cases. Consensys violated the Securities Act, the SEC allegedly said, because it offered and sold unregistered securities.

The third company in our roundup, Uniswap, represents the most unknowns so far. While Uniswap disclosed its Wells notice, it didn’t disclose any specifics. Uniswap didn’t respond to a request for comment on the details, either. 

As our own Casey Wagner pointed out in this newsletter a few weeks ago, Uniswap chief legal officer Marvin Ammori said securities regulators could — as they did with Binance and Coinbase — charge the firm with operating as an unregistered exchange and broker. 

It seems likely that Uniswap could also face securities charges as well, based on what we’ve seen with pending lawsuits and the other Wells notices. 

So the summer of fun, with the bull market looking like it’s just getting started, might be interrupted by a few more lawsuits. Yay.

— Katherine Ross

Data Center

  • Robinhood’s stock was down nearly a percent at the close yesterday, but it’s still up 95% over the past year.
  • Bitcoin, trying to regain $65,000, dropped back to $64,000 after Robinhood disclosed its Wells notice.
  • Grayscale’s bitcoin ETF posted another day of inflows, a record for the fund, on Monday. The firm saw positive flows of nearly $4 million.
  • Ethereum notched $30 million of inflows, finally breaking a seven-week streak of outflows, per CoinShares data.
  • Hong Kong’s new ETH and bitcoin ETFs recorded $307 million in inflows last week, according to the data.

Bubbles are mathematically impossible

If crypto were the ‘98 Chicago Bulls, Paradigm and a16z would be Michael Jordan and Scottie Pippen.

A few editions ago, we looked at the companies listed in a16z Crypto’s portfolio for a temperature check on how those bets are playing out this bull market cycle. 

Time to compare that to Paradigm.

Paradigm has fewer investments listed than a16z — 57 to 95. A similar percentage of startups have issued their own tokens, around 40%. 

a16z Crypto says it has $7.6 billion in assets under management in its four crypto funds. Paradigm, meanwhile, reportedly had $8.7 billion toward the end of 2022 — when crypto markets were bottoming out. 

Considering how wild these assets can be, let’s just call it even.

Complete details of either firm’s investments in the crypto space aren’t public knowledge, so we’re in the dark on size, mixture of equity and tokens, vesting schedules and cost basis. 

That means we can’t know exactly how well the funds are doing. We can still figure out what their star performers might be, at least out of the portfolio companies with native tokens.

Let’s say our current bull market began in mid-November 2022, when bitcoin bottomed out around $16,500. 

In Paradigm’s case, it discloses unspecified holdings in bitcoin, ether, Coinbase stock, 23 crypto entities with their own tokens, and 33 without.

Most cryptocurrencies have underperformed the top two cryptocurrencies, with only four beating bitcoin up until the end of April, and another three came out ahead of ether.

Just like in a16z’s case, Sky Mavis’ RON token, the native asset for gaming-centric layer-1 Ronin, is the standout by far, having multiplied 11 times in price. 

Next were governance tokens for DeFi structured products protocol Ribbon Finance, trader-focused NFT marketplace Blur and DAI issuer MakerDAO’s, which have more than tripled.

Worst were also governance tokens. JET, for Solana-native lending app Jet Protocol, and FLX, for non-pegged stablecoin protocol Reflexer, which manages RAI. JET has fallen 97% this bull market, FLX has shed 60%.

When we looked at tokens issued by a16z’s portfolio companies, the median return was about 130%, largely thanks to RON and Solana, with about 15% of tokens losing value in the current cycle.

In Paradigm’s portfolio, including bitcoin, ether and Coinbase stock, the median is 58%, with about one-third posting negative returns.

Granted, all this says very little about the potential gains, both unrealized and unrealized, of both funds’ crypto ventures. It also doesn’t at all reflect the health of the companies tied to each token, only market sentiment.

It does, however, show how few VC-backed tokens have outperformed bitcoin in this bull market so far. 

Food for thought for those playing along at home.

— David Canellis

The Works

  • Australia’s tax office is probing crypto traders in the country, according to AFR.
  • Fintech firm Revolut is launching a crypto exchange for traders in the UK. 
  • The SEC delayed another spot ether ETF late Monday. 
  • Block said Monday that it’s planning to offer $1.5 billion worth of senior notes.
  • Apple is developing its own data center chip for artificial intelligence, the WSJ reports.

The Morning Riff

Another day, another series of “Satoshi-era coins on the move” headlines. 

Yesterday, a clutch of bitcoins worth some $44 million “awoke” according to transaction data

It’s long been the case that crypto media jumps to report on anything related to old coins — that is, any holdings that haven’t budged in a decade or more. 

But this has seemed especially true in recent months, with bitcoin’s recent all-time highs prompting long-time holders to blow the dust off their wallets. A recent survey from Fortune and Chainalysis posits that old coin movements have become routine as of late.

Should people pay so much attention to these Lazarus-style hodlers? Maybe, if you’re the sort who cares a great deal about how many coins are effectively out of circulation because they were previously thought to be “lost.”

Me? I think people are looking for entertainment; if the number isn’t going up, at least somewhere, a number is doing something

— Michael McSweeney

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